In Asia who benefits and loses the most from falling oil prices?

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Jakub Mardusinski's picture

            Oil constitutes for approximately 18% of total Asian imports, excluding Japan. The world crude production is estimated at over 90 million b/d. With a price of $120 a barrel it amounts to $4 trillion per annum, whereas at $65 almost to $3 trillion. For a country that is a net importer of crude, which is the case for the majority of Asian economies, in the short-term cheaper oil price is a positive phenomenon and the benefit from a trillion dollars transfer can be regarded as analogous to a tax cut. Although all importers experience the recent crash differently they all share some common effects: increased household income on consumption, lower production costs, and impact on headline and core inflation rates. The defining criteria on who wins or loses more spans on a number of prevailing factors such as: impact on budget deficit and overall fiscal position, ability to take adequate regulatory responses from government revenue departments, exchange rate movements and ramifications to economic data on industrial production, FDI, or domestic demand growth.


            The first case to look at is China, which is the most dependent importer of crude in Asia. The country has $3.9 trillion in foreign reserves; it has to build roads and railways, maintain the power plants working and needs to feed 1.4 billion people. At the moment we are seeing China benefiting from cheap crude prices, with oil imports rising 9.5% in 2014, and the state owned petroleum energy companies pursuing the national long-term stockpiling strategy of filling up emergency reserves. The economic data shows that with a barrel price 20% cheaper in 2015 compared to a $100 average of last year the government coffers in Beijing could expect an inflow of $50 billion. With the slowing industrial expansion, diminishing exports, bad debt increasing and difficulties in moving towards consumption-led growth model, it is believed that cheap oil could give China a hand in offsetting the partially lost ground. Furthermore, based on historical figures every price decline of crude of $1 saves Xi Jinping’s cabinet $2.1 billion a year. If the latest oil crash sustains throughout the year, the imports account will be lowered by 3% or $60 billion. With most Chinese exports being manufactured goods, whose prices did not see a decline, the foreign currency shall go farther and household living standards ought to improve, unless falling demand alters that.


            On the other hand, China being recently the single unquenchable consumer of commodities could be regarded as the biggest risk and its slowing growth a crucial contributor to lower prices. While many are fond of pointing out the benefits of cheap crude, one should look at what falling prices say about the demand curve, where China is a mystery with mixed data on services PMI on the positive side, and manufacturing PMI dropping below the pivotal 50 level on the negative. The government is undertaking reforms to shift the growth balance away from raw materials-intensive heavy investments in real estate. Moreover, Beijing’s aim is to stem growth of credit. If the officials in China undermine growth, the prices of crude and other commodities could see a further decline. Hence, it should be pointed out that Chinese economy after many years has finally come into a less oil demanding development stage. Lastly, the biggest fear is that crude prices could get entrenched. As a large oil consumer, China is a short-term winner. Yet in the medium-term with cutting the imports account, declining prices could potentially give rise to export surplus, consequently contributing negatively to current-account imbalances and growing deflationary pressures to the world economy making everyone a loser.


            Despite the less analytical attention that has been paid to them, Indian and Indonesian farmers happen to stand out as the biggest short-term gainers in the region given their dependence on energy-intensive agriculture. Farmers, who require five-times amount of energy to produce a dollar of output as manufacturers in China, profit most from cheap oil. With farmers in Asia stemming from poor countries the crude crash is a positive phenomenon on balance for this working class in India and Indonesia, the former being home to a third of the world’s population living on under $1.25 a day. More specifically the boon for these countries is threefold. Firstly, in relation to exports imports become cheaper. In case of India, oil accounts for around 30% of imports, and while exports in the country are largely diverse, there is no sign of across-the-board falling prices. Secondly, confronted by high current-account deficits inexpensive energy from oil curbs inflation, which already fell in India to 6.5% from over 10% in 2013. This should consequently lead to lower interest rates and have a boosting effect on investment. Thirdly, the short-term positive effect of cheap crude allows India to cut its budget deficit (currently approximately 4.5% of GDP) and improve fiscal position by increasing taxes on petrol and diesel, and by lowering fuel subsidies (or scrapping them completely as in Indonesia) that for a long time disabled policymaking in both states. The subsidies on fertilizers, food and fuel in India are huge, amounting to $41 billion or 2.5% of GDP. The New Delhi government is in control of diesel prices and has thus far compensated losses to the sellers. The period of Q4 2014 was the first one in a longer time span when sellers became profitable.


            With the volatility of world markets, an awful amount of debt tied to the oil market, the dynamic geopolitical situation and unknown price trends of crude, in the medium-term the winners and losers of cheap oil are difficult to predict. The biggest risk is that nobody knows at the moment how long the current low prices will continue and what specifically is driving the drop (the declining demand in China or increased supply from shale boom, say). The historical figures show that crude prices especially bounce up and down with the market volatility. Rising taxes in Asian economies would signify that while this could be a brief shock, the current market for crude is going to establish a mood for upcoming years. For instance, if Chinese authorities decide to cut oil subsidies now, then when prices of crude go up again, Chinese households will be faced with increased prices. As a reaction, they should utilize less oil that would leave more for others. Hence, the households in countries that do not increase taxes would be given a comparative advantage. Scrapping subsidies or imposing higher gasoline taxes is economically sensible and the time to do so is opportune for politicians. However, given volatility of crude prices setting long-run policies as a reaction to the latest phenomenon could bring along undesirable ramifications. In a few years time some states will encounter cheaper prices, while others will see the opposite, which can shift trade volumes and growth in ways difficult to predict today. As the story continues to unfold, one thing becomes certain: there is sizable uncertainty in regards to the development of demand and supply curves, which as can be learned from the latest events, are not speculative experiments outlined on blackboard, but cold facts that pertain to everything and everyone.


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