Be careful what you wish for. After an ambiguous start, Western leaders have broadly welcomed the wave of protest and revolutions sweeping North Africa and parts of theMiddle East. But beneath the words of encouragement about people taking charge of their own destiny, there is a growing and vital concern – the security of our oil and gas supplies.
The West’s complicity in supporting the autocratic regimes that characterise many of the big oil-exporting nations is in part explained by the fact that, whatever their sins, they did at least seem to provide stability in the energy markets. That stability, however, has been thrown up in the air by the wave of protest sweeping the region.
Initially, it was assumed that there was a difference between oil-poor Arab nations such asTunisia and Egypt, where the uprisings have been as much about living standards as anything else, and the much richer Gulf states. That theory was swiftly proved wrong.
In Saudi Arabia, even King Abdullah’s panicky decision to order another multi-billion-dollar splurge of spending on education, healthcare and infrastructure may not be enough to buy off the opposition. People seem to want something more precious than money: freedom.
Whatever happens, speculation about the possibility of major interruptions in supply has sent the already perky oil price bounding higher. At one point yesterday, Brent crude hit $120 a barrel, which in real terms is approaching the sort of peaks we saw in the 1970s.
That’s making policymakers decidedly jumpy. Never mind the effect on inflation, which is already elevated, and the consequent implications for interest rates – by absorbing money which would normally be spent on other things, high oil prices have powerfully negative consequences for demand. Each of the last five global recessions has been preceded by a sharp spike in oil prices. Are we about to see the same thing happen again?
Everyone has been so focused on buttressing the banking system against further catastrophe that they seem to have forgotten about the continued power of oil to shock. Analysts have polarised into two distinct camps – the alarmist and the broadly sanguine, with little room for argument in between.
Those of a sanguine disposition point to the fact that, although Libya is an important producer, it represents less than 2 per cent of global output. Even if all production were suddenly to cease, the Saudis and other producers should be able to fill the gap from their ample reserves of spare capacity.
This, of course, assumes that the Saudis do indeed possess such spare capacity (many believe they don’t) and that it remains largely unaffected by the unrest. If Saudi falls, then the oil price will go through the roof, and probably stay there for a considerable length of time. That’s the alarmist scenario – and it seems more likely by the day.
Since the oil price shocks of the 1970s, Western economies have very considerably reduced their “energy intensity”, the amount of energy they use for any given unit of economic output. This, in turn, has limited their vulnerability to oil price shocks.
One positive effect of high prices is that they encourage this process. After each recession, the gas guzzlers eventually return to American highways, but always in smaller numbers than before. Most nations are also taking steps to insulate themselves from these shocks by developing alternative sources of energy. If oil consumption per head in the US were to fall to European levels, it would reduce world demand by a quantity approximately equal to Saudi’s entire output.
But these things take time. And while energy intensity is falling in the West, it’s surging in the developing world. Technology transfer ought to mean that emerging markets such asChina will reach peak energy intensity at a much earlier stage of their development than the industrial pioneers of the West did – but even so, the peak is still some decades off, and in the meantime demand will keep on growing.
Most models that predict the effect of rising oil prices on economic output have always struck me as fairly meaningless. To say that for every $10 the price increases, 0.5 per cent gets knocked off global GDP, doesn’t tell you much – what matters is the speed with which prices rise and the time they stay high. The damage to confidence caused by a fast-rising oil price tends to have a much greater impact on demand, particularly in the US, where the price of petrol is a key determinant of overall spending.
After a very rapid increase, of the sort we’ve seen in the past year, there comes a point when consumers collectively decide to go on strike and stop spending. We are, I fear, perilously close to that tipping point. With advanced economies still struggling to emerge from the financial crisis, another oil price shock is just what we don’t need right. So now, everything depends on Saudi Arabia.
If it succumbs to the contagion, or fails to compensate for lost production in Libya by boosting its output, then we may have to wave the global recovery goodbye.
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