Sars Increasingly Affects World Oil Demand

threatening short-term economic prospects in Asia. Until 5 May, SARS has infected more than 6,500, putting East and Southeast Asian countries, especially China, under considerable strain. The economic problems have already been spread to other economies but only to a lesser extent.

A great uncertainty what Sars is concerned, has lead to a massive loss of consumer confidence, which reduce private consumption in Asian countries. Tourism has been hardest hit. Furthermore, investments will be delayed or even reduced in reaction to the illness. The increased government spending in the region will never be able to counterbalance the lack of private spending and investments.

The absence of tourists has hit the whole hotel and retail sector. Tourism accounts for over 9 percent of GDP in East Asia. Airlines had to take drastic measure in reaction to the illness. 40% of scheduled flights into Hong Kong were cancelled. Singapore Airlines has asked all of its 6,600 cabin-crew members to take unpaid leave, and has cut capacity to barely one-third of normal levels. Lufthansa, Germany?s biggest carrier saw a decline on its Asian routs of as much as 85 percent. As a result, the company intends to reduce working hours for some of its staff and ground planes.

Beijing's and Shanghai?s international airports saw their cargo volume plummeted by half this month.

The decrease demand for aviation fuel has also consequences for China?s refinery industry. China Aviation Oil, which supplies nearly all of the country's jet imports, says that jet fuel demand is already 46% lower in May compared to the corresponding period a year ago. In order to compensate the decreased sales, Petro China, announced to cut its crude procession in May by 5 percent to 1?766 million barrels per day.

Being aggregated to a macro level, the numbers present the following dull picture. China, until now the fasted growing economy, will see its growth reduced by up to 2 percent this year. A loss in GDP means large reduction in income and output and could reach US$ 27.7 billion. This massive slowdown has also repercussions to Western economies. It is estimated that every 1 percent reduction in GDP reduces the export growth of the US by 0.2 percent.

The slump can affect the demand for oil thoroughly as every 1% fall in Asia's GDP would cause a reduction of around 50,000-100,000 bpd, while every 10% drop in regional flight capacity would translate into a 90,000 bpd loss. It is likely, that other commodity price will be affected in a similar way.

Measures have been taken to fight the downward spiral of the Asian economies. China for example has announced a package of tax relief measures for business sectors which were hit by the outbreak of Sars. Furthermore, the Asian Development Bank stated that it would support regional efforts to combat the spread of the disease by reallocation funds and extra credits of up to $27 million.


Author: Andreas Wild