The Indian government subsidizes most fuel costs, meaning state oil firms are forced to sell fuel at hugely discounted rates to shield consumers from inflation. But with the price of oil soaring to a recent high of $135 a barrel, refineries have been unable to cover costs and pressed to the point of bankruptcy.

The inability to pass high prices onto consumers cost state-run refiners about $43 billion for the year ended March 31, Serangulam V. Narasimhan, finance director at Indian Oil Corp. Ltd., said last month. The companies lost roughly $18 billion the year prior.

The Indian government had tried to cope with the matter by scrapping a 5% import tax on crude oil and cutting the import tax on gasoline and diesel to 2.5% from 7.5%, but the measures proved ineffective. So, yesterday (Wednesday), the government attempted to ease the burden on the refiners by boosting its subsidized fuel prices for the first time since February.

The price of gasoline will rise 11% in the Indian capital of New Delhi to $1.17 (50.6 rupees) per liter. Indian drivers will pay 9% more for diesel, and families will be charged an additional 17% per cylinder of cooking gas, India’s Oil Minister Murli Deora told reporters.

Still, as Deora also pointed out, even with the price hike, India’s state-owned oil companies are projected to lose a total of $58.4 billion this fiscal year, which runs from April through March 2009.

“The prices should have been raised higher for a real impact,” Ballabh Modani an analyst with Mumbai-based Enam Securities Pvt. told Bloomberg News. “There’s no point in an ad hoc increase.”

While the companies still stand to lose a significant amount of money, the Indian government must tread carefully when raising prices, as wholesale prices are already at a three-and-a-half-year peak of 8.1%.

The hike in fuel prices was India’s biggest in 12 years, and is expected to add another between 0.5% and 0.6% to wholesale prices. If the government had pushed prices any higher, it would have been risking social unrest among the nation’s poor who are already coping with high food prices.

“Already milk, vegetables, wheat – the price of everything has gone up so much,” Balaram, an office driver earning a little over $100 a month, told Reuters. “And now gas and petrol. With my salary, after paying my rent and my expenses, what will I send home? How will I feed my family and what will I save?”

Together, food and fuel account for about 75% of household spending for poor families in Asia. And India, despite its growing reputation for economic success, currently has the largest number of people living in abject poverty: more than 350 million, or about a third of the population.

Source: India Fuels Inflation by Bailing Out Refineries

As I said on Friday, Congress just passed a US$57 billion alternative energy plan – that promises to do little but make the headlines.

Meanwhile, in another chamber of Congress, executives of big-oil firms were called on the carpet to account for recent sky-rocketing crude oil prices.

Congress wants to know why crude oil is soaring past US$135 a barrel – double the price of last year! Hmm… more demand than supply maybe?

Of course Congress just doesn’t get it! As the CEO of ConocoPhillips correctly points out, “The fundamental laws of supply and demand are at work.” We are getting squeezed by oil exporting nations that are “managing demand for their own interest,” and severely restricted access to energy reserves both at home and abroad.

Today, the International Energy Agency said that a major supply crunch is looming unless the world’s oil majors can ratchet up production by 12.5 million barrels a day within the next seven years. Uh… don’t count on it.

Decades of underinvestment in new energy exploration and development, and a seismic shift in who controls access to new energy deposits means sustainable high prices for years to come. Fossil fuels are a dead-end for American big-oil firms – it’s time to embrace an alternative energy future!

MIKE BURNICK, Senior Editor & Global Markets Analyst

Source: Congress Doesn’t Understand $135 Oil

• The World Trade Organization (WTO) has published a new draft of plans for a global trade deal that will be discussed the next time world trade ministers meet, BBC News reported. Although the plan doesn’t change existing tariff or subsidy cuts, it does offer some compromises and clarifies some key “sticking points.” Negotiators hope to have a deal closed by the end of the year.

• Battered by increasing steel costs and dampened consumer demand due to high gas prices, Ford Motor Co. (F) announced yesterday (Thursday) that it would not be able to meet Chief Executive Officer Alan Mulally’s goal of returning to profitability by 2009, Bloomberg News reported. North American vehicle production will be cut throughout the rest of this year due to “the rapidly changing business environment in the [United States],” a company statement read.

• First-time jobless claims fell 9,000 to 365,000, from a revised 374,000 the previous week, the Labor Department announced yesterday (Thursday), Bloomberg News reported. The decline was unexpected and indicates that companies are responding to the current U.S. economic slowdown by curtailing hiring, while trying to maintain current employees.

• Hong Kong’s Hang Seng index hit a one-month closing low yesterday (Thursday) in reaction to the declines in the U.S. markets. Oil firms Sinopec Shanghai Petrochemical Co. (ADR: SHI) and PetroChina Co. Ltd. (ADR: PTR) also weighed on the index. “Weak U.S. stocks and Beijing’s denial on an imminent deregulation of oil product prices hurt market sentiment,” Kenny Tang, associate director at Tung Tai Securities, told Reuters.

• Bookseller Barnes & Noble Inc. (BKS) yesterday (Thursday) reported a loss of $2.2 million, or 4 cents per share, for its fiscal first quarter ended May 3, compared with a loss of $1.67 million, or 3 cents per share, for the same period in the prior year, Reuters reported. Barnes & Noble reduced its full-year outlook based on the difficult economic environment and announced it would consider “the feasibility of a transaction” with rival Borders Group Inc. (BGP).

• The American Petroleum Institute, the trade group for major oil and natural gas companies, spent nearly $1.3 million in the first quarter to lobby on fuel economy standards, appropriations bills, and other issues, the Associated Pressreported. The API also lobbied on various pieces of legislation dealing with oil taxes and fees, renewable fuel standards, climate change, offshore drilling and more, according to the form posted online April 21 by the House clerk’s office.

• Bill Miller, portfolio manager at Legg Mason Capital Management, has not signed on to the Yahoo! Inc. (YHOO) investor coup being led by Carl Icahn. However, in an interview at a New York conference Wednesday, Miller, whose fund controls a 5.4% stake in Yahoo, said he wants Microsoft Corp. (MSFT) to reopen talks to buy Yahoo outright and not simply forge a joint venture. “It is a strategic imperative for Microsoft to change its position,” Miller told Reuters after speaking at the hedge fund conference.

• The International Energy Agency announced yesterday (Thursday) that it is studying depletion rates at about 400 oil fields in its first-ever study of world oil supply. The Paris-based group said the study, to be released in November, was prompted by concern about the volatility of world oil markets and uncertainty about supply levels.

• The spinal-products unit of medical-device maker Medtronic Inc. (MDT) will pay $75 million to settle accusations that it defrauded Medicare by telling doctors to bill in-hospital stay – even when a cheaper outpatient visit would have done the job, The New York Times and The Associated Press both reported. Originally, the accusations had been leveled against Kyphon Inc., which Medtronic spent $4.2 billion to buy in November.

Source: Global Investing Roundups: Friday, May 23rd, 2008

But behind this headline is the finding that spiraling gas and oil prices are of more concern to Americans than the home mortgage crisis.

Twenty-one percent of Americans say the most important problem facing the US economy is gas and oil prices, while only 14% named housing and the home mortgage crises.

The poll also shows that only 21% of Americans believe the economy is in good shape, the lowest percentage since October 1992 — and this number is down 17% since January.

“If you think pump prices are high now hold on to your wallet,” says Mike Burnick in the Offshore A-Letter.

“Since June 1st last year, crude oil surged almost 58% higher in price. Over the same period however, the price of unleaded gasoline has only advanced about 19%

“Prices at the pump usually climb as America enters its summer travel season, boosting demand for gasoline. Over the past five years, demand for unleaded has jumped on average 4% between April and July.”

“Even with oil prices at $80 a barrel, major oil firms are printing money,” says Floyd Brown at Investment U.

“They have been showing financial discipline and therefore are increasing returns to shareholders. Natural gas supplies are tightening after a return to colder winter temperatures and firms specializing in providing this clean-burning product are throwing off immense amounts of cash. Plus, the oil service stocks have paused even as oil exploration budgets are growing.”

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