In this Thursday, Sept. 11, 2014 photo, cars line up in a traffic congestion next to Mass Rapid Transit (MRT) construction site, right, in Jakarta, Indonesia.Achmad Ibrahim/The Associated Press
As crashing commodity prices cause panic in Calgary and Ottawa, as well as Caracas and Moscow, the new year is dawning much brighter for several emerging economies in Asia – where falling oil prices are a boon.
Across the Asia-Pacific, countries such as Japan and India stand to benefit from drastically lower oil prices, since many of them are net energy importers. The benefits will not be evenly distributed, of course, and there will be downsides. But some investors are betting that the new normal in energy markets will boost growth in many of Asia's emerging markets, as well as the region's more mature economies, and give policy-makers greater political leeway as they implement tough, but needed, structural reforms.
"These economies are going to prosper," says David Kunselman, a senior portfolio manager with Excel Investment Counsel Inc., which has about $250-million invested in India. "And you'll see Calgary and other parts of the world suffer – I shouldn't say suffer, but go in a different direction."
Japan, for instance, pays about $250-billion annually for energy imports – a cost that has only gone up since it shuttered its nuclear reactors in the wake of the Fukushima disaster. Prime Minister Shinzo Abe has taken on record levels of debt as he tries to revive Japan's stagnating economy and faces political opposition to restarting the reactors. Paying less for oil and gas imports will help his newly re-elected government, even as it lowers energy costs for consumers struggling with Japan's new inflation.
"The short-term benefits are obvious," says Tom O'Sullivan, the founder of Mathyos Energy, an independent energy consultancy based in Tokyo.
The manufacturing export powerhouse of South Korea, too, is a huge net importer of oil and gas: Roughly 97 per cent of its primary energy demand comes from energy imports, according to the U.S. Energy Information Administration, with almost all of it arriving by tanker shipments of crude oil and liquefied natural gas (LNG).
Several countries, such as India and Indonesia, are not only net importers but also heavily subsidize fuel costs. Indonesia, for example, has spent as much as 20 per cent of its national budget on making energy cheaper for its enormous population. Many observers criticize this as wasteful, untargeted spending, since it not only needlessly subsidizes wealthy car owners, but also leads to market distortions such as people buying cheap gasoline in Indonesia and selling it at a profit in nearby Singapore.
For newly elected leaders in India – the world's third-biggest importer of oil, after overtaking Japan last year – and Indonesia, the fall in oil prices will cushion the political backlash from moving to cut these subsidies. Joko Widodo, Indonesia's newly elected President, raised fuel prices shortly after his inauguration in October. Indian Prime Minister Narendra Modi, elected last May, used the falling price of oil to loosen state control of diesel prices and raise tariffs on natural gas.
Mr. Kunselman says lower energy prices will also have positive ripple effects throughout the Indian economy – keeping food transportation costs down and lowering the price of key vegetables such as onions.
The falling oil prices also give many emerging Asian economies a more positive current account balance, and give policy-makers leeway to cut interest rates. India's central bank governor, Raghuram Rajan, took advantage of lower inflation last week to cut the key repo rate by 25 basis points, bringing it to 7.75 per cent in a bid to spur growth.
There are downsides to lower oil. Malaysia, as the world's second-largest exporter of LNG and the second-largest oil producer in Southeast Asia, will suffer a drastic drop in revenues for state-owned energy firms such as Petronas – which has billion of dollars invested in British Columbia's nascent LNG export industry. In Australia, where multiple LNG export terminals are under construction, lower oil revenues for the oil majors building them – combined with lower LNG prices expected as a result of looming oversupply – could sap enthusiasm for these projects, which are already experiencing huge cost overruns. The same could hold true for Canada's west coast, where projects are in even earlier stages of development.
And Mr. O'Sullivan notes that Japan had been working toward greater energy efficiency and was starting to develop its renewable energy sector, efforts he suggests will falter as the cost of oil removes the pressure to act in these areas.