Without kerosene subsidies, India’s poor could be forced to use forest wood for fuel.

By KEITH BRADSHER

JAKARTA, Indonesia - To understand why fuel prices in many countries have soared over the last year, it helps to talk to the captain of a battered wooden freighter in Jakarta.
He pays just $2.30 a gallon for diesel, the same price Indonesian motorists pay for regular gasoline. His vessel burns diesel by the barrel, so when the government prepared for a limited price increase this spring, he took to the streets to protest.
“If the government increases the price of fuel any more, my business will collapse totally, said the boat captain, Sinar, who like many Indonesians uses only one name.
From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies - estimated at $40 billion this year in China alone - are also removing much of the incentive to conserve fuel.
The oil company BP, known for thorough statistical analysis of energy markets, estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year - growth that has helped drive prices to record levels.
In most countries that do not subsidize fuel, high prices have caused oil demand to stagnate or fall. But in countries with subsidies, demand is still rising steeply, threatening to outstrip the growth in global supplies.
President Bush warned about the effects of subsidies on July 15. “I am discouraged by the fact that some nations subsidize the purchases of product, like gasoline, which, therefore, means that demand may not be causing the market to adjust as rapidly as we’d like, he said.
Indeed, the biggest question hanging over global oil markets these days may be how much longer countries can keep paying the high cost of subsidizing their consumers. If enough countries start passing the true cost of oil through to their citizens, many economists believe, demand growth will slow, bringing the oil market into better balance and lowering prices .
China raised gasoline and diesel prices on June 21, though still keeping them below world levels. World oil prices plunged more than $4 a barrel within minutes on the expectation that Chinese demand would slow.
Many countries, like India, have raised oil prices considerably in recent months, only to watch world prices climb even further, pushing up the cost of subsidies once again. China’s estimated $40 billion in subsidies this year is up from $22 billion last year, mainly for this reason, although consumption has also risen .
Political pressures and inflation concerns continue to prevent many countries from ending subsidies and letting domestic prices bounce up and down.
Many in Asia bridle at being told to reduce oil use, particularly by the United States .
Making matters worse, Asia’s oil production has barely risen over the last decade, so Asian nations increasingly compete with the West to import oil from the Mideast and Africa.
In Asia, subsidies have been particularly prevalent for diesel. Many governments see diesel as more important because truckers and ship captains need it to distribute goods; if diesel prices rise, consumer prices often follow.
To be sure, subsidies are not the only cause of high crude oil prices. Strong global economic growth, particularly in Asia, is requiring a lot of energy. Political tensions between the United States and Iran and market psychology have played a role.
The cheapest fuel per gallon in many Asian countries is not diesel but kerosene, commonly used for cooking by the very poor.
While the subsidies encourage greater consumption, eliminating them is not easy. “If you reduce the subsidy for kerosene, people are likely to forage in the forests for fuel, and environmentally that is very bad, said Ifzal Ali, the chief economist of the Asian Development Bank.
Kerosene is similar to jet fuel, so strong Asian demand has helped push up costs for airlines.
In Indonesia, the nearly 30 percent increase in prices for low-octane gasoline that was put in place in May has already prompted some less affluent families to drive less.
Subrata, a 34-year-old who sells gasoline to local motorcyclists in Karawang, Indonesia, said that the increase had halved his sales.
If the price rises further, he said, “people will not buy it and it will be a heavy blow for the lower classes.