Prelude to a downturn

A THREEFOLD increase in oil prices is causing major headaches for the capitalists internationally. Fuel protests by fishermen, truckers and farmers brought France to a standstill, forcing the government to make concessions.

As French protestors reluctantly dismantled their barricades, lorry drivers and farmers in England and Wales were building theirs up. Protests have also spread to Scotland, Germany, Belgium and the Netherlands, threatening a Europe-wide movement.

New Labour spokesperson John Reid claimed that people in Britain "do not react to the French way of doing things." This was while pickets of refineries and distribution centres were rapidly escalating and farmers' leaders were warning of a new winter of discontent.

At the same time, fears of a global recession have grown. The capitalists had been congratulating themselves that the US economy was on course for a 'soft landing'. Productivity has been increasing and growth slowing gradually. But one global strategist at Meryll Lynch commented: "My concern is that the oil price rise will cause a much sharper than expected economic slowdown."

Shares of corporations such as Du Pont and Dow Chemical fell on the stock exchange after they issued warnings of lower profits due to higher oil prices.

The European central bank has been forced to increase interest rates, worried that price rises could push inflation well above their 2% limit. There are already signs that the German economy is slowing down and higher interest rates could mean lower growth throughout the Euro zone.

Japan, only barely emerging from a 10-year recession, is heavily dependent on imported oil and could be especially hit by rising prices. And in South East Asia an extremely fragile 'recovery' could also turn into its opposite.

Three times in the last 30 years, oil prices have tripled - three times the world economy has plunged into recession. Fears that prices could go over $40 a barrel (up from $10 eighteen months ago) and trigger a recession, prompted Clinton to put pressure on OPEC to increase oil production.

He's also worried that rising prices could scupper Gore's election campaign. OPEC have agreed to increase output by 3% (800,000 barrels a day). All this will have to come from Saudi Arabia, the only country with excess capacity. Other OPEC countries such as Venezuela are aganst increasing supplies. One Venezuelan newspaper summed up why with the headline: "Oil rises to $35 a barrel and poverty reaches 81%."

For every $1 drop in the price of oil, Venezuela's economy loses $1 billion a year. President Ch‡vez, who has attacked "savage neo-liberalism" and called for a "multi-polar" world, said: "Lower prices would be like passing a death sentence on ourselves and our people". For countries like Venezuela the crisis can only get worse.

Economic analysts doubt whether OPEC's decision will have much impact in the short term. This is already the third increase in production agreed this year. Stock levels in the US are at their lowest level for 24 years and it will take some time for any increases to come through.

'New Economy' evangelists argue that new technology will lessen the effect of oil price rises this time round. Certainly economic conditions aren't the same as when oil shocks hit the world economy in 1973 and 1979.

Then inflation was already much higher than it is now before the price increases took place. But every time that oil price rises have occurred, economists have underestimated their effect on the wider economy.

The US economy alone has been holding up the world since the collapse in south-east Asia in 1998. One factor extending the boom was precisely the low price of oil.

But even if oil is not the trigger for a world recession, consumer and corporate debt, a growing current account deficit and inflated share prices all mean that the US economy is extremely susceptible to external and internal shocks which could lead to a serious downturn world-wide.

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In The Socialist 15 September 2000:

Blair: running on empty