Sunday, March 6, 2011

The world should fear a Saudi revolt

By Dennis Morrison, Gleaner Writer

Petrojam's billing prices for 87 and 90 octane gasolene jumped by $2.50 per litre in each case last week, the biggest movement in a single week since prices were liberalised nearly 20 years ago. And what is even worse news for motorists is that oil prices are predicted to continue rising in the short term, at least, if the political turmoil in the Middle East drags on.

A motorist I met at the service station last Thursday had the greatest difficulty understanding the runaway gasolene prices, even when the disruption in oil production in Libya is being offset by increased supplies from other producers. "Why should oil prices have gone up by US$20 per barrel in a couple of months when there is no shortage?" he asked.

Because oil fuels the engine of modern economies, perception of potential disruption in supply tends to have an exaggerated impact on prices as markets try to anticipate shortage. Geopolitical uncertainties, therefore, tend to feed price volatility, as is the case right now. Markets treat gold, a traditional safe haven in times of political and economic crises, in a similar way.

The volatility we are seeing in oil markets is being driven not just by events in Libya and the threat of civil war there, but by speculation that the political 'brush fire' that started in Tunisia and spread to Egypt could sweep the Middle East and North Africa. The US$20 jump in oil prices since January suggests that market watchers have begun to calculate the potential ramifications of the unrest spreading to Saudi Arabia, the giant oil producer in the region and the world's second largest, marginally below Russia.

There is a view that Saudi Arabia is unlikely to see major protests since Saudi culture is against civil disobedience, the king is popular, and demands for political reforms are muted. But demographically, the country is quite similar to other Arab nations now caught in the political cauldron. As in Egypt, people in the 15-25 age group in Saudi Arabia are the biggest bloc of the population, and unemployment among them is more than 30 per cent. This is the age group likely to revolt and join the Facebook revolutionaries.

Welfare benefits

To placate them, the king is disbursing a US$30-billion economic package of welfare benefits, including unemployment insurance, funds for affordable housing, and generous grants for sports and culture. With the backing of the powerful religious establishment and the economic goodies, the regime may be able to maintain calm. Except that the ferment in its majority Shia neighbour of Bahrain could feed discontent in the Shia population in the important oil-producing area of its eastern province.

Conscious of the risks, the Saudis have acted to bolster the regime in Bahrain by providing military reinforcements.

10% of world oil output

Saudi Arabia produces nearly 10 million barrels of oil a day, more than 10 per cent of world output. Libya produces just over 1.5 million barrels per day, less than 2.0 per cent. Just imagine the impact on oil markets if revolution were to break out in Saudi Arabia and disrupt production! The impact on the global economy would be of such a magnitude that the US would possibly intervene militarily. These imponderables are now the preoccupation of risk analysts and are behind the increased risks (higher than Bahrain and Morocco where protests have occurred) that financial markets have attached to Saudi Arabia's debts in recent weeks.

The possibility that the conflict in Libya could turn into a war of attrition will continue to be a factor in keeping oil prices high in the short term. But if it is contained and the Saudi regime is able to ward off any serious spillover from the political turbulence in the rest of the region, prices are likely to come down. In this case, the threat of rising oil prices scuttling the global economic recovery would lessen. And Jamaican motorists, as well as households, would get some relief at the pumps and in our electricity bills.

In the worst-case scenario, Jamaica would be confronting stagflation - no or low growth combined with high inflation. Even with the prices of many domestic food crops coming down to levels that make housewives happy, the pressure from higher costs for a range of imported food items is increasing. Wage increases are being kept tight in the private sector, and most public-sector workers are on a wage freeze, so consumer spending is falling. Hence, businesses are hurting and must contend with rising energy costs.

This is a tough environment in which to frame the upcoming national Budget. More than ever, the highest priority must be to accelerate investment initiatives where conditions are most favourable: the energy sector, where the electricity-generating system must be modernised to service a captive domestic market; agricultural output to supply the local market; tourism projects can be synchronised with market demand in the medium term; and the ICT sector, which still presents growth opportunities.

Dennis Morrison is an economist. Email feedback to

March 6, 2011