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India, Malaysia Raise Fuel Prices as Oil Rally Bites

India and Malaysia raised retail fuel prices on Wednesday, joining a growing number of Asian nations no longer able to afford big subsidies in the face of record-breaking oil prices.

The prospect of higher fuel prices for Asian drivers, whose demand has helped power the oil price rally, pushed U.S. crude prices to their lowest level in three weeks.

But analysts cautioned that oil demand will not be significantly dented until China also raises prices.

Oil's four-fold price rise since 2003 has hit consumers around the world, and forecasts that prices are unlikely to fall under $100 a barrel has forced governments to act, despite fears of galloping inflation.

The rally has forced Taiwan, Sri Lanka, Bangladesh and Indonesia to review subsidies.

"Due to a relentless increase in international oil prices, it has now become absolutely necessary for the consumer, who is an important stakeholder, to also shoulder a small part of increased burden," India's oil minister, Murli Deora said.

The action has not come at a good time for either government.

India's ruling party faces several state polls this year and a general election by next May, while Malaysia's Prime Minister Abdullah Ahmad Badawi is trying to arrest a slide in public support and fend of a challenge to his leadership.

India raised petrol and diesel prices by about 10 percent, cut taxes on oil imports and raised the price of cooking gas by 17 percent, but prices are still far below market levels.

The oil minister said India needed to raise petrol prices by half and double diesel prices to match the rise in crude costs

Despite India's relatively moderate price rises, the opposition Bharatiya Janata Party and the coalition government's own leftist allies said they would take to the streets in protest.

Inflation Fears

Malaysia raised petrol prices by 41 percent and said it will start using global market rates for fuel in August to prevent subsidies from eating up a third of its budget.

The government would save 4 billion Malaysian ringgit ($1.23 billion) on fuel subsidies and twice as much by raising the price of natural gas.

India is already struggling to tame inflation which has soared to 8.1 percent, unlike Malaysia, where inflation was 2 percent last year but is now expected to double to 4 percent.

In India, a Reuters poll after the price rises showed economists expect more costly fuel to lift annual wholesale inflation to a 13-year high of 9.2 percent on June 7.

Inflation in China is skirting a 12-year high but the Asian giant, which grew 11.9 percent last year, has the muscle to withstand the pressure of high crude oil prices and is unlikely to raise prices at least until after the Olympics in August.

Goldman Sachs said in a report China had periodically readjusted to market price levels and was likely to raise prices in due course.

"We therefore expect fuel price increases in China in the medium term, potentially impacting demand growth by an incremental 30,000 barrels per day over the course of the year following the price increase," it said.

China's oil demand is expected to grow by about 370,000 barrels per day in 2008 to 7.9 million bpd.

The International Energy Agency said on Monday that world oil demand was shrinking faster than first thought and the agency may cut its forecast for world oil demand growth further.

Analysts say India's moderate increase in prices would have at best a small and temporary impact on demand as the economic boom has raised household incomes, while public transport is inadequate, giving motorists limited options.

"We have no choice but to pay up. We have to cut down on other expenses such as eating out and things for yourself because it's not in your budget any more," said Bina Chadha, a government officer in Mumbai.