With $100 Oil, How Are Asian Countries Responding?
Although demand from the OECD has fallen somewhat, likely on higher prices and growth slowing – oil demand is down 1% in the US in the last year by some measures- demand from emerging markets, especially in Asia is holding – and is likely to rise in the future. Japan is a notable exception. Most emerging Asian economies have responded with two prongs: Cushion the costs of rising prices using subsidies, and seek out new supplies. Price controls have cushioned the price shocks and limited political costs of inflation, which has been driven more by rising food and other input costs but at high fiscal costs. In energy markets as in a number of other needed resources, most Asian countries are price takers – and those prices have been rising (witness the newly negotiated iron ore prices) . With demand rising and limited resource endowments, the energy sector is seen as a good area of investment and diversification for their savings.
Price Controls: Despite some adjustments (the raising of the base price), price controls in emerging Asia persist as countries fear the political costs of inflation. To a large extent this is also a measure of the persistent state control of the energy sector. Controls reduce the cost passed on to consumers but require governments to cover the differential either by subsidize energy companies or require companies to cross subsidize downstream activity from more lucrative upstream activity. these price control systems vary. The Malaysian and Indonesian governments bear the full cost (via EIU). In both India and China compensation is at the discretion of the government (see Fitch PDF). While countries have been reluctant to raise prices, some have cut import duties in an effort to limit them. However it is counted – and whatever the political costs of removing them, subsidies bring a considerable fiscal burden.
Other responses focus more on locking in resources or finding ways to buy into this aspect of the commodity markets, the following might be part of a new great game, perhaps. The following approaches have been used:
National oil companies: Although the state backed oil companies of China (and India) attract the most attention, particularly as they strike deals with other NOCs, many Asian countries sponsor Oil companies to access supplies and benefit from long-term global demand. To date, though in terms of access to foreign oil reserves and effect on the global markets, Asian NOCs are still comparative small players though that may be changing.
Prepaying for Energy Resources: JBIC (Japan) loan to Abu Dhabi national oil company (ADNOC) will be repaid with proceeds from oil sales to Japanese companies like Cosmo Oil.
Government-sponsored energy investment: funds sourced from pensions, national oil companies and other government sources are being deployed towards energy resources –trying to redress the absorptive capacities for energy – and a perception that the financial rewards will continue to be there. Taiwan, Korean entities have allocated such funds or plan to co-invest with national oil companies abroad and the proposed India sovereign fund may borrow from reserves to invest in energy. The latter though is subject to much debate domestically and is only one of the plans being discussed surrounding India’s assets. But are they now, going in at a high?
Energy Reserves: Setting up strategic reserves either at home or in key suppliers. This, though is really only a solution to short-term disruptions and with oil prices this high, it doesn’t seem a good time to stockpile, though both India and China have begun centralizing their reserves. China’s snow storm demonstrates however, the limitations to such reserves. only limited coal reserves were available, only for a few days.
Shift to alternate energy sources: Soaring oil prices have made coal more attractive. In fact, rising demand for coal has contributed to its tight supply/demand balance. there are supply and transport limitations (as illustrated by the effect of Chinese and Australian weather on the coal market) upon shifting within the energy mix. Despite some natural gas use, Asia accounts for 13.5% of demand globally, increasing LNG production would be difficult – because of costs, rising domestic demand in Indonesia and other factors. And use of of alternative fuels has so far been limited.
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