A new model for nastiness

If we believe that the downturn is likely to share some of the characteristics of the 1930s, rather than being simply a repeat of the 1970s, then it is unlikely that oil producing countries and commodity exporters will escape problems. Oil prices have been driven up to levels considerably higher in real terms than the 1970s by demand pull from China and India. If China and to a lesser extent India suffer severe downturns, then oil demand must drop off correspondingly and it becomes unlikely that the 1970s pattern of continuing high oil prices even in a recession will be repeated.

If oil prices drop sharply, the political effect on oil producing countries will be considerable, and not necessarily pleasant.
The Shah of Iran basically fell because of the 1973 oil price rise. He was already overspending in 1972-3, supported largely by bank loans, then he spent with total abandon in 1974 as higher revenues had appeared to make Iran’s oil wealth inexhaustible. Needless to say, he then ran out of money, as the international banking system would not provide him with sufficient funds to complete the projects he’d initiated in the bubble year. 1976 and 1977 were thus years of relative austerity in Iran, much to the fury of the Iranian people who had come to expect a bonanza. It should thus have been no surprise that revolution occurred in 1979, although robust US support for the shah might have enabled him to overcome it.

This time around, the overspending oil producers are obvious: Venezuela and Russia. Venezuela will undoubtedly get into severe difficulty once the oil price collapses. This is on balance likely to favor US interests (and those of the Venezuelan people) provided that the crisis can be leveraged to remove Hugo Chavez from the country’s leadership. If he remains, Venezuela will become another Cuba, with deep repression and a suffering and impoverished populace but forming no real threat to the United States.

Asia Times