Fuel subsidies in Asia driving oil price inflation?
By Jon Fernquest |
Thai government policy has heavily subsidised fuel costs.
The price of diesel, LPG, and other fuels has been set well below what they would be if market forces (supply and demand) set the price.
Other Asian countries such as China and Indonesia have also provided fuel subsidies. Indonesia spends six times as much on energy subsidies as it does on agriculture.
This Tuesday the Bangkok Post published an important New York Times article on these subsidies and the role they have played in creating even more inflation, presented here in easy English.
Mismatch in supply and demand drives oil price increases
Worldwide fuel subsidies have caused a mismatch in supply and demand and this has helped push up world oil prices.
In countries that do not subsidise fuel, high prices have forced people to conserve fuel. With fuel conservation, demand for fuel has dropped considerably.
China reduced subsidies on June 21. This caused world prices to fall immediately by $4 per barrel because traders expected that increased fuel prices in China would lead to reduced fuel demand in China.
Some claim recent across the board reductions in excise taxes on fuel in Thailand are not technically a subsidy, but the effect is the same as a subsidy. The cost of fuel is lowered at a time when it is actually increasing. Consumers do not conserve and continue to demand large quantities of limited supplies, fueling continued price rises.
Diesel subsidies have been especially popular in Asia. Trucks and ships move goods and if diesel prices increase, then the price of these goods will increase also. Diesel prices have climbed almost twice as fast as gasoline prices in the United States during the last year because of these subsidies.
Difficulty of maintaining subsidies
Over time subsidies become increasingly expensive and difficult to maintain. LPG subsidies in Thailand are a good example. The cost savings from installing an LPG system in a car, taxi, or truck have become so great that large numbers of people have rushed to install the system, often without even knowing of the subsidies and the likelihood that subsidies will be cut in the future. Earlier this year, LPG usage had grown so great that Thailand actually had to start importing LPG. PTT, who had been providing the subsidies, said the government would have to start contributing more to the subsidies (Read article).
India also reduced subsidies to reduce the financial burden that the government faced in paying them, but when oil prices rose, they faced the burden once again (because the susidies cover a percentage of the price).
Political pressures cause of subsidies
Subsidies can make a government popular quickly and can help political parties win elections.
Political pressure and short-term political gain make introducing subsidies easy and removing subsidies difficult.
(Source: Bangkok Post, op-ed section, 29-07-08, page 12, Keith Bradsher, New York Times, link)
Vocabulary:
a subsidy - the government pays part of the cost, making the activity cheaper and easier
fuel subsidies - the government pays part of the cost of fuel
X subsidised - part of the cost of X has been paid by the government
X is technically Y - if you follow the definition strictly X is Y (may not actually be true)
X is effectively Y - X is Y, even though by strict definition may not be true
not technically a subsidy - is actually a subsidy, but by strict definition is not a subsidy
supply and demand - sellers in market supply goods, buyers in a market demand goods
market forces - when buyers and sellers meet and bargain in a market, the price of the good is the price that matches supply with demand (all goods sold), the market clearing price
mismatch in supply and demand - when prices are set so that supply does not equal demand, so there is excess demand or excess supply
conserve - use less
conserve fuel - use less fuel
fuel conservation - the habit of using less fuel
X expected - people believe that X will happen in the future
across the board - everywhere, in every case
across the board reductions - reductions everywhere
excise taxes - taxes on goods
fueling continued price rises - causing continued price rises
the likelihood that X - the probability or percentage chance that an even will happen (for example, there is a 35% likelihood of rain tommorrow)
a burden - something difficult to do
financial burden - payments difficult to make
pressure - people forcing you to do something
political pressure - politics is forcing you to do something
