Subsidies: Fueling Egyptian Turmoil
The time is 8 am. During March 2012, 200 people at a depot just west of Cairo are waiting for a truck delivery of butane cylinders. One gentleman yells, “Please, I’ve been waiting for 10 days to get my cylinder–who can bear this?”
Necessary for home cooking and heating water in the vast majority of Egyptian households, butane cylinders from the Egyptian government are 16 times cheaper than the retail price. Each of the 200 people standing in line were supposed to hand in an empty cylinder, get a receipt and have the transaction noted on their national ID card. They return a week later to get a full one.
Reading about turmoil in Egypt, I have found that most of the economic analysis presents an overview. They cite 2.2% GDP growth (World Bank), 13% unemployment (World Bank) and close to 25% youth unemployment. They talk about a lack of foreign investors, fewer tourists and too many government jobs. They say that with government spending growing, fuel subsidies are an expensive problem.
I needed the butane gas queue story though, to see the real impact of subsidies.
Egypt subsidizes fuel by purchasing it at a relatively high price and then sells it for much less. According to one Egyptian news source, in 2012, they paid for 72% of the cost of butane gas and 57% of the cost of diesel fuel. Because lower prices typically create the incentive to demand a greater quantity, you have shortages, lines, resource overuse, unproductive government spending.
With quantity demanded exceeding quantity supplied at the subsidy price, you have a shortage:
However, even with the massive inconveniences and inefficiencies, it is tough to diminish or eliminate a subsidy because they create huge political and economic dilemmas. You can’t live with them and you can’t get rid of them easily.
Worldwide Fossil Fuel Subsidies
Sources and resources: Comparable to the butane queues, this article tells of the impact of diesel shortages on Egyptian micro buses, here you can read more about the butane lines and this Washington Post article has an excellent overview of Egypt’s economic challenges and for details on Egyptian subsidies, this article presents the stats. Finally, here is more from Bloomberg on countries that were and were not able to eliminate their fuel subsidies.
Please note that graph was added to post and stats were revised with World Bank numbers.