Emerging economies in Asia, which are struggling with rapidly weakening domestic currencies, are scrambling to ward off the repercussions of a surge in the price of oil, attributed mainly to increased optimism about a global economic recovery and the prospects of a U.S. military strike on Syria.
The worst-case scenario of a significant disruption to oil supplies from the Middle East seems highly unlikely, according to a research report from Capital Economics, a London-based research consultancy, which added that the jump in global oil prices remains a key concern.
While the cost of a barrel of Brent crude, currently at about $114, is not significantly higher compared to the average of $111 since early 2011, when the Middle East plunged into turmoil in a wave of uprisings, emerging economies in Asia, which are struggling to avoid a deep dent in their foreign exchange reserves amid capital outflows, are hesitant to pay huge sums for imported oil, made dearer by crashing currencies.
India Mulls Risking U.S. Ire For Iranian Oil
India is considering a plan to maintain a steady flow of oil imports from Iran, which could save India $8.5 billion, but endanger its relations with the U.S. and increase the risk of losing an exemption from U.S. sanctions against countries that do business with Iran.
Importing crude oil from Iran, whose oil exports have been reduced to less than half of the 2.2 million barrels per day, or bpd, prior to U.S. sanctions, is cheaper because it is payable in rupees and Iran will use these funds to purchase agricultural products and medicine from India.
India’s oil import bill is one of the key causes for driving up the country’s gaping current account deficit, which hit a record high of 6.7 percent of gross domestic product, or GDP, or $125 billion, last year, and the government is expected to launch a campaign on Sept. 16 to cut domestic demand for oil by 3 percent.
China, India, Japan and South Korea are Iran’s biggest oil buyers, and their imports of Iranian oil have dropped by more than a fifth compared to a year ago, as they try to import within the limitations set by U.S. sanctions.
In the year to date, the Indian rupee has depreciated by almost 17 percent against the dollar.
Malaysia Cuts Fuel Subsidies
Yet another Asian nation trying to shield its economy from volatility in the currency and commodity markets is Malaysia, which, on Monday, cut fuel subsidies for the first time in more than two years, as the government attempts to boost investor confidence to halt the ringgit’s fall and to trim fiscal deficit ahead of the 2014 budget, slated to be unveiled on Oct. 25.
Malaysia is second only to India in its budget deficit among emerging markets, and Prime Minister Najib Razak has announced plans to lower the deficit to 4 percent of GDP, or $11 billion, from 4.5 percent in 2012, according to Reuters.
In the year to date, the ringgit has depreciated by 6.55 percent against the dollar.
Indonesia Banks On Biodiesel
Indonesia, which is also trying to reduce oil imports in order to reduce its current account deficit amid the rupiah’s weakness, issued a new regulation on Aug. 28, raising the proportion of domestically-produced biodiesel to at least 10 percent from the current 2.5 percent in the country’s overall energy requirement.
Increased consumption of biodiesel -- diesel fuel derived from plants and animals that can be used alone or blended with petrodiesel -- is also expected to help stabilize the price of palm oil, which dropped in July to its lowest level in three years, hurting Indonesia and Malaysia, the world’s top palm-oil producers.
In June, Indonesia had raised fuel prices by as much as 44 percent, sparking protests, although fuel prices in the country, even after the rise, continue to be among the world’s lowest. And, the government said it shed a portion of its heavy burden of fuel subsidies in order to divert resources to improve infrastructure across the country -- a measure applauded by economists.
In the year to date, the rupiah has depreciated by 12.5 percent against the dollar.