Energy subsidies lead to large fiscal costs at the expense of vital spending on health, education and infrastructure. In addition, they lead to wasteful consumption. Some of the oil exporting countries are amongst the most energy intensive and least energy efficient economies. Energy subsidies engender a bias in favor of energy intensive industries. More important, such subsidies are also inequitable since they mostly benefit the rich. in certain regions, fuel subsidies also encourage cross-border smuggling and they also aggravate the level of pollution.

Once a country provides energy subsidies it is very hard to reduce them and many countries are struggling with the political challenges and instability caused by attempts to reform such subsidies as people resist what they believe to be their entitlments.

The indirect means of redistributing oil and gas rent through subsidies, transfers and free public services is inefficient, inequitable and unsustainable. In considering options for redistribution oil wealth, oil producers must assess the comparative effectiveness of alternatives. In general, cash transfers to certain segments of the population are a superior form of transfers than in-kind or indirect transfers. They are more efficient, because they give people the choice of using the money more effectively. Moreover, if they are well targeted they may achieve the objectives of equity and sustainability. Alternative means of redistributing oil wealthy also need to be evaluated and compared in light of available administrative and institutional capacity.

In addition, subsidies fuel corruption, discourage efficient energy use and make it hard for newer sources to compete.