ECONOMICS JOURNAL SERIES 1 - Oil
Hmm, I'm not too sure whether I should actually start with oil(I wanted to start with the foundations, things like mathematics vs linguistics, the role of Newton in influencing the fundamentals of Economics, evolution of Economics over the years...), but since its such an important issue and it appeared in today's Straits Times commentary, I feel that there is a need to discuss it.
The first big hoo-hah on oil recently is the rising oil prices. This has certainly caused people to be worried, as they are afraid that rising oil prices will lead to a general rise in products' prices and this might actually dampen the current recovery. Pessimists even feel that it will be serious enough to cause a global recession just like in the late 1970s.
However, I strongly think that these views are unfounded. The reasons behind the rise in oil prices now and then are completely different. In the past, it was a ploy by the OPEC cartel to threaten the western world(partly because of political issues and Israel) while now, it is more of a matter of demand far outstripping that of supply(although the Iraq war has done a good job of affecting some oil supplies, but it is not that significant). Furthermore, Saudi Arabia is willing to support the USA and help prevent further increases in oil prices should there be a need to(they are still able to produce more oil at cheaper prices than the rest of the world). In my opinion, the main reason behind the gradual rise in oil prices is due to consumers' confidence, just like how the belief that a country's currency is over-valued will eventually lead to a devaluation(this is pretty much like the collaspe of investors confidence during the 1997 Asian Financial crisis).
Anyway, as I have mentioned, it is a gradual rise in global oil prices, not a sudden huge increase. The fact that it is gradual means that people(the rational ones, who are usually the big bosses of corporations) are expecting it, and hence they are constantly readjusting their own prices as well as their expectations on production costs. In turn, by having the element of time on their side, they are able to restructure and improve certain production techniques to cut costs which might actually reduce the rise in commodities prices(this point might be dubious, as it is dependent on the industry). In short, because people are expecting it, they are already prepared for it(unlike the past).
Another point is that much of the demand for oil now is from USA and China, and that the former rapidly growing economies of ASEAN and East Asia are now demanding less oil than before. Since, global demand for oil is expected to rise sluggishly, as well as the availability of other kinds of energy, it is unlikely that the rise in oil prices will actually affect the world's economy that badly. In fact, I just feel that the current recovery might actually be dampen a little bit(I believe its less than 1%), and instead, other reasons(such as politics, and the whole talk about free trade) could actually be the real stopping force behind economic expansion.
Lastly, my own worries now for the world is the sustainability of the US economy(its debt, widening budget deficits and persistent trade deficits, low savings rate). If it suddenly crashes, or falls into a slump like Japan in the 1990s, it might spell doom for the rest of the world. Our hopes will then rise on East Asia and Europe to provide the guiding light in global economic recovery, well USA takes time out to reflect and cure its own economy.
The first big hoo-hah on oil recently is the rising oil prices. This has certainly caused people to be worried, as they are afraid that rising oil prices will lead to a general rise in products' prices and this might actually dampen the current recovery. Pessimists even feel that it will be serious enough to cause a global recession just like in the late 1970s.
However, I strongly think that these views are unfounded. The reasons behind the rise in oil prices now and then are completely different. In the past, it was a ploy by the OPEC cartel to threaten the western world(partly because of political issues and Israel) while now, it is more of a matter of demand far outstripping that of supply(although the Iraq war has done a good job of affecting some oil supplies, but it is not that significant). Furthermore, Saudi Arabia is willing to support the USA and help prevent further increases in oil prices should there be a need to(they are still able to produce more oil at cheaper prices than the rest of the world). In my opinion, the main reason behind the gradual rise in oil prices is due to consumers' confidence, just like how the belief that a country's currency is over-valued will eventually lead to a devaluation(this is pretty much like the collaspe of investors confidence during the 1997 Asian Financial crisis).
Anyway, as I have mentioned, it is a gradual rise in global oil prices, not a sudden huge increase. The fact that it is gradual means that people(the rational ones, who are usually the big bosses of corporations) are expecting it, and hence they are constantly readjusting their own prices as well as their expectations on production costs. In turn, by having the element of time on their side, they are able to restructure and improve certain production techniques to cut costs which might actually reduce the rise in commodities prices(this point might be dubious, as it is dependent on the industry). In short, because people are expecting it, they are already prepared for it(unlike the past).
Another point is that much of the demand for oil now is from USA and China, and that the former rapidly growing economies of ASEAN and East Asia are now demanding less oil than before. Since, global demand for oil is expected to rise sluggishly, as well as the availability of other kinds of energy, it is unlikely that the rise in oil prices will actually affect the world's economy that badly. In fact, I just feel that the current recovery might actually be dampen a little bit(I believe its less than 1%), and instead, other reasons(such as politics, and the whole talk about free trade) could actually be the real stopping force behind economic expansion.
Lastly, my own worries now for the world is the sustainability of the US economy(its debt, widening budget deficits and persistent trade deficits, low savings rate). If it suddenly crashes, or falls into a slump like Japan in the 1990s, it might spell doom for the rest of the world. Our hopes will then rise on East Asia and Europe to provide the guiding light in global economic recovery, well USA takes time out to reflect and cure its own economy.
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