“The price of gas went up!”
Now as citizens of Trinidad and Tobago, we are no strangers to “the price of gas going up”, ie. Gas being “more expensive”. In the last fiscal budget, the Minister of Finance indicated that the price of diesel and super gasoline would increase. Now, what does that really mean? At the end of this, I’m hoping you’d be able to tell me… In Trinidad and Tobago, the costs of fuel and electricity are subsidized, which, as mentioned before in the first blog post, simply means that money is granted by the government to ensure that the price of a commodity, in our case electricity and fuel, remains low or competitive. Basically, the government covers a portion of the cost, resulting in more affordable prices for the average citizen. The government does this to decrease the cost of production and encourages suppliers to increase output, without major price inflation occurring. How do subsidies work? 1. Fuel Subsidies Both the Government and Exploration and Production (E & P) companies share this burden. Petrotrin supplies the commodities to the domestic market, NP and Unipet, at a market price which is below the international price. The Government and the E&P companies will then compensate Petrotrin for that loss which occurred in the sales. 2. Electricity Subsidy T&TEC buys natural gas from the National Gas Company (NGC) at a price that is significantly lower than the average market price. T&TEC then pays independent power producers, such as Powergen, Trinity Power and Trinidad Generation Unlimited (TGU) to convert the natural gas to electrical energy. This means that NGC forgoes the amount of money they could have gained by selling the natural gas at the market price. God is a Trini: Price Comparisons The average price of electricity (per Kilowatt per hour) in Trinidad is: ONE THIRD the price of electricity in the United States and nearly ONE EIGHTH the price of electricity in Barbados. The average price of super (95 octane level) gasoline (per litre) in Trinidad, is : nearly HALF the price in Barbados, and approximately ONE QUARTER the price in the United States. The average price of diesel (per litre) in Trinidad is: roughly HALF the price in Barbados, and around ONE-SEVENTH of the price in the United States. The average price of Compressed Natural Gas or CNG (per litre) in Trinidad is estimated at ONE FOURTEENTH the price of CNG in the United States. It is quite evident that the prices of the commodities paid by Trinidadians are waaaaaaaaaaayyyyyy lower than the prices paid by Americans and Bajans. In the Caribbean Trinidad and Tobago allocates higher than the average (in per cent of GDP) when it comes to subsidies. Benefits of subsidies… This is evidently an advantage for the citizens of Trinidad and Tobago since power and gasoline is now made more accessible and affordable to them. Also, by subsidizing the cost of Compressed Natural Gas (CNG), the Government of the Republic of Trinidad and Tobago is now encouraging citizens to start using the cleaner alternative form of fuel for their cars. Cheaper fuel costs = Lower public transportation fees. Cheaper electricity rates = Lower electricity bills. Is There a Downside? The answer to that question my friends is a big, resounding YASSSSSSSSSS!!!!!! Apart from the obvious benefit of cheaper prices, on the flip side, there are many disadvantages to having fuel and electricity subsidies. These include: 1. Expensive for the Government: Subsidies are basically taxes in reverse. In Trinidad and Tobago, approximately 50% of the country’s annual budget is allocated to transfers (eg. GATE) and subsidies. 2. Higher Taxes: The money being forwarded to our subsidies must come from somewhere right? Since our climate does not promote the growth of money trees, subsidy money is most likely derived from taxes. In order to maintain fuel and power subsidies in this economic situation we are now facing, the government may have to raise taxes to accommodate them. 3. Wastage of Commodities: If we’re getting electricity at such a cheap cost, what is going to stop people from “wasting it”? It can be argued that “people waste electricity and fuel because it’s cheap”. If people we’re being billed the market price for power, they would be more motivated to monitor how much electricity their homes and businesses use instead of leaving their appliances plugged in, lights on in their home and using air conditioning units all day. 4. The money… The money being used for subsidies can be pumped elsewhere, into other sectors to benefit our economy. Instead of spending so much money on fuel and electricity subsidies, the government can use that money for projects such as improving our agriculture sector, or investing in renewable energy, just to name a few. 5. Climate Change: I know what you’re thinking, here we go again with this Climate Change thing….but to be honest, it’s a serious issue that is plaguing our planet and it needs to be handled ASAP. Low energy subsidies contribute greatly to carbon emissions. If gasoline and electricity is so cheap, why would any sane person want to invest in renewable sources of energy for their cars, homes and businesses? And to be fair, they have a valid point. The initial start-up costs of using these renewables would obviously be more expensive than these subsidized prices we are currently paying for power and gas. 6. Inequity: Subsidies tend to benefit the rich more than the poor. How you may ask? Well, since both the upper and lower classes pay taxes (which may sometimes be high), and the cost of fuel and power tends to be the same for both the upper and lower classes, the upper class tends to come out on top since they are capable of spending more, but they end up spending the same amount as the lower class. Still confused? Look at the following picture… What should be done? It is wise for the Government to reform energy subsidies. The subsidy should be gradually lessened and eventually phased out. While that may seem unreasonable to consumers, the population may be more receptive to the move of this action is accompanied by the following: improvements and new investments in public transportation and transport planning; cheaper alternatives to gasoline and diesel as transport fuels, CNG being a viable option; investments and promotion of renewable energy use in homes and businesses; education of the general public on the pros and cons of subsidies and how they affect the economy; transparency with regards to where the money being saved from subsidies, is being used. Now that you are aware of what “the gas price going up” really means, the next time the price of fuel or electricity is increased, you can now comprehend exactly why the government is doing this. Finally, let me leave you with this: Would you consider subsidies as our country spending beyond its means?