Galloping Oil Prices: Asia at Risk

 

Spiraling oil prices pose serious threat to growth of Asian economies, notably India and China.

Asian economies, especially India and China might not be able to sustain the growth tempo which has driven the global economy.  The ongoing unrest in the Middle East may lead to double inflation rate and growth rates cut across in Asia. Runaway oil prices pose several risks to Asia. High fuel costs could induce slower global growth rate which in turn cuts demand for the region’s exports and would slow domestic consumption in the region. Investors concerns that oil prices could rise further if turbulence spreads to other major oil-producing countries like Saudi Arabia. Oil prices continue to drive equity markets lower across the globe.

Economists warn that China, India, the Philippines, Taiwan, Vietnam and Thailand are at risk from inflation given their high correlation between energy prices and core Consumer Price Index (CPI). Report indicate that if oil prices stay around $120 per barrel, India’s growth rate could fall to 6% from 8.1% and China’s would be cut to 8.8% from 10%. Frederic Neumann and Sherman Chan, economists at HSBC are of the view that “Asian exporters will feel some pain, as could consumers in the region. US consumers, faced with another shock at the pump, will cut back on trips to the mall. Therefore, it all circles back to Asia eventually.” These developments would deprive the global growth driver just as developed countries start to get back on track.

India is one of the top-risk countries in terms of the cost of heavy oil subsidies. The economy could see inflation double to 14% in the coming months from the currently predicted 7.2%. If crude oil prices cross $150 per barrel, Indian government would be forced to deregulate diesel prices. Although the economy is vulnerable to an external oil price shock, but the country’s public sector finances are in a healthy position and growth is fairly robust. However, economists say it a negative, but it is not going to be enough to cause economic recession or to reverse growth in Asian economies. They are optimistic that oil will probably not stay that high, because its sentiment driven, and will probably come down a bit.

However, the UK-based www.liveoilprices.com forecast that oil prices into the spring and summer of 2011 (October 2011 – $150 oil), will go higher than the current $120 per barrel as global oil demand is higher than oil supply and there is another bubble emerging in the oil market. It cites the following two reasons for the same. It further adds “Of course, many short to medium term situations over the world could change this view (Middle East or Asian Conflicts) but most of the potential situations would only make oil prices go even higher. According to the website, the only way oil prices would see a big fall in 2011 would be if the US dollar makes a massive recovery, back to the 90 – 100 level.

Tags : Galloping Oil Prices: Asia, Global Oil Prices, Crude, Petrol Prices.

N Janardhan Rao, Senior Economist.