Distress calls

Market sentiment put simply, gossip and rumor overlaid by a few shaky predictions have always been able to drive the Hong Kong stock market more easily than sound financial facts.

All it takes is talk about an impending oil crisis, bolstered by TV pictures of blockades in Europe and speculation about threats to the US economy, for stock markets across the region to plunge. The SAR's dependence on oil is far less than it was before the manufacturing sector moved to the mainland. But that has not stopped distress calls going out to the government to cut fuel taxes. No doubt some of the same protesters are simultaneously demanding action to stop mounting air pollution. If so, they forget that since fewer vehicles on the roads bring a much needed breathing space so a rise in oil prices is not entirely bad. Panic, on the other hand, may become a self- fulfilling prophecy.

The worst government reaction would be to reduce taxation. It needs the revenue to sustain recovery. Part of the function of the levy is to dampen demand for fuel in the interests of conservation. The domestic economy will not be drastically affected by a rise in the short term. Consumers must be prepared to absorb the increases. But allowing taxi drivers to impose a surcharge if prices go on rising is worth considering. "User pays" is a sound financial principle.

The real fear, as usual, hinges on the U.S. Federal Reserve, which may raise interest rates because of inflationary worries, dragging the local revival back into the doldrums. The global economy has provided an unusually supportive environment for East Asia's recovery, says the World Bank, warning that if oil prices rise US$5 a barrel more than this year's projection, or $10 a barrel for next year, world growth will fall up to one percent.

But, with OPEC countries promising to increase output, and Saudi Arabia saying it has already put an extra 600,000 barrels per day on to the market, things should improve within months. The main hazard is a severe winter in the West increasing demand when reserves are at their lowest for decades.

But the picture is not all gloom. Each time the world is held to ransom by oil-producing nations, it makes advances that reduce dependence on the commodity. Keeping supplies low and prices high could damage OPEC as much as the rest of the world. It can be assumed OPEC ministers will do all they can to avoid disaster for either side.

-- The South China Morning Post, Hong Kong