The High Cost of Cheap Fuel

 

I saw things in Cairo that I thought were only true in the movies. This whirlwind trip has been a real eye opener for me, an enormous culture shock and I have come to realize my own naivety surrounding mega cities in developing countries. To give you an idea of the conditions:

• the city is home to 18 million people
• the sixteenth most populous city in the world
• a diameter of 15 km

There are two extremes here: rich and everyone else. Most people live in homes that are in poor condition at best and generally absolute wrecks. Half a million squatters are living in cemetery tombs in central Cairo.

The cost of living is quite low which allows the population to scrape by on little-to-no monthly income. I am by no means a policy expert and I cannot say that I know the history or understand the problems that the Egyptian government and people have faced, but to me it is evident thatthe subsidization of gasoline and diesel fuel is an absolute disaster.

Cairo is a therefore a perfect case study for people looking for reasons why the subsidization of fossil energy is a bad idea.

Market manipulation in the form of taxes and subsidies by governments are tools that are used to persuade the market in a direction that the government sees as beneficial to society. These tools can be used effectively, as we have seen in Denmark to encourage local growth of community renewable power.

In Egypt, the current price for a liter of gasoline is about 0.15 CAD$. The subsidy was initiated under the pretext of protecting domestic jobs, stimulating the economy and protecting the poor from high prices.

At first glance, I suspect that many North Americans would wish that our government “came to the rescue” and subsidized our fuel prices. Think about how cheap a trip to the mountains in your SUV would be if fuel only cost 15 cents a liter!

However, the fuel subsidies are by no means a free-ride for the Egyptians. The money used to subsidize the real cost of fuel has to come from somewhere. In the case of Egypt, subsidies have displaced funds for basic needs such as education, health care and the environment. In the case of the environment, the subsidization creates a triple negative hit: reduced government spending to protect the environment, increased pollution from the excessive use of fossil fuels, and reduced economic incentive to use renewable and clean energies.

Over 2 million vehicles congest Cairo’s roads, many of them being old carbureted gas engines, old diesels, two-stroke motor bikes and rickshaws. The air pollution in the city is unbelievable. The black smoke from the vehicle exhausts blanket the city like nothing you can imagine. It fills the streets and sticks to the building making everything grey. It is so dense that when you are in the heart of the city on a windless day you can not see the sun in the sky. There is nowhere you can go to take a fresh breath of air. The lung problems that these people are going to have in 20 years are hard to fathom.

As for economics and profit stimulation, it seems to have only brought wealth to a small percentage of already wealthy people who were able to capitalize on the system. Currently Cairo has a 20% unemployment rate.

Furthermore, the country is living in delusional cheap fuel bonanza while the commodity price of oil is steadily climbing towards 100 $/barrel. The government is being squeezed and has admitted that the fuel subsidy will have to end soon. However, society has become addicted to this cheap oil and feels that it cannot survive without it!

According the locals I was staying with, riot police have been set up all over the city in anticipation of riots and public unrest when the subsidies are stopped. My Egyptian friend claims that the removal of fuel subsidizes will also cause overnight inflation on the entire economy. Food prices, taxi cabs (the artery of Cairo’s transit) and generally everything that touches any kind of transport or manufacturing in the country will be forced to ramp up prices to account for the major adjustment.

The real question becomes: how will the people making 300 $/mo or less adjust and more importantly how will the people who are unemployed make ends meet? Unfortunately only time will tell and hopefully the Egyptian Government has a plan to slowly ease the people into a substantially more expensive life.

As for North America: we too are addicted to private transport. While we have much stricter emission standards we too are going to be faced with difficult transport decisions in the all too near future. Governments need to invest more heavily in our public transportation system and people need to start using it- not only for cost considerations but also for the environment. The policy that drives the decisions in our cities and countries needs to not be only concerned about which overpass is causing major congestion but how to improve public transport and make cities more walk-able, bike-able and livable. We need to start making decisions and investments thinking about the 10-15 year plan and not concern ourselves with political platforms only aimed at wining the next election (i.e. 2% GST cuts).

In the end I can say that I enjoyed my trip. I met a great number of very humble and gracious people and can say that while the lungs of the Egyptians may not be too healthy their hearts more than make up for it. I sincerely hope that their government has a few plans on how to deal with the impending fuel crisis that this country is going to face very soon. I am glad that the companies that were represented in the course we taught are at least looking to start a wind industry. This is an enormous step in the right direction.

Even though we can selfishly think of all the good reasons for subsidized fuel, it is quite clear that one way or another we all end up paying the full price (and maybe even more) in the end. We can only avoid the true and external costs of fossil fuels for so long. Even in North America we will have to pay the piper sooner or later. If we choose sooner, we can choose our destiny, if we choose later we will likely end up in the same boat as our Egyptian brothers.