Libya Turmoil

This year was roller coaster ride from the beginning. The Middle East was facing an upheaval. Autocratic and corrupt regimes were suddenly facing the spectre of their silent masses chanting slogans and seeking their ouster. This was an unprecedented drama unfolding right in front of our eyes on our tv sets. So far the regimes of Tunisian Zine El Abidine Ben Ali and Hosni Mubarak have been toppled and the heat is turned on to Moamar Qadhafi, who is coming hard on it’s protesting masses. These countries are gifted with natural resources specially oil which makes their economy one of the key pillars of the global economy.

That is exactly why the turmoil in the Middle East could be a nightmare for the fragile global economy. There are many reasons to give the finance managers sleepless nights. First reason is the oil coming from these regions that fuel our energy thirsty economies. We saw a trailer of what the rising oil prices could do to the world in 2008, when oil prices rose from $95 per barrel to $145 within just six months. Though the prices came down very quickly but once the price starts to rise there are many actors who get involved ending up in a vicious cycle of destruction. What I fear now is that the 2008 spike showed how mindset and fast computerised trading can dominate the market for volatile commodities like oil. It is understood that with little change in prices momentum trading kicks in and people rush to profit from the future prices, pushing the prices to new heights in no time. At the end it affects the markets really badly.

In 2008 one of the elements absent now was present, a calm MENA. With rising prices the governments of the region put in place mechanism that worked to ease out the prices in no time. But the same element of stability is threatening the already volatile oil prices. Before this revolutionary fever got to grips oil prices were going up on a slower pace. I even wrote about the prices in last month’s issue. Now with world’s biggest oil producing region going through unrest could put the whole world economic recovery on a tailspin. What we cannot do is predict the future, as I certainly believe elements of surprise can always shock the global economy as Hosni Mubarak’s exit or maybe another regime falling in the region in near future or some other unexpected elements brewing under the surface.

Right now on the surface of it the threat to Algerian presidency, Libyan revolutionary leadership or the catch of catches Saudi monarchy or the Iranian ayatollahs seems to be threatening the economic recovery. But there are many other elements that could derail the economic recovery setting off the precedence of an “oil shock”. Currently Bahrain, Algeria and Libya are struggling to contain the uprising, with Libya using extensive force to quell the protests. Majority of oil industry has foreign workers employed in these countries. Majority of these foreign workers are leaving these countries en masse leaving behind a redundant industry. This would definite affect the oil production in the short and longer run. Just to remind the readers that Algeria and Libya, control nearly 4.5 percent of the world’s oil production, while Iran with its 4.8 percent is an obvious wild card.

On the other hand reducing state control over cities, as it is the case in Libya leaves key installations at the mercy of protestors. This could provide the protestors an opportunity to sabotage these facilities in order to exert pressure on their respective government. As a result this will severely disrupt the oil supply affecting the oil price as it is happening as we speak.

We know that the global economy at the current stage might bear rising oil prices up to 10 or 15 percent. Thinking of more than that send shivers down my spine, many finance managers would faint by the very idea of it.

The current prices if they remain at the same level with all the troubles in mind are bearable. On the other hand Saudis who are always handy to keep the oil prices at a level have recently suggested they’d pump enough oil to keep prices closer to $80. According to experts Saudis can produce up to four million barrels per day in excess to their current production that is roughly equivalent to Algeria plus Libya or Iran’s total production. But what if the noble house of Saud falls prey to this fever of revolution itself? Or these very reassurances could make price increases even more destabilising in case something unforeseen happens.

With Egypt and Bahrain coming back to some sort of normality and Saudi king announcing $34 billion relief package for his masses the signs are increasingly optimistic. Egypt’s interim military rulers have started adopting reforms quickly and their assurance of on time free and fair election and smooth transition to a new government will further boast their country’s shaken economic outlook. But the sooner the deliver the better it would be because investor are not going to wait instead they would start looking towards alternative avenues. Another risk factor attached specifically with Egypt is the smooth operation of the Suez Canal. The canal being a vital source of Egypt’s foreign currency receipts also ensures the supply/movement of crude oil. So far it has been kept open and remained relatively unharmed by the affects of protests.

Yet the element of surprise could come from anywhere as the whole region is facing a level of uncertainty. Egypt’s volatile uprising brought us to face with the fact that the world economy is not out of the woods, and that things we do not anticipate can have a significant negative effect on global markets and risk sentiment.

What we know for sure is that these changes are coming due to economic grievances of MENA region’s oil-exporting nations. It is a situation present in every country more or less. With autocratic regimes ruling from multi decades the situations becomes even worse because the older the regime is the more they become isolated and out of touch from their masses.

So far, there are little affects of the changes on oil markets and world economy. The world economy is at a very vulnerable stage because of the underlying insecurity in countries battling uprisings as well as uncertainty in the countries that have seen regime changes recently. All the major oil producers, whether it is Saudi Arabia, Algeria, Libya or Iran have same types of socioeconomic problems. If any of these countries face an Egyptian-style revolution, that could be the moment economists dread for.

Written by tahir