Crude awakening

Asia/oil: Asian markets reeled in response to oil’s latest surge. Investors are right to worry. Asia is a glutton for energy and most of its crude still comes from the Middle East. While the guessing game over where Arab protests might spread has focused on the immediate vicinity, oil is an economic transmission mechanism that bears close attention.

Asia’s rapid growth has made it more, not less, dependent on Arab oil. Efforts to promote cleaner and closer sources of energy, such as natural gas, hydroelectric and nuclear power have not dented the region’s thirst for crude. Japan and South Korea import 80 per cent of their energy, according to the World Bank. Abundant coal enables China and India to import less, but their oil consumption is rising fast. Oil accounts for 30 per cent of Asia’s energy and more than half of that oil comes from the Middle East, according to BP.

Low stockpiles leave Asia vulnerable to price spikes and shortages. Only a few countries have amassed sizeable oil reserves. China has been building a strategic reserve, but at the end of 2010 had only enough for 40 days of consumption. The International Energy Agency recommends countries have at least 90.

Developing Asia’s growth is still highly energy intensive. Advanced countries like Japan can get more than $8 of GDP from every kilogram of oil they burn; China gets only about $3.75. Higher oil prices tend to sap economic growth.

Rising fuel prices are political dynamite in Asia as elsewhere. It was fuel price hikes that touched off the riots in 1998 that toppled former Indonesian dictator Suharto.

Subsidies in China, India and Indonesia will mute the impact of higher oil prices on the poor, who would otherwise bear the brunt of costlier cooking gas and fertiliser. But maintaining subsidies as oil climbs will burn a growing hole in budgets, consuming funds that otherwise would be spent for growth. And keeping fuel prices artificially low only encourages consumption.

Oil’s ascent stands to crimp growth and heighten tensions in a region already grappling with inflation. For Asia, West Asian turbulence comes at a precarious moment.