Global Economy Transitioning from 2014 to 2015 (Part Two)

The first part of this article addressed economic events in the United States and Europe, emphasizing the rise of the dollar and its impact on international monetary and trade relations. In the second part, we look at other developments that took center stage in the global economy in 2014 and continue to loom over the outlook for the coming year. A significant shift in the oil market in the second half of 2014 surprised nearly all observers of the global economy with the steep decline in oil prices. Since the late 1990s, influenced by various economic and geopolitical factors, the price of 'black gold' had been on the rise. The most important factor in this relentless increase was the rise of emerging powers, especially China and India, in the global economic arena. The People's Republic of China, with its astonishing economic growth, quickly became a major oil consumer, overtaking Japan as the second-largest importer of this commodity. On the other hand, OPEC, under the undisputed influence of Saudi Arabia, once again took control of the global oil market as a powerful cartel, confidently steering the market to stabilize its boom. Thus, before the astonished eyes of the global economic circles, the price of oil surpassed the thresholds of fifty, seventy, and one hundred dollars one after another over fourteen years (except for a brief period during the 2008 crisis). It is worth remembering that not long ago, the scenario of oil prices crossing the two hundred dollar mark did not seem impossible. It even appeared that Ahmadinejad, Chavez, Putin, and the Gulf sheikhs were pinning their hopes on the scenario of an unstoppable rise in oil prices. However, 'black gold' surprised once again and fell sharply, even as the Middle East and North Africa were engulfed in the chaos of Syria, Iraq, and Libya, and the emergence of the most dangerous and powerful terrorist organization of contemporary times in the region. How is it that the most important oil region in the world is burning, yet oil prices are falling instead of soaring? This question gave rise to the 'conspiracy theory.' Media close to Vladimir Putin, the President of the Russian Federation, were among the first to speak of a joint plan allegedly concocted by the Saudis and Americans to lower oil prices, thereby putting Moscow, Tehran, and Caracas in trouble. However, the 'conspiracy theory' fades in the face of the simple realities of the global oil market. The simplest of these realities is supply and demand, which played the main role in the fall of oil prices in 2014. The supply of oil in the global market was abundant, as with the rise in prices of this commodity in recent years, investors turned to resources that were previously unprofitable to exploit due to high costs. The exploitation of unconventional oil resources (shale) in the U.S. surged for this reason, as producing this type of fuel could only be commercially viable if oil prices were in the range of ninety to one hundred dollars per barrel. Several other resources, including those in deep ocean waters and other inaccessible fields, were in the same situation. It was with this opportunity that the exploitation of unconventional oil fields in the U.S. rapidly increased, bringing the country closer to Saudi Arabia and Russia in terms of production, significantly reducing its dependence on imported oil, and even nearing the status of a new exporter of 'black gold.' This transformation occurred while Russia and Saudi Arabia were sending oil to the market at full capacity, and in the war-torn region of Iraq, the main fields continued to operate under relatively normal conditions. The surge in oil supply coincided with a decrease in demand, as economic activity slowed in many industrial regions of the world, including the European Union and Japan. Emerging powers, especially China, were not immune to the slowdown in economic activity. The increase in supply, coupled with the decrease in demand, raised excess oil inventories in the global market and pushed prices down. In this situation, Saudi Arabia, as the influential power of OPEC, faced one of two options: 1) Riyadh could significantly reduce the organization's share of global oil production in hopes that a decrease in supply would raise prices again. This option would allow OPEC's competitors, especially U.S. unconventional oil producers (shale), to solidify their foothold, at the expense of the organization's members. 2) Riyadh could accept the fall in oil prices, at least in the short term, and even accelerate it by flooding the market with oil to drive out new competitors and increase its share here and there. Saudi Arabia opted for the second option and accelerated the decline in oil prices, hoping not only to exhaust unconventional oil producers (shale) but also to 'punish' its major regional rival Iran and Russia (due to its support for Bashar al-Assad) by lowering oil prices. In this sense, if there is a 'conspiracy,' it should be considered primarily a product of Riyadh against the U.S. However, without significant changes in oil supply and demand, Saudi Arabia would never have had to resort to this option, the outcome of which is still uncertain for Riyadh's calculations. In the final days of 2014, oil prices fluctuated around fifty-five dollars per barrel, having fallen sixty percent from earlier in the year. The consequences of this significant shift are difficult to predict. Many oil-importing countries, from Europe and Japan to China and India and poorer nations, will benefit from the decline in oil prices, lifting a heavy burden from their foreign trade. Regarding other consequences of falling oil prices, several questions can be raised: 1) How resilient are U.S. unconventional oil producers (shale) against falling oil prices? If they exit the scene under the pressure of falling prices, what impact will this event have on the overall economy of the U.S. and the world? 2) A significant portion of European countries' long-term energy plans (including investments in clean energy) has been based on oil prices above one hundred dollars. What will happen to those plans with the drop in oil prices? 3) Many oil-exporting countries, under pressure from declining foreign currency revenues, will be forced to adopt contractionary policies in both financial and trade spheres. What impacts will these policies have on their social and political situations? The list of questions could be extended. The specter of economic crisis in Russia The current economic tensions in Russia, of which the fall of the ruble is one of the most striking signs, could have very significant results, even beyond its borders, if they continue. International media attribute these tensions to two main factors: economic sanctions imposed by Western powers in relation to the Ukraine crisis against Russia, and the fall in oil prices. One must be very cautious regarding the impact of sanctions on the Russian crisis, as no significant economic pressure from the West has yet been applied to Russia, and the economic restrictions against this country are by no means comparable to those imposed on Iran. Nonetheless, it can be accepted that the simultaneous fall in oil prices with the initial imposition of Western sanctions disrupted the general economic atmosphere in Russia and created a growing fear that led to capital flight and a sixty percent collapse of the national currency, one of its most apparent consequences. It is essential to emphasize that in explaining the current economic turmoil in Russia, one should not only focus on the fall in oil prices and Western sanctions. The roots of the crisis in Vladimir Putin's country are deeper than that: 1) The collapse of what was called the 'socialist camp' led to the emergence of a group known as 'transition countries.' These are countries that were supposed to move away from a centralized, closed, and state-controlled economy to a free economy based on private ownership and competition through fundamental reforms after the fall of communism. The process of this transition was successfully completed in several Eastern European countries (Slovenia, Poland, the Czech Republic, etc.). In contrast, other countries, with the Russian Federation at the forefront, have remained halfway through this process. Russia is in a situation where it has combined the worst aspects of both communist and capitalist economic systems. 2) After communism, Russia failed to find a suitable place for itself in the globalized economy. Today, world markets are filled with Chinese, Brazilian, Turkish, and Thai goods, but there is little news of Russian-made products. Russia's current role in international division of labor is the production of oil and gas, and from this perspective, the legacy left by Stalinist communism has turned it into a large oil emirate equipped with intercontinental missiles and nuclear warheads. The secret of Russia's fragility against oil market shocks lies here. 3) After communism, Russia did not achieve much success in renewing its political institutions and civil society and failed to replace the former totalitarianism with a rule of law system. This failure has exacerbated Russia's economic disorder, partly because widespread corruption has dominated the fabric of its production, trade, and banking systems, and a powerful oligarchy has replaced the former communist elites in controlling the country's fate. A large portion of Russia's wealth has been transferred abroad by this greedy oligarchy. The vast foreign currency revenues from oil and gas, at their peak, masked Russia's vulnerabilities. But with the reduction of this painkiller, deep economic wounds in Russia are quickly surfacing. This is the situation we are witnessing today. The issue is that Russia could, in its fall, drag many European banks and economic institutions down with it. It is no coincidence that EU member countries are treading carefully when it comes to deciding on sanctions against Russia. Russian economic entities have borrowed hundreds of billions of dollars from Western banks in recent years and today must repay their debts with a ruble that has lost sixty percent of its value. The first signs of Russian firms' inability to meet their financial obligations could put several European banks in a precarious position. Western companies that have made significant investments in Russia will undoubtedly not be immune to the consequences of the Russian crisis (if the fall in oil prices continues). It is no wonder that eyes are fixed on Russia, and what happens in this country in the coming months will have an undeniable impact on global economic events in the coming year. Other Events China) The economic dynamics of the 'Yellow Empire' have created one of the most astonishing economic transformations in the history of the global economy over the past three decades. In fact, the entry of a country with a population of one billion three hundred million from the periphery to the center of the global economy has created a new geography of industry and commerce on the planet. According to the latest statistics from the International Monetary Fund, China's gross domestic product in 2014 surpassed that of the United States, thus making the country left behind by Mao Zedong the world's largest economy based on this criterion. Of course, this statistical transformation faces many caveats, including that the calculation of GDP is based on purchasing power parity and not nominal (the dollar does not have the same purchasing power in all countries, and therefore international organizations publish countries' GDP both in nominal dollars and based on purchasing power parity). However, from any perspective, China's rise in both growth rates and international trade is astonishing. Nevertheless, the flip side of the coin should not be forgotten. China's transformation into a significant economic giant means that any change in its economy rapidly and severely impacts many other economies around the world. Currently, the official industrial growth rate in China has dropped below seven percent, one of the lowest growth rates in recent years. Additionally, there are experts on Chinese issues who claim that the actual industrial growth rate in China has fallen to two to three percent, which its official apparatus conceals. They also say that the slowdown in industrial growth in China is one of the reasons for the significant reduction in oil imports from this country, which has itself been a significant factor in the global price drop of this commodity. An economic recession in China (compared to previous growth rates) could significantly affect global economic developments in 2015 if it persists. Another concern regarding China relates to its housing market. Housing prices in major cities have taken on a bubble-like form, and their collapse could create a major crisis, especially for the banks in the country. Africa) Reviews and developments in 2014 once again showed that the African continent is undergoing new events, with signs of economic leaps visible in some of its countries. Under the influence of technological developments, especially the remarkable spread of mobile phones, unknown forms of business communications are rapidly expanding across the black continent. Simultaneously, several emerging powers, especially China and India, have begun investing in Africa. It is worth noting that due to rising wages in China, investors from that country are going to Africa to take advantage of cheap labor, including producing textiles and clothing in Ethiopia.