High Oil Prices Can Tip Asian Economies Into Recession Says Morgan Stanley Report

Asian economies are in danger of slipping into a recession if oil prices remain at current high levels, U.S. investment bank Morgan Stanley said in a report Tuesday. A slowdown in the Chinese economy, which the U.S. investment bank said was already underway, is the main factor behind the prediction that Asia will soon feel the pinch from high oil prices which surged to a record high last week.

China's booming economy, which posted the fastest growth of 9.5% in Asia last year, was a major driver behind the strong demand for oil and other commodities, the bank's chief Asia economist Andy Xie said in the report. "Overheating has grossly exaggerated China's commodity demand," Xie said. "However, China has begun to slow. Without the China offset, current oil prices could push a number of Asian economies into recession soon," he said without specifying which country was at risk.

Oil prices touched an all-time high last week with New York's main contract, light sweet crude for August delivery rising to $60.95 a barrel on concerns of a possible global supply shortage of distillates, including heating fuel, during the fourth quarter as the northern hemisphere winter kicks in.

Speculative demand, the other factor behind the sharp surge in oil prices, will be curbed once the oil bubble burst as actual demand in the region slows sufficiently, Xie said.

"The demand for oil is softening in Asia, and the days of the oil bubble are numbered, in my view. The bubble will burst when demand slows sufficiently to create enough excess capacity to overwhelm speculative demand." Xie said the Asia Pacific accounted for 29% of the world's consumption of oil.

Copyright Agence France-Presse, 2005

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