Terms Of Trade

Hamodia

December 19

The collapse in the price of oil is, for Israel and most other countries in the world, a huge Chanuka present. Of course, the oil I’m talking about is not the kind that most people use in their menorahs — although it’s ‘kosher’ for that purpose, but not recommended. Nor is the massive fall in price, in excess of 40% since the price peaked at the end of June, a genuine miracle, since it accurately reflects the changing balance between supply and demand on the global market.

But the fact remains that none of the people whose business it is to analyse the oil market predicted anything like this. More than likely, none of them even imagined it possible — for if you read the material being produced in mid-year, the expectation was for higher prices and the fear was that there would be a sharp spike. That sounded very reasonable, given all the geopolitical problems developing at that time — ISIS in Iraq, Libya being torn apart and, above all, Russia causing problems in Ukraine.

As things turned out, all of these problems are still with us and some are even worse than they were then — but not only have they not caused oil prices to rise, they haven’t even been able to prevent them falling. So much for experts providing rational analysis!

As always happens in these situations, after the event we are being treated to all kinds of conspiracy theories to explain what has happened. The Saudis did it all on their own; the Americans did it; the Saudis and the Americans did it together — etc. etc. The reason why Saudi Arabia and the US are the prime suspects is because their enemies — Iran and other OPEC countries such as Venezuela, ISIS and Russia — are the biggest losers. True, Saudi and the US are themselves major oil producers, so they are also losing heavily from the price slump — but they can absorb the loss, whilst their enemies are much more vulnerable.

Whether these theories have any validity or not, they underline one major fact — there are countries that are heavy losers, countries that win in some respects and lose in others — and countries that are big winners. The more a country’s economy is dependent on producing and exporting oil, the more it stands to lose — and the converse is also true.

But oil, although it is rightly considered the most important commodity in the global economy, is not the whole story. Prices of all the key industrial commodities — such as iron and copper — have suffered significant price declines in recent months or for even longer. There are many reasons for this, with the single most important one called ‘China’, but the consequence is that all nations reliant for their economic well-being on the mining or extraction of raw materials are being hit hard.

The flip side is that nations that do not produce but only consume raw materials are benefiting, not being hurt — but that is only half the story. The prices of raw materials are being hammered, but the prices of manufactured goods are not falling so much — and the prices of sophisticated goods and of many services are not falling at all, and in some cases are rising. In other words, the more developed a country’s economy is, the less it is being impacted (so far) by the global slowdown.

This is what economists refer to as ‘the terms of trade’. If the things you import are getting cheaper, but the prices of the things you export are not falling, or are even rising, then the terms of trade have moved in your favour. Israel, as a country with very few natural resources (most of the recently-discovered natural gas is for their economic well-being still undeveloped) , is enjoying a sharp decline in its import bill. Meanwhile, its exports, especially high-tech goods and services, still command high prices.

This economic boost is in addition to the geopolitical benefits that Israel is garnering from the damage inflicted by the oil price crash on the economies of Iran, Iraq and other enemy countries. Let’s pray that this happy state of affairs carries on!

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