Cheap oil: Asia's winners and losers

Attendant fills up vehicles at a Jakarta petrol station 02/02/2015 Image copyright AFP
Image caption Falling oil prices have been blamed for stagnating economic growth in some countries

The price of crude oil has halved since June 2014. What does this mean for Asia? BBC World Service economics correspondent Andrew Walker tackles some of the key questions.

Who has benefited?

Mainly those countries that need to import oil, that use more of it than they can produce themselves. The probable gainers include India, South Korea, Thailand and - up to a point - China and Japan.

South Korea is a striking case. It imports 97% of its energy needs and is the world's ninth biggest user of oil.


The reasons in short are:

  • lower inflation
  • lower costs for business
  • higher spending power for households
  • improved government finances
  • central banks can keep interest rates lower
  • smaller deficits in a country's international payments

Lower inflation

Cheaper oil means lower overall inflation. There's the direct impact of the price of fuel and, in time, the prices of other goods may be affected too.

Petrochemicals - fertilisers, plastics and much more - use crude oil as the basic raw material. The price paid by consumers for most goods includes an element for transport costs, which are lower when oil is cheaper.

That is very welcome for countries where inflation has been a problem, India for example. It was already on the way down before the oil price rout, but now, at less than 6%, it's within the central bank's target range.

That's an improvement over the IMF's expectations a year or so ago, that inflation would remain close to double digits.

Lower interest rates can be a benefit that flows from the reduced inflationary pressure. A recent cut in rates by the Reserve Bank of India was partly a response to cheaper oil.

Government finances

India is also an example of a country whose government finances have been helped by the oil price decline. Like many developing nations, India has a long history of subsidising fuel.

The IMF and the World Bank have almost as long a history of encouraging reform, to reduce the cost to government budgets and to provide incentives for energy efficiency.

India has taken the opportunity both to cut subsidies and to raise taxes on energy. Indonesia has also cut energy subsidies.

International financial position

Both these countries also benefit from reduced strains on their international financial position.

They have large "current account deficits" - a term that covers trade in goods and services and some financial transfers.

Image copyright Reuters
Image caption Consumer inflation hit a five-year low in China in January

Both were in a group that came to be known as the "fragile five" in 2013 at a time when developments in US financial markets made emerging economies with large current account deficits look susceptible to destabilising capital flight.

That episode is over though there could be more in the future - perhaps when the US Federal Reserve starts to raise interest rates, which could be later this year. Cheaper oil is reducing those deficits and making the countries concerned less at risk in future.

There's a third partly Asian member of this group - Turkey - which is also likely to benefit from the lower oil prices.


The benefit to consumer spending comes from reduced fuel costs. They can spend more on other things. Some of that spending is likely to go on imported goods, but much will benefit local businesses.

Capital Economics, a London consultancy, says the impact on economic growth will depend on whether consumers decide to spend or save the windfall. It says households with high debts "may be tempted to use the boost to their incomes to pay down debt rather than increase their spending".

Asian countries with high levels of household debt include Malaysia, Thailand and South Korea, according to Capital Economics.

Could the fall help rescue China from its growing problems?

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A slowdown in China's economic growth has been widely expected for years. It's a rather longer term development than the recent decline in oil prices.

China's economic performance was heavily dependent on exports and investment. (Important though investment is for any economy, it can be too high, if it's financed by excessive borrowing and leads to a boom in marginal, uneconomic projects.)

A shift towards economic growth more based on supplying Chinese consumers is seen as inevitable and desirable, regardless of the short-term gyrations in the price of oil.

Having said that, there is an impact. There is the benefit already described to consumers and the reduction in business costs. The downside is China's closeness to deflation or a fall in the overall price level (more on that below).

Who has lost out - and why?

In short, the big oil producers - most of them in the western part of Asia.

The oil powers on the southern shore of the Gulf have, for the most part, government budgets that need a much higher oil price to balance the books. There are estimates from Deutsche Bank for what they call the break-even oil price for those nations. All are well above current prices, and for Saudi Arabia it is getting on for double.

Image copyright AP
Image caption Malaysia, a major oil producer, is South East Asia's third-largest economy

But then these are countries which have large financial cushions to absorb the impact of lower prices for a long time. That's not true of Iran. Cheaper oil has aggravated the impact of sanctions and persistent economic weakness.

Further east, Malaysia is the major oil exporter, though the gap between production and what it uses at home has narrowed in recent years. Energy accounts for 20% of the country's economy, so cheaper oil is a problem.

Some other Asian countries do produce significant amounts of crude oil. But for most, it's not enough to cover their own needs - less than half in the case of China, about a quarter for India. So their oil companies may be hit but the economy is likely to benefit.

Although China and Japan are net importers of oil, there is a factor that weakens the beneficial impact. That is the problem of deflation or falling overall price levels. Japan has had recurrent episodes since the mid-1990s and China is not far from it now.

There is some debate about whether moderate deflation really is such a disaster, especially if cheaper energy imports are the driving factor. But the mainstream view is that it is best avoided. For some countries, cheaper oil does mean an increased chance of deflation.

What are the global implications of Asia's economic problems as the year progresses?

China is the big one for the global outlook. Chinese industry is a major customer for raw materials from many countries - Australia and Indonesia for coal, Chile and Zambia for copper, Angola and the Gulf for oil, and Brazil for soya beans to name just a handful.

China is also an important market for German producers of industrial machinery and motor vehicles. That partly reflects China's investment boom, so the shift there to a new source of future economic growth could take the shine off that market for German industry.

If cheaper oil moderates the slowdown in China it would also mitigate the impact on China's suppliers.