Surging oil prices cause havoc to Asian economies

Oct 27, 2004 02:00 AM

by Elaine Kurtenbach

For Asia, it's less an oil shock than a slow, painful squeeze. The soaring cost of crude is draining consumers' wallets and hitting national treasuries as Asian governments pour billions of dollars into subsidies to keep fuel prices from rising too high.
For Yukio Fujikawa, who spends his days driving around Tokyo refilling vending machines, the new economic reality means trying to cut the amount of gasoline he uses:
"I try not to step on the accelerator that much."

The surge in oil prices presents deeper problems for Asian governments -- many struggling to curb inflation and nurture economies still not fully recovered from the financial crisis of the late 1990s. The Asian Development Bank forecast recently that growth in East Asian economies would slow to 6.5 % in 2005 from 7.3 % this year, although it's not clear how much of a contributor high oil prices are.
In the Philippines, President Gloria Macapagal Arroyo has declared a "grave economic crisis," bannedunofficial use of government vehicles and urged commuters to car pool.
In India, which imports three-fourths of the oil it uses, the state-owned oil company estimates it will spend $ 27 bn this year for oil imports, up 50 % from 2003. With inflation running at a nearly four-year high of more than 8 %, the government has slashed taxes on oil products and resisted raising retail prices.

But analysts say an oil shock similar to the crises of the 1970s is highly unlikely, even with crude above $ 50 a barrel. They say it would take many months of such prices to significantly eat into growth.
"Even if oil prices do stay high, it's not the end of the world for the Asian economies," said Jonathan Anderson, UBS Asia Pacific economist in Hong Kong. "Even if crude prices stay at $ 55 per barrel for the whole of 2005... real GDP growth would still be above 4.5 % for the region."

Asian oil consumers have long been sensitive to the vagaries of international prices thanks to a premium of $ 1 per barrel or morethey traditionally pay on crude from the Middle East. They grumble that Middle Eastern producers have gouged them because there is less competition among suppliers in Asia than in other parts of the world. This latest price surge worsens the pain.
"How can a small trader like me survive if fuel prices go up every year?" said Mullion, a street vendor in Jakarta who like many Indonesians uses only one name. "Poor people use kerosene daily, but its price is already rising and sometimes it disappears from the market."

In South Korea, the government has ordered fewer field manoeuvres for its 650,000 troops, who face Communist North Korea across the world's most heavily armed border. Commanders are combining assignments and doubling up on trucks to save gasoline. Price hikes worry South Korean families stretching to meet heating bills.
"The heating cost for last winter was already high enough," said Lee Wha-ja, a vegetable pedlar. "I really don't know if I could afford oil for heating this winter."
Price hikes for gasoline, diesel and cooking gas sparked violent protests in Nepal. In Thailand, the government has ordered supermarkets and gas stations to close early to conserve fuel.

The pain is not confined to individuals. Prices for many petroleum-based industrial materials, such as plastic, have jumped, making costs higher for manufacturers on whom Asia's growth depends. So far, manufacturers have absorbed most of the higher costs.
Many governments are giving billions of dollars in subsidies to oil companies. Net oil exporters like Malaysia, Indonesia and Brunei ought to profit from oil's high price tag, but the subsidies are consuming those windfalls. Indonesia, Asia's only OPEC member, has let its output stagnate, while imports of increasingly expensive oil products have soared. The government has quadrupled its fuel subsidy allocation.

The region's biggest economy, Japan, remains as dependent as ever on imported oil. But since the oil shocks of the 1970s it has become vastly more efficient in energy use.
In China, government price controls keep gasoline relatively cheap. Although prices were raised an average of 6 % in August, Chinese drivers still pay only one-third what South Korean motorists do.
But the world's second-biggest oil importer after the United States is facing its hottest inflation in seven years. Higher prices will boost China's oil import bill by more than $ 10 bn this year.

China's leaders say they will conserve energy, step up oil and gas development and create national petroleum reserves.
"They're also trying to develop alternatives, like grain alcohol as car fuel, and liquefied coal, but these options will only lighten the burden," said Chen Xingdong, an economist with BNP Paribas Peregrine in Beijing.

Source: The London Free Press
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