Energy markets are too dangerous to be used as a political tool
Editor’s Note: The writer is Ali Farid Khwaja, Chairman of KASB KTrade Securities in Pakistan and a Rhodes Scholar from University of Oxford. The article only represents the views of the author and not necessarily of Gwadar Pro.
It’s a tragedy. Humanity just survived its biggest crisis, but with more than 6.5 million lives lost. Yet the memories of this shared tragedy do not seem to be sufficient to lead to create a global spirit of shared community. The pandemic was not even fully over and there a multitude of new crisis threatening humanity. More caused by our own decisions than by nature. Climate change has triggered floods in Pakistan which have displaced more than 33 million people, and the war between Russia and Ukraine has led to exodus of 8 million people as refugees. Millions more across Europe will be threatened by lack of affordable energy this winter. If all of this is not enough, the strengthening of the US dollar threatens the global economy and has already pushed millions below poverty line.
This year, the US dollar is up more than 16% against the basket of other global currencies and is now at a twenty-year high. A shift towards protectionists policies is eroding the gains made from trade and globalization. This has led to a severe disruption to supply chains and a global inflationary super cycle. To deal with this, the US is raising interest rates, which is effectively further exporting US inflation globally. A terrible mixture for a global disaster.
Cracks are quickly appearing in the global markets. Many emerging markets are on the verge of sovereign default. But the tremors are not just in weaker markets. In the UK, the pound slide to an all-time low and the Bank of England had to intervene to bail out the pension market from a sudden collapse. More worryingly, instead of a rational coordinated response, other countries are also seeing rise of right-wing political forces which could end up creating a vicious spiral. Italy now has a far-right Prime Minister, the first since fascist dictator Benito Mussolini.
It is a worrying development. While the developed countries are choosing isolationist policies and electing populists, at the same time, climate change and economic recession would increase the migration of people from the developing countries.
The UK and European countries will be forced to raise interest rates in order to defend their currencies. This could eventually trigger a similar banking crisis as what happened in 2008. A 20% decline in UK house prices could lead to equity hit to the banking sector.
The primary transmission channel through which a stronger US dollar feeds into higher global inflation is energy prices. Consequently, an unintended outcome of the current economic crisis could be that the rest of the world would be forced to develop barter-like agreements for energy trade.
Energy markets are too dangerous to be used as a political tool in geopolitics. Wars should be fought in battlefields. Economic tools of warfare are inhumane, unjust, and hurt all humanity.