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Oil
price puts Asia's recovery at
risk
By Kosuke Takahashi
TOKYO - As crude-oil prices surge toward a
record and psychologically intimidating high of US$50 a
barrel, Asian business circles have begun to worry
whether this might hurt the sustainability of the
region's recovery since the 1997 financial crisis. The
fast-growing economies of China and India are likely to
be hit hard by record-high crude prices because of de
facto tax increases for end-users and consumers, while
Japan appears to keep its cool despite recent hikes
because of its generally efficiency-conscious firms.
Still, companies across the region, such as those in the
airline and chemical industries, are starting to shift
cost increases to consumers, fueling fears of inflation
in the near future.
One effective way to curb
surging oil prices in the region is to conclude
free-trade agreements (FTAs), abolishing tariffs on oil
products. India already has cut a range of duties on oil
products and Japan and South Korea are negotiating their
own FTA that would lower oil prices.
Last
Friday, the price of West Texas Intermediate crude oil,
an international benchmark in oil pricing in New York,
settled at $47.86 a barrel at the close of trading. That
was, indeed, up 45% from around $33 a barrel at the
beginning of this year.
Experts have pointed out
that recent crude oil hikes are fundamentally quite
different from those of the oil shocks of the 1970s and
the 1990-91 Gulf War. This time, it is not just supply
worries founded largely on Middle East developments that
have been driving up the price of crude, but also
growing demand worldwide, especially from the United
States, China and India. Traders have been sensitive
enough to pay attention to any news that could affect
supply-demand fundamentals of oil markets. If some news
on supply disruptions from Iraq and Russia gets about,
then crude-oil values climb. Spot news on high demand
from China and others countries has the same effect. The
speculative frenzy by fund houses is also helping to
drive crude-oil futures to what seems for many like
stratospheric prices.
Higher oil prices could
lower regional GDP
Higher oil prices are
definitely a troublesome issue for Asia because of its
unabated demand for imported oil, especially by China
and India, as well as the openness of its export-driven
economies. A recent study conducted by the International
Energy Agency said that if crude-oil prices increased by
$10 a barrel and sustained that increase, Asia as a
whole would experience a 0.8% fall in gross domestic
product (GDP). Some countries would suffer much more
than others. The International Monetary Fund (IMF)
reported in May that the Philippines would lose 1.6% of
its GDP in the year following the sustained $10-a-barrel
price increase, and India 1.0%. China's GDP would drop
0.8% and its current-account surplus, which amounted to
about $35 billion in 2002, would decline by $6 billion
in the first year, the IMF said.
Japan,
meanwhile, would lose 0.4%, with its relatively lower
oil-consumption rate compensating to some extent for its
almost total dependence on imported oil, the IMF study
estimated. Although Japan imports virtually all of its
oil, rising crude prices do not hurt as much as they
have in the past because Japan's economy is not as oil-
dependent as it once was. Japan's dependence on oil for
its energy needs, which stood at 77% around the time of
the first oil crisis of 1973, has dropped below 49%,
according to Japan's Agency for Natural Resources and
Energy. This decline reflects the progress of efforts in
the industrial sector to reduce the amount of oil and
energy used.
The strong yen is also helping
Japan, since crude-oil prices are denominated in US
dollars. The dollar fell to an average of 108.74 yen
last month, from 118.34 yen a year earlier.
There are many optimists who claim that higher
crude-oil prices won't hurt the Japanese economy very
much. Among them is Kimiyoshi Tsukasaki, an economist at
the Japan Center for International Finance. He told Asia
Times Online that actually current crude-oil prices are
not so high after adjusting for inflation. He pointed
out, for example, that the price of crude oil in 1980
was equivalent to $63 in the current range after
adjusting for inflation, compared with the current
high-$40 range. He also said that for Japanese firms,
higher business profits in a strongly recovering economy
can surely more than offset losses caused by costlier
crude oil.
For these reasons, many experts say
that what Japan fears are the possible, future secondary
effects brought on by the United States' and China's
economic slowdowns caused by various factors, including
oil-price hikes. China is trying to cool down its
overheated economy, especially key sectors, including
steel and cement.
Faced with surging crude-oil
values, Asian countries have already stepped up their
efforts to prevent oil prices from spiraling out of
control. Last Thursday, the Indian government cut a
range of taxes and duties on oil products such as
gasoline and kerosene to curb inflation, which has
climbed to nearly 8%, the highest in three and a half
years, fueled by surging global oil prices. Behind this
move is India's growing demand for oil. On the same day,
the country's largest crude-oil importer and refiner,
Indian Oil Corp (IOC), announced that the country's
crude-oil imports may go up to 100 million tons in
2004-05, up 11% from the previous year.
China
tries to cool economy and oil demand
Meanwhile,
China, Asia's other energy guzzler and the world's No 2
oil consumer after the US, is scrapping new projects to
cool down its heating economy, thereby curbing the
demand for oil and curbing inflation as well. China's
crude-oil demand, indeed, jumped 24.6% on the year to
6.48 million barrels a day in the April-June quarter,
according to the International Energy Agency's oil
market report for August.
The Thai government
has listed energy saving on the national agenda. Prime
Minister Thaksin Shinawatra himself called on the people
to help save energy in his weekly radio address on June
5. He said several energy-conservation measures would be
imposed, including the promotion of natural gas for
vehicles (NGV) to replace oil and the use of hydropower
for electricity generation.
Meanwhile, in South
Korea, on August 12 its central bank cut its key
interest rate for the first time in 13 months in a bid
to stimulate the country's sputtering economy, suffering
from sluggish domestic demand and flat consumer
spending. Apparently the world's 11th-largest economy
needed a preemptive measure to stimulate domestic
demand, depressed by high energy prices, to ensure that
surging oil prices would not sap the life from South
Korea's economy.
In Asia's private sectors, some
will be hit harder by higher oil prices than others,
even in efficiency-conscious Japan. Among them is the
airline sector. In July, Japan's three major airline
companies, including Japan Airlines Co, raised
international fares by 5%, fearing that the rising cost
of jet fuel might threaten companies' profits. These
companies are also considering another fare increase in
the wake of what appears to be the unstoppable rise in
crude-oil prices. Singapore Airlines is also poised to
raise its fares by $2-$7 next month, following a
previous fare increase of $5 in June.
Buffeted
by the continuing increases in oil prices, other
regional airlines such as South Korea's Asiana Airlines,
China Airlines, Hong Kong's Cathay Pacific, Taiwan's Eva
Air, Malaysia Airlines and Vietnam Airlines have also
asked the Civil Aeronautics Board of the Philippines for
fare hikes for travel to that country.
For
consumers, rising gasoline prices are perhaps a biggest
worry. For example, in Japan, retail prices as of July
10 increased for four consecutive months to 114 yen
($1.04) per liter, up 1 yen from a month earlier,
according to the latest data released by Japan's Oil
Information Center.
Need to accelerate FTA
talks
Oil-market traders say the world is at the
beginning of the end of cheap oil, as developing
countries such as China and India continue to support
current high prices amid concerns over a supply shortage
in the world. One effective way to curb surging oil
prices in the region is to cut tariffs. Such a move is
under way in earnest between Japan and South Korea. Both
governments are striving to conclude an FTA by the end
of 2005, including possible political agreement on
removal of tariffs on oil products such as gasoline.
Both countries' oil refiners are predictably opposed to
such a move because they would surely have to face
tougher competition than ever. But multinational,
integrated oil companies, refiners and the industrial
giants such as oil majors recently have been enjoying
high profit growth on the back of surging oil prices. To
help them serve the population more efficiently, FTAs
are needed in Asia, where resource-poor counties are
heavily dependent on oil.
Kosuke
Takahashi is a former staff writer at the Asahi
Shimbun and currently a staff writer for RIM
Intelligence, an oil market news agency in Tokyo. He can
be contacted at kosuke_everonward@ybb.ne.jp.
(Copyright 2004 Asia Times Online Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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