Production and consumption are two interdependent concepts in the economy and one triggers the other in a certain period of time. Growth has become one of the main realities of the new millennium and two new global actors China and India have become the main catalysts of the world economy in this period.

Mainly China devastated the concept of economy that we know with its competitive, low tech but low priced goods all around the world. It has become really hard to survive against this giant and not only in developing countries but also in developed ones the walls of protection against Chinese goods were seen as effective instruments. However, this type of a policy formulation contradicts with the principles of international trade which claim mobilization of goods and services would bring competition, specialization and prosperity to the world economy.

In this decade while certain sectors have suffered this situation, consumers have enjoyed this competition, since domestic producers while trying to keep their costs lower to be able to compete with the goods that occupy their markets the quality and technological innovation have gained impetus in global sense.

For several years the US economy is moving on a delicate path that FED is trying to prevent a possible unwanted result by pursuing proactive monetary policy.  Using interest rates as an economic instrument they firstly tried to prevent an inflationist tendency in the country but then with the collapse of mortgage market, the threat of recession has become more serious. The world is getting used to ups and downs in financial markets since then, due to the fear of a general recession to triumph in the world economy. Last week Bush government announced the new economic package which aims to cool down markets by implementing fiscal policies. This package of $160 billion aims to stimulate the US economy by increasing consumption in the country. However, some economists like Ercan Kumcu[1], are skeptic about the effectiveness of such an implementation. Kumcu, showing permanent income hypothesis of Friedman as a theoretical basis for his claims, says that announcing this policy as temporary Bush government has already undermined the effectiveness of this policy.

We will see if this new economic package will succeed or not, but the truth is, it is not enough to cool down the international markets, and even the floating continues in the Asian markets this week.

Why the US matters?

A certain question comes to one’s mind, “Why does it matter a problematic situation in the US?”. I accept that it is a question that keeps the answer in it, “Because the US matters”. First of all, the US is the biggest buyer (or in other words the biggest consumer) of the world economy which makes this country a vital center for the developing countries and blocs like the EU. A recession threat means shrinking consumption and even increasing unemployment rate. Like domino effect, firstly producers like China, the EU and other industrial countries would have to bear negative impacts of this situation and then the countries who sell crude materials to these producers would have to face with this situation.

May be the financial mechanisms would decrease or delay such a risk by playing an active role, but until then everybody should get ready and minimize the risks as much as possible. Economists recommend to the entrepreneurs in the countries like Turkey not to borrow in terms of foreign currencies in this regard.

Energy Markets

Being an important input for the production, it is hard to say that energy is bullet proof and would not be get affected from these ups and downs in the global economy.  Several references are given to the indicators that cause inflationist pressure on energy markets such as

·         Regional and political turmoil like in Iran, Iraq and Africa

·         Demand pressure that arises from the Asia Pacific

·         Seasonal changes and environmental disasters

·         Depreciation in dollar against foreign currencies

·         Increasing cost of oil extraction

·         Speculative effects

·         Others

This list can be extended, but I try to give the main reasons above. As can be seen there are political and financial causes behind the increasing tendency in the energy markets and there is an interdependent relation between the ongoing growth and a relatively stable ambiance in the world economy. Nevertheless, recently the direction of oil prices have turned downwards as the political tension relatively decreased and the expectation regarding to the economy changed. We can state several important factors that would affect hydrocarbon prices in the upcoming period.

Supply effect

It is a reality that oil and gas producer countries have enjoyed for a certain period of time from the windfalls in the energy market and they are keen on to turn their reserves into financial assets as much as possible since energy goods are the dominant source of revenues of these countries. (It is true that some exceptions exist like Norway or the US) It can be said that investments also concentrated on production of oil and gas. Thus, in the long term we can see repercussions of these investments as the increase in production capacity.  

Demand effect

A slowdown in the world economy can cause the pressure on the oil prices to decrease due to decreasing demand. As stated before oil is an important input and recession in the world economy would negatively affect production and consumption. Thus, locomotives like India, China and even the EU and the US would demand less oil.

Dollar effect

Developments in the US economy and the situation of dollar are also important. The main currency for oil trade is still US dollar ($) even some initiatives of several producers to sell oil in terms of Euro (€). Thus, one should closely follow these developments for the energy markets. Moreover, next year a new President will be in the White House and her/his political and economic policies do really matter.

Conclusion

It is true that world economy is passing via a delicate period. Policy formulations of financial actors and governments would be so important to be able to survive or get over from this situation with minimum losses. Windfalls in the energy markets can still continue, but a recession risk can cause energy markets to tumble down too. There exist two options ahead of us; Minimizing risks and taking preventions, and turning times of crisis into opportunities. Even these seem independent from each other, the ones who would be able to converge these two will be the winners of this period.

For your comments

hozertem@gmail.com

Hasan Selim Özertem

Editor of USAK Energy Review