Oil for $80? Asian drivers can pay $50

Analysts are on high alert for signs of reduced oil demand that could crimp the market’s rally, but can rest assured that the domestic subsidies that have shielded many Asian drivers are in little danger of being swept away soon.

With Chinese inflation at its highest in almost three years and Middle East nations anxious to avoid any risk of domestic unrest, policy makers will remain keen to keep fuel prices low by global standards, analysts and officials say.

State-run refiners such as Indian Oil Corp. and China’s Sinopec may convince their owners to nudge prices higher this month, but history has shown that modest increments are largely ineffective in deterring demand growth in economies growing at near or above double-digit rates.

“Their demand is even more inelastic than in developed countries," says Yong-hun Jung of the Asia-Pacific Energy Research Centre. “Once you own a car in a place without well-developed mass transit, you don’t really switch."

Reckoning China and India’s price rises against crude in early 2003, the start of a five-year rally, motorists are paying the equivalent of about $50 oil -- not cheap, but a far cry from the $78.77 a barrel record high for U.S. crude on Wednesday.

Drivers in Saudi Arabia are paying less than they did several years ago, as many Gulf producers use their growing petro-dollar revenues to keep pump rates among the world’s cheapest, wary of risking public ire at a time of instability in Iraq.

Installed to help maintain social harmony at a time of economic transformation, the regulated price policies also mute the need for conservation on the part of consumers, allowing demand to grow unfettered, and driving global prices higher.

Oil demand in China, India and the Middle East has risen by more than 4 million barrels per day (bpd) since 2002, more than half the world’s total growth, and should expand by another 790,000 bpd this year, the International Energy Agency said.

China Conundrum

Some industrialised nations like the United States have also been surprisingly immune to any price-induced slowdown in consumption, although the world’s number-three user Japan is into its second year of shrinking gasoline demand.

“Because so many people live within ready access to trains, they’re quitting their cars," says Mizuho Securities Co. Ltd. analyst Hidetoshi Shioda. “Gasoline consumption will be really hurt this summer."

Not so in China, where a new car is sold every four seconds and retail gasoline prices are only 54% higher than at the start of 2003, and about 11% higher than mid-2005.

By contrast, the monthly average price of U.S. crude in July was 127% higher than January 2003 and up 26% from two years ago.

“With personal income growing and profits for most enterprises strong... little impact on demand itself is expected from higher oil prices," said Gong Jinshuang, a researcher with a think tank run by the China National Petroleum Corp.

Beijing’s last increase was a 10-11% move in May 2006, it’s biggest one-off rise to date, although in January it bowed to popular pressure and cut gasoline rates by 3.8%.

Refiners who shoulder the burden of higher crude costs are agitating for another increase to staunch their losses, although some analysts say it is unlikely they will attempt to force their point by reducing the sale of domestic gasoline and diesel, as they did in mid-2005, causing consumption to fall.

To minimise that risk, Beijing gave top refiner Sinopec a $1.2 billion rebate in late 2005 and another $640 million the following year to keep it in line with the state’s aims.

“Sinopec’s first goal is social responsibility, not profit," said an analyst attached to the company’s research division.

Consumer inflation that hit a 33-month high of 4.4% in June, sparking a third interest rate rise, may also stay Beijing’s hand from any significant price hikes.

Inflation of around 4.4% in India is less of a concern, although the government’s fragile grip on power may make it reluctant to make any sudden or significant changes.

India last raised prices in June 2006 before cutting them back in November and February. Diesel prices are up 33% since mid-2004 while gasoline has been raised by only 20%. Average crude price is up 82%.

“Demand for oil products in our country is inelastic, it will not come down," says Amitendu Palit, an economist with the Indian Council for Research on International Economic Relations.

“In fact we are becoming more energy intensive as we are growing more at over 9%."

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