The slightly more than fifty percent (50%) fall in oil prices since June 2014 seems etched in stone. Oil prices are dipping. To shore up prices, oil exporters are relying on supply side economics. The market is not well understood. When major OPEC countries are sticking to their guns rather than implement expected production cuts, it could only be opined that uncertainty rides the market.
The steep fall of oil prices since June 2014!Source: Investing.com
For the past nine months, the news is beset with falling oil prices followed by reduction in energy bills – gasoline prices have fallen, fuel prices at the stations have fallen, prices of non-durable goods have also followed suit. Consumers seem to be having a good time. Income after taxes and transfers, what is called disposable income, is now worth more. Globally, the fall in oil prices have benefited consumers. It is estimated that the increase in global GDP due to a decline in oil prices should be around 0.7-0.8%.
But it’s not alright on the economic front for both oil importing and exporting countries despite the burgeoning demand.
The sweet story resides in the short-term. What really matters is the medium and long-term effects of a sustained and unrelenting fall in oil prices. What would a Central Banker do if reducing costs of production passes through declining inflation? According to Raju Huidrom, “the U.S. Federal Reserve has typically chosen to respond vigorously to inflation increases triggered by higher oil prices but has responded less to unexpected declines in inflation following oil price declines.” Expected monetary expansion are already been put in place. The European Central Bank’s quantitative easing program will give more liquidity to the banks and make the prices on corporate assets rise while their yields fall, therefore kicking in expected increases in investment. It is rumored that Israel might start a quantitative easing program soon.
But the problem, as foreseen in the recent OECD’s interim assessment report that was released last week is that expected investment increases might not be in the right channels. Increased capital expenditures and increased consumption of durable goods is a monetary policy goal but the market might not give them victory on a platter of gold. According to the OECD, the market is not operating on fundamentals.
Therefore, it is advised that fiscal policy should be used to strengthen and safeguard monetary policy. Reduction in the budget deficits of most developed countries and the BRIC countries would be desirable. Spending cuts in government are not easy to implement. It takes a long time. It takes strong political willpower. Even Nigeria, one of the foremost oil exporting member of OPEC, has been rumored to warn civil servants that to kick in spending cuts, they might have to accept some retrenchment.
If oil prices continue to remain adamant, the market will have to surrender to uncertainty. Except OPEC countries like Saudi Arabia agree to production cuts that should prop up oil prices.
Next in the series: Oil price uncertainty (2): Attired as a bear.
Obama and Cameron. Is China strong enough to divide this friendship?Credit: Telegraph.co.uk
The United States probably hopes it can continue to hold back the flood of Chinese insistence. The United Kingdom, its staunchest ally, thinks otherwise. On retrospection, one would conclude that the flood is insistent and could get more so as time goes by. China is the second largest economy in the world. It is one of the largest emerging economies globally although its annual growth is projected to slow down to 7% and one of the most populous nations in the world.
So, it would be natural that China should seek ways to stack itself against the barriers placed on its path to global financial governance. It recently launched the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank. Singapore, United Kingdom and Indonesia have agreed to be members of the AIIB. About 27 nations are expected to be member nations when the March 31 deadline expires. The U.S might be wondering in disbelief but as the UK sees it, that’s how the wind of change is blowing in international financial circles.
The UK believes the world is changing and it has to change with it. In a recent World Economic Forum article, Jim O’Neill, a former chairman of Goldman Sachs Asset Management, clearly states the arguments of the UK government.
He argues that growing resistance to China’s inclusion in International financial governance will fuel and create the development of parallel international financial institutions like the AIIB. China’s economic might cannot be passed over. Its Gross Domestic Product (GDP) is bigger than Germany, France and Italy combined. Even if the US refuses to ratify the agreement reached on agreed changes to the governance of the IMF and the World Bank, BRICS nations which consist of Brazil, Russia, India, China and South Africa, have shown a commitment to have their voices heard outside the channels of the IMF and World Bank.
Those are not easy assertions. Even if the US accepts those arguments, it reluctantly will, if at all. It’d rather address China’s rise to global economic superpower status which is at odds with the UK’s belief that China’s internal affairs should be left as is – internal.
The IMF Managing Director Christine Lagarde is quoted on Reuters as saying she would be "delighted" to cooperate with the AIIB.
So, will these divergent opinions create a rift in the US-UK alliance? It remains to be seen.
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