Sunday Herald

Sunday Herald - 18 December 2005
The year we watched the rise of oil, gold, China and India
Business Leader

http://www.sundayherald.com/print53328

IF you looked at 2005 from a distance you would scarcely believe that the oil price shock – which saw the price of crude break through $70 per barrel in the aftermath of Hurricane Katrina – would have such limited economic effects.
Compare it to the earlier oil spikes of 1973 and 1980 which provoked severe bouts of “stag flation” (a nasty combination of recession and high inflation) which paralysed the global economy for several years afterwards.

There are two main reasons why high oil prices, which have been matched by dramatic rises in the prices of many other commodities this year, have not led to a similar scenario this time around.

The first has been that central banks responded in a much better fashion to higher commodity prices, gradually raising interest rates – or at least hinting at higher rates – in a bid to ease inflationary pressures on the wider economy. The US Federal Reserve last month raised its short-term rate to 4%, the highest level in more than four years.

The second reason is globalisation, which has itself been made possible by the end of the cold war and the opening up of the Chinese and Indian markets.

Back in the 1970s and early 1980s, national economies were like giant silos, and therefore far more susceptible to pricing pressures at times when energy prices went through the roof.

In today’s more globalised world, both production and services are more mobile and trade union power has to a large extent been emasculated.

Production can therefore be transferred to places, such as India, where unit labour and other costs are significantly lower.

Mirroring the rise in oil this year has been a parallel rise in the price of gold. Lovers of the shiny metal have driven the price up to more than $530 per Troy ounce, largely because of their fears of a return to inflation and their lack of faith in the stewardship of the developed economies. In an uncertain global environment, they view gold as a deeply reliable hedge.

But, this time, they might have made the wrong call. Inflationary pressures have come off the boil since the summer, as the $10 per barrel drop in the price of oil since the summer starts to work its way through the system.

Energy efficiency is also playing a part in ensuring inflation has not followed the oil shock. A further reason why developed economies have been more able to accommodate high oil prices is because the shift from manufacturing to services means they are much less energy-intensive. While oil imports represented 3% of the GDP of OECD countries in 1980, they account for just 1% today.

Competition and productivity improvements have further ensured the knock-on effects have been much more muted than the doomsayers feared. Global economic growth of 4.25% in 2005, as predicted by the World Economic Forum, is a creditable performance at a time of such uncertainty.

Another big story of 2005 has been the continuing remarkable growth of the economies of India and China. They are expected to grow at 7% and 9% respectively in 2005, despite their dependence on imported oil.

Scottish businesses that neglect the opportunities presented by these two economic powerhouses – either as a manufacturing base or as a consumer market – might well be missing a trick. Particularly when we have just passed another global economic milestone. Last week it emerged that following a revision by Beijing statisticians, China’s GDP in 2004 in fact reached £1.13 trillion, a whisker ahead of the UK’s £1.11 trillion, making it the fourth largest economy in the world.




But China and India may also represent a real threat to our future economic wellbeing. Chancellor Gordon Brown recently warned that the two countries between them are training more engineers, computer scientists and university graduates – four million a year – than Europe and the US combined.

Can the global economy continue to grow and the new challenges be met without the protectionism of a “fortress West” mindset among the developed economies?

At year end the omens do not look good. The strains imposed by shifts in global economic power were bubbling to the surface in Hong Kong this weekend, where the crucial World Trade Organisation talks are said to be “in peril”.

This is a result of the intransigence of the European Union, which is resisting calls to end its agricultural export subsidies by 2010, and US reluctance to give duty-free and quota-free access to goods from the world’s least developed countries.

Without such concessions, the current Doha round of trade talks is unlikely to culminate in a fairer trade treaty next year. It would prove an unfortunate end to the economic year.

Copyright © 2005 smg sunday newspapers ltd. no.176088
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China Urges U.S. to Join Kyoto Treaty - New York Times

China Urges U.S. to Join Kyoto Treaty - New York Times

November 30, 2005
China Urges U.S. to Join Kyoto Treaty
By THE ASSOCIATED PRESS
Filed at 9:41 p.m. ET

MONTREAL (AP) -- China -- one of the world's major polluters -- urged the U.S. to join the Kyoto treaty Wednesday, rejecting arguments that the pact is flawed because it fails to restrict emissions by developing countries.

China's Sun Guoshunis said his country was already cutting the polluting emmisions, adding it was unfair to expect China and India -- with the world's largest populations -- to ask their impoverished people to cut back on energy consumption.

''We really feel pity that the U.S. has not yet, and is not going to join the Kyoto Protocol, not only because of the size of its total emissions, but also because of its higher per capita emissions,'' Sun, director of the Department of Treaty and Law at the Chinese Ministry of Foreign Affairs, said in an interview with The Associated Press.

He spoke during the first meeting of the 140 countries that have ratified the Kyoto Protocol since it was signed in 1997 and went into effect in February.

More than 8,000 environmentalists, scientists and government officials were attending the 10-day conference in Montreal. Some 120 environment ministers and other government leaders were expected to arrive next week for the final negotiations.

On Wednesday, the conference finalized the treaty's so-called ''rule book,'' establishing greenhouse emissions cuts and mechanisms to allow developed countries to earn credit for carbon reduction by investing in development projects in other nations.

''The Kyoto Protocol is now fully operational. This is an historic step,'' said Canada's Environment Minister Stephane Dion, who is presiding over the conference.

The Kyoto agreement targets carbon dioxide and five other heat-trapping gases blamed for rising global temperatures and disrupted weather patterns. It calls on the top 35 industrialized nations to cut emissions to 5.2 percent below their 1990 levels between 2008 and 2012.

Harlan Watson, the senior climate negotiator for the State Department, said Washington would not be party to any agreement with legally binding targets.

''There's more than one way to address climate change,'' Watson said. ''The idea that you have to be bound by a Kyoto-like structure to address the issue, we believe is a fallacious one.''

The United States, the world's largest emitter of greenhouse gases, argues the accord is flawed because of it does not restrict emissions by developing countries. President Bush has called for an 18 percent reduction in the U.S. growth rate of greenhouse gases by 2012 and has committed $5 billion a year on science and technology to combat global warming.

Environmental groups have denounced Washington at the conference, not only for turning its back on Kyoto, but also for saying it won't participate in negotiations for commitments to greenhouse cuts after the first phase of Kyoto expires in 2012.

The Bush administration said Kyoto would cost the U.S. economy $400 billion and almost 5 million jobs, while excluding China and India from mandatory emission caps.

China is a major world polluter with carbon emissions are soaring. Many cities, including Beijing, are thick with air pollution and large regions have been hit by drought, failing crops and sandstorms linked to global warming.

Sun noted that while China is the world's second-biggest emitter of greenhouse gases, it also has the largest population, 1.3 billion people.

While China's gross domestic product had quadrupled from 1980 to 2000, ''energy consumption only doubled,'' he added. ''So that shows big efforts by the Chinese government.''

Sun said China's objective was to raise energy efficiency by 20 percent between 2006 and 2010.

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