straitstimes.asia1.com.sg By Kelvin Wong

THE next time you request takeaway from your favourite mee pok stall, do not be surprised if you have to pay more than the usual 20 cent surcharge for the plastic container.

In an unexpected twist, plastics have become the latest victim of global oil price hikes in recent months arising from fears of an impending war in Iraq and political unrest in Venezuela.

According to the Singapore Plastic Industry Association (Spia), the prices of petrochemicals - essential raw materials for plastics - have surged by about 25 to 30 per cent in the last five months.

Plastic resins, which are broadly classified as petrochemicals, are themselves obtained from the refinement of crude oil.

'The prices of petrochemical products are very much related to crude oil prices,' Spia president Ronald Lim told The Straits Times yesterday.

'With the sharp increase in raw material prices, some manufacturers are having to absorb this extra cost and are hurting as a result,' he added.

The price of crude oil hit a two-year high last Thursday at US$39.99 a barrel.

Prices have been climbing steadily since mid-November last year when they hovered around US$25 a barrel.

The prices of plastic resins - which are used to make everyday household plastic items such as trash bags - have also moved in tandem.

For example, the price of PVC (polyvinyl chloride), which is used for trunkings that conceal electrical wires, rose from US$550 (S$955) per tonne in October last year to US$710 per tonne last month, Spia data showed.

The price of high density polyethylene, a plastic resin used in ordinary shopping bags rose from US$570 in October last year to US$760 per tonne this month.

Similarly, the price of polypropylene - commonly used in products such as food bottles and automobile battery casings - surged from US$660 to US$860 per tonne over the same period.

Would this translate into higher prices of plastic end-products?

Said Mr Lim: 'If prices of plastic resins continue to rise, then plastic products are likely to follow.'

Plastic manufacturers contacted yesterday agreed that the price hikes have hit them hard.

'We have been trying to absorb the increases so far but from this month onwards, we would probably have to raise our prices,' said Mr Toh Cheng Wan, managing director of Chuan Durn Plastic Industries.

The company manufactures shopping and trash bags, as well as plastic sheets for packaging.

www.smartmoney.com

  Over a Barrel “I don't think oil could cause a recession at the levels they're at now, but...if they get into that $40 to $50 range for a year, that could certainly cause [one].” — David Wyss By Scott Patterson March 6, 2003

MANY AMERICANS, IF asked for their opinion on the current state of "light crude," would probably reply with some disparaging references to Will Farrell's "Old School" and bemoan the pathetic state of the frat-house comedy, which has fallen into sorry times of late.

But ask a Wall Street economist about light crude, and you're more likely to get hand-wringing prognostications of double-dip recessions, global deflation and even — harkening back to the 1970s (which saw the birth of the frat-house comedy) — that dreaded word: stagflation.

Last week, the price of light crude oil touched $40 a barrel on the New York Mercantile Exchange, a level not seen since Iraq invaded Kuwait in 1990. Suffering from the shock of a strike in Venezuela and war jitters over the Middle East, oil prices have skyrocketed during the past few months, threatening to derail the shaky economic recovery and plunge the U.S. into its second recession in three years.

This is no laughing matter to Standard & Poor's Chief Economist David Wyss, who estimates that a double-dip recession could cause the S&P 500 to plunge 20% to the mid-600s. As Wyss points out, "we've got this huge cloud sitting in front of us called Iraq," and everything depends on what happens there. If the war is quick and crude production in the Middle East is left relatively stable, then the price of oil will drop and a recession will probably be averted. But if things don't go to plan, all bets are off.

SmartMoney.com asked Wyss, 58 years old, for his opinion on the economic fallout from high oil prices, whether the Energy Department should open up the Strategic Petroleum Reserve and who stands to benefit from the rising cost of energy in today's market.

SmartMoney.com: What are the odds of high crude-oil prices leading to a recession?

David Wyss: It depends on how high they go and how long they stay high, which depends mostly on what happens in Iraq. I'd have to say the odds are 25% to 30%. I don't think oil could cause a recession at the levels they're at now, but they're getting close to that level, and if they get into that $40 to $50 range for a year, that could certainly cause a recession. If it gets into the $60 range, it wouldn't have to stay that high for as long. It's a tradeoff between price and length. In today's prices, we hit $75 in 1979 during the Iranian hostage crises, and it stayed above $40 in today's dollars for over five years from 1979 to 1985, so high prices can be sustainable for a long time.

SM: How would a double-dip recession impact the S&P 500?

DW: Not good [laughs]. I think we would find some new lows. We're already down a lot, of course. My guess is that we'd probably get a correction down into the mid-600s. Any recession should last as long as oil prices stay high. If oil prices start to come down, we'll start to see the stock market recover. It would take the economy a while to turn around, but the market's normally a leading indicator. The market will start to turn up as soon as it sees the light at the end of the tunnel.

SM: Which industries will get hurt the most by the high cost of oil, and who will benefit?

DW: Well, start with the usual suspects. Transportation gets hit, especially airlines. Tourism drops off. Obviously areas like trucking are going to have to try to pass through higher costs. Also utilities, although they don't burn as much oil anymore. The refining businesses take a hit. Although with the refiners, if you have an integrated producer, they're going to make up enough on the crude to offset what they'll lose on refining. It's the pure refiners that are in trouble. Also car companies, because when oil prices go up people don't want to buy those huge SUVs anymore. In the last month or two we've seen a huge drop-off in SUV sales, and part of that I think is people are realizing how much it costs to fill up the tank on a Chevy Suburban. The crude producers will benefit, of course. If the prices stay high long enough, the oil-service providers will see a big upside, as well as the natural-gas producers, and probably some of the alternative-energy producers.

SM: Do you think high oil prices could cause deflation, as Morgan Stanley Chief Economist Stephen Roach has argued?

DW: I tend to disagree with that. I was around in the 1970s, and believe me, the high price of oil didn't cause deflation back then, and I'm not sure why it would now. High oil prices will slow the economy, they can cause recession, but to call that deflation seems to be a misuse of the term. If energy costs go up for manufacturers, they have to raise the price of their products, or else they lose money. That's the standard argument. That's not deflation by any normal use of the term. I think what [Roach] is doing is mixing up deflation and recession. Yes, high energy prices can cause a period of stagnation, but I'm much more worried about this causing a repeat of the stagflation [a combination of high inflation and weak growth] of the '70s than a Japanese-style deflation.

SM: Many analysts are blaming war fears for the high cost of oil, but what about the strike in Venezuela? Hasn't that had a big impact as well?

DW: I actually think that's more of a factor than war fears. We're losing about two- to two-and-a-half-million barrels a day in Venezuelan production. That's more than the total Iraqi production. Without the situation in the Middle East, of course, we'd be seeing high prices, but probably not this high, and it wouldn't last as long. And we might have been able to put more pressure on Venezuela if we weren't so worried about Iraq.

SM: In 1991, after the Gulf War, oil prices dropped precipitously. But some economists are arguing that, since oil inventories aren't as high as they were during the Gulf War, prices will remain inflated after a war because there won't be sufficient supply to push the cost of oil down. What do you think?

DW: I'm not sure that's true. I don't think we've counted all the reserves. I remember that people made the same argument back in 1991. There's always a tendency to look back at the last two points and draw a straight line between them and call it a long-term trend, and I think we're getting that in the oil market. There seems to be a long-term stability for oil prices, corrected for inflation, in a $20 to $30 range. If you go back to pre-OPEC days, prices are running around $20 a barrel at today's prices. So except for that period from 1979 to 1985, it's been in that range since about 1960. So I think oil prices will drop to the extent that there is going to be a knee-jerk rise, which will then go down after the war ends. But how quickly oil prices come back down depends mostly on how much damage gets done to the oil fields during the war and how long it takes to bring them back online. It depends on how the war goes. Absent damage to the oil fields, I don't think there's any reason to believe that oil prices won't go back down. I don't think they'll go down to $18, but I do think they'll go back down to the high $20s.

SM: Energy Secretary Spencer Abraham has resisted calls to open up the Strategic Petroleum Reverse so far. Do you think the Energy Department should release some of the reserves?

DW: No, because what happens if there's a war and we really do get cut off? Maybe the high prices now are hurting the economy, but if you don't have that reserve ready when we go into war, what do we do? Releasing a minimal amount won't do anything. You've got to supply significant added oil to the market, and if you do that you deplete the reserves that have to be there to fight a war. It's true that today's prices are high enough to cause some damage to the economy. Roughly what we've seen today is about $50 billion off consumer purchasing power from the rising oil prices over the last six months or so. Generally speaking, $10 on oil adds a little over half a point to inflation and takes about three-tenths of a point off of gross domestic product.

SM: Will OPEC offset the high prices by expanding production during the war?

DW: It'll try, but whether OPEC can do it or not is the question. If everything goes to plan, it wouldn't have to produce that much more extra, because we don't get that much from Iraq. It's less than we're losing in Venezuela because of the strike. So if there's no disruption of other production, then it's not a big deal. Be there's probably going to be a lot of Kuwaiti production shut down. And there's always the risk of not just disruption to the fields, but disruption of the oil flow through the Straits of Hormuz as a result of terrorist activity or Iraqi military action. They could drop bombs on a couple of tankers going to the Straits, or terrorists could run a speedboat up to one and set off a bomb, or even fire a shoulder-fired missile from the shore. And if you have terrorism targeted against major refineries, against oil shipment facilities in the Middle East, it could have a major impact.

www.globeandmail.com By MICHAEL DEN TANDT Thursday, March 6, 2003 - Page B2 Closing Markets Thursday, Mar. 6

     S&P/TSX 	-61.27	6328.6
     DJIA 	-101.61	7673.99
     S&P500 	-7.75	822.1
     Nasdaq 	-11.51	1302.89
     Venture 	-6.6	1093.06
     DJUK 	-.34	144.66
     Nikkei 	-103.47	8369.15
     HSeng 	-146.92	8962.26
     DJ Net 	-.13	38.54
     Gold (NY) 	+3.70	356.90
     Oil (NY) 	+0.31	37.00
     CRB Index 	+0.34	245.38
     30 yr Can. 	+0.02	5.40
     30 yr U.S. 	+0.03	4.69
     CDN$ buys
     US$ 	+0.0006	0.6798
     Yen 	+0.0300	79.6900
     Euro 	-0.0012	0.6181
     US$ buys
     CDN$ 	-0.0012	1.4711
     Yen 	-0.0500	117.2300
     Euro 	-0.0025	0.9093

By rights, Jean Chrétien should have left politics years ago. The fact that he's still ensconced at 24 Sussex Dr., midwife to an era of renewed spending on a grab-bag of tangential "legacy" projects, is proof positive that Canada desperately needs a credible opposition.

Having said that, only the willfully blind could fail to notice that the Prime Minister is doing a good job these days at managing -- saints have mercy -- the critically important Canada-U.S. relationship.

Yes, that's right: He of the intemperate press aide, the yankee-bashing MP, the sclerotic military, and the frankly critical foreign policy speeches.

On this particular file, the man is doing a good job -- possibly even a great job. If he keeps it up, he may even manage to be remembered for this, rather than craven power-seeking.

How can this be? It's very simple. U.S. President George W. Bush's manic determination to invade Iraq, alone if necessary, regardless of costs or consequences, is demonstrably reckless and dangerous.

It has the potential to destabilize the world and torpedo its fragile economy.

The Prime Minister has opposed that policy, repeatedly and publicly, with very little ambiguity. Furthermore, his so-called "Canada compromise" is the closest thing that's emerged to a solution to the diplomatic impasse that threatens to destroy the United Nations and the Atlantic alliance.

In working toward a realistic, peaceful resolution of the Iraq crisis, however slim and dwindling the chances of success may be, he is in agreement with the majority of Canadians, and Americans too for that matter.

But, with Canada's particular economic and strategic interests in mind -- $2-billion a day in cross-border trade -- he's tended to frame his opposition in the language of a deeply concerned friend, as opposed to a fierce or resentful critic.

Mr. Chrétien's speech to the Chicago Council on Foreign Relations last month was a case in point.

"I am convinced that working through the United Nations," he said, "if at all possible, as difficult and as frustrating as it sometimes can be, will not only immeasurably strengthen the hand of the United States but also of those around the world who want to support it."

Whatever the Prime Minister may feel in his heart, that's not the language of an anti-American. Neither is it the language of a lapdog.

For the most part, Mr. Chrétien's strategy has worked. Mr. Bush is still talking to him. So is French President Jacques Chirac, Mr. Bush's nemesis at the UN. And 84 per cent of Canada's exports, including $10-billion or so a year in lumber, are still flowing south. The sky has not fallen.

To hear the Prime Minister's domestic critics tell it, his Iraq policy is both shameful and impossibly oblique, as well as a grave threat to Canada's interests.

Andrew Coyne fumes in the National Post that Mr. Chrétien has "taken no position that might be mistaken for a policy." Don Martin, writing in the same publication, frets that the Prime Minister has cross-scheduled a Calgary speech on May 8 with one at the same time, in the same city, by Barbara Bush, the First Mother. Heavens. Might this not draw the President's ire? And Mr. Martin is only half joking.

Underlying all this handwringing is the assumption, sometimes voiced, sometimes not, that a wrathful United States might crush Canada's booming economy, anytime it chose, simply by locking down the border.

That assumption is misguided. It ignores a plethora of facts -- most of which Mr. Chrétien pointed out in his Chicago speech, but almost none of which were reported in Canadian press accounts of it. For example, Canada is the largest foreign market for 38 U.S. states; buys more U.S. products than all 15 European Union countries combined; and supplies 17 per cent of U.S. crude imports, more than either Saudi Arabia or Venezuela.

In other words, a healthy American economy absolutely requires an open Canada-U.S. border. To be sure, security trumps the economy, to an extent. But if it ever came to turning down the heat and turning off the lights in Syracuse, N.Y., the definition of security would change, and quickly.

To his credit, Mr. Chrétien knows this. He mentions Canada's energy stats in every U.S. speech, and has done so for months. That may be one reason why he hasn't shied away from pressing Mr. Bush, and strongly at that, to avoid unilateralism. He knows a pre-emptive U.S. conquest of Iraq is not in Canada's interests, or anyone else's. And he likewise knows that, should Mr. Bush ever wish to punish Canada economically for its pacifist stance, he can't. He'd be crippling his own country as well.

Is it crass, disloyal, to speak in such blunt terms about Canada's greatest friend? One could as easily ask whether it's disloyal for Mr. Bush to brush aside the legitimate concerns of every important U.S. ally of the past 50 years. He's playing hardball, in the service of what he sees as U.S. needs. Mr. Chrétien, in remarkably subtle fashion, is doing the same for Canada. Good for him.

www.billingsgazette.com Thursday, March 6, 2003

BEIJING -- In his final report as head of China's government, Premier Zhu Rongji on Wednesday called for continued high economic growth and bureaucratic streamlining while warning of the widening gap between rich and poor. Speaking to the annual session of China's legislature, Zhu outlined his accomplishments that made China the world's top recipient of foreign investment, the sixth largest economy and fifth largest exporter while pulling millions of Chinese out of poverty. Zhu set a target of 7 percent growth this year, just under last year's 8 percent increase in gross domestic product, the fastest among the world's major economies.

"We should continue to take developing agriculture and the rural economy and increasing farmers' income as the top priority of our economic work," Zhu told the 3,000 delegates. He made it clear that Beijing's spending spree on water works, roads and airports, funded by domestic treasury bonds, would continue this year. The congress is due to ratify a new generation of Communist Party leaders as heads of state and government, finalizing decisions made at the 16th Party Congress in November.

www.nytimes.com By SABRINA TAVERNISE

MOSCOW, March 5 — While many countries are beginning to feel the pinch of high oil prices, Russia, the world's No. 2 oil producer, is suffering from a very different problem — too much money.

Russia's economy is awash in oil dollars. The combination of rising proceeds from exports and the heavy borrowing that Russian oil companies have done abroad has cash flowing into the country faster than the economy can absorb it. The central bank's currency reserves have risen by $4.8 billion, or more than 10 percent, since mid-January.

At the same time, the flow of cash out of the country is slower than it has been in years. Russians' faith in their currency, the ruble, has been rising, and they are not as quick to stash cash aboard.

The abundance of dollars is an enviable problem, and it contrasts sharply with fears about the state of Russia's infrastructure and its debt load that many thought would grip the country this year when its loan repayment obligations are scheduled to reach a peak.

Still, the situation is a headache for policy makers who are trying to steady the economy and minimize the zigzags of boom and bust.

"The oil price is responsible," Oleg V. Vyugin, first deputy chairman of the central bank, said in an interview. "No one counted on it being so high. We thought a decision on the war in Iraq would come sooner."

Russia's financial system, in many ways, is poorly equipped to handle such inflows of cash. Banks generally lack critical mass. Because the banks are too small to make loans on the scale that Russian companies require, the companies generally turn to foreign lenders, depriving Russian banks of the business they need to grow. The domestic banking industry has been adrift since the financial collapse in 1998.

A big concern is that the ruble will rise sharply against the dollar, making Russian goods less competitive with those made abroad. Many manufacturers, including the country's biggest carmaker, Avtovaz, reported a sharp improvement in business after the ruble was devalued in 1998; now the carmaker is cutting production and asking the government for trade protection.

Russia is in its fifth year of economic growth, with a national budget cushioned by a sizable surplus. Oil output continues to rise, up 11 percent in January and February in contrast to the first two months of 2002. Wages are rising, and company profits are soaring. And a stronger ruble makes imported goods more affordable for consumers.

The other big fear is inflation. Higher wages are translating into more spending and greater consumer demand, and the Russian central bank has been pumping even more money into the economy by buying dollars, an effort to keep the ruble from strengthening too much.

Russian policy makers are aware that the incoming tide of dollars is temporary, and that oil prices may fall later in the year. In the meanwhile, Mr. Vyugin said, the central bank is not going to make any sharp moves; rather, it is hoping that the government will mop up some of the additional money by running a large budget surplus.

"The situation — with Iraq and high oil prices, low interest rates in the U.S. and the weakening of the dollar — is temporary," Mr. Vyugin said. "By the end of the year the situation will be cleared up. We will try to make it through this period and not make big adjustments in the exchange rate."

The Russian federal government, which receives a third of its revenue from oil and gas, calculated its 2003 budget based on an average oil price of $21.50 a barrel. Lately, turmoil in the Middle East and in Venezuela, another major producer, has pushed crude oil prices up to nearly $40 a barrel.

"The government has an enormous windfall, and that should be saved fully," said Poul Thomsen, director of the International Monetary Fund office in Russia. "Otherwise the high oil prices will be associated with stronger pressures for a ruble appreciation, and that could choke the output recovery."

While Russia's oil is a boon, in the long run it is also a burden. Policy makers here are concerned about depending too much on such a volatile commodity, and are looking for ways of strengthening other parts of the economy. Crucial to that, they say, will be an upgrading of Russia's inefficient economic institutions — its weak legal system, bloated state apparatus and sagging Soviet-era utilities.

"It is important for growth outside the energy sector to prevent a sharp ruble appreciation by saving the oil revenue windfall," Mr. Thomsen said. "But over the long run, structural reforms are much more important."

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