Companies and governments to bear brunt of soaring oil
Higher oil prices will hit Asia's oil-importing economies hard but it will be governments and companies that bear the brunt of the costs while ordinary consumers escape relatively unscathed.
When the Asian Development Bank published its yearly outlook in April, chief economist Ifzal Ali warned that every US$10 increase in the price of a barrel of oil would knock 0.8 percentage point off the region's economic growth rates.
At the time, the bank reckoned developing Asia's gross domestic product would expand by a robust 6.5 per cent this year. But when they made that forecast, the bank's economists were assuming an average price for Brent crude of just US$41 a barrel for the year.
Three months later, the benchmark blend is trading just short of US$60 a barrel, and some traders are anticipating prices as high as US$80 a barrel for the lighter varieties of crude by the end of the year.
Even if the oil price were to stay at current levels, the increase in energy costs would be enough to hold back Hong Kong's growth rate to 4.7 per cent this year and just 2.9 per cent next.
The impact on other oil-importing nations in Asia would be even more severe. Higher oil bills are already hurting in Korea, where the current account dipped into deficit in April, and Thailand, where the authorities are predicting a current account deficit of US$3 billion this year, compared with a US$7 billion surplus last year.
The increase will also hurt the region's fast-developing giants, India and China. Although Japan is also a major oil importer, its economy is highly energy-efficient. China, in contrast, consumes three times as much oil and gas relative to the size of its economy, and India even more.
The good news is that with more than US$2.5 trillion in foreign exchange reserves, Asian countries will have no difficulty paying their swollen import bills. Even better, depending on your point of view, is that governments and companies will be forced to carry much of the burden of higher oil prices.
In countries around the region, including India, Malaysia, Thailand and Indonesia, governments subsidise energy costs, shielding local people from the direct impact of higher prices.
Although that helps keep a lid on inflation rates, it can severely damage government finances. Last year the cost of Indonesia's fuel subsidies rose fourfold to nearly US$7 billion, or nearly 3 per cent of GDP.
Even though Jakarta raised most fuel costs by 29 per cent in February, prices are still subsidised by between 40 and 80 per cent and economists warn the government's subsidy bill could soar again this year, potentially prompting a fiscal crisis.
Even where there are no fuel subsidies, such as in Hong Kong, individuals' pockets will not be too badly hit. Although consumers will have to absorb the direct impact of higher oil prices, by paying more at the petrol pumps, the indirect effects will be limited.
With competition fierce, capacity plentiful, and the business cycle beginning to head down, corporations have almost no power to pass energy costs on to consumers through higher retail prices. They will simply have to absorb higher oil prices and accept lower profit margins.
That is good news for consumers but could be a potential disaster for equity investors.