While investors fret over the debt crisis in Europe and discuss its possible impact on Asia’s growth, one economist tells CNBC that emerging markets face a greater risk from rising oil prices than from Greece’s rising woes.
“While everybody is focused on Greece, the bigger risk is the rising cost of oil,” says Frederic Neumann Co-Head of Asian Economics Research at HSBC. “If the price of crude continues to climb it will snuff out the recovery we are seeing in the United States and will weigh on Asian exports.”
Brent crude is currently trading around $120 a barrel and is about $10 more expensive than what is was at the same time last year. Neumann believes geopolitical uncertainties and robust Asian demand could drive prices even higher this year.
“People who believe Europe weakness will rein in oil prices in the near future are underestimating Asian demand,” he says.
The region also stands to suffer the most from a spike in crude as most Asian economies are very energy intensive.
Asia, including Australia and New Zealand, is the largest consumer of crude oil today, accounting for almost 32 percent of world demand, with North America making up about 26 percent and Europe close to 17 percent, according to HSBC data.
Worry About Growth, Not Inflation
Neumann argues that the greatest impact of high oil prices will be on growth, rather than on inflation.
“If prices were to go up to $140 a barrel this year, that would mean a 30 percent year-on-year increase, which is manageable from an inflation perspective,” he said. "I would only be worried about inflation if the year-on-year change in prices is 90 percent, like it was in 2008."
He added that when it comes to growth, the level of oil prices matters much more than the rate of change, "since the cost of crude acts like a tax on economic activity.”
The overall cost of oil consumption to GDP is the highest in Asia’s emerging markets at 7 percent compared to a little more than 5 percent for the U.S. This makes economic activity in the region more vulnerable to price rises.