Emerging Asia will keep fuel prices on tight leash

By Kevin Plumberg - Analysis

HONG KONG (Reuters) - A dramatic crash in oil prices this year has prompted governments across emerging Asia to slash heavily subsidized fuel prices, but this should not be confused as a sign that the region is moving toward free energy markets.

On Sunday, Indonesia became the latest Asian nation to cut fuel costs, erasing half of the increases made earlier this year when oil prices were scaling record highs.

Cutting domestic prices of gasoline, diesel and other fuels as world prices fall makes economic sense, especially with low-income consumers hit hard by the global recession.

However, no Asian government is likely to take any time soon the politically risky step of letting market forces alone dictate domestic energy costs for fear that oil prices, which fell more than 50 percent this year, will eventually climb again.

In addition, elections in Indonesia and India next year and a pending leadership change in Malaysia, will make leaders there particularly reluctant to risk fundamental changes that would bring higher efficiency, but could be hard to reverse.

Only months ago, a surge in oil prices to records above $140 a barrel forced governments to raise fuel costs to prevent ballooning subsidy bills from blowing up their budgets.

That unleashed a wave of protests from Bangkok to Seoul and enflamed opposition parties throughout the region. So when oil markets retreated to a four-year low of $41 earlier this month, the authorities seized the opportunity to pass on the cuts.

"It's easy to lower prices when fuel prices fall, but you're damned if you raise them when fuel prices go up again," said Subir Gokarn, Asia-Pacific chief economist for Standard & Poor's in New Delhi. "I don't in any realistic sense see a quick and dramatic transformation in the energy price system."

EASY CUT

Gokarn said Indian general elections early next year made the 10 percent cut in gasoline prices and near 6 percent drop in diesel earlier in December an easy decision, but fundamental changes that would link all domestic prices further to international markets would be a hard sell.

India is flirting with lifting controls on transport fuel costs, according to the Economic Times report on Friday. That would help consumers if oil keeps falling, but crude's downside potential is seen limited after it has already shed more than $100 from its record high.

In the past several days, India cut fuel prices for the first time in nearly two years and China said it will do it at the start of next year. Indonesia, Malaysia and Vietnam, have taken similar steps earlier.

Indonesia, which has the cheapest fuel in Asia, followed a cut in gasoline prices in early December with a further 9 percent reduction and a 13 percent cut in diesel prices on Sunday, erasing half of the increase from earlier this year. The cuts serve a double purpose: they should help bring inflation down from double digits and boost the popularity of President Susilo Bambang Yudhoyono, who will seek re-election next year.

A decade ago, riots over cooking fuel price hikes helped trigger the ouster of President Suharto and subsidy cuts in May hit Yudhoyono's popularity ratings.

However, no long-term policy changes have been made.