As we mark the official start of the never-ending U.S. Presidential campaign with tonight’s Iowa caucuses, it’s worth remembering the one thing that politicians would be wise not to fiddle with during an election year: gas prices. One of the fastest ways to alienate voters is to be seen supporting anything that intensifies pain in the pump. Remember John McCain’s proposal during the 2008 elections—backed by Hillary Clinton—for a “gas tax” holiday? That’s one reason why—as POLITICO reports today—U.S. states lose collectively $10 billion a year, thanks to politicians’ refusal to increase gas taxes in line with inflation and construction costs, which starves needed infrastructure of funding. But the political cost of messing with gas is simply too high:
For politicians, the decision of supporting a gas tax increase isn’t one to be made lightly. In Iowa, which hasn’t raised its tax in 22 years, a citizen advisory panel recommended an 8 cent to 10 cent bump per gallon in November. Republican Gov. Terry Branstad quickly took any increase off the table, instead asking his Department of Transportation to look for savings.
“Everyone realizes that we need more funding for roads and bridges,” said Tim Albrecht, a spokesman for Branstad. “I don’t think the legislature was especially willing to put a burden on Iowa’s tax payers at this time.
Assuming U.S. politicians did have the gumption to increase gas taxes—even just to bring them in line with inflation—there’d be a lot of unhappiness, and a few pols might end up losing their jobs. But I’m betting there would not be major protests in the streets that could potentially bring down the national government.
Nigeria, however, is different.
Africa’s most populous country is also a major oil exporter, producing some 2.4 million barrels of crude a day—and sending much of it to the U.S. You’d assume that all that oil would mean cheap gas for Nigeria’s 160 million residents, most of whom are desperately poor. But you’d be wrong—in part because of inefficiency and corruption, Nigeria lacks the infrastructure to actually refine much of its crude, so most of the oil is shipped abroad in its raw form, forcing the country to then import expensively refined oil and gasoline.
To keep petrol relatively affordable, the Nigerian government has provided expensive fuel subsidies for nearly four decades. But the $10-billion a year oil subsidies drain public money away from more important sectors and distorts the economy. So at the end of the year Nigerian President Goodluck Jonathan made the politically bold decision to cut back on the subsidies, a move that could save the government $8 billion a year—four times the annual health budget.
As a result, on New Year’s Day the price of a gallon of gas more than doubled, from $1.70 a gallon to $3.50. The new price may not sound too high to Americans—it’s still 3o cents less than the average price in the U.S.—but most Nigerians live on less than $2 a day. Any increase in the price of gas will in turn increase the costs of other staples that depend on oil, from food to medicine to even electricity, since many Nigerians depend on gasoline-powered generators because so little of the country gets regular power. It was a New Year’s Day shock—and Nigerians weren’t going to take it laying down.
On January 3, hundreds of angry residents marched through the commercial capital of Lagos to protest the subsidy change. Marchers reportedly prevented petrol stations from selling fuel at the new, higher cost. The desperation among many protesters was palpable, as the AP reported:
“I don’t want to lose customers by doubling my rates, so I’ll have to bear some of this cost myself,” said Yomi Esan, 31, a driver for a taxi chain. “My biggest worry is losing my customers because this is how I feed my family.”
The measure risks bringing public wrath down on President Goodluck Jonathan, who says it is needed to reform the economy.
“Don’t push us to the street; for we went to the street to make you president and would not like to go to the street to remove you as president!” the Conference of Nigerian Political Parties (CNPP), an opposition umbrella group, warned.
The anger isn’t jut about the rising costs of fuel, however. Nigeria is one of the most corrupt countries in the world, and nowhere is that so obvious as the in its mismanaged oil sector. Nigeria’s oil resources are worth billions, but much of that money is wasted or siphoned off by a few wealthy insiders, while the Niger Delta—home to much of that oil—has become an environmental and humanitarian catastrophe. Subsidized fuel was one of the few ways that ordinary Nigerians benefited from that oil wealth, even in a roundabout fashion—so it’s not surprising how angry they became when that boon was removed.
Yet neither can Nigeria afford to keep spending billions to keep gasoline cheap—not if it wants to deal with a host of other pressing problems, as EconoMonitor points out:
Fuel subsidies always pose problems, distorting both demand and supply as companies are reluctant to produce a good sold at below local or global market prices as they will lose money and lower prices encourage greater demand as the price signals fail to influence demand. Given the political rents to be garnered from Nigeria’s oil sector, the extensive subsidies and other reform of the downstream oil sector have been very difficult.
This bold move though, does suggest that Goodluck Jonathan’s somewhat technocratic policy makers are committed to bringing spending on to a more sustainable path and using some of Nigeria’s scarce resources on the needed infrastructure. This implies that perhaps there might be some surplus left to go into the new and vaunted sovereign wealth fund.
More than $300 billion a year is spent globally on subsidies for oil. We often imagine that money going to line the pocket of rich oil company executives—and indeed, Big Oil does benefit from subsidies. But much of that money is spent as it is in Nigeria, keeping fuel affordable for the poor—and incidentally, keeping them pacified. Yet oil subsidies simply aren’t sustainable—not for the climate, because they prop up inefficient use of oil (like in Venezuela, where gas is cheaper than water), and not for the global economy. And as oil prices rise—as they’re likely to keep doing in 2012—those subsidies will cost poor governments more and more, which is why you’re likely to see other countries to follow Nigeria’s lead. Just don’t expect the changes to be smooth.