The double-sided results of falling oil prices in Asia

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Jiongqing Yao's picture

Since June 2014, oil prices have fallen more than fifty percent to under $50 a barrel, which is at its lowest level since 2009. There are multiple reasons for the falling oil prices. For example, an oversupply from exporters resulted from the United States shale oil boom, a weaker demand from importers led by the slowing economic growth in the energy-intensive countries, and the appreciation of the U.S. dollar due to the recovery of the U.S economy. The huge fall in oil prices impacts the Asian economy significantly since Asia has the largest oil importers and exporters. It acts as an international stimulus that stimulates the economy of big oil-importing countries, and at the same time, there will be a redistribution from oil producers to consumers who benefit from cheaper energy. As we can see, the falling of oil prices has double-sided results. The biggest winners are the heavy users of energy who are largely dependent on oil imports and the biggest losers are those exporters who have a high break-even price and who spend rather than save most of their oil revenue.

            Iran is the biggest loser from the oil prices plunge in Asia. Iran is the third largest oil exporter in the world and oil and gas revenues made up around fifty percent of its fiscal receipts in 2013 (Giles). According to The Economist, Iran’s Brent crude break-even price is more than $130 per barrel, which is the highest in the world (Myre). Therefore, the oil prices below $50 per barrel is disastrous for Iran. Moreover, according to The Washington Post, Iran lost around fifty percent of its oil revenue in the past two years due to the sanction from the United States. With a foreign exchange reserve of only $100 billion, it will be extremely hard for Iran to survive this crisis without cutting its production if the oil prices remain low (Giles). In fact, Iran wanted to cut its production in November 2014, so it was already suffering from a great loss when other OPEC oil exporters decided to maintain oil output. However, if Iran cut its production level and gave up some of its market share, it would be fatal to its economy in the long-term when the oil prices rebound in the future.

Although Saudi Arabia is the largest oil exporter in the world, it is much stronger than Iran in many aspects and thus will not suffer as much as Iran does during this battle. Saudi Arabia’s historical conflict with Iran and fear of the U.S. shale revolution have fueled their efforts to protect their market share. With a foreign exchange reserve of more than $740 billion and the Brent crude break-even price as low as $89 per barrel, Saudi Arabia can easily survive this crisis (Giles).

            On the other side, India benefits the most from the falling oil prices in Asia in the short term. India is the fourth largest oil importer in the world. It is almost eighty percent dependent on oil imports to meet its crude oil needs and oil represents thirty-seven percent of India’s total imports and sixty-seven percent of its trade deficit (Dominguez). It is estimated by Oxford Economics that India would shrink its trade deficit by around twenty-five percent if oil prices remain low (Dominguez). Moreover, India has been beset by high inflation for years, but now with lower oil prices, India’s inflation rate has dropped to 4.4 percent in November 2014 (Giles). According to Giles’s article “Winners and losers of oil price plunge”,  “By October, the cost of oil imports has already fallen to $164bn over the previous 12-month period, from a peak of $169bn in July, and that bill will shrink further.” Due to the declining of oil prices, the India government has abandoned its diesel subsidies and raised taxes on both petrol and diesel (Giles). Prime Minister Modi seeks to take advantage of the falling oil prices to bolster government revenues and reduce its fiscal deficit. The fall of trade deficits, fiscal deficits, and the inflation rate could lead to lower interest rates and thus boost investments in India. Indians can use the money they save from cheaper oil prices on other goods and services, which will improve the economy of India overall.

            Even though India is not the largest importer of oil in Asia, there are many reasons why it benefits more from the plummet of oil prices than other larger oil importers. For example, although China is the largest oil importer in the world, it benefits less than India does from the falling oil prices because petrol prices in China is set by the state; China has not fully passed on these prices decreases, so the people in China cannot save as much money as people in other countries have. Moreover, China’s strategic oil reserves are too small, as they are only enough to meet their oil requirements for less than 10 days by 2014 (Hornby). While according to Tank World News, India’s strategic oil reserves are enough to meet their oil requirements for 13 days by 2013, we can see that China will benefit less than India since the amount of oil it is able to buy and storage now cannot last as long as other countries can. Japan, as the third largest oil importer in the world, is in danger of possible deflation if oil prices remain low, which will be a catastrophe for Japan’s economy. Furthermore, the huge depreciation of Japanese currency offsets some of the benefits of the oil prices decline to Japanese consumers. Therefore, India is the biggest winner from the falling oil prices in Asia in the short term.

            However, the oil prices will not remain this low forever, they will rebound one day. In the long term, if the current oil producers do not cut their production or lose their market share, Saudi Arabia will be the biggest winner. As the largest oil exporter in the world, Saudi Arabia will benefit the most once the oil prices rebound to the previous level.

            In conclusion, the decline in oil prices is significant for Asia as Asia is the headquarters of both oil producers and consumers, therefore, the plunge of oil prices has double-sided results in Asia. Moreover, in different time frames, the winner and loser will be different or even switch places. In the short run, the biggest oil importers such as India, China, and Japan will benefit the most, and the biggest oil exporters such as Iran and Saudi Arabia will lose the most. However, in the long run, Saudi Arabia will be the biggest winner when the oil prices rebound and those producers who have lost their market share will be the biggest losers from this crisis. The leaders of Asian countries should do their best to save the economy or take the advantage of the oil prices plummet, in order to maximize their profit or minimize their losses and win this battle.

References: 

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