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Tension Spreads Across The Global Economy
Malaysia Perspective | 07 March 2011

By Predeeben Kannan

The recent political upheavals in North Africa and the Middle East have only added stress to the world economy, still recovering from the crisis in the Euro zone. Looking back at history, it is quite evident that political and social uprisings in countries such as Iran and Iraq have caused volatility on oil supply and demand. In the last couple of weeks, we have witnessed similar concerns due to the situation in Libya.

As the third largest producer and the site of the continents’ largest known reserves, Libyan oil accounts for 2 percent of world output. The region where Libya is situated supplies a third of the world’s oil needs and the worry is that recent events there could seriously disrupt oil supplies and throttle the world economy. If the recent rise of oil is any indication, it could just be the pre-cursor for more to come. If one were to look back, Nymex crude oil prices were in the US$85 range at the beginning of the year, less than 2 months back. It is currently hovering at around US$100 a barrel.

Analysts believe that if the unrest in Libya spreads to major oil powers such as Iran and Saudi Arabia, the possibilities of oil rising to the “dangerous” levels of US$150 a barrel could become a reality. Michael Lo at Nomura even predicted the possibility of US$220 a barrel! This would definitely put a damper on economic recovery, inflation and living standards worldwide.

Italy is the global economic power most affected by the current situation in Libya, as the North African nation supplies one fourth of its oil demand. The situation is made worse now that an estimated 300,000 barrels per day (bpd) of Libya’s 1.6 million bpd of production has been put to a halt, as companies evacuate staff and suspend operations. Much of Libya’s oil industry is run by foreign firms including ENI of Italy and Repsol of Spain, while Libya’s National Oil Corporation (NOC) has traditionally been tightly controlled by the state. It has been reported by several International media agencies that the Gaddafi regime might even contemplate destroying its own pipelines to create more volatility.

Economic Damage Outweighs Global Supply
The US government in its attempt to prevent a global worry about the rise in crude oil announced recently that Saudi Arabia could increase production and replace Libya’s crude oil losses within one month. This is based on the fact that OPEC has around 5 million bpd of spare capacity, which is more than sufficient to offset any Libyan shortfall, and Western oil stocks are relatively plentiful.

However, the economic damage caused by the crisis may be more substantial than the crude numbers suggest. If the unrest succeeds in fracturing businesses and consumers confidence more widely, then the effects on the real economy could easily outweigh a small short-term loss of oil supply.

This point was reinforced by the Executive Director of the International Energy Agency, Nobuo Tanaka at a major oil conference recently,

“Regardless of the margins of disruption, if the US$100 per barrel of oil is continued in 2011, the burden of oil to the global economy is as bad as 2008. It is especially bad for emerging economies like India, China and Africa”.

Based on a Nomura International study, the increased tension in the Middle East and North Africa will create more worries for Asian economies as their exports to the region is fairly large.

Ketaki Sharma, an economist for Nomura was quoted as saying,

“Those closer to the Middle East and North Africa have sizeable exposure, with India most exposed, followed by South Korea”.

India’s exports to Egypt, Tunisia, Saudi Arabia and Iran accounted for 21.2 percent of its total exports. South Korea was the second-largest exporter to the region, selling 6.2 percent of its total exports to the region.

Tremors Felt In Asia
It almost seemed like a repeat of the oil price hike in mid 2008. Companies dependant on oil took a tumble in trade on the third week of February. Most affected were airlines which were among the biggest losers in Asia’s stock markets. As fuel represents about 40% of operational costs for airlines, investors were worried that the higher prices would create dents in profits.

Shares in Singapore Airlines, the world’s second-biggest carrier by market value, declined 1.7%, while Korea Airlines slumped 9% and Cathay Pacific Airways fell 4.5%, during the week. In Taiwan, China Airlines lost 6%, dropping to its lowest value in more than six months. Shares in Australia’s national carrier Qantas slipped 1.2%.

However, mining stocks led the gains on the back of rising gold prices caused by traders moving into the safe haven precious metal amid concerns over inflation and tensions in North Africa and the Middle East.

The automobile and electronics sectors were affected in Tokyo trade on the third week of February. Automobile makers underperformed the benchmark Nikkei index with shares of Toyota falling 0.4%, Honda was down by 0.9% and Nissan lost 1.8% during the period. Meanwhile, consumer electronics makers Sony slipped 1%, Canon was down 1.4%, while Panasonic and Sanyo Electric traded slightly above breakeven.

Adding salt to the wounds of Japan Inc, it was reported that Japan’s trade balance fell into the red for the first time in nearly two years in January, as exports slowed significantly, while imports grew amid rising commodity prices. The value of exports in the reporting month grew 1.4 percent from a year earlier to 4,971.4 billion yen, registering 14th consecutive months of gain. But the pace of increase was much slower than the rise of 12.9 percent in December and 9.1 percent in November, due to weaknesses in shipments to China and other Asian economies, the Finance Ministry said in a preliminary report.

Another worry is Japan’s dependence on the Middle East for over 80 percent of its crude oil imports. The value of crude oil imports rose to 920 billion yen in January, up 10.6 percent. However, with recent prices of crude oil hovering around US$100 a barrel and likely to rise even further, the Japanese economy looks certain to be hurt with more than just the loss of its second largest trading nation status to China.

The rise in transportation and food costs are also posing greater inflationary risk for countries across the Asia Pacific region. Singapore was the latest country to announce that its January’s CPI rose by some 5.5% as compared to that a year ago, the highest since December 2008. This has led many analysts to believe that the Monetary Authority of Singapore may begin to tighten its exchange rate policy during its next meeting in April. Although the trend is believed to be attributable to the annual Chinese New Year spending spree, analysts are concerned of greater risks of inflation across Asia, if the global situation does not take a turn for the better.

This article has information from various sources. The views and opinions expressed are those of the author and do not necessarily represent that of the publisher.

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