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It’s not only developed countries that are fretting about the latest spike in oil prices, which are edging towards $100 per barrel. In emerging markets, where fuel imports have soared in recent years, many fear that the consequences for growth could be equally severe.
Yet according to outspoken UBS economist Jonathan Anderson, emerging markets have nothing to fear from high oil prices. In fact, Anderson argued in a research note this week – entitled “Why Doesn’t Oil Matter?” – that these prices should play a “very benign role in the growth process.”
Why? Anderson notes that the pre-crisis rise in oil prices was largely the consequence of supply failing to keep pace with increased demand from the emerging world. This was “due in large part to the lack of investment in infrastructure and exploration over the previous decade.”
Today’s world is different, says Anderson. We are already beginning to see signs of supply responding to the higher price environment of the last five years.
Another factor is the relatively low dependence on oil as an energy source in emerging markets. In the developed world, oil makes up roughly 40 per cent of total primary energy use (25 per cent comes from natural gas, and the rest is a combination of coal, hydro and nuclear power). In emerging markets, by contrast, oil accounts for only a quarter of energy consumption. The lion’s share comes from coal, the “most abundant and evenly-supplied of all major fuels in longer horizon”.
This discrepancy is even more marked for China and India – the two biggest contributors to emerging market growth – where oil makes up only 20 per cent of energy use, half the share of the developed world.
Finally, strong external balances have left emerging markets better able to cope with rising oil prices. While the need to import fuel continues to rise – net imports as a percentage of gross domestic product have doubled since 2000 – emerging markets still have a strong balance of trade surplus because they export so many non-fuel goods.
As a result, the average current account position for emerging markets has improved from a deficit of 4 per cent of GDP to near balance today.
Of course, none of this set in stone. The supply side is especially volatile in commodity markets, as 2010′s freak weather patterns illustrated. The fact that much of the world’s new oil is expected to come from politically unstable Iraq only adds to the uncertainty.
Nor are emerging markets’ current account positions certain to improve in the near future, as consumer demand for products such as automobiles rises and countries such as China seek to rebalance their economies.
Nevertheless, it’s hard to deny Anderson’s conclusion that latest oil rally – whether a temporary spike or a long-term shift – doesn’t spell the end of the emerging markets growth story.
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