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Published: August 28, 2006

Oil Subsidies and the Excessive Savings of Poor Countries.

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  • Oil Subsidies and the Excessive Savings of Poor Countries.
    • Blog Post extreme energy Oil

Why hasn’t the rising market price of oil plunged the world into a global recession? I’m not going to pretend I know the answer but a few otherwise unrelated articles I read today got me thinking about whether or not there is more to worry about than we might think.

First, everybody seems to be worried about the US housing market, which is fair enough given its overall impact on the economy, but it was something else about the discussions at the recent meeting of US central bankers in Jackson Hole, Wyoming, that caught my eye. Edmund Andrews, writing about the meeting in the New York Times, noted that “new research presented this weekend suggested that the United States could not count on a continuation of cheap money from poor countries. Those flows could stop as soon as countries find ways to spend their excess savings at home.” I had to read this a few times to digest it, but if I understand him correctly Edmund is suggesting that poor countries might decide to spend their excess savings at home rather than buy US Treasury bonds and that this is actually more of a problem than it sounds given the fact that the US deficit is largely being financed by countries like China these days.

Then I came across an article about how Nepalese gas dealers had gone on strike because the Government had reversed its decision to lower subsidies to petrol, diesel and other oil products. The Government had at first claimed that it couldn’t afford to keep oil prices artificially low given the rising market price of oil so it was going to reduce subsidies and increase the price of oil. This announcement was followed by riots in Nepal so the government reversed its decision and this, in turn, triggered a strike among the people who sell the oil. Sounds confusing to me too, but what it boils down to is that the Government of Nepal is damned if it does and damned if it doesn’t on the oil subsidies question. It is massively in debt to the Indian Oil Company and finding it harder and harder to sustain the (what I would consider to be rather dubious) policy of blanket oil subsidies, but folks in Nepal will go ballistic if the Government raises the price. A similar discussion is going on in India right now with perhaps broader potential consequences.

So what do these things have to do with each other? Maybe nothing, but it seems that we may all be a little bit in denial about the long-term consequences of our dependence on oil (the US is borrowing “excess savings” from “poor” countries to finance a growing trade deficit – including oil imports – and Nepal is going further into debt to the Indian Oil Company in order to subsidize its oil). Addiction breeds denial?

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