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Foreign Countries Cutting Fuel Subsidies Will Decrease Oil Demand
John Ryden, San Francisco Examiner
Indonesia has decided to decrease their fuel subsidies; thus raising the price of gasoline for consumers at the pump. The new price will rise 28.7% to a price of 65 US cents per liter or $2.46 per gallon. India also announced an increase in gasoline prices to $2.66 per gallon, an increase of about 7%. Taiwan is another country that is ending a freeze on gasoline prices.
These price increases are important to creating more elasticity in the demand for oil. If governments fix the price of gasoline at below market levels, when demand increases there and supply remains constant, the price can only go up. In economic terms, this creates a demand curve that is almost vertical. Small increases in demand with fixed supply can create huge price increases. By passing through the increased price to consumers, demand will be reduced and price will find a new equilibrium point at a lower price point. Could this create a short term top in the price of oil?
Longer term, higher oil prices are going to cause consumers to seek ways to decrease their consumption.
… If the Peak Oil theories are true, then oil production will start decreasing and we will be in a world of pain.
John Ryden is an Engineer with a background in Finance and Economics. Here he will discuss how energy production, energy use, and conservation affect us and the rest of the world with a focus on the economic implications.
(27 May 2008)
Ryden talks about subsidies to consumers. Aren’t subsidies to oil companies equally a problem?
John Ryden’s position with the Examiner sounds like the beginning of a trend – the “peak oil” beat. -BA
Asian countries begin to burst the oil bubble
Ambrose Evans-Pritchard, UK Telegraph
One by one, countries across Asia and the Middle East are being forced to abandon price controls on fuel and energy, bringing hundreds of millions of consumers face to face with the true market cost of oil. The effect has already begun to chip away at world demand and may ultimately trigger a slide in crude prices.
… The fast-changing politics of the emerging world has started to chill enthusiasm in New York and London for oil futures contracts.
… Stephen Jen, currency chief at Morgan Stanley, says half the world’s population now enjoys fuel subsidies of one sort or another. … The result has been to encourage promiscuous use of fuel. It has masked the underlying rate of inflation in emerging markets, and flattered the economic growth rate.
… A cyclical correction as the global economy slows would not necessarily invalidate the Peak Oil theory. There can be powerful ups and down with an upward “supercycle”, even if the world is gradually running out of fossil fuels.
(29 May 2008)
Although from an economic point of view, it makes sense to eliminate fuel subsidies, the resulting pain will not be equally distributed. As usual, those who are poor will suffer most. Between rising food prices and fuel prices, we can expect political instability (= riots, civil wars and revolutions) unless the situation is handled carefully. -BA
Crude prices may have peaked but developing countries hold the key
Hamish McRae, Independent
… All the commodity markets have a frothy feel to them at the moment. There have been some sharp falls, for example in the wheat price – indeed, food prices in general seem to have ended the upward path they have sustained for the past 18 months. Quite how far prices will eventually come back will vary from commodity to commodity, for in some cases there has been a speculative element that has pushed the price beyond economic fundamentals. Obviously, the greater the speculative excess the greater the potential for a fall.
But oil is different from most other commodities. It is vastly more important; it has fewer substitutes and, for some applications, none at all; and there is a long-term problem of supply.
… However, while the developed world may follow the path of conservation, there is not much evidence that the developing (or perhaps one should say the newly industrialising) world will do the same. As you can see, previous oil shocks had little impact on demand, but then the absolute amounts of oil being consumed were much lower. So far, there has been no evident fall in demand from developing countries, and as noted above, they are now almost as important as the developed world. Why no fall? Partly, it must be because of the strong underlying growth but there has also been a short-sighted policy response. One of the policies adopted by many developing countries has been to try to shield consumers from the impact of higher oil prices by subsidising the stuff. You can understand the pressure to do so but this cannot be sustained for long and there are signs that some subsidy schemes are now being phased out.
(29 May 2008)
