- By Steve LeVine<p> Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory. </p>
Oil and gasoline prices — currently continuing their rise through the roof — are doing so in their role as a mirror on history. We will never look at the Middle East the same way again — contrary to what we generally thought, the region’s monarchs and dictators are all susceptible to the popular will. What one might call the Susceptibility Index is a relative one — the globally crucial petrostates of Saudi Arabia, Qatar, and Kuwait seem comparatively secure. Yet, since so many articles of faith have already been punctured — Mubarak is gone; Qaddafi looks like he will be behind him; the 230-year reign of the al-Khalafis of Bahrain is threatened — we cannot rely on assurances that these geopolitical big wheels are absolutely secure either. And so oil prices are surging for a second day.
Here’s how Helima Croft and Amrita Sen at Barclays Capital sum it up in a note to clients today:
The foundation that has held the region together for the past 30 years has been shaken and the first cracks that appeared in the tectonic plates with the uprising in Tunisia and Egypt is now causing widespread ruptures in the region.
Therefore, the economic models on which the big industrial nations, Wall Street, and the banks are operating will have to be reconfigured to take account of this new risk premium to the global economy. But Croft and Sen go on to say that oil history also shows that one should not fret too much — markets correct themselves, and the flow of energy that feeds the global economy will probably not be damaged. Read on for their thoughts.
Update: I discuss the big oil picture out of Libya and the Middle East this evening on Marketplace.
The oil industry in several countries has often emerged relatively unscathed from long periods of civil war and civil emergencies, most particularly when the geography is helpful and when output takes place offshore or in desert conditions. The most striking African examples of that phenomenon are Algeria and Angola, where the threat to supply was limited even in the case of vicious internal conflicts lasting a decade or more.
Meanwhile, oil traders are as cheerful as larks. Why? Because uncertainty means they can get in the casino, bet big, and earn an entire annual payout or even two in a single week of work. How do oil traders make money in this kind of a market? By betting different angles on the outcome of the turmoil.
Take a look at the two Bloomberg videos below. In the first, we hear the argument for higher prices from Jonathan Barratt, of Commodity Broking Services in Sydney, who says traders are inserting a price premium for the unrest into oil prices. In the second, we have Jason Schenker of Prestige Economics, who says prices may be subdued, and heading lower, depending on events.