Falling Commodities Prices could Create Economic Turmoil
It is a little hard to believe, but the collapse in oil prices might not be a good thing. The collapse in oil prices could lead to economic conditions similar to those during the Great Depression.
One of the underlying causes of the Great Depression was a collapse in the prices of agricultural commodities. The cost of some of farm products fell by 50% during the early 1930s and devastated rural America and the U.S. economy.
Oil prices that are now under $50 a barrel are already having a similar effect on some countries. Venezuela is now in danger of defaulting on its loans and hyperinflation, The Washington Post Wonkblog reported. Inflation in that country is now running around 63.6%, and store shelves are empty because the country has no money to buy imported food.
Venezuela president Nicolas Maduro is desperately traveling around the world, begging for new loans to keep the country going. The Chinese have pledged around $20 billion in loans, but that may not be enough. Without the loans, economic collapse could be imminent in the South American country.
Beijing is willing to lend Venezuela money in exchange for free oil. That could make things really bad because oil revenues make up 25% of Venezuela’s gross domestic product. Now half of that money has suddenly disappeared. What’s worse is that public spending now makes up slightly over half of Venezuela’s GDP, around 51.3%, and it is basically funded with oil revenues. If the oil money disappears, half of Venezuela’s economy could simply disappear.
“It will be a year of extreme scarcity,” Venezuelan economist Angel Garcia Branch said of 2015 in a CNBC article. “What’s coming to Venezuela is chaos that will probably lead to barbarity and people looting.”
Canada Hurt Too
Venezuela is not the only country that could feel the pain. Falling oil prices are leading to inflation in Canada, where the Bank of Canada has tried to boost business by cutting interest rates. Oil has pushed an economic boom in Canada in recent years, which seems to have ground to a halt. The Bank of Canada is hoping that cutting interest rates will make up for the lost oil revenues.
Other nations that could be hit hard by falling oil prices including Saudi Arabia, Iran, Russia, and possibly the United States. The drop will hit less-developed countries the hardest because lower oil prices will give people and businesses more money to spend and stimulate developed economies.
In the United States, retail sales increased in November and December because falling oil prices gave consumers more money to spend. Industries, including mining, railroads, and manufacturing, are also boosted by low oil prices, particularly when they lead to lower transportation costs.
The effect of falling oil prices should have us wondering about other commodities and energy in general. As modern technology makes increases the supply of commodities, prices will drop making industries and enterprises unprofitable with devastating effects on employment and the greater economy. A major result of this will be the disappearance of jobs or drastic cuts in salaries in an attempt to make up for lost revenues in many businesses. Another will be widespread bankruptcies and liquidations as occurred during the depression. One of the causes of the drop in agricultural prices during the Depression was the mechanization of farms, which greatly increased food supplies. Expect the commodities glut to have a similar effect on commodities industries and economies dependent upon natural resources extraction.
The effects of such developments as Elon Musk’s Giga Factory, which could greatly increase the supply of lithium batteries and cheap electricity, could have similar repercussions. Instead of a century of shortages, we could be on the verge of a massive energy glut that could wreak economic and political turmoil around the globe.
Even though it may make our trips to the gas station less painful, we might come to regret the falling oil prices, particularly if we see depression-type conditions in nations all over the world.