The AP reports," China raised prices for fuel by as much as 18 percent on Friday in a move intended to cool the nation's surging energy consumption." Light, sweet crude for July delivery fell $4.75 to $131.93 on the news. The increase in oil consumption by asian countries is well known, but the fact that China, India, Malaysia, Indonesia and several other asian countries have subsidised oil for their industries and consumers has not been widely reported by many news sources.
From a June 10 Forbes article, "Cutting oil subsidies in a handful of Asian countries should curb demand for crude by as much as 80,000 barrels per day this year (...) But in the grand scheme of things, that shouldn't dent the record high prices oil has reached recently." Eduardo Lopez, an analyst with the Paris-based International Energy Agency, was quoted:
Until a big player like China or India chooses to decisively scrap or reduce fuel subsidies by a significant amount, the underlying supply-demand balance will continue to be tight.
An 18% reduction in fuel subsidies by China could be called a "significant amount" in some quarters.
A May 23 Reuters article reported:
Americans are curbing their driving in the face of record-high gasoline prices, data released on Friday showed highway miles driven in March fell 4.3 percent from a year earlier, the first March decline since the last major oil shock in the late 1970s. According to the Department of Transportation, Americans drove 11 billion miles less in March 2008 than a year earlier, the first time estimated travel on public roads fell in March since 1979. The data marks the sharpest year-on-year drop for any month in the history of the agency's reporting, which dates back to 1942.
As we all know, that reduction by American drivers has had no effect the price of oil. At least part of the reason for that is oil subsidies in several asian countries have kept prices substantially lower than prices in other parts of the world. Low fuel prices have not provided any incentive to reduce consumption in those countries. China actually has price controls in place that limit the amount that can charged for retail fuel prices. Refineries and traders must deal with the fact that 40% of their crude oil is imported at prices that cause them to lose money. In effect the more they sell, the more they lose. The only way to cut losses is to produce less, causing "long queues of cars and trucks stretched every day for more than a week outside the 20 gas stations along Guangzhou Industry Avenue and another major thoroughfare in the provincial capital of Guangzhou."
India has recently raised fuel prices by 10.0%, and Malaysia raised prices by 40.0%. Last month, Indonesia raised prices by 30%. The Malaysian government spent about $12 billion on oil subsidies last year, which is around 25% of its annual budget. India was reported to spend 9% of its GDP on oil subsidies. According to the International Herald Tribune:
... As it is, developing Asia accounts for only about 20 percent of global oil consumption. But the more important statistic is that Asian countries account for about two thirds of the annual increase in global oil demand and an even higher percentage of the increase in imports. (...) With developing Asia now consuming about 17 million barrels a day - and that figure rising by about 1 million ever year - the key question is: How much additional demand has been created by these oil subsidies?
Aviation kerosene and electricity prices will also rise for most Chinese businesses, but residential housing and the farming and fertilizer industries are exempt from price increases. Areas in the Sichuan province hit by a massive earthquake last month will also be exempt.
Oil subsidies by asian countries is only one of many causes for the recent oil price increases. Reducing or eliminating those subsidies does help get the market back to more realistic supply and demand numbers.