Commodities, Emerging Markets, Energy, Stocks

How Low Oil Prices Will Impact Southeast Asia

By Stratfor Global Intelligence

Photo courtesy of

Photo courtesy of

Over the past six months, declining oil prices have sent shockwaves through the global economy, providing much-needed relief to consumers and factories in some countries while slashing export revenues and undermining currencies and government budgets in others. But the longer oil prices hover near six-year lows, the more they will affect the prices of natural gas and other commodities and manufactured goods, particularly those from Southeast Asia.

Overall, falling oil prices and East Asia’s broader economic and geopolitical evolutions will have mixed effects on the region. If they remain low, the prices of oil, natural gas and commodities could deter foreign investment into more expensive offshore and enhanced oil recovery projects in countries like Indonesia and Malaysia. At the same time, cheap energy will provide a boost to consumers and manufacturers that could improve trade throughout the region. Low energy costs could even help governments accelerate political and regulatory reforms designed to improve transparency and continuity for foreign investors — a critical precursor to successful regional economic integration.


In our annual forecast, Stratfor wrote that 2015 would likely prove something of a watershed year for Southeast Asia. As China’s manufacturing economy struggles through structural reforms and attempts to move up the value chain this year, wage and policy pressures in coastal Chinese provinces will drive more low-cost manufacturing-related investment into emerging Southeast Asian economies, particularly Indonesia, Vietnam and the Philippines. Meanwhile, the competition between China, Japan and South Korea for regional economic and diplomatic influence will result in more investment in infrastructure development across Northeast Asia. It will also increase efforts to deepen trade and investment ties with members of the Association of Southeast Asian Nations, commonly known as ASEAN.

At the same time, ASEAN countries will make several important internal changes to facilitate regulatory reform, institutional development and infrastructure expansion in preparation for the Dec. 31, 2015, deadline for the official formation of the ASEAN Economic Community. In response to ASEAN economic integration, countries will also seek to expand capital and labor flows throughout the region. Ultimately, just as the benefits and risks of ASEAN economic integration and Southeast Asia’s long-term evolution will not be spread evenly across the region, low energy prices will benefit some countries more than others.


As Southeast Asia’s largest energy producer and consumer, Indonesia will feel the effects of lower energy prices in 2015, albeit inconsistently across different regions and sectors of the economy. Cheaper energy will be a boon to the island of Java, which houses close to 70 percent of Indonesia’s population and four-fifths of the country’s factories, not to mention its largest auto market and refinery complex. The island produces virtually no coal and, as of now, limited quantities of oil and natural gas, so its exposure to negative fallout from low oil prices is minimal.

However, low energy and commodity prices, especially for coal and metals, will hurt many of Indonesia’s economically vital and politically powerful outlying regions such as Sumatra, East Kalimantan and Sulawesi, places where reliance on resource extraction is greater and sectors such as private consumption, services and manufacturing are comparatively underdeveloped. In December, representatives from the Indonesia Petroleum Association warned that low energy prices could force companies operating in Indonesia to cut capital expenditures by up to 20 percent in 2015, pushing realized new investment into the sector well below the government’s $32 billion target. In late January, Indonesian state-owned energy firm Pertamina announced it would cut expenditures by up to 50 percent in 2015 if oil prices fail to recover. Combined with foreign energy firms’ continued uncertainty regarding the contract extension process, low oil prices could reduce or delay near-term foreign — especially Western — investment in expensive offshore oil and natural gas ventures such as Chevron’s Indonesia Deepwater Development and Inpex’s Abadi LNG projects.

The direct impact of weak oil, natural gas and commodities prices on economic stability and employment in resource-dependent outer islands will be partially offset by rising government-led investment into port, road, energy and electricity infrastructure development. This investment was made possible by the government’s move to eliminate gasoline subsidies and reduce diesel and electricity subsidies in January.

In 2015, the government’s efforts to expand critical infrastructure in less-developed outer islands and more efficiently link those islands with Java and the world will receive a boost from rising Chinese and Japanese investment in the region. While most of that investment will go to Java, the only island in Indonesia with sufficient power and transport infrastructure to support large-scale manufacturing activity, there are indications that foreign companies, particularly Chinese ones, are considering investing in infrastructure projects like smelters, ports and railways in other regions. Chinese overseas investment is set to continue growing this year, with Japan and South Korea likely to respond in kind. Jakarta is working to direct more of that investment, along with domestic spending, to the country’s outlying islands, reducing the risk of protracted economic and employment crises.

In terms of their impact on the Indonesian economy as a whole and on the government budget, low energy prices will be a net gain. Oil-related revenues, including taxes on production and export duties, account for less than 12 percent of government revenue in Indonesia. When natural gas-related revenues are included, the figure rises to 14.4 percent. While the sum is not a trivial amount for a government hampered by perennial budget deficits, it is less than the 20 percent of the 2014 budget that was set aside for fuel and electricity subsidies. In fact, though final spending figures for 2014 are not available yet, real subsidy spending likely exceeded projections.

Even if government oil and natural gas-related revenues fall by half in 2015, subsidy reductions and eliminations will still give Jakarta a comfortable buffer to expand spending on infrastructure and social services. As for consumers and manufacturers, low energy prices substantially reduce the impact ofcuts to fuel subsidies in the near-term, providing a solid base for consumption growth and keeping Indonesian industry regionally competitive and attractive to foreign investors in 2015.


As a net oil exporter and Southeast Asia’s second largest energy producer behind Indonesia, Malaysia is the country most threatened by falling energy prices. In 2013, Malaysia exported the equivalent of 73 percent of its GDP, of which 22 percent came from exports of natural gas (9 percent), refined oil products (8 percent) and crude oil (5 percent). As of November 2014, Malaysian energy export revenues were marginally growing compared with the year before. Income from overseas crude sales rose 8.2 percent year-on-year, but revenue from natural gas and refined products exports grew by only 1.9 and 0.8 percent respectively. Although numbers are not in yet, revenues likely fell sharply in December and have continued to slide into January and February as benchmark oil prices dipped under $50 per barrel.

Reduced export revenues will not be the only place Malaysia will feel the effects of falling oil prices. In 2013, the latest year with full data available, oil-related income accounted for 29.5 percent of total government revenue, but only about 55 percent of that income came from taxes and export duties on domestic production. The remainder took the form of “dividends” from state-owned energy firm Petronas, which runs extensive international upstream and midstream operations in addition to its domestic functions, directly exposing it to fluctuations in global oil prices. On Dec. 2, Petronas announced it would reduce its total payments to the government by $11.8 billion in 2015, down from $17.3 billion in 2013. The firm also said it would cut capital and operational expenditures by 15-20 percent and 30 percent respectively, if the price of oil stayed below $75 per barrel. The company has not revised these projections yet, but with oil prices hovering below $50 per barrel, further cuts can be expected.

On Jan. 20, Malaysia’s government responded to the drop in global oil prices by cutting $1.5 billion, about 2 percent, in planned spending and by raising its 2015 budget deficit target from 3 to 3.2 percent of GDP. Meanwhile, Kuala Lumpur has cut its GDP growth forecast for 2015 from 6 percent to 4.5-5.5 percent and let the Malaysian ringgit slide almost 4 percent against the dollar in hopes that low input costs and a weaker currency will combine with robust regional demand for electronics to stimulate faster growth in the country’s manufacturing export sector.

Falling energy-related revenues and slower economic growth come as social and ethnic tensions mount between the ethnic Malay majority, which dominates the country’s key political and administrative institutions while enjoying preferential treatment in education and employment in the civil service, and the economically vital but politically marginalized Chinese and Indian ethnic minorities. Following the 2013 general elections in which Malaysia’s long-ruling Barisan Nasional coalition lost the popular vote but won the majority of seats thanks to gerrymandered parliamentary districts, these tensions have spilled into Malaysian civil society, the courts and to a lesser extent, the street.

In 2015, reduced government spending could combine with opposition to the perceived entrenchment of conservative, pro-ethnic Malay hardline voices within the government and its efforts to sideline opposition leader Anwar Ibrahim to give rise to social unrest. However, the disorder is unlikely to be on a scale that would disrupt business continuity in Peninsular Malaysia, where most of Malaysia’s ethnic minorities live, let alone affect the energy and resource hubs of Borneo. More likely, social and ethnic tensions will continue to smolder in 2015 and 2016 before finding another potential outlet around the 2017 general elections.


Low energy prices will benefit almost all of Thailand, Southeast Asia’s leading energy net importer. Though the volume of Thai crude oil imports rose by 5.5 percent in 2014, their value fell nearly 15 percent thanks to the drop in oil prices after June. Given that the country spent 10 percent of its GDP importing oil last year, the benefits of falling oil prices on Thai industry and consumers will likely be even more pronounced in 2015. Indeed, while low oil prices will not help Thailand attract significant new investment, they could help convince some manufacturers eyeing moves to lower-cost competitors such as Indonesia, where average monthly wages in manufacturing are only $163 compared to Thailand’s $379, to stay in place for now. Though the government has taken recent actions, such as tightening martial law Jan. 29, to prioritize social stability at the expense of growth-inducing policies, any external factors that reduce foreign manufacturers’ incentive to embark on expensive moves elsewhere are welcome.

Thailand maintains an energy and electricity subsidy program that caps the price of electricity for poor households and compensates for oil price volatility when necessary. However, subsidy expenditures are not nearly as much of a drain on Thailand’s budget as they have been in countries such as Indonesia and Malaysia. At the same time, energy-related income is not a significant source of revenue for the government, bringing in only about 3.5 percent of the budget in 2014. In other words, falling energy prices should not have a decisive impact on the Thai government’s ability to fund itself in 2015.

While Thai consumers, manufactures, logistics providers and farmers will feel the benefits of cheaper energy, the gains will be limited in most cases. If the Thai central bank’s projections prove true, exports — which account for more than 60 percent of the country’s GDP — could rise 1 percent in 2015, a modest improvement from 2014’s decline of 0.4 percent. Also, Thailand generates 63 percent of its electricity from natural gas, 70 percent of which is imported from Myanmar. As Thailand reduces its piped natural gas imports from Myanmar and boosts imports of liquefied natural gas, lower regional natural gas prices will ease the impact of this shift on electricity prices for Thai households and manufacturers. When combined with the other effects of falling energy prices, this will provide a marginal boost to Thailand’s economic performance in 2015. Still, even if cheap energy is unlikely to spur a revival of Thailand’s economy, it will give Thailand’s rulers a subtle buffer against economic and social instability.

Other Regional Impacts

Other Southeast Asian countries will meet low energy prices with mixed responses. In the Philippines, which produces less than 20,000 barrels per day (bpd) of crude oil and imports more than 300,000 bpd of crude and refined oil products, cheaper energy is — at least in the near-term — a positive, especially since the Philippines maintains no fuel or electricity subsidies. However, the longer prices remain below $50-60 per barrel, the greater the risk that foreign firms, which the Philippines depends on to develop offshore oil and natural gas projects, will avoid potential projects in politically restive regions.

Low energy prices are also a net gain for Singapore, which relies on natural gas and oil for virtually all of its power generation. The country continues to benefit from strong regional oil trade as China, taking advantage of low prices, ramps up oil purchases. Likewise, falling oil prices benefit Laos, which uses no natural gas and imports all of the 3,500 bpd of oil it consumes, as well as Cambodia, which imports all of its 43,000 bpd in oil demand.

The picture is less clear for Vietnam, a net oil importer that nonetheless exports roughly 160,000 bpd in crude oil, roughly $8 billion in 2013 and about 6 percent of the country’s exports by value. In Vietnam’s case, the benefits of cheaper energy for industry and consumers will outweigh the drop in government revenues and should not have a significant impact on the country’s exploration and production efforts. The lower prices, however, may hamper Vietnam’s capacity to respond in kind to Chinese exploration activity, which Stratfor expects to remain strong despite the oil price drop.

Low oil prices are hurting Brunei, which exported the equivalent of 31 percent of its GDP in crude oil and 37 percent in liquefied natural gas in 2013. Relatively stable liquid natural gas prices and export levels will offset the economic, social and political impact of falling oil revenues, and any unrest will be largely contained within the diminutive country.

Myanmar, seeking to secure some form of accommodation with ethnic rebel forces while deepening its own economic “reform and opening” process, will not see low energy prices have a significant impact on the country’s macroeconomic and political struggles in 2015. However, prices could cause foreign firms with operations in the country to re-evaluate outstanding and prospective investments, delaying the development of offshore resources. Myanmar will steadily shift away from exporting natural gas to Thailand and rely more on domestic consumption, limiting its immediate exposure to fluctuations in regional natural gas prices. Meanwhile, with Chinese purchases likely to rise despite slower economic growth in 2015, Myanmar will benefit from transit fees on the oil and natural gas now flowing through its pipelines to China’s Yunnan province.

While the drop in global oil prices will benefit some countries, others will see declines in government revenue and spending, resulting in increased instability. However, the unrest will largely be manageable. In the near term, most of Southeast Asia will benefit from the downward pressure of low oil and natural gas prices on transportation, consumer goods and other commodities. But protracted low energy prices could deter foreign investment into offshore oil and natural gas developments in some parts of the region, paving the way to worsening energy security. Nonetheless, in 2015, the benefits of low oil prices for consumers, manufacturers and governments across most of the region will outweigh the risks to energy investment and activity.

Courtesy of Stratfor Global Intelligence, © 2015 Stratfor
Stratfor is a geopolitical intelligence firm that provides strategic analysis and forecasting to individuals and organizations around the world.  For more information, please visit Stratfor Global Intelligence


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