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A quick conversation about the Arab Spring, Oil Production and the World Economy!

Interesting Article: OPEC October Oil Output Rose as Libya Offsets Saudi Arabia Cuts by RACHEL GRAHAM / Riyadh published Wednesday, October 9, 2011
According to a recent article in Business Week, OPEC’s crude production rose in October as higher Libyan output offset cuts in Saudi Arabia, Nigeria and Venezuela, the group’s secretariat said. The 11 members of the Organization of Petroleum Exporting Countries bound by quotas produced 27.27 million barrels a day in October, Vienna-based OPEC said today in its monthly oil market report. Production climbed from 27.18 million barrels in September, OPEC said, citing secondary sources for the data. OPEC Secretary-General Abdalla el-Badri said yesterday that the global oil market is “balanced” as reductions were being made to accommodate increasing supplies from Libya. Saudi Arabia cut output by 0.7 percent to 9.47 million barrels a day last month, while Venezuelan trimmed supply by 1.5 percent to 2.38 million barrels, according to the report. Libya produced 350,000 barrels a day in October, up from 86,000 barrels the previous month. The North African country was producing 1.6 million barrels a day before the start of this year’s rebellion that ousted Gaddafi. So what has the Arab Spring done for Oil production in general and the world economy?

The uprisings that swept the Middle East this year have cost the most affected countries more than $55 billion, a new report says, but the resulting high oil prices have strengthened other producing countries. Statistical analysis of International Monetary Fund (IMF) data by political risk consultancy Geopolicity showed that countries that had seen the bloodiest confrontations -- Libya and Syria -- were bearing the economic brunt, followed by Egypt, Tunisia, Bahrain and Yemen. Between them, those states saw $20.6 billion wiped off their gross domestic product and public finances eroded by another $35.3 billion as revenues slumped and costs rose. But as the major oil producers such as the United Arab Emirates, Saudi Arabia and Kuwait avoided significant unrest -- often through increasing handouts as oil prices rose -- they saw their GDP grow. Oil prices rocketed from around $90 a barrel of Brent crude at the start of the year to just short of $130 in May before retreating to around $113 recently. "As a result, the overall impact of the 'Arab Spring' across the Arab realm has been mixed but positive in aggregate terms," the report estimated, saying overall the year to September saw some $38.9 billion added to regional productivity. It wasn’t until the Arab Spring arrived in Libya that worldwide oil prices really began to fluctuate, as the country's output of light sweet crude quickly dwindled from 1.3 million barrels a day to a mere 60,000, a loss equivalent to 5% of Europe’s total supply, or more than 15% of Italy’s, France’s, Switzerland’s and Austria’s. Taking a look at Libya, OPEC officials, oil analysts, and Libya’s former oil minister Shokri Ganem (who defected a few months ago) all agree that restoring production to its previous levels will take years--until 2013 or 2014 at the earliest. With sufficient repairs, the country could produce 400,000 barrels a day in a few months. But the oil markets no longer seem to care, oil futures are well off their April peaks. The problem is no longer supply, but demand. The combination of American austerity budgets, the slow-motion collapse of the Eurozone, and sluggish Chinese manufacturing growth all suggest a double-dip recession is in the offing. That, plus the Saudis running the pumps flat-out and the release of emergency barrels from the U.S.'s strategic reserve have conspired to drive prices down (for now). University of California at San Diego economist James Hamilton recently looked at 11 oil price spikes since World War II and found that “every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession.” This was especially true in 2007–2008, when the recession that technically began in December 2007 dovetailed with July 2008’s oil spike, paving the way for the economy’s implosion that fall. Based on this it almost seems as if the best short-term solution to the bumpy plateau may be the sources of the latest oil shocks, Libya and Iraq. In a post last year on the Peak Oil discussion site The Oil Drum, now-FireEye chief scientist Stuart Staniford argued “Iraq could delay Peak Oil a decade” if it could manage to boost production from a Saddam-era 2.5 million barrels a day to 12 million in 2017--a level its ample reserves are easily capable of supporting. Iraqi officials admitted in May, however, they would miss that target by a wide margin. The opportunity to boost production in a free and open Libya is much smaller (its production peaked at 3 million barrels a day in the 1960s) but every little bit counts as the world tries to buy time for renewables to achieve market parity. Now, taking all that into context, an interesting model to look at is Saudi Arabia and Bahrain. Saudi Arabia has long struggled to preserve a system of authoritarianism, Toby Jones, assistant professor of history at Rutgers University and author of Desert Kingdom: How Oil and Water Forged Modern Saudi Arabia, stated that the ruling class continues to do all it can to protect its power and check resistance. Why? “The rulers sit atop a closed political system, where citizens have almost no influence,” said Jones. “Potential democratic change threatens the domestic ruling power’s strength … and the unbridled privileged access that comes with it,” he added. Jones explained further how this system is manifested in the international political economy of oil, the basis of Saudi Arabia’s massive wealth. “High oil prices are necessary to sustain both the domestic political system and the patronage that fuels it,” he said. Essentially, scarcity is manufactured, and production is manipulated to garner the highest revenue, said Jones. “Given the logic of global capitalism, it would be shocking if countries like Saudi Arabia acted in any other way,” he added. Because oil is the second most abundant liquid on the planet, Saudi Arabia’s real power stems from the perception that oil is a scarce resource. Riyadh understands that consumers’ appetite for oil is so great that its prices can continue to climb. The Saudis have correctly guessed that consumers’– and especially Americans’ – breaking point, at which the price of oil becomes truly unacceptable, is still quite distant from current prices. So in terms of this, he also explains why Bahrain and Saudi Arabia had not seen further protests and actually received backing from the U.S. Jones said, “The US’s commitment to the preservation of the political status quo in the Persian Gulf has been disastrous for the Arab Spring.” Americans’ oil dependence has inadvertently affected the aid and success of the protests, particularly in Bahrain. Saudi leaders view the Arab Spring and the pro-democracy protests as “the single greatest threat to their rule in a generation,” thus influencing the strength of their own response and the nature of the US’s involvement, said Jones. Perhaps the anti-government demonstrations and rebellions raging through the Arab lands are part of a concerted effort to cause havoc in the world’s main supply of petroleum. The petroleum market has responded to each of these uprisings with spikes in prices and clamoring to nail down supply contracts. Syria seems to be next, therefore, in terms of Syria, protests have continued throughout the year in the face of a bloody crackdown, the impact is hard to model but early indications suggested a total cost to the Syrian economy of some $6 billion or 4.5 percent of GDP. One way Syria could get out of this is to follow the model Saudi Arabia and Bahrain used where, Saudi Arabia instituted handouts and initiated wider public investment programs, which amounted to some $30 billion -- perhaps seen by the kingdom's rulers as a way of avoiding real reform. But increased oil prices and production helped boost gross domestic product by more than $5 billion and pushed up public revenues by $60.9 billion. In Bahrain, oil helped cushion the impact of weeks of protest, with the fall in GDP relatively low at some at 2.77 percent. Public expenditure rose some $2.1 billion, partly because of cash transfers of $2,660 to each family. Taking it more of a world perspective on the economy, the world must invest US$38 trillion in energy over the next quarter century if it is to meet growing demand, says the International Energy Agency (IEA). Some $10tn of that is required for oil alone, but the Arab Spring is threatening to derail important projects, said Fatih Birol, the chief economist of the IEA, which advises 28 industrialized nations on energy issues. "In other countries they are not able to put money for projects on the table because they have other pressing issues in their countries to meet demands from the population. In some countries, because of the unrest, the projects are not going forward as much as we would like to see." Energy ministers from IEA member countries and the heads of major oil companies from Shell to Petrobras met on October 19th as multibillion-dollar investments in new oilfields and gas terminals hang in the balance. It seems now, Bahrain and Saudi Arabia boosted money to their populations, Syria, could in theory do the same. Not so for Yemen, Libya and Tunisia that have had their Arab Springs and are moving forward. What I found interesting is that the world is dependent on what happens globally to all of us, an Arab Spring might not affect Middle America directly, but our pockets will definitely feel the results of it.



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