Asian Economies Starting to Feel Effect of Oil Prices
The global economy has shown few ill effects from rising oil prices, but the latest surge is starting to exact a toll on Asian economies.
In Thailand and Indonesia, where high fuel prices have sparked political protests, governments have slashed growth estimates for the year.
Other countries, including Japan and the Philippines, are employing energy conservation programs to blunt the effect of oil costs.
India faces the prospect of political instability from expected price hikes, and analysts say high energy costs could soon become a drag on China, which relies heavily on cheap fuel and other raw materials to prime its manufacturing growth.
Skyrocketing oil prices are “a heavy tax on most Asian economies,” said William Overholt, director of Rand Corp.'s Center for Asia Pacific Policy.
Oil has doubled in price since the start of the year, ending last week at $66.13 a barrel. That’s worrisome news for Asia Pacific economies, which rely on imports for 67% of their oil needs. Not only do they face unexpectedly high oil bills, but they fear that high energy costs, coupled with rising interest rates, will spook consumers in one of their largest export markets, the U.S.
As U.S. companies trim their energy consumption and consumers pare their spending, the slowdown is already being felt across the Pacific.
“Some of these countries are facing some real issues,” said Kenneth Courtis, vice chairman of Goldman Sachs Inc. “Their trade numbers are going bad, inflation rates are moving up and people are grumbling” because governments are being forced to let energy prices rise.
The World Bank predicts that the global economy will slow to about 3% this year from 4% in 2004, but the effect on individual countries will vary widely.
Oil-rich nations in the Middle East and Central Asia will reap an extra $100 billion this year in oil exporting receipts, according to the International Monetary Fund. Similar good fortune will befall Latin American countries with vast oil reserves, such as Venezuela.
But oil importing countries in Eastern Europe and Africa will suffer, and the poor will be hit particularly hard because they depend heavily on kerosene for cooking and warmth, according to the World Bank.
Some economists warn that the global picture could darken if political tensions between the U.S. and Iran or Venezuela, or a natural disaster, lead to a sudden squeeze on oil supplies.
“We are very concerned, even more so than in recent years, that these kind of supply shocks will be much more difficult to handle for the global economy,” World Bank economic forecaster Hans Timmer said.
Much depends on where oil prices are headed, with at least one prominent energy analyst -- Matthew R. Simmons, chairman of Houston investment bank Simmons & Co. International -- predicting oil prices could reach $100 a barrel.
Robin Bew, chief economist at Economist Intelligence Unit, a London-based economic analysis firm, disagrees with that prognosis. Barring a major supply disruption, he believes that oil prices will stabilize soon and soften next year as the U.S. and Chinese economies start to slow, demand eases up and new refining capacity comes on line.
John Kingston, director of oil for Platts, a New York-based global energy information service, said a tight supply and political uncertainty in key oil-producing regions had made markets unusually jittery. Last week, prices spiked to record levels on news of a temporary oil shutdown in Ecuador, a power outage in Iraq that hit the refineries and the sight of Hurricane Katrina bearing down on the Gulf of Mexico.
“Without much spare capacity out there, these things tend to get magnified,” Kingston said.
The biggest worry right now is Asia, which, with the exception of Malaysia, depends heavily on imported oil. Even Indonesia, a member of the Organization of the Petroleum Exporting Countries, is a net oil importer.
Asian experts are not predicting a replay of 1997, when a collapse of the Thai baht triggered a financial contagion that impoverished millions. They said most Asian economies are stronger today, having developed new markets in China, pared back their debt and rebuilt their foreign reserves. Japan, the region’s largest economy, is also a world leader in energy efficiency, thanks to steps taken after the two oil shocks of the 1970s.
Nevertheless, Asian governments are taking steps to cushion the economic effect of energy costs. Some have imposed emergency energy restrictions in hopes of avoiding more draconian, and unpopular, price hikes. Filipino workers have been ordered to take three-day weekends. Japanese salarymen are wearing short-sleeved shirts and abandoning their ties so they can turn off their air conditioners.
Ifzal Ali, chief economist at the Asian Development Bank in Manila, said those steps had simply delayed the pain for countries such as Thailand and Indonesia, which will experience much slower growth in 2006.
“Countries have been in denial, and now it is gradually sinking in that this is here to stay for the foreseeable future,” he said.
As oil prices have risen, many Asian governments have spent billions of dollars to avoid raising prices for kerosene and other fuel. But those expensive subsidies are eating away at governments’ reserves and forcing them into debt to maintain them, said William Belchere, chief Asia economist at Macquarie Securities in Hong Kong. “At some point, that will begin to grind into their economies,” he said.
That has already happened in Thailand, which was forced to abandon price controls on diesel fuel this summer after spending $2.5 billion in subsidies, said Eugene Davis, managing director of Finansa, a Bangkok-based investor group. He said the government’s mishandling of the energy situation had contributed to a loss of investor confidence and put pressure on the currency.
Davis said Thailand’s growth could slow to 2% this year, less than half its projected growth.
Elsewhere, high oil prices are extracting a political price. In Indonesia, there were nationwide protests this spring when the government raised fuel prices to cover soaring energy costs. But the government recently warned that fuel subsidies could double this year to $15.3 billion if prices held at current levels, which would force another price hike.
In India, where state-owned energy companies are running huge losses, the government will soon be forced to raise fuel prices, said Amitabh Dubey, an analyst at Eurasia Group in New York. He predicted that energy would be a hot issue in next year’s elections in the Communist-controlled states of Kerala and West Bengal. “There will be political instability,” he warned.
Energy prices have also become a problem in China, where fuel prices are heavily subsidized, said Jason Kindopp, a China specialist at Eurasia Group. Last week, the government dispatched extra police to Guangzhou after service stations ran short of gas and motorists were forced to endure lengthy waits and rationing.
Kindopp said the shortages occurred because some of the state-owned refineries had trimmed production or exported their gasoline because they were tired of operating at a loss under the government’s strict price controls. Since the start of the year, retail gas prices in China have risen by 15%, while global oil prices have risen by 50%, he said.
To avoid future shortages, the Chinese government may have to raise retail prices, which will not only be politically unpopular but also stoke inflation and put a brake on the economy.
“It’ll certainly have a dampening effect,” Kindopp said, “because so much of what is driving China’s economic growth relies on low-cost inputs.”
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Hungry for oil
In 2005, the Asia Pacific region will import nearly 16 million barrels of oil a day, representing 67% of its daily needs. That figure is expected to rise to 71% in 2010.
Imported oil as a percentage* of total consumption, 2005 estimates
Indonesia (An OPEC member): 15%
*Oil dependence ratio is based on net, not gross, oil imports
Source: FACTS Inc.
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