A bull oil market has been putting a squeeze on poor households in Asia, even before the recent spike that took crude oil prices closer to $100 a barrel. Now, Asian governments are starting to feel the strain over subsidies on politically sensitive fuel prices.
China raised domestic fuel prices Thursday on diesel and gasoline by nearly 10 percent after gas stations reportedly began rationing diesel to truck drivers in response to bottlenecks at state-run refineries. The jump in prices came despite a recent pledge by Prime Minister Wen Jiabao to stick to existing price caps amid concerns over rising food costs. Even gas stations in Beijing have suffered shortages.
In Asia, hiking fuel prices can be a perilous political move. The recent protests in Burma that were later brutally repressed began in August, after diesel prices doubled overnight. Commuters unable to pay higher bus fares had to walk to work, and their plight became a lightning rod for dissent. In recent years, authorities in Nepal and Indonesia have also faced demonstrations over the removal of fuel subsidies.
Last week, the UN Development Program (UNDP) released a report that highlighted how removing state subsidies risks fomenting political unrest. Rising oil prices, the agency said, were cutting gains in reducing poverty in the Asia/Pacific region and forcing families to scale back consumption. A survey of poor households in four countries found that energy bills rose by an average 74 percent during 2002-05, before the current run-up in crude prices.
Buoyed by export growth and backed by heavy subsidies, China's economy has appeared impervious to rising crude prices. But that doesn't mean that rising fuel prices aren't felt by poorer households in China and other countries, says Nandita Mongia, an energy expert for the UNDP in Bangkok and lead author of the new report. Many families have been hit hard by the rising cost of public transportation, as well as by higher bills for cooking fuel and electricity.
In response, poor families are traveling less, turning off lights at night, and reverting to traditional fuels. "People are cutting back and looking for cheaper fuel sources. They're staying close to home. In urban areas, people are thinking, 'Do I go to the hospital today?' " she says.
How to keep the public happy
When it comes to easing public concern over rising fuel prices, UNDP researchers say pump-price subsidies aren't necessarily the answer, as they don't always benefit the poor. Targeted government subsidies are preferable, such as the smartcard system used in Malaysia for poor consumers. The electronic smartcard prevents subsidy recipients from selling their fuel allocations on the black market.
Countries should also heed the wake-up call of higher oil prices and invest in fuel efficiency, according to the UN report. In theory, higher fuel costs should spur efforts in Asia to invest in alternative and renewable energy sources, such as ethanol and hydroelectric power. China has set ambitious fuel-efficiency targets and promoted hybrid cars, as has Thailand, Southeast Asia's largest carmaker.
In the meantime, Ms. Mongia says microprojects using renewable energy such as hydroelectric and solar offer the best hope for rural communities who are bypassed by the national grid.
"The market can't deliver at a price that they can afford, but microprojects can deliver," she says. The UNDP report also recommended creating a regional oil fund that can support poor countries during periods of high prices, as well as invest in alternative energy.
Asian demand its own worst enemy
The paradox, say analysts, is that Asia, led by fast-growing China and India, is the region most responsible for driving the oil market to its current heights. Asian countries' insatiable demand for oil to power their export-oriented expansion has been outpacing supply, partly because governments had been tacking on high subsidies to keep growth robust. But few expect tanker deliveries to Asia to slow, despite the pain of higher import bills.
"A lot of the increase in demand [for oil] is coming from Asia, particularly China and India … and they should continue to account for a big share of growth in global demand, just as they account for a big share of economic growth," says David Cohen, a regional economist at Action Economics in Singapore.
While the US remains the world's largest oil consumer, Asia's dependence on export-led manufacturing means it uses more oil per unit of GDP than the service-oriented US.
China currently consumes 7.6 million barrels of oil a day, or 9 percent of world output, according to the International Energy Agency. By comparison, a decade ago, China's daily oil intake was under 4 million barrels.
China's cut in fuel subsidies pushes up pump prices towards $3 a gallon, in the same ballpark as what US consumers are currently facing, but still far below European prices. Given the burgeoning problems of emissions and congestion in Chinese cities, higher prices could deter would-be car owners and depress fuel consumption, which in turn would ease pollution.
But that would run against the interests of China's government and of US and other foreign automakers who have invested heavily in China, says David Zweig, a social scientist at Hong Kong's University of Science and Technology. "The best would be if fewer people bought cars, but that's not what the Chinese government wants. Cars are the driving force in the Chinese economy," he says.