An Unpleasant Surprise Coming

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An Unpleasant Surprise Coming

Recently, I bought gas for $2.10 per gallon, a very pleasant experience indeed. This would be a typical reaction for anyone in a market economy where cheap energy is essential for building a growing and completely diversified economy.

 On the other side of the coin, there are many places where lower oil prices are not considered a good thing. Here is a comment about the situation in Venezuela almost a year ago:

 MARACAIBO, Venezuela—Amid worsening shortages, Venezuela recently reached a milestone of dubious distinction: It has joined the ranks of North Korea and Cuba in rationing food for its citizens.

On a recent, muggy morning, Maria Varge stood in line outside a Centro 99 grocery store, ready to scour the shelves for scarce items like cooking oil and milk. But before entering, Ms. Varge had to scan her fingerprint to ensure she wouldn’t buy more than her share.

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The government rolled out the system last month across 36 supermarkets in this western border state, Zulia, whose capital is Maracaibo, with a recent expansion into a select number of state-owned markets in Caracas.

Venezuela is turning to rationing because of shortages caused by what economists call a toxic mix of unproductive local industry—hamstrung by nationalizations and government intervention—and a complex currency regime that is unable to provide the dollars importers need to pay for basics.

The tumbling price for Venezuela’s oil, which has fallen by nearly $15 a barrel since September to $77.65 on Friday, is likely to mean even more scarcity in the cash-strapped country, economists say.

Their suffering is getting worse because today the price of oil has dropped to almost $46 per barrel.

Other unhappy people include those of Saudi Arabia: 

The Saudi economy is heavily dependent on oil, which accounts for 90% of fiscal revenue, 80% of current account revenue, and 40% of gross domestic product, analysts at Fitch noted (WSJ 8/24/15)

Saudi Arabia has an oil based economy with strong governmental control over major economic activities. Saudi Arabia possesses 25% of the world’s proven petroleum reserves.

Saudi Arabia is a centrally planned economy. Private enterprises do exist, they are however regulated by the Saudi government. (Simple Guide P. 31) 

Even with immense oil reserves, government controlled economies do not produce high Gross Domestic Products per capita. Now, these economies are going to have to borrow a lot of money to replace their lost foreign currency reserves:

Saudi Arabia, the world’s largest oil producer, is the prime example of the swiftness and magnitude of the selloff: its foreign exchange reserves fell by $20.2 billion in February, the biggest monthly drop in at least 15 years, according to data from the Saudi Arabian Monetary Agency. That’s almost double the drop after the financial crisis in early 2009, when oil prices plunged and Riyadh consumed $11.6 billion of its reserves in a single month.

In the oil price collapse of 1998 to $20 per barrel (adjusted for inflation) Russia, formally the Soviet Union, defaulted on its debt. And it is suffering today from the current contraction of oil prices to $40 a barrel.

When a government’s economy fails, it has to borrow a lot of money to buy what it cannot produce. Therefore, the value of its currency falls because other producers of goods and services demand higher prices to protect them as recipients from the risk in further declines in the value of the currency they just accepted. Brazil is an excellent current example:

“Brazil’s currency hit its lowest level against the dollar in two decades, as investors wagered that the commodity rout and political turmoil will continue to batter the country’s economy. On Tuesday, the Brazilian real hit its weakest point since the currency was introduced in 1994. Trading as low as 4.0667 to the dollar, the real has lost 35% of its value against the dollar so far this year.” WSJ 9/23/15

The Federal Reserve is committed to lowest rates in our history after 7 years of the slowest economic recovery since the Depression. During this period, the Obama Administration doubled our national publicly held debt from 5.8 trillion dollars, which took over 200 years to acquire, to today’s 13.146 trillion in the same 7 years.

When interest rates go up, we in America will pay the price for the Obama administration’s “Socialism,” i.e. massive government spending.

 


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