Bye-bye gas subsidies

Could higher gasoline prices in China and India mean lower prices here in the United States?

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By Steve Hargreaves, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- If gas were more expensive in China and India, would it be cheaper in the United States?

Dozens of countries in the Middle East and Asia have subsidies and controls that keep gas prices low for consumers. Many think that the government tinkering artificially fuels demand, imposing higher prices elsewhere in the world.

Let the price rise in those countries, the thinking goes, demand will fall, and global prices will come down too.

But in recent weeks, China, India, Indonesia, and Iran - countries where the government sets the price of gas - all have raised prices.

And now analysts disagree on what the impact will be. Some say that gas consumption - and worldwide oil prices - could actually go up.

"Their lifestyle has changed so much for the better, it's not going to impact them that much if gas prices go up 20%," said Nauman Barakat, an energy trader at Macquarie Futures, the trading arm of Macquarie investment bank. "They are willing to pay more so they don't have to wait in line."

Others agree.

"Actual consumption is unlikely to be affected seriously," analysts at Wood Mackenzie, and energy consultancy, wrote in a research note. "As long as China's overall economy remains strong, significant growth in vehicle ownership will more than offset the negative effects of this price rise."

One result is that higher gas prices could give refiners an incentive to make more gasoline and eliminate the shortages that have plagued China and other fast-growing countries.

The price of gas

Gasoline is a relatively similar product and costs about the same to produce anywhere in the world.

To get the "true price" of gasoline, the price without taxes or subsidies, one could take the current U.S. price - about $4.09 a gallon - and back out the 40 cents or so we pay in taxes, said Bill Veno, an oil analyst at the consultancy Cambridge Energy Research Associates. That leaves a "market price" of about $3.70.

Some countries tax gasoline to death, and end up with a much higher retail price. In England a gallon of gas goes for $8.60, according to numbers provided by Vena. In Belgium it's $9.04. In the Netherlands it's nearly $10.

But in other places - whether it's to stimulate the economy of placate a restless population - gas is much cheaper than the market rate. In Saudi Arabia it's 45 cents. The Venezuelans pay just over a dime.

According to the International Monetary Fund, 46 countries had price subsidies in 2008. Most are either in Asia or the Middle East.

Barring Iran - which lacks refineries, needs to import gasoline and recently raised its pump prices from 30 to 38 cents a gallon - there's little chance most counties in the Middle East will eliminate their subsidies anytime soon. These high oil prices have left them flush with cash.

But Asia is a different story. The Asian countries generally have bigger populations, and are usually net importers of oil. For them, price subsidies are a pricey proposition.

The Chinese recently hiked prices from about $2.82 to $3.29 a gallon, according to various media reports. India also raised prices, although remains about 30 percent below market rates.

Thailand, Vietnam, and South Korea area all thought to be considering a gas price hike.

"The bill is just getting too big," said John Kilduff, an energy analyst at MF Global in New York.

Kilduff thinks rising fuel prices in Asia will limit demand, and might ultimately lower prices worldwide.

"Those customers just don't have the durability U.S. customers do," he said. "It's going to have a real impact on them."

Cambridge's Veno agrees.

"These subsidies artificially protect consumers from the high price of oil," he said. Eliminating them "would have almost an immediate effect to curtail demand."

Over the next few months, we may get to see just who in this debate is right.

Gas prices have climbed to record levels. Are you feeling the pinch? Tell us how gas prices are affecting you and what you're doing to cope. Send us your photos and videos, or email us to share your story. To top of page

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