Asian crisis dampened by falling oil prices

• Currency, oil price declines [74,705 bytes]
• Effects of oil price on demand in Asian 'crisis' nations [98,360 bytes]

Historically, Asian economies in the aggregate have been relatively insensitive to changes in oil prices, but the recent fall in currency values in some key Asian countries is partly counterbalancing the effects of falling oil prices.

This is the view expressed by David Isaak and Fereidun Fesharaki in a recent report published by the East-West Center, Honolulu.

"In the Asia-Pacific region," said Isaak and Fesharaki, "the drop in oil prices is inextricably tangled with the financial crisis affecting Indonesia, South Korea, Thailand, Malaysia, and, to a lesser extent, Japan and the Philippines."

Imports spur change

The change in oil price effects on Asian economies has occurred because many countries in the region have become important oil importers.

"Oil imports make up an important component of the trade balance, even in the region's largest oil producers," said the report. "The simple rules about who wins and who loses when oil prices change no longer apply in Asia, in a strict sense."

The region's financial crisis has cut the long-term outlook for Asian demand growth by about 1.1 million b/d (about 700,000 b/d in the short term), say the authors. "If not for the low oil prices during the onset of the crisisellipsethe effect might have been more severe, with an additional 1-2 million b/d cut from longer-term growth.

"In addition, higher oil prices could have resulted in a prolonged absolute decline in demand in the six crisis countries-a fall in demand large enough to lead to a few years of negative growth for the region as a whole."

Price declines

Isaak and Fesharaki believe that, while it is still true that economic growth has a dominant effect on Asian oil demand, "ellipsewhen currencies weaken by 50% and psychology turns pessimistic, price effects can become strong."

For many of what Isaak and Fesharaki call the region's "crisis countries" (Indonesia, Japan, Malaysia, Philippines, South Korea, and Thailand), the decline in the value of their currencies was commensurate with the decline in oil prices, in percentage terms.

"Although these changes don't really 'cancel out,' the effects of the currency crisis on oil prices in most of these countries has been greatly muted by the simultaneous fall in the world price of oil," said the authors.

Country snapshots

In South Korea, prices have risen, but the increase has been lower for gasoline than for other products. This, says the authors, reflects the realignment of South Korea's "nonmarket-determined prices."

Indonesia's product prices have never been linked to market forces, and an attempt to raise them was largely rescinded after the recent Jakarta riots. Because Indonesia exports large quantities of middle distillates, the decline in world oil prices has cut oil the country's oil revenues, but it also has cut Pertamina's import expenditures.

Thailand's price increases have been more in line with its currency devaluation, but much less than they would have been if oil prices had remained high. Malaysia and the Philippines have seen little net change in prices.

Japan has seen about a 10% drop in consumer oil prices this year. But Isaak and Fesharaki explained, "ellipsethis merely continues a trend of sagging prices following Japanese oil industry deregulation in 1996."

Imports

The Asia-Pacific region's oil demand dwarfs its output, despite the fact that there are several important producing countries there. Demand is about 19 million b/d now vs. production of only about 7.4 million b/d.

Regional oil production has increased steadily since the early 1980s, but this has been outweighed by far by rising demand since 1985. Even if regional oil output continues to grow, the increase will be small relative to demand growth.

Unlike Middle East producers, say the authors, even the major Asia-Pacific exporters are also major importers.

"The traditional distinction between the 'oil importers' and the 'oil exporters' has begun to break down in Asia. Some of the big oil exporters are net oil importers; others are seeing imports gain ground."

Australia and China are already net oil importers. And, while Malaysia and Indonesia both have substantial net trade surpluses in oil, they are seeing vigorous demand growth.

Demand outlook

While oil prices have had little effect on demand outside the six crisis countries, the effects in those countries has been dramatic.

The East-West Center predicts South Korean oil demand in 2000 to be at 2-8% below the 1997 level. In Indonesia, demand is expected to be about 100,000 b/d less in 1998 than in 1997, and as much as 12% lower in 2000.

The center predicts Thailand's oil demand will be essentially flat through this year, and up slightly in 2000. And very slow growth is predicted for Malaysia through 2000.

"In Malaysia, financial problems may lead to higher-than-expected oil growth in the long term, if gas utilization investments are slowed."

Meanwhile, Japan's demand outlook is for very slow growth, China's demand will be up only about 5% this year (slow for that country), and India's demand seems to be slowing more than expected, said the authors.

Forecast trimmed

The East-West Center has cut its base-case demand projections by about 700,000 b/d in the near term, and by about 1.1 million b/d in the longer term (see graph, p. 38).

The graph also shows the center's demand projections if prices had remained steady: "The depressing effects on demand would have been much stronger-a cut from the precrisis forecast of 1-1.5 million b/d in the near term, and a cut of 2-3 million b/d in the longer term," said the authors.

"Thus, lower oil prices not only helped most of the Asian economies cope better with the financial crisis; they also helped to prevent a major amplification of the surpluses in the oil market, both upstream and downstream.

"We do not subscribe to the notion that the Asian financial crisis caused the oil price decline, because the demand effects were in no way large enough to drive such a change. It is likely, though, that, if oil prices had not declined, slashes in Asian demand would have been much more severe-possibly severe enough to drag the prices down as an after-effect."

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