By Andrew Woods, ICS | Source: AWEX, IMF, Project Syndicate, BP
Among the turmoil in markets around the world, oil prices have fallen by around half since mid-2014. Oil prices regularly rise and fall, but this is only the fourth fall of this magnitude in 40 years. A recent article by Anatole Kaletsky in Project Syndicate (link to full article below) made some interesting comments on the fall in oil prices. Following this theme, how will recent oil price movements impact wool prices?
The thesis of Kaletsky’s article was that oil is a commodity for which supply varies. This, in turn, is a major driver of the price. Nothing surprising there. The importance of this point to modern economies is that the world consumes 340 million barrels of oil per year, so a $10 fall in the per barrel price equates to a transfer of $3.4 billion from oil producers to oil consumers. Since last year, the oil price has fallen by US$60. This is equivalent to a transfer of 2 trillion dollars (US$), enough to change world economic growth.
Figure 1 shows the year-on-year change in an oil price series (West Texas Intermediate) in US dollar terms, from the early 1980s onwards (bars). The four big falls in the oil price have had their bars darkened. Economic growth has tended to improve for a couple of years following the drop in oil price. Figure 1 shows the EMI increasing (in Australian dollar terms) for the couple of years following the drop in oil price.
In figure 2 the EMI is replaced with the 19 MPG. The volatility of the 19 MPG was higher than the EMI during the 1980s and 1990s, reflecting that the 19 MPG was on the edge of the merino distribution at the time. A similar pattern is shown to figure 1, with the 19 MPG increasing year-on-year for the two years following the big drop in the oil price.
Wool prices are sensitive to changes in economic growth, so this pattern fits the economic logic of sharply lower oil prices boosting economic growth, which in turn boosts wool prices. The downside to low oil prices is the pressure it applies to apparel fibres by helping manmade fibre prices remain at low levels. Cotton prices are already feeling the pressure of low polyester prices.
Article by Anatole Kaletsky - http://www.project-syndicate.org/
The fall in oil prices by half during the past year are likely to help economic growth improve during the next couple of years, by transferring money from oil producers to oil consumers. This, in turn, will help demand for apparel including wool. Big falls in oil prices in the past have been followed by firmer wool prices in the following two years. That’s the good news. The potential bad news is that low oil prices will help manmade fibre prices stay low, thereby increasing the competitive pressure in the apparel fibre markets. Cotton is already feeling this.
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