Singapore: Reluctance by China and India to fully eliminate fuel subsidies means it may be years before rising prices begin to seriously erode oil demand in the world’s fastest growing major consumers.
While smaller countries are shocking their drivers into conservation by raising prices sharply to ease the burden of subsidies, Asia’s largest and third largest consumers— which together account for half of the world’s demand growth this year—are set to maintain a far steadier, gentler approach.
India agreed to raise diesel and petrol prices by 10% on Wednesday, the biggest one-off increase in a dozen years. But that pales next to Indonesia’s 29% rise last month, and Malaysia’s decision to hike petrol prices by 41% and diesel prices by a sharper 63%.
Full throttle: A scene outside at a petrol pump in Ghaziabad. Oil demand growth in India has accelerated to its fastest pace in eight years despite fuel prices having risen by up to 65% since 2003.
“In general, price changes leave oil demand nearly untouched in the short run,” say consultants at Vienna-based JBC Energy. “Oil consumers might find it easier to adjust to small price changes.”
The issue of demand destruction has come into sharp focus in recent weeks, with oil prices falling from their peaks as traders fear that Asian demand—one of the catalysts for oil’s long rally—could quickly fall as subsidies are removed.
There is precedent for the case—Indonesia’s demand fell by one-fifth in the wake of a doubling in prices in October 2005, and has only recently recovered; India’s oil demand growth, however, has accelerated to its fastest pace in eight years despite fuel prices having risen by up to 65% since 2003. “So far, fuel prices have been so low that the share of fuel expense was relatively minor compared to total income, which was growing very rapidly,” says Yonghun Jung of the Asia Pacific Energy Research Centre, which studies demand trends.
If drivers in Beijing or New Delhi feel their governments will continue to keep prices from rising swiftly, analysts say they may see little reason to hold back from spending on the ultimate status symbol—a private car—and fuelling it may take precedence over other expenses.
“We have no choice but to pay up. We have to cut down on other expenses such as eating out and things for yourself because it’s not in your budget any more,” said Bina Chadha, a government officer in Mumbai, in response to India’s fuel price hike.
Even in the US, whose prices are relatively cheap by world standards, a trebling in pump prices since 2004 to $4 (Rs170) a gallon has seen evidence of weakening demand only appearing now, highlighting the challenge in prying drivers away from the steering wheel.
By contrast, Chinese and Indian prices have not even doubled since 2003, when both began controlling prices more rigidly.
There is little doubt that cheap prices have artificially encouraged consumption growth in the two giants, where oil demand has risen by one-third since 2003, adding another 2.78 million barrels a day to world demand—more than Germany’s entire use.
Countries that have recently raised prices by more than 10% or are poised to do so—Taiwan, Indonesia, Malaysia and Sri Lanka—consume about 2.7 million barrels per day, one-third as much as China alone.
And there’s little reason to think that the two economic giants have the stomach or need for quicker or bolder action. China has made taming inflation its top priority and is reluctant to risk public discontent by raising prices ahead of the Olympics, but is widely expected to begin allowing them to increase after August if the inflation threat subsides.
India’s Congress-led government faces elections next year, and is also desperate to contain inflation.
“We believe that to promote an equilibrium between supply and demand growth, price increases need to be not only more widespread, but also longer lasting as we believe demand growth responds to price inflation rather price levels,” Goldman Sachs said in a report issued a day before India’s decision.
Even when consumption does begin to moderate, it may have more to do with alternative transport than a reaction to prices, analysts say. Jung says that ambitious plans to build at least 13 subway systems in China and expand bus networks in major metropolises could help temper growth in the future, as it will prevent an auto addiction from taking hold too strongly.
Trever Houser, director, Energy and Climate at the Rhodium Group, a China-focused consultancy, says that even a 25% increase in Chinese prices would only shave about 1% off demand growth since commercial users would simply pass on the hike to customers.
“What would have a larger impact on Chinese oil demand is if high oil prices cause a fall in consumer spending and purchase of Chinese products elsewhere in the world,” Houser said.