Fuel Prices Likely to Threaten This Year’s Growth

With turmoil in the Middle East and worldwide demand expected to remain strong, economists here say oil prices will remain high for much of this year.

Prices for fuel—which account for 5 percent of household spending here—have steadily risen for more than a year, and economists say persistently high prices could slow the rate at which Cambodia’s economy grows.

The average price of gasoline at the pump has risen from 4,700 riel per liter in January and is now at 4,900 riel, or about $1.20. Prices are up almost 13 percent compared to the same period last year, when they stood at 4,350 riel per liter.

With much of the country still relying on diesel generators for power and transport costs being integral to tourism, the price of oil has direct consequences for the economy.

In London, the spot price for Brent crude was at $122.30 per barrel in morning trade yesterday, up nearly 30 percent since the end of last year.

Kang Chandararot, director of the Cambodia Institute of De­ve­lopment Study, said recent rises were primarily to do with unrest in oil producing countries in the Mid­dle East, particularly Libya.

In addition to changes in supply and demand, the price of oil tends to fluctuate due to changes in the value of the US dollar, in which the commodity is traded internationally.

However, Mr Chandararot said he thought further strengthening of the US economy, coupled with the possibility of diminishing un-rest in oil producing countries, could see prices slip back toward the $80 per barrel mark by the end of the year.

But in the meantime, as the oil price remains high, peoples’ spending power will take a hit, he said.

“The increase of the price of oil has changed the spending structure,” said Mr Chandararot. “This is not so good for consumer confidence in Cambodia.”

He said that although salaries in the garment sector had recently in­creased, consumers would likely spend less on transport and travel due to high fuel prices. That could result in a hit for the tourism sector as fewer people choose to fly or travel domestically.

“This can affect business confidence too,” Mr Chandararot said, adding that he expected prices to remain high at least until the third quarter of this year.

In its economic update for the region this week, the Asian Deve­lopment Bank said risks to economic growth included “higher-than-assumed oil prices, which could hurt the prospects for Cam-bodia’s tourism and clothing exports and push up inflation.”

Both the World Bank and Prime Minister Hun Sen have raised concerns in recent weeks about the risk of inflation due to rising food prices and high capital inflows from more developed countries.

According to a report released last month by the Organization of the Petroleum Exporting Coun­tries, world demand for oil is ex­pected to grow by 1.4 million barrels per day in 2011.

The report said a surge in the oil price over a sustained period of time “could impact growth in oil importing countries” like Cambodia.

Despite a 19 percent increase in air arrivals in the first two months of 2011, those in the tourism sector say high oil prices risk triggering a dip in demand for people looking to visit the country.

“It’s definitely the biggest challenge we have this year,” said Nico­las Masse, country manager in Cambodia for Dragon Air.

“The airlines may decide to drive up tariffs to reflect the high costs, which could have an influence in demand.”

According to the International Air Transport Association, airline ticket prices will rise by 20 percent in 2011 across the industry. The association also predicts that net profits will fall by 46 percent to $8.6 billion in 2011 due to high oil prices.

At Dragon Air, fuel accounts for 35 percent of expenses.

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