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Nov 1, 2007

Financial Times on oil prices

Great Financial Times article today on how Taiwan's political situation forces the government to hold to a rather unsustainable subsidizing of fuel prices.

Read it here. Highlights:

The recent surge in global oil prices has presented ­Taiwan’s
government with a dilemma.

CPC Corp, the state-owned refinery through
which the government controls the island’s oil and gas market, is due to raise
prices on Friday to reflect the latest spike in inter­national crude oil
prices. A failure to do so could land the refiner in the red and yield a
bail-out bill to be footed by taxpayers.

However, a move on Wednesday by lawmakers eyeing closely contested January
parliamentary elections to try to impose a price freeze means that for the third
time in a little over a year efforts to liberalise Taiwan’s energy sector are
being put under political pressure....

In the 1970s and 1980s, ­Taiwan achieved its economic miracle by
providing resources such as land, water and power at low prices that allowed its
businesses to grow into competitive exporters. However, as its economy has
matured and the cost of energy has risen, the policy formula has not changed.

The government took an initial step last year to make consumers and
businesses pay the real price of energy by approving the first power price rise
in 23 years and allowing some flexibility in domestic oil prices. The legacy of
past policies, however, has both discouraged energy efficiency and meant the
government must decide whether to shoulder losses or risk spikes in inflation in
a country that, after years of low to zero inflation, has become intolerant of
even modest price rises.

Taiwan’s government allowed CPC in July 2006 to adopt a floating price
mech­anism that calls for weekly adjustments. However, that system was
watered down by the government in ­September to allow only monthly
adjustments and a potential freeze on prices if the cumulative rise in one month
exceeded 15 per cent.

Legislators added to the pressure on Wednesday by passing a resolution
demanding a freeze in fuel prices, after which the government appeared likely to
order CPC not to increase the prices of cooking and heating oil.

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