As oil, gold and currency prices change, are we prepared?
AS the rise and rise of the dollar halts, and with improving economic conditions, marginal that they are for the time being, of the world's leading economies, we see that as oil prices ' bottomed out' and stabilised, gold started to fall.
If ever there is a commodity that reflects the true state of the economy, it is the price of gold. From a dizzying peak of Rs. 70,720 for ten grams it has now moved into the Rs. 40,000 range. For the last one week it has, on a daily basis, been falling. If we assume that the price of oil in relation to that of gold moves according to the true condition of our economy, we, after 27 months, have seen oil stabilise and over the last one week has been moving up, very slowly.
On Tuesday even with news of a bomb blast at Brussels Airport, the oil market did not panic. For gold the immediate reaction was a very slight price increase out of fear of more blasts. Experts are of the opinion that within a week prices will start to fall again. Such is the long-term outlook for gold. But then as oil is a time-lapse commodity, its price is much less prone to shocking incidents, which is now the new accepted norm. The 'fightback' has to come within this new norm.
We notice that after a low of US$35 a barrel, oil has been, rather very slowly, rising. But rising it will remain. On Monday it was firmly above the US$41 a barrel mark. Brent deliveries for May 2016 rose to US$41.71, and it seems that with OPEC meeting, finally, on April 17, 2016, in Doha, the one-point agenda of capping outputs could come about, even if it is conditional. The steady rise and rise of oil prices seem almost sure.
So we have three indicators. The value of the dollar, the price of gold and the price of oil. These are the three indicators that show us, and everyone interested in studying the economy, of which way the trend is. We have the dollar growing in strength and moves to stabilise and let it recede. We have the price of gold, slowly, falling. And then we have the price of oil, as demand rises, increasing.
In such a situation we see the falling dollar, marginal that it is, being held responsible for the price increase.
But then a strong dollar sharply hits oil prices because oil is quoted in dollars. Could the now ' calmer' Iran be a strong tool in the hands of the USA to keep oil prices in check, given that their prime concern is the US economy, which is under Obama on the rise?
That is why most political economists fear that if Trump makes it to the White House, which is a possibility given the "fear factor" he so effectively instils in the conservative American voter, we could see US deficits soar and the economy, rebuilt so carefully by Obama, tumble.
If we examine recent history through the 'butter and guns' lens, we can well see a return to a more aggressive USA, and oil prices might soar faster than we imagine. The Yemen War could well be part of the same scene. No marks for guessing where Pakistan stands.
The question now is will Iran play its "promised part" in the capping of outputs to help oil prices to rise? The Iranians are master diplomats, and they have announced yet again that their interest in OPEC will begin once they return to pre-sanction levels. They have an argument, for the Saudi levels have not fallen. So the success of the Doha meeting in three weeks' time will depend on how effectively the Americans have cornered the Iranians.
So for the time being we have oil prices rising slowly, the dollar weakening slightly and gold prices falling, again slowly. Then entire economic orchestra is in perfect tune. We also have the Gulf oil economies, Russia and even Venezuela all bent on an output freeze. The scene is set and oil prices have started to move up.
Oil analysts are of the opinion, and for good reason, that the political jigsaw will not fit, and that output freeze is, for this reason, unlikely. My own opinion is that even if the 'output freeze' is not agreed, the Iranians will come up with a 'time barred' solution. This will allow for prices to keep, very slowly, rising.
But our concern in Pakistan is to see how will our economy fare? Given the dangerous level of domestic borrowing, which added to our foreign debt, is more than our total national Budget, and the speed with which borrowing is from commercial banks, with a deliberate policy not to lend to Pakistani entrepreneurs, just where are we headed?
Do we want to see our manufacturing rise, and hence exports to rise? The reality is that both manufacturing and exports have been falling.
The official version is that it is also falling in other countries as the lag effect of the 2008 Recession leaves a 'weakness fever' on the world economy. This is factually incorrect. Just examine the degree of the decline and it speaks for itself.
That is why Pakistan must be careful while planning its economic policies. After months of pondering (just who was pondering??) the Prime Minister's Office has released the Strategic Trade Policy right up to the year 2018. It states that market accessibility, our falling manufacturing capability, the terror threat, the lack of infrastructure, and very little electricity available for industry are the reasons we are in the decline in real terms. Imagine!
The point is who is to blame for this state of affairs. Every person has his own set of theories. Some blame corruption, and rightly so. Some blame excessive borrowing, and rightly so. Most blame our energy crisis, and rightly so. There is a lot of finger-pointing possible. The point is we need a sound long-term plan with enough flexibility to counter oil, gold and currency fluctuations, with manufacturing being encouraged and fancy transport schemes being avoided. In short, we need a lot of common sense injected into our governance, which just seems to be collapsing.