Oils: New Realities

Emerging economies are contributing to record oil prices by subsidizing demand in their home markets as they seek to shelter their populations from the impact of crippling fuel costs, the International Energy Agency says in a new report.

As crude prices hit another record Tuesday, the Paris-based IEA downgraded its forecast of world petroleum consumption for 2008, saying that high prices and economic weakness in the industrialized world are eating into oil demand.

But the developing world is bucking that trend, notably China and the Middle East, as booming economies and subsidized fuel have kept oil demand climbing sharply.

In China, the government recently entrenched its subsidy program – which could cost as much as $87-billion (U.S.) – in order to end its frequent bouts of embarrassing fuel shortages in time for this summer's Olympic Games.

But it's not just China that is avoiding a political backlash among its citizens by subsidizing pump prices and heating oil.

Middle East oil producers such as Saudi Arabia and Iran keep retail gasoline prices artificially lower to placate young and restive populations.

Venezuelan President Hugo Chavez subsidizes fuel prices not only in his own country, but in Cuba and Nicaragua and even poor neighbourhoods in the United States, to win political favour.

Russia's booming car market is fuelled by subsidized gasoline prices. And Vietnam has frozen oil prices until June in a bid to stem inflation.

While the international agency expects demand in industrialized countries to decline this year by 0.7 per cent or 300,000 barrels of oil a day, it said Tuesday that oil consumption in the rest of the world will grow by 3.7 per cent or 1.4 million barrels.