Drowning in oil
The capitalist world economy is fast slowing down. Investors and central bankers worry about a catastrophic crisis. Meanwhile, asks Eddie Ford, does Venezuela’s oil-reliant Bolivarian revolution face its nemesis.
Showing the jittery state of the world economy, both the Standard & Poor 500 and Dow Jones Index have notched up their worst ever start to the new year since 1929.1 That does not necessarily mean, of course, that we are about to have another 1929 - rather that for the first two weeks of this year, these markets have racked up big losses of up to 10%. Whether you want to start panicking is up to you.
At the time of writing, the Asia -Pacific stock markets appear to be in full retreat.2 MSCI’s broadest index of Asia-Pacific shares outside Japan sank 2.1%, to levels not seen since late 2011, and Japan’s Nikkei was down 3.7% - leaving it 20% below last year’s peak and thus technically entering a bear market (broadly defined as a 20% fall from a previous peak).3 But the pain does not stop there. Stocks in Australia have fallen 1.3%, with the Asia-focused bank, ANZ, down 4.5% and the country’s huge resource and energy sectors also being punished. In South Korea, the Kospi index was down 2.6%. Hong Kong’s Hang Seng index has continued to fall sharply, shedding 3.75% - having lost more than one-third of its value since April last year.
In turn, the FTSE100 has fallen 155 points, or 2.6% - its lowest level since November 2012 - putting it in bear market territory. The same goes for the German Dax and the CAC-40 in Paris, respectively down by 2.5% and 2.3%. Meanwhile, the International Monetary Fund cut its global growth forecasts on January 19, blaming a slowdown in China, the falls in commodity prices and the Federal Reserve’s move to start raising US interest rates. Mining giant BHP Billiton has added to the bleakness by saying it sees no early recovery in iron ore or coal prices. Full of gloom, William White, chairman of the Organisation for Economic Cooperation and Development’s review committee, told TheDaily Telegraph that the problems building in the global financial system were now “worse than it was in 2007”. He warned that central bankers had “used up all their ammunition” (January 19).
As most of our readers will know, this massive sell-off and general gloom has been fed by the continuing slide in the price of oil (now below $28 a barrel - its lowest point since 2003) and, as mentioned above, increasing concern - if not fear - over the dramatic slowing down of the Chinese economy. Or, in the words of Phil Orlando, chief equity market strategist at Federated Investors in New York, there is a “tsunami of negative psychology” about China and there is “nothing we can do except step back, hunker down and wait for the carnage to play out”.4
Official Chinese figures tell us that the economy grew last year by 6.9%, compared with 7.3% a year earlier - marking its slowest growth in a quarter of a century. For what it is worth, the IMF predicts that the economy in China will grow by 6.3% this year and 6% in 2017 - Beijing having set an official growth target of “about 7%”. Most analysts think that any growth below 6.8% would fuel calls for further economic stimulus. The government-backed China Securities Journal reports that Beijing has the “policy space” to further support the economy, including raising deficit spending to around 3% of annual economic output. China’s central bank revealed late on January 19 that it would inject more than 600 billion yuan ($91.22 billion) into the banking system to help ease a liquidity squeeze, expected before the long new year celebrations. However, such a move was not particularly usual before the holidays and stopped well short of an actual cut in bank reserve ratios. Since November 2014, China has cut interest rates six times as part of a range of measures designed to bolster flagging growth.
But official Chinese statistics and growth figures are notoriously flaky, if not an enormous exercise in creative accounting. The data comes from provinces across the country and, though Beijing stands accused of ‘inflating’ the overall figures, the individual provinces are also thought to ‘sex up’ their results - everybody lies to each other in typical Stalinist fashion. Confusion reigns. But in December 2015 even the state media suggested that regional economic data had been drastically exaggerated, with one province reporting revenue 127% higher than the actual number. According to Wikileaks, back in 2007 China’s current premier, Li Keqiang, described regional GDP data as “man-made” and “unreliable”. Instead, he suggested determining growth from electricity consumption, volume of rail cargo and amount of loans disbursed (the so-called ‘Li Keqiang index’).
Most serious guesstimates have the growth figures nearer 2%. In the financial press you can regularly read stories about former fund managers and investors beginning to pull out of China on the basis - or expectation - that it is going down the plughole one way or another.
Of course, as we have pointed out before in this paper, it is not the actual Chinese stock exchange that matters - that is more or lessinsignificant, compared to the equities traded in the City and on Wall Street. But a slowdown in the Chinese economy as a whole has an immediate knock-on effect on Australia, Canada and many other countries. For a European or Japanese car company, it matters how much spending power the Chinese middle class has. For many African countries like Nigeria or the Congo, it matters how much money Chinese companies have to spend on investment. Australian or Indonesian mining companies are heavily dependent on Chinese demand for iron ore and coal, whether increasing or slowing. And steel plants in Wales and elsewhere go bust if China is flooding global markets with steel too cheap to compete with.
The Asian markets have been particularly rattled by the warning from the International Energy Agency that the oil market could “drown in oversupply”, now that sanctions against Iran have been lifted - Tehran has vowed to boost output by 500,000 barrels a day, thereby cancelling out production cuts elsewhere (such as Russia).5 Additionally, the agency estimates about 300,000 b/d of additional crude could be flowing onto world markets by March - not to mention the fact that last year production from countries outside Opec, led by the “stubbornly robust” United States, grew 1.3 million b/d from the prior year to 57.6 million b/d. Overall, the IEA calculates that 285 million barrels will be added to stocks this year.
In other words, this means that there will be an overabundance of oil, alongside a weakening of demand as China, Japan and the eurozone stagnate or record less and less growth. Furthermore, adding to the pessimism, warm early-winter temperatures in Europe, Japan and the US and continued economic woes in Brazil and other commodity producers caused a sharp reversal in the oil market last year. Demand more than halved from 2.1 million barrels a day in the third quarter (almost a five-year high) to a year low of one million barrels a day in the final quarter. As storage space on land becomes scarce, the IEA report points out, it may become profitable to stockpile excess crude on tankers at sea in order to accommodate the oil glut. Any sort of bounce back is unlikely, concludes the agency - just a further downward pressure on prices, possibly to a level previously thought unimaginable.
Demonstrating the ruthless interconnectivity of the global capitalist economy, that crushes all beneath its heel, the slump in oil prices has had a devastating effect on various governments throughout the world - none more so than Venezuela, which depends on oil for about 95% of its foreign currency and has the world’s largest oil reserves. Of course, the main recipient of its oil exports was the US, and this financed the ‘Bolivarian revolution’ - which certainly lifted the position of the poor in shanty towns and slums, especially when you bear in mind that in 2008 oil was at $147 a barrel.
Now the country faces chronic shortages of basic foods, inflation is soaring and the murder rate is going through the roof - with the prospect of things only getting worse and worse, as oil prices continue to fall in the aftermath of the Vienna agreement. This is exacerbated by US sanctions against the country and massive corruption at all levels of society.
In despair, on January 16 the Venezuelan president, Nicolás Maduro - successor to Hugo Chávez and a member of the United Socialist Party of Venezuela (PSUV) - declared an “economic emergency”, seeking extraordinary powers to rule on economic matters. This is not the first time that Maduro has attempted to rule by decree since becoming president in April 2013. He announced the creation of a new agency, the Vice Ministry of Supreme Social Happiness, to coordinate all the social programmes - its aim being to take care of the most “sublime, vulnerable and delicate, to those who are most loved by anyone who calls themselves a revolutionary, a Christian and Chávista”.6
Maduro ruled by decree between November 19 2013 and November 19 2014 - requesting an enabling law in order to fight corruption and launch an “economic war”. Then on March 10 2015 Maduro again asked to rule by decree following the sanctioning of seven Venezuelan officials by the US, requesting powers to “confront” the “aggression of the most powerful country in the world” - the national assembly granted him such power until December 31 2015.
In a rather rambling three-hour speech, Maduro maintained that the country’s economic misfortunes were the result of a “non-conventional war that attacks our homeland”. The central bank, which for some reason has not published any economic statistics since the end of 2014, declared on January 15 that Venezuela’s economy shrank 4.5% in the first nine months of last year and that inflation had hit an eye-watering 141.5% - the country’s revenue having plummeted by 62%, thanks to the sharp downturn in oil prices. Needless to say, there has been a huge slump in the purchasing power of most Venezuelans. Maduro called the figures “catastrophic” and appealed for “national unity” to face the economic crisis. His decree would give him wider powers for 60 days to intervene in companies or limit access to currency and also gives authorities special “temporary powers” to boost production and ensure access to key goods - including taking command of companies’ resources, and to impose currency controls.
However, this time around Maduro might have problems getting his own way. For the first time in 17 years, the mostly centre-right opposition controls the assembly after winning the December elections - the Democratic Unity Roundtable coalition securing 109 of the 164 general seats and all three indigenous seats. The government’s own coalition, the Great Patriotic Pole, won the remaining 55 seats - the PSUV being in alliance with the Communist Party of Venezuela (two seats) and the even smaller Bicentennial Republican Vanguard (one seat). Clearly masses of people are becoming disillusioned with the Bolivarian revolution and are in desperation turning to the parties of the right because they appear to offer the prospect of stability.
For communists, the deepening problems in Venezuela - just as with Syriza in Greece - shows yet again that leftwing attempts to save capitalism from itself are bound to fail. Certainly the path to socialism and working class rule does not, and never could, come through the Bonapartist rule of Chávez and then Maduro. To act as a class the workers must be formed into their own party. Not subordinated to the PSUV and the Great Patriotic Pole.