Big Asia oil consumers resist fuel price cuts at $80

SINGAPORE (Reuters) - Asia's fastest-growing oil importers are resisting for now the political lure of cutting domestic fuel prices after crude costs nearly halved since July, helping keep a tight lid on consumption already being curbed by an economic slowdown.

While their resolve may erode if prices -- now hovering at near their lowest in 13 months -- fall much much further below $80 a barrel, China, India and Indonesia seem content to stand pat for now, with earlier inflationary pressures having ebbed and state refiners in the black for the first time in years.

For analysts looking to China and India to generate four-fifths of the world's demand growth next year, the prospect that fuel prices will remain relatively higher may be one more reason to bet against a renewed surge toward $150.

"Right now around $80 we seem to be at a sweet spot that many can live with," said Jeff Brown, managing director for consultancy FACTS Global Energy.

"China won't necessarily reduce prices outright but they might go back to a market link," he added, referring to the country's long-stated desire to once again allow prices to match global rates rather than setting them centrally.

For the first time in years, many Chinese drivers are now paying more for their gasoline than those in the United States, where average retail pump rates plunged by a record nearly 10 percent over the last week to $3.15 a gallon.

While the suggestion of a cut has been floated in local media recently, officials have good reason to resist.

State-owned refiners in China and India are finally turning a profit, or nearly so, after years of living off fickle government hand-outs to offset the cost of selling cheap fuel.

In India, with the depreciation of the rupee, the break-even crude oil price for refiners is $61 a barrel based on import costs, about $10 below current costs, and refiners like Indian Oil Corp (IOC.BO), hobbled with a debt burden that has doubled to $20 billion since April, would fiercely resist any price curbs.

Indonesia will not cut prices so long as the average for this year remains above its budgeted $95 a barrel, a mines and energy ministry official said. The rate so far is still $108.

Only last week China showed its resolve in trying to curb demand growth in order to ease its growing dependence on imports, when Beijing unexpectedly raised city fuel prices in order to pay for the cost of cleaner, greener grades. That followed a shock 18 percent pre-Olympics rise in June.

PRESSURE STILL ON

A few in Asia have already caved.

Malaysia, a small consumer that produces all of its own fuel, cut prices on Tuesday for the third time since it hiked them dramatically in June; Vietnam, the region's second-biggest importer, has also cut prices and is rumored to do so again.

And to be sure, officials could find reasons to justify a cut, if they were looking.

China has cut interest rates for the first time in 6 years, showing that its focus has clearly shifted from fighting inflation to stoking growth, and cheaper fuel could help that.

In both India and Indonesia, elections loom next year, and inflation still remains something of a bug-bear.

And while China has been reasonably resolute in raising prices steadily, if slowly, since 2004, when prices were half current levels, it has taken advantage of previous pull-backs.

Beijing trimmed gasoline prices by nearly 4 percent in January of 2007, after crude collapsed briefly back below $50. That relief proved fleeting, but Beijing didn't raise prices again until November.

"They never do anything in a hurry. The degree of volatility makes any kind of planning very difficult, whether you're an economist or a politician," said Simon Littlewood, president of consultancy Asia Now in Singapore.

LESSONS LEARNED

Still, after years of subsidized price regimes, there are signs that governments have learned their lessons.

As economists have long argued, and China and India have experienced in recent years, the distortions caused by subsidies creates long-term problems with investment and increased demand, and does far more to help the wealthy than to aid the poor.

Backsliding on promises to gradually scale back subsidies could also stymie the shift toward fuel conservation that has picked up in recent months, a trend highlighted by the abrupt contraction in new car sales in both China and India.

Just as artificially cheap fuel helped turbo-charge demand in expanding China and India, the rise in prices as governments scaled back multibillion-dollar subsidies has helped tame it.

"There is a risk that domestic prices have been elevated to a point that consumers are gradually becoming more price sensitive," said independent U.S.-based analyst Paul Ting.

Even if prices were cut, economic history suggest that consumption rates would be slow to pick up speed. While oil demand and income growth are symmetrical -- they typically move in lock-step with each other -- the same is not true of prices.

"When prices go up, consumers adjust their habits," said Brown. "When prices come down they don't go out and buy new, less-efficient cars."

(Additional reporting by Muklis Ali in Jakarta, Nidhi Verma in New Delhi and Chua Baizhen in Singapore; Editing by Michael Urquhart)