Fuel Subsidies Begin To Take Toll in Asia

Costly fuel subsidies are creating budgetary pressures for Asiangovernments, raising the odds that this year's rise in oil prices willcause long-term damage even if prices retreat soon.

Most major countries -- including the U.S. -- don't normally intervene toinfluence the prices of gasoline or other fuels. But in developing Asia, many governments use subsidies and other methods to shield consumers fromunexpected swings in energy costs.

Those supports have helped Asia maintain a higher rate of economic growththan the rest of the world this year. But as oil prices remain high, thesubsidies are beginning to take a toll.

In Indonesia, ballooning oil subsidies are expected to cost the government more than $6 billion in 2004 -- far more than the world's fourth most populous nation will spend on health and education combined. That costpresents a challenge for incoming President Susilo Bambang Yudhoyono, whohas made dealing with oil subsidies a top priority when he takes office Oct. 20. Deadly riots triggered by a fuel-price increase in 1998 helped cause the collapse of former President Suharto's authoritarian regime.

Even so, many economists say their biggest worries concern Indonesia and Thailand. Despite being East Asia's only member of the Organization of Petroleum Exporting Countries, Indonesia has seen its oil production fall sharply in recent years, thanks to a lack of new investment and the depletion of many older fields.

This year, the production decline has turned Indonesia into a net importer for the first time. The result is that the deeply indebted country is spending billions of dollars to fix the price of petroleum fuels at levels that are as much as 60% below world prices. Economists are particularly disturbed by the practice because the subsidies benefit middle-class drivers of cars far more than the poor who truly need government aid.

From the Wall Street Journal.