updated version: Auto Industry in Transition II
Take a look at the graph…. Today, crude oil costs about $131 per barrel and it was already close to $150 per barrel early this month. Ten years ago, the average price for crude oil was about $12 per barrel. There’s much talk of a bubble in the oil market right now. I could imagine that there’s a bubble, and I can also imagine that the price of crude oil might go down again for a short period after the bubble bursts, but the general tendency leaves no doubt that first, the era of cheap oil is over and second, in the medium and in the long term, oil could still reach new record levels. And there are several facts indicating that the oil price spike is less of a bubble but more a result of demand exceeding supply. And there’s no relief in sight. Either the oil market does not work correctly or oil is still cheap. The price will keep rising until it reduces demand resulting in falling prices. However, demand for crude oil is still growing significantly and there are fears that supply might decline. (Check out: Oil will become even more expensive, a coming up fundamental transition – scary news) And even if gasoline consumption in Europe and in the U.S. has fallen in recent months, the insatiable demand for oil from emerging nations is offsetting this easily. Therefore, the sixty-four thousand dollar question is: ”What is going to happen to Chinese oil demand over the next years?”
It’s important to consider that China is among those countries that subsidize gasoline and diesel fuel to keep domestic consumer prices for fuel down in order to make them affordable to citizens who earn lower wages than in industrialized countries. There are many nations across Asia that have subsidized fuel, amongst India, Thailand, Indonesia, Malaysia, Pakistan and many others. Governments absorb the costs directly or they pass them on to refineries and national oil companies that are making enormous losses consequently. But inevitably, this practice is failing and meanwhile, most governments have started rolling back subsidies which have kept fuel prices artificially low. It’s alarming how difficult it turned out to be to go this necessary step. Most gas price hikes in these countries raised storms of protest.
Another issue is that inflationary pressures keep some governments from passing on the tremendous price hikes to the consumer, even though, hardly any government can still afford to keep on subsidizing fuel. There have been series of price hikes across all Asian economies withfixed prices for fuel. On Monday, Vietnam which already suffers from 26.8% inflation had to increase the retail prices of gasoline by 30 percent. And even China had several double-digit price hikes in 2007 and 2008, though the Chinese could probably afford subsidizing gasoline the longest due to its enormous foreign exchange reserves. And China will continue to consume oil at ever higher prices. As China depends overwhelmingly on domestic coal for nergy, only 10% of China’s energy consumption is imported and therefore exposed to world oil price fluctuations. But even if China can offset the price spike in part by burning its trade surplus, there’s no way to keep consumer prices unaffected. Indeed, China has fundamental problems with its pricing mechanism. This came to the fore when hundreds of drivers waited in long queues in front of gas stations earlier this year. Suppliers to the Chinese domestic market are loosing much money per barrel supplied and refineries stopped processing to avoid losses which lead to a supply shortfall. Be it India, China or Vietnam. The gap between domestic prices and international oil prices will have to be closed finally, even if this step might spark severe protests. According to the Economist, India spends about $17.5 billion on fuel subsidies this year. This amount could still rise despite cuts in subsidies. But the Indian and the Chinese governments fear that if people have to spend more money on gasoline, consumer spendingwill go down and that might cool the broader economy. Moreover, civil unrests would definitely occur. Many middle-income families in China and India spend all their money on a car and an unprecedented storm of protest would threaten the social stability if these first-time car owners couldn’t anymore afford driving. Years of saving money would have been for nothing.
Fortunately, there’s a solution in sight: Electric cars. India and China will inevitably embrace this economical and environmentally friendly mean of transportation. Electricity is cheaper than gasoline and electric cars can help India and China out of the squeeze. Reducing gasoline consumption is the only way to limit the subsidy budget in the medium term. Besides, electric cars would help to clear the air in congested and polluted urban areas such as Mumbai, Bangalore, Shanghai and Beijing. Of course, a generous budget will be necessary to introduce the technology and infrastructure into the domestic mass markets, however, jobs will be created, emissions can be reduced and prices for EVs will come down. Even today, there are electric cars which are cheap enough for emerging nations.
The industrialized countries should attach great importance to these technologies and other alternatives, too, as we have to reduce our reliance on fossil fuel imports. Otherwise, high-ranking government officials will still have to travel to the Middle East and ask sheiks that they’d please lower the price of oil. Sooner or later, they’ll realize that they’re talking in vain. There is a clash of interests and as long as we depend on oil imports, the exporters are in the stronger position.
Recently, House Speaker Nancy Pelosi interviewed by CNN’s Wolf Blitzer asked President Bush to release 10% of the strategic petroleum reserves. I really oppose this foolish idea. We are not in a crisis that’d justify to tap into the stockpile. Besides, it’s not a short-term price peak and the effect won’t be felt for long at the pump. But refilling the reserves will be very expensive. I’d suggest that Ms. Pelosi scrap that idea. Oil is an asset that’s essential to economic growth and security, therefore a disruption would be disastrous.
Investment guru Jim Rogers said that the price of oil is a function of demand, supply and terrorism. Three factors of influence mean a lot of fluctuation. Therefore, we can’t anymore afford to be reliant on oil imports and we have to learn to conserve energy. However, this does not necessarily mean to cut back on our living standard.
India’s government cutting fuel subsidies raises a storm of protest
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