Elevated energy price and Asia
- We are not looking at relentless rise in energy prices
- Supply side response is likely, given the macroeconomic and socio-political ramifications
- Asian policy makers are caught between the urge to extend pandemic support
- …. while recognising that inflation and rates have likely bottomed
- In the backdrop of COP26, there is also added attention to energy transition
Global commodity prices have risen in the aftermath of the pandemic-induced crash last year. Fueled by pent-up private demand, public sector spending, and supply side disruptions, a wide range of prices, ranging from fertilizer to palm oil have risen, but the most spectacular rise this year has been in the energy category. As of mid-November, crude oil price was more than double of last year’s level, while natural gas price was more than four times higher.
Supply side response is likely, given the macroeconomic and socio-political ramifications of prolonged period of elevated energy prices. The US is considering releasing oil from its strategic reserves, Europe is in negotiations with Russia to ease gas supply, Opec nations are facing calls for softening their production quota, and as has been the case in the past, if oil price remains high, Shale and other producers start ramping up investment and production.
Against this backdrop, we don’t see substantial upside to oil, but we also don’t see a correction around the corner, given the prevalence of relatively strong demand globally. As per our energy analyst’s forecast, crude will hover around $75 to $80 next year.
A range of $75-80 is not new to the world, and various buffers for dealing with elevated prices exist, varying across countries. Nonetheless, the pace with which prices have increased is striking, and the risk of a spike in prices in case of supply shock is worth considering. Also, there are financial market implications, with the link between energy price, inflation, and interest rates.
In this publication, we look at the high energy price absorption capacity of various Asian economies. Our economists examine the implication for inflation, subsidies, fiscal deficit, current account balance, and monetary policy. Our overall assessment is that higher inflation risk is not so great a threat to necessitate strong policy action. At the same time, this is an uneasy moment for Asian policy makers, caught between the urge to extend pandemic support while recognising that inflation and rates have bottomed. In the backdrop of COP26, there is also added attention to energy transition. Economies that are vulnerable to high import cost of conventional energy should speed up their shift toward renewable energy.
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