The Bolivian and Chilean governments' recent efforts to confront that dilemma led to dramatic images of unrest, with protesters in both nations burning tires, throwing rocks and building barricades in response to announced policy changes.

At the end of December, major cities across Bolivia erupted when President Evo Morales' government decided to remove price controls that were artificially depressing fuel prices. The move would have increased fuel prices by as much as an estimated 83 percent. The protests quickly engulfed the nation, forcing an abrupt U-turn on the part of the government.

No sooner had the tires stopped burning in Bolivia than tensions boiled over in the southern Magallanes region of Chile. With the onset of the new year, Chile's national oil company, ENAP, announced a plan to cut natural-gas subsidies in the country's south. The policy meant that Magallanicos, as the region's inhabitants are known, would see their gas prices rise by more than 16 percent. Residents of the frigid region, for whom gas subsidies have become a way of life, were not pleased with the announcement.

The unrest rapidly escalated and cost then-Minister of Energy Ricardo Raineri his job. Only with the appointment and immediate dispatch of the hero of last year's mine rescue, Laurence Golborne, was the government able to extract a compromise and bring an end to the strife.

Key here is that in both instances, the turmoil subsided only when the Chilean and Bolivian governments backed down from their efforts to reduce subsidies. The core issue of how to square national budgets with rising prices and subsidies was not resolved, but rather kicked down the road.

In Bolivia, the annual cost to the government of subsidizing and maintaining low fuel prices is more than $400 million, exerting a real drag on the nation's budget. In Chile, the price increases are justified by the roughly $4 billion in debt currently carried by ENAP. Chilean officials also point to the rationale behind the policy -- namely, to promote new natural-gas exploration in the one place in Chile where that is possible.

For much of Latin America, particularly in some of the region's most-important economies and oil-producing nations, an emerging debate has focused not only on the energy-price spike, but also on the subsidies put in place to control prices. Energy subsidies have for years been an important issue from Mexico to Venezuela. A quick tour across Latin America underscores the looming subsidy crisis. The numbers are staggering: In the Dominican Republic, subsidies of the electric sector cost the government more than $1 billion in 2008, while Mexico shells out upward of $20 billion annually. Venezuela spends roughly $10 billion each year to keep fuel prices low.

The origin of subsidies and the reasons for their persistence in Latin America can best be explained by the region's politics. With social unrest routinely bubbling below the surface, any measure that appears to provide economic relief to a large, and often downtrodden, portion of the population is politically useful.

When coupled with the added appeal to government bean counters and economists of its dampening effects on inflation -- the all-time bogeyman in Latin American economics -- it has historically proved to be an attractive option. Unfortunately, from a purely economic perspective, subsidies are a regressive way to address the existing social and economic inequalities faced by many countries in the region. Numerous studies have analyzed the winners and losers when a government chooses to subsidize its energy, and not surprisingly, the big winners are the more affluent -- namely, vehicle-owners and energy-intensive consumers -- rather than the ostensibly targeted poor.

The economic and environmental implications of energy subsidies have drawn increased attention globally. At last November's G-20 summit, a road map for phasing out fossil fuel subsidies authored by the International Energy Agency, the Organization for Economic Cooperation and Development, and the World Bank identified the "triple win solution" of removing subsidies as enhanced energy security, reduced greenhouse gas emissions and economic gains. 

The report identified two key policy prescriptions as the most-effective alternatives to current approaches: well-designed rural electrification subsidies to make energy services affordable to the poor, and better-targeted compensation packages for the poorest households -- or broader reforms to mitigate the impact of ending subsidies -- to protect the most vulnerable. 

As things stand, however, the region's governments are footing an increasingly unaffordable bill to assure cheap energy supplies to their citizens. And the examples from Bolivia and Chile underscore that recent clumsy approaches to redressing the imbalance are politically radioactive. Others will surely take note and be far more cautious with any policies that may engender similar popular blowback.

But if upward oil-price projections for the year are accurate, the topic of subsidies will continue to confront governments across the region as they strive to balance fiscal demands with soaring energy costs. 

Efforts underway in Mexico, one of the region's largest subsidizers of energy, offer some reason for hope. Just this week in Davos, President Felipe Calderon reiterated his nation's commitment to phase out onerous energy subsidies while providing a social safety net for its poorest citizens. One concept the government has developed is a more-targeted effort for energy assistance as part of Oportunidades, the nation's conditional transfer program for very low-income households. 

With 18 other countries in Latin America running conditional transfer programs, Mexico's approach may offer a practical model for balancing the phasing out of energy subsidies with targeted redirection of part of the savings to the segment of the population most adversely affected. 

The region's ability to sustain its economic resurgence against the current energy backdrop -- and deal with the ever-present potential for crippling protest -- may very well depend on it.

**Jeremy M. Martin is the director of the Energy Program at the Institute of the Americas at the University of California, San Diego. The institute is a non-profit inter-American organization focused on economic development in the Western Hemisphere. Martin can be reached at jermartin@ucsd.edu