Additionally, low oil prices will be a MAJOR FACTOR in fostering political volatility in oil producing states such as Iran and Venezuela that derive much of their public budgets from exporting crude. In order to make up the shortfalls, these states have to either a) cut politically popular entitlement programs (like food and energy subsidies); b) borrow more money; and/or c) print more money.
None of these choices is particularly attractive. A silver lining in the cloud is that a stronger $USD will make exports more attractive again. But, caution must be exercised as TOO STRONG a dollar will make existing loan repayments prohibitively expensive - as was demonstrated all too painfully last October-November.
Economic Outlook: The OECD effect
Jun 24, 2009 (UPI via COMTEX) --
A stomach-punching World Bank report this week was followed by a pat-on-the-back report from Paris that said stimulus spending was taking effect.
The Organization for Economic Co-operation and Development's semiannual economic forecast upgraded its March prediction of a 4.3 percent contraction this year to 4.1 percent decline, while 2010 would see a 0.7 percent growth rate, a step up from its previous prediction of a 0.1 percent decline.
Two days after the World Bank said global output would decline 2.9 percent this year, OECD -- with a focus on 30 developed nations including Germany, Britain, Japan, Canada, Spain and Australia -- said conditions had improved, especially in the United States and China, where monetary policy shifts were backed with large stimulus sending packages.
"Thanks to firm action to stimulate our economies, it appears that we have escaped the worst during this crisis," said OECD Secretary-General Angel Gurria, who added himself to the list of economic leaders calling for a "clear and credible plan" for policy shifts for "phasing out emergency measures as recovery takes hold."
"A recovery already appears to be taking hold in China," where growth is expected to hit 7.7 percent this year, the report said. In the United States, a 4 percent drop for 2009 was revised to a decline of 2.8 percent. In Europe, "signs of recovery are not yet clearly visible," OECD reported, projecting the euro area would see output decline 4 percent in 2009 and break even next year. In Japan, "there are signs that the slowdown triggered by the collapse in trade is coming to an end but the recovery will be slow."
Japan's economy was predicted to fall 6.8 percent this year, but return to 0.7 percent growth next year.
Holding up those numbers, the OECD said crude oil prices were likely to average about $55 per barrel this year and suggested home prices were still elevated in many countries, The New York Times reported Wednesday.