| It's risky to rule out $100 oil and a US spending collapse following the resulting tightening of liquidity. |
| In the past couple of weeks, the world has suddenly become more dangerous "" I am not referring to the bomb blasts in Mumbai's suburban trains, but to the oil price, the increasingly ominous and explosive political situation and tensions in West Asia, and the impact these could have on the world economy. And these developments have come at a time of greatly increased volatility in equity and commodity markets, and can have significant repercussions for growth, for capital flows, for the "animal spirits" of the entrepreneurs: together, they are an explosive mix. |
| Oil prices have been on the boil for some time now "" it is difficult to remember that the per barrel price was in single digits just eight years ago. Increasing consumption and the output going down by more than two million barrels a day because of socio-political disturbances in countries from Iraq to Nigeria to Venezuela, have been widely blamed for the 600 per cent price rise in eight years. The more recent flair up is because of heightened political and military tensions in that notoriously volatile region, namely West Asia, on which the world is dependent for oil. For one thing, after Palestinian militants kidnapped an Israeli soldier recently, Israel has been bombing and attacking Palestine in order to get him back. Another militant outfit in Lebanon captured two other Israeli soldiers, and Israel has retaliated by bombing Beirut and other parts of Lebanon. Hundreds of deaths have been reported, and foreigners are being evacuated. The crisis could escalate as Hezbollah, the Shiaite militant organisation, is backed by Iran and Syria. The US is supporting Israeli actions almost completely and vetoed a Security Council resolution criticising Israel for its attacks on a sovereign country. |
| As it is, the US and Iran had been on a collision course, ever since George Bush listed that country as a member of the "axis of evil". (The other members are North Korea and Iraq.) The confrontation with both Iran and North Korea is over their nuclear ambitions. While Iran had warned that any precipitate US action would result into sharply higher oil prices, the possibility has become stronger in recent weeks. With Shiaite Hezbollah under attack, one can hardly rule out the possibility of Iran getting drawn in the Israel Lebanon conflict. It is already supplying arms to Hezbollah. Will it curtail/suspend oil exports? In that eventuality, the price that had touched $78 a barrel last week, may well reach the three figure mark. |
| Such an eventuality, coming on top of highly volatile equity and commodity markets worldwide, would surely impact world growth and capital flows to developing country markets. The inflationary impact of oil at $100 may well force central banks to tighten liquidity more than what they are doing already, leading to further falls in equity and commodity prices. A doomsday scenario would be the collapse of housing prices in the US, and a sharp fall in consumer spending and all that would imply for exports from the developing countries. While many may find this too pessimistic a scenario, to my mind, it would be risky to rule it out. |
| For us in India, there are two other risk factors. Islamic fundamentalists, frustrated with US-backed Israeli power and aggression, may well retaliate against relatively soft societies, as India surely is. In that event, 7/11 in Mumbai may well be followed by other incidents. |
| Another factor needs mention. Deepak Parekh, who probably knows the subject better than anybody else, has been voicing concerns for some time that the real estate market is overheated and due for a correction. Already there are reports of a fall in fresh bookings for residential property, also because of a rise in interest rates. This asset class may also suffer and the expected large foreign capital flows in the sector may not materialise. Eight per cent growth? Keep your fingers crossed! |
| Even as equity and commodity prices have been very volatile, the currency market in major currencies, has been unusually stable for the last several months. But, lately, the dollar has crept up gradually "" the safe haven effect? |
| Tailpiece: Poor Mr Bush! In his first term, his ambitions were boundless. He was more than happy to force regime changes in Afghanistan and Iraq, and seemed eager to do something similar in the other "axis of evil" countries. The ideological underpinning for the so-called Bush Doctrine was provided by his neo-conservative supporters. He now finds the Taliban getting more powerful by the day in Afghanistan, and Iraq sinking into an ever messier quagmire. And, even the neocons are turning against him : "Neocon(servative)s accuse Bush of appeasement in face of N Korea and Iran threat", Financial Times, July 15. The Europeans? "Harris Poll: Europe suspicious about Russia but sees US as greater threat"! (ibid).
Email: avrco@vsnl.com |
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