Can Price Fall -300%? Growth Rate Asymmetry is Now Wrong!

This is a typical question that we taught students in the past about the asymmetry between positive growth rates and negative declining rates. For example, the Year-on-Year change of tourist arrivals could grow more than 100%, but could never fall more than 100%! It is because when it falls 100%, it means ZERO tourist arrivals! It is logically the minimum as the number of tourists cannot be negative.

Figure 1 shows the YoY of Tourist Arrivals to Hong Kong from 1999 to 2020 (Apr). Due to the SARS in 2003 and the COVID-19 in 2020, the plummets are disastrous. The latest fall in Apr 2020 was -99%! It fell from about 6 million in Apr 2019 to just 4125 in Apr 2020. The calculation is (4125–6m)/6m = -99.9%. It is unprecedented and the record is hard to break because even if the number of tourist arrivals becomes zero, the maximum declining rate is -100%!

In contrast, the growth rate can exceed 100%. For example, Figure 1 also shows that after the SARS the V-shaped rebound of tourist arrivals resulted in an almost 300% increase in the number of tourist arrivals.

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Figure 1 YoY of Tourist Arrivals to Hong Kong, 1999–2020. Source: HK Tourist Board

However, this logic of growth rate asymmetry is now WRONG! Since 2020, the market tells us that the change of a price can be more than -100%. Since Apr 2020, the negative oil price scenario has made a paradigm shift. Price falls can exceed -100%! Figure 2 shows the plummet of the price of WTI futures per barrel in US dollars. On Apr 20, the oil price fell from about $20 to almost -$40, i.e. it drops by about -300%! The calculation is (-$40-$20)/$20 = -3.

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Source: Oil Price Chart Apr 17 — Apr 23, 2020. Flood (2020)

Even though it is rare to have a negative oil price, and it rebounded quickly in the past few weeks, but once it breaks the beliefs, it becomes the new normal. Just like negative interest rates, it was rare before 2009. But once it comes true, it changes the market presumption, and it spreads like wildfire. The US President even urges the Fed to quickly exploit the negative interest rate tool.

In fact, when I reported in Jan about the recent two plummets of oil price, I found the rates of decrease almost unbreakable as they were close to the maximum: “it plummeted dramatically to USD34.93 in Feb 2009, i.e. a 74% fall! Then it rose back to above USD100 and leveled off for almost 5 years and then it abruptly plummeted to the recent bottom at USD30.10 in Jan 2016.” (Yiu, 2020) Yet, the year 2020 is a year of unimaginable. Negative price would make a lot of economic theories fail.

References:

Yiu, C.Y. (2020) Oil Price Effect on International Trade, Medium, Jan 10. https://medium.com/@ecyY/oil-price-effect-on-international-trade-3087b187bb77

Flood, C. (2020) Oil prices on a slippery slope, Financial Times, April 24.

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