Now Asia, not West, hit by oil

OPEC leaders meet today to decide if they should increase supplies, lowering costs.

OPEC oil ministers are meeting today to decide how wide to open their spigots. They are sensitive to the cries from pocketbook-pinched US consumers. But the American and European economies are actually much less vulnerable to oil hikes than they were 20 years ago.

Today, developing economies, particularly in Asia, take the biggest hit when oil prices rise.

At current price levels, China's oil-import bill will jump 250 percent this year, says a new report by the International Energy Agency in Paris. More cars, more factories, and more people cooking with propane instead of wood means that developing countries are gobbling up more of the world's oil output - 43 percent today, as compared with 29 percent in the 1970s. At the same time, the economies of developed nations are increasingly fueled by information, not oil.

But in a global economy, all share the high oil-price risk. "If this tips Asia back into recession, that could hurt the US economy substantially," says Mike Lynch,director for Asian energy and security at Massachusetts Institute of Technology's Center for International Studies. "The indirect effects are potentially very serious, but are the hardest to figure out."

So from Beijing to Manila, everyone from taxi drivers to titans of industry is waiting for the decision by the Organization of Petroleum Exporting Countries in Vienna.

A senior Persian Gulf official told Reuters on Saturday that pre-conference negotiations were closing in on a deal to lift crude output by 1 million to 1.5 million barrels daily - or about 5 percent above current levels.

A Gulf official admits that the recent reversal in oil prices to $28 a barrel in the US, from a peak of $34 two weeks ago, has strengthened the case for boosting volumes nearer to 1 million barrels per day. Most cartel members favor oil prices in the $20 to $25 per barrel range.

While Americans complain about the rising cost of gas at the pump - still almost the lowest in the world among developed countries - analysts say that the greatest economic risk is seen in Asia, where economies are still fragile after the 1997-98 economic crises.

"Developing countries suffer more from an oil price hike, as they are more reliant on their energy-intensive manufacturing sectors," noted the IEA report released last week. "If the current price level were to be sustained for the rest of the year," large deficits "would put a damper on global growth," the report warned.

The result is inflation, and the higher cost of importing oil could "wipe out the benefits" of foreign assistance, it said. India's oil-import bill, for example, is estimated to rise $6 billion for the year 2000.

For strategists in Asia, the high prices have caused a search for alternatives, the way American policymakers sought non-Mideast energy sources after the price spikes of the 1970s.

"The issue of energy security is important, because as imports go up, the bulk of them are from a small region in the world," says Rajendra Pachauri, head of the Tata Energy Research Institute, a nonprofit think tank in India's capital, New Delhi.

The risk for India and other countries is that higher oil prices eat up foreign-exchange reserves. Few Indians can forget that reserves fell so low after the high oil prices of the 1991 Gulf War that they were asked to sell personal supplies of gold.

Demand for oil in Asia is rising sharply, because of rapid industrialization and a jump in car ownership. Korea needs more for its large petrochemical industry, while India and China - where the number of cars is still relatively small - need more oil for manufacturing.

Like the US, the bulk of oil imports for Japan, Korea, and Thailand come from the Mideast. China, too, is becoming more dependent on Middle East supplies. "China's economic growth has outstripped its own energy resources," says William Ramsey, IEA deputy director. "China is an energy superpower second only to the US. Meeting its energy needs is one of the most difficult challenges China will face."

Though China gets some 75 percent of its total energy needs from its own vast coal supplies - and that may only drop to 64 percent by 2010 - China's energy demand is among the fastest-growing in the world, at 5 percent a year, and most of that is filled by more oil imports.

Chinese consumers have been shielded by state-determined gas prices, but that will change as it liberalizes and privatizes the oil industry.

"China is going to have increasing concerns about price volatility, but also about security of supply," says George Gilboy, of the Massachusetts-based Cambridge Energy Research Associates in Beijing. "Chinese officials are becoming more concerned about security of oil - that is a hot topic in China now. Higher prices have got their attention."

Another trend, notes Mr. Gilboy, is that more nations are "moving away from traditional views of security of supply, which were associated with military power and control of territory. They are moving towards a view that security is reached through diversifying supply and relying on the market."

(c) Copyright 2000. The Christian Science Publishing Society