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Asian
governments are squirming.
With
crude oil near $130 a barrel, their strategy to shield
consumers from high energy prices is becoming a drag on
national budgets. The unsustainable subsidies and price
controls must go, say economists. The problem is with
the timing of any such move.
The cost
of living is soaring almost everywhere, pushed higher by
food. Inflation expectations are hardening. In such an
environment, policy-makers will have to think twice
before raising energy costs. A quickening of inflation
is to be avoided, even if the acceleration is temporary.
A good
time to act was last year, especially in the first half
of 2007, when the price of crude oil averaged about $60
a barrel. Inflation wasn’t as big a challenge in 2007 as
it is now and authorities had ample leeway to start
letting higher costs of petroleum products pass through
into local prices.
They
missed the chance.
A survey
of 42 developing countries by the International Monetary
Fund showed that as much as three-fifths of the extra
cost of 2007 was absorbed by governments and refiners.
Only eight nations fully passed on last year’s
48-percent increase in gasoline prices to the retail
consumers in their countries.
Indonesia,
which was forced to increase fuel prices from May 24
after holding them steady for almost three years, is a
case in point.
Indonesian protests
Retail
gasoline prices have been allowed to rise by more than a
quarter. Even then, motorists in
Jakarta
are only paying 64 US cents for a liter of gasoline, or
$2.40 per gallon. In neighboring Singapore—where there
aren’t any fuel subsidies—the pump price is
two-and-a-half times as high.
Who will
explain this to protesters on the streets? As far as
they are concerned, the cost of living is already very
high.
But what
option does Indonesian President Susilo Bambang
Yudhoyono have? If he doesn’t plug the large hole that
energy subsidies are leaving in the government’s budget,
the rupiah might falter, stoking inflation and hurting
the poor.
Indonesia’s
resolve in going through with the price increase is
prompting analysts to consider the likelihood of similar
action by
China,
India, Russia and the Middle East, which will together
consume more crude oil in 2008 than the United States.
With
little chance of a spectacular increase in supply, a
reduction in petroleum demand in these nations holds the
key to making oil affordable again. And these are
precisely the countries where governments distort demand
in a big way.
‘Complex
web’
As
Francisco Blanch, head of commodities research at
Merrill Lynch & Co., puts it, “the oil market is trying
to find a demand destruction point.” And it can’t find
such a point partly because of “a complex web of
subsidies and price caps.”
A report
last year by McKinsey & Co. estimated that ending
subsidies would prune demand for transportation fuels by
3 million barrels a day. Contrast this with the increase
in crude-oil production promised by Saudi Arabia:
300,000 barrels a day.
It’s
never easy, politically, to remove subventions.
But it’s
especially hard now with runaway inflation.
With the
Bharatiya Janata Party—India’s main opposition
party—winning control of the legislature in the southern
Indian state of Karnataka in recent polls, the
government of Prime Minister Manmohan Singh will think
twice about removing price controls on gasoline and
diesel.
India, China
Indian
refiners, such as state-run Indian Oil Corp., are
together losing about $140 million a day because the
government hasn’t allowed them full cost recovery. The
price of diesel sold at gas stations in New Delhi has
risen just 4 percent since September 2006.
China,
where inflation is at a 12-year high, has rejected as
“baseless” speculation that it will allow heavily
subsidized prices to rise.
China
Petroleum & Chemical Corp., or Sinopec, is losing about
$430 on each ton of products it sells even after
receiving $1 billion in compensation last month from the
government, more than for all of last year.
The
Malaysian government estimates handouts to be 51 percent
more expensive this year because of higher crude prices.
Out of
the estimated $16.5 billion Malaysian subsidy, the
biggest contribution will come from Petroliam Nasional
Bhd., or Petronas. The state-owned refiner is forgoing
profits by selling gas to power producers and other
consumers below cost.
Malaysia,
which last raised prices of gasoline, diesel and
liquefied petroleum gas in February 2006, is also
hesitant to allow another increase because of political
reasons.
Political compulsions
Prime
Minister Abdullah Ahmad Badawi’s government is in
trouble. His predecessor, Mahathir Mohamad, wants
Abdullah to quit for delivering the ruling coalition’s
worst poll performance. Opposition leader Anwar Ibrahim,
emboldened by unexpected electoral gains, has threatened
to topple the government by September 16.
Taiwan,
which relaxed controls on fuel and electricity prices
this week, is in a better position. The decision has
been taken by a new government, which—unlike the one in
Malaysia—isn’t running low on political capital.
Asian
authorities should have shown greater alacrity last year
in weaning their populations off cheap energy. For too
long, they hesitated to do the right thing.
Starting
in August 2007, they may have even begun to see such
adjustments as unnecessary, hoping that a recession in
the United States would cause petroleum prices to
stabilize.
They
were so wrong. |
