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Welcome to stagflation

by on 16/03/2012

Welcome to stagflation

Contrary what some commentators believe, the oil price is not so much about the fear premium as about limited recourses. Just ten years ago, only 20 percent of the world population the wealthy Europe, US, Japan, and Asian tigers countries, enjoyed decent standard of life and freedom of transportation, (private cars), since the middle of the last decade the Chinese population started gradually, to join the club of wealthy nations. It seems ” butterfly effect “, caused dramatic rise on oil prices, (and other commodities as well), at 2007, when within a year it grow from 50 US$/barrel to 150 US$ (other commodities behaved accordingly), dropping back to 30 US$/barrel immediately after the collapse of Lehman Brothers.

It is inevitable that any attempt by the emerging economies to achieve the same level of consumption as the wealthy countries will create competition for raw materials and energy sources, and it has to cause sharp increase in their prices.

It seems that at today’s technologies, the level of consumption in the world is close to its upper limits and our planet is having difficulties carrying on with the already existing appetite for consumption in the level of wealthy nations. It seems even more improbable that it could cope with additional over-consuming people, so necessarily any attempt to increase it in one region will cause other region to decrease its consumption level.

Yet in today’s world, about 4 billion people living in China, India, Latin America and the South-East Asian, people that demand the same level of consumption as the population of wealthy nations, especially since they are the producers of most of the consumption products that they enjoy. These regions with young and growing populations (in contrast to the ageing and stagnating populations of the wealthy nations), are about to take over the leading role in the world economy within few years and will demand accordingly their share in the consumption. It is necessary to say, that while an increase of consumption is politically and socially easy, its decrease is politically almost impossible. But as in the past, the necessity will happened and eventually the wealthy nations will give up part of their share of consumption in favor of the emerging nations. The only way it can happen is by price increase of commodities and the final products as well, or in other word stagflation.

The current economic crisis, started this process of more even distribution of the consumption in the world, since it had hit primarily the most wealthy regions, and less so the emerging economic regions. The economic stimulus made by US and EU moderated this trend to shift the use of resource to the developing nations, but it will have only temporary effect. Already at 2009 the Chinese car market became the biggest in the world. What we see with the oil prices is only continuation of the process that started in 2007 and was interrupted at 2008 by the collapse of Lehman Brothers and the economic crisis that followed it.

My understanding is that the oil price rise is indication that the US and EU economy is out of the crisis, and the world is back in the pre crisis economy level of 2007, but with the obvious shift of consumption from the wealthy world toward the less developed world.

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