The Impact of Emerging Markets

Robert Hsu, May 19, 2008

Crude oil prices made another new record high this week, breaking above $120 a barrel to settle at $123. Unfortunately, I think it is only going to get worse as we enter the summer months. Demand for oil worldwide isn't going to slow any time soon, and with production disruptions in predominant fields in Nigeria and Iran, logic tells us that oil prices will to continue their march higher.

Even though the cost of crude oil is making record highs, most Wall Street analysts are still expecting that the growth in U.S. oil inventory will alleviate the pricing pressure on oil prices. But I think that the Wall Streeters are failing to consider the impact of emerging market demand. Wall Street oil analysts have consistently underestimated growth in emerging market energy demand and ignored the economic shifts in China and other Asian countries. But the reality is that emerging markets are having a huge impact on global consumption and are greatly contributing to the higher oil prices.

Just look at the startling numbers: In the past seven years, the U.S.'s share of global GDP has declined by 10% in purchasing-power-parity terms. In the same period, BRIC economies (Brazil, Russia, India and China) increased their share of the global GDP by an astounding 70%.

Even with a slowdown in developed economies led by the U.S., emerging market economies continue to grow. And as domestic consumption in emerging markets grows, it more than makes up for the loss in exports to developed countries, resulting in a decoupling with developed countries like the U.S. This is exactly what is happening in China, where domestic consumption jumped 20% in the first quarter of this year, even as U.S. domestic consumption growth slowed down to a trickle.

So as countries like China enter the global economic scene, their consumption is starting to have a significant impact on global supplies and prices. This is what has happened with oil, as increasing demand in these countries has added pricing pressure to the cost of oil, helping to push prices to record-highs.

The increased impact of emerging markets is a new phenomenon, as the U.S. has been the world's top economy for years, and many investors on Wall Street are having a hard time adjusting to it. But as for us, we recognize the huge economic shift that is taking place. So while many Wall Streeters are missing out on this opportunity, we are raking in the profits with our Asia Edge holdings. In two of our oil plays, we have 14% and 26% gains, and I think that we will see more gains going forward as oil prices likely shoot through the roof.

To find out more about these oil plays and my specific buy advice, become a member of Asia Edge today.

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