Surging oil prices are starting to pinch the pocketbooks of Asian consumers and could quicken inflation and slow economic activity in a region that has led global growth in recent years.
The jump in crude — the US benchmark is trading near a 10-month high of US$107 a barrel from US$75 in October — has sent fuel prices higher across Asia, where only Malaysia is a net oil exporter among the major economies. In Singapore, for instance, a liter of 92 octane gasoline at ExxonMobil stations has risen 6 percent this year to S$2.15 (US$1.71) a liter.
Higher oil prices have already made Asian policymakers think twice about cutting lending rates and implementing other stimulus measures designed to boost economic growth as shockwaves from Europe’s debt crisis spread. If crude gets much higher, it could force central bankers to raise rates, sacrificing growth to tame inflation.
The backbone of Asia’s economy has traditionally been exports to the US and Europe, but a growing middle class and a boom in purchasing power in recent years in countries such China and Indonesia have made Asian consumer demand increasingly vital to the global economy.
“I spend most of my day on the road driving clients around to see properties,” said 27-year-old Singapore real-estate agent Timothy Chen, who switched last week to a less expensive, lower-octane gasoline to help stem his rising fuel bill. “It’s frustrating because I’m paying more for petrol, but I’m not making more money.”
Some in the region, such as Singapore and Hong Kong, import all of their crude and are particularly exposed to higher energy prices, which boost transport and production costs, and therefore the cost of most goods. The cost of crude has spiked recently amid investor optimism that an improving US economy will boost demand and fears that rising tensions over Iran’s nuclear program could lead to global supply disruptions.
“Rising oil prices appear more like a tax on global growth, eating into spending power in the US and Europe, and hitting many Asian economies at a time when they are slowing,” Standard Chartered Bank chief economist Gerard Lyons said. “The impact of oil prices on the global economy can never be underestimated. Rising oil prices are usually the biggest threat to continued global growth.”
Asia’s strong trade and government surpluses have so far helped it absorb higher global oil prices without a significant impact on the region’s inflation and economic growth. The IMF is forecasting GDP in Asia will expand 6.7 percent this year from 6.3 percent last year.
However, GDP forecasts will not take the sting out of higher fuel costs, especially for the region’s poor.
Even if the most recent data suggest inflation remains largely in check, Asia might still be hurt by the recent surge in oil prices, since it can take months or years for higher energy costs and tighter monetary policies to work their way through an economy, said Sean Darby, chief global equity strategist with Jeffries in Hong Kong.
“Well after the oil shock occurs, the economy will still be impacted,” Darby said.
South Korea, Taiwan and Thailand are the biggest net crude importers relative to the size of their economies, while India — with trade and government deficits and an inflation rate at 6.6 percent in January — is in a weak position to absorb higher energy costs, analysts said.
Another worry is that higher oil prices will force countries that subsidize consumer fuel costs — such as India, Indonesia and Thailand — to spend more on crude and less on other public expenditure that could help economic growth.
“Asia has shown in recent years that high prices are not a barrier to the region’s continued rapid economic growth,” Singapore-based Capital Economics Asia economist Daniel Martin said.
However, if prices jump because of a supply disruption from a violent conflict over Iran’s nuclear program while the global economy slows, the impact on Asia would be worse than, say, a scenario in which prices rise more gradually because Europe has stabilized and the global economy and oil demand are growing faster.
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