The three largest economies in Asia – China, Japan and India – also happen to be three of the biggest oil importers in the world, trailing only the US. Our head of APAC takes a look on the impact of the falling oil price on the region.
Rapid economic development has turned Asia into an energy-hungry region. In fact, up to 18% of the total imports in Asia are petroleum, oil and lubricant products. With oil prices recently falling to the lowest level since 2009, Asia's fuel-dependent economies have received an instant stimulus that is expected to boost the region's economies.
If you look at the top four largest net oil importing counties in the world, three are from Asia Pacific, and the oil-guzzling economies of China, Japan and India are set to be the real winners from the recent fuel slump.
Helping drive China towards increased consumerism
China is the world's biggest oil consumer and the second-largest net oil importer, so the impact of the tumbling oil price on the country is enormous. As a matter of fact, the tumbling oil prices are caused partly by the slowdown of China's economy. The past two decades have seen the country's share of global oil consumption increase from 4% in 1993 (when it first became a net importer) to 11% at the end of last year.
In 2014, China imported up to 300 million tonnes of crude oil, which is 60% of its total oil consumption. The plunging oil prices are definitely a windfall for China as every US$1 slide in crude oil helps the country save US$2.1 billion annually. Currently, oil is trading below US$59 per barrel as opposed to the average price of US$109 seen over the past four years. The US$50 per barrel plunge in price would immediately generate a $112 billion stimulus (equivalent to 1.1% of China's GDP) to the country's economy.
Though the gloomy global economic outlook is affecting China's export-led economy, the oil slump could assist the country to control inflation and increase consumer purchasing power. It has provided the country a great opportunity to shift towards a consumption-driven development model. Last month, the Chinese government gave its 40 million civil servants a salary increment of at least 31% in an effort to stimulate domestic consumption.
China's economy still has enormous potential to grow. The country could leverage on cheap oil to transform its economy from the export-driven to consumption-oriented.
Counteracting the depreciating yen in Japan
The oil slump is a blessing for Japan, too. It is the third largest net oil importer in the world. Last year, it had an energy import bill which claimed 5% of its GDP, or up to US$210 billion. Although the yen has depreciated almost 14% in the past six months, crude oil still cost 30% less for Japan and helped the country to save US$37 billion (equivalent to 0.8% of its GDP).
Last month, the Japanese government announced that the country posted a 60% decrease in trade deficit following the growth in export and a significant fall in oil and gas import. Japan used to enjoy surpluses in trade, but that is reversed when it started to import almost all of its fuel in 2011. The country pays a huge energy bill since it shut down its nuclear plants in the aftermath of earthquake and nuclear crisis in Fukushima.
This year, the Abe administration projects the country's GDP will touch the US$4200 billion mark for the first time in eight years. This is because the oil plunge has brought down the high price that Japanese households and industries have paid for gasoline and electricity since the depreciation of the yen started two years ago. It stimulates the economy by raising disposable household income and corporate profit margins, which will in turn restore consumer confidence and boost consumption in the country while encouraging businesses to invest more into the economy.
Expected current account surplus in India thanks to falling oil price
The oil fall is certainly a boon for India as energy made up 34.5% of its total imports in 2014. It is estimated that every US$1 slide in crude oil would save the country a massive US$650 million. India's current account deficit and fiscal deficit could be pared down by 0.5% and 0.1% of GDP respectively for a drop of US$10 in fuel price.
In 2015, India's current account is expected to record a current account surplus of 0.3% for the first time in 10 years due to plunging energy prices. The substantial improvement in the country's books will give room for the Reserve Bank of India to implement a more assertive and development-oriented monetary policy.
Declining energy prices also presented the Indian government with the perfect time to carry out long-overdue fuel subsidy reforms. Prime Minister Modi took advantage of cheap fuel to drop the diesel subsidy that cost India 0.3% of its GDP in a bid to bring the country onto a more sustainable development path.
The savings from scrapping the subsidy can be channeled to growth-centric investment such as infrastructure development, education spending and poverty eradication. The sluggish oil price is exactly what the newly-elected government needed to break free from its massive fuel subsidy and revive its stagnant economy through progressive economic policy.
Benefits to spill over to all of Asia?
China, Japan and India are the largest economies and most populous markets in the region. The benefits these countries are getting from cheap oil could create a spill-over effect to the whole of Asia Pacific. It is estimated that sliding fuel prices will boost the region's gross domestic product (GDP) by 0.25% to 0.5% in 2015.
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