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Politics : Sioux Nation -- Ignore unavailable to you. Want to Upgrade?

To: geode00 who wrote (30160)	8/29/2005 12:49:22 AM
From: stockman_scott	Read Replies (1) \| Respond to of 361732

Globalization's First Oil Shock - Stephen Roach (New York) morganstanley.com This is the first oil shock in the modern era of globalization. That means its impacts are likely to be compounded by the cross-border linkages that shape the global trade cycle. In today’s US-centric world, that spells unusual vulnerability. If higher oil prices take a toll on the over-extended American consumer, repercussions in the rest of an externally-dependent world will be all the more acute. That puts Asia, the world’s most rapidly growing region, right in the cross-hairs of the energy shock of 2005. Globalization complicates the transmission of shocks around the world. That’s especially the case with respect to the current energy shock. Countries will be hit both by the direct effects of rising energy costs, as well as by the indirect impacts of energy-related pressures on their major trading partners. To the extent that the American consumer remains the principal engine of growth on the demand side of the global economy, those nations that rely on exports to the US as major sources of growth will be hyper-sensitive to any energy-related cutbacks in US consumption. In my view, the American consumer is very much at risk in the current oil shock (see Beneath the Surface, 16 August 2005). First, US households have drawn their saving rates down to “zero.” By contrast, in earlier oil shocks, US consumers had a cushion of saving they could rely on in order to maintain existing lifestyles -- saving rates that averaged 9.5% in the two shocks of the 1970s and 7% in the shock just prior to the Gulf War of early 1991. Today, the only saving backstop is embedded in an increasingly precarious housing bubble. Second, just prior to the two oil price spikes of the 1970s, discretionary spending of US households had gone to excess -- setting the stage for America’s most severe consumer-led recessions. A similar overhang is evident today: The GDP share of consumer durables and residential construction has averaged 14.3% of GDP over the past year. That’s virtually identical to excesses hit just before the two energy-shock-induced consumption collapses of the 1970s. Third, mounting pressure from higher energy prices is already more acute than in the past. While US consumers have reduced the portion of their budgets spent on energy-related items to 5.7% of total consumption -- down from readings hit in earlier oil shocks -- these outlays have already increased by 1.6 percentage points of GDP from the early 2002 low. By contrast, this same share had increased by only about 1 percentage point in comparable periods running up to the three previous energy shocks. With real, or inflation-adjusted, oil prices having more than tripled since the last recession ended in late 2001, the vulnerability of the over-extended American consumer can hardly be taken lightly. That could well be a big problem for the rest of a US-centric global economy. Particularly worrisome is the possibility of a double whammy to the world’s fastest-growing region, non-Japan Asia. This economic bloc -- which accounts for fully 28% of world GDP as measured on a purchasing power parity basis -- is likely to be hit especially hard by the combined impacts of its inefficient energy consumption technology as well as its excessive dependence on the American consumer. China is the most obvious case in point. Its oil consumption per unit of GDP was double that of the developed-world average in 2004. China, like many Asian countries, tends to subsidize the price of retail energy products. While that means the cost of higher oil prices is deflected away from Chinese consumers, the impact falls more acutely on its government finances. At the same time, in the face of soaring energy costs, China’s subsidy structure has already caused serious disruptions to retail supply -- resulting in long petrol lines that are strikingly reminiscent of those experienced in the 1970s. Moreover, about a third of China’s total exports go to the United States. That means one of China’s largest and most dynamic sectors -- exports currently account for more than 35% of Chinese GDP and were still surging at close to a 30% y-o-y rate through July -- is very much a levered play on the staying power of the overly-extended American consumer. That’s a tough place to be for any economy in an energy shock -- even China. With the possible exception of Japan and India, the rest of Asia may not be in much better shape. Still lacking in support from domestic demand, most other Asian economies have become tightly integrated into a China-centric supply chain. Consequently, to the extent that China’s exports to the US slow in response to energy-related impacts on US consumption, production adjustments will ripple through the Asian supply chain and have adverse impacts on economies such as Korea, Taiwan, Singapore, and Malaysia. That’s yet another manifestation of the interdependencies of globalization. A US-centric consumption adjustment could well have powerful ripple effects on a China-centric production complex. Japan and India may fare a little bit better than other major economies in Asia. To the extent that Japan is able to sustain its recent improvement in domestic demand, that would tend to cushion any blow to exports that might arise from energy-related impacts on Japan’s major trading partners. Japan is also insulated by the extraordinary progress it has made in improving its energy efficiency since the oil shocks of the 1970s; since 1973, Japan’s oil intensity ratio -- oil per unit of GDP -- has fallen by 83%, well in excess of the 50% decline experienced by the US over the same period. Nevertheless, Japan would be exposed to a China slowdown. With China now Japan’s largest export market, a shortfall in Chinese economic growth traceable to the energy shock could be a blow to the nascent recovery in the Japanese economy. For India, it’s a different story -- less of a China-centric connection and more a tale of inefficient use and pricing of energy. India’s oil per unit of GDP is like China’s -- double the developed-world norm. Like China, its domestic pricing structure of retail energy products is also heavily subsidized -- meaning that rising global energy costs will have an adverse impact on India’s already strained fiscal position. Consequently, while Japan and India are somewhat less exposed to soaring energy prices than other Asian economies, they can hardly be expected to emerge unscathed. Globalization is a win-win for the world economy. But an unbalanced strain of globalization is a risky way to go -- it has the potential to skew the impacts of any shock. Such is the case with the energy shock of 2005. If the over-extended American consumer gets hit as I suspect, Asia could be in serious trouble.