$100/b oil aggravates pain from Asia’s acute oil addiction

There's always a price to pay when one doesn't have an immediate alternative to cure one's addiction – and for Asian oil importers, it's no different.

Asia's top oil buyers are dependent on imports for 70%-100% of their needs. With high oil prices – ICE Brent crude topped $100/b in Asian trade Feb 24 as Russian President Vladimir Putin announced military operations in Ukraine – the pain is felt not just by refiners and consumers. It's also a burden that forces governments to alter fiscal policies to cushion the blow from massive foreign exchange outflows.

Hard statistics tell the story about the over-dependence of Asia, home to some of the most prized clients for oil producers from the Middle East and Latin America. South Korea buys 100% of its oil requirements from overseas, India about 85%, China about 70% and Japan about 99.7%.

"High oil prices will dampen demand and will undermine the fragile economic recovery if they continue to rise," said Lim Jit Yang, advisor for oil markets at S&P Global Platts Analytics.

Take the example of India: for every 10% increase in crude oil prices, the wholesale price index increases by 0.9%-1% and the consumer price index by 0.4%-0.6 %. A 10% rise in oil prices leads to an increase of nearly $15 billion in India's current account deficit, or 0.4% of its GDP, leading to a depreciation in the rupee.

"For oil marketing companies, higher crude prices lead to higher borrowings for working capital and higher interest rates. This impacts the profit margins of oil marketing companies," Gurmeet Singh, director general of the Federation of Indian Petroleum Industry, told S&P Global Platts.

Battling it out

As economies struggle, the dramatic sprint of crude oil toward $100/b is prompting Asian importers to rethink their fiscal road map.

Japan, for example, has decided to provide subsidies to refiners and oil product importers in the current quarter with the aim of curbing the price rise. South Korea has lowered taxes on auto fuels by up to 20% for six months from November.

"While we forecast producer price index inflation to have peaked in Q4 2021, it is likely to remain elevated, at least in the first half of 2022," Oxford Economics said in a recent research note on Asia. "In addition, risks are to the upside amid high oil prices and the threat of renewed supply chain issues due to omicron outbreaks."

Despite the rising prices, Platts Analytics expects Asian oil demand to grow by 1.5 million b/d year on year in 2022, up from 1.2 million b/d in 2021.

But as prices rise, the impact of expensive oil on demand will vary across Asian countries and will depend on how much supply they hold – either in strategic petroleum reserves or from domestic production.

According to Platts Analytics, among Asia's big four oil consuming countries, China is well-positioned as it has substantial domestic production, coupled with relatively high SPR levels. China's relatively low inflation rate means that it has leeway to boost economic growth if needed, which it expects to be 4.9% for 2022, with oil demand growing at 560,000 b/d.

"India, on the other hand, is more vulnerable as it depends heavily on crude imports, and it has relatively low SPR compared to other major Asian consuming countries. India's soaring consumer price index continues to be a cause of concern for the economy, although growth is expected to be strong at 8% for 2022," Lim of Platts Analytics said.

But as geopolitical concerns rise because of the mounting tensions between Russia and Ukraine, leading oil importers are hoping for a favorable US-Iran nuclear agreement, which would open up flows from the OPEC producer, and ease the tight supply situation and cool global oil prices.

Related factbox: Crude prices climb as Russia 'invades' Ukraine

Wake-up call

The current rally in prices may have also served as a wake-up call for Asia to reduce its over-dependence on oil and look for other alternatives.

Refiners in the region are increasingly pursuing strategies that would help them stay relevant even if the energy landscape changes drastically, while at the same time helping to absorb the shock from volatile oil prices.

While many refiners in the region are geared towards maximizing output of gasoil and gasoline, they are increasingly widening their product slate by improving efficiency and installing petrochemical production units, which could support growth for refiners in different scenarios.

"Hit hard by the soaring oil prices, refiners have also been aggressively looking for diversification towards clean energy projects. Energy players are looking to retain their profitable core while also capturing some of the clean sources of opportunities emerging in low-carbon markets, including renewable power, bioenergy, next-generation mobility, energy services, and hydrogen," FIPI's Singh said.

And while $100/b seem daunting, not everyone is unhappy with high oil prices. It presents an opportunity for the region's upstream sector.

"The Asian market is the major driver in the global energy dynamics; therefore, with about 40% share in global energy consumption, primarily oil- and gas-centric, I see this as a prolific scope for the Asian E&P sector to strongly rebound and have significant activities in this year, which is exciting," Pankaj Kalra, CEO of Essar Exploration and Production, told Platts.

Vibhuti Garg, lead India energy economist at the Institute for Energy Economics and Financial Analysis, said $100/b oil would accelerate the push toward cheaper renewable energy alternatives. These alternatives might just ease Asia's suffering from high oil import bills.