As the year draws to a close it is customary to review the year gone by. What do you think was the most significant event of 2014 ? Some would say Ukraine. A few might vote for Ebola. Still others might say ISIS. What about the missing Malaysian Airlines plane ? Others might say the Indian elections. Many in my part of the world might even say Lingaa 🙂
In my opinion however, the most significant happening of 2014 was the steep fall in the price of oil. In June 2014, Brent crude stood at $110 a barrel. Today it is at $ 60. This has profound ramifications on both the economics and politics of the world.
Because of the world\’s dependence on oil as the primary source of energy, there has been a massive transfer of wealth over the last decade or two from the poor to the rich. Most of the world\’s nations are oil importers. A few, blessed by sheer geographical luck are oil exporters. Wealth has gushed from the former to the latter for years now.
With the step decline in the price of oil, the tide has turned. The oil exporters are facing economic disaster. The hardest hit is Russia – a kleptocracy that has frittered away the oil boom years, now suffering from the twin effects of falling oil prices and the sanctions over Ukraine. The rouble has crashed and they have been caught pissing in to the wind (apologies to this blogger !). Next in line is Venezuela, another country that wasted the good years. Iran is yet another sufferer. Even mighty Saudi Arabia is vulnerable. The following chart shows the lot that is in trouble.
The rest of the world is a winner. Inflation, world over, has come down. Global GDP may raise by 0.5% or so, purely on account of oil price. The US and China are the biggest beneficiaries. In fact the booming shale gas production in the US, coupled with weak economic growth globally has caused the fall in price of oil. As an aside, the tree huggers in the UK and elsewhere in Europe who have been blocking every move to frack in Europe must be forced to pay $110 a barrel for oil and not benefit from the effect of the shale gas revolution in the US.
Poor countries across the world have benefited from lower oil prices and have been able to curb inflation. India is the biggest beneficiary of them all. Inflation in India has steeply fallen solely on account of oil prices. Petroleum subsidy has fallen so much that the government has raised taxes on petroleum products and at the same time decontrolled diesel prices without a squeak from the public. The fiscal situation would have been a far greater disaster but for the unexpected bonanza.
Oil prices will probably recover, but are unlikely to go back to three figures in the near term. That might have larger consequences. Inflation can be held in check. Funding to the Islamic jihadists, which has largely flown from oil money is likely to be constrained. Russia is unlikely to repeat its misadventures as in Ukraine. The oil producers such as Venezuela and Nigeria, who are most affected will be forced to adopt more sensible economic policies which can only benefit them in the long run. All in all, we can ring in the new year with a feel good factor.
PS : This blogger owes an apology for going AWOL for 2 months and is deeply thankful to his readers who have all been very kind and encouraged him to \”come back\”