Surge in oil prices to tip Asian economies into recession?

08-Jul-05

Series of terror attacks on central London's public transport system are considered to have led oil prices to dip yesterday. Although prices bounced back later in the day, they continue to be in the vicinity of US$60. US crude fell to a low of about US$57.20 but recovered by noon to about US $60.50 a barrel. Brent crude on the other hand fell to about US $55.55 before recovering to about US $59.23 a barrel in London. Oil prices continue to hover around US$ 60 this week. Prices are up 51% from a year ago due to a surge in demand from China and the U.S. Rising demand reduces the cushion between production capacity and consumption. Surge in demand also seems to be accompanied with problems on the supply side. Limitations of refining capacities are causing bottlenecks even as most oil-producing countries are pumping at maximum capacity. Supply shortages are raising concerns about stockpiles for Q4 2005 - the peak demand season during the Northern Hemisphere winters. Compounding the supply situation is the earlier than usual arrival of Storms in the Gulf of Mexico, gaining momentum and showing danger signs of turning into hurricanes. Gulf Coast States along the Gulf are home to 50% of the nation's refining capacity. There seems to be a plethora of factors upsetting the demand-supply balance, which seem to be constantly exerting upward pressures on oil prices. Asia Pacific accounts for 29% of the world's consumption of oil. Asia will soon feel the pinch from high oil prices. Asian economies seem to be in danger of slipping into a recession if oil prices remain at current high levels. A slowdown in the Chinese economy, already underway, is the main factor behind the prediction. China's booming economy, recording a growth of 9.5% in Asia last year, seems to have overheated, exaggerating China's commodity demand. Now it seems that China has begun to slowdown. The demand for oil is softening in Asia, and the bubble will burst when demand slows sufficiently to create enough excess capacity to overwhelm speculative demand. Without the China offset, current oil prices could push a number of Asian economies into recession soon