Impact of High Oil Prices on Growth and Inflation

Mr Yee Jenn Jong asked the Minister for Trade and Industry (a) how is the Government preparing Singapore for a scenario of rising crude oil prices given increasing tensions in the Middle East and Iran's decision to halt oil exports to certain countries; and (b) how will persistent high oil prices impact our growth and inflation forecasts.

The Second Minister for Trade and Industry (Mr S Iswaran) (for the Minister for Trade and Industry): Mr Speaker, Sir, let me first highlight that the geopolitical tensions in the Middle East and Iran's decision to halt oil exports to certain European Union countries have not significantly affected global oil supply at this point in time. The affected EU countries have started turning to alternative sources of crude oil supply to meet their needs. Saudi Arabia, the world's largest oil producer and exporter, has also made commitments to increase oil production to compensate for any shortfall in supply due to the Iranian oil curbs.

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Although the developments in Middle East are evolving and highly uncertain, they have not had a major impact on our domestic costs at this juncture. As such, we are maintaining our 2012 GDP growth forecast at 1% to 3% and the CPI inflation forecast at 2.5% to 3.5%. The Government will continue to closely monitor the situation, and take these into account when reviewing its GDP growth and inflation forecasts. Nevertheless, we recognise the risk that a deteriorating situation in the Middle East may cause oil prices to raise. Indeed, UK Brent oil prices have risen from around US$110 per barrel at the end of last year to more than US$120 per barrel recently, close to the recent peak level registered in April 2011 when the Middle East and North Africa faced significant political unrest.

Should this trend continue, we, as a small economy almost wholly reliant on imported energy, will face higher energy prices. Businesses, particularly in energy-intensive sectors such as transport and chemicals, could face rising costs. Electricity and gas tariffs may also increase as the price of natural gas, which is used for electricity and town gas production, is pegged to oil prices, which is the usual practice in the Asian gas market. To enhance our resilience against supply and price shocks in uncertain conditions, diversification of our energy sources is key. Diversification will help ensure that we continue to have secure and competitively priced energy supplies to support our growth. We will continue to explore the development of viable alternative fuel sources. For example, we are building a Liquefied Natural Gas, or LNG, terminal which will provide access to the global gas market. Electricity import is another option that we are considering, which could allow Singapore to tap into new energy options that may be unavailable or economically infeasible in Singapore. The Government also works with industry players to explore alternative feedstock options to increase the competitiveness of the more energy-intensive industries, such as refineries and crackers, in Singapore. For example, the Economic Development Board (EDB) is exploring using Liquefied Petroleum Gas as a complementary feedstock to naphtha.

Beyond supply-side solutions, the Government also promotes more efficient energy use, and encourages businesses to play their part in using a scarce and precious resource wisely. We provide grants for energy efficiency projects, administer programmes which encourage energy efficient design and technology, and work closely with companies to uncover opportunities for energy efficiency through audits and benchmarking studies. Adopting energy efficiency practices helps companies cope with energy price volatility in the short term, but also prepares them for a future that will increasingly be energy constrained.

Mr Yee Jenn Jong (Non-Constituency Member): Sir, I thank the Second Minister for the answer. One supplementary question. Does the Minister foresee that there may be some additional short-term measures that may be needed when the oil prices stay very high for a long time and inflation becomes unbearable, and if so, what may this be?

Mr S Iswaran: Mr Speaker, Sir, there are many suppositions and hypotheses in the Member's question. I would repeat what I said in my reply, which is that we are closely monitoring the situation and if indeed there is a substantive impact that requires government actions, we will then take the necessary steps.

11.04 am

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Mr Speaker: Order. End of Question Time.