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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

SEPTEMBER 24, 1999 VOL. 25 NO. 38

Petroleum Power
Will rising crude-oil prices halt Asia's turnaround?
By ASSIF SHAMEEN

    ALSO IN ASIAWEEK
Putting on the Kid Gloves
Hyundai is no Daewoo, which is probably why Seoul is giving it a break

A Few Kind Words
Some things the chaebol did right

Petroleum Power
Will rising crude-oil prices halt Asia's turnaround?

Property Poker
Malaysia is playing for high stakes as it looks for solutions to a massive real-estate glut

'We Have Too Many Banks'
The Philippines' new central banker looks ahead

It looks like the party is moving. Last year, with the price of crude oil averaging just $13 per barrel, Asian oil importers like Japan, South Korea and the Philippines did not have to worry about huge energy bills as they went about repairing their recession-hit economies. It was exporters such as Indonesia, Malaysia and Brunei that looked on with trepidation as prices skidded to $9 a barrel in December. Now, oil producers expect higher earnings while importers are budgeting for bigger expenses. Last week, oil prices touched $24 per barrel. Analysts expect the $27-level to be breached before the year ends. Oil at $30 a barrel may not be as far-fetched as it sounds.

Should we worry? Obviously, pump prices in most of Asia will rise. But Pauline Gately, an economist with Deutsche Securities in Hong Kong, is not fretting. "Even if they go up another $3 or $4, high oil prices won't derail the Asian recovery," she says. "Most Asian economies are in a deflationary spiral anyway. There will be an impact, but it will be minimal across Asia -- barring the Philippines, perhaps." Geoffrey Barker of Dresdner Kleinwort Benson agrees, noting that Korea, Taiwan and possibly Singapore can offset some of the oil-price increases by allowing their currencies to strengthen.

What is sure is that the world is due for a spell of strong oil prices. One reason: Asia is pulling out of recession faster than expected and needs more fuel for its industries. Seasonal factors are also in play. Oil demand peaks in winter (normally the last six weeks of the old year and the first six weeks of the new). North America and Europe are topping up reserves now that autumn is here. Above all, the 11-nation Organization of Petroleum Exporting Countries, which produces 40% of the world's oil, is proving remarkably disciplined. OPEC is expected to extend current production cuts to March when it meets next week. "If OPEC [members] stick to their quotas for a few more months, we will see prices move upward far more quickly," says Paul Ashby, a regional oil analyst at ABN Amro Equities in Sydney.

In Asia, one beneficiary is Indonesia, which is expected to reap an additional $3 billion in oil revenues. But importers will need to shell out more dollars. "Korea will end up paying about $4 billion more this year," says Dresdner's Barker. That's not too bad, especially since the won is appreciating against the greenback. The currency gains are trimming what could have been a heftier bill. In Korea as elsewhere, inflation can be headed off not by raising interest rates but by revaluing the local currency.

Japan, China, Hong Kong and to some extent Singapore are fighting deflation, so rising oil prices can be something of a boon. Besides, energy prices have a relatively small weighting in most of Asia's consumer-price-index baskets. Inflation figures would not show large upward swings unless oil prices really shoot up and stay there. (No one is predicting the return of the $40-per-barrel level of the 1980s.) But Barker worries about the Philippines. "It cannot afford to revalue the peso and it has a weak current account," he says. "Prolonged high oil prices is going to be a negative." Thailand may also face difficulties because the baht is also weakening against the U.S. dollar.

All bets are off if the U.S. economy slows drastically. Although crude prices have more than doubled since February, retail gasoline prices in America are up just a third, suggesting that there is room for further increases. (A 100% rise in crude-oil prices normally translates into a 50% increase at the pump.) Crude oil at $27 to $30 a barrel may cause the U.S. Federal Reserve to hike interest rates again -- and again. A 0.5%-to-0.75% increase over the next six months may puncture the U.S. stock market, particularly high-flying Internet stocks. If the economy then grinds down, American purchases of Asian goods and services may slow too, which will be bad for the region's recovery. A lot of ifs, but economically fragile Asia needs to be aware of the darkest scenarios.

This edition's table of contents | Asiaweek home

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