Food and Drink

All going up: Oil prices, gas prices, a good glass of wine

Scott Tong Feb 24, 2011
Food and Drink

All going up: Oil prices, gas prices, a good glass of wine

Scott Tong Feb 24, 2011


Kai Ryssdal: Crude prices, as I mentioned earlier, did give back just a little bit today. But the trend line’s sure up. And when oil’s higher, you know what tends to follow?

Yes, pump prices, but that’s not the answer I’m looking for. Try high-end red wine.

That’s the takeaway from a study by the International Monetary Fund. It’s lighthearted, but it makes a serious point about commodity and energy markets. From the Marketplace Sustainability desk, Scott Tong reports.

Scott Tong: Hmm, what’s the link between crude oil and wine? Both have light, sweet varieties. Drinking and driving — there’s a crack to be made there.

But Serhan Cevik at the IMF has a better explanation. He looked at oil prices the last two decades, and compared them to an index of fine wines, mostly French. And, voila.

Serhan Cevik: It turned out that the results were quite robust.

In economics, that’s called an understatement. The price correlation topped 90 percent. Those numbers, and a very cool topic, have turned Cevik and his co-author into mini-celebs.

Cevik: I’ve never heard somebody call an IMF paper ‘cool,’ but from that point of view it’s quite encouraging.

Now here’s the why: He found the prices of both liquid assets boom and bust because of changes in demand. No, not demand from rich countries — ours stays steady — but from emerging markets. It’s the new wealthy in new countries that move markets.

Cevik: As they become richer, they demand greater energy, greater amount of commodities, and wine as well.

Which reminds me of a wine-and-dine weekend I attended two years ago in China. The tycoon hosting it meant it expressly for rich people, clearly a bit fuzzy on compensation in public radio. We sampled caviar, premium cognac — like Creation, from Jean Martell, $300 a bottle. And we drank Bordeaux, which is fitting because China just leapfrogged the U.S. as the biggest overseas market for Bordeaux. This is some of the priciest wine.

Chinese billionaire property developer Wang Shi explains the appeal.

Wang Shi: There is a joke that goes, we don’t look for the best, we look for the most expensive.

That suggests the streets of Shanghai, Mumbai and Dubai are filled with shoppers who think expensive equals good. It makes sense to Chip Chaikin at the private-equity firm Bluepoint Capital. He’s a China long-timer.

Chip Chaikin: People used to keep their tags on their suits, sticking on the outside, so they could indicate to people it was a high-end brand and they paid a lot for it.

Now, before you smirk at “those Chinese people,” consider: Not long ago, it was us.

Chaikin: I’m sure that the high-end French vineyards looked down their nose when they had to sell the wine to newly wealthy Texans a couple generations ago. And it’s sort of now the entrepreneurial Chinese turn. But money and sophistication don’t always go together. And sometimes that second one lags a little bit.

Global markets don’t care. So long as emerging economies buy, prices stand to rise. Whatever the commodity, says Cevik at the IMF: Wheat, rice, coal, Chateau Latour.

Cevik: I would not be surprised if we take 50 commodities, and find very similar results to what we found for crude oil and fine wine.

Now if you invest in wine, he suggests you cork your enthusiasm. The paper argues that wine tracks other investments, so it’s a lousy portfolio diversifier.

Harvard economist Robert Stavins agrees wine’s a risky venture. And he should know — he edits the Journal of Wine Economics.

Robert Stavins: Only the premium, the top five wines from Bordeaux — Lafite Rothschild, Latour, Margaux, Haut-Brion and Mouton — have consistently beat the stock market.

You might think this brainy economist is one of the few qualified to dabble in a bit of Bordeaux speculation. But does he? He’s a mutual fund guy.

Stavins:My portfolio investment is much like yours and everyone else’s. I do have a substantial stock of wine in my cellar, but that’s because I want to age that wine.

In Washington, I’m Scott Tong for Marketplace.

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