An excerpt from The Economist, June 14th, 2014
For decades, governments from Egypt to Indonesia have subsidised the price of basic fuels. Such programmes often start with noble intentions--to keep down the cost of living for the poor or, in the case of oil producing countries, to provide a visible example of the benefits of carbon wealth--but they have disastrous consequences, wrecking budgets, distorting economies, harming the environment and, on balance, hurting rather than helping the poor.
Emerging markets are not the only places that distort energy markets. America, for instance, suppresses prices by restricting exports. But subsidies are more significant in poorer countries. Of the $500 billion a year the IMF reckons they cost--the equivalent of four times all official foreigh aid--half is spent by governments in the Middle East and north Africa, where, on average, it is worth about 20% of government revenues. The proceeds flow overwhelmingly to the car-driving urban elite. In the typical emerging economy the richest fifth of households hoover up 40% of the benefits of fuel subsidies; the poorest fifth get only &%. But the poorest suffer disproportionately from the distortions that such intervention creates. Eqypt spends seven times more on fuel subsidies than on health. Cheap fuel encourages the development of heavy industry rather than the job rich light manufacturing that offers far more people a route out of poverty.
I would argue that the same picture applies equally to North America, see my earlier blog on fossil fuel subsidies.