Yesterday morning during my morning commute, I heard an story on the radio that’s a sobering sign of the times. As I was blowing cash out my tail-pipe on my nearly 40-mile drive to the office, a guy on the radio described his own plight. He’s in worse shape than me.
At least my 6-cyclinder Chrysler Sebring convertible gets decent gas mileage for my long commute. The guy on the radio talked about how he was “stuck” in his Ford Excursion – unable to afford to fuel it up, but unable to trade it in for a reasonable price either.
My other car, the “family truckster” is a 2005 Ford Explorer. It’s bad enough on gas mileage, but is a necessity for my wife, two kids, dog, and various friends and teammates from my kids’ soccer and volleyball teams.
But the Ford Excursion is two heavy-metal models up from my Explorer. It’s a big, hulking vehicle, built on a heavy duty truck frame, with a big-block engine that measures gas mileage in gallons-per-mile instead of the other way around. My Explorer looks positively anemic in comparison.
Well, this guy interviewed on the radio has an Excursion, which he likewise needs to tote his kids (he has 4!) and assorted friends, teammates, etc., etc… around town. I already empathize with this guy big time.
Gas-Guzzlers Getting Priced Out of U.S. Resale Market
It seems he tried to trade in the Excursion at a local car dealer, hoping to at least downsize to a slightly more fuel efficient mini-van, still big enough for the kids, etc. But even though the Excursion’s book value is close to $20,000, the dealer would only offer him $8,000 for the gas-guzzler.
The reason: the dealer told this guy that big SUVs just aren’t moving. The dealer already had dozens on the lot (at a list price of $20,000) but they just weren’t selling with gas above $4 a gallon. At least this is an example of free-market forces at work.
Drivers in many emerging market countries just aren’t feeling the same pain, which is a big reason why oil and gasoline prices remain so high. That’s because many foreign nations subsidize the price of gasoline at the pump, as well jet-fuel, and other fossil fuels. In China for example, the government has a cap on gasoline prices.
As a result, drivers there pay about half of what Americans do at the pump. Beijing also subsidizes electricity rates, in a desperate (and misguided) attempt to keep a lid on consumer price inflation, which is already running at 8% annually. Imagine, how high inflation would surge if the gas-caps were scrapped?
Fuel Subsidies Thrive South of the Border
In Latin America, the situation is just as bad, if not worse. Most Latin American countries, including oil-rich nations like Venezuela and Mexico, are “shielding motorists from the impact of higher oil prices” through generous subsidies, according to a recent Financial Times article.
Chile just promised to add $1billion to its “fuel price stabilization fund.” Argentina has $11 billion worth of fuel oil subsidies in place now, and its expected to rise “much further this year” along with the soaring price of crude.
In Colombia, truck drivers went on strike this week over high fuel prices. The government’s solution: “raise taxes on private oil companies to finance increases in its $3 billion petrol and diesel subsidy.” Yeah, that’ll work, NOT!
Even in Mexico, which is a big crude oil exporter, a lack of refining capacity means they impart much of their gasoline. So Mexico City is paying $19 billion this year to maintain gasoline price subsidies – that’s four-times more than last year.
$100 Billion in Global Fuel Subsidies is NOT Money Well Spent
Note to Mexico: Perhaps that $19 billion would be better invested in new oil & gas well technology to reverse declining production rates at PEMEX!
Overall, global fuel subsidies will cost as much as $100 billion in 2008 – that’s twice as much as last year – according to data from the International Energy Agency. That’s money better spent on alternative energy development, or at least conventional energy production.
It’s no wonder oil prices are so high. Most of the world’s developing nations simply haven’t felt the “pinch” of higher prices yet, like we have. The U.S. and other nations went down this crooked path of price controls three-decades ago in an ill-conceived response to the energy crisis of the 1970’s.
It didn’t work then… and it won’t work in emerging Asia and Latin America now.
Worse yet, when these ridiculous subsidies are finally scuttled, then the lid on inflation will really blow-off, and these nations are likely to get hammered with crippling hyper-inflation.
Something’s got to give… hopefully sooner rather than later.
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