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SEPTEMBER 29 , 2000 VOL. 26 NO. 38 | SEARCH ASIAWEEK

All You Need to Know
Nervous about oil prices? Here your worries are addressed, your questions answered
By TIM HEALY

ALSO:
• Crude Awakening: Now at their highest since the Gulf War, petroleum prices are roiling markets, worrying businesses and igniting angry protests. Here's how dearer oil could hurt Asia's fledgling recovery ‹ and what the region needs to do to weather black gold's steep ascent
• Blackout Alert: Expensive oil threatens the region's best-recovering economy

Recent stock market falls offered a sobering reminder of how mere economic concerns can quickly look like crises. It helps, in such times of maximum stress, to know exactly what are legitimate worries and what are herd-like jitters. Of course, when the protestors take to the streets as they have throughout Europe (and in Manila) the mass nervousness becomes legitimate. In other words, if there's a stampede for the exits, you'd better at least have scoped out the escape route. But we're getting ahead of ourselves. For now, high oil prices are more of an annoyance than a threat to the region's economic recovery.

Do rising oil prices threaten the region with another Crisis?
By itself, expensive oil is unlikely to drag the region so far down. But combine high-priced petroleum with, for instance, the decision by Ford to back out of its planned purchase for Daewoo and you produce a bloodbath in Seoul stocks. The Seoul market recovered part of its 8% single-day loss in following sessions, but investors there remain jumpy. When the Hong Kong exchange fell more than 4% on Sept. 18, it wasn't because investors feared the city would suffer at the gasoline pump. Oil was just a precipitating factor among many (including a U.S. stock slump, earnings warnings and continued dotcom weakness). Given the fragility of Asia's recovery from the Crisis, it might not take much bad news to sink confidence — and we've seen the kind of downward spiral a bit of gloom can start. The currency shocks three years ago should never have knocked the region for a loop the way they did in 1997; oil shouldn't today. But it would be foolish not to be concerned.

There must be someone to blame. Just tell me who it is.
Not so fast. It might have been easy to demonize the Organization of Petroleum Exporting Countries (OPEC) or Saddam Hussein or even gas-guzzling Americans in the past. Most of the serious price spikes in the '70s were driven by supply shortages. But the current problems are more complicated. Oil prices dipped below $10 a barrel in 1998 and stayed low for some time mostly because demand was weak, especially in Asia because of the Crisis. The low price decreased the incentive for oil companies to explore aggressively and for refineries and shippers to invest in new capacity.

If it isn't OPEC's fault, what happened?
In large part thanks to cheap oil, Asia and Latin America have recovered strongly from recessions. America is continuing its decade of growth. And European economies have surged. Today, the whole world is buzzing. Global GDP in the first half of this year was more than 5%, highest in more than a decade. You may have noted that even when OPEC announces increases in the amount of oil its members will pump, prices barely move. That's because shippers are maxed out. Refineries in the U.S. are running full-bore. American oil supplies are at a 24-year low. This is not to mention that most oil-producing countries are already pumping as much petroleum out of the ground as they can. You think you want lower oil prices? Think again. The surest way would be a world-wide recession.

What is the biggest threat to Asia?
There are several. A return of inflation would probably hurt average consumers the most since they are likely to lose spending power to higher prices long before they see wage increases. Certain industries like airlines — and tourism in general — would feel the pain most acutely if they are forced to raise prices because of higher fuel costs. But the biggest threat may be the impact an oil shock has on the U.S. Its consumers have been key engines of global growth, continuing their spendthrift ways even when the rest of the world turned miserly. But with the cost of gasoline and heating oil soaring, and America's already-bad trade deficit worsening because of high-priced oil imports, will American consumers continue to spend like there's no tomorrow? For the answer, tune in again — tomorrow.

Which countries will be hurt?
South Korea may suffer more than any Asian economy because oil is relatively more important to its large manufacturing base. Thailand is less reliant on oil but more vulnerable to small shocks of all kinds. Same for the Philippines. Japan has made progress reducing its petroleum dependence, but a spike in prices is likely to do little but frighten already weak-kneed consumer confidence. "Japanese consumers are still tight-fisted about spending," says Sakaiya Taichi, the head of Japan's Economic Planning Agency. "We can't be too optimistic about the economy for upcoming quarters."

On the other hand, at least the high price will help oil exporters like Indonesia, right?
Don't count on it. Indonesia is the best example in Asia of a backward, incoherent oil policy that seems designed primarily for the rich. The nation should be overjoyed by the increase in crude prices. However, because it subsidizes gasoline so heavily (see chart), it nets only a relatively small amount when the cost of oil rises. A $1-per-barrel price increase translates to $140 million extra to the government annually. This means that if oil stayed where it is now for a year — nearly $25 a barrel more than it was two years ago — the windfall would amount to only about $3.5 billion. By comparison, the cost of recapitalizing Indonesia's banks is estimated to require in excess of $60 billion in addition to the $66 billion already spent. Under pressure from the International Monetary Fund, Indonesia's government has agreed to reduce gas subsidies by 12% next month. Malaysia is an oil exporter and it also subsidizes gasoline, though to a smaller extent than Indonesia.

Will oil hit $50 a barrel?
Probably not. And even if it did, most analysts think oil prices are headed down in the medium and long run. Short-term movements in oil prices are notoriously hard to predict, but a few experts are looking for prices to top out near $40 a barrel in the next several weeks before falling at least a little. This goes against conventional wisdom that cold winter weather in northern climes will keep both demand and prices high through the first months of 2001. A few plugged-in experts note that a more nuanced analysis of the market reveals that heating oil, which is already passing through refineries, is likely to be in relative abundance this winter. In the longer term, oil men are divided about supply. One theory holds that global supply has permanently peaked and is headed down. Others believe that new exploration, better recovery techniques and investment in refinery capacity will satisfy generations of robust demand.

Will Asia suffer more from an oil shock than the rest of the world because it hasn't improved its energy efficiency very much?
It is a fallacy that Asia has ignored past oil shocks and not improved its efficiency. Yes, Asia — not counting Japan, which has more in common with the West — may well suffer more than developed economies because oil is of relatively greater importance to total output in the region. But that has to do with the region's economic structure, not efficiency. The economies of North America, Western Europe and Japan are relatively less reliant on manufacturing than Asia and generally produce higher-value goods. "Take a simple analogy," says Lee Eng Lock, the Singapore-based technical director for Supersymmetry, a U.S. consultancy to companies wanting to improve energy efficiency. "Consider a truck that uses $50 worth of fuel to move a payload worth $50,000 in Asia. The same truck might move a payload worth $150,000 in Japan for the same $50. The improved efficiency in Japan is just a numbers game. Having worked in Asia, Europe, Japan and the U.S. on energy efficiency for high-tech manufacturing, I will say there does not appear to be any efficiency difference."

Is it time to start bowing and scraping to OPEC countries again?
Absolutely not. Today's oil market is unusual in that it requires virtually no discipline from OPEC members to sustain a high price. With demand so high, most are free to produce almost as much oil as they can. OPEC might want to believe it still has the power to disrupt the world's economies, but it has about as much influence controlling how high oil prices go as it did trying to protect itself from the slump two years ago. Past experience has revealed the weakness of the cartel when low prices actually required members to show self-discipline. Today OPEC controls just 40% of the world's oil, and the current spike in prices may actually be something of a last hurrah for the group. The day is fast approaching when an alternative-fuel, environmentally friendly car becomes affordable and practical, which could be a death-knell to the group. "The stone age came to an end not for a lack of stones, and the oil age will end not for a lack of oil," said one Arab sheik recently. Ironically, OPEC's near-term influence may depend on how poorly two of its members get on. Iraq is currently accusing Kuwait, which it invaded in 1990, of drilling a well diagonally to steal oil from an underground reserve in its territory. Kuwait contends the allegation is technically improbable and realistically ludicrous. Iraq has threatened to cut its production, already limited by sanctions, in retaliation. If this dispute were to escalate and production were disrupted, this is precisely the sort of external shock that could really make Asia nervous.

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