Oil price surge highlights Asia's political dilemma
Tuesday, 6 November 2007
Kathrin Hille in Taipei, Raphael Minder in Hong Kong, and John Aglionby in Jakarta
THE recent surge in global oil prices has presented Taiwan's government with a dilemma.
CPC Corp, the state-owned refinery through which the government controls the island's oil and gas market, is expected to raise prices to reflect the latest spike in international crude oil prices. A failure to do so could land the refiner in the red and yield a bail-out bill to be footed by taxpayers.
However, an earlier move by lawmakers eyeing closely contested January parliamentary elections to try to impose a price freeze means that for the third time in a little over a year efforts to liberalise Taiwan's energy sector are being put under political pressure.
Taiwan's dilemma offers a stark example of how Asian governments are struggling to deal with growing imbalances between deep-rooted subsidy systems and rocketing commodity prices that make them unsustainable.
With oil edging ever closer to an inflation-adjusted record high, arm-wrestling between politicians worried about disgruntled consumers and state companies facing higher costs is getting more intense across Asia. Simultaneously, it is prompting new efforts by oil-importing economies to diversify their energy supplies.
"The move in the oil price means either an impact on the willingness of refiners to supply, or an impact on the bills that governments will have to pay to keep subsidies," says Edward Teather, a UBS economist. "Clearly it concentrates minds."
In the 1970s and 1980s, Taiwan achieved its economic miracle by providing resources such as land, water and power at low prices that allowed its businesses to grow into competitive exporters. However, as its economy has matured and the cost of energy has risen, the policy formula has not changed.
The government took an initial step last year to make consumers and businesses pay the real price of energy by approving the first power price rise in 23 years and allowing some flexibility in domestic oil prices. The legacy of past policies, however, has both discouraged energy efficiency and meant the government must decide whether to shoulder losses or risk spikes in inflation in a country that, after years of low to zero inflation, has become intolerant of even modest price rises.
Taiwan's government allowed CPC in July 2006 to adopt a floating price mechanism that calls for weekly adjustments. However, that system was watered down by the government in September to allow only monthly adjustments and a potential freeze on prices if the cumulative rise in one month exceeded 15 per cent.
Legislators added to the pressure late last week by passing a resolution demanding a freeze in fuel prices, after which the government appeared likely to order CPC not to increase the prices of cooking and heating oil.
Many Asian countries have not waited for the recent oil price surge to start dismantling subsidies. Following deregulation in 2004 and 2005, liquefied petroleum gas is now the only fuel subject to price controls and subsidies in Thailand.
South Korea, the economy that resembles Taiwan's most closely in the region, started liberalising domestic fuel markets in 1996, introducing competition and imposing taxes on petroleum products.
Taiwan is not alone in choosing political exigency over fiscal prudence, however. A UBS report published last week concluded that, of south-east Asia's five biggest economies, only in Thailand and Malaysia was there any "likelihood of a sharp adjustment in energy costs at the retail level by end 2008".
Two years ago, Indonesia managed a far-reaching subsidy reform when it raised fuel prices by 126 per cent after a spike in global oil prices. However, Indonesia's example has not fundamentally altered political concerns about angering poorer consumers, even though the corporate lobbying is gaining momentum.
In October Tenaga, the Malaysian state-owned power generator, asked for government permission to pass on increased costs to customers as part of a review of a pricing system that has been in place since 1985. But analysts see any change as unlikely.
"Should Malaysia do it? Absolutely. Can it do it in the short term? For political reasons, I seriously doubt it," says Joseph Jacobelli, utilities analyst at Merrill Lynch.
Part of the reason is that governments feel they can afford the cost of maintaining subsidies, even if it means diverting resources from other government programmes.
Indonesia is a net oil importer. However, Sri Mulyani Indrawati, finance minister, says that while government spending will increase by Rp37,200bn ($4bn, £1.97bn, €2.83bn) over the next two months if the oil price stays above $90 a barrel, state revenues will rise by Rp32,700bn. The deficit, she says, can "be closed with expenditure savings from other non-priority [areas]" meaning that "the budget will be manageable and sustainable".
While Indonesia and others can still cope with the situation, more expensive oil could cripple some of Asia's minnows.
The state electricity company of the Maldives, which four years ago had cash reserves of about $6.0m, now relies on the government to cover 80 per cent of its operational costs.
The cost of oil is also leading to greater investment in other sources of energy, sometimes cross-border. Demand from India and Thailand is behind a handful of hydro-electric projects that are set to benefit Laos, Bhutan and Nepal.
"There's clearly a flip side to the coin," says Samuel Tumiwa, senior energy specialist at the Asian Development Bank.
"High oil prices mean a boom for some countries, as hydro projects are now getting developed that were previously not financially viable."
THE recent surge in global oil prices has presented Taiwan's government with a dilemma.
CPC Corp, the state-owned refinery through which the government controls the island's oil and gas market, is expected to raise prices to reflect the latest spike in international crude oil prices. A failure to do so could land the refiner in the red and yield a bail-out bill to be footed by taxpayers.
However, an earlier move by lawmakers eyeing closely contested January parliamentary elections to try to impose a price freeze means that for the third time in a little over a year efforts to liberalise Taiwan's energy sector are being put under political pressure.
Taiwan's dilemma offers a stark example of how Asian governments are struggling to deal with growing imbalances between deep-rooted subsidy systems and rocketing commodity prices that make them unsustainable.
With oil edging ever closer to an inflation-adjusted record high, arm-wrestling between politicians worried about disgruntled consumers and state companies facing higher costs is getting more intense across Asia. Simultaneously, it is prompting new efforts by oil-importing economies to diversify their energy supplies.
"The move in the oil price means either an impact on the willingness of refiners to supply, or an impact on the bills that governments will have to pay to keep subsidies," says Edward Teather, a UBS economist. "Clearly it concentrates minds."
In the 1970s and 1980s, Taiwan achieved its economic miracle by providing resources such as land, water and power at low prices that allowed its businesses to grow into competitive exporters. However, as its economy has matured and the cost of energy has risen, the policy formula has not changed.
The government took an initial step last year to make consumers and businesses pay the real price of energy by approving the first power price rise in 23 years and allowing some flexibility in domestic oil prices. The legacy of past policies, however, has both discouraged energy efficiency and meant the government must decide whether to shoulder losses or risk spikes in inflation in a country that, after years of low to zero inflation, has become intolerant of even modest price rises.
Taiwan's government allowed CPC in July 2006 to adopt a floating price mechanism that calls for weekly adjustments. However, that system was watered down by the government in September to allow only monthly adjustments and a potential freeze on prices if the cumulative rise in one month exceeded 15 per cent.
Legislators added to the pressure late last week by passing a resolution demanding a freeze in fuel prices, after which the government appeared likely to order CPC not to increase the prices of cooking and heating oil.
Many Asian countries have not waited for the recent oil price surge to start dismantling subsidies. Following deregulation in 2004 and 2005, liquefied petroleum gas is now the only fuel subject to price controls and subsidies in Thailand.
South Korea, the economy that resembles Taiwan's most closely in the region, started liberalising domestic fuel markets in 1996, introducing competition and imposing taxes on petroleum products.
Taiwan is not alone in choosing political exigency over fiscal prudence, however. A UBS report published last week concluded that, of south-east Asia's five biggest economies, only in Thailand and Malaysia was there any "likelihood of a sharp adjustment in energy costs at the retail level by end 2008".
Two years ago, Indonesia managed a far-reaching subsidy reform when it raised fuel prices by 126 per cent after a spike in global oil prices. However, Indonesia's example has not fundamentally altered political concerns about angering poorer consumers, even though the corporate lobbying is gaining momentum.
In October Tenaga, the Malaysian state-owned power generator, asked for government permission to pass on increased costs to customers as part of a review of a pricing system that has been in place since 1985. But analysts see any change as unlikely.
"Should Malaysia do it? Absolutely. Can it do it in the short term? For political reasons, I seriously doubt it," says Joseph Jacobelli, utilities analyst at Merrill Lynch.
Part of the reason is that governments feel they can afford the cost of maintaining subsidies, even if it means diverting resources from other government programmes.
Indonesia is a net oil importer. However, Sri Mulyani Indrawati, finance minister, says that while government spending will increase by Rp37,200bn ($4bn, £1.97bn, €2.83bn) over the next two months if the oil price stays above $90 a barrel, state revenues will rise by Rp32,700bn. The deficit, she says, can "be closed with expenditure savings from other non-priority [areas]" meaning that "the budget will be manageable and sustainable".
While Indonesia and others can still cope with the situation, more expensive oil could cripple some of Asia's minnows.
The state electricity company of the Maldives, which four years ago had cash reserves of about $6.0m, now relies on the government to cover 80 per cent of its operational costs.
The cost of oil is also leading to greater investment in other sources of energy, sometimes cross-border. Demand from India and Thailand is behind a handful of hydro-electric projects that are set to benefit Laos, Bhutan and Nepal.
"There's clearly a flip side to the coin," says Samuel Tumiwa, senior energy specialist at the Asian Development Bank.
"High oil prices mean a boom for some countries, as hydro projects are now getting developed that were previously not financially viable."