We have witnessed the price hike of all petroleum products as the crude prices become higher in the international market. It rose up to 135$ per barrel. Usually when price go up demand falls. But world demand for oil has kept rising for five years even though the price has been become 4X of what it was earlier. The question arises that why the trend is not continuing with oil?
The short answer is the demand has indeed fallen in countries where consumers have borne the full brunt of higher price. In the US the price of petrol has crossed 4$ per gallon, so consumption is falling. But Oil demand is stayed high in Asia, where demand has been rising fastest. Why? Because most Asian governments have rigid price control on petroleum products. Though the global price has been skyrocketed, domestic price have risen very little, thanks to implicit government subsidies of trillions of dollars. This spares the pain of consumer. And in the absence of any pain, consumer have very rationally kept consuming. The International Energy Authority estimated in January 2008 the consumption in China, India and the middle East would rise by 1.2million barrels/day . This was partly because of highest growth of Asian nations and partly because of rigid price controls. The good news is that the Asian governments have decided to bite the bullet , china’s government has decided to increase the petrol and diesel prices by 18% and jet fuel by 25%. Malaysia has increased the price of petrol and diesel by 41% and Indonesia increased by 31%. Pakistan has announced to remove the subsidy which cost the 2.4 billion dollar last year by the end of 2008. In India the petrol is costlier by 5 Rs/liter and diesel by 3 Rs/ liter, these are timid, insufficient increase yet they should increase the conservation in coming months.
In sum many big Asian consumers, who earlier kept demand booming through price control, are finally changing course. That should cool demand in the second half of 2008 and so the price will come down.
