HIGH OIL PRICES (Impact on Singapore's economy)

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HIGH OIL PRICES:

(Impact on Singapore's economy): 1.

Mr Leong Horn Kee asked the Minister for Trade and Industry (a) what is the expected impact of the recent and potential further increases in oil prices on the various sectors of Singapore's economy; and (b) whether the revised GDP growth forecast of around 8% for this year will be affected.

2.

Dr Amy Khor Lean Suan asked the Minister for Trade and Industry (a) what will be the impact of persistent high oil prices on our economic growth; (b) whether the scenario of persistent high oil prices has been taken into account in our latest growth forecast of 8% to 9% for the whole of 2004; and (c) what measures have been or can be taken to offset any negative impact of high oil prices on our economic growth.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, may I have your permission to take Question Nos. 1 and 2 together because they are on the same topic?

Mr Speaker: Yes.

Mr Lim Hng Kiang: Mr Speaker, Sir, higher oil prices affect theSingapore economy in a number of ways. Most directly, it reduces demand for our oil and petrochemical exports as consumers either reduce their usage or turn to alternative products. Other non-oil domestic exports and re-exports can also be adversely affected indirectly if higher oil prices slow down the economic growth in our key trading partners.

Oil prices sustained at high levels also affect domestic demand. Consumer sentiments may be hurt and prices of non-oil consumer goods could increase as businesses pass on the higher cost of

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energy. This is likely to lower private consumption growth in Singapore. Private investments, too, may become more sluggish if businesses believe that energy prices will stay persistently high, thus lowering the profitability of new ventures. The impact on investment may also be greater if interest rates rise with higher inflation expectations.

The impact of high oil prices would not be felt equally among the various sectors of the economy. The transport sector would bear a higher share of the price hike initially since fuel enters directly into its costs. The manufacturing sector could also experience greater upward cost pressures due to the higher energy intensity and the reliance on petrochemical products as primary inputs for some of the activities.

Nevertheless, much of the impact of an increase in oil prices is expected to be felt only with a time lag. Oil prices have only started rising sharply since April this year, and much of the impact of the recent increase is unlikely to be felt in the current year. The consumer price inflation in Singapore, for instance, remains low in recent months and most major economies have continued to maintain strong growth momentum.

Hence, recent studies by the Asian Development Bank and International Energy Agency expect only small reductions in Asian GDP growth from the increase in oil prices. For Singapore, the ADB study released in June 2004 estimates that GDP growth this year will be 0.4 percentage point lower due to the increase in oil prices.

The ADB projection is similar to estimates by the Ministry of Trade and Industry. In a scenario where oil prices stay at an average of US$45 per barrel from August to the end of the year, GDP growth for 2004 is projected to fall by

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about 0.4 percentage point below the baseline case. If oil prices are assumed to rise to US$50 and remain at that level to the end of the year, MTI's projection is that GDP growth for the year could be 0.6 percentage point lower than in the baseline case. Most of the negative impact is expected to come from a decline in external demand for Singapore's exports.

While the downside risk to Singapore's GDP growth this year has risen recently, the impact of higher oil prices alone is unlikely to result in the full-year growth for 2004 falling below 8% at this point. Preliminary economic indicators for July also continue to indicate that the growth momentum has remained positive.

It is still too early to make an accurate assessment on how the economic outlook for 2005 will be affected, when the impact of higher oil prices will be felt. Much would depend on developments going forward, including the trend of crude oil prices. The MTI will closely monitor the situation and update its GDP growth projections, where necessary.

The price of oil has shown significant volatility since the 1970s and is likely to remain so for the foreseeable future. We can best mitigate the impact of higher oil prices by adapting our business practices and lifestyles to improve energy efficiency. For instance, we could turn to the increasing number of energy-saving alternatives when choosing electrical appliances and devices. We could also switch towards transport vehicles with greater fuel economy. These changes in consumption behaviour will only happen, however, if businesses and consumers receive the right price signals. Hence, we should not artificially suppress prices. Instead, we should allow prices to respond to higher energy cost so that demand for oil can be moderated. By doing so, we can continually limit our

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dependency on oil and reduce our sensitivity to future shocks in oil prices.

Mr Leong Horn Kee (Bishan-Toa Payoh): Mr Speaker, Sir, I would like to thank the Minister for his assurance that we can still keep to about 8% GDP growth. But I have just been reading this article from Business Week on "Coping with sky-high oil prices" which predicts that oil prices may go up to US$100 per barrel. Of course, we do not wish for that scenario to happen but ---

Mr Speaker: Ask your question, Mr Leong.

Mr Leong Horn Kee: May I ask the Minister that should oil prices go to such a high level of US$100 per barrel, as stated in the article, what would be the impact on our GDP growth this year and other impacts, like inflation, and on sectors that require oil as fuel, such as pump prices, electricity tariffs and even on transport costs like bus fares and MRT fares.

Mr Lim Hng Kiang: Mr Speaker, Sir, obviously, one can paint many different scenarios. Mr Leong Horn Kee referred to the article where they postulate a probability of oil reaching US$100 a barrel. But for those who look at the fundamental demand/supply conditions as well as the whole supply chain, they have come to the assessment that there is no shortage, and they estimate that the price reflecting these demand/supply conditions will range between US$38 and US$40 a barrel. But, of course, those are based on fundamental demand/supply conditions. How the market reacts due to expectations and concerns about disruption of supply, this is reflected in both spot prices and future prices.

As I have said in my answer, the momentum of growth in Singapore is still very strong. We have had an average of 10% growth for the first half of this year

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and we are already coming to the end of the third quarter. The numbers for July show that the momentum has been maintained. We are reasonably confident that we should be able to end the year within our growth forecast. If oil prices remain persistently high, even to the level of US$100 per barrel, then the impact will affect us more in the longer term, ie, in 2005 and 2006, and for that we have to monitor and assess it separately.

Dr Amy Khor Lean Suan (Hong Kah): Sir, I would like to ask the Minister two questions. Given the time lag between the persistently high oil prices and its impact on the economy, I would like to ask the Minister what is the likely impact on the consumer price index for the coming year. Secondly, is the Ministry, together with any other Ministry, makingconcerted efforts to reduce our reliance and dependence on oil given that oil prices are going to be volatile in the foreseeable future?

Mr Lim Hng Kiang: Mr Speaker, Sir, as I explained in my answer, the CPI impact is still very moderate for the time being. The overall global inflation situation is still reasonably benign. Energy prices impact only a small component of the overall inflationary picture. So we do not expect the inflationary situation to get out of control. But obviously energy prices can feed to other costs and this will reflect itself in the CPI later on after a lag.

On our dependency on oil and other related energy sources, as I explained in my answer, we import everything we use, and this is a long-term strategy that we have undertaken since the 1970s and 1980s to reduce our reliance on oil and other energy sources through diversification, alternative uses and through uses of other modes which are more efficient and to conserve the use of energy. For example, the Ministry of Environment and Water Resources is promoting the use of alternative fuel for cars. Our two biggest

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uses are electricity generation and transport. For electricity, we have gone to gas and we are looking at other sources. For transport, I think LTA is promoting the use of other modes of public transport as well as other energy sources.