Asian countries, consumers are moving against soaring oil and gasoline prices; markets are working

The Financial Times reports that some Asian governments finally are coming to their senses and reducing the subsidies on gasoline that have made their consumers so price insensitive in the face of soaring petroleum prices. Even though China has billions in dollar reserves, it, too, must come to its senses soon.

Impact graphs from the FT:

As crude oil pushed through $135 a barrel for the first time, Taiwan, Malaysia and Indonesia announced plans for urgent action to free prices or cut subsidy costs. China denied rumours of an imminent increase in retail prices, but may relax price controls.

“It is probably more affordable for a country like China to subsidise than Indonesia,” said Peter Gastreich, oil and gas analyst at UBS in Hong Kong. “But if oil prices keep going up, it is simply not in any country’s best interest to keep subsidising these prices indefinitely.”

In Taiwan, the first act of the newly elected administration of President Ma Ying-jeou was to abolish price controls on petrol and diesel from June 1. The new government also said it would raise electricity prices in July.

Malaysia said it would soon announce a new petroleum subsidy scheme to keep its fuel subsidy bill at around last year’s level of M$40bn ($12.5bn) in spite of rising oil prices. With oil at $130 a barrel, the bill would reach M$48bn in the current fiscal year, exceeding the M$40bn that the government plans to spend on infrastructure and other development projects.

On Thursday I warned here that the speculative petroleum bubble was sure to be punctured sooner or later. It turns out that others were having the same thoughts and posted them on http://www.seekingalpha.com. Petroleum prices and the prices of energy stocks fell a bit today, after touching record highs yesterday.

The markets are working even though the governments of producing countries have been manipulating the markets for years with war threats and other tactics designed to boost prices.

Not only are consumers in Europe and America cutting consumption in the face of unaffordable gasoline prices, but also some governments in Asia have had it with the oil bubble.

The idea that China and India will continue to increase petroleum consumption regardless of price is a fairy tale. At some point, they will have to make their consumers price sensitive enough that they will reduce their consumption.

If the Asian governments follow through on annoucements reported in the Financial Times, that may be what it takes to puncture the bubble, which apparently has been inflated in recent days by short covering in the futures markets.

Just the idea that Asians will become price sensitive and cut consumption and that China might follow suit could be enough to puncture the oil price bubble. Markets are fickle, and fickle up usually is followed by fickle down.

No one can predict near term nor long-term price movements in commodities prices or in any other prices, but it sure looks like this may be an important turning point in the petroleum markets.

More short covering in the oil futures markets could cause a rally during the next few days, but when the shorts are out of the markets, petroleum prices could go through a major correction.

Full Disclosure: I don’t have positions in any energy stocks or futures.

For educational purposes only. Investigate stocks on Reuters.com, Yahoo.com and Google.com. Also, search the web for information.

 

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