A Resurgent Asia Craves Oil By Clay Chandler Washington Post Foreign Service Wednesday, October 11, 2000; Page E01

HONG KONG  In Hong Kong, Cathay Pacific Airlines is adding flights to accommodate extra passengers. In China, cars and trucks are logging more miles. And in South Korea, the nation's giant steel mills are boosting production in response to stronger demand.

Asia's economies are shaking off the effects of the 1997 financial crisis more rapidly than almost anyone expected. But as it rumbles back to life, this region is gulping oil again, boosting worldwide demand for energy and making it much easier for oil-producing nations to maintain higher prices.

Just as the implosion of booming Asian economies three years ago triggered a production glut that drove the price of crude oil down to around $10 a barrel, the region's comeback has played a key role in pushing prices to above $37 a barrel last month.

Those gyrations, however, may have obscured what many economists consider a more important, long-term trend: As it pushes forward along the path of industrialization, Asia is developing a mighty thirst for oil. Asia now consumes 21 million barrels--or 27 percent--of the 77 million barrels of oil the world burns every day. Oil consumption was rising faster in Asia than in any other region in the world before the crisis, and demand has snapped back quickly as the crisis has receded.

"If all the global-healing apostles and all the Asian bulls are right, and the world continues to grow, with Asia fully recovering, then oil demand is likely to explode over the next two years," Hong Kong-based fund manager Mark Faber warned in a recent report to clients.

Andy Xie, an economist at Morgan Stanley Dean Witter in Hong Kong, estimates that the region's 10 key economies, including Japan, will use 7.6 percent more oil this year than in 1999. In the nine economies other than still-sluggish Japan, Xie predicts oil consumption will climb nearly 11 percent this year. Economic recovery in Asia, he contends, is the "primary cause" of the global surge in oil prices.

Asia now quaffs roughly the same amount of oil as the United States. But this region has 3 billion people, while the United States has only 265 million. Annual oil consumption per person is only two barrels in Asia, compared with four barrels in Latin America and 24 barrels in the United States. Even modest gains in Asian living standards--more cars, more washers and dryers, more homes with air conditioning--could translate into big increases in the global demand for oil.

Economies in North America and Western Europe are using less energy per dollar of economic output as they mature and shift from manufacturing to services and information technologies. In Asia, Japan and Hong Kong have followed suit. But most of this region's economies are moving in exactly the opposite direction--becoming less energy-efficient as they concentrate on heavy manufacturing.

In South Korea, which must import every drop of oil it uses and is already the world's sixth-largest buyer of crude oil, manufacturing now accounts for about 33 percent of overall economic output, up from 29 percent before the crisis.

More worrisome is China, already the region's least energy-efficient economy even though its industrialization drive has yet to hit high gear.

China trails only the United States and Japan in total oil consumption. Although it can meet some of its energy needs from domestic sources, domestic wells aren't pumping nearly enough to keep pace with needs of China's fast-growing economy.

Meanwhile, health and environmental concerns have prompted Beijing to scale back the nation's long dependence on coal, which now accounts for more than 70 percent of China's total energy needs. The result: China is shelling out hard currency for foreign oil. Oil imports accounted for one of every five barrels China consumed last year. The ratio is expected to rise to one in two by the end of the decade. "Demand from China alone is a big reason oil prices have surged" this past year, argues Tim Condon, regional economist at ING Barings Securities in Hong Kong.

Analysts at Massachusetts-based Cambridge Energy Research Associates expect China's appetite for oil to increase dramatically over the next two decades, rising from 4.4 million barrels per day now to 7.2 million barrels per day in 2010 and 10.7 million in 2020.

Of course, the recovery in Asia wasn't the only factor boosting oil prices. The unexpected strength of the U.S. expansion also played a role, as did the failure of the world's major oil producers to accurately forecast global demand.

Experts differ on how much continued growth in Asia will push up global oil prices in the future. Many analysts anticipate a fall in oil prices late next year, as oil companies boost exploration budgets and if the Organization of Petroleum Exporting Countries makes good on its promise to raise production by 800,000 barrels per day.

In the longer term, however, the picture is hard to read. Alarmists have warned since the first global oil shock in the late 1970s that the world is within years of exhausting its supply of fossil fuels, only to see estimated reserves rise with the advance of technologies for finding and extracting oil.

But Asia's return to growth is sure to test the resourcefulness of oil producers--particularly if the region's economies continue to outperform expectations.

Few analysts think Asia's economies can match the spectacular growth rates they managed before the crisis. Consumer confidence is shaky. In most countries, banks are still struggling to clear bad loans. Throughout the region, government leaders have moved slowly to dismantle the clubby business practices that many say provoked the crisis in the first place.

But for all those problems, the Asian Development Bank recently raised its growth projection for the region's developing countries--a grouping that excludes Japan, Australia and New Zealand--to 6.9 percent for the coming year. That's up from the 6.2 percent growth it forecast last year, and it assumes that oil prices will remain at $30 per barrel.

So far, the spike in prices has had little effect on Asian economic growth. Many experts say oil prices would have to stay above $40 per barrel for at least a year to knock Asia back into a slump.

Economists say Asia would suffer less from higher oil bills than from a drop in demand for exports if higher oil prices curb growth in the United States and Europe. From country to country, however, the direct impact of higher oil prices would vary substantially.

The region's three oil exporters--Indonesia, Malaysia and the sultanate of Brunei--will benefit. But Thailand, where dependence on imported oil is high and investors are wary of even the slightest jolt to the nation's fragile banking system, could be hit hard.

In South Korea, a sustained increase of $10 per barrel in the price of oil could tip the nation's surplus into deficit and clip more than 2 percentage points off gross domestic product. Seoul recently introduced rules to ban the use of neon lights to conserve energy and ordered bathhouses to close one day a week.

In the Philippines, government efforts to control energy prices and improve the reliability of electrical power generation have had disastrous effects on overall energy efficiency and left the country more exposed to outside price shocks than ever. According to a Merrill Lynch analysis, the Philippine economy now requires 25 percent more oil to produce a dollar of economic output than it did 10 years ago.

Meanwhile, Japan, the region's largest economy, won't be affected much by higher prices. Its economy remains weak, and in any event, the government's strategic petroleum reserve is the equivalent of 150 days of the nation's oil requirements.

http://www.washingtonpost.com/wp-dyn/articles/A48630-2000Oct10.html

-- Martin Thompson (mthom1927@aol.com), October 12, 2000