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Reduced Subsidies, High Prices Rein In Asian Oil Usage

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Reduced Subsidies, High Prices Rein In Asian Oil Usage

Demand Forecasts 
Are Being Reduced; 
Thai Bike Sales Rise
July 9, 2008; Page A7

BANGKOK — People in some Asian countries are reining in their oil consumption as prices climb and governments unwind subsidies, offering early signs of a shift after years of rapid growth in demand.

Asia has been the world’s biggest source of new oil demand, with China alone accounting for half the world’s increase this year. Government subsidies have kept retail prices in the region artificially low, encouraging consumption.

Now changes are afoot. After Malaysia in early June raised gasoline prices 41%, Steven K.C. Poh, a marketing consultant near Kuala Lumpur, says he and his wife sold one of their two large cars in favor of a smaller, more fuel-efficient vehicle. They are now saving more than $30 in fuel a month.

Affandi Samson, a supervisor at a Shell gasoline station along a highway near Kuala Lumpur, says his business has dropped at least 30% since the price increase. He now needs at least one fewer tanker of fuel each week. “We are open 24 hours and strategically located, so business should be good,” he says, but it isn’t.

Crude-oil futures have fallen 6.4% since setting a record high of $145.29 a barrel last Thursday. The benchmark futures price settled $5.33 lower Tuesday at $136.04 a barrel on the New York Mercantile Exchange. Speculation about slackening demand played a role, but one-time factors also accounted for the market’s seesawing. (Please see related article.)

[Cool down chart]

Many forecasters have lowered their estimates of Asian oil demand this year, in part because of fewer government subsidies. Facts Global Energy Group, a consultancy in Singapore, says it now expects Asian oil demand to rise 2.7%, compared with an earlier estimate of 3.3%, though it notes that even at slower rates, Asian consumption growth is still strong. It also says growth rates should continue to moderate in China, India and other Asian nations as their economies mature and develop more service industries, which use less oil than manufacturers do.

In Thailand, where officials long ago cut some subsidies to let international price fluctuations filter through, bike sales are soaring. Traffic on the local subway system has increased 10% to 15% in the past month. Some farmers have parked their tractors in favor of using livestock.

“I try not to use a car when it’s not necessary,” says Thanas Thammakulvich, a 46-year-old policeman, who took advantage of a park-and-ride program in Bangkok one recent afternoon that allowed him to get free parking in return for using an elevated train. “I admit that driving a car is more convenient, but we need to be more concerned about the soaring oil price.”

In Indonesia, television producer Khrisman Surya says he has parked his car in the garage and is using a motorbike to ride to work every day. He saves about $110 a month, he says.

Whether such moves will add up to a more sustained moderation of Asian oil demand remains to be seen. It will likely take several months or more for comprehensive data to emerge on the impact of this year’s fuel-price spike in Asia.

Some Asian consumers curbed energy use temporarily after price increases in Indonesia and elsewhere in 2004 and 2005, only to reverse their behavior once oil prices stabilized and other government-assistance programs kicked in. In some places, consumption cutbacks were offset by newer sources of demand as people with rising incomes bought their first cars or other energy-guzzling devices.

And it is too early to tell whether high prices are significantly curbing consumption in India and China, the two biggest sources of new demand in Asia. In India, officials raised fuel prices by only about 10% in early June. “That’s not sufficient — it can be weathered,” says Dharmakirti Joshi, an economist at Mumbai ratings agency Crisil.

Still, the increases in India triggered broad protests, with as many as four million truckers going on strike. Anecdotal reports suggest more drivers are outfitting their cars to run on fuel made from natural gas, rather than more-expensive gasoline or diesel. Rickshaw and bus drivers — whose vehicles already used natural gas — face longer lines at stations as a result. One rickshaw operator says he now waits one hour for a fill-up, compared with 10 minutes before.

In China, where authorities raised state-controlled gasoline prices 17% last month, many analysts are expecting demand to increase in the short run because Chinese refining companies had been undersupplying the market to avoid selling fuel at artificially low prices. Now that retail prices are higher, analysts believe the refiners will release more supplies to satisfy pent-up demand, allowing people to buy more fuel now before moderating their demand later.

Economists have long pressed Asian leaders to curtail their subsidies because they believe Asia needs to endure the same kind of price shock that hit the U.S. and other countries in the 1970s, triggering changes in consumer behavior that ultimately made them more efficient users of crude.

When prices first spiked a few years ago, economic growth was accelerating in Asia, boosting incomes and allowing many people to ignore higher fuel costs. This year, growth is slowing and rising prices for food and other necessities are making it harder to disregard fuel-price increases.

“Our salaries do not increase” as fuel prices rise, says Rupert Agregado, who works for a wireless-communications company in Manila. “So I cut back.” He used to drive to work every day. But since March, he has been using public transportation four days a week, saving his car for Fridays.

Write to Patrick Barta at [email protected]

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