TICKY FULLERTON, REPORTER: The oil price could be overtaking developments in Europe and in China as the big worry for the global economy.
Indeed, the latest report from the Economist Intelligence Unit warns that the growing tensions with Iran risk a 30 to 50 per cent rise, a major shock.
Well Grant Williams is our man with an eye on the big picture.
He’s strategy advisor at Vulpes Investments and author of the investment newsletter Things That Make You Go Hmmm, and he joins me now from Singapore.
Grant, welcome up there.
GRANT WILLIAMS, VULPES INVESTMENTS: Hi, Ticky.
TICKY FULLERTON: Now, the Economist Intelligence Unit is talking about this possible shock within weeks as a result of the Iran-Israeli tensions. Do you agree with them?
GRANT WILLIAMS: Well, I don’t think any of us know if and when any such action’s going to come. It really would be a big shock for something like that to happen before the US elections in November. And I read that report, and yes, they’re talking about a 30 or 50 per cent spike in the oil price.
That would potentially be a fairly short-term problem, but it’s definitely there. It’s something hanging over the markets. It’s been there for a while. And here we have Brent crude up at $126, which is pretty close to the highs we’ve seen recently.
TICKY FULLERTON: So, you say if it happens, it could happen for a short period of time. But 30 to 50 per cent, what would do that do to Europe and indeed America?
GRANT WILLIAMS: Well any recovery that we were seeing globally – and there’s a lot of arguing backwards and forwards about whether we are actually seeing any kind of self-sustaining recovery – it would certainly put a stop to that pretty quickly. So it would be a serious concern for everybody.
I mean, we’ve seen releases from the Strategic Petroleum Reserves in the States and the UK recently in an attempt to bring the price down.
But everyone is talking about the supply side of oil and obviously like everything else, it’s a two-sided equation. We have demand constraints on the other side as well, and even though the Western world has seen oil use decline since the high price in 2008, the Eastern developing countries, their demand for oil is increasing every year. And at the moment it’s pretty pricey in the sensitive demand increases.
TICKY FULLERTON: I was looking at a chart that you have out on the net at the moment, and it’s quite amazing, the most exposed to an oil shock are some of the Asian countries, Malaysia, Singapore, Thailand, Taiwan, Korea and indeed India.
GRANT WILLIAMS: Yes, absolutely. And Japan – I see on that chart Japan’s a little way further down that list, but Japan has started to use a lot more liquid natural gas that they realise that they’re very, very dependent on the oil price being reasonably low for them.
And here in Asia, Singapore particularly, it certainly does have issues with a rising oil price. Malaysia, perhaps a bit more surprisingly, but yes, those other two countries that will be hurt the most.
TICKY FULLERTON: Even if a real shock doesn’t happen, prices presumably are going to remain high. Will that also impact the pace of the recovery in the US and presumably inflation in Europe?
GRANT WILLIAMS: Undoubtedly. A rising oil price is one of the most inflationary things you can have because everybody needs to use it. And it’s something that isn’t included in the CPI in the States, which speaks volumes.
But yes, if we get a rising oil price, it will crimp demand, there’s no doubt about that. And it’s something that the world just can’t actually take at the moment with such a tenuous recovery going on.
TICKY FULLERTON: Now Grant, China seems more resilient according to the same Economist Intelligence Unit. They are forecasting 8 per cent growth this year. I assume you don’t agree with that.
GRANT WILLIAMS: Oh, look, China’s in a position – there are two very, very strong arguments.
One for there being a huge slowdown in China and one for them kind of muddling through and keeping things together. Now, to be honest I think it’s a little too early to make that judgment; both side’s arguments are fairly convincing.
But, you know, what you do have is a huge bad loan problem in China. And you have the problem that their two biggest clients in Europe and the US, consumer spending has been pretty weak. And so if they don’t get a recovery in the consumer spending from the West, then they’re going to have to try and switch their own economy to more consumer-led and that’s a much bigger task than you would think it’d be.
So, China certainly has its issues, but I honestly think it’s a little too early to make a call on the hard landing or not just now.
TICKY FULLERTON: And briefly, they are pretty immune to oil prices, or moreso than other countries in Asia.
GRANT WILLIAMS: Well they’re not immune; nobody’s immune. That’s the one thing that I think we can say with certainty: nobody’s immune to a rising oil price. China have reserves, they’ve been accumulating those reserves, but they’re as much subject to those rising prices as everybody else, believe me.
TICKY FULLERTON: Grant Williams, very interesting. We’ll follow that oil price very closely. Thank you very much for joining us.
GRANT WILLIAMS: Pleasure.
Category: Crude Oil, Energy, and Gold Futures