Why do governments subsidize gasoline consumption? An empirical analysis of global gasoline prices, 2002–2009

Governments spend hundreds of billions of dollars annually to subsidize the consumption of fossil fuels without understanding the environmental and economic problems this practice creates. To shed light on these problems, we examine the case of gasoline subsidies using data on gasoline prices in 137 countries for the years 2002–2009. It is useful to study gasoline pricing because gasoline is the most important transportation fuel, and there are data for many countries for the time period of investigation. We find that major oil producers subsidize gasoline consumption by artificially reducing prices; countries with weak institutional capacity also seem to subsidize gasoline, but the effects are weaker. These results suggest that policy interventions to improve institutional capacity could help developing countries in particular reduce their fossil fuel subsidies.