Imperialism, Oil Prices, World Economy & Nuke Threat
Representational Image. Image Courtesy: Wikimedia Commons
World oil prices have finally crossed $100 per barrel this week-end and have even touched $110. Considering the fact that they were around $69 per barrel before the beginning of imperialist aggression against Iran, this represents a very steep climb in just the course of a week. It has been caused less by any actual shortage arising from Iran’s closing of the Strait of Hormuz than by the anticipation of such a shortage arising. This rise is not just different from the steep escalation of oil prices in 1973: it was then caused not by any shortage but by OPEC’s (Organisation of Petroleum Exporting Countries) jacking up the price several-fold; it is also different from the sharp oil price rises that occurred in 2008 and 2022.
Both these latter two episodes of price increases were, by their very nature, short-lived: the 2008 rise was caused by excess demand arising from contingent factors, such as the rise in China’s demand and the disruption of supplies from Nigeria and West Asia, neither of which could last long.
The 2022 rise likewise was because of Western sanctions against Russia following the Ukraine war, and it had to come down both because Russia managed to maintain much of its supplies despite the sanctions and also because US energy flowed in to replace that from Russia within the European market, though at a higher price.
The present rise, however, caused by Iran’s response to US-Israeli aggression against it, is likely to last the entire duration of the current war, of which there is no end in sight. This is because several countries’ oil supplies, not just Iran’s, pass through this Strait, their total amount being almost double the entire output of Russia. And far from seeking to douse speculation, US President Donald Trump has downplayed the price rise itself, calling it a “small price to pay” for pursuing the objectives of the war.
If the rise in oil prices is going to last for quite some time, then its impact on the world economy will be quite profound. It will, of course, accentuate inflation not just through its direct impact on consumers via the energy products they buy, but even more importantly through a whole range of goods and services into whose production oil enters as an input, and other goods and services into whose production these goods and services in turn enter as inputs.
Thus, a rise in fertiliser prices because of the oil price rise will raise the cost of production of foodgrains, and hence foodgrain prices (if the profit-margin of foodgrain producers is not to shrink). And all this is quite apart from the rise in transport costs of all commodities which will give a comprehensive additional push to inflation.
Since the beneficiaries of the oil price rise will be immediately holding their windfall profits quite substantially as bank deposits that create no direct demand for goods and services, while the losers from inflation will have to curtail their total demand for goods and services in real terms, such an inflation will have a depressing effect on the level of world aggregate demand, and hence will cause a recession in the world economy. Here we come once again to the specific nature of the current oil price rise.
In a situation where the oil price rise is because of a concerted action by producers but not because of any supply shortfall, governments of the affected countries can pursue expansionary fiscal and monetary policies to keep up aggregate demand and counter the recessionary threat (though this is not what governments actually did in the early 1970s). But if the price rise is because of a supply shortfall, then such countering is not possible. In fact, recession in such cases becomes not only inevitable but actually a means of overcoming the supply shortfall. Hence, an inflationary recession in the world economy will necessarily follow a persistent oil price rise.
This would be true for all countries (including even the oil producing countries themselves if they do not take any counter-measures which they easily can). For countries of the Global South, however, things would be even worse for an additional reason, which is the following:
All oil importing countries will witness a worsening of their current account deficit on the balance of payments because of the rise in oil price, and this is a factor we have not taken into account in the above discussion. We have assumed, in other words, that there will be no problems in financing this increased deficit. For instance, the increased bank deposits of the oil exporting countries would be used by these banks for giving loans to the oil importing countries to cover their deficits.
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But countries of the Global South, unlike those in the Global North, are not sufficiently creditworthy in the eyes of such banks or of other international creditors, in which case they would find it difficult to finance their increased current deficits. Their currencies then would start depreciating and they would have to incur external debt on far more onerous terms, by agreeing to exceedingly stringent “austerity” measures, or by pledging their mineral resources to foreign creditors, and such like. In their case then inflation will be even more acute, not just because of the oil price rise and its fallout, but additionally because of the exchange rate depreciation which will raise all import prices.
Likewise, in their case, the recession will be even more acute, not just because of the reduced demand for goods and services by their domestic populations owing to the inflation, but additionally because of the “austerity” measures imposed by foreign creditors.
It follows, therefore, that the hardships of their populations will be even greater. It is particularly urgent for them, therefore, to put pressure on the US to end this utterly immoral and illegal war.
India will be extremely hard hit by a persistent rise in world oil prices. Around 84% of the crude flowing through the Strait of Hormuz is destined for Asian countries like China, India, Japan and South Korea, so that the closure of the Strait, quite apart from its impact on world oil prices and exchange rates, will have a direct impact even on the timely availability of physical oil supplies in these countries, of which India is a prominent constituent.
Of course, Trump has “allowed” India to import Russian crude for a while to avoid the effect of higher oil prices. (It is an insult to our anti-colonial struggle that we have to be “allowed” like a colony, almost eight decades of our independence, to import crude from a country of our choice; and it is a disgrace that we have a government today that meekly accepts such “permission” by Trump instead of showing him the door). But this “permission” too is only for a brief period of one month, after which the scenario sketched above will come to pass. For India to remain quiet and not protest against US-Israeli aggression is, therefore, utterly suicidal.
In fact, Iran’s act of closing the Strait of Hormuz and thereby causing an upsurge in world oil prices, is meant precisely to arouse opposition to the war among the countries of the Global South, to persuade these countries that the war against Iran is also a war against them and will bring them great hardships as well, that they cannot just remain indifferent to it.
Iran’s military commanders even visualise a rise in global oil prices to as much as $200 per barrel, which would be back-breaking for the world’s people, especially the people of the Third World, unless they intervene immediately to roll back the imperialist offensive.
Their silence now may prove expensive in another, even more sinister, sense. When Trump faces popular anger within the US because of the inflationary recession arising as a consequence of the war unleashed by him, which in any case is already unpopular within his own country, he may try to curtail the length of the war by resorting to the drastic step of using tactical nuclear weapons against Iran.
The US is the only country in the world that has ever deployed nuclear weapons on another country, and James Galbraith, the well-known US economist, mentions at least three occasions when it was dissuaded by internal advice from repeating that catastrophe (The Delphi Initiative, March 9). Unless the world firmly stands up to the US government and expresses its unequivocal opposition to the war it started, and opposition to the US’s cynical contempt for international law, a repetition of that drastic step may emerge as a real possibility.
Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. The views are personal.
