Booming Asian economies have helped ramp up the global oil price—but Asian consumers have not paid the price. Fixed fuel prices have shielded consumers from the oil price spike. That requires subsidies, which are costing Asia’s governments more and more.
The policies are changing. Indonesia and Taiwan raised fuel prices last week. India seems set to follow. China, the big one, may also act, though probably not until after the Olympics.
India shows the dangers of the subsidized fuel policy. While the newly affluent middle class drives cheaply, its state-owned oil firms, Indian Oil Corp. Ltd (IOC), Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd, are borrowing expensively. They lose roughly one-third of a US dollar on every litre of petrol they supply and half a dollar on every litre of diesel. Their debt is spiralling: up, reportedly by $800 million (Rs3,408 crore) a week. IOC intends to double its borrowing ceiling to Rs80,000 crore. This cannot go on. India’s oil minister Murli Deora now seems determined that it won’t, though he faces political opposition. A compromise rise of about 10% seems likely. It will bolster the oil firms’ finances somewhat, and have some economic costs.
India’s inflation rate, already up to 7.9%, from 6% a year ago, may climb higher. Growth, 8.4% in the fourth quarter, may be dented a little. To try to avert these negatives, the government is tempted to shield consumers by reducing fuel excise duties. That would be a mistake. The government would lose revenues, while Indian consumers would again be discouraged from thinking harder about the cost of the fuel they consume. But subsidizing fuel so heavily is unsustainable. Asian governments are going to be forced to pass on high oil prices to consumers. As they do, inflation will worsen and oil consumption will fall. But it might help pull down the too high price of oil.
For more views visit www.breakingviews.com