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In the 1970s and 80s there were a number of Oil Shocks, where the price of oil shooting up plunged oil-importing Western nations into economic recessions, because their economies were so heavily dependent on oil. The US was so traumatized by these economic shocks that it carefully pursued a multi-decade close alliance with Saudi Arabia to ensure a continuous supply of oil at low price, and sought to preserve that good relationship at any cost, even looking the other way when Saudi Arabia became the biggest funder of international Islamic terrorism and again when Saudi government officials and Saudi citizens participated in and funded the 9/11 terrorist attack on the US.
In the last year, the price of oil has dropped dramatically and this has plunged oil-exporting nations into economic recessions, because their economies are so heavily dependent on oil. eg Oil comprised 95% of Venezuela's exports, and its significant drop in price has plunged them into major recession.
There are two general lessons countries should learn from this history:
1. Specifically with regard to oil: Try not to be too dependent on oil.
Historically, this was impossible, because oil was pretty much the only option for energy. And all modern nations needed energy. But now, with new technology it is possible to use alternative energy sources, and have electric cars etc. So there's major national security and economic security motivations to invest in renewable technology. Getting away from oil is not something that should be done merely because of pollution or global warming, but something that should be done out of strategic national interest.
2. Generally with regard to economies: Try not to be too dependent on any one product, because it introduces a great deal of risk.
Specifically, this is one of the major problems with globalization of trade. One of the ideas in global free market economics is that if one country is particularly good at producing cotton and another particularly good at producing butter, then instead of each producing 50% cotton and 50% butter, they should instead focus on what they're good at and then trade with each other. If one country then produces 95% cotton and the other country 95% butter and they trade, they will be able to increase overall production by maybe 10% or so because each is better at producing their own specialty. This is generally the logic that motivates international free trade agreements like NAFTA, CAFTA, TPP, etc.
But specialization of the national economies introduces a great deal of risk. What happens to the Butter nation when margarine is invented? What happens to the Cotton nation when their country's cotton plantations catch a new strain of cotton mold and their production is wiped out? If each of those countries had a diversified economy, they could cope easily with a hit to one of their sectors of production, because the rest of the economy would carry on fine. But what happens if Butter is 95% of their exports, and the rest of the world decides they now want to buy margarine instead of butter? What happens if oil is 95% of their exports and the price of oil drops by an order of magnitude? The simple answer: Economic collapse, chaos, and poverty.
Too much specialization opens countries to great economic risk. In my own country, historically the products of importance were lamb and wool. Then England, who had been purchasing ~100% of our lamb and wool entered the European Economic Community, and EEC trading restrictions forbid them from buying for us, and our economy collapsed overnight. Today, our export economy heavily focuses on milk products, and a major yearly economic event is the Global Dairy Auction which sets the price of international milk products. A substantial decrease in the price of that good could throw the country into instant recession. As a result, I am very skeptical of the value of international trade agreements that, by virtual of globalizing trade, seek to encourage each country to increasingly specialize production in particular areas, and therefore make every nation more vulnerable to the risk of complete economic collapse should their own specialist product fail for any reason.
In the last year, the price of oil has dropped dramatically and this has plunged oil-exporting nations into economic recessions, because their economies are so heavily dependent on oil. eg Oil comprised 95% of Venezuela's exports, and its significant drop in price has plunged them into major recession.
There are two general lessons countries should learn from this history:
1. Specifically with regard to oil: Try not to be too dependent on oil.
Historically, this was impossible, because oil was pretty much the only option for energy. And all modern nations needed energy. But now, with new technology it is possible to use alternative energy sources, and have electric cars etc. So there's major national security and economic security motivations to invest in renewable technology. Getting away from oil is not something that should be done merely because of pollution or global warming, but something that should be done out of strategic national interest.
2. Generally with regard to economies: Try not to be too dependent on any one product, because it introduces a great deal of risk.
Specifically, this is one of the major problems with globalization of trade. One of the ideas in global free market economics is that if one country is particularly good at producing cotton and another particularly good at producing butter, then instead of each producing 50% cotton and 50% butter, they should instead focus on what they're good at and then trade with each other. If one country then produces 95% cotton and the other country 95% butter and they trade, they will be able to increase overall production by maybe 10% or so because each is better at producing their own specialty. This is generally the logic that motivates international free trade agreements like NAFTA, CAFTA, TPP, etc.
But specialization of the national economies introduces a great deal of risk. What happens to the Butter nation when margarine is invented? What happens to the Cotton nation when their country's cotton plantations catch a new strain of cotton mold and their production is wiped out? If each of those countries had a diversified economy, they could cope easily with a hit to one of their sectors of production, because the rest of the economy would carry on fine. But what happens if Butter is 95% of their exports, and the rest of the world decides they now want to buy margarine instead of butter? What happens if oil is 95% of their exports and the price of oil drops by an order of magnitude? The simple answer: Economic collapse, chaos, and poverty.
Too much specialization opens countries to great economic risk. In my own country, historically the products of importance were lamb and wool. Then England, who had been purchasing ~100% of our lamb and wool entered the European Economic Community, and EEC trading restrictions forbid them from buying for us, and our economy collapsed overnight. Today, our export economy heavily focuses on milk products, and a major yearly economic event is the Global Dairy Auction which sets the price of international milk products. A substantial decrease in the price of that good could throw the country into instant recession. As a result, I am very skeptical of the value of international trade agreements that, by virtual of globalizing trade, seek to encourage each country to increasingly specialize production in particular areas, and therefore make every nation more vulnerable to the risk of complete economic collapse should their own specialist product fail for any reason.
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