Oil Price and the changing times
John Samuel
Oil is back in the centre of Economic and Political Discourse- at the international, national and local level. What does this mean for the future of Economy and geo-politics?
The roots of this phase of economic globalization are in the economics and politics of the 1970s. The protagonist was oil. There was a food crisis too. This perpetuated the new cycle of debt and many highly indebted poor countries. The economic turmoil of the seventies (due to oil shock, saturation of state-and consequent inefficient and ineffective public expenditure, food crisis, and consequent new indebtedness of poor and developing countries) paved the way for the new mix of neo-conservatism, neo-liberalism and the third way. The indebtedness and Balance of Payment crisis in many countries gave unprecedented power to IMF and World Bank- and the consequent Economic and Policy Conditionalities. That is how the story of the new phase of Economic Globalization commenced somewhere in the early eighties.
While there are similarities between the Oil Shock, Food Crisis and economic conditions of the seventies, and the one we are beginning to face now, the political and economic context are not the same. The first twenty five years after the Second World War saw unprecedented and sustained economic growth in Europe and America. In fact, the demand created by the reconstruction after the war, the aid system in the fifties, and the capabilities in Europe without the burden of maintaining the colonies helped to a significant extend to propel this economic growth. In other words, there was a significant demand within the western countries and the internal market competence to deliver the supplies. By the seventies, the market got saturated- in terms of demands- and the state got saturated- in terms of the sustainability of public sector spending and effective social welfare. As a result, there was a real compulsion to find new market elsewhere and to restructure the tax and public expenditure pattern. The rise of Japan and the competitive edge of Japanese products in the Asia, oil rich Gulf countries and US also created a sense of urgency to create new markets. To a certain extend EU was a sort of political solution to enable market integration so as to address the issue of market saturation.
The Oil shock, and the consequent debt trap and balance of Payment crisis gave a great opportunity for OECD countries to develop a combined strategy of trade, aid, debt and the conditionality approach to open up the markets of developing countries and less developed countries in Latin America, Asia and Africa. The economic and political implosion of the USSR in the late eighties also created a crisis of the centralized policy planning mode and a non-dollar based trade framework (there was almost a barter system between USSR and many other countries). In fact, more than the ideological threat of communism, the West was more worried about the trade( in Oil and other commodities and arms) and such a system posed a global road block for the western capitalist mode of trade. After the fall of USSR, it was a free ride for the finance capitalism and neo-liberal mode of policy and trade framework.
The present situation is very different. The growth of the last fifteen years is propelled by the growth of Asian economies, Latin America and parts of Africa. For the first time, the population of China and India also tend to become an economic asset (instead of liability) in terms of productive capability and domestic market expansion. Such a growth is partly due to the new infrastructure development in different parts of Asia (in fact much bigger in scale than the one in Europe in the sixties) and also due to competitive edge in terms of cheap labour and skills. The finance capital market too played a key role in propelling new investments in the stock market that propelled the economy. Asian countries are beginning to play a competitive game and also using the very finance capital market to acquire market share, productive capacities and big MNCs. Many of the take over (of Tata, Mittal and others) is of immense symbolic importance.
Due to job flights and due to the crisis of the social -development, there is a fast emerging vulnerable middle class and poor across Europe and USA. There is an added shade of identity politics (dramatically different from the old Communist "threat"). The migrant communities which provided the crucial labor inputs during the growth period of Europe now have become a political liability. This means there is more political and economic insecurity among a large number of working class vulnerable middle class and poor. All European countries are facing a new internal crisis of politics and economics (particularly in the context of the alienation of Muslim communities who are born and brought up in Europe).
This means there is a shift in the political sociology at the grassroots level in the USA and EU and other parts of Western Europe. Many of the European countries like Italy, Spain and France are facing serious economic crisis. This also means that there can be shift in the macro-political economy and geo-politics. Hence, the context is dramatically different from that of the economic crisis of the seventies. Now there is no crisis of Balance of Payment (as of now) and there is lots of Foreign Exchange Reserve. There are vibrant domestic markets in India and China. In fact the growth is sustained by the economic growth in Asia.
It seems the ongoing economic troubles, oil price hike, and food crisis will be the spring board for another key political and economic shift in the world. The price of oil climbed from $ 10 for a barrel in 1999 to $ 135 last week. Goldman Sachs says it will hit $ 200 within the next 24 months! This means the price of Oil has risen by 900 percent in the last one decade. Oil spending as a share of global economy may cross 7 %( more than the peak in 1979). Oil drives the engine of the present global economy. USA consumes 25% of the world output. Though demand in China and India increased, China consumes 9% and India consumes only 3% of the total oil demands.
As the price of oil climbs, the commodity prices will go up. This also means the food prices will be relatively higher in the International market. The oil price increase is making new political tension and turmoil. But if the price goes up, at least in some segments, there will be a decrease in demands. The SUV market in the US and elsewhere has already in a slump and will face a crisis. This will also have consequences in countries like China and India- which sustain the global economic growth (and demand for commodities) to a large extend. It will be difficult to sustain the subsidy levels for Oil in India and the governments will be forced to increase the price (there is no other way). A mix of inflation, increasing oil price and deceleration of economy (for e.g. in Real Estate) can create new political tensions and equations in many countries, including India.
The increasing oil prices will further make the Oil producing countries very cash rich. So the prominence of Russia, Iran, Venezuela, Saudi Arabia and Gulf countries will significant increase. This also may induce a new arms race- lead by Russia. On the one hand it will give rise to a multi-polar world and on the other hand it can propel a war. It is also interesting to note that most of the Oil producing countries are run by autocratic or authoritarian regimes; many of them are in the Arab World
The role of National Sovereign Funds of Gulf countries will increase dramatically. It is estimated that if the Oil price climbs up- 6 gulf countries will have a value of $95 trillion dollars (American Economy is around $ 13 trillion) - about twice the size of public equity market. Already Sovereign Wealth Funds of the Gulf countries are buying up the major and controlling stakes of big western banks and this will create new protectionism.
A possible inflation (if it crosses 15%) in Asia can create a serious economic troubles. There will be a devaluation of currencies in these countries- with a potential trouble for finance capital market. There is a real trend of Inflation in most of the countries in Asia (Vietnam-highest. Thailand (almost 10%), India, China and others) and the oil price hike will further accentuate the problem. A persistent inflation and a stagnant economic growth may result a Stagflation in different parts of Asia, including India.
This all means a) this phase of economic globalization will not be sustainable and it will be transit in the next phase b) there will be new protectionism( particularly in terms of commodity market, food etc) c) There will be more regional trade and regional economic activism.
So there will be a possible tendency to regulate the finance flow and there will be more restriction for the commodity market. The elections and politics of Europe and USA will be forced to address the issue of vulnerable middle class and poor. Look at the election promises in the USA- the jobs. Health system and social security are top on the agenda. There will be political pressure to increase the allocation at the social sector and for creating new jobs-and reduction of the foreign aid (this is what happened in Japan from 99 onwards)
The next US President will be forced to initiate new protectionism and new social-welfare measure. This will have an impact on the global trade. The oil price hike may affect the travel as well as trade (due to higher freight charges).
All these do not mean a "reversal of globalization". This means a new phase of globalization- along with a new protectionism in many countries. There will be a scope for a New Deal and a new kind of Social democratic politics in Europe and elsewhere.
The World is at the threshold of a new phase. The present economic slow-down is likely to be persistent for another four years. It will influence the shape of economy, political dynamics and geo-politics in the years to come.
