Conflicts, Oil Prices, and International Financial Stability by Hossein Askari

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Hossein Askari is the Iran Professor of International Business and International Affairs at the George Washington University. He served for two and a half years on the Executive Board of the IMF and was Special Advisor to the Minister of Finance of Saudi Arabia. He also directed the team that developed the first comprehensive domestic, regional, and international energy models and plan for Saudi Arabia in the 1980s.


 

"Oil prices, like the prices of other goods or services, are driven by supply and demand, a fact often lost in the media frenzy over climb- ing prices..." 
 
"To prevent a drop in national standards for a future generation, depletable-resource-based economies need to strive for a higher savings rate during the period that the resource is contributing to national output..."

 


Over the last 100 years, crude oil has been priced between $10 and $30 per barrel (adjusted for inflation, in 2010 U.S. dollars), with the exception of two periods: 1973-1983 and 2001-2011.1 These two periods were both marked by conflicts, upheavals, and disruptions in the Middle East. The resulting oil price shocks were dramatic and led to large swings in current account balances, as oil producers rapidly acquired cash for their increasingly valuable resources. Large current account surpluses signify net annual savings in a country’s transactions with the rest of the world, and large imbalances put stress on the international financial and banking system. These massive surpluses and corresponding deficits played a leading role in the developing-world debt crisis of the 1980s and may have a contributing factor to the global financial crisis of the late 2000s. In this paper, we begin by taking a brief look at the factors affecting oil prices, a subject that is often the victim of popular misconceptions. Then, we turn to a significant result of higher prices, large swings in current account balances, and potential financial crises. We conclude by proposing a change in U.S. and international policies to contain conflicts, reduce violent swings in oil prices, better manage and recycle the current account surpluses of oil exporters, and reduce the likelihood of recurring and severe financial crises. (purchase article...)