Some countries subsidize the price of fuel, meaning drivers aren't feeling the brunt of crude's rise.
It’s Economics 101: For most goods, when the price soars, demand falls, and that leads to lower prices. But this hasn’t been the case with crude oil. Its price has roughly doubled in the past year amid soaring demand. One reason: Some countries subsidize the price of fuel, meaning drivers aren’t feeling the brunt of crude’s rise.
Cracks, though, are beginning to form. Prices around $130 a barrel mean governments can’t afford to maintain low prices at the pump for long.
“The day of reckoning already has arrived in Indonesia,” says JPMorgan economist Bruce Kasman. It recently boosted fuel prices by 30 percent, amid a widening budget deficit, the first major increase since 2005. Kasman thinks Taiwan and Malaysia could be next. And Robert Christensen, an analyst with Buckingham Research Group, expects China to ratchet back subsidies after this summer’s Olympics in Beijing, which would ease demand.
So far, though, the thirst has kept growing. China’s consumption of oil rose nearly 17 percent to a record high during the first quarter, according to the China Petroleum and Chemical Industry Association.
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In the developed world, meanwhile, demand for oil fell by 2.8 percent in March from the previous year, says the International Energy Agency. This includes a 3.3 percent drop for the United States, as gasoline neared an average of $4 a gallon.
Not all experts foresee fewer subsidies. JPMorgan’s chief emerging markets strategist, Adrian Mowat, thinks India, for one, lacks the political capital to boost prices.