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June 23, 2008 Source: www.AsiaEcon.org The price of crude oil hit a new high of $140 dollars a barrel on New York mercantile this week. Whle Americans are affected by the daily damage of higher gas prices, industry around the world is feeling a significantly greater impact.


Global Oil Crisis: What it means to the Asian Market

23 Jun 2008

Source:  www.AsiaEcon.org

The price of crude oil hit a new high of almost $140 dollars a barrel on the New York mercantile this week. While Americans are affected by the daily damage of higher gas prices, industry around the world is feeling a significantly greater impact. In developing Asia, which consumes about 17 million barrels of oil a day (worth about US $2.38 billion at current market price), both businesses and workers are experiencing the strain of higher prices and loss of profits. In the smaller regions of Southern Asia, many have recently been driven to massive protest in order to protect their livelihoods.

“The market is extremely volatile at the moment,” says oil industry expert John Hall. “Any disruption to supply is immediately jumped on.” Much of the blame for the recent surge in oil prices falls on the weak US dollar (by which future markets trade oil). Other blame is placed on the sub-prime mortgage crisis, OPEC and terrorism in the Middle East. As fear and prices increase, a multiplier effect through several different markets occurs.

While making its way to industrial and consumer use, suppliers and governments must in turn pay for the inflated costs of fuel. In China, the country’s largest oil producer, Petro China Co., is facing heavy losses. “We predict the company’s net profit will drop 45 percent in the first half of the year,” said Liu Gu, an analyst with Guotai Jun’an Securities in Shenzhen, early in 2008. “If the year-long average crude oil price stands at $105 per barrel, we estimate PetroChina will pay over 120 billion yuan in windfall taxes.” With barrel prices now far beyond these predictions, major Chinese oil companies are facing unimaginable taxes.

Petro-China plans to create 60 billion yuan ($8.67 billion) in corporate bonds to reduce debt and finance better methods of natural gas and oil production. “The company needs large amounts of capital for project investments during the 11th Five-Year Plan (2006-10), as well as to cover rising windfall taxes caused by soaring crude prices and government caps on domestic refined oil product prices,” according to the statement.

Refiners too are experiencing falls in profit. Sinopec, Asia’s largest refiner, saw a loss of over 20 billion yuan in the first quarter.

Governments have created massive oil subsidies in the past years to maintain large volumes of importation. Malaysia’s oil subsidies, before they were recently abandoned, would have reached seven percent of the country’s GDP this year, and cost about a third of the government’s total budget. In 2008, Vietnam spent US $38 billion on imports, more than it did in all of 2007, tripling its trade deficit. Japan is one of the world’s most oil efficient countries. Their government does not believe in subsidies, to which they attribute much of the increase in oil prices because subsidies boost demand.

But the problems extend beyond even governments, producers and consumers. Those stuck in the middle, the low- and middle-income workers, are making their voices heard as oil and food prices have become unacceptably high, even with subsidies. In South Korea, truckers and construction workers have spent the past few weeks on strike, calling for higher wages and lower fuel prices. Construction workers were joined by some 13,000 truckers in their protest this week, disrupting operations at major sea ports. While the strike still has not been resolved, workers have already caused US $2.3 billion in losses for exporters and US $2.43 billion for importers. The Korean government must respond quickly, or the strike could cause irreversible damage to the economy.

In other South Asian countries, more workers are protesting and actually receiving government attention. Thai truckers recently postponed a blockade of the capital Bangkok this week, after the government resolved to increase subsidies for fuel costs. In Malaysia, the government said it was considering rationing petrol and diesel at subsidized rates to avoid worker disruption.

The rotating EU president and the energy minister of Qatar have both warned the oil price could exceed $200 a barrel if the US dollar continues to drop. At such a price per barrel, the stability of our global economy may be in jeopardy.

So what is an Asian country to do at the hands and whims of an oil market dominated by Western powers? Build its own oil market! In the East China Sea, Japanese and Chinese governments came together this week to coordinate drilling the field ensemble, which holds a suspected 92 million barrels of oil. This location is one of several Japan and China will begin working on in the near future in an attempt to discover more Asian oil.

In Hong Kong, plans to open a self sustaining crude oil futures market are underway. This plan “will help Asian oil importers hedge price risks” Financial Secretary John Tsang says. China currently uses Dubai futures for bargaining and decision making. A futures market in Hong Kong would create some autonomy, and allow oil to be traded “in a fair and transparent manner in the Asian Time Zone”. Singapore, which is currently Asia’s largest oil trading center, is now handling over $300 billion worth of trade annually.

The extent to which these new measures will help Asia is a matter of time and determination. If governments are unable to continue providing subsidies and finding new means for the importation of cheaper products, global consumers, in particular, Western countries, will soon feel the effects of Asia’s debt. The prices of the goods they produce will undoubtedly rise in order to compensate, and the multiplier effect will be thrown into a chaotic uprise. At that point, perhaps the blame game and oil frenzy will finally subside and international business will be forced to bring markets back into some semblance of stability.

Source: www.AsiaEcon.org 

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