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ADB: drop in oil prices to be short lived
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14:38, September 16, 2008

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· Surge in Oil Prices
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Developing Asia will face a prolonged period of high and volatile oil prices that will temper growth and force governments around the region to make policy adjustments to encourage increased energy efficiency among consumers, said the Asian Development Bank (ADB) on Tuesday.

The recent drop in oil prices will be short lived and the region's explosive growth will put further pressure on global oil supply and keep prices elevated above 100 U.S. dollars a barrel until at least 2020, said the Manila-based bank in the Asian Development Outlook 2008 Update.

In a comprehensive study of the trajectory of future oil prices and the implications for developing Asia, the latest report warns that Asia, as a net importer of primary energy, will be hit hard by a prolonged increase in the price of oil.

"High oil prices are here to stay, and the sooner that developing Asia wakes up to this reality the better," ADB Chief Economist Ifzal Ali said in a press release.

"The past few years of robust growth in the face of rising oil prices should not delude us into believing that Asia's growth prospects will be immune from the effects of expensive oil. Looking ahead, a prolonged elevation of oil prices would almost certainly have an adverse impact on Asia's future growth," he added.

The report notes that the current oil price surge, which began in 2003, is fundamentally different to previous oil shocks in the 1970s, which were caused by temporary supply disruptions. This time, it says, high oil prices have been mostly driven by surging demand and the inability of suppliers to keep pace.

Developing Asia's breakneck growth and large appetite for imported energy has already had a significant impact on global oil prices, and the report predicts that the region, together with the Middle East, will continue to place upward pressure on oil prices into the future.

A reduction in surplus oil capacity caused by increased demand, alongside financial speculators betting on higher oil prices, wil llead to even greater price volatility in the oil market, according to the report.

While the report forecasts that higher output and weaker demand will push down prices slightly in the short term, as is now happening, prices will start to soar again in the next decade due to a sustained gap between supply and demand.

Ali said that the report's long-term oil forecasts should sound a warning to developing Asia's policymakers.

"Developing Asia's oil consumption is three times as high as its oil production and so it cannot afford to ignore the findings of this report. Failure to act today will have larger costs tomorrow," said the economist.

"Painful but necessary adjustments will have to be made in the areas of macroeconomic policy as well as energy policy. Above all, policymakers should use a carrot-and-stick approach of subsidies and taxes to encourage the region's firms and consumers to use oil more efficiently. A welcome trend in this respect is the phase-out of fuel subsidies and price control already underway in the region," he added.


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