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Asia Must Strike Right Balance On Oil Policy

Updated on Jul 29, 2008 – SCMP

Asian governments are acting irresponsibly in maintaining subsidies on oil. They believe that keeping prices down will promote development, control inflation and ensure stability. Each of these points is arguable. What is not, however, is that their efforts are encouraging abuse of a commodity that is in short supply, and diverting precious resources from vital sectors such as education and health.

High oil prices have forced some governments in the past two months to lower subsidies. The price caps they had in place were so hefty that to do nothing would have further eroded budgets. Domestic concerns were behind their moves – yet it is global reasons that should be driving their policies. Subsidies increase consumption and this is helping push prices higher.

Asia accounts for just 20 per cent of world oil use. There is no denying that it is the US and other developed countries that by far consume greater quantities. But it is taxes, not subsidies, that generally determine prices in these nations, and in the absence of concerted government intervention, people are being more careful about oil use. In Asia, the opposite is true; about two-thirds of the annual increase in global oil demand is from our region. The percentage for imports is even bigger.

China is perhaps the only Asian country able to withstand record oil prices and maintain present subsidies. Yet on June 20, Beijing announced an 18 per cent increase in the price of diesel and a 5 per cent rise in electricity charges on the mainland. The move followed on the heels of Taiwan, India, Indonesia and Malaysia. The steps were small, but necessary. Further cuts are needed; the aim should be to eventually scrap subsidies.

Capping oil prices in developing countries benefits a minority. On the mainland, the winners are big industry and the privileged few who can afford vehicles. The losers are the government and the petroleum companies forced to take a cut in income. Leaving prices to market forces would achieve the central government’s wishes to keep growth in check and decrease pollution levels. Throughout the region, the diversion of large chunks of budgets to keeping oil prices down is preventing the development of social sectors. In India and Indonesia, funding that should be going to education and health care is instead being used to keep motorists on the road. Malaysians have some of the cheapest petrol and highest per capita vehicle ownership. Rather than subsidising oil, governments should be improving living standards and trying to tackle global warming.

Ministers from China, India, Japan and South Korea met US Energy Secretary Samuel Bodman in early June and acknowledged in a statement that “phased and gradual withdrawal of price subsidies for conventional energies is desirable”. Subsidies, they said, “should be replaced, where possible, by better targeted policies for intended beneficiaries”. Efficiency would be enhanced and the door opened for greater investment in alternative energy sources. Japan is already one of the world’s most fuel-efficient countries. China and India refused to commit to a timetable.

Asia’s developing nations are taking the right steps, but small ones – and not necessarily for the right reasons. They should be looking as much at conservation and responsible use of oil as growth and inflation rates. Social development must not be ignored. Only by casting off subsidies can they move onto the right track. Such a decision has to be gradual and may seem filled with uncertainty. It is nonetheless the only sustainable way forward.

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