High oil prices here to stay, ADB warns Asia

High oil prices here to stay, ADB warns Asia

Agence France-Presse Manila

High oil prices are here to stay and Asia should wean its people off costly fuel subsidies as the region absorbs the fallout in terms of lower economic growth, the Asian Development Bank (ADB) said on Thursday.

Crude oil prices in late August are now 75 percent above the Philippines-based lender's average price estimates for 2005. It said prolonged prices at this level "would have the potential to cut developing Asia's growth and would pose challenges for economic management."

While some uncertainties remain, "higher oil prices could be here to stay for some time," the ADB said in its twice-yearly publication, the Asian Development Outlook. The first direct effect would be soaring inflation.

If oil stays at US$70 a the barrel in 2006, gross domestic product (GDP) growth would be cut by 1.8 percentage points in Thailand, 1.4 points in the Philippines, 1.3 points in Singapore and 1.1 points in India, Indonesia and Malaysia, it said.

It would shave a whole point off GDP in China, 0.9 points in Hong Kong, half a point in South Korea and 0.2 percent in Taiwan.

The region uses 20 percent of global oil output while producing only 11 percent, making it a huge net importer.

With import bills expected to rise by by more than 26 percent of GDP in Tajikistan, 12 percent-plus in Mongolia, 4.9 percent in Singapore and 4.4 percent in the Philippines, developing Asia would need to boost its annual export growth by an average of 3.0 percentage points to offset the 75 percent rise in crude oil prices.

Sustained high oil prices "would inevitably restrain output growth" while Asia's "major industrial trading partners would also suffer, amplifying direct negative effects" through reduced exports.

The risks are significant "but with appropriate policy responses, should be contained in size and duration ... (and) significant and long-lasting reversals would be unlikely," it said.

At the same time, "developing Asia needs to re-evaluate decisions that have been made in the belief that oil would remain cheap and that higher prices would be temporary," it said.

First on the agenda would be "fuel subsidies, artificially low prices, and low levels of taxation on oil products," situations that it said are widespread across the region. Thailand just recently abolished fuel subsidies except on liquefied petroleum gas.

The report said the costs of subsidies "have escalated sharply and are now beginning to create fiscal strains," even though studies show that "the idea that subsidies benefit the poor most does not always square with the facts on the ground."

The fiscal strains, both on the government and the oil companies' books, are evident in the oil subsidy regimes in Bangladesh, China, India, Indonesia, Malaysia, Nepal, Thailand and Vietnam, the ADB said.