Business | Oil & Gas
Oil price crash prompts Asian governments to slash fuel prices
A dramatic crash in oil prices this year has prompted governments across emerging Asia to slash heavily subsidised fuel prices, but this should not be taken as a sign the region is moving towards free energy markets.
- Reuters
- Published: 23:46 December 15, 2008
Hong Kong: A dramatic crash in oil prices this year has prompted governments across emerging Asia to slash heavily subsidised fuel prices, but this should not be taken as a sign the region is moving towards free energy markets.
On Sunday, Indonesia became the latest Asian nation to cut fuel costs, erasing half of the increases made earlier this year when oil prices were at record highs.
Cutting domestic prices of gasoline, diesel and other fuels as world prices fall makes economic sense, especially with low-income consumers hit hard by the global recession.
However, no Asian government is likely to take the politically risky step of letting market forces alone dictate domestic energy costs for fear that oil prices, which fell more than 50 per cent this year, will eventually climb again.
Elections in Indonesia and India next year and a pending leadership change in Malaysia, will also make leaders there particularly reluctant to risk fundamental changes that would bring higher efficiency, but could be hard to reverse.
Only months ago, a surge in oil prices to records above $140 (Dh514.21) a barrel forced governments to raise fuel costs to prevent ballooning subsidy bills from blowing up their budgets.
That unleashed a wave of protests from Bangkok to Seoul and enflamed opposition parties throughout the region. So when oil markets retreated to a four-year low of $41 earlier this month, the authorities seized the opportunity to pass on the cuts.
"It's easy to lower prices when fuel prices fall, but you're damned if you raise them when fuel prices go up again," said Subir Gokarn, Asia-Pacific chief economist for Standard & Poor's in New Delhi.
Easy cut
Gokarn said Indian general elections early next year made the 10 per cent cut in gasoline prices and near 6 per cent drop in diesel earlier in December an easy decision, but fundamental changes that would link all domestic prices further to international markets would be a hard sell.
India is flirting with lifting controls on transport fuel costs, according to a report on Friday. That would help consumers if oil keeps falling, but crude's downside potential is seen limited after it has already shed more than $100 from its record high.
In the past several days, India cut fuel prices for the first time in nearly two years and China said it will do it at the start of next year. Indonesia, Malaysia and Vietnam, have taken similar steps earlier.
Indonesia, which has the cheapest fuel in Asia, followed a cut in gasoline prices in early December with a further 9 per cent reduction and a 13 per cent cut in diesel prices on Sunday, erasing half of the increase from earlier this year. The cuts serve a double purpose: they should help bring inflation down from double digits and boost the popularity of President Susilo Bambang Yudhoyono, who will seek re-election next year.
Given the desultory global economic outlook, likely to keep oil prices under pressure, some economists urged developing nations to take advantage of the extraordinary drop in world commodity prices to begin unwinding fuel subsidies.
"There is a reluctance among some governments to lock themselves into permanent programs of this kind, even though, through better targeting, the final costs to the taxpayer would be lower than providing general subsidies on liquid fuels to everyone," said Deepak Bhattasali, lead East Asia and Pacific region economist with The World Bank in Washington.
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