The true cost of oil and gas

I often hear how we can’t afford to move to renewables because they are too expensive and need too many subsidies to be competitive. Well, have these critics thought about how much we subsidise natural gas and petrol?

A group of economists from the World Bank and IMF went into great detail to sum up all the explicit subsidies given to producers of fossil fuels across 170 countries. They calculate that explicit subsidies amount to $725bn worldwide or some 0.6% of global GDP. Meanwhile, they calculate that there are an additional $6.7 trillion (5.8% of global GDP) provided in implicit subsidies by not taking into account the damage fossil fuels cause to the environment and human health.

To give you an idea, let me focus on the price of petrol and diesel to run cars and lorries. The chart below shows the actual retail price in $/litre across 25 countries (red diamond) and compares it to the true cost to society. This true cost consists of the cost to supply petrol, the global warming costs caused by burning the petrol in a car or lorry, the cost to human health from road accidents, the damage done to the road from driving on it, local pollution near roads, the cost to society from congestion and the taxes charged on the fuel.

True cost of petrol (left) and diesel (right)

Source: Black et al. (2026)

All in all, petrol and diesel are too cheap everywhere except the UK, which currently has fuel costs that roughly match the actual cost to society. In the US, meanwhile, fuel prices need to more than double from $3 per gallon to about $6 to $7 per gallon to reflect the true costs of burning petrol and diesel.

Of course, the problem is that if you charge the true cost of these fuels, you are punishing mostly low-income households. High-income households can easily afford to pay more for fuel because for them, fuel costs are just a small part of their household expenses; for poorer households, that is not the case. Charging the true cost of fuel would reduce low-income households’ purchasing power by 4%. Eliminating just the explicit government subsidies to fossil fuels would still reduce their purchasing power by 1.8%, while high-income households would see their purchasing power shrink by just 0.2%.

Yet, the authors argue that these distributional effects are better dealt with by other government subsidies like means-tested tax rebates or fuel allowances for low-income households. The current system of blanket government subsidies, in contrast, ensures that most of the subsidies flow to the richest households, who least need them.