The Doom of Resource-Dependent Economy
For a long time, a viewpoint has been prevalent that the demand and price of crude oil will always be on the rise. The price hike of international crude oil that followed World War II seemed to have supported this position.
A tug-of-war between oil exporters and buyers, however, changed that trend. In 1973, an oil embargo was imposed by the Organization of Petroleum Exporting Countries (OPEC) against the United States and several other countries. After that, developed countries, led by the United States, have invested heavily on the research and development of new energy resources in a bid to weaken oil exporters' grip over their energy supplies.
After the global financial crisis, the United States started deleveraging its economy. Business bankruptcies, slumping housing prices and bad bank loans created room for the development of a new economy. Against this backdrop, the United States started the research and production of shale gas and shale oil on a massive scale, rewarding the nation with spiraling shale gas and oil output. Crude oil output in the United States increased to 14 million barrels a day in August 2014, almost doubling from the 8 million barrels a day at the end of 2008. The ongoing shale revolution in the United States has utterly changed the global supply structure of crude oil, a major cause for the recent plunge in the oil price.
To cushion the impact from the shale revolution, oil exporters in the Middle East, with Saudi Arabia as the representative, scrapped the limitation of oil output, resulting in plummeting oil prices globally. They aimed at sustaining the traditional oil supply structure by using a low-price strategy to squeeze the market share of Russia and to block the development of U.S. shale oil. In addition, the demand for crude oil has been on the decline amid a growth slowdown of emerging economies--particularly China--further intensifying the imbalance between oil supply and demand. The price of crude oil nose-dived to the current $55 per barrel from the $108 per barrel in July, demonstrating the new pattern of oil supply and demand.
The boom of new energy has lifted economic growth in developed countries and, as a consequence, investment started to flow back to developed countries. This dealt a heavy blow to emerging economies that are severely reliant on foreign investment and external demand, especially those that are heavily dependent on resource exports. The energy price slump has caused shrinking fiscal revenue, reduced government spending, declining consumption and investment, leaving those economies in recession. Massive capital outflow results in depreciation of local currencies, inflation, plunging asset prices, deterioration of balance sheet and spiraling debt in banks. Subsequently, a currency crisis may erupt.
In essence, this round of crisis for the ruble is no different from the 1998 ruble crisis and the 1997 Asian financial crisis. Developed countries have successfully embarked on a new journey of technology-driven growth, attracting global capital to flow to them from emerging economies.
During this process, the more reliant a country is on exports, foreign investment and resource output, the heavier the blow it will receive. Technological breakthroughs in the new energy sector have channeled global capital to flow back to the United States. The capital backflow will be more obvious following the withdrawal of quantitative easing (QE) and mounting possibility of interest rate increases in the United States. Now is only a start. Early in 2013 when the United States announced it would consider ending the QE, currency crises erupted in India and Indonesia, followed by the currency depreciation in Argentina and Turkey at the beginning of 2014 and the current Russian ruble crisis.
Resource-abundant countries tend to be spoiled by dividends brought about by those resources, and neglect the improvement of domestic production capacity and the diversification of their domestic industrial structures. Hence, they are more vulnerable to massive inflows and outflows of global capital. After this round of technological revolution in developed countries, their comparative advantage in resources will diminish or even vanish.
The U.S. shale gas revolution has sent a strong signal that a resource-dependent growth pattern can no longer be sustained. Sadly, some resource-dependent developing countries are not focusing on the really important issue of improving domestic industrial structure, but are focusing on minor issues: either seeking to sustain their reliance on energy output or condemning the West and looking for alternative export destinations.
China has remained basically intact despite the Asian financial crisis, the plummeting oil price and the ongoing ruble crisis, not because the Chinese economy is strong enough to withstand those crises, but because China's capital markets are not entirely opened. Signals sent by those crises can't be clearer--China's advantages in human resources, capital, environment and land have greatly weakened. With two major growth drivers--export and investment--losing momentum, China has to restructure the country's industrial chain with technological innovations and improvement in efficiency.
This is an edited excerpt of an article published in Securities Times
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