Fanfare for the Common Man: An Economic Analysis of Oil-Related Gains and Losses in Asia

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Benjamin Mills's picture

Many armchair economists will argue that Asian construction giants have gained the most from the plunging cost of oil, proposing that such a drastic drop in the price of one of their main inputs will allow those companies to tackle more lofty projects and provide commensurate gains in profit and infrastructure. Especially for countries like China who have been experiencing a stall in growth, this could provide the impetus needed to jumpstart a lagging economy. Examining the issue from an even wider perspective, others will choose to award the top prize to the governments of nations such as India and Indonesia, who will be able to use this drop in prices to alleviate some of the pain stemming from their high current-account deficits. High interest rates can be cut without feeling the usual aftereffects in the inflation rate, and fuel subsidies that have long hobbled these national economies can be decreased without the usual commensurate spike in domestic oil prices. However, a much simpler answer exists—those who benefit most are not governments or multinational corporations, but the common man across Asia. In fact, while the common man will experience gains in both the short and long-term, the future of those governments mentioned above looks less optimistic.

            The effects of falling oil prices have long been seen as a boon for consumers, but this example is particularly notable due to Asia’s current makeup. From an economic standpoint, the drop in price of consumer goods (particularly gasoline and food), alleviates some of the pressure on the average citizen while acting as a hefty stimulus for Asian households. More money is freed up for other purchases, driving up consumption rates in the short-term and increasing the possibility of a rise in the savings rate in the long-term. This is particularly important to note for those who subscribe to Jeremy Bentham and John Stuart Mill’s idea of utilitarianism. Of course there are major parties whose gains overshadow those of the average citizen, but examining the issue from a utilitarian perspective takes into account Asia’s entire current population. Of the ten largest countries in the world, six are located in Asia, and these numbers show no signs of slowing. Multiplying each citizen’s gains across an entire population dwarfs those of other parties, resulting in the maximum total benefit. A drop in the price of oil in particular slashes consumer prices across the board because of the nature of the resource. Since consumers overwhelmingly purchase final goods for which oil is an input at multiple stages of production, a small drop in price is multiplied many times over. For a citizen employed in manufacturing or similar industries that heavily depend on oil, this could also mean increased job security in the short-term, followed by the possibility of long-term growth if investment decisions are sound during this period.

             The decision of who will lose the most from falling oil prices is slightly less obvious. Although the prevailing belief is that Asia is particularly well-suited for the gains that come from such a drop due to the fact that most are importers of energy, the long-term prognosis is less rosy. Obviously, Chinese petrochemical companies will experience a drop in profits that they cannot do much to rein in by cutting production, as OPEC and the United States are the main players driving the surge in supply. Asian governments will also need to tread extremely carefully in order to derive the maximum benefits from the price change, and this is where some countries may fall victim to poor timing. Many Asian nations, particularly China, have been attempting to shift their focus from construction to consumer-related growth, lessening their dependence on oil. At this point, they have a decision to make—continue their current economic development plans or capitalize on the current market to try to collect last-minute gains. For governments who have been lulled into a sense of security by long-term patterns of growth, such drastic changes may not be easy, as current economic policy in India demonstrates. Recent Credit Suisse research has suggested that although the drop in oil prices resulted in economic gains from subsidy cuts, the beneficial effects will not truly be felt on the trade deficit until the next financial year, with some experts arguing that they may not even be felt at all. As economic growth slows worldwide, the export-driven economics of Asiatic countries could suffer from a lack of demand large enough to cancel out any possible gains. Furthermore, many Asian allies such as Russia will be hit hard by the drop, decreasing the chances of a financial life raft being available if one country loses its balance and increasing the chances of a domino effect.

            Overall, the winners and losers in this latest fluctuation in oil prices depends on how quickly the countries and their people can adapt. By their very nature, the emerging economies of many Asian nations are unwieldy and slow to respond to change, as they are only now coming into their own on the world stage. Therefore, the people of these nations will be in the best position because of their adaptability and the relative simplicity of the decisions they need to make. Moderately increasing consumption, investing enough to protect themselves if the petroleum pendulum swings back to higher prices, and taking advantage of the current market to secure their future will prove much easier than adjusting major economic policy to account for a resource with extremely high volatility.

References: 

“How Cheap Oil Can Benefit Asia | Asia | DW.DE | 18.12.2014.” DW.DE.

“Oil Price to fall until Major Asian Manufacturers Feel the Benefit.” Reuters 7 Jan. 2015.

“What to Buy To Benefit from Low Oil Prices. Part Two: India.” Forbes.

Yep, Eric. “Falling Oil Spells Boon for Most of Asia’s Economies.” Wall Street Journal 4 Jan. 2015.