Headwinds for the economy as the price of oil skyrockets.
While some put the unrest in the middle east down to a popular yearning for the ability to vote the Muslim Brotherhood and similar groups into power the reason is more prosaic: rising prices, especially food and other basic commodities.
One year corn price chart:
One year wheat:
Not just food:
Importantly for Indonesia, rice, has not quite joined the party, yet, although famed investor Jim Rogers is ‘bullish’ on it, which is a bad sign…
And now oil; three month crude oil futures:
Now above the key $100 level, with some, such as Jim Rogers again, forecasting $150 oil soon.
Background: the 2008 stockmarket crash in the US was preceded by a massive liquidity shortage among large banks; the US Federal Reserve’s response to this was “quantitative easing”, a policy to increase liquidity, basically print more and more dollars, to encourage fearful banks to start lending again, spur on economic activity and prop up the stock market; when liquidity increases, so does inflation, and because the dollar is still the world’s reserve currency, this inflation gets exported all over the globe, resulting in the rising basic commodity prices as above.
Back to oil. ‘Premium’ fuel is subsidised to the tune of about 40% at the pump in Indonesia. The 2010 budget allocated 88.9 trillion rupiah for subsidies, while at this year’s budget the subsidy had to be increased to 95.9 trillion, but this figure was based on an average oil price of $85 per barrel, well below the current level.
Hatta Rajasa, the coordinating minister for the economy, said in late February that a plan to reduce the subsidy had had to be shelved, due to the rising cost of oil, thereby guaranteeing a much higher burden for the state.
In neighbouring Thailand they have a similar issue with fuel subsidies, but seem to be coming to the reverse conclusion as to what to do about it: Thailand may remove oil subsidy as fund runs out
Thailand’s state Oil Fund has fallen to about 7 billion baht ($230 million), the Energy Ministry said on Friday, suggesting the government may soon remove a fuel subsidy
So there is a bind: reduce the subsidy to save money/maintain finances (possible Thai route), or maintain the subsidy to…. lighten the burden of the people/prevent civil unrest (Indonesia).
We shall see which is the wiser policy.
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