Fossil fuels comprise the lion’s share of East Asia’s energy supply. For Japan, 83% comes from fossil fuel; for Indonesia, 78%; for South Korea, 79%; and for Taiwan 92% (Note 1). Oil is the primary source, with 50% of Japan’s energy consumption; 41% of Indonesia’s consumption; and 51% of Korea and Taiwan’s consumption coming from oil. For Japan, 100% of its crude oil
supply comes from imports; for Indonesia 37% comes from imports; and for Korea and Taiwan 99% comes from imports. Given the importance of oil in their energy matrices, how do oil prices impact Asian economies?
How Oil Price Changes Impact Asian Industries
Recent research has investigated this question by examining how oil price changes impact sectoral stock prices. Theoretical and empirical evidence indicates that sectoral stock price changes help to predict sectoral changes in profits, investment, and output. Thus, examining how oil price changes affect stock prices can shed light on how they impact the underlying sectors. Results are obtained for Japan, Indonesia, Korea, and Taiwan.
When the world economy is booming, the demand for oil and thus the price of oil tends to increase. When the world economy slows, the opposite happens. Oil supply and other factors also impact oil prices. Hamilton and Bernanke presented methods to decompose oil price changes into portions driven by aggregate demand and by oil supply and other factors. Their techniques are used to divide oil price changes into those due to global aggregate demand changes and those due to oil supply changes.
Oil price increases driven by rising global aggregate demand should benefit sectors that compete in world markets. This is indeed the case, where increases in world demand benefit consumer electronics, machinery, autos, and electronic components in Japan. They also benefit iron and steel in the other three economies, coal in Indonesia, shipbuilding in Korea, and textiles in Taiwan. Oil price increases driven by world demand harm sectors catering to the domestic market, such as food producers, home furnishings, restaurants and bars, and cosmetics in Japan; drug & grocery stores and consumer staples in Indonesia, and food producers, drug & grocery stores, and cosmetics in Korea. The deleterious impact of higher oil prices on domestic sectors is as expected. Higher oil prices increase the cost of running tractors and thus the cost of producing food. They also decrease consumers’ discretionary income and thus their ability to spend on domestic goods. Higher oil prices damage the cosmetics industry both by decreasing consumers’ purchasing power and by increasing the costs of inputs. They also damage the airline sector in Japan and Korea.
Many Japanese Firms Benefit from Oil Price Increases
While no firms in Korea or Taiwan gain from oil price increases driven by reduced oil supply, many firms in Japan do. These are largely industrial firms. Japanese industrial firms excel at providing crucial products that are needed when energy prices increase. As an example, researchers at the Bank of Japan found that positive oil market-specific price shocks not explained by global economic activity increase Japanese industrial production in several sectors. They noted that goods produced by Japanese firms in industries such as automobiles are more energy-efficient than goods produced by foreign firms. Oil price increases thus shift demand from foreign products to Japanese products.
Since many Japanese industries gain from higher oil prices, the Japanese government should not provide universal subsidies to alleviate the burden of rising energy prices. Not only do these subsidies benefit wealthier consumers and firms that gain from higher oil prices, they also work against decarbonization and burden the government with fiscal expenditures. In addition, abolishing Japanese gasoline taxes to help all businesses and consumers is suboptimal. Indonesia should also eschew blanket subsidies on energy, as many sectors there also gain from oil price increases. Both Japan and Indonesia should target subsidies at poorer individuals and at industries that suffer from oil price increases.
How Asian Firms Can Reduce Fossil Fuel Use
With the wild fluctuations in oil prices, many sectors in Japan, Indonesia, Korea and Taiwan are affected, with some benefiting from positive effects, while others suffer negative effects. This volatility whipsaws Asian industries. Firms and governments should respond by continuing to shift to renewable energy sources. This would also be environmentally responsible and help governments to meet their greenhouse gas emission goals. I will illustrate these effects with examples from various sectors.
As Japan, Indonesia, Korea, and Taiwan are mountainous, it is challenging to provide room for solar farms. Perovskite cells can help as they are 20 times thinner than regular solar panels and can therefore be employed in small spaces such as sports stadiums and airport terminals. Industry, governments, and universities should continue researching this promising technology.
The airline sectors in Japan and Korea are also harmed by higher oil prices. Airlines could move towards carbon neutrality by using more sustainable aviation fuel (SAF), but currently SAF is four times more costly than conventional jet fuel. For this reason, Japanese and Korean airlines avoid SAF. Japan and Korea are flooded with tourists. By imposing a small surcharge on tourists, governments could obtain funds to subsidize SAF use.
The cosmetics industry is also exposed to oil price hikes due to the high use of petrochemicals. Cosmetic companies could replace petrochemicals with oleochemicals made from renewable materials such as vegetable oils. Not only are oleochemicals more eco-friendly, they also contain fewer carcinogens than petrochemicals. Thus, they are healthier for consumers.
Food production and farming suffer with higher oil prices. Oil and other carbon-based fuels are used to run tractors and farm machinery, warm greenhouses, pump irrigation water, make fertilizers, raise livestock, bring food to markets, and distribute food. Fossil fuels can be supplemented or supplanted by renewable energy sources. In addition, Asian governments can promote smart farms. These use automation, artificial intelligence, and the Internet of Things to promote sustainable agricultural practices. Farmers who studied at vocational colleges and specialized schools are more likely to adopt smart farming techniques. Governments can help promote environmentally friendly farming techniques by subsidizing education at vocational colleges or specialized schools.
Taiwan Semiconductor Manufacturing Company (TSMC) is harmed by oil price increases. TSMC guzzles energy. It used 25,000 gigawatts of energy in 2023. This is twice as much energy use as General Motors. To shield itself from oil price fluctuations and to please its customers, TSMC should reduce the use of fossil fuels in its supply chain. The majority of the carbon footprint of electronic devices comes from manufacturing semiconductors. Semiconductor makers can reduce their fossil fuel use in several ways. These include reducing the utilization of process gases that stoke global warming, innovating to reduce the energy consumption of furnaces, clean rooms, and other capital machinery, and employing eco-friendly methods to transport semiconductors to customers.
Conclusion
Asian firms are exposed to oil price changes. To protect themselves from volatile oil prices and to reduce greenhouse gas emission, they should reduce fossil fuel use and turn to renewable energy sources. As discussed above, governments can provide incentives to facilitate this transition. Other ways for firms and policymakers in the region to reduce their carbon footprint are discussed here, here, and here.
