Foreign subsidies fuel greater demand but threaten supplies by allowing consumers to pay far less than the average world price for gasoline.
JAKARTA, Indonesia — To understand why fuel prices in the United States have soared over the past year, it helps to talk to the captain of a battered wooden freighter here.
He pays just $2.30 a gallon for diesel, the same price Indonesian motorists pay for regular gasoline. His vessel burns diesel by the barrel, so when the government prepared for a limited price increase this spring, he took to the streets to protest.
“If the government increases the price of fuel any more, my business will collapse totally,” said the boat captain, Sinar, who like many Indonesians uses only one name.
From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel.
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The oil company BP, known for thorough statistical analysis of energy markets, estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels.
In most countries that do not subsidize fuel, today’s high prices have caused oil demand to stagnate or fall, as economic theory says they should. But in countries with subsidies, demand is still rising steeply, threatening to outstrip the growth in global supplies.
President Bush warned about subsidies July 15: “I am discouraged by the fact that some nations subsidize the purchases of product, like gasoline, which, therefore, means that demand may not be causing the market to adjust as rapidly as we’d like.”
Indeed, the biggest question hanging over global oil markets these days might be how much longer countries can keep paying the high cost of subsidizing their consumers. If enough countries start passing the true cost of oil to their citizens, many economists believe, demand will slow, bringing the oil market into better balance and lowering prices.
China raised gas and diesel prices June 21, though still keeping them below world levels. World oil prices decreased more than $4 a barrel within minutes.
In Indonesia, the government spends six times as much on energy subsidies as it does on agriculture, even as rice prices have soared. Many countries, including India, have raised oil prices in recent months, only to watch world prices climb further, pushing up the cost of subsidies once again.
Political pressures and inflation concerns continue to prevent many countries — particularly in Asia, where inflation has become an acute problem — from removing subsidies entirely and letting domestic prices bounce up and down.
“You talk about subsidies, you’re not only talking about the economy, you’re talking about politics,” said Purnomo Yusgiantoro, Indonesia’s minister of energy and mineral resources. He ruled out any further price increases this year beyond one in May that raised the price of diesel and regular gasoline to $2.30 a gallon.
Nobuo Tanaka, executive director of the International Energy Agency, said subsidies were clearly a big factor contributing to the mismatch in supply and demand that has helped push up prices.
Indonesia spends more on fuel subsidies — $20 billion this year — than any country except China. Some economists estimate fuel use in Indonesia would fall by as much as a fifth if the government were to eliminate subsidies entirely.
Many in Asia bridle at being told to reduce oil use, particularly by the United States, a country of sport-utility vehicles and big houses.
Making matters worse, Asia’s own oil production has barely risen over the past decade.
Indonesia, with extensive oil fields that made it a top target for Japanese conquest in World War II, became a net oil importer a few years ago. Oil output from its aging fields has tumbled by almost 40 percent since 1995, and the country plans to withdraw from the Organization of the Petroleum Exporting Countries (OPEC) at the end of this year.
So Asian nations increasingly compete with the West to import oil from Africa and the Mideast.
In Asia, subsidies have been particularly prevalent for diesel, although many countries subsidize gasoline as well. The subsidies have been an important reason U.S. diesel prices have climbed almost twice as quickly as gasoline prices have over the past year.
Many governments see diesel as more important because truckers and ship captains need it to distribute goods; if diesel prices rise, consumer prices often follow.