Asia's increasing powerhouse role

Michael Richardson ,  Singapore   |  Fri, 04/25/2008 12:11 AM  |  Opinion

High oil prices are bad for Asian economies that rely on imported oil, among them China, Japan, India, South Korea, Thailand, the Philippines, Hong Kong, Taiwan, Singapore and, increasingly, Indonesia. They fuel inflation, discontent, hardship and, in some places, instability.

However, these obvious problems conceal a tectonic shift taking place in the global economy. Asia's dependence on the oil-rich Persian Gulf is contributing to the massive transfer of wealth, influence and power from the West to Asia and leading Gulf energy exporters.

How does the symbiotic relationship between Asian traders and Middle East oil producers work? Asia spends many tens of billions of dollars each year on oil from the Gulf. Take China: It was a net oil exporter as recently as 1993, but now has to import about half the oil it uses and has become the second largest oil consumer in the world, after the United States. If the price of oil stays close to, or above, US$100 per barrel as forecast and demand for oil in China remains strong, Beijing will have to spend well over $100 billion this year importing crude oil and refined products.

About half this money will go to Gulf producers because around 50 percent of Chinese oil imports are from the Middle East, defined as the Gulf oil exporters plus Oman and Yemen. Japan's Gulf oil bill will be even bigger, since nearly 90 percent of Japanese oil comes from the Middle East.

But as with other Asian oil importers that rely on the Gulf, this oil powers the manufacturing export industries and transport networks that enable leading Asian economies like China and Japan to amass huge surpluses in their trade with the European Union and the U.S.

For example, while China may have paid around $30 billion for Middle East oil in 2006 before the latest phase of the oil price surge, it amassed a merchandise trade surplus worth almost $145 billion with the U.S. in that year and a surplus of nearly $100 billion with the European Union. Its surpluses with both the U.S. and Europe have grown even larger since then.

Accumulated over years, these foreign exchange surpluses from oil in the Gulf and manufacturing trade in Asia are swelling the coffers of Gulf and Asian sovereign wealth funds that are buying substantial chunks of distressed U.S. and European banks, as well as significant holdings in a wide range of other Western companies. The International Monetary Fund has found that since 2000, the number of sovereign wealth funds has nearly doubled from 20 to 40, managing assets with an estimated value of between $1.9 trillion and $2.9 trillion.

Many of the wealthiest and most active of the funds are in Asia and the Gulf. They want to improve returns on their holdings. Morgan Stanley has forecast that if global growth and market expansion continue, sovereign wealth funds could control assets worth as much as $12 trillion by 2015.

Much of their investment is expected to flow to Asia as its powerhouse role in the world economy increases -- provided, of course, that oil inflation, food shortages, a slowdown in the West, and a general strengthening of Asian currencies against the U.S. dollar do not knock the region's export-led growth off course.

What we have seen so far is part of the trend propelling Asia's rise as an increasingly prominent force in global affairs. Singapore's Minister Mentor Lee Kuan Yew noted in a column he wrote for Forbes Asia magazine last month that Asia is expected to produce 50 percent of the world's GDP by 2030, regaining the position it held at the start of 19th Century, when China and India produced more than one-third of global income.

The Gulf-Asia energy nexus is also having a positive spin-off in two-way trade and investment. Trade between Asia and the Middle East is booming as Asian economies sell manufactured goods to the region and buy oil and natural gas in return. Millions of Asians work in the Persian Gulf and Middle East investors are starting to redirect more of their wealth to Asia instead of the West.

The writer, a former Asia editor of the International Herald Tribune, is an energy and security specialist at the Institute of South East Asian Studies in Singapore.

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