Resource Curse: Is Africa the New Middle East?

50/55 (c.91%) of states in #Africa now producing or prospecting for oil; commercial secrecy + corruption 'the rule' http://t.co/q9H0dD7G

— ッ MEDIOLANA® EDU (@Mediolana) September 2, 2012

The Real Oil Shock: Dirty, Scarce Fuel Still Key Economic Determinant

Last Friday, while the world concerned itself with matters such as the contents of a mobile telephone belonging to the courier of the deceased ‘CEO’ of Al Qaeda and the ‘second chance tickets‘ applications process for the 2012 Olympics, we at Mediolana were instead transfixed by a story run by that rarest of things, a newspaper of record: the Financial Times reported on the move of the International Energy Agency (‘IEA’) to release 60m barrels of oil from its emergency strategic stocks during July 2011 to compensate for the loss from the market of Libyan output since that nation’s descent into a surreal international war. The 60m barrels are to be supplied in the ratio of 50:30:20 by the US, Europe, and Japan and South Korea.

The International Energy Agency is made up of 28 member states, all of which also belong to the Organisation for Economic Co-operation and Development (‘OECD’), the elite grouping of the ‘traditional’ global economy which includes countries such as the United States, Japan, the United Kingdom, Germany and France; the measure detailed above is only the third occasion since the IEA’s 1974 inception that it has released oil, and the first since 1991.

The more prescient of our readers might already have realised why Mediolana is staring at this development in much the same way as dot-com investors gawped at the paper valuation of their shares during the course of 13th March 2000:

1. Libya’s contribution to the world oil market in ‘normal’ circumstances is less than 2%. Yet disruption in what should be a peripheral energy supplier has engendered the kind of response usually reserved for events of huge geopolitical and energy market significance, such as the First Gulf War. The IEA – and by logical extension, the OECD – must therefore be extraordinarily exposed to any sustained upward movement in oil prices.

2. Any instability in a country which is actually an important player in the global oil market – Saudi Arabia, for example, which was estimated in 2009 to hold 18% of all proven oil reserves – could shatter any contingency plans that the IEA has in place.

Libya and OPEC: the beginning of the end of cheap oil?

The ultimate consequences of the still-unfolding events in Libya remain to be seen, but while the world’s eyes are focused on the spectacle of a courageous revolution against a dictator whose probable final days at the helm of his country have been characterised by a mixture of industrial bloodletting and surreal performance art, two developments which have barely flickered on the global consciousness could yet prove to be the most profound results of the Libyan uprising:

1. On 22nd February 2011, the price of Brent crude oil rose to US$108 per barrel; six days later, Al Jazeera’s Hoda Abdel-Hamid reported that the opposition authorities now in control of eastern Libya ‘are scrutinising contracts with the intent to cancel any that they deem to be illegal‘;

2. On 25th February 2011, the Spanish government announced that effective from 7th March 2011, motorway speed limits would be lowered, train ticket prices cut and usage of biofuels would be intensified. Around 13% of oil consumed in Spain is sourced from Libya; deputy prime minster Alfredo Perez Rubalcaba stated that a €10 per barrel increase in oil prices would cost Spain – a country already on something of an economic precipice – an extra €500m per month. Spain was alone in instituting such measures.

These developments are significant because they illustrate two interrelated phenomena: the strong possibility of a recalibrated relationship between oil-producing nations and their clients, and the rather moderate response of oil-dependent territories to this recalibration. As this blog examined on 7th February 2011, uber-economist Nouriel Roubini has convincingly posited that there is nothing less than a symbiosis between recessions and high oil prices. And this makes recent developments in Libya even more salient, because while its revolutionary predecessors Egypt and Tunisia possess relatively small oil reserves, Libya is a member of the Organisation of the Petroleum Exporting Countries (‘OPEC’), pumping 1.6 million barrels per day and meeting almost 2% of the entire global demand for oil.

OPEC itself is replete by countries in the Middle East and North Africa that are presently experiencing or have rich potential to experience significant unrest; indeed, Algeria, Iran, Iraq, Libya and Saudi Arabia make up nearly half of the organisation’s membership. If the thirst for reform in these countries proves as unquenchable as the planet’s desire for palatably priced oil, a lot more contracts might be abrogated, and many more speed limits – not least that of the world economy – reduced.

Double-, triple- and quadruple-dip recessions: welcome to fonduenomics

One of the biggest economic questions of our time is whether certain nations – particularly in the developed world – are heading for a so-called ‘double-dip’ recession, where two periods of declining Gross Domestic Product (‘GDP’) tightly bookend a short period of growth. For example, the United Kingdom is one country where this phenomenon may well be occuring: after an economic slump that lasted for much of 2008 and 2009, a 0.7% decline in GDP was registered for the fourth quarter of 2010.

However, a rich, elegant piece recently penned for the Financial Times by Nouriel Roubini* – Professor of Economics at New York University’s Stern School of Business and socialite extraordinare – makes several excellent observations that leads one to reconsider the whole double-dip dilemma, including the following:

1. Three out of the past five global recessions have followed a Middle East geopolitical shock that led to a spike in oil prices;

2. During the most recent recession, while eyes were transfixed on the September 2008 bankruptcy of global financial behemoth Lehman Brothers, oil prices doubled in the twelve month period to the summer of 2008, peaking at US$148 per barrel;

3. High oil prices are a huge burden for most major actors in the global economy and have the potential to tip economies into recession.

These facts are sobering enough, but in the contemporary geopolitical context it is possible to view them as devastating. As Roubini himself notes, partly as a result of the recent upheavals in Tunisia and Egypt, oil prices are now hovering around US$100 per barrel; downward pressure on oil prices is limited by the commodity being priced in a currency being subjected to quantitative easing measures, i.e. US dollars, and inelastic supply, i.e. a rather finite amount of oil left to be extracted.

Moreover, there are numerous events that are highly likely to occur in the short- or medium-term which may well engender further spikes: Israeli-Palestinian friction; unrest of the type witnessed in recent weeks in any number of Middle Eastern countries; rapidly intensifying usage and resource acquisition by China and India; further devaluation of the US dollar; the list stretches on.

This would appear to make the chances for sustained growth in much of the developed world slim, and instead produce a pattern that is reminiscent of that staple of après-ski menus – fondue – whereby economies dip in and out of recession in much the same way as bread is dunked in melted Gruyère: with great regularity. These multiple-dip contractions may give birth to a new science of fonduenomics; remember where you heard this concept first.

*Original photo © 2009 Kjetil Ree (http://commons.wikimedia.org/wiki/User:Kjetil_r)