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THE INVESTOR
ANALYSIS
Cheaper oil amounts to
a tax cut on a scale no
government itself could
ever afford
material
world
A fall in the price of oil and other commodities
could fuel an economic boom in the long run
ByAnthony Hilton
F
or the past six months the markets
have been fretting about the
slowdown in China, and with good
reason. Since the financial crash of
2008,most of theWestern world
has been struggling to grow at the rates which
were normal in the post-war period.World
trade has continued to expand; but only
because, in the years following the crash, China
continued with its breakneck expansion,
producing goods for export and sucking in raw
materials – everything from iron ore to cement
– from the four corners of the world. Now that
has come to an end, some investors and
economists fret that without China there will
be no locomotive strong enough to pull the
world economy along.The alternative they see
is deflation, stagnation and despair.
But it may not be that bad. Indeed, there is a
strong case to be made that the world should
be pleased, not frightened, by China’s
slowdown: its breathtaking expansion has
commanded a disproportionate share of the
world’s resources and left precious little room
for anyone else. Economies have grown fast in
the past, of course, but never has the world
seen such a transformation take place so
rapidly in such a large country.The upside is
the arrival of a major new force on the
economic stage; the downside is that its
gargantuan appetite for rawmaterials to feed
its expansion and infrastructure investment
has shaken the world.
This is what the commodity boom-and-bust
is all about.With China going flat out, all the
world’s metals, coal and oil prices went
through the roof. Shipping fleets were
expanded,mines were developed and oil fields
were drilled – all to feed a boom in which the
record-high prices looked like they would last
for years.Then the Chinese changed course,
deciding that their investment- and export-led
model must change to a strong, domestically
focused, consumer-led economy.
Such an economy consumes fewer natural
resources.The change marked the beginning of
the end for the rise of commodity prices and
they have been falling ever since.This is most
visible in the more than halving of the price of
oil, but is shown no less dramatically in copper,
iron ore, zinc, and all the other essentials of a
modern economy.Many of these prices are at
their lowest in six or more years.Mining and
oil shares, which had been the highest of high
fliers, have tumbled back to Earth. Raw
material producers, from countries such as
Brazil to Nigeria and SouthAfrica toAustralia,
have prospered from the commodity boom but
are now struggling to cope with the bust.
History teaches us that, when commodities
fall, economies boom.That is what happened
in the 1950s when commodity prices collapsed
