The Second Leg of Demand is Threatened

An article in the Financial Times last week caught my attention:

Asia to cut subsidies as oil hits $135

By Kathrin Hille in Taipei, John Burton in Singapore and Raphael Minder in Hong Kong

Published: May 22 2008

"Asian governments on Thursday moved to cut energy subsidies to protect their finances and those of state-owned energy companies in the face of soaring oil prices. As crude oil pushed through $135 a barrel for the first time, Taiwan, Malaysia and Indonesia announced plans for urgent action to free prices or cut subsidy costs. China denied rumours of an imminent increase in retail prices, but may relax price controls."

I wrote about the beginning of the end of subsidies in my blog post from May 13. As consumers in Asia begin to pay higher or even market prices for gasoline and other refined products, the effect on demand will be staggering. This process will not occur overnight but will eventually filter its way into the overly optimistic demand projections in emerging economies.

Article Highlights

Taiwan

"In Taiwan, the first act of the newly elected administration of President Ma Ying-jeou was to abolish price controls on petrol and diesel from June 1. The new government also said it would raise electricity prices in July."

Malaysia

"Malaysia said it would soon announce a new petroleum subsidy scheme to keep its fuel subsidy bill at around last year’s level of M$40bn ($12.5bn) in spite of rising oil prices....also suggested that the government would take the unpopular step of raising electricity tariffs. “If there is a rise in the price of [natural] gas, we will have to pass that along, since we are not going to see Tenaga [the state power monopoly] lose money,” he said."

Indonesia

"The Indonesian government said it would “soon” go ahead with a plan to raise fuel prices by an average of 28.7 per cent."

China

"The Chinese government said that stock market rumours of an imminent increase in domestic fuel prices were “groundless”. However, analysts forecast that Beijing would eventually endorse subsidy cuts."

Full Article

Other countries not discussed in this article are also ending subsidies:

"Egypt - the most populous Arab state - has raised petrol prices by 40pc, despite protests in Cairo.

"Sri Lanka lifted diesel and petrol prices by 25pc over the weekend."

"India may have to follow soon to prevent its trade and budget deficits climbing to dangerous levels. "The situation is alarming. We need to stem the rot," said India's energy secretary, MS Srinivasan."