Big oil consumers helpless as prices skyrocket

South Korea joins other Asian nations in giving handouts to the needy
Straits Times 9 Jun 08;

SEOUL - SOUTH Korea announced yesterday it would hand out US$10.2 billion (S$14 billion) to its lowest-income citizens over the next year to offset the rocketing price of oil, joining the growing list of Asian countries scrambling to deal with a potentially explosive problem.

The move came after oil posted its biggest one-day price gain last Friday, which prompted the world's biggest energy consumers, including South Korea, China, India and the Group of Eight nations, to issue a statement yesterday expressing 'serious concern' over soaring prices and urging a shift to alternative fuel sources.

Japan, which hosted the meeting, warned that the world could plunge into recession.

Announcing the government package in Seoul, Prime Minister Han Seung Soo told a news briefing: 'We are facing great difficulty as the world's fifth-largest oil consuming nation while we do not produce a drop of oil.

'The government will do its best to help reduce the burden from rising oil prices on consumers.'

The package, which will benefit about 13.8 million people, includes income tax rebates for the 78 per cent of the country's workers who earn less than 36 million won (S$48,000) a year.

The government will also pay 50 per cent of the increase in oil costs for bus drivers, truckers, farmers, fishermen and those on lower incomes. Owners of trucks with less than a tonne capacity will also receive tax rebates.

Mr Han said the government would use surplus tax revenues from last year and an expected surplus from next year's collection to fund the package.

But that surplus may be under threat, as officials have acknowledged that the country - Asia's fourth-largest economy - is unlikely to achieve its 6 per cent growth target this year because high oil and food prices have hit consumption. Annual consumer price inflation last month hit a seven-year high of 4.9 per cent, led by fuel costs.

South Korea's financial measures to alleviate the pain felt by oil users come as other Asian countries roll back oil subsidies that are proving too costly for governments.

Unable to afford big subsidies, India, Malaysia and Indonesia have already raised fuel prices, triggering protests in all three countries.

Strikes and protests have also been reported in Europe, particularly among farmers, fishermen and truckers, demanding a cut in oil prices which have doubled over the past year and risen 44 per cent this year alone.

US crude surged to a record US$139.12 a barrel last Friday in New York.

Analysts have warned that rising inflation caused by soaring fuel and food prices threatens to undermine many Asian governments facing elections.

'In any country that has elections coming up within the next two years, inflation and how the government wrestles with (it) will be important,' said Mr Robert Broadfoot of the Political and Economic Risk Consultancy.

'So therefore we're talking about India, the situation in Malaysia is still not finished yet, in Indonesia you've got elections next year, and the Philippines in 2010,' said the Hong Kong-based analyst.

He added that the issue of rising prices was extremely difficult for governments to handle.

At the G-8 energy ministers meeting in the northern Japanese city of Aomori yesterday, the United States called for an end to continued heavy price subsidies in the region - which buoy demand - but China and India said they could only raise domestic rates gradually in view of their fragile economies.

AGENCE FRANCE PRESSE, ASSOCIATED PRESS, REUTERS, BLOOMBERG

So, who is to blame?

OIL PRODUCERS AT FAULT?

'Every head of government across the world is dealing with this challenge now and it goes to global oil supply, in large part, the role of Opec...Opec needs to open the production lines to a greater extent...The G-8 provides an opportunity to apply the blowtorch to Opec - and it's time that happened.'
AUSTRALIAN PRIME MINISTER KEVIN RUDD

THE AMERICAN GORILLA

'Let's not kid ourselves. There is one big gorilla in this market on the demand side, and it's the US. We use three times as much oil as China with one-quarter of the population.'
MR SEVERIN BORENSTEIN, a business and public policy professor at the University of California-Berkeley, who also directs the university's Energy Institute

UNREALISTIC CHEAP FUEL

'It's a shock, but if you look at the rate of oil production globally, it has been 85 million barrels a day for three years in a row. We know demand is increasing because a lot of nations are still subsidising oil, which ought to stop.'
US ENERGY SECRETARY SAM BODMAN

IT'S THE IRAQ WAR

'The oil crisis is linked to ...the war in Iraq...The food crisis, thanks to the boom in biofuels, also results from the oil crisis.'
US ECONOMIST JOSEPH STIGLIZE, a Nobel laureate

CHEAP MONEY

'Oil prices are surging not because of a supply shortage, but because of massive liquidity.'
MR TOSHINORI ITO, senior analyst at UBS Securities Japan, referring to the influx of financial funds into markets, helped by low interest rates