Oil at $100/bbl aggravates the pain of Asia’s acute oil addiction

There’s always a price to pay when you don’t have an immediate alternative to cure your addiction – and for Asian oil importers, it’s no different.

Asia’s major oil importers depend on imports for 70-100% of their needs. With oil prices high – ICE Brent crude topped $100/bbl in Asian trading on February 24 when Russian President Vladimir Putin announced military operations in Ukraine – the pain is not only felt by refiners and consumers. It is also a burden that forces governments to change their fiscal policies to cushion the blow of massive currency outflows.

Strong statistics tell the story of overreliance on Asia, home to some of the most prized customers of Middle Eastern and Latin American oil producers. South Korea buys 100% of its oil needs from abroad, India around 85%, China around 70% and Japan around 99.7%.

“High oil prices will dampen demand and undermine the fragile economic recovery if they continue to rise,” said Lim Jit Yang, oil markets adviser at S&P Global Platts Analytics.

Take the example of India: for every 10% increase in crude oil prices, the wholesale price index increases by 0.9% to 1% and the consumer price index by 0.4 % to 0.6%. A 10% rise in oil prices increases India’s current account deficit by almost $15 billion, or 0.4% of its GDP, leading to a depreciation of the rupee.

“For oil marketing companies, higher crude prices lead to higher borrowing for working capital and higher interest rates. This impacts profit margins for oil marketing companies,” Gurmeet Singh, chief executive of the Indian Petroleum Industry Federation, told S&P Global Platts.

To fight

As economies struggle, crude oil’s dramatic sprint towards $100/bbl is prompting Asian importers to rethink their fiscal roadmap.

Japan, for example, decided to grant subsidies to refiners and importers of petroleum products in the current quarter in an attempt to curb rising prices. South Korea cut taxes on automotive fuels by up to 20% for six months from November.

“While we expect PPI inflation to have peaked in the fourth quarter of 2021, it is expected to remain elevated, at least in the first half of 2022,” Oxford Economics said in a recent research note. ‘Asia. “In addition, risks are on the rise due to high oil prices and the threat of further supply chain issues from omicron outbreaks.”

Despite rising prices, Platts Analytics expects Asian oil demand to rise by 1.5 million b/d year-on-year in 2022, from 1.2 million b/d in 2021.

But as prices rise, the impact of expensive oil on demand will vary from Asian country to Asian country and will depend on how much supply they hold – either in strategic oil reserves or in national production.

According to Platts Analytics, among the big four Asian oil-consuming countries, China is well positioned as it has substantial domestic production, coupled with relatively high SPR levels. China’s relatively low inflation rate means it has room to boost economic growth if needed, which it expects to be 4.9% for 2022, with demand for oil growing by 560,000 bpd.

“India, on the other hand, is more vulnerable as it is heavily dependent on crude imports and its SPR is relatively low compared to other major Asian consumer countries. be a source of concern for the economy, although growth is expected to be strong at 8% for 2022,” said Lim of Platts Analytics.

But as geopolitical concerns rise over rising tensions between Russia and Ukraine, major oil importers are hoping for a favorable US-Iranian nuclear deal, which would open up flows from the OPEC producer, ease the tense situation of supply and cool world oil prices. .

wake up call

The current price hike may also have served as a wake-up call for Asia to reduce its overreliance on oil and seek other alternatives.

Refiners in the region are increasingly pursuing strategies that would help them stay relevant even as the energy landscape changes dramatically, while helping to absorb the shock of oil price volatility.

As many refiners in the region aim to maximize diesel and gasoline production, they are increasingly expanding their product line by improving efficiency and installing petrochemical production units, which could support growth. refiners in different scenarios.

“Hard hit by soaring oil prices, refiners have also aggressively sought to diversify into clean energy projects. Energy players are looking to keep their profitable core business while capturing some of the clean sources emerging opportunities in low-carbon markets, including renewables, electricity, bioenergy, next-generation mobility, energy services and hydrogen,” said FIPI’s Singh.

And while $100/bbl sounds daunting, not everyone is unhappy with high oil prices. It represents an opportunity for the upstream sector of the region.

“The Asian market is the main driver of global energy dynamics; therefore, with a share of around 40% of global energy consumption, mainly centered on oil and gas, I see this as a prolific opportunity for the Asian E&P sector to rebound strongly and have significant activity this year, which is exciting,” Pankaj Kalra, CEO of Essar Exploration and Production, told Platts.

Vibhuti Garg, India’s chief energy economist at the Institute of Energy Economics and Financial Analysis, said $100/bbl oil would accelerate the push towards less renewable energy alternatives. dear. These alternatives might just ease Asia’s suffering from high oil import bills.

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