At a time when most economists have retreated in disgrace to the sidelines and left the economic crystal ball business to self-interested pundits, conspiracy theorists and political posers, we are being constantly bombarded with predictions of which magic oil price will be the world economy crusher.
One of the latest predictions, “Two-hundred dollar oil would break the back of the global economy,” on June 25 by Deutsche Bank AG’s chief energy economist Adam Sieminski (Bloomberg) is the latest of many going back to when $50 oil would cause a global economic meltdown.
So what do these apocalyptic pronouncements mean to someone doing or looking to do business in China? One is tempted to counsel building an economic bomb shelter lined with gold bullion and then crawling into it until the mayhem abates, but is this the best course?
As with most global pronouncements, you have sit down figure out whether it’s true and what the effect will be on your business. At some point, the price of oil could break the proverbial camel’s back of the current world economy, but if that happens, people will still need the basic necessities of life and will continue to buy the goods and services they can afford.
Old assumptions and economies are replaced by new assumptions and economies. The process will be painful for many. The questions are what it will mean to you if it happens and what do you do in the meantime.
Some Basics.
• Consumption: The U.S. currently uses more than seven times as much energy as China.
• Demographics: The U.S. has 303.8 million people and China had 1.34 billion people.
• Demand: The U.S. has been slowly reducing its demand for energy while China and other emerging industrial economies like India have been increasing their demand.
• Supply: A lack of refining capacity, the Iranian and Iraqi issues, fears of long-term structural deficits in the oil supply and Russian production reductions have created uncertainty in the oil markets.
• Trade: Year-to-year comparisons for the first four months of 2008 show that U.S. exports to China grew by 22 percent, imports grew by 3 percent and the overall U.S. trade deficit declined by 2 percent.
• Commodities: Energy price rises are putting additional pressures on an already stressed world agricultural system, creating inflation.
• Money: The U.S. dollar is weakening against other currencies as the price of oil goes up.
My guess is that the economic fracture point is when the cost of transporting goods from overseas markets is greater than the cost savings of producing them overseas. If it happens, then existing plants and equipment will be only valuable for production in their local markets, and production will shift to the lower-cost areas. Even if this point is reached, there are and will be numerous ways to make profits in trade.
Currently, the weak dollar has made U.S. exports more competitive, especially against countries whose currencies have remained relatively stronger, like the Euro and the Pound. If you compete against European business in segments which China is using, there are opportunities. If you sell equipment or processes which save energy, water and production materials, there are opportunities. If you sell agricultural products and can get them to China at competitive rates or you can provide equipment, services or processes which can increase yields, there are opportunities.
To figure out whether the oil rise/dollars decline hurts or helps you, look at how much of your costs are affected by energy, including materials, processing and transportation and the competitive costs of your goods and/or services vs. the world market.
Look at the elasticity of demand for what you offer and whether you will get more return from local or international opportunities. Do not panic, look for the opportunities. Remember, downturns are the best times to acquire assets and build capacity for upturns.
Where there is change, there will be displacement, but also opportunities. Figure out which applies to you and plot your response.
