Winners and Losers in Asia from Plunging Oil Prices

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David Brady's picture

After years of rising oil prices fueled largely by growing demand in China and other emerging markets, 2014 will be remembered as the year that the price bubble burst. Brent crude plunged from its peak of over $110/barrel to under $60 by the end of the year. Because Asia is so large, the price drop will have varying implications throughout the continent. Asian manufacturers, energy consumers throughout the continent, and oil net importing countries, particularly India will enjoy the greatest benefits. Meanwhile, oil net exporting countries, governments needing high oil prices to balance their budgets, oil companies and their investors, and banks that made loans to oil companies come away as the major losers. In the long run, all will suffer as falling oil prices set back efforts to cut carbon emissions and reduce global warming.

On the whole, oil net importing countries like Japan, Singapore, and South Korea welcome the price drop. It keeps more money inside each country and helps energy consumers and manufacturers. Consumers are now paying a smaller percentage of their paychecks for gasoline than they did a few months ago, and this will enable them to spend their money on other things, which should increase economic growth. Additionally, Asian airlines and other transportation companies which incur major fuel costs will see higher profits. Moreover, the lower gasoline prices worldwide should help Asian manufacturers experience a boost in demand for their exports, especially from the United States. Nevertheless, these Asian countries will experience costs that offset these benefits. For example, Japan is a major oil importer, but the price drop may contribute to its current deflationary trap.

India is the major Asian country with the most to gain and the least to lose. Oil accounts for a large percentage of Indian imports, but only a small percentage of its exports. India is a growing emerging market with a rising demand for oil. High oil prices placed a heavy burden on the Indian economy, and to help defray some of the high energy costs, the Indian government provided fuel subsidies to its poorest citizens. This was expensive, and the price decline allows the Indian government to end these subsidies. Other countries such as Malaysia and Indonesia have also ended their fuel subsidies.1 Likewise, the lower oil prices have allowed the Indian government to raise oil taxes.2 These combined measures will strengthen its fiscal position without really hurting energy consumers since the oil price drop cancels them out. Falling oil prices in India also reduce the risk of inflation, which had been a problem until recently. In 2014, inflation dropped to a five-year low as food prices fell. Combining lower food and energy costs may soon allow the Reserve Bank of India to cut interest rates, which would spur domestic investment and growth.3 For all these reasons, India appears to be the country that is the clear-cut winner from lower oil prices.

Not everyone welcomes the oil price reduction, however. Oil net exporting countries came to rely upon the high oil prices to fund their governments and balance their budgets. Iran, in particular, is hurt by the oil price decline. The Iranian economy has not been performing greatly, largely due to economic sanctions imposed by the United States and its allies because of Iran’s nuclear program. Economic conditions, however, appeared to be improving. Even with the sanctions, the IMF projected 1.5 percent growth in 2014 and 2.3 percent in 2015.4 Those projections did not factor in $60/barrel oil, however. The low oil prices specifically hurt Iran because according to the IMF, it needs oil at $136 to balance its budget. On the other hand, other Middle Eastern countries can manage at lower prices. Kuwait, United Arab Emirates, and Qatar can breakeven around $70/barrel.5 Therefore, oil below $60 a barrel puts Iran at a competitive disadvantage and severely strains the Iranian government’s budget. Consequently, it will be forced to look to other areas to cut spending. Cutting government spending will hinder Iran’s already fragile economic growth and would likely lead to political instability when certain popular programs are cut.

Even with Iran’s problems, Russia is the biggest loser in Asia from the oil price decline and the country grabbing the most headlines. Before the plunge in oil prices, Russia was experiencing economic difficulties largely due to the fallout from invading Ukraine and the resulting sanctions imposed by the United States and Europe, but $100/barrel oil made things appear better than they were. Revenues from oil make up about 45 percent of Russia’s budget, and the Russian government’s economic budget projections assumed $100/barrel oil.6 Like Iran, the lower oil price will hurt Kremlin’s budget, and it has already caused panic in the financial markets. Indeed, a significant amount of money has left the country, Russian bond prices have risen, and its currency, the ruble, has weakened. In December, to entice investors to keep their money in Russia, the Central Bank of Russia raised interest rates from 10.5 to 17 percent.7 This drastic rate hike, however, makes a Russian recession likely, and this will lead to angry citizens and political unrest.

With crises brewing in Russia, Iran, and other oil producing countries around the world, the price plunge will hurt Asian investors in oil companies and in governments that rely on oil revenues, as well as banks that made loans to them. Because of lower oil prices, many energy companies will have to default on their debts, and some companies will fail because they undertook projects factoring in $100/barrel oil. $60/barrel oil will mean fewer free cash flows generated by the oil drilling projects, turning what seemed like a positive investment into a money losing endeavor. Chinese banks, in particular, are heavily exposed in Venezuela and other oil exporting countries, so China will suffer if they default.8

Finally, in the long run, the most devastating consequence from the oil price decline will be the effort to slow climate change. The price decline means fossil fuel consumption will continue and likely increase, and the price drop came at a particularly bad time because global policy makers appeared to be making progress to curb carbon emissions. In November, the United States and China made a joint announcement on climate change and clean energy cooperation. Chinese President Xi Jinping announced that China planned to increase the amount of non-fossil fuel energy to 20 percent of total energy use by 2030.9 Furthermore, at a United Nations Conference in December in Lima, Peru, countries agreed to submit a voluntary and non-binding plan on how they would reduce carbon emissions.10

The drop in oil prices reduces incentives to cut fossil fuel use and decreases the likelihood that the countries will carry out their voluntary pledges. A decade ago during belief in “peak oil,” a theory that the world had reached its maximum production levels, there was a sense of urgency to develop renewable energy. Though fears of peak oil passed, high oil prices preserved these incentives. As a result, the prices of solar energy and other renewables have decreased dramatically over the last decade.11 With oil prices at $60/barrel, however, this progress could erode as interest in renewable fuels decreases.

Lower fossil fuel prices are exactly what environmentalists do not want. Economists have pushed for a carbon tax as a market friendly approach to address climate change.12 Because of political opposition, a carbon tax is unlikely to be enacted. Lower oil prices, however, effectively become a carbon subsidy that has already passed through legislation. Consequently, lower oil prices will likely undermine the UN climate deal and other agreements to reduce carbon emissions. The environment will suffer as a result leading to more extreme weather patterns, rising sea levels, and other disasters throughout Asia and the rest of the world.

In conclusion, the days in which oil consistently sold over $100/barrel appear to be over. There will surely be supply disruptions and other events that will cause temporary price increases, but oil producing countries can no longer rely on high oil prices to carry their economies. Despite longstanding concerns with high oil prices, the price plunge is actually a mixed blessing.  Energy consumers welcome lower prices, but the environment, political instability, and other financial consequences could put a damper on the benefits.
























[1] John Aglionby, “Malaysia follows Indonesia and abolishes fuel subsidies.” Financial Times. November 21, 2014.

[2] James Crabtree and Jyotsna Singh, “India raises tax rates on petrol and diesel.” Financial Times. November 13, 2014.

[3] Victor Mallet, “Economic Windfalls for India as Global Growth Slows.” Financial Times. October 15, 2014.

[4] Andrew Mayeda, “Iran Central Bank’s Seif Says Sanctions Won’t Stop Growth.” Bloomberg. October 11, 2014.

[5] Gregory Viscusi, Tara Patel, and Simon Kennedy, “Oil Shock Streaks Across Globe from Moscow to Tehran to Caracas. Ready for $40?” Bloomberg. December 1, 2014.

[6] Brad Plumer, “Oil Prices Keep Plummeting as OPEC Starts a Price War with the US.” November 28, 2014.

[7] Neil Irwin, “Vladimir Putin vs. the Currency Markets: What to Know About the Ruble’s Collapse.” The Upshot December 15, 2014.

[8] Chris Giles, “Winners and Losers of Oil Price Plunge.” Financial Times. December 15, 2014.

[9] The White House Office of the Press Secretary. “Fact Sheet: U.S.-China Joint Announcement on Climate Change and Clean Energy Cooperation.” November 11, 2014.

[10] Brad Plumer, “Lima Climate Deal: Every Single Country Now Plans to Tackle Emissions. Sort of.” December 14, 2014.

[11] The Global Commission on the Economy and Climate. “Better Growth Better Climate.” The New Climate Economy Report. The Synthesis Report. Page 37.

[12] Lawrence Summers, “Let this be the year when we put a proper price on carbon.” Financial Times. January 4, 2015.