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Fuel Subsidies, the Oil Market and the World Economy

This paper studies the effects of oil producing countries' fuel subsidies on the oil market and the world economy. We identify 24 oil-producing countries with fuel subsidies with retail fuel prices that are about 34 percent of the world price. We construct a two-country model where one country represents the oil-exporting subsidizers and the second the oil-importing bloc, and calibrate the model to match recent data. We find that the removal of subsidies would reduce the world price of oil by six percent. The removal of subsidies is unambiguously welfare enhancing for the oil-importing countries. Removal of subsidies is welfare improving for the oil-exporting countries as well, in the baseline calibration. However, the optimal subsidy from the point of view of oil exporters is not zero, in general.

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Keywords: Oil prices, Fuel subsidies, Fiscal policy, Open economy macro

DOI: 10.5547/01956574.36.SI1.nbal

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Published in Volume 36, Adelman Special Issue of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.