Singapore : not quite full-blown crisis yet

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Oil shock not quite full-blown crisis yet, but be prepared

IN FLEETING glimpses, the ghost of the 1973 oil crisis has been making its reappearance in Singapore.

Tightening supply from the Organisation of Petroleum Exporting Countries (Opec) have sent crude-oil prices soaring more than 200 per cent, now topping US$30 (S$51) a barrel, since its low of US$10 a barrel in February 1999.

The oil shortage has come about because Opec cut back on production in April last year to try to prop up sagging oil prices.

The oil cartel has since promised to boost production to keep prices down to US$25 a barrel, but is holding back from flooding the market, as this could destabilise global markets further by sending oil prices on a roller-coaster ride.

Singapore, as a net importer of oil and the world's third largest oil refinery, has already felt the impact of the oil shock.

Over the year, pump prices here have gone up by 15 cents per litre, and electricity prices by 33 per cent.

But the severity of the oil shock on Singapore's economic outlook should not be exaggerated.

Mr Eddie Lee, an economist at stockbroking firm Vickers Ballas, thinks that the oil shock may shave slightly over 1 per cent off Singapore's economic growth this year.

Unless oil prices surge out of control in the last quarter of the year, he does not think there is cause for panic, given Singapore's likely strong full-year growth results.

Although motorists and lower-income families have started to voice some pain, the price hikes have, so far, not filtered down into real economic problems.

In fact, Mr George Abraham, chairman of the feedback group on economic development, has yet to receive complaints on the price hikes, and thinks it is too early to tell if businesses here will be affected seriously.

Of course, economic wisdom tells us that higher oil prices will translate into higher business costs, which will cause investments and consumption to fall, and buyers will hurt when businesses pass higher costs on to them.

Items like petrol, engine oil, transport fares, electricity and gas, are likely to bear the brunt of the global oil-price hike.

And businesses that use large amounts of these resources, like airlines and chemicals companies, may suffer higher costs as a result, which they might try to pass on to consumers eventually.

These higher costs might feed into the prices of other goods and services, sparking a general rise in the price level. This is known as imported inflation. Countries, such as Singapore which imports most of its energy, fuels and other raw materials, are especially vulnerable to it.

But because oil and its related products account for only 10 per cent of the weight of the consumer price index (CPI), the oil shock is as yet unlikely to set off a big jump in domestic inflation.

In a report released in August, the Trade and Industry Ministry estimated that even a year-long increase of US$10 in oil prices would raise inflation by only 0.8 per cent.

This is because demand for oil here is lower than elsewhere in the world. For businesses, manpower still takes the lion's share of costs, followed by commercial and business services like advertising, accountancy and consultancy.

So, higher costs will be an inevitability, but it would be dubious to suggest that runaway inflation and a full-fledged crisis are on the horizon.

Of course, who in economic punditry can make pronouncements with utter conviction?

The joker in the deck, as it has always been since the end of the Asian economic crisis, is that the United States' Federal Reserve may lose its nerve over the oil shock's inflationary pressures and over-hike US interest rates to the extent that investor confidence snaps, and the economic crisis is replayed in global terms.

If that were to happen, or if Opec fails to live up to its commitment to stabilise oil prices, Singapore's economic outlook would change dramatically for the worse, along with the rest of the world.

Be warned.

http://straitstimes.asia1.com.sg/singapore/sin8_0919.html



-- Martin Thompson (mthom1927@aol.com), September 18, 2000


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