Friday, February 25, 2011

NOW we see the folly of our faustian bargain on oil...,


Video - Corny movieline Dune trailer.

The Independent | Commodities markets are telling our leaders something they should have grasped long ago. The price of oil is surging. At one point yesterday, the price of a barrel of crude touched $120 – its highest level since 2008. The commodities trading markets are telling the world something it should have grasped long ago: that the global economy is disastrously over-reliant on energy from the most unstable of regions.

The violent chaos in Libya is the proximate cause of the market jitters. The revolutions in Tunisia and Egypt did not alarm oil traders, but Libya is a significant oil exporter. As Colonel Muammar Gaddafi's regime has imploded, the pumps have stopped. Output has fallen by three-quarters. And when the supply of any commodity suddenly falls, its price generally rises.

The markets are also casting wary eyes in the direction of Saudi Arabia, the world's biggest oil exporter. This week, King Abdullah promised a £22bn financial relief package for his subjects. This is plainly an attempt to pre-empt the outbreak of popular protests occurring in his country of the sort that have been witnessed across the region. The Saudi Arabian oil minister is also suggesting that his country could increase production to make up for the shortfall from Libya.

But the situation is not under the Saudi regime's control. A month ago, Hosni Mubarak in Egypt and Muammar Gaddafi in Libya looked entirely secure. Now the first has been forced to resign and the sun has almost set on the regime of the second (although there is no telling how much damage Gaddafi could do on the way out). Anyone who asserts that the same could not happen in Saudi Arabia has few grounds for their confidence. King Abdullah certainly has more resources with which to buy off discontent, but it is impossible to say how effective this will be. When people have the scent of freedom in their nostrils, they can be impossible to deter. The markets certainly understand this.

The knock-on effects of a spike in oil prices threaten to be painful. The sudden jump in energy costs could derail the recovery from the economic crash of three years ago. Britain's inflation is already double the Bank of England's 2 per cent target. If the oil price remains at these levels, it will feed through to prices and the Bank will feel no alternative but to raise interest rates, pushing up the cost of borrowing and undermining consumer confidence. But other countries would be just as badly damaged by an oil price shock. Even the likes of China and India would struggle.

The world is reaping the consequences of bad geopolitical decisions going back decades. After the Second World War, the West entered into a Faustian bargain with autocratic Middle Eastern regimes. We would buy their oil exports and turn a blind eye to the repression of their populations. In return, they would buy Western-manufactured weapons and luxury goods. China has made a similar bargain with repressive regimes more recently. But the Arab revolutions are upsetting those deals.