Catalog

	Table of Contents
p. 23 of 25 BACK | NEXT Foreword, Acronyms and Abbreviations, Definitions I. Developing Asia and the world II. Economic trends and prospects in developing Asia III. The challenge of higher oil prices Adjusting to higher oil prices: The challenge for developing Asia Why are oil prices so high? Why high oil prices matter Policy responses to higher oil prices Long-term responses Conclusions Selected references Statistical appendix

Asian Development Outlook 2005 Update : III. The challenge of higher oil prices

---

Conclusions

Although there remains some uncertainty about their future path, higher oil prices could be here to stay for some time. The run-up in prices that has occurred since March 2005 would appear to have a significant permanent component. Supply as well as demand pressures would now appear to be figuring more prominently in the market outlook. In this context, and with a view to its longer-run energy security and efficiency, developing Asia needs to reevaluate decisions that have been made in the belief that oil would remain cheap and that higher prices would be temporary.

First, fuel subsidies, artificially low prices, and low levels of taxation on oil products are widespread in developing Asia. The financial costs of these subsidies have escalated sharply and are now beginning to create fiscal strains. Those countries that are yet to begin removing subsidies may be able to draw useful lessons from the experiences of others, such as Thailand, that have moved quickly to dismantle them. The idea that subsidies benefit the poor most does not always square with the facts on the ground. Although subsidies may provide short-term relief from the pain of higher oil prices, they do so at high opportunity cost and at the risk of upsetting macroeconomic stability.

Second, few countries in the region adequately tax oil products. In most, excise taxes fall far below international benchmarks. Given the likelihood of an exponential increase in the demand for energy in the coming decades, and Asia's reliance on oil, taxes on oil products will have an important part to play in promoting sustainable energy use. The pain from higher taxation of oil products is more than likely to be compensated by greater energy efficiency, a more diversified energy mix, and a cleaner environment.

Third, there is a wide body of evidence to suggest that the right incentives--market incentives--will generally work best in influencing choices about oil and energy consumption. Regulation, where used, should have a "light touch" and be used to emulate market outcomes rather than supplant them. Recourse to direct administrative controls, such as those now being implemented in some countries, should be used with care. Administrative controls are often difficult to implement, can be easily evaded, create opportunities for rent seeking and corruption, and create significant efficiency losses. Besides, they often fail to curb consumption.

Fourth, for net oil importers, the appropriate macroeconomic response to higher oil prices is to fine-tune fiscal and monetary policy to accommodate, not resist, needed adjustments in output and prices. Fiscal accommodation should be largely automatic and should not attempt to compensate for negative output effects that are unavoidable. Monetary policy should lean against underlying inflationary pressures. Favorable initial conditions across much of developing Asia should mean that most economies can bear these adjustments without seriously jeopardizing growth.

Finally, for net oil exporters, higher prices will provide resources that can be used to accelerate development. But a measured approach is needed in which the use of oil revenues is planned within a medium- to long-term framework. To avoid the risks of developing a lopsided economic structure, care must also be taken to avoid a rapid and excessive appreciation of the real exchange rate that would divert resources out of non-oil, traded goods activity.

Back Long-term responses	Next Selected references