Cut the Subsidies!

Asian countries move to cut oil subsidies

07/11/2005

Asian countries have moved swiftly to reduce oil subsidies costing
billions of dollars,
to relieve the unbearable burden on their budgets. Thailand, Indonesia and
Malaysia have
announced plans to remove or reduce fuel subsidies by 2006.

Subsidies are a huge problem for developing countries, says William
Ramsay, Deputy
Executive Director of the International Energy Agency (IEA). Indonesia has
"good social
reasons" to subsidise fuel, he says, but as oil become more expensive, the
money will
have to come out of other areas, such as health. This will lead to the
erosion of
welfare services in Indonesia, he told ATI.

The total cost of subsidies in Indonesia is almost a third of the budget.
As Ramsay
spoke, Jakarta announced plans to raise fuel prices on October 1 to reduce
the fuel
subsidy, but to cushion the blow and prevent protests, 15.5 million
families, who
survive on less than Rp175,000 (US$17) a month, are to receive monthly
payments of
Rp100,000.

Early in 2005, diesel subsidies in Indonesia were cut. Industry sources
say subsidies on
fuel for the mining and export manufacturing sectors have been removed.
However,
subsequent increases in crude oil prices mean that expected budgetary
costs of all
subsidies have swollen and now exceed their 2005 appropriation.

In June, Jakarta increased its budget allocation for fuel subsidies to Rp5
trillion
(US$7.9 billion), from Rp19 trillion in the October 2004 budget. It has
subsequently
estimated the subsidy in the 2006 draft budget at Rp101 trillion.

Thailand has announced that fuel subsidies will be removed by February
2006 and has
stopped all diesel subsidies. The cost of subsidies to Thailand has been
calculated at
US$2.2 billion over an 18-month period to July 2005.

Malaysia has adopted a graduated approach and has, so far, lifted petrol
and diesel
prices three times in 2005. Even so, direct fuel subsidies are expected to
cost Malaysia
RM6.6 billion this year - up RM4.8 billion in 2004. The Asian Development
Bank (ADB)
says tax exemptions on petrol and diesel will cost the Malaysian
Government an
additional RM7.9 billion. Malaysians pay only RM1.62 (US$0.43) per litre
for premium
petrol. The Government also plans to suspend excise taxes on petrol and
diesel.
Malaysia, a nett oil exporter, gains directly from higher global oil
prices - nett oil
export revenues jumped RM1.1 billion to RM7.4 billion in the first half of
2005.

In Bangladesh, the State-owned oil distributor, Bangladesh Petroleum
Corporation, is
accumulating very large operating losses, to an estimated US$445 million
(equivalent to
0.7 per cent of GDP) in the 2005 financial year.

In its 2006 budget, Bangladesh reduced oil taxation and cut the duty rate
on crude oil
from 25 per cent to 7.5 per cent. It also lowered rates on petroleum
products from 25
per cent to 15 per cent, and the supplementary duty on products, which
were taxed at 15
per cent, was removed. Despite these moves, but without a substantial
pass-through of
international prices to consumers, losses will remain large.

The ADB says the Government will eventually need to deal with the
accumulated losses -
its oil import bill jumped by US$540 million to $1,540 million last
financial year.

In India, the ADB says, fuel subsidies are increasing very rapidly and are
likely to
undermine the budget deficit programme the Government has in place.

An unintended consequence of subsidising fuel is smuggling, where cheap
fuel is taken
out of those countries with subsidy programmes to those where consumers
pay full price
for fuel.

"No-one knows how much is being smuggled. I have talked to the governments
and they
suggest that large volumes are involved." says Ramsay. As long as there is
a price
differential, he adds, the problem will exist. And if the borders are
porous (as is the
case of Indonesia), it is difficult to patrol the coastline to stop
smuggling. He says
smuggling takes place through piracy or simply hooking up with a refinery
for cargoes of
petrol. If increases in oil prices are passed to consumers, it will remove
the incentive
to smuggle.

Indonesia was a nett exporter of oil until a couple of years ago. Ramsay
says Indonesia
has the potential to return to exporting oil, but has to attract
investment first.
Industry sources say that, with more than 600 million barrels of estimated
oil reserves,
and oil fields in Cepu and Central Java, Indonesia could reestablish
itself as an oil
exporter. But Exxon Mobil and Indonesia's State-owned oil company,
Pertamina, have been
locked in negotiations since 2001 over how to split revenue from the Cepu
fields.

China, which now imports about 30 per cent of its oil requirements, was
also a nett
exporter until the mid-1990s. However, Ramsay does not see a reversal of
this trend. He
says that in the greater Asian region, there are considerable reserves in
East Siberia,
which, if exploited, eventually could give the region a much better
balance of supply
and demand. To fully exploit the reserves in Russia's eastern regions,
such as Sakhalin,
will require serious investment to build pipelines and other
infrastructure.

Similarly, Central Asia holds good reserves where commercial production is
already
extracting oil. But many of these countries have geographical constraints
and the oil
can only leave the region through Russia. By contrast, Ramsay says, there
is a better
balance of gas production and usage in the region.

Source : Asia Pulse 04 Nov 2005