9 the information published under the Petroleum Industry Monitoring, Analysis, and Reporting Program. As one lawmaker put it, “We do have some information now on margins, but we don’t know what profits are. Is there excessive profit or not? We need that information and we don’t have it” (AP 2007). The program was repealed in 2010.

Many governments in developing countries keep retail prices of one or more oil products artificially low, thereby subsidizing them. Oil was considered a strategic good and price controls were common worldwide decades ago. While many governments today treat oil no differently from other commodities, a large number of governments have not moved from the era of price controls to deregulation. In some countries, consumers have become accustomed to relatively low prices, and in the last decade a confluence of food crisis, oil price shock, financial crisis, and, in some countries, political crisis has made it politically difficult to press on with price reforms. Reasons cited by the opponents of price reforms include protecting the economy from high world oil prices, curbing inflation, promoting economic development by making relatively cheap energy available, and making modern energy affordable to them. In major oil producing countries, low oil product prices are regarded as windfall dividends from oil revenue to which many citizens consider themselves entitled.

Opponents of subsidy reduction often argue that higher oil prices hurt the poor more than the rich. This may be true when both the direct and indirect effects on household expenditures are considered. For example, a detailed study of households in Madagascar found that a 17percent price rise would increase household expenditures by 2.1 percent for the bottom quintile, compared to 1.5 percent for the top. About three-fifths of the increase in expenditures was due to indirect effects, mostly through higher food prices. At the same time, because the poor spend far less on energy and food in absolute terms, the top quintile captured 40 percent of the total benefits of lower oil prices, whereas the bottom quintile captured only 9 percent (Andriamihaja and Vecchi 2008). Most poor do not own motorized vehicles or backup electricity generators and hence they may spend less than the rich on oil products not only in absolute terms but also as a percentage of total household expenditures. However, in countries where the poor rely on kerosene for lighting, they may be the largest spenders on oil products in terms of the percentage of total household expenditures, as shown by an analysis of household expenditure surveys in Bangladesh, Cambodia, and Uganda (Bacon, Bhattacharya, and Kojima 2010). What these observations suggest is that, even purely from the standpoint of equity, there is a cost associated with reforming oil price subsidies, and that cost should be weighed against the opportunity cost of maintaining the subsidies.

Some may argue that a fuel price subsidy is justified when the fuel is a merit good, such as a clean cooking fuel that causes much less pollution and has health benefits. Given cash instead of price subsidies, households may use the cash for other purchases while reverting to traditional fuels that are cheaper or collected for free, with attendant air pollution and health problems. As section 5 shows, however, it is difficult to target price subsidies for oil products, and universal price subsidies have large leakages.

Price subsidies for oil products are provided today because they are easier to administer than social services or social protection and are visible and politically popular. Although they benefit the politically powerful disproportionately (both legally and illegally through diversion and smuggling), subsidies can be billed as a pro-poor policy if necessary. All too often, if the government in power is attempting to reform universal price subsidies on the grounds that the bulk of the total subsidy goes to the rich, the opposition would nevertheless argue that the