Crude oil hits US$80, Asia's bill to top US$1t a year

Motorists drives past an electronic board at a petrol station in Paranaque city, Metro Manila February 4, 2016. — Reuters pic
Motorists drives past an electronic board at a petrol station in Paranaque city, Metro Manila February 4, 2016. — Reuters pic

SINGAPORE, May 18 — The cost of Asia's growing thirst for oil will surpass US$1 trillion (RM3.96 trillion) this year, about twice as much as in 2015 and 2016, as oil prices touch US$80 per barrel and continental demand hits a record.

Oil prices have risen nearly 20 per cent since January and topped US$80 per barrel in intraday trading yesterday for the first time since 2014.

With the US dollar in which most oil is traded — strengthening, concerns are rising about the size of the hit to economies from higher energy prices, especially in import-reliant Asia. Surging costs could feed inflation and 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, and its share is 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 US$768 million per day, US$23 billion per month — a whopping US$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 subsidised, households and businesses in poorer countries are also more vulnerable to rising oil prices than they are in wealthier nations.

In developing economies such as 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 such as Japan or Australia.

Diesel and 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. — Reuters