KEVIN RAM­NAR­INE

The sub­sidy on pe­tro­le­um prod­ucts such as gaso­line and diesel has its ba­sis in the Pe­tro­le­um Pro­duc­tion Sub­sidy and Levy Act of 1974 which aims, among oth­er things, to shield the pop­u­la­tion from the va­garies of in­ter­na­tion­al oil prices. This pol­i­cy came about fol­low­ing the qua­dru­pling of oil prices from 1973 to 1974 on ac­count of the Yom Kip­pur War and the con­se­quent Arab oil em­bar­go of West­ern coun­tries.

Oth­er coun­tries have sim­i­lar fu­el sub­si­dies in place with the most ex­treme case be­ing Venezuela where diesel is 1 US cent per liter. By com­par­i­son, in T&T we pay $TT1.72 per litre for diesel or 26 US cents per litre (diesel is cheap­er than bot­tled wa­ter in T&T). In­ter­est­ing­ly, the most ex­pen­sive diesel can be found in places like Nor­way and Swe­den which are among the rich­est coun­tries in the world.

In T&T, the sub­sidy is a func­tion of the in­ter­na­tion­al oil price. This trick­les down to what is called the ex-re­fin­ery price. This is the price at which Petrotrin sells gaso­line and diesel to the two whole­salers Unipet and NP. The high­er the in­ter­na­tion­al oil price is the high­er the ex-re­fin­ery price of gaso­line and diesel will be. There­fore, keep­ing the re­tail price at the pump con­stant re­quires a Gov­ern­ment sub­sidy. Part of the sub­sidy is cov­ered by a levy paid by the oil and gas com­pa­nies.

In the last 15 years (2001 to 2015) the cost of sub­si­dis­ing fu­el was TT$34.4 bil­lion. This is about US$5.2 bil­lion or the equiv­a­lent of what is in the Her­itage and Sta­bi­liza­tion Fund. In times of high in­ter­na­tion­al oil prices such as 2011 to 2014 the sub­sidy av­er­aged over TT$4 bil­lion per year. How­ev­er, giv­en that oil prices are cur­rent­ly low, the sub­sidy should be much low­er.

At cur­rent oil prices (about US$40 per bar­rel), there is no sub­sidy on Pre­mi­um Gaso­line. In fact when you put Pre­mi­um Gaso­line in your ve­hi­cle you are ac­tu­al­ly pay­ing the Gov­ern­ment about TT$2 on every litre. At cur­rent oil prices there should be a small sub­sidy on Su­per Gaso­line of about 15 TT cents. Diesel how­ev­er re­mains sub­si­dized by ap­prox­i­mate­ly TT$1.10 per litre.

I guess that af­ter spend­ing TT$34.4 bil­lion a nat­ur­al ques­tion would be�what do we have to show for that ex­pen­di­ture? It may be ar­gued that the en­tire pop­u­la­tion has ben­e­fit­ted. But have some ben­e­fit­ted more than oth­ers? The ar­gu­ment one hears is the sub­sidy ben­e­fits the poor man. That may be some­what true but the facts are that the fu­el sub­sidy ben­e­fits the rich far more than any oth­er group.

The sub­sidy al­so caused or caus­es an il­le­gal trade in diesel. In 2011 the Min­istry of En­er­gy took the lead to deal with this scourge. I can­not say con­vinc­ing­ly that it was stamped out but I can say it was dealt a se­ri­ous blow. The facts are that in 2010 the il­le­gal trade in diesel was out of con­trol. In 2011 the Min­istry of En­er­gy and oth­er Gov­ern­ment agen­cies co-or­di­nat­ed ef­forts to treat with the prob­lem. The re­sult was a drop in the sales of sub­sidised diesel from 669 mil­lion litres per an­num in 2010 to 536 mil­lion litres at the end of 2015.

This is a dif­fer­ence of 133 mil­lion liters of diesel or a 20 per cent de­cline.

That can be at­trib­uted to the il­le­gal trade in diesel which saw our sub­sidised diesel al­leged­ly be­ing sold in South Amer­i­can coun­tries and to fish­ing ves­sels in the South­ern Caribbean.

The oth­er neg­a­tive as­pect of a fu­el sub­sidy is the im­pact it has on en­er­gy ef­fi­cien­cy, the en­vi­ron­ment and car­bon emis­sions.

Every­one talks about green­ing this and green­ing that. That is laud­able.

How­ev­er, sub­si­dies on gaso­line and diesel won't help us get there.

We have made a com­mit­ment to the Unit­ed Na­tions at COP 21 to re­duce our Car­bon Diox­ide emis­sions in the trans­porta­tion sec­tor by 15 per cent by 2030.

We should take this com­mit­ment se­ri­ous­ly. What is the plan to get there? CNG and Hy­brids are the way to go. I'm hap­py to see that CNG is start­ing to gain mo­men­tum and we are start­ing to see some more Hy­brids on the roads.

The is­sue is not whether we need to sub­sidise or not to sub­sidise. The con­sen­sus in the aca­d­e­m­ic com­mu­ni­ty sug­gests that the sub­sidy on trans­porta­tion fu­els should go the way of the neg­a­tive list and price con­trols.

There is no econ­o­mist worth his salt who thinks it should stay. The is­sue how­ev­er is how the Gov­ern­ment man­ages the re­moval of the sub­sidy. It should be re­moved in­cre­men­tal­ly and in a man­ner that man­ages in­fla­tion­ary pres­sure while al­low­ing the coun­try to ad­just.

T&T has no op­tion but to mi­grate to­wards a mar­ket econ­o­my. The al­ter­na­tive to that is a set of failed pop­ulist so­cial­ist poli­cies which tells us to buy a sub­sidised steel plant that can't make mon­ey.