Bursting Bubbles and the Economics of Domination

By Mathew Maavak
[Mr. Maavak can be reached at mathew@maavak.net. Or visit his site Panoptic World]

Volatility is spreading and now we have oil to make it more combustible.

While those degrading images from Abu Ghraib transfixed us with horror for a while, our heads are finally turning into another ominous direction. Our sense of humanity and outrage are being supplanted by a more survivalist instinct, if headlines are an indicator of human prioritization.

It’s the oil crisis that is now making headlines, and if it exacerbates, there won’t be any pockets of humanity unaffected by the present global turmoil. You can ignore distant wars, but not your pockets, when they are gradually relieved of their weight in cash, unless remedial measures are taken soon.

Oil prices have reached record highs and any optimism, for the time being, is tenuous. Unlike other previous crises, which followed the 1973 Yom Kippur War and the 1979 Iranian Revolution, this one does not have a purely political dimension. This one is different.

Giant, expanding economies like India and China, representing 40 per cent of humanity and their enormous markets, are demanding more oil, and existing pumps will have to be primed up to meet this demand. If this cannot be met, at a satisfactory level of supply and cost, the global economy will likely receive a nasty shake-up. Unlike political showdowns, there is no effective solution to mass market demands, except to meet those demands. Only a weakened economy will dampen the need for fuel.

The pressing need for fuel may jolt the global economy more than the war in Iraq, or its erratic oil supply.

The US cannot lead a global economic recovery as it did in the past, where it can spur growth even if certain nations implode economically. If Indian and Chinese economies lose momentum, the loss of markets, and the availability of cheap goods and labor, is going to dent any hopes of a speedy recovery.

It’s just not the Asian giants. The largest eurozone economy is reeling as well. The German economy, already in a depressing state, is losing investor confidence. The traditional motor of eurozone is sputtering under “surging oil prices, prospects of interest rate rises and weak domestic demand.” (AFP, May 18).

So far, know one is predicting a repeat of the 1930s Great Depression, which actually struck an Asian giant first before the United States. Tokyo’s 1927 banking crisis would affect Wall Street in two years, setting the stage for a bloody showdown costing millions in lives. Black gold is a bankable product. When supply collapses, pandemonium reigns.

Stock markets everywhere are taking a battering. India alone lost US$40 billion in investments in one single-day on May 17 and only recovered when Sonia Gandhi declined the Prime Minister’s post in favor of Manmohan Singh, the “architect of India’s economic reforms.” Some nations like Malaysia reacted fast, with its Prime Minister Abdullah Ahmad Badawi initiating a plan to buffer any economic fallout. Turmoil elsewhere is no longer confined to TV screens, humanitarian missions and moral support. The public has to be reassured before the panic buttons are pressed.

Reassurances are important as financial and mob psychologies work in similar ways. Any swing in moods can be catastrophic and they belie whatever fundamentals of politics, society or economics in place. It took one assassination – that of Iraq’s Governing Council head Ezzedine Salim – to trigger the first wave of the oil panic, though war-torn Iraq cannot be counted on as a reliable supplier of oil at present, even if it does have the second largest proven reserves in the world.

Our emotive reactions to the recent events in Iraq are losing its spark, and news from Abu Ghraib and Fallujah are being consigned to the inside pages. Realistically, you can’t compare denuded wallets, and the prospects of an empty stomach to barbarically nude photos.

OPEC’s overproduction and its promise to pump more oil seem to balm neither our fears nor the oil markets. Sustained high production alongside sustained high prices will be destabilizing. Prices of commodities will increase, inflicting an adverse impact on consumer spending and the demand for oil. This will affect supply at the source. A full-blown oil crisis only goes away after it runs a full cycle, leaving discontent of sorts in its wake.

Futures oil contracts do not indicate a rosy outlook either.

“Futures contracts of U.S. light crude for June delivery reached $41.85 a barrel in New York, before retreating to $41.55, up 17 cents from Friday's close. It was a new record close on the New York Mercantile Exchange. In London, July contracts of North Sea Brent reached $38.50 a barrel on the International Petroleum Exchange,” settling at $37.90 by the evening. (AP, May 17)

Market psychology is capricious. “In spite of OPEC's efforts to micromanage oil supplies, the current robust demand for crude has caught it by surprise.” (AP, May 17)

Political maneuvering, on the other hand, can be predicted with uncanny precision. A confident and ready army can brazenly flex its sinews of war to sag the morale of its rival. Some things can be brandished in the open but not high finance, which prefers to operate in secrecy. Its tentacles permeate through apertures of opportunity and it can withdraw just as quickly, grasping a booty. Warring blocs may sign a peace accord with full publicity of its political clauses. The financial dimension in any conflict disappears. Only those with unmeasured power know where it is, and what it can do. This is the real power play and that’s a reason why it’s hard to predict market behavior. The world has been caught in a financial trap too many times.

Since higher oil prices lead to lower spending and lower profits, corporations will be vulnerable to takeovers. If US investment houses can dip into their huge cash reserves, they might find easy pickings in India and China, if the situation persists. Many Japanese and South Korean conglomerates were gobbled up by US firms after the 1997 East Asian Crisis. Watch out for some bitter pills prescribed by the IMF, if a domino reaction takes place.

(The Indian stock market collapse was partly triggered by the ballot-boosted communist parties’ precipitous statements against public sector disinvestments. Ironically, they might end up causing just the opposite, with foreign investors better positioned to bargain their way into the Indian market).

US airlines, always the front line victims in any oil price hike, are under finding it hard to take off. Many came out barely afloat after Sept 11, and the current jet fuel prices are likely to plunge some into bankruptcy. “Jet fuel makes up 12 to 14 percent of airlines' operating costs and is their second-biggest operating expense after labor.” (Reuters, May 19).

According to the Air Transport Association, every “dollar increase in the price of oil” represents “US$425 million in additional expenses for the airline industry.” (AFP, May 19). Passing the cost to passengers, who would want to trim their expenses, wouldn’t help much. Businesses that rely heavily on air transportation will be heavily hit. The trickle down effect will snowball.

Only the United States is in a position to dictate the level of oil supply. With an army battling in Iraq, and camped right to Saudi Arabia, the US has effectively cornered the two largest proven oil reserves in the world. Under pressure, the Saudi monarchy will oblige any request, and their current oil producing capacity will take preeminence over any farsighted plan to drill oil elsewhere in “three to four years” time.

If this scenario works out, there will be a question mark over how US authorities are going to deal with the Iraqi insurgency. Undoubtedly, some countries will turn a blind eye to any drastic change in the prosecution of war, even if “self-rule” is granted to the Iraqis as promised.

Whatever the outcome of the US elections, Pax Americana will pre-dominate. How the American consumer will fare is uncertain, and perhaps irrelevant to the US corporate army, who, by themselves are ready for their own foreign wars.

The number of Americans filing claims for unemployment aid grew unexpectedly last week. Optimism predictions are still plentiful, and can yet win over market psychology.

In the meantime, President George W. Bush refuses to dip into the nation’s reserves, citing the War on Terror as a precaution. The US Strategic Petroleum Reserve is estimated “at 660 million barrels, equivalent to more than two months of imports. They are stored “in salt domes on the Gulf Coast, and were “created after the 1973 oil embargo…” (AP, May 19).

Bush is sympathizing with the people, a marked contrast to his serial denials. “I fully understand how that affects American consumers, how it crimps the budgets of moms and dads who are trying to provide for their families,” Bush said. “How it affects the truck driver. How it affects the small-business owner.” (AP, May 19)

To show he meant business, Bush released the first installment of a five-year, $1.2 billion research grant to develop hydrogen-powered cars. That came in pretty slow. When it was first announced more than a year back, then Democratic presidential hopeful Joseph Lieberman called it a “pipe dream.” Sales of fuel conserving hybrid cars have shot up, but the likes of Lieberman, found in both the Democratic and Republican camps, not to mention the White House, prefer to see US soldiers guarding Iraqi oil pipelines instead, and perhaps dying over them.

Ask yourself this question. If hydrogen powered cars were not feasible, why invest in their development now? Why not earlier, when private carmakers were already selling them?

It’s a win-win situation for the Bush administration, or his successor. If the situation is contained, the US army can be strategically pinned down in the Middle East. No one will prevent Bush’s buddies from ravaging Alaskan wildlife reserves for oil this time either.

Kuala Lumpur, May 20, 2004

Copyright @ 2004 Mathew Maavak

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