The record high crude oil prices are forcing governments, especially highly oil subsidized countries, to reconsider their policy on oil subsidies. Removal of oil subsidies might cut demand in some of the world’s fastest growing economies.

Oil subsidies should be avoided to artificially lower domestic energy prices through fiscal measures. It works against market-based adjustment of energy demand. There's probably a better way of spending that money rather than subsidizing energy. - G7 Finance Ministers and Central Bankers In spite of the global economic slowdown, the price of crude oil has stayed well above $100 per barrel. Increased geopolitical risk is also adding further embedded premium, meaning prices would only rise and not decline in the coming days.

Accordingly, the perspective on crude oil prices should be based on the fact that major oil-consuming nations and even oil producers are faced with the problem that subsidized fuel prices pose to their growing economies. Governments, especially those in highly oil subsidized countries like China and India, are no longer in a position to push the inevitable to the future. They are now starting to roll back subsidies that have kept the prices of gasoline and other fuels artificially low. Moreover, mounting subsidies in the pricing of hydrocarbon energy products indirectly pose environmental risks, as they encourage excessive use of hydrocarbon energy. Countries like India should drastically and urgently reconsider their energy pricing and transportation policies to fight the ever-increasing traffic and pollution that their cities face.

In Asian countries, retail prices of petroleum-based products like gasoline, kerosene and diesel are highly subsidized in particular to make them affordable to citizens who earn lower wages. By subsidizing oil prices, governments absorb the costs directly or pass them along to oil exploration and production companies. For instance, reports predict that the Indian Government will pay Rs 500 bn or $12.7 bn in fuel subsidies in the fiscal year ending March 2008. Higher fuel prices will have a direct impact on the economic growth. Consumers will have to curtail spending, which in turn can help the broader economy. In some countries, high fuel prices even threaten to cause civil unrest among poverty-stricken masses. On the whole, high subsidies on oil prices are likely to worsen the fiscal conditions of highly subsidized oil-consuming economies.

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