For the record, high oil prices don't leave us running on empty

PUBLISHED : Wednesday, 29 September, 2004, 12:00am
UPDATED : Wednesday, 29 September, 2004, 12:00am

THE TREND OF oil prices can be an odd thing. Just the other day I was refuelling the car and the petrol station gave me four free cans of Coke with my purchase.

I suppose I got them because the oil companies are battling each other for local market share again, what with two new entrants to the market. Caltex does not want to lose even my scant business to Sinopec.

But I normally associate these sorts of giveaways with periods of low oil prices when the local oil companies do not want to lower their prices at the pump and try to make up for it with cheap household knick-knacks that they dump in your lap after you sign the credit card slip. Six years ago the space behind the driver's seat of my car was regularly piled high with tissue boxes and bottles of water. It is not what I expect when oil prices are near record highs, however, Coke instead of water, too. It may be explicable but it is still unusual.

Here is another oddity for you. Rising oil prices are bad for markets, would you not agree? Oil represents one of the most basic inputs to any economy and, when oil prices are rising, other economic activity is likely to slow down. This is sure to be a drag on share prices.

So could you please explain to me why the first chart shows what it does? The red line reading off the left axis represents the London price of Brent Blend in US dollars per barrel over the past 10 years, way up recently because of the setbacks that a certain American warmonger has taken in his military adventures in Iraq.

The blue line, reading off the right axis, represents the performance of the Hang Seng Index over the same period. If the theory were right, that blue line should have gone down when the red line went up and vice versa.

But clearly it has not. Periods of high oil prices seem rather to be associated with periods of a strong stock market performance in Hong Kong and, when oil prices go down, they mostly seem to take the Hang Seng Index with them - very odd indeed.

Here is one more strange-as-it-seems feature of oil price trends. As you know, oil prices have risen to more than US$50 a barrel and - as everyone tells you - may go even higher, which has never happened before.

The difficulty with this is that you cannot really make a direct comparison between oil prices today and oil prices 20 years ago, certainly not if you are doing so in terms of your own purchasing power. We may have encountered deflation over the past six years but, over the past 20, inflation has taken away more than half of the purchasing power of the Hong Kong dollar. What would the trend of oil prices look like if we took account of this inflation?

The second chart gives you your answer. If we do this on the basis of today's prices, in other words base this deflated price on today's Hong Kong dollar price of a barrel of oil, which is about HK$358, we get a price in early 1981 of $555 per barrel. Yes, prices have been way up recently but in terms of purchasing power we are still well below the peaks registered after the Iranian Revolution and the Iran-Iraq war.

Look at the way that the price of oil rose from late 1978 to early 1981. Over the same period the Hang Seng almost tripled from 499 to 1,487. Once again, we have this oddity of share prices seeming to like rising oil prices.

And one final statistic of interest. The total cost of our net oil imports over the past year amounted to the equivalent of only about 3 per cent of gross domestic product. At the beginning of 1982 that figure was 6.5 per cent, neither of them big figures but the latest is definitely much smaller.

Okay, okay, I am not about to claim that high oil prices really stimulate the Hong Kong economy. My point is only that these matters are never quite as straightforward as they may seem.

And as to why they are not, I would need the whole back page of this business section for even a partial discussion of all the questions involved.


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