In a diary over the weekend entitled, Countdown to $100 Oil ?!? Subsidies, hoarding, and bailing out billionaires, I took the contrarian position that oil is more likely to re-cross to the downside the $100 a barrel price, before it hits $200 a barrel. I cited evidence of hoarding on tankers, the Fed's realization that destroying the dollar might be a bad thing, and most of all, intense pressure being applied to Asian governments' subsidies of consumer oil prices in support of that position.
Today, with the price of a barrel of oil at the moment at $123.75, comes fresh evidence that those oil subsidies are collapsing. It turns out the laws of supply and demand work on the other side of the globe too.

In my first diary on this topic, I noted that the E.I.A. reported that Americans had cut back on their use of gasoline ever since it crossed the $3 a gallon threshold late last year.

The dropoff in US demand has accelerated: The latest MasterCard SpendingPulse survey found that demand for gasoline in the U.S. fell by 4.7 percent last week — which included the long Memorial Day holiday weekend — compared to the same week last year. Averaged over the last four weeks, demand was down 6 percent last week compared to last year.

There has also been a dropoff in Europe: Gasoline demand in Britain in April was running 7 percent below a year ago, while demand for diesel was down nearly 2 percent, according to government figures.

Conventional wisdom has been that an increase in demand in Asia would more than offset this US decline. However, it turns out that demand in Asia has been undrewritten by government subsidies to consumers, subsidies that are now exhausting government resources. A report last year by McKinsey & Co. estimated that ending those subsidies would prune demand for transportation fuels by 3 million barrels a day.

How much are those subsidies costing Asian governments? Well, in china, Sinopec, Asia's biggest refiner by volume, said it received a $1.75 milliion subsidy from the Chinese government in the first quarter alone!

Yesterday billionaire trader George Soros testified before the Senate that the oil futures market was poised for a steep sell-off, and suggested that the most likely catalyst was a demise of the Asian subsidies.

Today brings fresh evidence that those subsidies are crumbling:
yesterday Malaysia scrapped fuel price controls and India said subsidies were becoming unsustainable.

Malaysia will end price controls on gasoline and set prices at a market rate starting in August, a minister said today. Yesterday, Indian Prime Minister Manmohan Singh said subsidy payments can't be allowed to rise further. The end of capped fuel prices in Asia, the region where demand is rising fastest, may curb global crude oil demand.

``All the talk of subsidy cuts show that Asian consumers may not be willing to keep buying at such high prices,'' said Robert Montefusco, a broker at Sucden (U.K.) Ltd. in London. ``We may see prices come off a bit.''

Smaller Asian oil consumers such as Taiwan, Indonesia and Sri Lanka have all already raised domestic fuel prices:

Indonesia has decided to decrease their fuel subsidies; thus raising the price of gasoline for consumers at the pump. The new price will rise 28.7% to a price of 65 US cents per liter or $2.46 per gallon. India also announced an increase in gasoline prices to $2.66 per gallon, an increase of about 7%. Taiwan is another country that is ending a freeze on gasoline prices.

gasoline will rise 11 percent in India's capital New Delhi to 50.6 rupees ($1.17) a liter from midnight. Pump prices in Malaysia will increase 41 percent to 2.70 ringgit (83 U.S. cents) a liter from tomorrow and will now track global market rates.

Petroleum Minister Murli Deora told reporters that gasoline prices will be raised raised 49 cents a gallon, and diesel prices 30.4 cents a gallon.
That's an 11% increase in New Delhi, the capital, where gasoline will be hiked to $4.56 a gallon.

Previously gas prices in New Dehli had risen only 4% since 2006!

Perhaps the most important overarching note to make here is that hopefully we can firmly put to rest the notion that Asia was "decoupling" from the global economy and the effects of the US on that economy. A slowdown in Asia will on the one hand amplify the US slowdown, but if as a result the price of gas at least temporarily abates (remember the Goldman Sachs rejiggering of their commodity index that caused a 25%+ decrease in the price of gas before election day 2006?), US consumers will at least temporarily have a respite.