Economic Tsunami: Oil was the Key Factor

Economic Tsunami: Oil was the Key Factor

The world failed to realise this, it was all about a Tsunami. Tsunami is a big wave that raises the sea level very high and travel far distance and submerges or sallow the costal regions, islands etc., and while return, the same wave will sweep aside the land with a devastating effect. I am not talking about the Tsunami happened in Indonesia which created havoc in South and South East Asian countries. Western countries has developed early warning system for such Tsunami, which helps at-least common man to flee from low lands. It generally provides enough time for countries to do their rescue operations.

Here I am discussing about a silent tsunami, which didn’t kill anybody directly but it is capable to create havoc all around the world. Financial tsunami defeated all kinds of early warning systems and started affecting each and every corner of the world now. I am sticking with one factor here to define the effect of that tsunami. It is Oil. This oil tsunami started long back, may be in March 2003 when US invaded Iraq, and slowly it travelled all around the world and saw the seeds of economic imbalance. In 2004, the average of West Texas Intermediate (WTI) future oil price was 41.5 US dollar. So, one can say, this tsunami approximately started its journey in 2005 December because from January to November, the average price was 56.5 USD per barrel and in December it raised to 60.5 USD/B. In 2006, it slowly raised and by the end of 2007, it formed the arch of proper tsunami and raised further, crossed 100 $ mark and moved forward. By July, the oil price reached in its all time high with 147 USD/B.

Economists and oil business experts analysed all factors leading to this price hike and come out with different arguments. I am not evaluating any of such arguments but looking into the process, the way it raised and how it affected and what it is in the present condition. Blame game was going on between West and East powers or United States and Asian giants. Oil cartel OPEC also got its share in the blame game, strictly on production matters. Still, very few people properly realised the devastating effect of this price hike and raised the alarm in time.

Interestingly, none of the share markets in the world predicted or projected its affect in proper way. Nobody said that there is some malfunction happening in the worlds banking economy. Everybody was busy to project the economic growth of China and India along with other traditional European and American markets. Very few discussed about the financial irregularities happening in the stock market and the real causes of the price hike of oil. Nobody bothered to see the impact of oil price hike as a whole to the world economy and every one discussed about their own interested areas related to the hike. Some projected that Iraq war and instability in Arabian Gulf area is the root cause of this problem, many others reiterated that it was all about the greedy attitude of OPEC countries to enjoy windfall gains through price hike. Main argument regarding this was about the high demand created by the fast growing Asian countries China and India. All these arguments were true in some level but none of them looked beyond it. Very few tried to look into the cracking foundation of the biggest economy of the world, the United States. Very few discussed about the money flow towards the speculation market of Oil and from where it comes.

Problems of US economy were a very good selling item in the cold war period. The pulp production of erstwhile Soviet Union talked a lot about it before it collapsed because of its financial burden. In early 1990s, one Indian origin economist predicted about the collapse of US economy, if my memory is correct, it was Ravi Batra. After that, the world has changed a lot. Several new countries emerged; political map of the world was redrawn several times, Kuwait was annexed and freed, Osama kicked on the wrong place of United States, so Afghanistan was attacked, Saddam Husain lost the war and was hanged, Bush fabricated an electoral victory and repeated it after four years, and now they elected Obama to correct history. All these time, oil was politically a very significant factor and behind all cases of political instability, one can see the presence of oil factor.

As I said, the oil tsunami raised to its peak in July this year by touching 147 USD/B, then the world saw the curve of price started climbing down. If we look it from far, we can see that the tsunami tide of oil, which started in March 2003, took six years to reach to its peak level. But, as like tsunami, the major climb happened in its last stage only, that high tide raised its level from $ 100 to 147 in just six month time this year. By the time, entire world experienced its worst effects through raising prices of food commodities, energy supplies, services etc. Inflation hit the world economy hardly. Each and every country faced economic crisis due to inflation and measures taken by financial exchequers of countries affected the livelihood of common people.

Then, all of a sudden, the hell broke down. The media started bringing out the devastating effect of sub-prime crises in US. Yes, the news on sub-prime lending crisis was there in the media for quiet sometime but nobody expected its irresistible effects on world economy. Once, the media appeared with the stories of bankruptcy suits of big banks in US, the world started thinking about the economic security. Though the oil tsunami took nearly 6 years time to reach all time high of $147 per barrel, it took less than two months time to come down to more than half of its price. In September it scaled down the 100 dollar mark and by the end of October, it reached further down at $ 65 per barrel.

It is true that the public memory is too short. Now nobody is discussing about the price hike of oil but debating on the financial crisis which broke down the stoke exchanges all around the world. World over, the share prices are melting down, many companies filed pauper suit and expecting financial support from their respective treasuries. Few months back, those who fiercely fought against the involvement of ‘state’ in financial matters are arguing for the intervention of state to stabilise the market. But what happened to the oil hike? OPEC is having rounds and rounds of meeting to stabilise the oil price by cutting down the production. Once again, the basic theory of economics is back in lime light –the demand –supply theory. If it is true, what and where things went wrong?

Here, I am emphasising my finding that the Oil Price Hike was a Tsunami. It started slowly, rose up as a very powerful tide, gathered momentum in its journey, peaked at 2008 July and started its return in 2008 September. It was a virtual tsunami, so death rate is very minimal but the damage it created is phenomenal. Melting in Wall Street send panic messages to all stoke markets and every country is experiencing severe financial crisis. First, it was inflation, so the countries tried to arrest it by hiking the banking interest rates. Now, the crisis is appearing in the form of credit crunch. Flow of money is very much disrupted and now the governments are forced to reduce the interest rates on various loans. It is very difficult to connect all these developments with the oil tsunami. But I still believe, it was a tsunami and it created havoc on world economy and it is continuing.

(I accept this is an immature way of writing, and i am very much aware that posting it without editing is a crime. So, you can decide the punishment.)