UPSURGE IN OIL PRICES

Mrs Lim Hwee Hua asked the Minister for Trade and Industry whether the upsurge in oil prices, if sustained, will (i) affect economic growth for Singapore; (ii) exert inflationary pressure; and (iii) lead Government to introduce measures to curb oil-related consumption.

Mr Leong Horn Kee asked the Minister for Trade and Industry what in his assessment are the various effects of rising oil prices on the economy and its various component sectors, especially those that are dependent on oil, such as transportation, public utilities and manufacturing.

The Minister for Trade and Industry (BG George Yong-Boon Yeo): Mr Speaker, Sir, may I have your permission to take Question Nos 1 and 2 together?

Mr Speaker: Yes.

BG George Yong-Boon Yeo: Oil prices have risen sharply over the last two years, from a low of US$10 per barrel in January 1999 to a high of US$37 in September this year. This has raised global concerns about the impact on inflation and economic growth.

The oil shocks in 1974 and 1980 triggered global slowdowns1. However, the economic impact of the recent surge in oil prices is likely to be much less severe.

Firstly, energy conservation and the shift to alternative fuels have made the global economy less dependent on oil. Since 1974, the oil consumption per unit of real GDP has fallen by almost half in the US, EU and Japan, and by about 30% in the rest of Asia.

Secondly, the US$10 per barrel price in January 1999 was abnormally low. The average price over the last 4 years has been US$18. Compared to this, the present price of US$33 is not very high. Adjusted for inflation, the present price is only two-thirds (62%) of the 1974 level, and one-third (35%) of the 1980 level.

Studies of the economic impact of high oil prices have shown that it should be quite small. The OECD has estimated that a US$10 increase would only raise inflation by 0.4-1.1 percentage point and lower real GDP by 0.2-0.5 percentage point in the US, EU and Japan. Similarly, the Asian Development Bank (ADB) has projected that a price of US$35 a barrel for a year would reduce real GDP growth in the world by 0.2- 0.25 percentage point,

1 World growth slowed from 6.9% in 1973 to 2.8% in 1974, and from 3.8% in 1979 to 2.3% in 1980. and in Asia by 0.4-0.5 percentage point. The IMF has also estimated that high oil prices may only slice 0.3-0.5 percentage point off its world growth forecast of 4.2% next year.

In Singapore, although the surge in oil prices has caused import prices to rise, CPI inflation has remained low. CPI has only increased by 1.1% in the first 8 months this year. There are several reasons for this.

First, oil and related commodities account for only 10% of the CPI basket in Singapore.

Second, housing costs have been kept low by the weak property rentals.

Third, market liberalisation measures and stronger competition have kept inflation low for items like telecommunications and clothing. MTI has estimated that even if oil prices stayed at US$35 for a year, Singapore's CPI inflation would only be pushed up by 0.5 percentage point, and GDP growth would be reduced by only 0.5 percentage point.

We expect the Singapore economy to perform well for the rest of this year and next, despite the high oil prices. However, the impact of oil prices will vary among industries. Industries which are more dependent on oil, such as oil refining, petrochemicals, utility and transport, will be more affected.

For the oil refineries and petrochemicals industries, increasing crude oil prices have raised raw material costs as well as other oil-related input costs such as transport, electricity and fuel. This has squeezed profit margins. In the utility industry, the electricity tariff has had to be revised upwards 3 times this year because of fuel cost increases. In transport, SBS, TIBS and SMRT have Fuel Equalisation Funds (FEF), which are designed to soften the impact of sharp increases in fuel prices. This has enabled them to put off fare increases in the short-term. But if fuel prices stay high, eventually fare increases will be unavoidable.

Ms Lim Hwee Hua has asked whether the Government will introduce measures to curb oil-related consumption. At present, there is no need for Government to ration usage, as the cause of the oil hikes is mainly due to a surge in world demand, rather than any supply disruption or shortage of oil. The higher prices will already help to reduce oil usage and choke off excessive consumption.

Mr Leong Horn Kee (Bishan-Toa Payoh): Sir, I read in a recent press report that some lecturers in the Econometrics Department of the National University of Singapore have actually assessed that, with increasing oil prices and the positive impact on our neighbouring countries like Malaysia and Indonesia which are oil-producing countries, it may in fact have a beneficial effect on Singapore. What does the Minister think about that assessment?

BG George Yong-Boon Yeo: Mr Speaker, Sir, that would be a consolation prize.

Mr J. B. Jeyaretnam (Non-Constituency Member): May I ask whether the Government has taken note of the rising demands in other countries for their governments to cut the duty or tax on fuel oil? Has this Government considered it? Why is it not possible to reduce the tax or duty?

Mr Speaker: Order. Mr Jeyaretnam, we have a Question further down on the Order Paper. Unless the Minister has a reply, I suggest we wait till we come to that Question.