Citing oil prices, Asia starts reducing fuel subsidies

Citing oil prices, Asia starts reducing fuel subsidies

New Delhi: Consumers in Asia are feeling the heat of skyrocketing oil prices -- which rose above $96 a barrel on Thursday for the first time -- as governments start rolling back subsidies that have kept costs for gasoline and other fuel artificially low.

China raised gasoline and diesel prices by up to 10% on Wednesday in an effort to curb demand and ease pressure on refiners, who are being squeezed between the soaring value of crude oil and fixed prices for fuel.

In India on Thursday, the ministers of finance and petroleum met to discuss higher oil prices, and some economists and government officials there now think an increase in consumer prices is inevitable.

In Malaysia, the trade minister, Rafidah Aziz, told the local news agency Bermama that the country might have to raise prices soon.

Retail prices of petroleum-based products like gasoline, kerosene and diesel are highly subsidized in many Asian countries, in part to make them affordable to citizens who earn lower wages than in the developed world. Governments absorb the costs directly or pass them along to oil exploration and production companies. India, for example, estimates that it will pay Rs500 billion, or $12.7 billion, in fuel subsidies in the fiscal year ending in March 2008.

Confronted with higher fuel prices, consumers often curtail spending on manufactured goods or travel, which in turn can cool the broader economy. Among populations with high poverty, fuel price increases threaten to cause civil unrest.

Oil prices are up more than 50% this year, and light crude oil for December delivery leaped more than 1% in electronic trading on Thursday 1 November, to a record $96.24, before sliding back to close at $93.55 on the New York Mercantile Exchange.

China raised fuel prices to "ensure the supply of domestic oil products and the promotion of energy conservation," the National Development and Reform Commission said in a statement on Wednesday (31 October). Fuel has been in short supply in China, leading to rationing and long lines.

India, which has been trying to phase out fuel subsidies for several years, may be next.

Gasoline and diesel in India are subsidized but are also taxed up to 100%, while prices of kerosene and liquefied petroleum gas, or LPG, are kept very low to make them affordable to the lower and middle classes.

State-owned upstream oil companies like the Oil and Natural Gas Corp.(ONGC) absorb some of the cost. The remainder is passed along to refineries, and offset by "oil bonds" that the government issues to these refineries.

India's current fuel subsidies "could be unsustainable in the long term," said Abheek Barua, the chief economist for HDFC Bank in Mumbai.

In the short term, the Indian government has been able to absorb subsidies, in part because revenue from corporate taxes is strong and there is plenty of cash flowing into the country from foreign investment. "If oil touches $100 and moves up even further, by early next year some adjustment in retail prices is inevitable," Barua said.

Global oil supplies are being strained by the rate of economic growth in Asia, and the problem is likely to increase, energy experts say. The Indian economy is growing about 9% a year, and China's economy expanded at an annual rate of 11.5% in the third quarter.

The Indian government first said it would eliminate controls and subsidies of petroleum products in February 2002 and would phase out subsidies on cooking oil and kerosene over several years. The jump in oil prices has made that impossible, however. In the annual budget guidelines issued in March, the finance minister, P. Chidambaram, said that subsidies on kerosene and cooking gas would be extended indefinitely.

Reliance Industries, an Indian energy conglomerate, recently found large quantities of natural gas near the east coast of the country, raising hopes that India might become less reliant on imports in the future.

"Someone has to give serious thought to whether there is the potential to reduce dependency on crude oil," said Rahul Singh, an analyst with Citigroup in Mumbai.