No safe haven
Crude oil closed in New York at a record high of US$69.81 on Aug. 30. Yesterday, it closed at US$65.95, up 13¢ — putting US$70 oil within relatively easy reach.
At that price, the price of crude oil would be at 1974 levels, after inflation is taken into account — in essence matching the price of oil during the aftermath of the first oil shock, when the Organization of the Petroleum Exporting Countries (OPEC) restricted exports.
Fitch Ratings noted that today’s rise in oil prices is substantially different from 30 years ago. For starters, the recent rise has been slower and longer lasting, giving consumers more time to adjust to the higher prices. As well, developed nations have become far more efficient in their use of energy, requiring about half as much oil to produce each US$ 1- billion in GDP.
That said, gross oil consumption among G7 nations is rising fast. It was equivalent to 1.8% of GDP in 2004, up from 1.4% in 2003. At US$ 70 a barrel, plus a 1% increase in consumption, Fitch Ratings estimates that oil costs will rise to 2.6% of G7 GDP in 2005 and 3% of GDP in 2006.
While this so-called energy intensity is still down considerably from the 1970s, when it hit 5% of GDP in 1974 and a peak of 7.5% in 1979, the rising costs could nonetheless sap economic growth.
“Lower oil intensity means the macroeconomic implications are much less severe than in the 1970s,” Mr. Coulton said. “But comparisons with the 1970s — the nadir of post-war G7 macroeconomic performance — may be cold comfort.”
Looking for a safe haven? The Fitch report offers little respite from the effects of higher oil prices. In fact, emerging markets may be even worse hit, given the fact that their oil intensity is more than double that of the G7.
“Emerging market net oil importers could face significant monetary policy challenges as sharp interest rate increases may be needed — despite slowing growth — to underpin exchange rate and domestic bond market stability,” he said. Manulife surprise
Jamie Keating, an analyst at RBC Capital Markets, believes the Street is underestimating the potential of
Manulife Financial. Events that will provide earnings surprises “ to the upside” include additional cost savings and revenue from last year’s acquisition of U.S. insurer John Hancock, and “accelerated returns” from Asia, particularly in the area of wealth management, he said.
The “kicker” behind his 2006 earnings forecast, which is 6% above the consensus estimate, is the expectation of “more aggressive deployment of $3-billion in excess capital to shareholders” through higher share buybacks and dividend increases. He believes Manulife will buy back between five million and seven million shares each quarter through the end of 2006.
Hurricane Katrina, which smashed the U.S. Gulf Coast this month, resulted in a $ 165million charge for Manulife. While follow- up Hurricane Rita poses a “ real threat” of more charges to come, Mr. Keating views the catastrophes as onetime events for Manulife and expects earnings to rebound next year as “ reinsurance rates firm, and disaster frequency and severity normalizes.”