June 5, 2008 | posted by Michael Baxter in Oil |

The Honda Civic has the answer.     India Oil illustrates the threat.

In the US in May the biggest-selling auto was that fuel efficient car from Honda.  Available with a hybrid option, no less than 53,299 Civics were sold in the month, making it the best-selling car in the US.  It was the first time since 1991 that a pickup truck was not number one.

Yet the decline of the pickup does not stop there.  The Toyota Corollas and Camrys, and Honda Accord, all enjoyed greater sales too.

You know the reason why: it is the high price of oil.  US consumers want more gas per buck.

And yet in other countries, the full cost of higher oil is not yet being felt.

In India, for example, gas is a third cheaper than in the US, and as you know US gas is a lot cheaper than in Blighty.

According to Business Week, India Oil, the biggest oil refiner in India, is close to bankruptcy.  Why? Because the state owned company loses money every time it sells gas – and apparently India’s government-owned oil companies are expected to lose between them US$58.4 billion this year.

And that is why oil is staying high.  It is not just India, oil is subsidised in many countries throughout Asia, but there are signs it is changing.

In India the government has chosen to reduce its subsidies on oil by 11 per cent.  It’s not the first time this has happened, the government lowered subsidies in February too.

Indian oil minister Murli Deora said the government was “committed to protecting the interest of the common man as well as ensuring the financial health of the public-sector oil marketing companies.”

Mr Deora added, “Due to a relentless increase in international oil prices, it has now become absolutely necessary for the consumer, who is an important stakeholder, to also shoulder a small part of increased burden.”

But the move is hugely controversial.  Opposition spokesmen Rajiv Pratap Rudy said if an increase in fuel prices “… is inevitable, then the exit of the prime minister and his government is inevitable as well.”

But India is not alone.  In fact, the real fireworks came from Malaysia.  The government there is to increase gas prices by 40 per cent.  Malaysian Prime Minister Abdullah Ahmad Badawi said, “We cannot naturally keep subsidising at the current rate…We must reduce wastage. If we can change our lifestyles, we will not suffer a terrible situation…The long term plan is to increase … [gas] to market price.”

Indonesia, Taiwan, Pakistan and Sri Lanka have all taken similar steps recently.

But, for the time being, the dragon is not moving.    China can afford to stay put, at least for the time being, and it is thought there will be no relaxation of gas subsidies in China until after the Olympics.

We can complain about China, and there is no doubt the policy of subsidising oil introduces distortions into the market.  But frankly, the policy is not that different from the EU Common Agricultural Policy (CAP).  Okay, in China the idea is to help the consumer, CAP subsidies are there for producers.  But the two subsidies are equally damaging.

Of course, China is a wealthy developing country and has the luxury of being able to afford to do this.  In impoverished countries like the US and UK this option does not exist!

In reality, though, China remains a poor country.  It seems unlikely she can afford this subsidy indefinitely, and in any case, it is questionable whether it is really a good thing for the local economy anyway.

If the subsidy was lifted, the government could spend the proceeds elsewhere – and in time, this is surely what she will do.

But until then, the move to fuel-efficient cars in the US, and the reduction in tariffs in countries such as India and Malaysia, may just not be enough.

The likelihood is that the price of oil will only fall significantly when China lifts, at least partially, her gas subsidies.