The pain spreads

We may be headed for the first truly global recession.  The Wall Street Journal notes that Asia's dependence on exports is about to come back and bite them in the . . . current account surplus:

The meltdown in Asian stock prices on Friday stemmed in part from
the growing realization that the heavy reliance on exports that has
driven Asia's powerful growth is now turning into the its worst enemy.

The evaporation of consumer spending in the U.S. and Europe is
starting to hit deeply at Asian manufacturing titans that thrive on
sales to the rest of the world, and that are now rapidly scaling down
their capital spending.

On Friday, after reporting a 44% third quarter profit drop, South Korea's Samsung Electronics
Co. said it will reduce memory chip capital expenditure this year by an
unspecified amount due to weak market conditions, and may also lower
its overall capital-spending plans for next year in line with the weak
business environment. Japan's Sony
Corp. Thursday lowered its outlook for its fiscal year ending March
2009 and warned that the deteriorating business climate could force the
company to scale back capital spending, close plants and cut jobs to
shore up profit. The news sent Sony shares plunging 14% in Tokyo on

The worsening gloom in Asia comes despite the fact that on the whole
the region -- sight of a major economic meltdown a decade ago -- today
has limited exposure to the debt that is now causing havoc with the
financial systems of the U.S. and Europe. While some countries, notably
South Korea, are reliant on funding through international credit
markets that have dried up in recent months, Asia's banks haven't
invested heavily in mortgage-debt derivatives or other products that
have poisoned the balance sheets of their Western counterparts.

But in the last 10 years, Asia has doubled down with another bet on
exports as an economic engine, at the expense of developing a domestic
consumer market that many economists believe will insure more
sustainable growth. Exports accounted for 46.7% of gross domestic
product in Asia, excluding Japan, in 2007. That is a jump of 11
percentage points more than the comparable figure in 1998, during the
last economic crisis in the region, notes Stephen Roach, Morgan
Stanley's Asia chairman. In other words, Asia is now 30% more reliant
on exports than it was less than a decade ago.

Asia "may not be levered in the strict sense of reliance on global
credit," says Mr. Roach. "But it's certainly levered to the global

Meanwhile, the New York Times reports that Iran and Venezuela are panicking about the falling price of oil, which traded as low as $62.57 this morning despite a sizeable cut in OPEC production:

As the lowest cost producer, Saudi Arabia can afford to let prices fall for a while without hurting its budget. Most analysts estimate the Saudis could live with oil between $55 and $65 a barrel. Other producers are not so fortunate. Nigeria's oil minister said his country would be more comfortable with $80, Qatar has set a range of $70 to $90, and Iran's representative has said that anything below $90 a barrel would hurt some producers.

Some analysts believe that Venezuela's president, Hugo Chávez, needs $100 a barrel to pay for his expensive social programs.

In fact, the traditional "price hawks" -- Iran, Venezuela, and Libya -- are in a state of near panic at the drop in price, which few experts had anticipated even a few months ago.

Domestically, Iran's president, Mahmoud Ahmadinejad, who was elected on a populist platform to share the country's oil wealth, faces a tough economy that could jeopardize his re-election next year.

Iran's oil minister, Gholam Hossein Nozari, set the bar high when he arrived in Vienna on Thursday, calling for OPEC to slash its production by 2 million barrels a day, more than 6 percent of the group's output. His call was echoed by Rafael Ramírez, the Venezuelan energy minister, who said the group should make a "substantial" cut, while the representative from Libya called for a "huge" reduction in the cartel's output.

At the same time, some analysts warn that the current decline in prices could set the stage for a new energy shock when the economy and demand eventually pick up.

Energy executives have said that as prices fall, some projects will be delayed, and oil companies will most likely curtail investments. This will probably slow the growth in oil supplies, which had already been sluggish in recent years.

Venezuela has, as I've been noting for some time, set itself up for a disaster.  Venezuelan crude, while plentiful, is difficult to both extract and refine; the state owned oil company needs to maintain a very high level of investment, relative to revenues, just to keep the production steady.  Even more is needed to increase it.  For years, Chavez has been diverting investment funds into social spending.  This has created a popular belief that he (and Kirchner in Argentina) had found an alternative to market capitalism.

Of course, all this was funded by commodity booms caused by rising demand in the capitalist world.  Now that capitalism is hurting, these economies are hurting even worse--they tend to import most everything besides the commodities they produce, so a fall in oil prices means a corresponding fall in consumption.  It's as if economic dependence on commodities were a highly leveraged bet on world GDP growth.

Because of the diverted investment, oil production in Venezuela has declined sharply since Chavez's election--the coup was, in part, a revolt of executives at the state-owned oil company, who were concerned that he was running it into the ground.

If prices fall back further, Venezolanos will actually be worse off than they were before the spending.  Cutting down on the world's supply--making economic growth even weaker--is at best a dodgy bet.