Fuel Pricing and Subsidy Reforms in Asia after the 2014 Oil Price Crash: a Comparative Study of Strategies

S&P Global
Written By: Vandana Hari
S&P Global
Written By: Vandana Hari

A sustained plunge in benchmark crude oil prices from a peak of around $115/barrel in June 2014 to $30-50/barrel levels through the first half of 2016 provided a major impetus to governments across Asia to resume cutting back their fossil fuel subsidies and accelerating energy pricing reforms, which had been all but suspended in the years following the 2008 Global Financial Crisis.

Liberalization of oil products pricing in developing Asia’s major consuming countries has occurred in fits and starts over the decades, often dictated by the price cycles in the international markets, with every upswing in prices halting or sometimes even reversing the progress made during a period of low prices. Though GFC had sent Brent crude crashing nearly 74% from its historic high of more than $146 in July 2008 to a trough of around $36 by the end of that year, Asian governments, wrapped up in economic woes and concerns over inflation driven by their monetary easing, stood still on fuel subsidies in the months that followed. By the fourth quarter of 2009, crude had climbed back to around $80/barrel. It then went on to settle in a relatively high band of around $110-120 over the period of early 2011 to Q3 2014.

Withdrawing fuel subsidies from populations accustomed to cheap oil is especially difficult when international oil prices are high and the gap with subsidized fuel prices in the domestic market is big. The crude price tailspin that began in mid- 2014, however, largely eliminated that hurdle.

As declining international prices of fuels converged with their subsidized rates, calling an end to subsidies lost some of its political sensitivity. Besides, this time round, not only were the countries on a more solid economic footing, but the view that crude prices would likely remain depressed for a few more years as the market gradually worked its way out of oversupply and historically high inventory overhang in the absence of an OPEC intervention, encouraged bigger and bolder moves toward liberalization.

The Paris agreement on climate change adopted by 195 countries in December 2015 (Conference of Parties or COP21) served as a fresh reminder of the environmental imperative of adopting market pricing for consumer fuels.

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