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Asian consumers missing out on full benefit of crude oil slump

Conventional wisdom is that falling oil prices provide significant economic stimulus, but many Asian countries appear to be missing out on much of the benefit.

[LAUNCESTON, Australia] Conventional wisdom is that falling oil prices provide significant economic stimulus, but many Asian countries appear to be missing out on much of the benefit.

While Brent crude has dropped 51.7 per cent in the past 12 months, the retail prices of gasoline and diesel in major countries across the region haven't fallen by anything like as much.

China, the world's largest crude importer, dropped the retail ceiling price of gasoline by 125 yuan (US$19.64) a tonne from Wednesday, taking it to 6,830 yuan a tonne.

The retail ceiling for diesel was lowered by 120 yuan a tonne to 5,790 yuan, the sixth straight price cut since June.

However, since September last year, the retail ceiling for gasoline has dropped 24 per cent and by 29 per cent for diesel.

While this is a reasonable reduction, it's still only about half of what crude oil has declined in dollar terms.

As far as China goes, the blame can't be put on currency depreciation, even taking into account the sudden weakening of the yuan recently.

In yuan terms Brent has lost 50 per cent of its value in the past year, only slightly less than the loss in dollar terms.

While there have been increases in fuel taxes in China, they are nowhere near high enough to explain the gap between the decline in the price of oil and that for refined fuels.

It would seem the most logical explanation is that the windfall from cheaper crude is being used to prop up refiners'margins, rather than to stimulate the economy through cheaper transport costs.

In India, currency depreciation explains more, but not all of the disparity between crude and fuel pricing.

Retail gasoline prices in India were cut by 3.2 per cent in rupee terms as of Tuesday, taking them down to 61.20 rupees per litre (92.2 US cents), while diesel dropped 1.1 per cent to 44.45 rupees.

This takes the decline in gasoline prices to 10.6 per cent since September last year, again well short of the halving of crude prices, while diesel fared better, with a 24.6-per cent fall.

But the rupee has slumped by 9.7 per cent over the same period, meaning that in rupee terms Brent dropped 47 per cent over the past 12 months.

Again, it seems consumers in the world's second-most populous country aren't getting the whole benefit of the drop in oil prices, with margins at the mainly state-controlled refiners likely being boosted.

In Indonesia, the largest economy in Southeast Asia and the third most populous country in Asia, consumers haven't seen any benefit from lower crude.

Indonesia still has some of the cheapest fuel prices in the world and it removed most of its subsidies at the start of this year.

Currently gasoline costs around 7,300 rupiah (52 cents) a litre and diesel 6,900 a litre, up from 6,500 rupiah for gasoline and 5,500 for diesel last year, prior to the scrapping of all but a 1,000 rupiah a litre subsidy for diesel.

The rupiah has dropped about 20.5 per cent against the dollar over the past 12 months, meaning the price of Brent has slipped about 42 per cent in rupiah terms.

Since the retail prices have actually risen, this means the difference has gone to the government in the form of lower subsidies, and to help fund the losses of almost US$1 billion racked up by the state energy company Pertamina in the past year.

Even in an unregulated and competitive market such as Australia, there is a large gap between the decline at the petrol pump and the fall in crude oil.

The national average gasoline price for the week to Aug 30 was 130.9 Australian cents (93.2 cents) a litre, and 131.2 cents for diesel, according to the Australian Institute of Petroleum.

For gasoline this is down 11 per cent from a year ago and for diesel the decline is 15.2 per cent.

The Australian dollar has dropped 25 per cent against the greenback in the past 12 months, while the price of Brent has fallen 36 per cent in Australian currency terms over the same period.

There has been a minor increase in fuel taxes in Australia, but this was less than 1 cent a litre, meaning that once again it appears that much of the drop in crude prices has stayed in the refining, transportation and retailing system rather than reaching the pockets of motorists.

While the dynamics vary between countries in Asia, the common thread is that nowhere is the full benefit of low oil prices being felt.

Perhaps with the economic growth concerns in China, which threaten the rest of the region, starting to become more pronounced, it would be better to have cheaper fuel for consumers rather than healthy margins for refiners and fuel retailers.