Governments’ finances are set to come under further strain from mounting fuel subsidy costs as they attempt to shield households and businesses from the worsening energy crisis.
Countries around the world face calls to introduce or extend support to consumers after Brent crude soared to nearly $US110 a barrel last week as the spreading Middle East conflict destabilised energy markets, while the price at the petrol pump jumped to fresh records, including in the US and Germany.
The number of countries introducing fuel subsidies to protect consumers from surging prices has more than doubled over the past four months, rising from 16 to 38 at the start of September, according to Financial Times analysis of figures from the International Energy Agency.
Fifty-seven governments have now lowered energy taxes, up from 40 at the end of April, while the overall number with some form of consumer support has grown from 56 to 94.
France on Friday extended support for high-mileage drivers that had been due to phase out at the end of September, while German Chancellor Friedrich Merz promised to set out proposals to support drivers facing high fuel costs “very soon”.
In the UK, Prime Minister Andy Burnham is under pressure to at least help lower-income households when he sets out his plan for the economy next month.
The interventions are set to compound the pressure on government finances as global bond markets sink, sending US government borrowing costs to their highest levels since 2007 last week as inflation surges and central banks lift interest rates. They come despite calls from the IMF and other global bodies for governments to keep energy interventions narrow and time-limited.
“Governments are trying to adopt some way to ease the pain, but the problem is that once you do this, it is like ripping off the Band-Aid – it’s very hard to put back on,” said Paasha Mahdavi, director of the energy governance and political economy lab at the University of California, Santa Barbara.
The rising fiscal burdens on Friday prompted a warning from EU economy commissioner Valdis Dombrovskis, who said governments needed to respond to the “marked increase” in sovereign yields.
“This should focus minds: member states must prioritise prudent fiscal policies, sticking to the targets set out in medium-term plans,” he said.
But Europe is in a particularly vulnerable position as it will enter the winter with record-low gas stores. Normally, European Union countries draw on the gas in storage to provide about a third of the fuel used during the winter months.
In Britain, which depends heavily on gas for electricity and heating, typical household energy bills are due to rise by 4 per cent in October. Supplier EDF is currently predicting a further 26 per cent increase in January, although the final figure will depend on wholesale prices up to mid-November.
Strategic oil, fuel reserves
Underscoring the concern, French President Emmanuel Macron said G7 countries would meet in the coming weeks to look at releasing more strategic oil and fuel reserves.
In oil-poor South-East Asia, rising prices could not only challenge energy supply but also the region’s fiscal strength.
Several of the region’s largest economies – Indonesia, Malaysia and Thailand – subsidise fuel prices. Surging oil prices will increase the cost of such incentives and put additional pressure on state budgets. Indonesia has promised to maintain subsidies, while Thailand has been rolling them back since March due to fiscal pressures.
In the Philippines, which sourced nearly 95 per cent of its oil needs from the Middle East, transportation drivers held protests following the recent oil price jump and demanded subsidies from the government.
African governments are also struggling. Ndaba Gaolathe, finance minister and vice-president of Botswana, told the FT the government was being forced to intervene as higher fuel prices affected inflation.
“We have had to take policy decisions. We reduced fuel levies to cushion our consumers and businesses. Inflation has gone up from the Bank of Botswana range,” he said, referring to the central bank’s inflation target of between 3 per cent and 6 per cent.
Even the US is hardly proving immune to the effects of the crisis that has rippled across the world following the February 28 attacks on Iran.
As the world’s biggest oil and gas producer, it is normally better insulated from global price shocks. But the price of US diesel has smashed through records to reach nearly $US6.45 a gallon ($2.39 a litre) on Friday, according to the motorist group AAA; up 70 per cent since the war broke out.
While some US states implemented so-called tax holidays early in the conflict, the federal government has not brought in any national tax relief or subsidies. President Donald Trump has floated suspending the US18.4¢ a gallon federal gasoline excise tax, though this would require approval from Congress.
“The high fuel prices that we are seeing because of this war are politically toxic,” said Mahdavi. “They have the power to unseat incumbents and drive real dramatic political change.”
Extracted in full from: https://www.afr.com/companies/energy/fuel-subsidies-weigh-on-public-finances-as-energy-crisis-deepens-20260921-p60z8j
