• Home
• /
• Business

Emerging Asia will keep fuel prices on tight leash

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 scaling 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 any time soon the politically risky step of letting market forces alone dictate domestic energy costs for fear that oil prices, which fell more than 50 percent this year, will eventually climb again.

In addition, elections in Indonesia and India next year and a pending leadership change in Malaysia, will 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 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. “I don’t in any realistic sense see a quick and dramatic transformation in the energy price system.”

Easy cut

Gokarn said Indian general elections early next year made the 10 percent cut in gasoline prices and near 6 percent 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 the Economic Times 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 percent reduction and a 13 percent 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.

A decade ago, riots over cooking fuel price hikes helped trigger the ouster of President Suharto and subsidy cuts in May hit Yudhoyono’s popularity ratings.

However, no long-term policy changes have been made.

Inefficiency and instability

Given the desultory global economic outlook, which will likely 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.

Now is the time not to just cut fuel prices but to implement mechanisms that can automatically adjust costs once global prices substantially rise again so the impact on consumers will be gradual, Bhattasali said in an answer to questions over e-mail.

Asia, excluding Japan, is one of the most inefficient regions in the world in terms of its energy consumption relative to total economic output. Price caps, particularly through the 2007-2008 oil boom, encouraged overconsumption and wasteful use of energy.

If Asia completely lifted its fuel subsidies last year, global demand for oil would have been 1.25 to 2.5 percent lower, according to the International Monetary Fund. Those percentages may seem small but because additional sources of supply are so limited, a 3 percent decline in demand in 2007 would have doubled spare capacity.

Long-awaited changes to China’s fuel pricing system announced last week brought the country closer to a floating rate regime and to a long-term goal of higher energy efficiency. The overhaul could cut retail prices by nearly a quarter when the reforms kick in on January 1, according to Reuters calculations.

Larry Chow, director of the energy studies centre at Hong Kong Baptist University, said China could keep its fuel costs tied closely to world prices as long as oil is at $40-50 a barrel. But it would be unfeasible if oil headed back up to $100.

He expects oil to stay below $60 in the long run.

However, the country’s vast population of people who spend a third of their income on food alone suggests any further reforms will be carried out at a snail’s pace.

“When you cut subsidies, the biggest consideration is toward low-income families and inflation,” Pu Yonghao, head of Asia Research with UBS in Hong Kong, said. “This is probably why the subsidies are being lifted slowly, but it really depends on how much of a cushion families have against a rise in petrol costs.”