Edmond Warner the inside view: Don't blame Opec for a slowdown that comes straight out of the economics textbooks Special report: the petrol war Saturday September 23, 2000 The seismic plates of the world economy have shifted, and not only to the advantage of the owners of its raw materials. The providers of labour - you and I - are also gaining at the expense of the owners of capital. No surprise then that share prices are falling. It is difficult to find a Middle Englander, or indeed a Middle Worlder, who is not now aware that crude oil prices have tripled from their recent low. Politicians are seeking scapegoats. Those in power, most recently Germany's chancellor, Gerhard Schr�der, point accusatory fingers at the major oil companies. Those out of power, most volubly perhaps William Hague, point at those in power. However, much they would like to, few dare directly accuse the producers' cartel Opec, for fear of reactivating tensions that in the past only meant still higher crude prices. Anyway, the real culprits are the users of oil, not the suppliers. That means all of us, however green our individual credentials. As in any market, the oil price is set by the marginal buyer and seller. Opec's traditional price-smoothing activities aside, supply of oil is notoriously inelastic: it can only respond slowly to price changes. Demand, however, is driven directly by general economic activity. The result is high volatility. It is no wonder the oil price has surged, for the global economy has enjoyed a sustained upswing. Its engine has been a US economy that is now in its 10th year of uninterrupted expansion, placing strain on all raw resources - particularly labour. A rise in input prices is one of the economy's self-correcting mechanisms. Higher costs feed through to a combination of lower profit margins and higher output prices. Both have the effect of cooling activity, in turn easing demand for raw materials. Governments typically attempt to make this circle more vicious by raising interest rates and cutting their own spending so as to take the heat out of the economy. Such attempts often backfire, but usually because complex economic circumstances have been misread, not because the theory is wrong. Shifting balance An economy's spoils are shared between four parties: the providers of raw materials, labour and capital as well as government. The last is principally a redistributor between the other three but, depending on the state of its own finances and its tactics, it can alter the total accruing to the others. Leaving the showboating about fuel taxes where it belongs - to one side - the current debate about economic management clearly illustrates the shifting of the economic balance away from capital. The minutes of the September meeting of the monetary policy committee revealed a marginal vote in favour of leaving interest rates at 6%. The resolutely hawkish minority in favour of dearer money fears - yes, you guessed it - the effect of higher wages and more expensive oil. The chancellor finds hordes of under-employed and insecure Labour backbenchers rooting around in his supposed war chest. The rosy state of the country's finances is only secondarily the result of his much-vaunted prudence. Primarily it is a natural consequence of the economic upswing. The US election is being fought over the issue of how to spend the "growth bounty" generated by the American economy over the past 10 years. The British election will see much of the same. Just when the economic barbecue should be dampened, politicians with low security of tenure are about to squirt it with lighter fuel. There could not be a better advertisement for a command economy. Or, failing that, proportional representation. Workers of every collar colour might be forgiven for asking why the tightening labour market is not working for them. It is, but the fluidity of modern working practices has introduced permanent job insecurity for all. Western economies are moving closer and closer to full employment. Companies worry increasingly about the availability of labour. The trick for employers and government is to ensure that, through training, workers are recycled to mitigate the general inflationary consequences. America has performed this trick on a sustained basis throughout its upswing. Europe lacks the cultural characteristics of the American people, which have facilitated its seemingly miraculous growth. A frontier spirit has encouraged labour mobility across US state boundaries and across its industries to a degree as yet alien to the United States of Europe. >From the perspective of the providers of capital - investors - the emerging labour market problem has been containable, because overall activity has been expanding. Running plants faster and sweating employees harder has overcome the rise in the cost of individual workers. Just too tough With general inflation in the economy low, profits have been driven ahead by volume growth and a focus on efficiency. But the rise in oil prices has upset the delicate balance. There is one ball too many for the corporate jugglers to keep aloft. September has been marked by profit warnings from companies around the globe. The reasons cited are specific to the companies concerned but collectively they give the impression that corporate life is just too tough right now. Which is what the economic textbooks would predict. It is difficult to see a renewed upturn in profits growth, short of a swift reversal in oil prices and the surprise discovery of a generation of highly trained young workers hidden in a remote mountain state. While share prices do not always follow profit announcements - expectations are the key - the current wave of gloomy tidings has washed away investors' late summer confidence. So share prices are falling, down 7% in Britain so far this month, taking the FTSE 100 to 7% below its level at the start of the year. Worse before better, I'd guess. _______________________________________________ Crashlist resources: http://website.lineone.net/~resource_base To change your options or unsubscribe go to: http://lists.wwpublish.com/mailman/listinfo/crashlist
