• Thu
  • Dec 18, 2014
  • Updated: 3:40pm
PUBLISHED : Thursday, 04 April, 2013, 12:00am
UPDATED : Thursday, 04 April, 2013, 3:35am

A narrow escape from the perils of official subsidies

Running out of petrol and almost being blown up while driving around Bali brings home the pernicious nature of energy subsidies

Driving through the back hills of Bali some years ago, I was treated to a first-hand demonstration of how energy subsidies do more harm than good.

It was late in the day, and although our hire car was running low on fuel, I was untroubled. After all, this was back in 2000, when Indonesia was still a major oil producer and exporter. Petrol was cheap and plentiful. Or so I thought.

When we finally did come across a service station - owned and operated by state oil company Pertamina - there was not a single drop of petrol available. The manager was deeply apologetic, and assured us he expected a delivery at any moment. But rather than wait, he said, we should try another station some kilometres away. They might have some petrol, he explained.

Locating the second service station took some time, and lots of spirited debate when we stopped to ask for directions. But eventually we did find it: closed.

The proprietress of a nearby teashop assured us that it wouldn't have helped if it had been open - it had completely run out of petrol.

Even the old ladies who usually sold fuel in old lemonade bottles by the roadside were out of stock. But there were encouraging rumours of a Pertamina delivery tanker somewhere in the neighbourhood.

Boldly we set out in search of this tanker, and a third service station people thought it might call at. By now it was fully dark, our fuel gauge had been reading well below zero for the last half hour, and the car's engine was sputtering ominously.

Just when I had resigned myself to spending a cheerless night among the rice terraces, we rounded a corner to the sight of a brilliantly illuminated Pertamina station. And there, resplendent under floodlights and the centre of bustling activity, was the tanker.

But as we pulled into the forecourt, we realised that all was not as well as we had hoped.

For one thing, the people surrounding the delivery truck all appeared to be wearing military uniform. And the two other vehicles there looked just like a couple of army trucks. Getting out of the car, I was hit by a heavy blast of petrol fumes. It looked and smelled as if the soldiers were siphoning the petrol out of the tanker and into 40 gallon drums on the back of their trucks.

Gingerly approaching the nattily attired gentleman I took to be in charge, and hastily declining his offer of a cigarette, I enquired whether it might be possible to buy some petrol.

Buy? Never! He would give it to us, he said, briskly ordering one of his men to fill our tank.

We drove out of there as fast as we could, profoundly grateful not just for the petrol, but for escaping with our lives before the whole place went up in a monstrous fireball.

Later, a local businessman explained to me what had been going on. As an oil producer, Indonesia heavily subsidised domestic fuel costs. That meant petrol was cheaper at home than abroad, which encouraged wealthy tycoons to buy up vast quantities of subsidised fuel and ship it abroad for a handsome profit. In the case of the army, they just stole it. The result, in a country producing 1.5 million barrels of oil a day, was a chronic petrol shortage.

In short, energy subsidies are a disaster. In a report released last week, the International Monetary Fund condemned them roundly, saying "subsidies aggravate fiscal imbalances, crowd out priority public spending, and depress private investment … Subsidies also distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources".

All of which has to make you wonder why the Hong Kong government spends almost 5 per cent of its annual revenues on energy subsidies, mostly for coal-fired electricity. Surely the money could be better spent.



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This article is now closed to comments

It strikes me that your anecdote describes the problems with corruption and/or illegal export of natural resources, much less than problems with energy subsidies.
There is a lot to be said for making energy more expensive in Hong Kong, but given our huge fiscal surplus, arguments about energy subsidies being an unsustainable fiscal burden or crowding out other public spending hold no sway.

Also, most capital/energy incentive businesses in Hong Kong are already naturally deterred by the high cost of land/premises that such businesses tend to require.

What we are left with then are largely arguments about environmental externalities related to energy consumption. A lot of those can be very valid and relevant, especially on a longer term horizon.

However, as you must know, the money Hong Kong spends on electricity subsidies in Hong Kong for an important part consists of the electricity allowance we all find traces of in our bi-monthly CLP and HKE bills. Those disproportionally benefit lower income households, and were indeed designed as such: a form of relief for the soaring cost of living.

So, if you think this money could be better spent, that might very well be true. But it is not because Hong Kong has any problems reminiscent of the corruption you witnessed on Bali. And it is also not because Hong Kong's subsidies fit into the IMF's target basket of countries with fiscally unsustainable and economically distorting energy policies.
Let's see you explain that to the Chinese government, where cheap fuel has provided artificial demand for cars…..


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