An alternative scenario for oil

First, all the major Asian consumers of oil have now hiked retail prices. India, Indonesia, Malaysia, Taiwan and now even China have hiked retail prices by 12-40 per cent. This is a major break in pattern as these governments have now seemingly accepted the unsustainability of continuing to subsidise consumption. Having bitten the bullet, all now have plans to reduce oil subsidies further in the coming months. Once prices are hiked in these countries, they will not be reduced, independent of oil price movements, and thus consumers in these countries will now have to adjust to permanently higher fuel prices.
Given the income profile in these countries, the impact on consumption should be far steeper than price hikes in the OECD economies. Already demand for petroleum products is shrinking in the OECD, with gas demand in the US dropping by 6 per cent year-on-year. Demand growth in the Asian countries should begin to stall as price hikes cascade through the system. Today’s high oil prices are justified not on the basis of current shortages, but on the expected sustained growth in future demand. If the major Asian consuming nations, which account for all the incremental demand growth today, are on a clear path to remove subsidies and force energy efficiency, this has to have an impact on the trend incremental demand. As consumers accept that they will have to ultimately pay near global prices, demand and behaviour will adjust.

Secondly, there seems to be a serious mood change in the US towards energy security. The fact that John McCain has openly come out and suggested a revival of the US nuclear programme, and that the Governor of Florida has talked of re-examining the ban on offshore drilling, are just straws in the wind, pointing to a change in political mood. The US consumer is now feeling the pain of higher gas prices and the country will I think become more pragmatic in balancing environmental and energy security concerns.

Who would have thought that the Americans can ever be weaned away from their gas-guzzling SUVs? But that is exactly what is happening. As consumers adapt to high petroleum prices, this adaptation will soon manifest in policy change as well. One cannot rule out tax changes designed to reduce the carbon intensity of the economy.

Business Standard