In the past few weeks we’ve seen revolutions spread throughout a handful of countries in the Middle East. We’ve seen the price of oil spike as Libya (the 15th largest oil producing nation) sits on the verge of civil war.
Today we found out that 50% of oil production in Libya is now offline, pushing crude prices ever higher.
Interestingly, many of the revolutions have been spawned on facebook and other social networking sites. You may recall that Egypt unsuccessfully attempted to block all such sites prior to the overthrowing of the Mubarak regime. With that in mind we turn to a troubling new development in Saudi Arabia, the largest oil producer in the world with production over 5 times that of Libya:
Hard to say just how much traction this movement will garner, but it would be unwise to underestimate how quickly the now invigorated populace in these countries can unify around a cause. And if they do, the repercussions on the global economy will be significant to say the least.
Interestingly, Nomura published a report suggesting that if just Libya and Algeria (combined they are responsible for less than half the production of Saudi Arabia) were to halt production, oil prices would touch $220 a barrel.
While rising oil prices would absolutely benefit a small portion of the Canadian population centred in the West, it is a full blown drain on consumer spending which drives GDP growth to the tune of 65%. Discretionary income is eroded by higher oil prices and higher food prices most significantly as 1500 litres of fossil fuels are involved in the production and transportation of the food consumed by the average Canadian in a year. As this discretionary income evaporates, so too does a portion of consumer spending.
The threat of higher energy prices to the global economy has not been lost on the likes of the International Energy Agency, the Bank of Canada and several other organizations:
Geopolitical tensions may rise
Also worth noting is the fact that several ‘moderate’ governments have toppled or are set to be toppled to be replaced by God knows who. With the entire Middle East a powder keg to begin with, it bears considering what the political consequences will be of the new regime changes as the unrest contagion spreads. As one simple example, the new military-ruled regime in Egypt has allowed passage of Iranian warships through the Suez for the first time since 1979, a move condemned by Israel. Is this a sign of the times?
As John succinctly put it in a comment earlier today, “Make no mistake. What is going on today, in countries many of us had to Google just to figure out where they are, could make all our deliberations about the movement of house prices moot, and in very short order indeed.”
Watch this all with a keen eye!