Oil subsidies in emerging countries squeezed: IEA

LONDON (Reuters) - Some emerging market countries are finding it tough to maintain subsidies on fuel prices as oil has climbed to new peaks, the International Energy Agency said on Tuesday.

Most emerging economies have some form of price controls and are understandably reluctant for economic, political and social reasons, to allow a sharp rise in domestic oil prices, the agency said in its monthly Oil Market Report.

"At the same time, maintaining price controls is leading to severe distortions and mounting costs for public purses," said the IEA, adviser to 27 industrialized countries.

Oil prices have doubled in the past year and hit a record of $126.40 on Monday.

High prices have put pressure on world demand growth this year, although growth overall from emerging market countries remains strong at 3.7 percent, the IEA said.

But in Indonesia, for example, the government is under increasing pressure to cut subsidies on gasoline, diesel and kerosene, which are estimated to reach $12 billion in 2008.

It is reluctant to raise prices as this could hit growth and stoke inflation.

Thailand reintroduced diesel subsidies in March and these could be increased if oil prices rise further and could also be extended to public transport and industrial sectors, the IEA said.

Thailand is paying for this by allowing refiners to cut their contributions to its oil fund and energy conservation fund.

The new government in Malaysia has decided to maintain existing fuel price caps, while Vietnam has frozen oil product prices until June to stem rising inflation, the agency said.

Vietnam's gasoline prices have nominally been deregulated since mid-2007, but importers still need government approval when setting end-user prices and are effectively restrained from changing prices too often.

In Taiwan, there is speculation whether president-elect Ma Ying-jeou, who takes office on May 20, will remove fuel price controls which were imposed in November last year.

As a result of this price freeze, state-owned CPC Corporation is expected to lose about T$70 billion this year, the IEA said.

(Reporting by Jane Merriman; editing by James Jukwey)