More from Investopedia
In recent years, drivers have felt it each time they pull into a gas station: a sudden pang in the heart, and a low whimper sounding from their wallets.
One gallon of gas in the United States cost $3.417 US on Oct. 10 — a bit over 90 cents Canadian per litre. That's significantly off the $4 US or more American drivers have had to shell out in recent years.
It's not that way everywhere. In fact, in some countries gas is given away or downright cheap. The list of countries where you can find the cheapest gas at the pump:
- Venezuela (7.6 cents US/G or 2 Canadian cents per litre)
- Iran (37.9 cents US/G or 10 Canadian cents per litre)
- Saudi Arabia (60.6 cents US/G or 16 Canadian cents per litre)
- Libya (64.4 cents US/G or 19 Canadian cents per litre)
- Qatar (71.9 cents US/G or just over 19 Canadian cents per litre)
- Bahrain (79.5 cents US/G or 21 Canadian cents per litre)
- Turkmenistan (83.3 cents US/G or 22 Canadian cents per litre)
- Kuwait (87.1 cents US/G or 23 Canadian cents per litre)
- Oman ($1.173 US/G or 31 Canadian cents per litre)
- Algeria ($1.211 US/G or 32 Canadian cents per litre)
You may notice some similarities between these countries. First, none of these countries are considered to have developed economies. Second, none are considered to be full democracies. Third, they are all countries where you might expect to find oil. Re-ordering the above ranking according to the "CIA Factbook's" oil production and consumption statistics for 2010, we get:
- Saudi Arabia (No. 1 production, No. 8 consumption)
- Iran (No. 5 production, No. 14 consumption)
- Kuwait (No. 11 production, No. 36 consumption)
- Venezuela (No. 13 production, No. 24 consumption)
- Algeria (No. 16 production, No. 40 consumption)
- Libya (No. 18 production, No. 46 consumption)
- Qatar (No. 20 production, No. 62 consumption)
- Oman (No. 25 production, No. 70 consumption)
- Turkmenistan (No. 41 production, No. 72 consumption)
- Bahrain (No. 64 production, No. 101 consumption)
Why so low?
Some countries consume more than they produce (Bahrain), while Turkmenistan (1.7 barrels produced/consumed), Iran (2.3 barrels produced/consumed) and Venezuela (3.18 barrels produced/consumed) almost do.
Why would a country that produces so much oil want to keep prices at home so cheap, and thus keep demand high?
One reason is that low prices help governments present a picture of being benevolent, especially in countries facing high poverty rates. Another reason is that it sends a message that a country's resources can be used at home as well.
While motorists in the developed world might gnash their teeth at the thought of drivers in distant lands filling up a tank of gas for less than a cup of coffee, putting prices in dollar terms doesn't tell the whole story. After all, the average salary in the United States and Canada is likely to be higher than the countries on this list.
Looking at a country's GDP based on purchasing-power-parity (PPP) per capita gives us an idea of a country's income per head while taking into account price differences. (In the United States this figure was $46,860 in 2010):
- Venezuela ($12,048 US)
- Iran ($11,882 US)
- Saudi Arabia ($22,606 US)
- Libya ($13,845 US)
- Qatar ($88,221 US)
- Bahrain ($26,931 US)
- Turkmenistan ($6,804 US)
- Kuwait ($38,774 US)
- Oman ($25,491 US)
- Algeria ($6,965 US)
A Little Perspective
Looking at things this way takes some wind out of cheap gas' sails. While paying $1.211 US for a gallon of gas (or 32 cents Canadian for a litre) seems cheap, it doesn't look so cheap when Algeria's per capita GDP at PPP is $6,965 US.
In Algeria, filling up twice a month for a year would be $435 US, or about 6 per cent of per capita GDP at PPP. Filling up a tank in the U.S. the same number of times at $3.417 US per gallon would cost $1,230 US year, or 2.6 per cent of per capita GDP.
Despite drivers across the world having different levels of pay, keeping oil prices artificially low puts governments in a tough position.
It makes it difficult for them to let market forces take over in the future, especially since an increase in prices will be felt immediately. As seen in the U.S., people are very vocal about gas prices even though they make up a small portion of the average driver's annual spending.
It squanders a significant source of revenue that could be used to promote economic and social development. The government should be pumping money into a sovereign wealth fund that can be used to build non-commodity based industries.
It distorts consumer behavior by giving individuals and businesses an incentive to drive. This means that there is less of a reason to create more efficient technology, which means that there is lower demand for engineers and scientists.
According to the Sovereign Wealth Fund Institute, the sovereign wealth funds of some oil-rich countries are lacking. From the above list of countries with the cheapest gas, Oman, Iran, Algeria and Venezuela score poorly when it comes to transparency. Additionally, several have very low assets considering the amount of oil that is produced; Venezuela ($800 million US) and Iran ($23 billion US) should have better fund balances.
The Bottom Line
Governments know that the pressure is on, and some are moving away from heavy fuel subsidies. At the same time, the Arab Spring may make it more difficult to initiate the market reforms required to let gas prices appreciate.
If you are a government trying to maintain power over an unhappy population, the last thing that you want is to increase gas prices and anger them more. Whether countries can continue letting the domestic market siphon off cheap gas depends largely on political will, but it also will depend on how much oil they have left to dole out. After all, gas may be cheap but oil supply is quite limited.