Questions abt Oil

I had a question recently from a reader, so I've decided to answer his question in this entry, since I've been blogging so little and i think if any of you guys have a better understanding of the issue, do help him out. (Note: if you hv any idea, do leave a comment or send an email to me)
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I'm a Singaporean and currently very keen on understanding how much impact does the high oil price on singapore economy.

I suspect that the high oil price actually improve our economy instead of making it worst.

For example, I know that although many ASIA countries have bigger oil refineries than Singapore, but the country refining capacity can not cope with the local domestic demand and they have to import oil from various countries.

Singapore capacity is at 1.3m bbl and our domestic demand is only 700bbl and we are selling excess oil to other countries.

Can you help?

rgds
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Well firstly, I'm terribly sorry but my thesis is on the oil refinery industry in Singapore so I have relatively little knowledge to assist you in the sphere of oil prices affecting local economy. Even when it comes to the oil refinery, I have to admit that my thesis is sub-standard, not exactly the kind of book that makes you go "ahhhhh" in the library. Heh. I will try and answer all your questions to the best of my knowledge.

Firstly, Singapore has diversified her economy away from manufacturing and largely into service sector (such as finances, tourism, education, health etc etc). Even in the realm of manufaturing, there has been a move away from basic manufacturing towards higher advanced manufacturing that requires more technology and churn out more expensive stuff.
In short, there is a shift away from energy-intensive industries towards less energy needed sectors. Hence, in general, we are less sensitive to oil prices now due to the changed structural of our economy.

As for the impact of oil prices on the local domestic market, specifically to local inflation, I do not have a clear answer. Although record high prices are affecting our driving habits, I believe that it would not affect local inflation in a drastic way. I gathered this from some other studies of oil prices. Apparently, in developed countries, with higher income and more various options to spend their money, energy expediture has been reduced to a smaller percentage of a household total expediture. Since energy comprises a smaller share of the total expediture, the impact of a price rise has been relatively little.

Higher oil prices DO HELP our economy in one large way. High oil prices make it more profitable to explore and drill for oils in remote, hard-to-reach places, hence oil companies are more willing to fork out money to produce oil in these previously uneconomical oil-fields. Hence, they are now investing more on oil rigs, exploration equipment, and stuff like that on a global arena. Singapore has an active shipyard and many Singapore companies (Sembcorp, Keppal) are world players in this field. The Strait Times has been highlighting the many contracts and business they have acquired since oil prices increased.

As for the local oil refinery, Singapore's oil refineries serves to refine crude oil and export oil products to overseas markets. It is actually the 3rd largest oil refinery (not in actual size, but in geograpgical concentration) in the world.

Again, I could not give a analysed report on the impact of price. But in my thesis, I did a simple regression on RATIO of input and outprices (meaning the difference in selling price and cost) and CRUDE throughput (total refining volume) to Singapore's refinery income per barrel. RATIO is insignificant in this regression which just means that the profitability has less to do with fluctuations in crude and oil product prices.

However, if one has followed the trend, the increases in oil price for the past few months is mainly to do with limited supply, and not demand. And this limitation in supply is more or less to do with refinery capacity, even before Hurricane Katrina. Many refineries in the world are operating at almost full capacity, Iraq's oil refineries have been slower than expected to operate. This limitation in refinery has been the primary fear to push speculators and hedging companies to predict a prolonged increase in oil prices, even when refinery volume is still capable of supply total demand, but in a very tight way. Hence, at the beginning, oil prices spiralled upwards due to this speculation (as much as US $10 per barrel in recent months is due to speculation in the futures market).

With Hurricane Katrine, 10 oil rigs are out, and the other rigs there are operating at reduced capacity. Oil refineries in the area are all out as well. No guess for the reaction of oil prices. Supply is now more tighter, and with the next new refinery in the world scheduled only to operate in 2007. This means that exisiting refinery are now more hard-pressed to operate, and they can charge a higher fee for processing crudes.

Singapore's refineries are processing crudes for overseas market, so my guess is that the various oil companies' operations here are churning out a more decent profit line than has been the past few years (Singapore oil refinery's profitability has been eroding due to competition and they have been pushing hard to climb up the valued-added chain to have more higher value crackers etc for higher grade oil products, as well as venture towards petrochemical sector).

Actually if you ask me, in the longer term, many countries would probably prefer to have their own refineries than depend on Singapore even though it may not be economical to do so. The recent episodes have demonstrated how vulnerable the supply chain is, and i think many countries are insecure. This has actually been happening for quite a while, despite Singapore possessing very efficient and high-tech refining equipment, other countries have been trying to refine more of their crudes in their smaller inefficient teapot refineries (they call them teapot refineries coz its so small, not because its cute! HAHA). There has been a large pouring of investment in new refineries, and these may prove to draw market share away from Singapore in the next decade.

In any way, as an overall net oil importer, the economy definitely would suffer in an oil price hike, despite an improvement in oil refinery and shipyard. Its just my argument that we are suffering less relatively compared to years ago when we have less service industry and more basic manufacturing.

Just in the Straits Times today (6th Sept'2005), there is a report on the impact of an oil shock PLUS a dampened US economy. I think JPMorgan Chase Bank research team identified Singapore as one of the bigger losers. I quote, "Every sustained US$10 per barrel hike in oil prices could shave as much as 1 percentage point off its GDP growth." This reduction in GDP growth is mostly due to reduced demand from US and other export markets, rather than domestic impact from the oil hike.


Oh btw, one last thing. In case you missed this, if we account for inflation, in terms of real value of oil, the prices of oil has not reach the heights of the oil shocks of 1970's yet. Meaning, this "shock" today is actually not as significant as the 1970's, and the market is actually relatively comfortable with the recent hikes. We can still afford to pay more for oil. (But I'm driving my car less now, heehee)

Hope this helps. Readers, do leave any extra information if you have any to add.
Thank you.