Govts sustain oil demand surge with fuel incentives

London, Oct 28 | Updated: Oct 29 2004, 05:37am hrs
Governments around the world are helping sustain rapid oil demand growth by subsidising fuel or keeping duties low, limiting bills for consumers to avoid a public backlash over record prices.

Many analysts say governments should instead cut costly fuel subsidies and invest billions in public transportation, electricity generation and increased oil refining capacity, to avoid economic damage from longer-term high prices.

It gives the wrong signal to consumers and lengthens the time to slow demand, said Adam Sieminski of Deutsche Bank. Either consumers are going to pay the bill or government deficits will hurt economic growth fire or the frying pan, he added. Oil markets have been caught out this year by the fastest demand increase in a generation, driven by global growth and a booming China, which boosted oil prices to recent record highs of over $55 a barrel and led to fears of an economic slowdown.

Governments in Asia, Africa and South America cushion consumers from surging world prices with heavy subsidies, while the United States keeps gasoline duty low and European countries face revolts over high fuel tax policies.

The French government granted farmers a reduction in domestic duties earlier this month after truckers and fisherman blocked ports to protest against high prices. The UK also deferred a September fuel duty rise, fearing protests. France is looking to persuade the European Union it needs to take joint action to soften the impact of high oil, but has taken flak for acting unilaterally.

Eurozone ministers agreed oil consumption needs to be moderated at a meeting last week, but failed to agree how. Jet fuel is still not taxed in Europe and air passenger traffic is soaring as cheap flights entice holidaymakers.

Reuters