Oil Price Fall Brings Significant Losses for Big Producers
By Nick Beams
Global Research
February 05, 2016
The initial response of economic “conventional wisdom” to the slide in oil prices over the past 20 months—down from $110 per barrel in June 2014 to levels approaching $30—was that, whatever the impact on oil-exporting countries, it would aid the global economy because it would lift consumption and other spending.
It was argued that the falling oil price could not possibly be the harbinger of a global recession because all the previous downturns over the past 70 years—in particular the recessions of 1974–75 and 1981–82—were preceded by rising oil prices, while the period of growth in the 1990s was characterised by low oil prices.
That soothing scenario has been shattered over the recent period. The International Monetary Fund all but abandoned it last month, saying “the pickup in consumption in oil importers has so far been somewhat weaker than evidence from past episodes of oil price declines would have suggested.”
It has become increasingly clear that, far from providing a boost to the world economy, the precipitous drop in the oil price, together with other major industrial commodities, is symptomatic of deep recessionary trends.
The “conventional wisdom” ignored two major changes in the structure of the global economy over the past decade. First, that so-called emerging markets, many of which depend on the export of oil and other industrial commodities, now comprise about 40 percent of global gross domestic product, double their share in 1990, and so any decline in their revenues has a much bigger impact than previously. And, second, that the financial crisis of 2008–2009 was not merely a conjunctural downturn in the business cycle but signified a breakdown in the functioning of the global economy.
The downturn in oil prices is not only contributing to the lack of global demand—Apple pointed to the decline in demand from emerging markets as one reason for the expected first-ever decline in iPhone sales—it is working to create the conditions for a renewed financial crisis if oil-exporting countries default on their debts.
Venezuela could be the first in line. If oil prices continue at their January lows, Venezuela’s export revenues for this year will be $18 billion, compared to debt servicing charges of $10 billion. This leaves just $8 billion to finance imports, which came in at $37 billion last year. The economy contracted 10 percent last year, following a fall of 4 percent in 2014.
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