New decade

People have been rioting in the streets of Bolivia since Christmas Day. The reason for this is the doubling of fuel pump prices resulting from the decision of government to withdraw subsidies for the product.

Fuel prices in Bolivia were kept artificially low by the leftist government of Evo Morales as a key article of faith in his program of government. But the subsidies spent to maintain artificial fuel pump prices now threatens to eat up the poor country’s entire national budget and plunge it deeper into debt.

Bolivia’s poor, who bought into the vision of some quasi-socialist utopia under Morales, are terribly disappointed. But that peddled utopia cannot ignore the harsh realities of the market. Either the subsidies are withdrawn or Bolivia falls into financial collapse.

With fuel prices kept artificially low, a large number of Bolivians actually made a living from smuggling oil products across borders to neighboring countries where oil sells at the product’s real price. If Bolivia maintained artificial prices for oil, its entire economy will be bankrupted, with a large part of the subsidies enjoyed by people in neighboring countries benefitting from the oil smuggling trade.

Even Iran, medieval as its political system might be, decided last month to withdraw subsidies for oil products. Even the mullahs understood the system could not be sustained for too long. Iran was spending more subsidizing oil that it was making exporting crude. Cheap fuel has created a society of road maniacs driving gas-guzzlers.

This month, Britain will impose additional taxes and levies on fuel — even as Britons are today paying almost twice what Americans pay for their fuel. For their part, Americans are expected to pay $5 per gallon of gasoline. That will surely inflict pain on this car-crazy society.

All the oil-related events mentioned above provide us a glimpse of the challenges in the new decade we begin today.

It is, after all, not just a new year but a new decade that commences today.

The first decade of the 21st century was bracketed by the Asian financial contagion at its start and the subprime financial chaos that precipitated a severe recession at its close. Both events were the outcomes of sheer lack of discipline in the markets as financial products evolved much faster than regulatory policies and institutions.

At the root of the subprime crisis in the US that precipitated worldwide financial chaos is the unfounded public expectation that property prices will consistently rise over time. Individuals took out mortgages they could barely afford, expecting to sell their properties at a profit when things got tight. Because property mortgages were seen as investments, American consumers did not bother to save. It is not only the US government that has accumulated a large debt overhang; American citizens have a negative savings rate as well.

The mortgages were, in turn, transformed into all sorts of financial products sold to investors worldwide. No one imagined a significant default rate — if property prices remained on the uptrend. When property prices began to fall, the financial system unraveled.

Global recession pushed down demand for oil. The price spiral we saw in the preceding period abruptly reversed — for the moment.

As soon as global recovery gained traction this year, oil prices resumed its uptrend. Over the last two months, oil prices spiked once more. Underpinning this trend is the fact that global oil demand has equaled supply. Any economic recovery, with the rising oil demand this implies, will cause sharp increases in the price of a nonrenewable resource.

The new decade will be shaped principally by the fact that oil will no longer be cheap and credit will not be easy.

Economic growth, especially in the mature economies, will have to eked out by enforcing more discipline in consumption and public expenditure. Nations can no longer expect to borrow endlessly to cover deficits. They will have to match their expenditure with revenues and cut back of avoidable subsidies. This is the story in Greece and Ireland and everywhere else where public debt has become unsustainable.

Energy, too, will have to be consumed with greater prudence. The fact stares us in the face: the supply of oil is finite.

It is fashionable to talk today about shifting to renewable energy. The fact is, we do not yet have the technology that will ensure reliable as well as renewable energy. There is a strong suppliers’ lobby pushing international financial institutions to lend money to developing economies for renewable energy projects.

Although fashionable, renewable generation sources will raise the price of energy over four times the cost of generating energy conventionally. In our economy, where power costs are among the highest, renewable energy might be a cure more fatal than the disease.

With less headroom for budget deficits, governments everywhere will not only have to cut back on subsidies. They will eventually be forced to cut back on public services — or raise taxes dramatically. Either way, they will invite confrontation with their own citizens.

Governments will have no choice but to try to do more with less. Bureaucracies and processes will need dramatic reengineering. Those able to accomplish the reinvention of government ahead of the others will prosper. Those who lag behind in reengineering government will fail their people.

Obviously, leaders in this new decade must be well-versed and decisive, innovative and industrious, visionary and hard-working. They cannot expect to get by peddling their citizens shallow aphorisms, false utopias or ad hoc governance.

For our own sake, we hope we have the leaders we need to guide us through a more challenging new decade. We must demand from them the quality of leadership our nation needs to thrive in an age of more evident scarcity.