Economics a.k.a El Banzeen Ghaly!

Almost all Egyptians know that gas prices are subsidized, people outside Egypt might not but if they're reading now they do.

As a consequence, Egypt "enjoyed" one of the lowest prices for gas (petrol if you're a brit) anywhere in the world. Up until a few weeks ago 1 liter of 90 octane gas was being sold to the public for 1 EGP (around 18 US cents), that is less than 70 US cents per US gallon. For a quick comparison gas in the US is cheap because it goes for around $3 US a gallon, and is expensive in the UK where people pay around 1 sterling pound for a liter. That's more than 10 times as much.

A few weeks ago, the price at which gas is controlled rose 30% to 1.3 egyptian pounds, and while I was not there when it did, I can definitely imagine the major uproar on the streets following that. If conversations with friends and family are anything to go by, I actually bet thousands, if not millions, of people are still uttering swear words in disapproval of the government's action.

I, too, think this was a wrong step to take, gas prices should not have slidden up 30%. The subsidies should have been lifted and prices should have been let to shoot up to the 5 or 7 times the current price that it's estimated to be worth. I am not being sarcastic either, hold on to your guns a little bit before you declare me crazy and hear me out.


Subsidies mean that the government is paying the price difference between what you're paying at the pump and what it actually cost to get the gas to the pump. It does *not* mean that the cost of gas is less, it was just transferred and is being paid by someone else.

Now, a basic economic fact is that demand increases with lower prices and decreases at higher prices. That is why not everybody is driving around in cars costing millions of pounds, and why on the other hand almost everybody can eat bread.
In fact it is so basic that it's almost considered common sense, and is ultimately portrayed by the common saying "Abo balash kattar meno" or translated "Get more of that which is free".

Combine both facts and you get a better picture, taxpayers' money is used to buy gas and people are using more of it because of exactly that.
If subsidies were removed, and gas prices are allowed to fluctuate according to free market conditions, prices will shoot up to maybe 6 or 7 times their current values. This will naturally cause people to use less and prices will go back down a bit. Not back to the point they're at with subsidies but to the point where equilibrium is reached between supply and demand.

And before thinking that this would be a life threatening situation for low income people let me explain what I think.
What would people do if they found out their dinner is free? I say they will probably eat more than what they usually do, much more actually.
This is no different than the gas situation. I know that I drove around for much more than 500 Kms on the first day I got my first car in Egypt. I also know that it would have been prohibitively expensive for me to do that if gas prices were 5 times their values back then.

Nobody likes high prices, specially those who can't afford it themselves. And even though it might be nice to imagine a world where everyone affords everything, the underlying scarcity of resources makes that practically impossible.

What subsidizing gas is doing is taking from tax payers, many(most?) of which are low to middle income, and paying it for gas much of which is consumed by the higher income classes who own the bigger and more gas guzzling cars.

Still not convinced? I'll leave you with a few statistics I just looked up.

-The FY 2006-07 budget earmarks EGP 40 billion for fuel subsidies, up from EGP 22 billion in 2005, and more than is allocated to health and education combined.

-According to Boutros-Ghali, the rich benefit by EGP 1,700 per capita from fuel subsidies, while the poor benefit by only EGP 300 per capita.


Economics* is interesting isn't it?

*Most of my recently acquired and embarassingly little knowledge of economics has been through this book, Basic Economics by Thomas Sowell. A highly recommended read.

Layout

I know it's long overdue but somehow whenever I decide to blog I end up doing something else... I assume this is a good thing (that I'm busy with other stuff) but I also promise I'll keep on blogging (even if just photos :P).

Anyway, I just have a quick question, does the blog layout show correctly on your computer? Ever since I modified it to be wider so that I can post bigger photos inline it's been showing up great on my laptop but kinda funny on my desktop. Is it just my desktop?

Appreciate the feedback!