Editorial

Asia lowers fuel subsidies

India, Malaysia and Indonesia have led the way with cuts in fuel subsidies announced in the first half of this year, despite concerns about the impact on inflation and their respective rates of economic growth. This move by Asian countries followed the massive rise this year in global oil prices, leaving governments in New Delhi, Kuala Lumpur and Jakarta with little choice about how to respond. Despite the subsidy cuts, India's state-owned oil companies are still expected to lose US$ 58 billion by the end of 2009. Malaysia, for its part, is expected to spend some US$ 14 billion in subsidies over the same period. Now China has joined its Asian partners by increasing both petrol and diesel prices by some 18 per cent, directly contradicting its own assurances to the contrary from earlier this year.

According to one recent estimate published by The Economist, half the world's population enjoys fuel subsidies, so that petrol in some countries like Venezuela (admittedly a leading oil producer) is only five US cents per litre, compared to US$ 2.35 in Germany. The argument among some economist is whether higher prices will help to reduce world demand, presumably helped along by developing countries who continue to reduce subsidies. The counter-point heard in capitals like New Delhi is that eliminating subsidies will push up prices, stoke inflation and lead to social unrest. Yet the evidence suggests that oil subsidies actually benefit the wealthier segments of the population, such as those who use air-conditioners and cars. Hence a recent IMF study of five developing countries that found that 20 per cent of the richest households received on average 42 per cent of fuel subsidies. The bottom 20 per cent received less than 10 per cent. The study suggests that more cuts to fuel subsidies rather than less maybe the answer. Extra money generated for national exchequers by using this stratagem could be used for health, education and infrastructure that benefits all the population rather than just the privileged few.

Meanwhile Saudi Arabia's decision to hike up oil production by 200,000 million barrels per day has left analysts unimpressed with most predicting that prices are not likely to fall much below the current level of US$140. One analyst, Johm Hall of energy consultancy John Hall Associates, was widely quoted as saying at the end of June, 'The price will probably go back up to $140 per barrel this week because there is nothing to hold it back.' His comments followed the Jeddah meeting of oil producers and consumers who gathered to find ways of curbing oil prices that have resulted in a global energy crunch.

Leading Asian powers like India, China and Indonesia had previously been warned that their policies of subsiding oil prices was hiking demand and keeping prices high. Since then these three Asian countries, as well as some others, have significantly reduced oil subsidies leading to hopes that this will impact on prices as demand for oil is reduced in their roaring economies that have been enjoying double digit growth. Sceptics say it is not just the 'Asia' factor that is keeping prices high. They say unrest in Nigeria which produces a high quality light crude, and speculation that Israel could attack Iran, another major oil producer, is keeping oil traders jittery. Saudi Arabia's decision to pump more oil from July is encouraging, but the Saudi product is described as heavy and sulphurous for which there is limited refining capacity. The Saudis say they have always been prepared to raise output to calm prices, even at the risk of annoying their partners in the oil producing cartel known as Opec. They also insist that bottlenecks in refining capacity and wild speculation by investors are the real reason why oil prices continue to remain high.

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