Crisis in the Gulf
Will the oil price rise mean recession?
[Militant No. 1004, 10 August 1990, p. 11]
The current oil price rise is only a fraction of those of 1973 and 1979, yet it has provoked panic on the world’s stock exchanges.
So rickety is the economic framework globally that the capitalists fear the locomotive of growth, hailed as so dynamic in the 1980s, will slide off the rails and plunge the world into recession.
The first ’shock‘ during the 1973 Arab-Israeli war took Persian Gulf crude to $11.65 per barrel from only $1.80 in 1971.
Although this only wiped out a long-term decline in the real price of oil, it was enough to trigger a world recession. Higher oil prices were not the root cause . The downturn came from the worldwide acceleration of inflation, the decline of big-business profits and and the near collapse of the world money system.
Given these ingredients. the price rise by Opec (Organisation of Petroleum-Exporting Countries) set off a chain reaction of crisis .
The second shock of 1979 came after the Iranian revolution. The price rocketed to $30 per barrel and peaked at around $40 in 1982. Once again, because the condition of recession were already there. the oil price rise triggered a reversal of the faltering post-1974 world recovery.
In 1986, however. there was a sharp drop in oil prices, which fell briefly to only $8 a barrel. The oil producers were divided and exceeded their output quotas. while the high price had induced advanced capitalist countries to cut oil consumption and invest more in home production (like Alaska and the North Sea).
In 1987 oil prices recovered to about $18, subsequently falling a few dollars. Cheap oil was a significant factor in the continuation of growth in the world economy over recent years. Big business know they are lucky to have got away with cheap prices for so long.
Any increase. if sustained. must have a negative effect on growth. Only the degree is uncertain.
Will the new price level of $25 per barrel, resulting from Saddam’s military stroke, be maintained? This seems very probable.
Even before Saddam’s move, market forces were shifting in favour of the Opec producers. Relatively low oil prices led advanced economies like the US to turn from their own. relatively dear sources back to supplies from the Middle East.
Energy-saving measures adopted after 1973 have been relaxed. The US currently imports over 50 per cent of its oil compared with 30 per cent in 1985.
Higher prices. of course, could mean a swing back to Alaska. the North Sea and other fields. But this would require massive new investment and, while it would assure supplies. would not bring down the price.
Iran is demanding $30 a barrel and there is no reason why Iraq should be content with less. If Saddam gets away with his military ploy, it is unlikely that Saudi Arabia or any other Arab producer would dare to follow Kuwait’s disastrous example and exceed their Opec quota. thus undermining Opec’s target price.
If the US uses military power to enforce an embargo on Iraqi oil exports, however, there is still no guarantee that the price will be pushed down. Iraq currently produces about three million barrels per day (bpd) while Kuwait’s output was about 1.5 million.
Saudi Arabia has immediate spare output capacity of about one million bpd. The United Arab Emirates (UAE), Qatar. Libya and Nigeria together have spare capacity of about 1.4 million bpd.
Both Saudi Arabia and the big oil companies now have huge stockpiles which they could use to cushion the market while new wells were brought on line. The price of such co-operation, however, would undoubtedly be improved revenues for their oil.
So, whether or not Saddam’s strategy is successful, the price of oil is likely to continue on an upward curve. As in the period after 1973. the big oil companies will no doubt seize the opportunity of passing on higher crude prices to the consumer with an even bigger mark-up than before.
Dearer oil will particularly hit Japan and Germany. which depend very heavily on imports. Recently these two economies have been the engines of world economic growth. Anything which slows them down, as a higher energy bill inevitably will, is bound to act as a drag on world growth.
There are already indications in the USA of a slide towards recession. Higher oil prices, particularly in the form of a higher import bill (and so an even bigger trade deficit), will give a further push in this direction. All the economic pundits agree that higher oil prices will mean increased inflation, higher unemployment and lower production for the advanced capitalist economies. They disagree only over the scale and timing.
In the under-developed world, the labouring poor will face even greater poverty. High-priced oil will fuel price rises and further social explosions. It is too early to predict how the new oil shock will affect key currencies and interest rates. But it has already thrown the capitalists‘ economic policy-makers into confusion.
By Lynn Walsh
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