A Good Way to Wreck an Economy
The United States, Iran, Venezuela, and Ukraine are very different countries, with very different languages, on very different continents. And yet there’s at least one thing they all have in common: energy subsidies.
In Ukraine, the government sets the price for natural gas well below market rates. This discourages investors from searching for new gas, encourages people to use more than they need, and forces the government to spend billions of dollars to make up the difference.
In Venezuela, the government keeps the price of gasoline so low that it’s virtually free: less than one cent per gallon. So even though Venezuela has the largest known reserves of oil, the country’s government is going broke at a remarkable rate. It costs an estimated $12 billion each year to provide the gas subsidies.
In Iran, drivers pay a stiffer price -- between $1.60 and $2.60 per gallon. But that is far below the going rate for gasoline, even in Iran. Tehran’s Islamic Republic is yet another government spending itself into oblivion to subsidize energy for its citizens.
Clearly, subsidies aren’t the largest problem these countries face. But they are making bad situations worse, by diverting resources away from productive activity, by encouraging people to be wasteful, and by hiding the scope of the country’s problems from voters.
Of course, it’s easy for an American to be smug about energy policy. Today we sell more oil abroad than we buy there. States that allow fracking, such as Texas and North Dakota, are booming -- although states that ban it, such as California and New York, are struggling. But so be it. Federalism gives states the right to fail as well as the right to succeed.
Even as prices have been on the rise in Europe (strengthening Russia, a natural-gas exporter) they’ve plunged in the U.S. That’s helping to spur an increase in manufacturing jobs in this country as well.
Still, there’s plenty of subsidizing in the American energy market. President Obama’s 2009 “stimulus bill” directed some $40 billion to the Department of Energy. Much of that money turned into subsidies for wind- and solar-generated power. There are also a number of tax breaks and mandates for favored industries. The Renewable Fuel Standard, for example, essentially forces refiners to use ethanol.
Affordable energy leads to economic growth and opportunity. But you can’t generate affordable energy through government subsidies. Only a free market can do that. But Americans are still teaching the wrong lesson; John Kerry recently flew to Kiev to offer Ukraine $1 billion in energy assistance. Most of that money will just end up in Russian hands.
Free-market competition, in energy as in other sectors, is the real answer. Perhaps an answer future governments, in all four of these countries, will turn to.
Rich Tucker is senior writer in the B. Kenneth Simon Center for Principles and Politics at the Heritage Foundation.