Thursday, June 05, 2008

India, Malaysia Raise Gas Prices

Soaring cost of crude oil forces India to raise domestic fuel prices 11%; Malaysia, hit by massive subsidy bill, will raise gasoline prices by 40%.

NEW YORK (AP) -- Soaring oil costs are forcing India and Malaysia to raise fuel prices by reducing the subsidies they give to their residents.

Oil prices have doubled over the last year, spiking as high as $135.09 a barrel on the New York Mercantile Exchange on May 22 before falling back some. On Wednesday, the contract fell below $124 a barrel.

India imports nearly 75% of the crude oil it needs and it controls domestic prices of all fuel products, from gasoline to cooking oil.

But those price controls have caused state-owned oil companies to lose billions of dollars.

Petroleum Minister Murli Deora told reporters that gasoline prices will be raised raised 49 cents a gallon, and diesel prices 30.4 cents a gallon.

That's an 11% increase in New Delhi, the capital, where gasoline will be hiked to $4.56 a gallon. Fuel prices vary between states, which also impose their own taxes.

Cooking gas will be hiked to $1.25, per 30.8 pound cylinder. The increases go into effect at midnight Wednesday.

To help state-run oil companies, the government was also cutting the excise duty by 5% on gasoline, diesel and other petroleum products.

Communist parties, which are members of the ruling coalition, announced weeklong street protests across the country to force the government to take back its decision. They said in a joint statement that the government should further lower excise duties on petroleum products rather than raise prices.

Wednesday's price increase followed a similar move in February - but far from covers the gap with global market prices. Deora, the oil minister, told reporters that the moderate price increase was a compromise by officials "committed to protecting the interest of the common man as well as ensuring the financial health of the public-sector oil marketing companies."

The government is also mindful that an election must be held by the middle of next year, at the latest, and that price increases are unpopular.

"Are you happy or unhappy? People should compliment the government," Deora said, pointing out that the hike was far smaller than the recent runup in global oil prices.

At the current level of oil prices, Deora said India's state-owned oil companies were projected to collectively lose $58.4 billion this fiscal year through March 2009.

Malaysia said Wednesday it will raise gasoline prices by 40% to reduce the government's massive subsidy bill, a move that is expected lift the inflation rate to 5%.

The pump price of gasoline will rise on Thursday to $3.30 a gallon, from $2.32 a gallon now, Prime Minister Abdullah Ahmad Badawi told reporters.

"We cannot naturally keep subsidizing at the current rate," Abdullah said.

He said the government will also give a yearly cash rebate of $201 per year to owners of cars with an engine capacity of 2,000 cc or less to offset their burden from the massive hike. The money will be distributed to owners through post offices.

Subsidies have kept the price of fuel in Malaysia - a net exporter of oil - among the lowest in Southeast Asia. But the government says it can no longer afford to fund the subsidies, which are expected to cost the treasury more than $14 billion this year.

Abdullah said diesel prices will rise by $1.22 to $3.04 per gallon, a 67% increase.

Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad earlier indicated that further price increases were planned to bring fuel prices in line with global market cost.

"The long term plan is to increase it to market price," he said, suggesting gasoline prices could rise to $3.80 a gallon by August.

He said the move will save the government $1.29 billion a year. Shahrir said the hike in gasoline prices will likely increase the inflation to 5%.

Inflation hit a 15-month high of 3% in April, and was forecast at 2.5% to 35 for the full year before the new fuel prices were announced.

Fuel prices in Malaysia had been unchanged since February 2006, and economists have warned any move to abandon fuel subsidies completely may spark protests, push inflation sharply higher and weaken consumer spending - a bane to an already slowing economy.

The central bank has cut its 2008 economic growth forecast to 5% to 6%, from 6% to 6.5% previously.

But the government does not expect any protest or public anger, Shahrir said. "We are still giving a subsidy" to less wealthy people, he said.

Still economists were not convinced.
"This is quite a drastic measure," said Gundi Cahyadi, an economist with Singapore-based economic think-tank IDEAglobal. "In the long-run, it's good but the immediate impact will be negative. You can expect a slowdown in the economy to below 5.5% this year and probably into next year," he said.

He noted that Malaysia's gasoline price hike was the steepest in percentage terms among Asian countries such as Indonesia, Taiwan and India that have recently cut fuel subsidies.

It will relieve the government's financial burden over the long term but will also push up inflation and depress consumer spending and business investment, he said.

Cahyadi said the new fuel price is a "great risk" to Prime Minister Abdullah Ahmad Badawi, who is fighting for his political survival after his ruling coalition suffered election losses in March partly due to the rising cost of living.

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