$60 oil 'could hurt Asia's confidence'

$60 oil 'could hurt Asia's confidence'

Bernice Han, Agence France Presse, Singapore

As oil prices keep setting new record highs, there are growing concerns that Asia's energy-hungry economies can no longer continue absorbing the impact with crude creeping toward US$60 a barrel.

The risk of stagflation -- persistently high inflation and low economic growth -- is seen as low so far but $60 oil could puncture business and consumer confidence in the region, economists told AFP.

"I think it will have an impact... sentiment will be affected," said Nizam Idris, deputy head of research at IDEAglobal.com.

"As a consumer, you will be careful with your expenditures. It will have a psychological effect which will filter through to decision-making from consumers to producers," he said.

Julian Jessop, the chief international economist at London consultancy Capital Economics, also agreed crude prices at $60 a barrel would deal a psychological blow to the region.

"There is no doubt $60 would have a significant impact. Psychologically, clearly a price that high is going to be a big problem," he said.

Despite the warnings, Jessop said Asia was still in a better position to cope with higher oil bills than other regions because its economy is in stronger shape.

"I think paying a bit more for oil is not going to be the end of the world for Asia where growth has been strong for some time," Jessop said.

"Asia can afford to pay more for its oil compared to, say, Europe where the economic recovery is still very weak," he said.

Analysts say crude prices are now within striking distance of $60 a barrel after New York's main contract, light sweet crude for delivery in December, set a record of $55.50 in New York trading on Friday and finished at a record settlement of $55.17.

"I certainly wouldn't rule out $60 in the current environment. Virtually anything is possible," said Daniel Hynes, a Melbourne- based energy analyst at ANZ Bank.

Unusually low U.S. heating oil stocks ahead of the northern hemisphere winter and insatiable demand from a still booming Chinese economy are among the key reasons behind the sharp spike in crude prices in recent weeks.

Industry estimates put Asia's production at just 10 percent of the world's crude supply, but the region consumes 24 percent.

China, which once produced all its oil needs, is the region's largest oil importer and has overtaken Japan as the second largest consumer of oil in the world, just behind the United States.

The country currently relies on imports for one-third of its supplies and in turn accounts for about seven percent of world oil demand, with both figures expected to rise.

While the Chinese economy has so far withstood the onslaught of surging oil prices -- latest figures show gross domestic product grew a solid 9.5 percent in the nine months to September -- authorities have warned of the need to prepare measures to meet the challenge.

In late September, when oil prices were hovering around $50 per barrel, the International Monetary Fund (IMF) said economic growth in developing Asian countries was likely to average 7.3 percent this year.

But it said 2005 growth was likely to moderate to 6.5 percent, down 0.3 percentage point from the previous estimate, due to worries over oil prices and a possible Chinese slowdown.

The IMF said global expansion was likely to continue to weaken for several quarters partly as a result of the sharp rise in oil prices.