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Gone are the days of cheap petrol. One by one, countries across Southeast Asia has abandoned price controls on bringing hundreds of millions of consumers face to face with the true market cost of oil. The oil price bubble has burst.

It came but not without a warning. Many a time the governments from Kuala Lumpur to Manila have been told to lift the price caps. When they started to listen, it was bit too late.

The high price of oil was already taking a serious toll, in more ways tha
n they had thought. Inflation soared. Interest rates shot up. Governments faltered as deadly riots shook capitals across the region. The fuel subsidies that benefited politicians in Asean have now come back to haunt them.

Sweet Subsidies Turn Sour

Take Malaysia first. There the government lifted its subsidies on oil prices in June, immediately pushing up the price of petrol by 41 percent and diesel by 63 percent. The result was the biggest ever protests in Kuala Lumpur against Prime Minister Abdullah Badawi.

While the government was grappling to cut back on the fuel subsidy, which had ballooned to 40 billion ringgit ($12.44 billion) last year, the public believed it should enjoy cheaper fuel as Malaysia is a net oil-exporting country and national oil company Petronas is flush with profits.

“It was a difficult and agonizing decision to make. Many times, we have been tempted to walk away from such a difficult decision. Certainly, we realised that the decision would be met with great anguish not to mention anger from the people,” said Abdullah.

The protests against fuel price hikes
shook Malaysia’s Prime Minister Abdullah
and his ruling National Front coalition.

The prime minister, already besieged after the ruling coalition - National Front, or Barisan Nasional (BN) - lost the two-thirds parliamentary majority that it held since independence in 1957, made the unpopular move as crude prices continued to spiral above $130 per barrel, diverting funds from much-needed development projects.

Malaysia used to have some of Asia’s lowest petrol and diesel prices, fixing them well below market rates and paying subsidies to fuel retailers to compensate them.

As a net oil exporter, Malaysia gained from high oil prices, reaping $77.6 million a year in revenue for every $1 rise in crude prices. However, the government’s fuel subsidy bill had jumped along with skyrocketing prices of crude oil in the world market, forcing it to find alternatives to ease the burden on its finances.

Yet the government resorted to cut fuel prices again after annual inflation in August came in at 8.5 percent while world oil prices retreated from a record high in July of above $147 a barrel. Inflation in Malaysia has climbed since the government cut fuel subsidies as global oil prices rose. Annual inflation in May stood at 3.8 percent.

The efforts to ease price pressure on consumers didn’t help much as the public discontent continued to grow. Adding woes to Abdullah administration, the resurgent opposition began to mount a challenge, threatening to take over power.

The fuel subsidies backfired. Abdullah, in the wake of increasing calls for his resignation, has promised to step down in March next year while the fate of the ruling party hangs in the balance.

Indonesia: Biting the Bullet
It was a similar story in Indonesia where the government was forced in May to cut the subsidies on fuel by an average of 28.7 percent as high oil prices badly eroded the state budget.

The end of fuel price caps set off fiery demonstrations in cities across Indonesia where millions were already feeling the brunt of the rising cost of food. In the capital Jakarta, hundreds of Indonesian students and police clashed late May in protests against the sudden rise in fuel prices. In east Jakarta, students threw rocks and fuel bombs at riot police outside the Indonesian Christian University, prompting the officers to charge back using batons.

Despite the violent protests and barb wire
roadblocks, Indonesian President 
Yudhoyono seems to be holding his ground.

Price increases have always been a sensitive issue in Indonesia where millions live on less than $2 a day. A fuel price increase was one of the reasons for massive protests that led to the downfall of former President Suharto in 1998.

Yet, even after the average 28.7 percent increase, Indonesia still had some of the lowest fuel prices in Asia. Indonesia witnessed almost daily protests from students and workers in the run-up to the price hike, although there was no rioting.

The scheme was designed to pass on some of the savings on fuel subsidies to about 19 million poor families. Indonesia’s inflation rate hit a 19-month high of 8.96 percent in April, and the fuel price hike is expected to push it above 12 percent this year.

President Susilo Bambang Yudhoyono fought back, saying the move was necessary to avert an economic meltdown. The decision to reduce oil subsidies was the best, necessary and responsible solution “to save our national economy from crumbling and protect our people from harm,” he said.

The alternative, he warned, would be a possible financial and economic crash similar to that of 1997, and the real loser would be the people. But then there was the risk of widespread social unrest if fuel and food prices rise sharply.

To defuse the explosive situation, the government began giving cash handouts as part of a $1.5 billion scheme to cushion the blow for poor families affected by the price increases.

For Yudhoyono, the issue has proved a tricky one as he needs to gather all the support as he seeks a second term in the presidential elections next year. When he took office in late 2004, one of the legacies bequeathed him by his predecessor was a big gap between the world oil price and the domestic price of subsidised petroleum products. That left him with no alternative but to lift the price caps.

“The increase is about fairness. Subsidised fuels have been enjoyed by the haves,” rather than the have-nots, explained Purnomo Yusgiantoro. The energy minister said the government could guarantee there would be no more increases in fuel prices before the next presidential election due by mid-2009.

Indonesia had increased fuel prices on 30 separate occasions between 1965 and 2000. When the government more than doubled fuel prices in October 2005, consumption fell significantly. And the choice for the country of more than 200 million consumers (Asean’s biggest) is between saving energy or subsidising its price.

Indonesia’s ballooning oil subsidies had cost the government more than $6 billion in 2004 - far more than the world’s fourth most populous nation spent on health and education combined.

Indonesian public seems to be listening to Yudhoyono as the opinion polls ahead of the presidential elections are showing him topping the list of popular candidates. Read the Complete Article Subscribe to ASEANAFFAIRS Magazine

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