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An employee walks at an oil storage site of the Sinopec Corp. on the outskirts of Taiyuan, the capital of north China's Shanxi province, Nov. 19, 2007.

REUTERS/REUTERS

Oil's rise is an unwelcome setback for a slowing Asia. The price of crude has climbed by a quarter in the past two months. That could stoke inflation in the energy-hungry region and make it harder for central banks to respond by cutting interest rates.

Despite efforts to promote cleaner and closer sources of energy, Asia still depends on imported oil. Japan and South Korea import 80 per cent of their energy, according to the World Bank. China now accounts for 11 per cent of global oil consumption, second only to the U.S.

Brent's 26-per-cent climb since June 21 raises Asia's energy bill by $650-million (U.S.) a day, an amount equivalent to 1 per cent of economic output for a region the International Monetary Fund forecasts will expand 6 per cent this year. While that may sound healthy when compared with the U.S. and Europe, the risk is that growth in the likes of China, India and Indonesia will be too slow to absorb new entrants into the job market or meet expectations for rising living standards.

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More expensive oil may not be entirely bad. Prices are rising in part because investors expect China, Europe or the U.S. to combat the slowdown by spending more or printing money. If growth fails to respond, weaker demand should eventually reverse oil's rise. Developed countries may also ease the pressure by encouraging producers to boost output, or release reserves. But as long as oil defies economic gravity, Asia's central banks are in a pickle. In theory, relatively high interest rates give them more scope to respond to a slowdown. But if rising oil raises inflation, they'll be reluctant to cut rates. India's central bank kept its benchmark rate at 8 per cent last month because inflation is running at 7 per cent. Moreover, greater oil imports will shrink current account surpluses or widen deficits, depressing Asian currencies. In a weak environment, that might reduce the allure of Asian stocks and bonds, raising borrowing costs and worsening the slowdown. Asian policy-makers have to hope oil comes back to earth soon.

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