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Fuel crisis in Asia

Updated On: Nov 06, 2007

A fuel crisis appears to be looming in Asia as oil price continues to rise.

Consumers in Asia are feeling the heat as oil prices rocket to record levels hitting a new high of more than US$96 (S$139) a barrel. One reason behind the oil shortage is dwindling supplies as the northern winter approaches. Fuel demand for heating especially in the developed world increases. Coupled with rising demand by rapidly industrializing countries like China and India, demand has been acute.

The retail prices of petroleum-based products such as petrol, kerosene and diesel are highly subsidised in many countries in Asia, in part to make them affordable to citizens. Higher oil prices forces government to raise prices. In addition, faced with higher fuel prices, consumers often curtail spending on manufactured goods or travel, which in turn can cool the broader economy. It is a double whammy for most people.

The potential for any oil crisis in East Asia to spill over to social disorder is great. Witness the defiant protests in military-ruled Myanmar against soaring fuel prices that had led to a brutal crackdown. Indonesiafaced nationwide protests in 2005 when it announced a cut in subsidies that eventually led to a doubling of fuel prices.  That’s why several Asian governments are in a quandary over whether to cut subsidies that have kept prices artificially low.

'If we raise fuel prices again, it will burden the people,' Vice-President Jusuf Kalla said. 'So the government is firm that there will be no more price hikes.'  However, that would mean an increase in Indonesia’s fuel subsidy bill from an estimated 56 trillion rupiah to 90 trillion rupiah.  Indonesian central bank has warned that the country’s economic growth might be hurt if the high oil prices persist and inflation goes up.

The Malaysian government has also kept its promise not to raise prices this year, but International Trade and Industry Minister Rafidah Aziz told the local media that the country may be forced to raise prices soon. Prime Minister Abdullah Badawi also hinted at possible cut in fuel subsidies when he told UMNO delegates at the UMNO assembly that high subsidies for fuel in Malaysia could not be maintained for long. Malaysia has already spent some RM16billion (S$7 billion) in subsidising petrol prices in the first eight months of this year. Last year, fuel subsidies totalled RM15billion.

In several other East Asian countries, top leaders have to come out to explain the situation to the public. Thailand, which is facing rising inflation, said yesterday that it would cut the levy oil traders pay into a state fund in an effort to persuade them to delay retail price increases. 'If we reduce the state oil fund money, it will make oil traders slow their decision to raise oil prices,' said Thai Energy Minister Piyasvasti Amranand. He said the government had no plans to restore fuel subsidies, which had cost the Treasury US$2.7 billion in the 19 months from January 2004 to July 2005.

In Taiwan, 'I hope the public can understand the difficulties we are going through,' Taiwan Premier Chang Chun-hsiung said as the prices of petrol and diesel were raised by about 3 per cent.

China has resorted to rationing to cope with the oil squeeze.  "Sinopec is continuing to take energetic measures and striving to resolve the current situation of tight diesel supplies in some areas," the company said. Sinopec said it would import more oil in November to "stabilize the domestic market" but gave no information on when the crunch might ease.

So how did the oil crisis in China begin? The country's state-owned oil companies blame a scarcity of refining capacity due to price controls although members of the consuming public as well as the daringly outspoken Chinese media have accused Chinese oil companies of fixing a phony crisis to force regulators to raise retail prices. Soaring oil prices have forced many independent oil retail companies out of the market. The burden of making up the difference has fallen on the state-owned companies.

Chinese oil refiners are losing money due to government controls that have frozen the retail price of gasoline and diesel, preventing them from passing on soaring crude costs to consumers while authorities on the other hand have so far rejected appeals from oil companies to raise retail prices, saying they want to avoid hurting China's poor.

Under extreme pressure from the public and the government regulator, China's No. 2 oil company defended its efforts to meet the booming economy's fuel needs even as diesel shortages have led to rationing, public criticism of suppliers and a gas station brawl where one man was beaten to death after cutting queue to purchase gas in Henan (a sign of growing social disorder). Worse still, shortages have caused long lines at filling stations and disrupted trucking in export-driven coastal provinces. Trucking companies say the rationing has raised costs and delayed deliveries.

But the state oil companies themselves are fighting back quietly to counter Beijing’s central government pressures. A Sinopec official told Reuters that its largest refinery will switch off a crude unit in November and process 3 percent less crude than the previous month, sending a signal to Beijing in a move that could worsen the shortage. "It's ridiculous to shut down plants at a time of razor-thin supply," one source remarked. "I guess it's a silent protest for the central government to raise pump prices."  (6 November 2007)

Sources:

Abdullah hints at cut in fuel subsidies (Straits Times, 6 November 2007)

US$100 a barrel tipping point? (Straits Times, 3 November 2007)

Pressure to cut subsidies as oil price soars (Straits Times, 3 November 2007)

China fuel crisis spreads (Reuters, 31 Oct 2007)

Chinese oil giant defends supply efforts amid fuel shortage (AP, 31 Oct 2007)

China fuel crisis spreads (Reuters, 31 Oct 2007)

Myanmar fuel protests spread to northwest oil city (Reuters, 28 August 2007)

Indonesia’s 2007 fuel subsidy bill may increase (Antara News, 5 November 2007)