Trader Talk

End of Energy Subsidies: Pro & Con

There are signs that emerging-market governments who provide gasoline and other energy subsidies to their citizens are under intense pressure to lower those subsidies, and this is causing some trepidation among stock market bulls.


--Indonesia has announced they are reducing subsidies on gasoline, in an effort to reduce their budget gap. This may increase fuel prices by 28 percent. Protests have already broken out;

--Taiwan has said electricity prices will be going up for the first time since 2006, and will allow local oil refiners to raise prices;

--Malaysia has said it would review its existing fuel subsidy program "soon;"

So far, we have not seen price hikes in China and India, both of whom are obviously worried about social unrest.


--In China, rumors that China might consider lowering its considerable fuel subsidy program have generated several Chinese newspaper reports, where officials have denied that the government is considering lowering subsidies.

--In India, a major oil refiner, Bharat Petroleum Corporation Limited (BPCL) has announced that they are rationing gasoline to all of its stations, because the government has refused to allow them to raise prices.

Government energy subsidies are a two-sided coin. On one side of the coin, lowering or even ending government subsidies will help level the playing field and will lead to a reduction in demand. There is much truth to this: some countries have absurdly low gas prices ($0.89 a gallon in Egypt, $0.12 in Venezuela), which have clearly fueled demand.

On the other side, be careful what you wish for: these kinds of chain reactions are difficult to control, will almost certainly lead to more social unrest, and could have a much bigger impact on growth prospects for emerging market countries.

This is the scenario that worries bulls the most: the recent rally off the March lows has been predicated on the theory that the global economy--and global growth stocks--will not see the worst-case scenario bears are predicting. Oil at $135--and governments throwing in the subsidy towel--throws those assumptions into doubt, and makes it easier for fence sitters to continuing counting their cash.

Questions?  Comments?