Thursday, May 01, 2008

Another small irony in Middle-Eastern politics

The US invaded Iraq (so many people have thought) to ensure that its oil reserves were in friendly hands, and reduce its economic vulnerability. But now, it is the "friendly hands" of Saudi Arabia who are bringing Western economies to a standstill.

The price of oil is heading towards $120 a barrel, and some people suggest it could continue rising towards $200. According to a report yesterday in The Independent, on at least two occasions in the last few months, the price of oil has looked as though it was about to soften. The Saudi government - which controls 10% of the world reserves, and which is the only oil supplier who isn't pretty much running at capacity - has immediately cut production, to keep the price of oil high.

This isn't simply a supply issue - in fact, it isn't one at all. At least for now, there is sufficient oil for everybody. The price is actually being driven up by the market, which (as I've pointed out before) is far from being a tame animal. People are selling (weak) dollars, and buying oil, because they think it will get them a better return. The economics of oil production have hardly changed in the last three years. But the price of oil has more than doubled. However, the combination of market speculation and the vested interest of the suppliers (knowing that they can get a buyer for their oil at almost whatever price) is what is causing so much pain to Western countries. Official inflation figures may look good - but the price of energy and food (which, when push comes to shove, are actually the essentials) seem to be going up pretty steeply. Airlines are going out of business each week, and even the most profitable have been issuing warnings about how the price of fuel is going to affect their bottom line. Houses around us haven't been selling well for over a year, and where people need more room, they are generally extending rather than moving (the fact that thanks to stamp duty and so on, it will cost a family around here £20,000 or thereabouts just to move, before they can think of getting more space, also has a bearing).

I say "Western economies". Over the last couple of decades, the Chinese government has built up massive foreign currency reserves, due to its huge trade surplus with the rest of the world. So they can keep their economy going - at least for the medium term, they are better able to deal with high oil prices.

At least for now, China needs the West as a market - if there aren't people to buy Chinese manufactured goods, their economy will stall as well. So I can't see Western economies disintegrating whilst China thrives - at least for now. But with as many potential consumers in China as there are in the whole of North America and Europe, this isn't guaranteed indefinitely into the future.