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SINGAPORE: Oil prices fell below US$124 a barrel in Asian trade on Wednesday, their lowest in three weeks. However, analysts said we have yet to see the end of the recent spike, and this will have consequences for both businesses and governments.
Just last week, oil prices bubbled at new record highs, pushing past the US$135-a-barrel mark.
David Cohen, director of Asian economic forecasting at Action Economics, said: "It's likely that we'll go to a new high yet. It's probably premature to talk about last week's high as being the end. Even as the market adjusts gradually, it's a slow process."
Companies, especially those in the transport sector, are really feeling the pain.
Mr Cohen pointed out: "The most seriously impacted would be the transport sector, including the airline industry. Although SIA (Singapore Airlines) is one of the most profitable airlines in the world, it hasn't been immune to the squeeze on earnings that airlines experience."
"Locally, taxi drivers have been hurt. Although they've raised prices, it has fed back to slowing demand, as people cut back in response to higher taxi fares," he added.
According to some estimates, the airline industry is poised to lose billions of dollars this year because of high jet fuel prices, and some are already talking about consolidation.
Selena Ling, head of treasury research and strategy at OCBC Bank, explained: "In the slowing environment, companies may find it hard to raise prices and this means they may actually start to feel a squeeze in profit margins going forward if the trend is sustained."
"We may actually see some restructuring or consolidation in industries. For firms facing slowing growth or higher energy prices, they will have to find cost efficiencies somewhere, and try and improve labour productivity to overcome higher costs," she added.
But as surely as there are losers, there are some winners too.
Mr Cohen said: "What separates the winners from losers are people involved in producing or supplying producers. Here in Singapore, Keppel and SembCorp are the two largest producers of offshore oil drilling rigs - where business is booming right now as exploration activity is expanding in response to higher oil prices."
From a macro point of view, rising oil prices are becoming a real concern due to their potential to lead to greater economic imbalances and political instability.
Vietnam, for example, has been hit by two rating outlook downgrades after high oil prices pushed inflation to 25 per cent.
Ms Ling said: "Countries like Vietnam... are facing some mini-crises because inflation rate has hit 25 per cent year-on-year, and now you have credit rating agencies downgrading the outlook ratings for Vietnam from stable to negative because they deem policy response to runaway inflation too little, too late."
Mr Cohen added: "The politicians are all holding their breath, worrying that consumer reaction would get out of hand. Everyone remembers what happened ten years ago in Indonesia - where adjustment in prices of fuel contributed to the overthrow of President Suharto."
On Wednesday, India and Malaysia became the latest countries in the region to cave in to cost pressures by raising fuel prices. - CNA/ac
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