Oil spike: Indian consumers to be affected

If crisis in Libya spreads to other oil producing countries, there could be ramifications for energy prices and growth.

Libya is the first major oil producing country to be hit by a political turmoil. This has ramifications for the world. As it becomes clear that unrest in the world’s 16th largest producer of crude oil will disturb production, oil prices are set to go past the psychological barrier of $100 a barrel.

As Libya prepares for a regime change, more countries in the region may follow. This will impact energy prices and, presumably, growth dynamics of the world economy.

In its market strategy report, Royal Bank of Scotland Asia Securities says: “In the absence of clear answers, investors should consider relative winners and losers. We highlight basic economic conditions amongst the world’s major oil producers as an indication of sensitivity to potential popular unrest. Countries at the top of the list are Iran, Iraq, Algeria, Angola and Venezuela, although the latter is considerably richer.” These countries account for 12.7 million barrels of daily production, or 15.9 per cent of the global supply.

However, the impact on inflation, budgets and current accounts is much greater in India, Thailand and the Philippines, compared to economies like Korea and Taiwan. The only net-exporter in Asia is Malaysia.

So far there has been little impact of higher oil prices on the developed economies, if one looks at the experience in 2007, when the world GDP appeared to have peaked as oil crossed $95 a barrel. It seems high oil prices are a tax on economic expansion.

Having upgraded the sector to overweight in October, foreign brokerages are choosing to remain overweight on energy within the region and Malaysia. However, this has negative implications for India, industrials (including Airlines) and consumer discretionary (including autos). The clear message is to steer clear of consumer staples as long as crude oil keeps rising.