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Subsidies: a big culprit in high gas prices

Gasoline would be cheaper if countries ended their oil subsidies and let markets rule.

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In China, the government caps gas prices. Drivers there pay about half of what Americans pay. In many countries, oil prices are held artificially low, either by fiat or subsidy. The result? Consumption keeps rising, boosting global prices. The rest of the world – the part now racing to conserve – ends up paying more than it should.

Unfair?

Yes, say global actors such as the International Monetary Fund (IMF), which is calling on governments to let consumers face market prices in order to kick-start conservation and reduce official spending.

About half of humanity, from India to Chile, now benefits from cut-rate petroleum prices. In 2008, these countries will account for all the growth in world oil demand, or an additional one million barrels a day, according to Deutsche Bank. Their consumption will be the highest in eight years.

And these subsidies will cost as much as $100 billion in 2008, or twice as much as last year, estimates the International Energy Agency. That would be money better spent on reducing oil use – what's called "demand erosion" – than encouraging it. And sadly, it is the rich who benefit the most. The IMF says the top one-fifth of households in income receive 42 percent of fuel subsidies because they are the heaviest users.

Shielding consumers from the real costs of an oil-based economy only makes it more difficult for them to face the coming end of the oil era.

For wealthier nations that generally shun subsidies, the price of oil – still over $130 a barrel – is quickly altering lifestyles.

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