Asian oil demand crisis exaggerated?

Oil demand in Asia is not about to collapse because of the region's financial turmoil. Experience from previous crises has shown that, in a downturn, oil and energy consumption will not fall as much as economic growth. This is the view of two prominent energy economists, although some Asian oil officials disagree, saying that, at the micro level, regional demand has been badly hit.

June 15, 1998

4 min read

This is the view of two prominent energy economists, although some Asian oil officials disagree, saying that, at the micro level, regional demand has been badly hit.

Fereidun Fesharaki, director of the Energy Program at the East-West Center, Honolulu, said, at the Third Asia Oil & Gas Conference in Kuala Lumpur early this month, that the drop in oil demand in Asia has been highly exaggerated. Gasoline demand in South Korea and the Philippines remains up, he said, while oil demand in Malaysia has increased 3-4%.

Fesharaki added that it was not known when the dust from the Asian crisis would finally settle or what would happen to Indonesia, but he advised against overreacting.

British Petroleum Co. plc chief economist Peter Davies agreed, saying that, as the initial financial problems were addressed, energy consumption weakness may not be quite as sharp as widely believed, at least once the economic growth prospects were clearer. He said this had been the experience of Mexico and Argentina in the 1990s and Korea in 1980.

The fundamental transitions in Central Europe and the former Soviet Union also showed that oil and energy consumption do not decline as much as economic growth in a downturn. Then, as economic growth recovers and returns towards trend, the recovery of energy consumption is initially less than that of GDP, he added.

Notwithstanding these comments, conference delegates recognized that 1998 was going to be a tough year.

Fesharaki said the industry faced the twin challenges of low oil prices and the Asian crisis.

The oil business is fundamentally changing, he said, and some of the old ways of doing business are not working anymore. People need to be more cost-efficient.

For instance, he said the industry has to recognize the fact that oil prices in the range of $13-16/bbl are here to stay for the next 3-5 years. Businesses have to adjust and work with these lower prices.

Oil refineries would have to behave more rationally and cut refinery crude runs, and the more efficient refiners would do better. There would be consolidation and mergers and different ways of cutting costs. But the main idea is to win back investors' confidence in the region, he stressed.

Indonesian developments

Outside the conference, some industry observers were zeroing in on the move by Indonesia's state oil and gas company Pertamina to resume direct oil trading next month, after having to do so previously through companies such as Perta and Permindo, in which the sons of former Indonesian president Suharto figured prominently.

Singapore's oil trade with Indonesia is estimated to account for about 10% of the total bilateral trade. Pertamina's resumption of direct oil trading will mean that this is likely to be carried out under the $3 billion bilateral trade finance guarantee scheme that Singapore is discussing with Indonesia, said sources.

While oil officials had apparently provided some input to the Singapore Trade Development Board on oil trade with Indonesia about a month ago, this was before the latest Pertamina plan. They said they understood that the financing guarantee scheme had still not been finalized yet.

Meanwhile, in an earlier report, Pertamina had identified at least 120 Suharto-linked companies among its contractors and suppliers. This analysis followed an order from the new government to review all contracts aimed at rooting out those gained through favors.

Pertamina Pres. Sugianto was quoted as saying that the number of companies could grow, and added that the final list would be sent to Mines and Energy Minister Kuntoro Mangkusubroto within days.

In issuing the order, the minister said the contracts review was aimed at improving Pertamina's efficiency. He has said foreign companies that formed partnerships with Suharto-linked companies also would face a review of their status.

Critics have long accused Pertamina of inefficiency and of rampant collusion and corruption in its award of contracts. Pertamina has already said it will review the exclusive oil and fuel trading contracts awarded to two of its affiliates, in which several of Suharto's children are shareholders.