Davis, Lucas “The Economic Cost of Global Fuel Subsidies” (December 2013) (Revised version published in American Economic Review: Papers and Proceedings, 104(5): 581-585, May 2014) | WP-247R | Blog Post
By 2015, global oil consumption will reach 90 million barrels per day. In part, this high level of consumption reflects the fact that many countries provide subsidies for gasoline and diesel. This paper examines global fuel subsidies using the latest available data from the World Bank, finding that road-sector subsidies for gasoline and diesel totaled $110 billion in 2012. Pricing fuels below cost is inefficient because it leads to overconsumption. Under base-line assumptions about supply and demand elasticities, the total annual deadweight loss worldwide is $44 billion. Incorporating external costs increases the economic costs substantially.