Erratic behaviour

Malaysian Business,  Jul 1, 2008  by Bishen Bedi

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A FUNNY THING HAPPENED on the way to work the other day. BBC radio reported that the Chinese regime of Hu Jin Tao would increase the price of petrol by US$0.46 a gallon. In its infinite wisdom, the Chinese leadership thinks this will dampen demand for petrol by a marauding population of desperately capitalist, car-mad Chinese. In fact, it thinks this action alone would do its part in lowering the global price of oil.

Guess what? World oil prices dipped. And almost every major global media organisation, led by frenzied Americans, of course, went to town with the story. The question they posed was whether China's action could be a harbinger of a downward spiral of world oil prices - just to show the oil rich Arab sheikhs that despite their cartel, or cabal, their stranglehold on the world's oil price is not a foregone conclusion after all.

So world commodity prices started factoring in the possibility that higher oil prices would lead to lower global demand and that, in the medium term, oil prices would fall. That, they said, may just put an end to the great bull oil market run. Oil investors and speculators alike started dumping oil stocks almost as immediately as the story broke. But guess what? The very next day, prices started to climb - again. The bulls were back. So, too, the smiles on the faces of the Arab oil sheikhs. So, whatever happened?

Forget Economics 101. It's quite worthless, especially given today's world of price volatilities, supply bottlenecks and growing global uncertainties. And another thing. Despite China now having surpassed Japan as the world's number two economy, it is not one that can affect world oil prices to a point, that it will make the world's fuel-mad motorists grin like Cheshire cats.

So, what happened to the China promise for the oil bears? Quite the reverse to anything Economics 101 would teach. A higher oil price will only see higher demand, and not lower it. Why? Human psychology. Call it herd mentality, mixed with a hedonistic level of greed and stupidity.

When oil prices rise, motorists are the first to rush to petrol stations to fill up. And if they feel that prices would rise some more, would they not rush to the stations again, to fill up? Of course they would. And the more they do this, the higher will be the price of oil. Sooner or later, the whole charade will start to look like a dog chasing its own tail.

So who's driving up the price of world oil? Who's to blame? Motorists everywhere. In 1990, oil was at US$23 a barrel. Today, it's flirting around US$140. That's a 509% increase. And still, the US imports 70% of world oil. That's not going to stop any time soon.

Then there is China. Last year, Chinese bought 5.5 million cars, mini- vans and sport utility vehicles, plus 3 million commercial vehicles - up from just 1.6 million vehicles sold in 1997. This year alone, sales are expected to grow another 15% to 20%. No wonder the world's car majors are making a beeline for the China market. And coming onstream is India - quickly.

Here's the best part: the World Bank now forecasts that China's GDP will grow 9.8% in 2008. You know what that means, right? More petrol to fuel Chinese growth. Even if Saudi Arabia and the Organisation of Petroleum Exporting Countries (Opec) were to raise oil production, it is unlikely to add to world supply at such a rate that it would exceed global demand and bring down world oil prices.

Quite the contrary. World demand will surge. So expect world oil prices to soar to US$200 a barrel in next to no time.

There's another factor at work here. World oil prices are not just reflecting global demand but also shrinking world supplies. That's right, world oil reserves.

If you ask the Saudis, or any of the oil producing countries, just how much reserves they hold, they wouldn't be able to tell you. There's no way of telling. And even if they did, why would they tell anybody - unless they want to milk the world for every last cent, while the rest of the world foolishly - milks every last drop of the commodity to exhaustion.

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