What countries are most vulnerable to an oil price shock?

Mar 09, 2011 12:00 AM

Emerging Asia and Central and Eastern Europe are the most vulnerable regions in the face of a protracted rise in the oil prices, research by Nomura shows.

Under a simple metric constructed by the Japanese investment bank’s macro strategy team, Korea, Singapore, and the Slovak Republic top the list of those countries facing the highest risks of a worsening of the crisis in the Middle East and North Africa (MENA) region sending oil prices even higher. In the 40 country list, the US appears at the 19 place, meaning it is relatively well protected from the possible repercussions of a protracted civil war in Libya and the possibility of contagion to Yemen, Bahrain, or even Saudi Arabia.

The parameters used for the study include energy efficiency measured as GDP per unit of energy used, consumer vulnerability measured as share of energy in a country’s CPI basket, and the impact on its terms of trade as measured by net imports of energy as a percentage of energy used. The study finds Emerging Asia and Central and Eastern Europe at greatest risk. Amongst the top ranks we see Hungary, Poland, and the Czech Republic in places 4 through 6; and the Philippines, Thailand, Malaysia, Indonesia, and China in the 7th to 11th place.

The US is the first major economy to show up after China, with Germany and Japan two and three places back, in 21 and 22 place respectively. Italy, Greece, and Ireland seem pretty safe, coming in 30th, 33th, and 34th respectively, despite their ailing finances and sovereign debt risk.
The developed world seems better equipped to weather the current environment of high oil prices. Emerging economies, on the other hand, face a “double-whammy inflation/growth” trade-off which will cause significant headaches to central bankers and policy makers.

“Already elevated inflation expectations and rising food prices” will put pressure on central bankers who are gauging when to pull the hand brake to stave off overheating and runaway inflation, as policy makers from China to Brazil have begun to tighten. Interestingly, the market seems to have already discounted the growth impact, while paying less attention to the inflationary one,” note the analysts.

“The path of least resistance still looks to be more risk positive with the impact on the euro from the peripheral fallout seemingly fading and the S&P Financials topping the list of performers over the last session,” reads the report. They list the top 1-day “macro market movers” with the S&P financials, utilities, and tech sectors in the lead, followed by copper and emerging market credit default swaps. Among the top 10 worst performers rank the euro-dollar exchange rate, the 5 and 10 year British pound notes, and the S&P energy sector. (Read Why World Food Prices Will Keep Climbing) (Read Chris Helman’s These Oil Companies Benefit The Most From Soaring Crude)

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