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  • Mathieu Provencher

Economics upside-down

Hey People! I have a nice new topic for all my favorite people (and all the others too)! This is very relevant to your good friend Maduro (the clown currently running Venezuela).

The price of crude oil decreased substantially lately (it is the lowest it has been in many years). Oil tends to be less expensive when there is stability in producing nations, mainly the middle-east, and when the world economies slow down.

We have seen the exact opposite lately... there are violent conflicts in the middle-east right now (look at Iraq) and the USA is recovering very nicely, even growing fairly fast. What is going on here? Is Economics theory all wrong? (I'll give you a hint: it's not)

Although we have supply problems in the middle-east (and potentially in Russia for natural gas), there is a supply boost from the USA with their shale oil and gas that compensates for the loss (making supply problems much smaller). Also, although the USA is growing nicely, the rest of the world is expected to slow down and even shrink (not Canada of course). Europe is expected to go in a recession if we believe the IMF, which can sometimes-perhaps-not-impossibly be somewhat right sometimes.

The USA gaining strength compared to the rest of the world will have quite a few impacts on Peru. If that trend continues, we can expect a weakening of mineral prices (particularly gold) and perhaps a significant drop in Foreign Investments. We could see the end of QE even, which would be a great thing in my opinion.

First of all, Everyone should avoid the Venezuelan way, it just never worked, does not work, and will never work... it's just plain stupid. I am referring here to the populist policies with no economic justification other than getting on the good side of poor households (Argentina is doing the same, failing miserably also... as expected).

Now, for shale oil and gas... that's a different question. It seems to me that this new technology is still quite risky on environmental and even social grounds (no pun intended... well maybe a bit). The practice is still too young for us to really understand its impacts, positives and negatives, and I would not recommend that any country launches themselves in it at the moment.

However, there is something more important here: the Dutch Disease. Countries with abundant (or valuable, or both) natural resources have the risk of focusing on these resources at the expense of other sectors of the economy. This risk may be particularly important for small countries, like Peru (unlike the USA). In this sense, I would absolutely urge Peru to avoid the type of "specialisation" of economic activity that Venezuela is doing (oil revenues are very important for the government) but I would also urge you to avoid replacing your mineral dependence for shale oil and gas dependence.

Peru is in a good strategic location, has diverse resources, innovative people (although mainly focused on the short-term I must say), and a very low debt-to-GDP ratio... Peru could really develop long-lasting economic activities with high value added instead of selling yellow rocks to the rest of the world. That would decrease your dependence on external shocks AND increase your resistance against internal shocks.

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