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 on Oct. 10. That's significantly off the $4 or more drivers had to shell out in recent years. (For more on the ever changing gas prices, see The Gas Price Rollercoaster.)

TUTORIAL: Commodities

Cheapest at the Pump
It's not that way everywhere. In fact, in some countries gas is given away or downright cheap. The countries where you can find the cheapest gas at the pump, in U.S. dollars per gallon (2010):

1. Venezuela (7.6 cents)
2. Iran (37.9 cents)
3. Saudi Arabia (60.6 cents)
4. Libya (64.4 cents)
5. Qatar (71.9 cents)
6. Bahrain (79.5 cents)
7. Turkmenistan (83.3 cents)
8. Kuwait (87.1 cents)
9. Oman ($1.173)
10. Algeria ($1.211)

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. Reordering the above ranking according to the "CIA Factbook's" oil production and consumption statistics for 2010 (For more, read Top 5 Oil-Producing Countries In 2011.):

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. (To help you determine how gas is priced, check out What Determines Gas Prices?)

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 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.

1. Venezuela ($12,048)
2. Iran ($11,882)
3. Saudi Arabia ($22,606)
4. Libya ($13,845)
5. Qatar ($88,221)
6. Bahrain ($26,931)
7. Turkmenistan ($6,804)
8. Kuwait ($38,774)
9. Oman ($25,491)
10. Algeria ($6,965)

A Little Perspective
Looking at things this way takes some wind out of cheap gas' sails. While paying $1.211 for a gallon of gas, or around $18 for a 15 gallon fill up, seems cheap, it doesn't look so cheap when Algeria's per capita GDP at PPP is $6,965. Filling up twice a month for a year would be $435, or about 6% of per capita GDP at PPP. Filling up a tank in the U.S. the same number of times at $3.417/gallon would cost $1230/year, or 2.6%.

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) and Iran ($23 billion) 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. (To learn more about oil, see Oil As An Asset: Hotelling's Theory On Price.)

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