Jamaican Student Saw Oil Crisis Coming Two Years Before It Occurred — Research
The 1990 oil shock, which lasted nine months and contributed to the early-1990s recession, may have been predicted by a top Jamaican student, two years before the spike occurred.
Joe Issa, an economics and accounting major at College of the Holy Cross in the USA and the London School of Economics and Political Science (LSE) in the UK, made the prediction during his valedictorian speech for the class of ’88.
In 1987, he had spent a year at LSE where he became president of the Afro-Caribbean Society, which speaks on issues affecting humankind especially dictatorships and wars around the world, especially in Africa and the volatile Middle East, where the conflict which caused the 1990 oil crisis occurred.
Back at Holy Cross, international conflicts and other topics found space on the pages in an economic and political journal Issa founded, and which, it is believed provided the inspiration and narrative for much of his 1988 speech and in particular the prediction.
Economic fallouts as pre-conditions to oil crisis
“We are even looking at another oil crisis in 1990,” Issa told the audience, after outlining a string of domestic and international fallouts, including a faltering US economy saddled with both domestic and international debt.
He explained that US consumers save little and prefer to utilize master card’s 30-day credit, while the country’s international debtors, such as Brazil and Mexico, cannot pay back even the interest on their loans.
At the same time, according to Wikipedia, Iraq was also experiencing financial difficulties and couldn’t pay back its loans.
What led to the oil shock?
According to reports, the invasion of Kuwait by Iraq could have been triggered by one or a combination of factors, particularly financial pressures — a factor which Issa highlighted just before predicting the next oil crisis and in a sequence analysts suggest was not by accident, but deliberately done to show a correlation.
At the same time that Issa was highlighting financial pressures in the Americas in his 1988 speech, Iraq was experiencing its own difficulties with low oil prices and blamed Kuwait.
“Iraq felt Kuwait was overproducing oil, lowering prices and hurting Iraqi oil profits in a time of financial stress,” said Wikipedia.
To add to that, Iraq owed Kuwait some US$14 billion of outstanding debt which it could not pay for, on money borrowed, presumably to fight the war with Iran, in 1980 to 1988.
Therefore, should Iraq succeed in occupying Kuwait, it would have achieved two financial objectives — getting rid of the debt and having greater control of the price of its oil, as well as Kuwaiti oil.
Also in the mix is a 1988 initiative by the US Federal Reserve, targeting the rapid inflation of the 1980s. The premise was that by raising interest rates and lowering growth expectations, this would create greater price stability.
Whether or not Saddam Hussein’s Iraq, a staunch enemy of the US, new this, the August invasion of Kuwait, a staunch ally of the US, was seen as a threat to the price stability the Fed sought.
Economic impact of oil shock
Although the 1990 oil crisis was not as long and extreme as those of 1973–1974 and 1979–1980, it still contributed to the early-1990s recession, which continued into 1991 despite falling oil prices to previous levels.
Oil prices began to fall, following the easing of concerns over long-term oil supplies when the US-led coalition started to make gains over Iraq.
But the damaged had been done. The average monthly price of oil had increased from US$17 per barrel in July 1990, a month before the war started, to US$36 per barrel in October, reaching a peak of US$46 per barrel. The war lasted nine months.
Oil plays a central role as an intermediate input in the production process, so when its price rises, this represents a loss in terms of trade and a fall in real income for countries that import the fossil fuel.
In most industrial countries, factories can’t afford the rise in fuel cost so production is curtailed or restructured, sending many workers home.
The inflation rate will rise, as businesses pass their costs onto customers, with higher product prices. Interest rates will also be higher during a recession, as banks become more protective of shareholders funds.