ASIA OIL THIRST TAB $1 TRIL­LION A YEAR AS CRUDE RISES TO $80

The Gulf Today - Business - - SPECIAL REPORT -

SIN­GA­PORE: Oil prices are poised to break through $80 per barrel and Asia’s de­mand is at a record, push­ing the cost of the re­gion’s thirst for crude to $1 tril­lion this year, about twice what it was dur­ing the mar­ket lull of 2015/2016.

Oil prices have gained 20 per cent since Jan­uary to just shy of $80 per barrel, a level not seen since 2014.

With the US dol­lar - in which vir­tu­ally all oil is traded - also grow­ing stronger, con­cerns are rising that economies will take a hit, es­pe­cially in im­port-re­liant Asia. Surg­ing costs could have an in­fla­tion­ary ef­fect that will hurt both con­sumers and com­pa­nies.

“Asia is most vul­ner­a­ble to an oil price spike,” Cana­dian in­vest­ment bank RBC Cap­i­tal Mar­kets warned in a note this month, af­ter oil prices hit their high­est since Novem­ber 2014.

Asia-pa­cific con­sumes more than 35 per cent of the 100 mil­lion bar­rels of oil the world uses each day, ac­cord­ing to in­dus­try data, with the re­gion’s global share steadily rising.

Asia is also the world’s small­est oil pro­duc­ing re­gion, ac­count­ing for less than 10 per cent of out­put.

IN­FLA­TION, RISING COSTS

US bank Mor­gan Stan­ley said this week that diesel use con­trib­utes 10-20 per cent to cash costs for min­ers, while oil con­trib­utes from 4 per cent to 50 per cent to the cost of power gen­er­a­tion, de­pend­ing on a com­pany’s or coun­try’s fuel mix.

“A rising oil price there­fore shifts the en­tire cost curve higher,” it said.

China is by far Asia’s - and the world’s - big­gest im­porter of oil, or­der­ing 9.6 mil­lion bar­rels per day in April. That’s al­most 10 per cent of global con­sump­tion.

At cur­rent prices, this amounts to a Chinese oil im­port bill of $768 mil­lion per day, $23 bil­lion per month - a whop­ping $280 bil­lion a year.

Other Asian coun­tries are even more ex­posed to rising oil prices. Most dam­age will be done to coun­tries like In­dia and Viet­nam, which not only rely heav­ily on im­ports, but also where na­tional wealth is not yet large enough to ab­sorb sud­den in­creases in fuel costs.

“Poorer coun­tries with lim­ited bor­row­ing ca­pac­ity may face fi­nanc­ing dif­fi­culty amid higher im­port bills,” RBC said.

Un­less fuel is heav­ily sub­si­dized, house­holds and busi­nesses in poorer coun­tries are also more vul­ner­a­ble to rising oil prices than they are in wealth­ier na­tions.

In de­vel­op­ing economies like In­dia, Viet­nam or the Philip­pines, fuel costs eat up around 8-9 per cent of an av­er­age per­son’s salary, ac­cord­ing to Reuters re­search and fig­ures from sta­tis­tics por­tal Num­beo. That com­pares to just 1-2 per cent in wealthy coun­tries like Ja­pan or Aus­tralia.

DIESEL & LO­GIS­TICS

The surge in oil prices has a par­tic­u­larly big im­pact on trans­port and lo­gis­tics com­pa­nies. One such firm in Asia is courier LBC Ex­press Hold­ings in the Philip­pines.

“LBC has been in­tently watch­ing the move­ment of crude oil prices... What we, at LBC, are pre­par­ing for are the ef­fects an oil price in­crease may have on our car­ri­ers: air­lines, ship­ping lines, truck­ing com­pa­nies,” its Chief Fi­nan­cial Of­fi­cer En­rique V. Rey Jr said.

The high oil price “chal­lenges us to im­prove our own ef­fi­cien­cies to achieve bet­ter economies of scale and main­tain our mar­gins,” he said.

Some firms say they will pass on any higher costs to con­sumers.

Chryss Al­fon­sus Da­muy, Pres­i­dent and Chief Ex­ec­u­tive at Philip­pine firm Chelsea Lo­gis­tics, said his firm could be af­fected by higher oil prices, but “we can pass on the ef­fect to con­sumer via price ad­just­ments.”

Oth­ers said if they bur­den con­sumers with higher costs, they will lose clients.

Ashish Savla, owner of 50-truck strong Pravin Road­ways in Mum­bai, In­dia, said diesel ac­counts for more than half of his com­pany’s ex­penses, and that it was dif­fi­cult to pass rising ex­penses on to cus­tomers.

“Diesel prices have jumped 16 per cent in a year, but I couldn’t raise freight charges by 5 per cent. If I charge more, clients will use cheaper rail­roads,” Savla said.

Anil Mit­tal, who runs a con­tainer lo­gis­tics com­pany and is a mem­ber of Bom­bay Goods Trans­port As­so­ci­a­tion, said his firm was “al­ready oper­at­ing at wafer-thin mar­gins” be­fore prices rose.

The “diesel price hike has hit our busi­ness hard,” he said. Many small trans­port firms like his “are strug­gling to pay back bank loans they took to buy trucks.”

Given the eco­nomic costs and its reliance on im­ports, econ­o­mists say it is time for Asia to limit its ex­po­sure to oil. “It is very im­por­tant for Asia to re­duce its oil de­pen­dency and in­crease its en­ergy ef­fi­ciency... to pro­tect it­self from fu­ture oil shocks,” RBC Cap­i­tal Mar­kets said.

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