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Economics
Economics – Markets – Strategy
Oil prices are at all
time highs no
matter what
currency you
measure them in
Take them one at a time. The US is indeed growing far more slowly than normal.
That’s not new, as we frequently point out, but it is serious. GDP growth has
been falling steadily for four years. And while it is still positive, American
demand growth – far more important to Asia than GDP growth per se – has not
grown one iota for the past two quarters. Ten or twenty years ago, Asia might
be flat on its back by now. So little wonder that everyone thinks the skies are so
dark.
Then there’s oil. In US dollar terms, prices have doubled in the last 15 months
and tripled since Jan05. They are now at record highs in nominal terms and real
(inflation-adjusted) terms. This is not just a “weak dollar effect” so stronger
local currencies aren’t going to solve the problem. Crude prices are at all-time
highs measured in dollars, euros (/ECUs), deutschemarks, francs, pounds or any
Asian currency unit. Of 20 key currencies in which we have priced oil in real
terms, only in yen and Italian lira terms are real crude prices not quite back to
Nov79 levels (the previous peak in real terms). But they are not far off the mark
either.
G3 (US, EZ, JP) real and nominal crude oil price
Jun08=100, wtd avg spot price in local ccy terms, real deflated by country-specific CPIs
100
Nov79:
86
Jun08:
100
80
60
Feb74:
56
real
wt avg price
40
Oct90:
40
20
0
nominal
wt avg price
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Asia is home to 6 of
the world’s 14
largest oil
importers
High prices are a burden for importers of oil and Asia is home to 6 of the world’s
14 largest (Table 1, p1). China is the world’s third largest net importer; Korea
ranks fifth, India 7th, Taiwan 10th and Singapore 12th. Thailand is the world’s
14th largest but, as a percentage of GDP (8%), it is Asia’s largest and most precariously
placed given the run-up in prices. A doubling of oil prices would, in many a
‘first principles’ calculation, cost the country eight percentage points of GDP.
That would be a crippling blow for Thailand and for many other Asian countries,
even with smaller oil deficits. And in an old-fashioned oil crisis, like the ones in
1973-74 and 1979-80, the cost of such an price spike might just be that great.
Thus, either of these obstacles – zero US demand growth or a doubling / tripling
of oil prices – are by themselves enough to make investors squirm and government
officials tremble. But put the two together and you’re talking about something
altogether different. It’s the disaster scenario. Nothing more, nothing less.
And it isn’t a hypothetical ‘what if?’. Asia is right in the middle of it. Right
here, right now.
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