Arab rulers unable to exploit oil power
Saturday, 14 May 2011
Gousal Azam
The Arab world is luckier in the sense that it has one language and one major religion i.e., Islam. They are the luckiest in the sense that they are blessed with vast reserves of fuel oil, which has unnerving ability to destablise the world economy. The Middle East alone has often provided the spark because of geopolitics and geology. The Arab oil embargo of 1973, the Iranian Revolution in 1978-79 and Saddam Hussain's invasion of Kuwait in 1990 showed how they could wreak havoc on the world economy. Thus, the upheaval which has engulfed the Middle East is discerned a dark cloud on an otherwise bright horizon for the global economy. On empirical observation, it may be safely said that an oil shock has the ability to short-circuit the growth of world economy, as oil has the ubiquity and relative insensitivity of demand because of the fear factor. The Middle East produces 30 per cent of world's oil and 5.0 per cent is produced by North Africa. Libya's turmoil indicates that its continuity can disrupt oil supply. Libya's turmoil has halved its oil output, as foreign workers flee and the country stands fragmented. The spread of unrest across the region threatens wider disruption. The market reaction has not been sharp, rather modest. The Brent crude oil price jumped 15 per cent to US$ 120 a barrel on February 24. But the promise of additional production by Saudi Arabia knocked down the price again. It was $116 again on March 2, some 20 per cent higher than the beginning of the year and well below the peaks of 2008. Most economists expect that the global growth may slow because of the rise in oil price, but not so slow that may jeopardise the rich world's recovery. Economists' expectation involves two big risks. One is supply disruption or even the fear of it can push the oil price soaring. The other is that dearer oil could fuel inflation and that might attract a monetary clampdown that throttles recovery. Shocks to supply of oil have been minimal so far. Libya's upheaval has reduced oil output by a mere 1.0 per cent. In 1973, this was around 7.5 per cent. Libya used to export some 1.4 million barrel a day or about 2.0 per cent of the world's needs. Because of the previous oil shocks, today's oil market has plenty of buffers. Governments have stockpiles, which they did not have in 1973. Commercial oil stocks are more ample than they were when prices peaked in 2008. Saudi Arabia is termed to be the central bank of oil market. Technically, it has enough spare capacity to replace Libya, Algeria and a clutch of other small producers. The Saudis are in a position to pump additional oil to save the world from the turmoil. However, the apprehension of more disruption cannot be ruled out. The oil industry is extremely complex. Right sort of oil to the right place at the right time is crucial. And in Saudi Arabia, a kingdom, there exist many of the characteristics that have fuelled unrest elsewhere among an army of disillusioned youths. Nonetheless, spending $36 billion so far on buying off dissent, the repressive regime faces demand for reforms. Thus, a whiff of instability would spread panic in the oil market. The world economy is growing. Naturally, oil demand is far outpacing increase in readily available oil supply. So any apprehension about the inability of the Middle East to supply the expected quantum of oil for reasons beyond its control will accelerate a price rise. There is a feeling of comfort that the world economy is less vulnerable to damage from higher oil prices than it was in the 1970s. Global output is less oil sensitive. Inflation is lower and wages are much less likely to follow energy induced price rise. Dearer oil still implies a transfer from oil consumers to oil producers and as the latter tend to save more spells a drop in global demand. Market researchers predict that a 10 per cent increase in the price of oil will cut a quarter of a percentage point of global growth. Current growth of the world economy at 4.5 per cent suggests that the oil price would need to leap probably above its 2008 peak of almost $150 a barrel, to fuel the recovery. It is needless to say that the American economy is vulnerable to increase in oil price, because of its addiction to oil (and light taxation of it). Yet, inflation is extremely low and the economy has a number of slacks. This gives scope to the central bank to ignore sudden jump in the oil price. By contrast, fuel is taxed more heavily in Europe. As such, effects of the dearer oil are smaller. This leads the economists to apprehend that the central bankers are more worried about rising prices, hence the fear that they could take pre-emptive action too far, and push Europe's still fragile economies back into recession. This is more so because of NATO's involvement in the Middle East upheaval. Many governments in emerging markets have tried to mitigate inflation and reduce popular anger by subsidising prices of both food and fuel. It dulls the consumers' sensitivity, but enhances government concern. Danger lurks in the Middle East where subsidies on both food and oil are omnipresent and where leaders are increasing them to quell unrest. In many countries dearer oil and political uncertainties are feeding each other. Short term prospects of the world economy are thus shakier than many apprehend. The 2011 oil shock may again transform the world economy like 1970s. But the extent of the cost will depend on the politicians' handling of the world affairs. Having such a powerful instrument in the hands of the Arab rulers, they are not being able to use it in their favour. Blessed with one religion and one language, they fail to forge unity for the greater cause of the Arabs and people who are fighting for their survival and homeland. The hope for Arab or Muslim unity rests on democracy for which there are unrest. It has become a cause of concern for Israel which has been wooing the capitalist western world so that they replace the Arab despots by their stooges like in Afghanistan and Iraq. The writer is ex-secretary general of the Bangladesh Institute of Bankers
The Arab world is luckier in the sense that it has one language and one major religion i.e., Islam. They are the luckiest in the sense that they are blessed with vast reserves of fuel oil, which has unnerving ability to destablise the world economy. The Middle East alone has often provided the spark because of geopolitics and geology. The Arab oil embargo of 1973, the Iranian Revolution in 1978-79 and Saddam Hussain's invasion of Kuwait in 1990 showed how they could wreak havoc on the world economy. Thus, the upheaval which has engulfed the Middle East is discerned a dark cloud on an otherwise bright horizon for the global economy. On empirical observation, it may be safely said that an oil shock has the ability to short-circuit the growth of world economy, as oil has the ubiquity and relative insensitivity of demand because of the fear factor. The Middle East produces 30 per cent of world's oil and 5.0 per cent is produced by North Africa. Libya's turmoil indicates that its continuity can disrupt oil supply. Libya's turmoil has halved its oil output, as foreign workers flee and the country stands fragmented. The spread of unrest across the region threatens wider disruption. The market reaction has not been sharp, rather modest. The Brent crude oil price jumped 15 per cent to US$ 120 a barrel on February 24. But the promise of additional production by Saudi Arabia knocked down the price again. It was $116 again on March 2, some 20 per cent higher than the beginning of the year and well below the peaks of 2008. Most economists expect that the global growth may slow because of the rise in oil price, but not so slow that may jeopardise the rich world's recovery. Economists' expectation involves two big risks. One is supply disruption or even the fear of it can push the oil price soaring. The other is that dearer oil could fuel inflation and that might attract a monetary clampdown that throttles recovery. Shocks to supply of oil have been minimal so far. Libya's upheaval has reduced oil output by a mere 1.0 per cent. In 1973, this was around 7.5 per cent. Libya used to export some 1.4 million barrel a day or about 2.0 per cent of the world's needs. Because of the previous oil shocks, today's oil market has plenty of buffers. Governments have stockpiles, which they did not have in 1973. Commercial oil stocks are more ample than they were when prices peaked in 2008. Saudi Arabia is termed to be the central bank of oil market. Technically, it has enough spare capacity to replace Libya, Algeria and a clutch of other small producers. The Saudis are in a position to pump additional oil to save the world from the turmoil. However, the apprehension of more disruption cannot be ruled out. The oil industry is extremely complex. Right sort of oil to the right place at the right time is crucial. And in Saudi Arabia, a kingdom, there exist many of the characteristics that have fuelled unrest elsewhere among an army of disillusioned youths. Nonetheless, spending $36 billion so far on buying off dissent, the repressive regime faces demand for reforms. Thus, a whiff of instability would spread panic in the oil market. The world economy is growing. Naturally, oil demand is far outpacing increase in readily available oil supply. So any apprehension about the inability of the Middle East to supply the expected quantum of oil for reasons beyond its control will accelerate a price rise. There is a feeling of comfort that the world economy is less vulnerable to damage from higher oil prices than it was in the 1970s. Global output is less oil sensitive. Inflation is lower and wages are much less likely to follow energy induced price rise. Dearer oil still implies a transfer from oil consumers to oil producers and as the latter tend to save more spells a drop in global demand. Market researchers predict that a 10 per cent increase in the price of oil will cut a quarter of a percentage point of global growth. Current growth of the world economy at 4.5 per cent suggests that the oil price would need to leap probably above its 2008 peak of almost $150 a barrel, to fuel the recovery. It is needless to say that the American economy is vulnerable to increase in oil price, because of its addiction to oil (and light taxation of it). Yet, inflation is extremely low and the economy has a number of slacks. This gives scope to the central bank to ignore sudden jump in the oil price. By contrast, fuel is taxed more heavily in Europe. As such, effects of the dearer oil are smaller. This leads the economists to apprehend that the central bankers are more worried about rising prices, hence the fear that they could take pre-emptive action too far, and push Europe's still fragile economies back into recession. This is more so because of NATO's involvement in the Middle East upheaval. Many governments in emerging markets have tried to mitigate inflation and reduce popular anger by subsidising prices of both food and fuel. It dulls the consumers' sensitivity, but enhances government concern. Danger lurks in the Middle East where subsidies on both food and oil are omnipresent and where leaders are increasing them to quell unrest. In many countries dearer oil and political uncertainties are feeding each other. Short term prospects of the world economy are thus shakier than many apprehend. The 2011 oil shock may again transform the world economy like 1970s. But the extent of the cost will depend on the politicians' handling of the world affairs. Having such a powerful instrument in the hands of the Arab rulers, they are not being able to use it in their favour. Blessed with one religion and one language, they fail to forge unity for the greater cause of the Arabs and people who are fighting for their survival and homeland. The hope for Arab or Muslim unity rests on democracy for which there are unrest. It has become a cause of concern for Israel which has been wooing the capitalist western world so that they replace the Arab despots by their stooges like in Afghanistan and Iraq. The writer is ex-secretary general of the Bangladesh Institute of Bankers