Fuel Subsidies Sustain Oil Demand Growth.

A Reuters report on Oct. 29 noted that governments around the world were helping sustain rapid oil demand growth by subsidising fuel or keeping duties low, limiting bills for consumers to avoid a public backlash over record prices. Many analysts say governments should instead cut costly fuel subsidies and invest billions in public transportation, electricity generation and increased oil refining capacity, to avoid economic damage from longer-term high prices.

Governments in Asia including the Middle East, in Africa and in South America cushion consumers from surging world prices with heavy subsidies, while the US keeps gasoline duty low and European countries face revolts over high fuel tax policies. Reuters quoted Adam Sieminski of Deutsche Bank as saying: "It gives the wrong signal to consumers and lengthens the time to slow demand. Either consumers are going to pay the bill or government deficits will hurt economic growth fire or the frying pan".

The French government in October granted farmers a reduction in domestic duties after truckers and fisherman blocked ports to protest against high prices. The UK deferred a September fuel duty rise, fearing protests. France is looking to persuade the European Union it needs to take joint action to soften the impact of high oil, but has taken flak for acting unilaterally. Eurozone ministers agreed that oil consumption needed to be moderated at a recent meeting, but failed to agree how. Jet fuel is still not taxed in Europe and air passenger traffic is soaring as cheap flights entice holidaymakers.

Low fuel taxes in the US have helped make it the world's largest oil consumer. Its pump prices have risen sharply this year but are still far lower than Europe, leading drivers to snap up gas-guzzling sports utility vehicles (SUVs).

While US presidential candidate John Kerry has said he favours improved energy conservation, such as tougher vehicle economy standards, he has shown no sign that he would raise gasoline taxes, seen as a US political taboo. Reuters quoted Cynthia Poynter of consultancy IHS Energy as saying: "If they add tax to fuel, like in Europe, all hell will break loose".

The unfettered demand for transport fuels is stretching global oil refining capacity, yet oil companies are reluctant to invest in the sector. No new US refineries have been built in the past two decades.

In China, which last year overtook Japan as the world's second largest oil consumer, Beijing's cap on domestic prices may be inflating demand and adding to the supply shortage. "One reason why China has not yet exhibited any noticeable price elasticity of demand for oil is the fact that domestic prices have so far been held down artificially", said Credit Suisse First Boston in a report quoted by Reuters.

Beijing faces a dilemma between higher inflation or disruptions to living standards, as shortages may spread. But even if China raises prices, demand is likely to keep booming consumption from industry and power plants.