IEA sees ballooning fuel subsidies bill

By Muriel Boselli

LONDON (Reuters) - Fuel subsidies in fast-growing China, India and the Middle East cost $50 billion last year and the bill may be far bigger in 2008 if oil prices stay high, the International Energy Agency (IEA) head said on Monday.

Nobuo Tanaka, Executive Director of the IEA, said it was "not an unreasonable assumption" the cost of protecting consumers from market prices in these emerging economies could double to $100 billion.

Domestic fuel prices in major developing countries remain capped despite the doubling of oil prices in the last 12 months to around $130 a barrel. Subsidies allow consumers to continue guzzling oil, pushing up world prices.

"In many cases this is becoming a very unsustainable economic burden," Tanaka said during the Reuters Energy Summit, adding he would welcome a change on subsidy policies.

Smaller Asian countries such as Indonesia, Taiwan, Sri Lanka and Bangladesh are feeling the burden of rising oil prices and have either raised regulated fuel prices or pledged to do so.

"If they (emerging countries) stop subsidies, or price control, it gives a very strong message," Tanaka said, adding this would definitely weigh on demand.

"We are always recommending to these countries that we should move towards market forces to control the level of demand, he said.

"Sooner or later they'll have to change their policy."

Tanaka acknowledged the social issues that could go hand in hand with shifting the impact of oil prices onto the consumer but argued there were other ways to help the hardest hit.

The IEA chief also urged rich countries to resist growing pressure to cut fuel taxes, arguing this would not help ease oil prices.

"I would encourage all ministers to resist the growing pressure to cut fuel taxes because this is not the best signal to the market," he said.

French President Nicolas Sarkozy last week said the European Union should consider capping sales tax on fuel if oil prices rose further, but his proposal got short shrift from Brussels.

Any such move would need the approval of all 27 EU member states. Such unanimity may be hard to secure given EU finance ministers pledged in 2005 not to cut taxes on fuel in response to rising energy prices and have since reaffirmed the stance.

(For summit blog: summitnotebook.reuters.com)

(Reporting by Muriel Boselli)