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 $1tn this year, about twice what it was during the market lull of 2015/2016.Oil prices have gained 20% 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% of the 100mn 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% of output.
US bank Morgan Stanley said this week that diesel use contributes 10-20% to cash costs for miners, while oil contributes from 4% to 50% 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 9.6mn barrels per day in April. That’s almost 10% of global consumption.
At current prices, this amounts to a Chinese oil import bill of $768mn per day, $23bn per month – a whopping $280bn 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 subsidised, 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% of an average person’s salary, according to Reuters research and figures from statistics portal Numbeo. That compares to just 1-2% in wealthy countries like Japan or Australia. 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% in a year, but I couldn’t raise freight charges by 5%. If I charge more, clients will use cheaper railroads,” Savla said. Anil Mittal, who runs a container logistics company and is a member of Mumbai Goods Transport Association, said his firm was “already operating at wafer-thin margins” before prices rose.
Sources and photo-credits: Gulf Times