Gee, we didn’t see this Coming !!!!!
Well, actually, what the locals are calling the ‘internet intifadah,’ a seismic recipe of:
Youth – 50-70% of populations under 30
Unemployment – 10-30%, depending on age and location
Inflation – Food “consumes” up to 60% of income in some population segments
Inequality – High per capita GDP, but just horrible income distribution
Internet – I get Al Jazeera on my I-pad, and it’s (way) less biased than FOX. Google offers to convert Libyan cell phone calls to Tweets for the World. The fax machine helped to bring down the USSR. This is no different
. …has been building for a couple decades. It seems, to me, that while many in the Outside World expect a messy, disruptive transition to democracy, including sky-high oil prices, that’s a little premature. While anything is possible, the geopolitical analysis of ‘what’s next’ is different for each country – depending on the credibility/power of the military, the (increasing, except for Libya!) willingness of governments – mostly flush with petrodollars – to engage with its citizenry, and acceleration of changes already underway, and democracy is far from the easiest or first stop. The most important oil supplier, Saudi Arabia, is in the middle of a 5 year, $400 billion program to improve education, housing, and employment opportunities for its people, to which the Kingdom added $36 billion in automatic pay raises, additional housing, and conversion of many part time jobs to full time status. It is stunning to observe the process of compromise (so far) in such lawless regions as Yemen, and the abrupt shift of tone in Bahrain, probably the most critical situation outside Saudi. Yes, a lot more reform is afoot, over time, but my gut is that fears of a severe oil dislocation, while real, are overblown although I think Iran is more at risk than Saudi, due to its region-leading population (and relatively low oil reserves per capita for the area). Note that some oil is already re-flowing from Rebel-controlled fields in Libya – a sign that, at $100/bbl, it’s in almost everybody’s interest to produce, if possible.
What’s next? Well, the first task, somewhat like our own financial crisis, is to stabilize the situation, most clearly via enhanced public spending. For what are already some of the most subsidized economies in the world, this amounts to QE2, 3, and 4. The combined Saudi programs amount to $35-$40/barrel in additional social spending (versus 2009), adding to both the fiscal breakeven and incentive to maximize oil revenues. With most other OPEC capacity already tapped out, the underlying pressure to produce and maintain high prices is real. So, too, will be the traditional reluctance to control output if global demand slips, which is a distinct possibility at current prices. From an investment perspective, there has been significant commitment to infrastructure, particularly water, power, and industrial diversification, over the last five years, and plans to continue/accelerate over the next decade. Kuwait, for instance, plans to double its electric generation capacity by 2020. I think even more spending is ahead, benefitting (mostly) US, German, Chinese, and Korean E&C firms. A key is to figure out a way to train and hire each country’s own citizens, which is increasingly a part of the project tenders in, for instance, Saudi, where 90% of jobs are occupied by ex-pats.
Are the oilfields safe? Well, MEES reports, this week, on a presentation (IEF, a producer-consumer conference, in Riyadh) of Saudi Aramco’s new Khourais field development, onstream since 2009. The field produces about a million barrels a day of Arab light (better than Arab heavy, but not as high quality as most of Libya’s shuttered output), on the way to 1.2 million b/d rated capacity, and 1.4-5 million b/d of potential. Aramco has fenced the entire facility, including crash barriers, safeguards every single well, and the entire complex, with a security force of 35,000 – for less than 15% of the Kingdom’s capacity, implying up to 500,000 security personnel just to guard the oilfields. Wow.
Is the volatility over? Probably not. Will it spiral out of control? I don’t know. This could come back to haunt, but it seems that most (but not all!) of the change agents in the region, in addition to outside interests, understand the economic realities. The ‘fairway’ of oil prices could be in the $100-$135 range (Brent). and hoping nobody hits the ball into the rough with more dire consequences ($150-$200) . But demand destruction is also underway and, in particular, a spike has the obviously serious implications for the global economy, with downward pressure on prices under almost any scenario.