India: Cheap gas is too expensive

The government can no longer afford to subsidize pump prices.

Published June 4, 2008 2:30PM (EDT)

As if to punctuate one of the points George Soros made yesterday in his testimony to the U.S. Congress about the forces driving the price of oil, India's government announced on Tuesday that it was raising the retail prices of gasoline and diesel.

Readers will recall that Soros pointed to government subsidies aimed at keeping the price of oil down for domestic consumption as one of four factors contributing to the global sky-high price of crude oil. If the subsidies were removed, Soros argued, the consequent sharp rise in costs would inhibit demand, which would then reduce upward pressure on oil prices.

Why is India's government taking this step? According to the Financial Times the answer is simple. The cost of maintaining the subsidies was breaking the bank. India imports more than 70 percent of its oil -- "Without the increase, the government oil companies are facing a deficit of $57.8bn from selling fuel at a subsidized price."

"Due to the relentless increase in the international oil prices, it has become absolutely necessary for the consumer, who is also an important stakeholder, to also shoulder a small part of the increased burden," said Murli Deora, minister of petroleum.

We'll have to wait and see what impact the price rise has on India's 9-percent-a-year economic growth. But it seems logical to assume that the same pressure will ultimately force China's government to act similarly and adjust its own subsidies.

Camels are looking better than ever.

UPDATE: Synchronicity alert: Naked Capitalism's Yves Smith posts a lengthy excerpt of a Morgan Stanley research report that provides a wealth of detail and analysis on the subject of developing world energy subsidies. A taste:

A quarter of the world's gasoline consumption is subsidized, and, in terms of population, half of the world uses energy subsidies. This policy has created an important distortion, whereby rising oil prices have been effectively prevented from destroying oil demand. Subsidies have artificially raised inflation in the developed world (through artificially high oil prices) and suppressed inflation in the developing world (inflation would have been even higher in the absence of subsidies). As fiscal pressures mount, some countries will be forced to incrementally remove these subsidies. The net result will be an unwind of these distortions. For currencies, we believe that the net effect will be negative for emerging market countries, as this process will be stagflationary for them, and "Goldilocksy" for developed countries...

"Goldilocksy," by the way, means "not too hot, and not too cold."

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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