Asia oil bill to top $1 trillion a year as crude hits $80

The price of fuel goes up effective midnight tonight.

A worker fills a car with diesel at a fuel station in Suva in April. Picture: FT. File

SINGAPORE/MUMBAI/MANILA  – The cost of Asia’s growing thirst for oil will surpass $1 trillion this year, about twice as much as in 2015 and 2016, as oil prices touch $80 per barrel and continental demand hits a record.

Oil prices have risen nearly 20 percent since January and topped $80 per barrel in intraday trading on Thursday LCOc1 for the first time since 2014. [O/R]

With the U.S. dollar .DXY – in which most oil is traded – strengthening, concerns are rising about the size of the hit to economies from higher energy prices, especially in import-reliant Asia. Surging costs could feed inflation and hurt both consumers and companies.

“Asia is most vulnerable to an oil price spike,” Canadian investment bank RBC Capital Markets warned in a note this month, after oil prices hit their highest since November 2014.

Asia-Pacific consumes more than 35 percent of the 100 million barrels of oil the world uses each day, according to industry data, and its share is steadily rising.

Asia is also the world’s smallest oil-producing region, accounting for less than 10 percent of output.

INFLATION, RISING COSTS

U.S. bank Morgan Stanley said this week that diesel use contributes 10-20 percent to cash costs for miners, while oil contributes from 4 percent to 50 percent to the cost of power generation, depending on a company’s or country’s fuel mix.

“A rising oil price therefore shifts the entire cost curve higher,” it said.

China is by far Asia’s – and the world’s – biggest importer of oil, ordering 9.6 million barrels per day in April. That’s almost 10 percent of global consumption.

At current prices, this amounts to a Chinese oil import bill of $768 million per day, $23 billion per month – a whopping $280 billion a year.

Other Asian countries are even more exposed to rising oil prices. Most damage will be done to countries like India and Vietnam, which not only rely heavily on imports, but also where national wealth is not yet large enough to absorb sudden increases in fuel costs.

“Poorer countries with limited borrowing capacity may face financing difficulty amid higher import bills,” RBC said.

Unless fuel is heavily subsidized, households and businesses in poorer countries are also more vulnerable to rising oil prices than they are in wealthier nations.

“A rising oil price therefore shifts the entire cost curve higher,” it said.

China is by far Asia’s – and the world’s – biggest importer of oil, ordering 9.6 million barrels per day in April. That’s almost 10 percent of global consumption.

At current prices, this amounts to a Chinese oil import bill of $768 million per day, $23 billion per month – a whopping $280 billion a year.

Other Asian countries are even more exposed to rising oil prices. Most damage will be done to countries like India and Vietnam, which not only rely heavily on imports, but also where national wealth is not yet large enough to absorb sudden increases in fuel costs.

“Poorer countries with limited borrowing capacity may face financing difficulty amid higher import bills,” RBC said.

Unless fuel is heavily subsidized, households and businesses in poorer countries are also more vulnerable to rising oil prices than they are in wealthier nations.

In developing economies such as India, Vietnam or the Philippines, fuel costs eat up around 8-9 percent of an average person’s salary, according to Reuters research and figures from statistics portal Numbeo. That compares to just 1-2 percent in wealthy countries such as Japan or Australia.

DIESEL & LOGISTICS

The surge in oil prices has a particularly big impact on transport and logistics companies. One such firm in Asia is courier LBC Express Holdings (LBC.PS) in the Philippines.

“LBC has been intently watching the movement of crude oil prices … What we, at LBC, are preparing for are the effects an oil price increase may have on our carriers: airlines, shipping lines, trucking companies,” its Chief Financial Officer Enrique V. Rey Jr said.

The high oil price “challenges us to improve our own efficiencies to achieve better economies of scale and maintain our margins,” he said.