Lagniappe

 

 

Global Insight :Pressure mounts on
fuel subsidy regimes across Asia

 

No less than three different Asian governments have issued statements last month in which record crude prices are being blamed for prospective cuts in state subsidies and increases in domestic fuel prices.

Global Insight Perspective


Significance

Authorities from Malaysia, India, and Taiwan have all spoken out today about the pressure that the high international crude market price is putting on the established practice of capping domestic fuel prices.

Implications

Subsidy bills have become an unsustainable public-sector financial drain as oil prices approach US$100 per barrel. The NOCs of these three states will benefit from any higher retail returns, while Taiwan is the sole state in which there will not be increased incentives for foreign investor-led upstream work.

Outlook

While all regulators will attempt to soften the blow of the increase in prices that is on the cards, the countries' poor will bear a disproportionate share of the fallout.

All Change

Hot on the heels of China's move to increase domestic fuel prices last week and reports from Indonesia yesterday, which detailed the impact subsidies are having on the state budget (see "Related Articles"), officials from a number of states across Asia have raised the spectre of amendments to their own subsidy regimes. Reuters and Dow Jones report from Malaysia, India, and Taiwan today, where the pressure exacted by record international oil prices looks set to force regulators' hands and prompt a wave of fuel price increases.

Malaysia

First, from Malaysia, comes the news that maintaining some of Asia's lowest fuel prices is taking its toll on public-sector finances. Prime Minister Abdullah Ahmad Badawi has been quoted as saying: "What people have been asking is will there be a fuel price increase? Oil prices have reached $100. We can't avoid it". With the bill for direct fuel subsidies, which put the price of gasoline (petrol) at around US$0.50 a litre, and forgone taxes expected to reach 15 billion ringgit (US$4.5 billion) this year, Abdullah certainly has a point. In the absence of any price increases, he estimated that the gasoline and diesel subsidies will tally 20 billion ringgit next year. Despite the fact that 2008 is an election year and history indicates that any fuel price increase is bound to generate considerable public protest, it would appear the government is preparing to act to cut its losses.

India

The line coming out of India is one clearly appreciative of the social and economic upheavals that tend to follow increases in domestic fuel prices in Asia's leading emerging markets. Minister of Petroleum and Natural Gas Murli Deora has issued a statement in which he pledged the government was trying to minimise the hike in prices that was suggested last week. Despite its heavy import dependence, India's fuel prices have been static throughout the year as international prices have soared. Now, it looks as though the there will be a cut in import duties or an increase in retail price levels with a view to improving the margins of those NOCs that dominate the country's downstream sector.

Taiwan

The need to trim its NOC's losses was at the heart of Taiwan's recent decision to allow CPC Corp. to adjust its fuel prices once a month to reflect international crude price trends. However, the government has announced that it will adjust the current system to offer the domestic market greater price stability. From 1 December, CPC will only be able to increase or lower its prices by 12% in any given month. That represents a decrease from the 15% sweep that the NOC has enjoyed since the policy was enacted in September and, according to Information Minister Shieh Jhy-wei, is a direct response to a rapid rise in inflation seen of late. Fuel prices have been central to the 5.34% increase in consumer prices seen in October, a 13-year record.

Outlook and Implications

None of the reports has offered a timeline for action and it is clear that much political horse-trading will be required to push any of the proposed upwards price revisions through. Still, there is a palatable sense that resistance to international price trends is waning. No-one would suggest that Asian regulators are willing to make wholesale changes to their price regimes; low-cost fuel is too important to prevailing levels of demand, inflation is too great a concern and NOCs offer too convenient a route to bury costs for that to be expected. Indeed, as the Taiwanese experiment is proving, too much flexibility in the price regime can quickly lead to less desirable outcomes and necessitate swift regulatory intervention.

However, the extent of public-sector subsidy losses in a US$100/b world cannot be sustained. This fact has been accepted and there would appear to be greater confidence that the economy can absorb higher energy costs. The fact that higher domestic fuel market prices can represent an incentive for would-be upstream investors will not have been lost on Malaysian or Indian authorities. However, with the recognition that the prevailing regulatory stance must change, the challenge for regulators is to secure the benefits of higher domestic prices without disproportionately affecting any one constituency. The poorer sides of Malaysia and India have been the

 

Steven Knell is an Energy Analyst at Global Insight. Petroleumworld does not necessarily share these views.

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Petroleumworld News 12/28/07

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