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Cheap Oil Is Fueling Economic Development In Asia
The collapse of Silicon Valley Bank and Signature Bank shook up the U.S. banking system, possibly more strongly than news reports and government officials made it sound. A run on banks was barely avoided, and far from everyone believed Treasury Secretary Janet Yellen when she said the system was safe and sound. And oil prices took a dive.
Fears of more trouble in the U.S. banking sector—and in the European one, after UBS had to take over Credit Suisse to save it—are still gripping markets. Reinforcing expectations of an economic slowdown, these fears have served to lower oil prices despite fundamentals that suggest prices should be higher. And when oil prices are lower, poorer economies benefit.
The Wall Street Journal reported this week that while the Fed, the European Central Bank, and the Bank of England are all still in rate-hiking mode, central banks in Southeast Asia have either stopped monetary tightening or are preparing to wrap it up.The report cited India, Malaysia, Indonesia, and the Philippines as examples and went on to note that in the past three months, oil prices have shed some 10 percent and are also down by about 38 percent since last year’s peak.
With the economies of Southeast Asia largely insulated from any potential fallout in case of a banking crisis in the West, they are likely to outperform developed ones, the report suggested, even though the most export-oriented among them would likely suffer adverse effects in case of a greater slowdown in Western growth.
Asian developing economies, in other words, are about to outperform the developed ones—because they have access to cheaper oil, partly because of the West’s sanctions on Russia and partly because of that same West’s banking troubles.
In the West, meanwhile, governments are focusing on reducing the demand for oil and gas by planning massive buildouts of wind and solar power. These buildouts will cost billions, and building the supply chains for them will also cost billions because both Europe and the United States are starting more or less from scratch since China dominates current supply chains.
Speaking of China, the Asian powerhouse is set to be one of the biggest winners from the current situation. It is the world’s largest oil importer, and any downward trend in prices is good for it.
China also has a 5-percent growth target for this year, and while analysts have called that disappointing, it is only disappointing compared to Chinese growth in previous years. Compared to growth rates expected in the EU this year, for example, China’s target is huge.Brent crude is currently trading at less than $78 per barrel as of the time of writing. West Texas Intermediate is close to $70 a barrel. While fears of a banking meltdown seem to have started to subside, it will be a while before this affects prices.
In confirmation of that, Reuters; John Kemp reported earlier this week that hedge funds are dumping oil futures and other contracts at the fastest rate in six years in anticipation of a credit crunch and a consequent recession.
It is these fears of a recession in the West that will be harder to shake off. Some analysts argue that the recession is already here. Others prefer to debate definitions and whether a recession is indeed such a bad thing.
While this goes on, however, fears and economic growth trends will continue pressuring oil prices until supply tightens palpably, which most analysts seem to expect to happen in the second half of the year.
Because of the tightening oil supply, prices will inevitably start rising at some point, and they may well rise considerably. Until then, however, the developing nations of Asia could stock up on more affordable crude to help power their economies.
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