Oil, Gas Prices Ride Mideast Worries

Practical Economics

Oil, Gas Prices Ride Mideast Worries

How high will they go? Much depends on Saudi Arabia.

Unrest will continue to spread across the Arab world, toppling some regimes, testing others and sending oil and gas prices higher, at least for the summer.

The situation in Libya, Egypt, Tunisia and elsewhere looks remarkably like 1989 and the unraveling of the Soviet Union, with one big difference: The world didn’t depend as heavily on Soviet petroleum supplies.

Last week’s headlines in Libya drove the latest surge in prices. But this isn’t really about Libya, which supplies just 2% of the world’s daily oil needs. The higher prices resulted from anxiety about what’s next. Much uncertainty will remain in the coming weeks and months, even as some despots are driven from power and violence abates.

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But in terms of oil prices, here’s some good news: Saudi Arabia, the world’s largest exporter, won’t see a regime change. The same can be said, as well, for the United Arab Emirates, Kuwait, Oman and Qatar. Though unemployment is high and there is some restlessness among citizens, these are welfare states to a large degree, providing cradle-to-grave care -- and willing to improve it for stability.


In Saudi Arabia, for example, King Abdullah returned to the country after three months abroad seeking medical treatment and immediately announced $37 billion in additional benefits for Saudis. This includes wage increases, debt forgiveness and aid to the unemployed. Saudi Arabia, and the others, will see protests -- one online campaign calls for protests in March -- but outright rebellion is unlikely.

Saudi stability will help keep a lid on oil prices.

Oil will reach $110 a barrel, well short of the $140 top price in 2008, but higher than the same time a year ago. And the price of gas will push past the psychological barrier of $4 a gallon, testing the 2008 record of $4.11 by June -- just in time for the summer driving season.

As of today, we don’t expect a large, lasting impact on the economy. Growth will drag, however, if oil tops $100 for months and gas stays at $4 into the fall. In that case, look for GDP growth to slip to 2.75% instead of 3.25% for the year.


But at those price levels, there is no threat of a double-dip recession.

All bets are off, of course, if something else happens in the shaky region. And it doesn’t necessarily have to involve the Saudis.

Keep an eye on Iraq and Iran, for example. Both are among the top 10 oil exporters, and unhappy masses are putting enormous pressure on unsteady governments there. Lasting instability or uncertainty in either country would rock the global oil market much harder than the protests in Egypt or Libya -- or in Algeria, which might be next.

Iran has seen its share of protests in recent years, none resulting in significant government reform. However, galvanized by success in other countries, protesters are bound to try again. Look for protests and widespread demonstrations on March 21, the Iranian New Year, as a barometer for unrest and as a further hint of how painful filling the tank might be later this year.