The impact of skyrocketing crude oil prices on energy-intensive Asian economies is expected to be broad, with Thailand, Indonesia and South Korea among the worst positioned countries, Morgan Stanley said yesterday.
Although Asian markets have rallied by 10 percent this year amid soaring oil prices -- which have shot up by about US$20 per barrel since mid-May -- risks are growing, Morgan Stanley analyst Malcolm Wood said in a report released yesterday.
"For six reasons we believe that the oil price is now approaching levels from which it will have a material impact on growth and markets," Wood wrote.
First, a price of between US$65 and US$70 per barrel accounts for a similar share of world GDP as the level seen in the 1970s, which led to oil shocks and a global recession.
Secondly oil prices have more than doubled from the average price of US$31 per barrel in 2003, raising the risk of sticker shock, the report said.
Thirdly, the increase in real US gasoline prices is now as large as in any prior cycle and, fourthly, the US dollar is no longer declining, meaning that the impact of higher oil prices is being felt everywhere around the globe, the report said.
Fifthly, the growing cost of fuel subsidies means that higher prices are increasingly being passed on to consumers, while, finally, given that the US Federal Reserve's rates are now higher, policy is unlikely to offer as much of an offset as was seen in the early stages of the oil-price rally, according to the report.
Therefore, Asia is likely to be exposed to the full force of higher oil prices after these factors weaken the global economy and force governments to reduce fuel subsidies that have been shielding Asian economies from oil price impact, Wood wrote.
In the face of this looming impact, the worst positioned Asian economies include Thailand, Indonesia and South Korea, as a US$10 rise in oil price translates into a cost that is equivalent to 1.8 percent, 1.0 percent and 1.1 percent of these countries' GDP, respectively, according to Morgan Stanley's estimates.
Meanwhile, a US$10 rise in the price of oil costs an equivalent of 1.0 percent of Taiwan's GDP, the investment bank said.
Morgan Stanley also listed the auto, retail, hotels and tourism, and insurance industries as four losers amid skyrocketing oil prices.
This is because high oil prices could reduce consumer demand for vehicles and also lead to higher flight surcharges. Insurers and companies with significant leverage to market investment returns, meanwhile, would be impacted as markets weaken from the high oil prices.