"Kee" Points with Jim Kee, Ph.D.

  • Oil Tanker Attacks
  • Unrest in Hong Kong


Oil Tanker Attacks

There continues to be a series of sabotage attacks (involving planted bombs or mines) on oil tankers in the Gulf of Oman, allegedly perpetrated by Iran. The Gulf of Oman is near the Strait of Hormuz, through which one fifth of the world’s oil travels. It is considered a “strategic choke-point” or water passage from the Persian Gulf region to the Indian Ocean (via the Gulf of Oman and the Arabian Sea). Iran, Iraq, Saudi Arabia, Qatar, Kuwait, United Arab Emirates, etc., are all in close proximity. Two tankers were attacked on Thursday (One Norwegian-owned, the other Japanese-owned), which follows four attacks that occurred in May. The incidents occurred in international waters, and the US military ship the USS Bainbridge is in the region (evidently with the blessing of the international community) to defend interests including the freedom of navigation. Oil prices jumped a bit but overall are fairly restrained, with WTI trading at $52 and Brent Crude trading at $62. Think of WTI (West Texas Intermediate) as the price of US oil, and Brent Crude the price of global oil. The difference between the two largely reflects the cost of moving US oil to ports and then on to international markets (WSJ). Pipeline capacity is the limiting factor, and while international shocks should increase the price of Brent and widen that spread, new pipeline capacity being built in the US should work in the opposite direction towards lowering it. As for the price of oil in general (both WTI and Brent), this and other (e.g. Venezuela) supply constraints should put upward pressure on prices. But working to offset that is weaker global demand, particularly in China-led emerging markets, where most of the growth in oil demand has taken place during the last 20 years. Developed economies like Europe, Japan and the US are growing more slowly, and their output is increasingly less oil intensive (using less oil per unit of output). They’ve added really no growth in global oil demand over the past ten years (Federal Reserve Bank of Dallas).   


Unrest in Hong Kong

Markets at this point seem pretty unperturbed, and I think that’s because strife in the major oil producing regions of the world is nothing new. I put it in the category of “expected, but not predictable in its specifics.” Another recent headline event that I put in the same category is the current political turmoil in Hong Kong. Hong Kong is a fascinating case study in economics, about as close to a laboratory experiment as you can get. Hong Kong became a colony of the British Empire in 1842, and in 1898 Britain obtained a 99-year lease after which control would transfer to China, which occurred in 1997. In the 1980 television series Free to Choose, economist Milton Friedman described Hong Kong at the time as “the freest market in the world…no natural resources outside of a great harbor, no duties or tariffs on imports or exports, a low flat tax and a stable currency” (the Hong Kong dollar is still fixed to the US dollar, not the Chinese Renminbi). It had over 4.5 million people (7.3 million today), and yet wages had quadrupled since World War II, when Hong Kong was occupied by the Japanese. In 1997, when sovereignty was returned to communist China, I expected tremendous upheaval, i.e. “the world’s freest economy being handed over to communist China”, but that hasn’t really occurred, and it is because China has followed a ‘one country, two systems’ framework that has more or less left Hong Kong alone. There have been protests since (most notably in 2003 and 2012), over things like China-forced “patriotic education” in Hong Kong schools, and the Chinese government has largely backed away. But recently the Chinese government issued a hugely unpopular “extradition bill” that would allow extradition (seizure) of criminals to the China mainland (WSJ). Critics in Hong Kong feel that this is an obvious power grab on the part of the communist officials in China. They fear that it will be used for political purposes to silence dissenters regarding China’s growing encroachment over the city’s autonomy. Massive demonstrations followed, and it looks like the Chinese government is backing away again — for now. To be honest, what has perplexed me has been the relative calm between China and Hong Kong, not the recent unrest.