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Oil Prices Explode Upward

Here's the REAL Reason - Oil prices are hitting new highs every day despite the fact that demand for gasoline is plummeting in Europe and North America. The reason for this is that Asian demand remains explosively high due to the fact that Asian nations continue to subsidize prices at the pump, meaning that consumers pay less than market value for gas and demand remains high. And guess where your rebate checks are going?

While in recent months subsidies have been reduced, they are still high enough to protect demand. By March 2008, India, for example, had paid $12.7 billion over a year to keep fuel costs to the consumer low, and the huge subsidies continue. In contrast, fuel has been rationed in China, but subsidies have returned for the Olympic year.

Where do the Asian nations get the tax dollars needed to pay for these subsidies? In significant part from taxes on exports?in other words, right out of the pockets of those who buy their goods, primarily American consumers. Wal-Mart, which buys vast amounts of what it sells from India and China, posted strong results for the first quarter of 2008, primarily because Sam's Club posted a 9.5% increase in sales. Most of Sam's Club's appliances are manufactured in Asia.

At present, the United States government is in the process of distributing a $157 billion tax rebate, the largest in American history. Consumer polls indicate that the rebate will go in two directions: it will be used to pay higher gasoline prices, and it will be used to purchase large appliances. This will have the effect of both increasing gasoline demand over the summer driving season in the U.S., and remitting more export earnings to Asia. And the taxes on those earnings will be used to subsidize gasoline, so demand from both the US and Asia is about to increase. It's no wonder many oil traders expect to see $200 oil soon, and $5.00 gasoline in the US.

Since 2005, China and India have considered ending or phasing out fuel subsidies, but the governments are afraid of the consequences if they do so. As recently as 2007, this was an issue in the US media, and it appeared that subsidies would be phased out. It did not happen. Since then, it has become silent on the subject, and so have the Indian and Chinese governments.

Art credit: freeimages.co.uk

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