India and China are starting to get the message that they cannot buy oil cheap and sell by-products like gas and diesel low. When the deficits start to hit hundreds of billion of dollars, the action is a little harder to swallow
China has already started to back off of the practice of supplying more and more capital to support state-controlled oil operations like PetroChina (PTR) and China Petroleum (SNP). Now, India is matching that. According to MarketWatch, "The latest moves are expected to ease the losses at state-controlled oil-refining and marketing firms like Indian Oil Corp."
The fact that consumers and businesses in the two huge countries will have to pay significantly more for the gas that runs their cars, the diesel that runs their truck, and the oil that heats their homes could do some real damage to consumer spending and GDP growth in those countries. It is not totally unlike the choices that are being made in the US.
The net impact on the economies in India and China is that they may have to raise export prices to offset a decline in consumer spending. There are very few other alternatives to keep GDP improvements in hand.
Those more expensive exports will be marketed into the US and other parts of the West where there are buyer’s strikes due to poor credit markets and rising commodities prices.
Keeping fuel prices low may have pushed economic growth higher in China and India, but it is time to pay the pay the piper. His compensation has been deferred for too long.
Douglas A. McIntyre
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