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December 29, 2010

Higher Oil Prices Raise Concerns About Inflation in Asia-Pacific Region

Global oil prices are rising rapidly, pushed by increased global demand and a weaker U.S. dollar.

In Asian markets this week, oil topped $91 a barrel, and there are forecasts it will rise to $100 within weeks. In September oil traded at $75 a barrel.

The rapid climb in prices comes even though several major economies, especially the European Union, still grapple with weak economies.

Jason Feer is an analyst with Argus Media, an oil and energy sector intelligence broker. He says several factors are driving the rise, especially demand for heating oil during the northern winter and recent strikes in France that had closed refineries and cut North Atlantic supplies.

Expectations of strong demand in Asia, where economies are growing steadily, and rising demand in the United States add to the price pressures.

"The economic data there seems to be a general consensus that U.S. economic activity is not as badly affected as it was before and you might see some increased demand there. And certainly Asian countries have really weathered the great recession pretty well. So demand has held up in Asia," Feer said. "I think probably a lot better than most people expected. So it's a classic supply and demand [situation]."

Market analysts say the weak U.S. dollar also boosts prices, since oil is traded in dollars. There are forecasts the dollar could weaken further in 2011 because of the U.S. trade and budget deficits.

The aviation industry is preparing for higher fuel costs.

Albert Tjoeng is the manager of corporate communications in Asia for the International Air Transport Association. He says higher fuel costs will lift the industry's energy bill to $156 billion globally in 2011 from $139 billion this year.

"Looking specifically at oil … for the industry because of the higher fuel costs and lower GDP [gross domestic product] projected for next year we're looking at a lower profit projection of $9.1 billion for 2011 for the industry," he said.

Higher fuel costs, along with rising prices for other commodities, such as grain, are raising concerns of inflation in Asia.

The United Nations Economic and Social Commission for Asia Pacific says higher fuel and food prices particularly will hit the poor in the region - 950 million people - the hardest.

Still, in a recent report, UNESCAP says overall inflation will not be enough to snuff out economic growth in Asia's developing economies, which it forecasts will expand by about 7 percent next year. That forecast is down from estimated growth of 8.3 percent in 2010.