WHAT is the connection between the women and children being bundled over the Syrian border and the price of petrol at your local garage? How could it be that Syria, a country with no oil, might affect the price of that most precious of commodities? There have been many internal conflicts in Syria, yet not one has ever affected the price of oil, so why now?

Yesterday, as I filled my car and listened to the radio about the acrimonious OPEC meeting in Vienna, it was clear that if these petrol prices don’t stop going upwards we — not just in Ireland, but also all over the world — are going to grind to a halt!

But why should petrol prices be going up?

Traditionally, petrol prices have been demand-driven. This means that the greatest single impact on the price of petrol is world demand. If the economy of the globe is expanding, the demand for petrol rises and the price goes up. The world and his wife are now worried about the fact that the global economy is slowing down following two years of printing money in the US and on the cusp of what many now believe to be a major wobble in China. So should the price of oil, be going down?

What else is going on?

Maybe the first thing to look at is the trend over the past 30-odd years.

It is easy now, after having a decade of high oil prices, to consider that oil has always been expensive. But that is not the case. In fact, if you look at the oil price since 1985, you see two distinct periods. The first period, from 1985 to 2003, was characterised by oil prices being quite low and not particularly volatile. More interestingly, the price of oil hovered around a median price of $19 a barrel.

Since 2003 this stability has left the oil market and prices have shot up and down all over the place. The main thing to note is that the median price of oil in the past eight years has been $60 a barrel. So we have had a threefold increase as the likes of China and India have come into the world economic picture. Think about this. The US with 5pc of the world’s population consumes 25pc of the world’s oil. China with 25pc of the world’s population only consumes 9pc of the world’s petrol. This will change over the coming years and will rebalance to reflect population with dramatic ramifications. But for the moment, the one aspect to consider is China is here and is consuming.

The other factor is OPEC’s reaction to political and economic shocks. Consider, the rebellions in the Arab countries — particularly, in significant oil producers like Libya. Libyan production has been decimated. Traditionally Saudi Arabia, as the world’s largest producer and the world’s biggest reserve of oil, has on three major occasions increased production to offset any politics-related drop in production to maintain global prices. First in 1956 when President Moussadeq of Iran nationalised Iran’s oil supplies, then again in 1979 when the Ayatollah came to power and finally, in August 1991 after Saddam invaded Kuwait. Each time, Saudi replaced the lost oil and prices stabilised.

But this time Saudi Arabia has not replaced Libya’s lost oil production. Why the change in Saudi policy?

Two things are affecting the Saudi behaviour this time. The first is a collective memory of the Asian crisis in 1997. Following the Asian crisis and in respond to pressure to ease oil prices to facilitate a global recovery, the Saudis increased production. But, because global demand was so weak, the oil price fell and it didn’t recover. It fell to below $10. This low price of oil caused Russia, which depended on oil revenues to pay its debts, to default in August 1998. This further weakened the price of oil and scared the Saudis because the lower the price of oil, the lower their revenues and the bigger their budget deficit.

So the Saudis lost their appetite to bail everyone out and this memory lingers.

Add to this searing experience, the events of the last few months and you will see why the price of oil will remain above $100 a barrel for a while.

When the first revolutions of the Arab Spring emerged, Saudi Arabia, a family dynasty, realised that it had to react. It saw that, for the first time in Arab countries, repression didn’t work. The more the old regimes repressed the common people, the more the people came on the street. Plus the preponderance of Facebook, Twitter and YouTube meant they couldn’t suppress the message.

A young leader of the Egyptian revolution who I met recently at a Google conference explained the role of social media to me succinctly,

“We advertised on Facebook, organised on Twitter and told the world about it on YouTube.”

Seeing the fate of Mubarak, the Saudi royal family decided to kill any incipient revolution with kindness. It spent money on all sorts of welfare payments. This meant spending and continuing to spend.

Brilliant research conducted by the Centre for Energy Studies has put one figure on what the price of oil has to be for the Saudis to be able to afford this new policy of killing the revolution with kindness. In early 2011, it was $74 a barrel minimum at a production level of $8.5m at day.

Now consider the cycle; the Saudis need this as a minimum price to keep the welfare rolling, this puts upward pressure on your petrol pump price.

The resulting revenues generate a budget surplus in Saudi Arabia.

But that’s not all. The ongoing trouble in Syria makes the Saudis nervous. Syria’s government is reacting like Egypt’s did, but social media and 24-hour news is telling the world that the Syrian army is terrorising defenceless women and children. TV stations like Al Jazeera are beaming this into Saudi living rooms and, for the first time, Saudi women are seeing other Arab women leading the demonstrations.

This scares the royal family so much so that they have increased welfare spending again to buy off their population. This escalating cycle of spending, Arab street violence, media coverage and more spending, is causing the Saudis to require a bigger budget surplus each coming year.

The experts at the Centre for Energy Studies have indicated that next year the Saudis will need a minimum price of $91 a barrel at higher levels of output to have enough money to buy peace at home.

WHEN you link up all the bits of the global oil and politics jigsaw it is not difficult to see that the Arab Spring, which is to be welcomed by all of us who value personal liberty, is coming at a huge price to Irish car drivers.

Obviously this is not going to change anytime soon. More liberty over there, means less growth over here — hardly ideal, but that’s the way the story goes when you are completely dependent on oil.

David McWilliams hosts the Dalkey Book Festival this weekend. On Friday night, there will be an in-depth discussion of the Middle East.

Irish Independent

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