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Thursday, June 19, 2008

Oil Drops on Subsidy Cuts in China, India, Malaysia, Taiwan

Oil Falls More Than $4 as China Announces Fuel Price Increase: “Crude oil fell more than $4 a barrel, the biggest drop in 11 weeks, on speculation demand will decline, after China said it will raise fuel prices starting tomorrow.

China, the second-biggest fuel consumer after the U.S., will increase gasoline and diesel prices by 1,000 yuan ($145.50) a ton, the National Development and Reform Commission said. The increases represent a 17 percent gain for gasoline and 18 percent for diesel. Gasoline, natural gas and heating oil also fell.”

That should put the brakes on the Chinese economy…

This is the catalyst that will finally burst the oil bubble. India, Malaysia, Indonesia and Taiwan have increased fuel prices and reduced subsidies this year. This will have an immediate effect on fuel consumption in these nations because they really are marginal consumers and are therefore the most price sensitive.

In Dollar Smile, Global Decoupling, Oil Super Spike and Yields I argued:

“Increased demand from developing nations won’t drive oil much higher. Developing nations are the new marginal consumers. That is to say they are the most price sensitive elements of oil demand. For first world nations oil demand is very inelastic. For developing countries oil demand is far more elastic. That means for every $1 increase in oil, more demand will be choked off in developing countries than in first world countries.

Translation: Long before high oil prices cripple the SUV driving commuter making $48 201 (2006 US median annual household income) the Chinese factory worker making about $7 700 (2006 Est.) or the Indian worker making $3 800 (2006 Est.) will have given up on certain consumer amenities.

It is a serious mistake to assume that commodity prices at these levels won’t have a serious affect on these developing nations.”

The Shanghai Stock Exchange Composite has dropped from a high of 6 124 to 2 748 or 55%. Like all bubbles, this index first went parabolic, and then imploded twice as quickly…

The smart money was well aware of the extreme strains the gasoline subsidies put on government budgets. The smart money got out, knowing full well that it was only a matter of time before the spot price of crude and gasoline would force these governments to back off on their subsidies. The effect on both consumption and economic growth will be severe by virtue of the fact that the average Chinese or Indian consumer has far less disposable income to shuffle about. Fuel price hikes will take very real and immediate chunks out of their discretionary spending budgets.

Seriously, what did you think would happen? Come on, you didn’t really buy into the ‘Chinese are putting a million cars a month on the road’ hype? That demand in Asia would skyrocket even at $130 dollars a barrel because they’re a ‘super hyper growth ninja economy’? In the end, somebody has to pay. For a while it was the Chinese, Indian and Malaysian tax paper. But now that these subsidies have become ridiculously huge, the government has STARTED to shift the burden to the individual consumer. I say STARTED, because there are far more subsidy cuts to come…

The cure for high prices is high prices.

From my post Parabolic Commodities, The End is in Sight:

“This is all you need to know: PARABILIC = END IS NEAR.

First: When The Momos Go Parabolic…
Second: When The Momos Lead The Way Down
Thirdly: Life After Things Go Parabolic, This Bounce Too Will End.
Most importantly: All Bubbles Are The Same

I’m a big fan of Peak Oil Debunked. (Don’t freak, I am aware that oil is a finite resource that will peak someday… but that day isn’t even remotely close.)

Related Posts:
Damit, Why Won’t You Learn?
From Bubble To Bubble: More Hidden Losses
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB


Anonymous said...

a ‘super hyper growth ninja economy’?

- that's brilliant :]

Anonymous said...

I think oil prices will fall at some point but not below $100 and bubblevision will cheer about the collapse of the oil bubble though it would still be up for the year. What price do you think oil will drop to and what timeframe are you looking at?

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