Markets could no longer shrug off unrest in the Middle East this week. The Libyan crisis worsened, with Muammar Gaddafi refusing to step down. He called for a brutal crackdown against protestors, raising fears of civil war. Around 1,000 are thought to have died. The turmoil had wiped over 2% off global equities by mid-week, while investors seeking a safe haven propelled gold to a seven-week high over $1,400. Over 50% of Libya’s oil production has shut down because oil firms such as France’s Total SA and Italy’s Eni Spa, have had to curtail output. Brent oil has climbed over $115 a barrel.
What the commentators said
Could this be a turning point for equities? Markets have been “in a bullish delirium prompted by easy monetary policy”, as James Saft of Reuters.com put it, and “ripe” for a reversal. The threat of an oil price spike could “easily be the catalyst”. It’s certainly “hard to understand why investors have been so sanguine” about oil over $100, said Nils Pratley. Now that Libya has become the first major oil producer to be affected by revolts, it may concentrate investors’ minds.
You’d think Opec would have acted to temper oil prices by increasing supply by now, said Jeremy Warner in The Daily Telegraph. But the world economy is “not exactly a priority right now for the autocrats who dominate” the organisation. They’re worried about survival. Instability in Saudi Arabia would be especially bad news for the oil market.
While the developed world frets about dearer oil, what is the outlook for the region itself? Improving the economic prospects of the Middle East and north Africa will be a massive task. GDP per capita in the Arab countries increased by just 6.4% between 1980 and 2004, said Allister Heath in City AM. That’s less than 0.5% a year, despite the oil wealth. Chalk this up to “decades of mismanagement… and corruption”, with “a selfish elite” benefiting from “nepotism and state-chartered monopolies”.
The core problem is that, unlike emerging Asia and Latin America, the region lacks many of the basic building blocks of successful economies. These include properly enforced property rights and a functional taxation system. If it is to turn the corner and avoid a descent into extremism, radical restructuring will be required.