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Asia Faces Financial Pinch From Higher Oil Prices

With oil prices bouncing close to $120 a barrel, businesses and consumers in Asia are starting to feel some pain. In addition, governments that subsidize fuel costs for their citizens are seeing higher oil costs cut into budgets. Naomi Martig in Hong Kong takes a look at the implications of high oil prices for the region.

The recent surge in oil prices toward $120 a barrel had governments and consumers looking closely at their budgets.

Some economists and oil industry analysts say prices may inch down a bit in the coming weeks, but overall, there is little chance that they will fall much.

Peter Morgan, senior Asia economist for the bank HSBC in Hong Kong, says that as of now the high prices are not seriously affecting growth in most of Asia.

"Growth in Asia countries has stayed strong and that's partly because exports have been strong and that in turn is being contributed to the strength of demand coming from places like the Middle East," Morgan said.

Morgan says that consumers in many parts of Asia also are handling the rise in prices, for now.

"This is partly because a number of countries do have some kind of subsidization of various kinds of petroleum product prices and so consumers don't necessarily see the full impact of that," Morgan said.

The Asian Development Bank expects Asian economies to grow by an average of 7.6 percent this year. That is considered a healthy expansion but is down from last year's 8.7 percent gain. One reason for slower growth the ADB says - higher oil prices.

Mark Thirlwell, program director for international economy at the Lowy Institute for International Policy in Australia, says the rise in oil prices will affect countries in Asia differently. Countries such as Indonesia, for example, which subsidize fuel for the public, already see the effects of higher oil prices.

"On one estimate it is likely that the cost of Indonesian fuel subsidies this year are going to be about triple what they originally expected to be in the budget, because the original oil price estimated in the budget was well below the $120 a barrel mark," Thirlwell said.

If there is a long-term rise in oil prices, governments may have to rethink subsidies and force consumers to shoulder some of the financial burden. Food prices, however, are also rising quickly. Thirlwell says that most governments are concerned about the social impact of people paying extra for two of the largest items in most people's budgets.

Economists and regional analysts say oil-exporting countries such as Vietnam and Malaysia are likely to benefit from the run up in prices. The countries that must import both food and oil are at most risk. Thirlwell says China and the Philippines are likely to face problems. On the other hand, Thailand, which imports oil, may fare better.

"Thailand's import bill is being boosted by the run up in oil prices, so that's bad for the Thai economy," Thirlwell said. "But at the same time we see this big run up in food prices, particularly in rice prices, so that's been good for the Thai economy."

China is especially sensitive to increases in oil, it imports nearly half its needs. The government projects that by 2020 China will consume 62 percent more oil than in 2006.

Thirlwell says one of the problems facing developing countries like China is that little emphasis is placed on fuel efficiency.

"Developed countries tend to be operating at the frontier in terms of energy-efficient technology," Thirlwell said. "That's not the case in developing countries. They are often using older, cheaper technologies which are much less fuel efficient."

For instance, Japan, which imports most of its fuel, has pushed companies and consumers to cut waste. As a result, it takes only one-ninth as much energy as China to produce one unit of gross domestic product.

Economists say that in the long run, Asian governments must push to increase energy efficiency. For now, however, governments and consumers will have to adapt to higher costs.