Last Thursday this reporter was invited to attend a conversation with outgoing U.S. President George W. Bush, arranged by the American Enterprise Institute, and one of the more striking things he told us was that the decline in the price of oil was the equivalent of a stimulus package of $2,000 for every American family.

Technically, he's right. The collapse of the oil price from $147 per barrel last July to $37 this week has been a great relief. But that is to ignore the damage that was done to the U.S. and global economies by the soaring oil price in the first half of the year.

The dizzying climb in the oil price, fed partly by speculation and partly by overconfidence in China's ability to continue growing at double-digit rates -- thus sucking in ever more oil -- did a great deal of damage as it rose. It contributed directly to two of the three crises of the year: the fuel and the food crises, which combined to worsen the financial crisis.

The oil price fed directly into the spike in food prices, and the shortages and export curbs and subsidies that many developing countries imposed for fear that the food riots of Haiti and Cairo would start to spread.

This will have a long and unpleasant tail. Inspired by high food prices, farmers around the world borrowed money to buy or rent more land and to buy new farm machinery and seeds. Now that food prices have followed oil back down, those farmers are overextended.

In Brazil, combine harvesters are being repossessed as the farmers fail to keep up the payments, and land that was cleared last year is overrun with weeds. It looks as though Brazil's soybean harvest could fall by as much as half, and Argentina's wheat crop might fall even further. Since world food stocks are still unusually low, that suggests more food shortages next year, which will not look as though it is related to the oil price -- but at second- or third-hand, it will be.

The real damage, of course, has been done to those oil exporters that thought high prices were here to stay. Russia, whose state budget was predicated on oil at $90 a barrel, has lost about 30 percent of its financial reserves as the trade balance worsened and the ruble began its sharp decline. Kommersant newspaper reported last week that wage arrears nearly doubled during November, the sharpest such rise in a decade. The planned steady increase of 30 percent in the defense budget looks like an early victim of the Russian crisis.

The real estate bubble in Dubai has deflated, and, battered by the double effect of falling oil prices and OPEC's announced production cuts, the economies of the Gulf states are faltering.

"If oil averages $45 a barrel next year, then I expect to see significant budget deficits in Bahrain, Oman and Saudi Arabia," said Simon Williams, senior economist at HSBC in Dubai. But he added that the large cash reserves built up during the fat years should provide a cushion. Moreover, Saudi Arabia wisely predicated its budget on an oil price of $45 a barrel.

But the markets are not convinced. Consider what has happened to the cost of credit protection on Saudi and Israeli investments. Until the middle of November, investors in Israel consistently paid more, usually an extra 30 or so basis points above the London Interbank Offered Rate. But that changed after Nov. 16. It now costs 236 points above Libor to buy Saudi credit protection, compared with 185 points above Libor for Israel.

Other Islamic countries are in much worse shape. Indonesia, the most populous Islamic country, now pays 800 points above Libor for credit protection. Iran, whose low-quality oil gets only $32 a barrel when West Texas crude gets $37, is now facing 30 percent inflation and a $50 billion budget deficit, and Tehran newspaper headlines last week screamed out the question: "What has the government done with $200 billion in oil revenues?"

Credit protection for Pakistan's sovereign debt is running at 3,000 basis points above Libor, which means that if you have to pay more than 2 percent extra for a Saudi investment, you must pay 30 percent above Libor for Pakistan. That is simply unsustainable, because it means that private investors assume Pakistan is likely to default on its sovereign debt, which is why Pakistan is currently negotiating a rescue package with the International Monetary Fund.

Turkey, although the most broadly developed and soundly based of the Islamic economies and not an oil exporter, is also depending on a bailout from the IMF. Its currency has fallen by 30 percent even against a weak dollar, interest rates are at 20 percent, and the stock market has collapsed, falling by more than 70 percent.

The good news, or rather the only ray of light in the surrounding darkness, is that the fall in the oil price should help Turkey, so long as it can reach a deal with the IMF.

Ironically, one of the few beneficiaries of this wretched year has been the IMF itself, which was facing losses of $294 million this financial year. But the crisis has revived the need for IMF funds, and having approved financial rescue packages for Hungary, Ukraine, Iceland and Latvia in the last two months, the IMF is now expecting interest payments on its loans. It now expects a modest budget surplus of about $11 million.

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