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Under the Banyan Tree – What Middle Eastern oil means for Asia
651 Plays4 days ago
With events in the Gulf reverberating globally, Herald and Fred discuss Asia's reliance on oil from the Middle East and what price changes could mean for various parts of the economy.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/7twPV9j
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Transcript
Podcast Introduction
00:00:02
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Asia's Role in Global Energy Trade
00:00:33
Speaker
Hello from Hong Kong and welcome to Under the Banyan Tree. I'm Harold van der Linde, Head of Asian Equity Strategy at HSBC. The eyes of the world may be focused largely on the Middle East, but the ripple effects can be felt around the globe, not least here in Asia.
00:00:48
Speaker
They can indeed. I'm Fred Newman, Chief Asia Economist. Asia plays a huge role in the global energy trade, but this is about more than just the price of oil. It's economic growth, exchange rates, risk aversion, and of course, much more than that.
00:01:01
Speaker
We're not here to get political. What we are here to do is to put Asian markets and economics in context. So let's get started. From HSBC's Global Investment Research, you're listening to Under the Banyan Tree.
Asia's Oil Imports from the Middle East
00:01:22
Speaker
Let's begin with some numbers to set the scene here. Asia is a primary destination for Middle East oil exports. In fact, China alone bought around 80% of the crude oil that Iran exported in 2025, which amounted to about 1.4 million barrels per day.
00:01:37
Speaker
That's right, f Fred. and The four biggest economies in the region, that's China, India, Japan and South Korea, all rely on the Gulf for more than 50% of their oil imports. And in most Asian markets, the net import bill for oil and gas is at least 2% of GDP.
00:01:53
Speaker
So Fred, oil obviously plays a major role in
Economic Impact of Oil Prices
00:01:57
Speaker
the region. Before we go and talk about which countries are exposed, can we just talk a bit about the mechanics? Why is oil important to these economies? And what are the sort of transmission mechanisms that we see typically as oil prices go higher? Well, just before we answer that, Harold, I think it's important to say that this is clearly a human tragedy above all. It's not just about the price of oil or the impact on global economy. but Absolutely. But foremost, there human lives at stake yeah ah across the entire region. So yeah know with that in mind, um of course, it is worth looking at economic developments, but certainly that shouldn't be forgotten.
00:02:35
Speaker
Now, to run an economy nowadays, you need energy, and most of the energy comes from oil still, whether it's transportation or even for heavy industry, for example, airplanes, plastics. I thought actually a lot of economies had gone into renewables. Yeah, the oil has changed they have, but the core is still really oil, but fossil fuels. Unfortunately, we're trying to get away from that, but but that certainly is there. Now, if you're an importer and and the price of oil goes up, you're paying more for the imports and that's a cost that you have to pay whether it's consumers have to pay more for the oil or businesses have to pay more for it and that means a rise in global price of oil means that an importer has to pay out of its pockets more to other countries to import this stuff and that's hits your pocketbooks that makes you poor and it raises prices so you're both inflation and it's negative for growth and that's why If you're an oil importer, it's not necessarily good news if oil prices
Influence of Oil on Inflation and Exchange Rates
00:03:33
Speaker
go up. And this is the risk here that if you see a spike in oil prices, you're going to see higher inflation and weaker economic growth in these economies that import oil, of which we have a lot of them in Asia.
00:03:45
Speaker
Yeah, I can understand that. But typically governments would do that, not consumers or companies, you would think? or is that new Well, everybody who uses oil ultimately pays for it, right? So whether it's a person filling up the gas tank or the motorcycle at a gas station or whether it's governments that come in and ah buy large oil for the military or even deep for the for the population. That that makes sense. so for example, I know that some listed companies in in India, for example, they're what we call marketing companies. So they they buy oil and then they sell it as diesel and gasoline or whatever to people who have got cars. But their prices are very often fixed by the government. So, ah yeah, and then either the government or these companies have to
00:04:29
Speaker
That's right. So traditionally, um up until about 10 years ago, it was that in many countries across the region and indeed in many emerging markets and even some developed markets, the price of oil was kind of fixed by governments. They they subsidized it or they regulated the price. or of the you know the The cost would have been borne by certain importers. But what we've seen in the past 10 years or so is that governments have stepped back from regulating these prices. um Even in places like India, for example, the price of gasoline now is much more free-flowing, mirroring global oil prices. And that means that governments are not really...
00:05:08
Speaker
holding on to the price anymore, it fluctuates much more. That is, if you have a rise in global oil prices, it immediately affects how the the increase is reflected in change in price of oil. Yeah, that's right. India's done that. I think Indonesia did this to a large extent. and Also, certain countries...
00:05:23
Speaker
I'm thinking about China here, they have a sort of strategic reserve, right? They've got sort of ah a pool of inventory that they bought in in case prices go higher and there's a shortage and that they don't run out. Very large countries in the world have obviously luxury to set up reserves and they can kind of smooth out fluctuations in oil prices by releasing oil and into the local market or holding it back. But that's really so the US can do that, maybe some European countries at the margin.
Effects on Asian Importers and Exporters
00:05:50
Speaker
China can do that in a large way. But most of the most smaller countries don't really have these these large facilities. So generally the smaller the country, the more easily the price of oil feeds through into the gas pump sticker price. Now China is is interesting because it's the world's largest really consumer of oil even though it's trying to get away from that. And also was a big buyer of Iranian oil.
00:06:17
Speaker
um So about 8% of its consumption came from Iran. Now, if it can no longer buy that type of oil, it will have to buy oil elsewhere in the global market. And that means that it pushes up the price of of oil oil from other sources. Okay. Does it also impact exchange rates? I'm quickly thinking. Because if a country needs to buy more oil, that means it needs to sell its own currency to get dollars. That's right. You you pay more. You pay more for your imports and you get maybe less from your exports because there's weaker demand overseas. So that's generally for an oil importer. It's negative for the currency. So that's a general principle, of course. it is yeah yeah we We're talking about the mechanics here, right? And then maybe also if you're a central banker, you see your currency weakens, your inflation goes up. You want to raise interest rates, you think, but that doesn't help the situation. That's always a big the big debate, right? Do you raise interest rates? Because raising the interest rate doesn't correct the price of oil globally. Yeah, exactly. So why do it? But ah yes, if if oil prices rise and the currency weakens and there is inflation that starts to bubble up in the economy, yeah central banks can't just sit back and just ignore it because this if it becomes too persistent, too too long – you've got to come in and tighten policy. So generally speaking, that adds into the economic burden because you see tighter monetary policy than the otherwise would. yeah And that's also not good for growth. So
Asia's Energy Landscape and Importers
00:07:40
Speaker
think of higher oil prices not being good for growth and leading to higher prices.
00:07:45
Speaker
But I'm making a particular comment here, and that is for importers of oil, yeah not necessarily for exporters. Yeah, for them it would be the other way around, I presume, right? And there exporters of oil in the region? So that's interesting. In Asia, we largely have large importers of oil. In fact, Asian economies tend to be very large importers because often there's very little production on shore and also because these are manufacturing, heavy industry-driven economies. But there are, which sort of tend to think of three exceptions in Asia to this to this broad rule.
00:08:18
Speaker
One is Malaysia, which actually has net oil exports So if you did take oil and gas typically and they export more than consume so they actually – they're an exporter. And so they would at some sense benefit from higher oil prices although it gets more complicated. But generally they're they're OK when oil prices go up. Then you have Indonesia, which would produces oil, but not enough to fully cover its demand on shore. So they're still a slight net importer, even though they produce oil. They used to be a big oil importer, but over the years it has declined relative to domestic consumption.
00:08:53
Speaker
But there's a new kid on the block when it comes to oil and gas, and that is Australia. Australia has developed massive gas fields in the northwest of the country, and they're now such a big producer, particularly of gas, that they're probably no longer net importer. They're roughly balanced as well. But that's a huge change from many years ago. But over time, they are becoming a bigger player in the international market as a supplier
Transition to Renewable Energy in Asia
00:09:20
Speaker
of gas. Yeah. Okay, so through inflation, exchange rates and potentially how central bankers respond to this are some of the mechanics that filter through the region, right? If you would now say, put some of the countries that are most exposed to this, which are the countries and economies that are most exposed to higher oil prices in a negative way? And are there ones that you say, well, those are kind of in a much better position?
00:09:45
Speaker
So the way we look at this right from the top is to look at the net trade balance of oil imports and exports and gas imports and exports. And and then we kind of could looked at relative to GDP. So what you find is that an economy like Thailand, Korea, Taiwan, um they are major importers, net importers of oil and gas. And so the price goes up.
00:10:10
Speaker
of oil and gas, usually they run in tandem, they pay much more. And that's accounting for the fact that they also export stuff, but they import more than they export. Yeah, yeah, yeah. So as you mentioned. what about India? India is also quite exposed. So India is often put in the category as being highly exposed. However, it's actually not as exposed as other countries are, partly because India is less of a heavy industry-driven economy. So per unit of GDP, they don't require quite as much energy and say some of the industrialized countries in Northeast Asia do. But also because the Indian government has reduced its subsidies and price controls, India has become so much more efficient in using. These are exactly these price controls we spoke about in the beginning. Yeah, consumers are much more careful about how much they use and if the price goes up, then immediately – They switch or they drive less or whatever. They drive less. And so actually we see that the sensitivity of the Indian economy, of its currency to oil has actually declined quite a bit. And that's a positive development. And if we put this in a sort of historical context, for example, in India, 10 years ago, they would import more. So they would be more sensitive. But now there are other sources of energy they're using as well. So not only have they taken these price restrictions away, but also they're using solar
Benefits of Renewable Energy Beyond the Environment
00:11:27
Speaker
and wind solar. Nuclear and hydro on. And this is a very important point because talk a lot about climate change. There's of course a need to move away from fossil fuels to reduce carbon emissions. But there's another advantage if you move towards solar energy, wind energy, is that you reduce your economy's exposure to oil imports and price fluctuations. If you have solar panels, you don't need to import oil. And so that's a cost saving to your economy. Now, what we find in Asia is that because of the dramatic increase in solar energy and wind energy and overall energy basket, we see a reduced sensitivity to change in global oil prices. So we're no longer as vulnerable as we were. A decade ago. decade ago or two decades ago or three decades ago. Particularly if you have, take China for example, lot of cars are now electric cars. So they are effectively running on solar, wind or nuclear power. And they're not demanding fuel that comes from elsewhere on the globe. So in that way, China has sorts of, we often spoke about the technological advantage of sector. But there's a sort of import fuel oil sensitivity advantage for them in that sense as well, right?
00:12:42
Speaker
Yeah, there is. There's a cost saving, there's an environmental saving. ah and so this is often overlooked when it comes to discussing alternatives, that you have essentially this this reduction of cost to your economy, which is quite
Oil Prices and Equity Markets
00:12:56
Speaker
substantial. yeah But I think we talked enough economics probably because we got you, Harold, here, our market experts, but maybe we should take a quick break and then hear what you have to say about how oil prices influence equity markets.
00:13:17
Speaker
So, Harold, how as an equity investor do you think about this? Because rising oil prices, I guess, would be good for some companies in the stock market, particularly if you sell the stuff, um but less so for other companies. So do you see actually investors shifting around? oil prices go up, shifting around which sectors they take exposure to? Yes. So what you talk about is what we can call the direct impact. And I think there are two channels in which markets are being impacted, the direct impact and the indirect impact. The direct impact, if you're a oil exploration company or you sell oil products, the price go up, you sell more, you have a positive impact. If you buy oil, you're an airliner, for example, price go up is bad news for you. So that's that's a direct impact. Of course, sometimes travel will be impacted if it is ticket prices as well. but But this is broadly speaking the direct impact. Also, another sector that is direct impacted is shipping generally. the the Part of the ship is do oil tankers. If prices go up or down, it impacts demand for that and that means that these oil tankers get more expensive to to rent if the demand goes up. Or if there's too many of them and demand is weak, then the prices for the oil tankers, they respond from hour to hour. So, for example, at the beginning of this year in Asia, if you wanted to get an oil tanker for a day to import oil, it costs you 30,000 US dollars for a tanker a day. Now that is $200,000. Now that's bad news if you need these tankers. That's good news if you have these tankers and you lease them out. And what do these companies do again? And now we're getting to the second round effects. They say, well, we need to increase supply of these tankers. there's good demand for it. So they go to the shipyards. So certain other industries will be impacted. So this is i still, I would say, all the direct impact. And a lot of this actually is reflected in markets very quickly. Very often we're talking sometimes minutes, hours, boom, it's priced in. But what about consumers who pay more for oil? Is there a worry that consumers might pull back? Yeah. So this is, I think, much more important. This is the indirect impact. So you talked about how inflation goes up and prices move higher and interest rates maybe move higher and bond yields move higher and currencies can move and et cetera, et cetera. This is very often the bigger effect, but takes time for us to get a head around in the markets. How much inflation will be there? Which central banks are going to raise interest rates? Which ones are not? ah What happens with bond yields, which is interest rate expectations in markets? All these things start to gradually unfold and change as oil prices move.
00:15:52
Speaker
And the equity market needs to then reflect that. If bond yields go up, that's bad news for equities. But if then also the prices go up because consumers are going to not have as much because they have higher fuel bills, they're going to sell less other products, think about toothpaste or something like that, then that's bad news for toothpaste companies. And these are the second round effects, and they tend to be reflected in prices over much longer term.
00:16:17
Speaker
Now, taking a step back, um has the so the the importance of oil for the equity markets declined over time? Because I imagine, you know, back in the 70s, you know, oil was super important. you know, price changes immediately affected the economy much more than does today. Presumably also affected, therefore, stock markets much more. Are you sort of, in your long career as an equity strategist, are you paying less attention to oil now that you maybe did at beginning of your career? Absolutely. And I wasn't around in the 70s. I was around the 70s, but I didn't look at markets in those days. But I do have a lot of gray hair that I admit to. In the beginning, when Asian stock markets developed, a lot of governments said we need to we need to build out these equity markets. What did they do? State-owned enterprises were listed. Of course, private companies as well, but take China, for example, in the early 2000s, the biggest companies in the market were kind of oil companies or metal companies and miners and these sort of things. Banks and consumer companies but only got listed much later, 2005, 2006, and then they were relatively small. They grew in size. And then later on, we had internet companies. Now we have AI companies. So, Stock markets were much more concentrated in the past than they are now. And that means that you already spoke about that the economies are less sensitive to oil. Stock markets have that as well, but also because the composition has changed. as many other companies that have all sorts of businesses that do not touch oil as much. Think about gaming companies, e-commerce. They will be impacted in the second round's effects, but they are not as impacted as much as an oil company itself. essential interesting You answer that through the listing composition on the stock market, yeah what types of companies that are presented there. But then there's also the other argument from an economist's perspective, probably the impact of oil on everyday activity has diminished. It doesn't matter whether oil is 60 or 80, broadly speaking, whereas maybe it had mattered a lot 30 years ago. Exactly. um
00:18:13
Speaker
So volatility in oil, therefore, also probably presumably has less impact generally on on the equity market. Because the economic volatility or economic sensitivity is lower, but the market sensitivity or exposure to oil in the direct channel is now much lower as well.
00:18:28
Speaker
Well, we're going to have to leave it there, folks. Thanks for joining us under the banyan tree. And do also listen to the macro brief from HSBC Global Investment Research, our sister podcast, bringing you a global perspective on the key issues moving the markets right now. We'll continue to keep a close eye on developments in Iran and the Middle East and, of course, what it all means for Asia.
00:18:48
Speaker
For now, though, it's thanks and goodbye till next week.
00:19:00
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:19:12
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto to today's show.