- The Washington Times - Friday, September 22, 2000

TOKYO Rising oil prices are among the "good reasons to worry" about Asia's economic recovery, say many analysts.

Manu Baskaran, the usually upbeat research director of SG Securities, told the Asian Wall Street Journal on the sidelines of the recent World Economic Forum in Melbourne, Australia, that "the risks are rising" that any sharp economic pressures will be felt in a slowdown but not one of crisis proportions in a regional recovery that has gathered some momentum.

Mr. Baskaran pointed to a continued rise in oil prices, concern over Asia's banking comeback, volatile Internet share prices and fluctuating interest rates as potential sources of sharp economic pressures.

The rise in petroleum prices over recent weeks has stoked inflation concerns around the world, and Asia is no exception.

The International Monetary Fund's latest World Economic Outlook, due out next week, expects oil prices to continue to rise in coming months, the German edition of the Financial Times reported this week after obtaining a copy.

As winter approaches, the IMF expects oil prices to rise as demand for fuel oil increases amid low reserves and strong growth in the global economy, the newspaper said. Crude oil and heating oil reserves were not filled to the usual extent during the summer because of high prices.

Reserves low, needs rise

This will increase pressure on existing reserves during the winter, Financial Times Deutschland said. In the short term, extra requirements would rise to 5 million barrels of crude oil per day, while the members of the Organization of the Petroleum Exporting Countries (OPEC) plan to pump 3 million extra barrels a day.

Japanese Finance Minister Kiichi Miyazawa said on Wednesday that rising oil prices and the weak euro will be discussed when finance ministers and central bank chiefs of the Group of Seven industrial nations meet in Prague this weekend.

He hinted that the G-7 could take concerted measures, like asking petroleum exporting countries to sell more oil.

Minister of International Trade and Industry Takeo Hiranuma also expressed willingness to cooperate with the other G-7 nations in dealing with the oil issue, telling a news conference that measures such as saving energy and diversifying sources could be taken.

Added Mr. Miyazawa: "We need to exchange views on the oil problem. [Japan] will soon be affected by the economic slowdown in Southeast Asian countries as they face the impact of higher oil prices."

Asian surpluses dwindle

Higher oil prices could harm Asian trade across the board. Trade surpluses are dwindling in Thailand, South Korea and Taiwan. Thailand which has continued to pay off its foreign-currency-denominated debts has to avoid a decline in exports.

Thai government officials are carefully watching the movement of crude-oil prices, since a continued rise would cause the Thai baht to decline.

The reasons for Asia's oil dependence are well-known and straightforward.

While Asia was rapidly industrializing over the past three decades and consumers were moving from bicycles and motor scooters to automobiles the developed world was switching to alternative energy sources such as nuclear power and natural gas, and to more fuel-efficient cars.

But in much of Asia, some countries actually subsidized the politically sensitive cost of energy, and scant progress has been made in finding alternatives to oil.

"When Asia was making its rapid leap forward, oil prices were getting cheaper and cheaper," said Geoffrey Barker, chief economist for HSBC Holdings. "It wasn't a policy priority."

Japan, China are exceptions

The exceptions are Japan and China, according to Mr. Barker. Jolted by the autumn "oil shocks" of 1973 and 1979, Japan made an effort to reduce its dependence on imported oil. Today, he said, it consumes half as much oil for each dollar of economic output than it did 30 years ago.

China, on the other hand, has long used domestically available coal, reducing its dependence on oil, though polluting its air in the process.

For the rest of Asia, high oil prices have direct and indirect impacts. First, they raise the import bills of most Asian economies except Indonesia, Malaysia and Brunei, which are net petroleum exporters.

High oil prices are likely to raise Asia's collective import bill by about $20 billion in 2001, according to a Merrill Lynch report. The same report says the oil shocks of the 1970s cut Asia's economic growth by half. This time, it might trim just half a percentage point from regional growth next year.

The effect plainly won't be as severe as in the 1970s.

The entire region does not view the rise in crude oil prices with trepidation, however. Oil exporters like Indonesia, Malaysia and Brunei expect to boost revenues.

Analysts agree that one important regional buffer is China, which appears, according to official data, to be enjoying a stronger economic recovery than expected from the 1997 Asian downturn and which is more reliant on coal than on high-priced oil.

'Not pushing panic button'

"No one in Japan is pushing the panic button on oil just yet," said Tosiro Ueda, editor of Nippon Oil Newsletter. "Japan's own economic uncertainty and the region's pace of comeback from the doldrums are more immediate concerns."

Naoya Minami, president of Tokyo Electric Power Co., said Wednesday: "The current high prices in oil will not affect our industry for a while. The industry here is even planning to cut prices."

Major Japanese power companies have announced they will lower electricity bills by about 5 percent to be competitive after the market is deregulated.

But according to Yotaro Kobayashi, chairman of Fuji Xerox and president of the Japan Association of Corporate Executives, "Possible inflation in the U.S. caused by the current soaring oil prices could affect the Japanese economy as a result of a drastic decline in the U.S. stock market."

Bank of Japan Governor Masaru Hayami said last week that recent rises in world oil prices to 10-year highs have yet to affect other costs in Japan. "Right now, there is no impact on prices in Japan," Mr. Hayami said.

But from another perspective, rising oil prices already have eaten into Japan's current-account surplus and helped to drag it down by 17.6 percent year-on-year in July, the Finance Ministry said. This was the third consecutive monthly fall.

Shift to nuclear power

Analysts have said that Japan, a major oil importer, is not as vulnerable to oil-price shocks as it once was because industry has diversified its energy sources, mainly into nuclear power and natural gas.

On a contradictory note, the Japan Energy Economic Institute issued a research result on Sept. 13 warning that oil prices could plunge because of oversupply. The report said world oil supply exceeded 1 million barrels daily from July through September this year.

"U.S. uncertain management of its supplies is a major problem," the institute said.

One of reasons for the recent oil price rise was the lower U.S. oil inventory heading into the winter heating season, analysts here said.

Meanwhile, Keiichiro Okabe, head of the Japan Oil Industry Association, termed OPEC's decision to boost daily output as "positive," though he noted that the increase is not enough to drive prices of petroleum products back to their former levels.

The biggest threat to much of the region, many specialists say, would be if oil prices rose even further and stayed high.

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