By Kristin Carew, Carnegie Mellon University
Since the beginning of the Tunisian revolution in late January, political unrest has proliferated in the Middle East/North Africa region. Much of the relevant American media coverage has been dedicated to Egypt, one of the United States’ important regional allies, and Libya, where the U.S. is now engaged in military operations. However, these nations have not been the only ones affected. Conflict has spread across many Middle Eastern states, including Algeria, Bahrain, Djibouti, Iran, Iraq, Kuwait, Morocco, Oman, Saudi Arabia, Syria, Tunisia, and Yemen. The grievances behind these protests span a wide range of economic issues (high unemployment, poverty, inflation, and housing shortages), political issues (unpopular regimes, human rights violations, and corruption), and religious issues (conflicts between Sunni and Shiite populations, power struggles between secular and religious political groups).
There has been much speculation about what the economic impact of the region’s unrest will be. This discussion has been centered thus far on oil, its best-known export. To be sure, oil prices have a large impact on the world economy, and uprisings in the Middle East have the potential to push them higher. A halt on exports from war-torn Libya alone would have cut crude output by 2.3%, if not for increased production elsewhere. Other exporters, including Oman, Yemen, and Saudi Arabia, have raised production to compensate for lost Libyan output, but these countries have also been disturbed by protest activity in the last several months, casting uncertainty on the reliability of their oil production. As a result of such concerns, oil futures have surged past $108/barrel.
Despite supply fears, some analysts contend that such price rallies are unjustified. According to MF Global, increased output from nations less affected by protests and slackening demand following Japan’s nuclear crisis imply that an oil surplus actually exists and that price increases have been driven by geopolitical news and not by actual data. While rational grounds for the rally exist due to ongoing growth in global demand and the gradual U.S. economic recovery, these factors may not be sufficient to support current price levels after initial panic over the Middle East subsides. Nevertheless, many institutions, including the IMF, have raised forecasts for oil prices.
While the upward trend in oil prices is an important one to follow, the prevention of an oil supply shock would not prevent economic fallout from occurring. The effects of such a widespread series of disruptions in Middle Eastern economies will certainly extend beyond the price of a single commodity. Where else might the global economy experience problems?
Natural Gas
The Middle East, home to 45% of the world’s natural gas reserves, has a prominent role as an exporter of natural gas. In sharp contrast to oil prices, natural gas prices have not spiked worldwide in response to regional unrest and actually declined on average as of the beginning of March. Because natural gas is a more segmented market, prices have been less volatile at a global level.
Even so, some regions are more affected by natural gas supply fluctuations than others. While the United States can rely on domestic natural gas, Europe is vulnerable to supply disruptions. Libya, which has cut off exports, triggered a 12% price increase in natural gas within the European market. Algeria, as Europe’s third-largest supplier, could have a severe impact on the European economy if its exports were also suspended. Thus far, though, in a move analogous to compensatory oil production in the Middle East, Russia has offset turmoil in this market by increasing natural gas exports to Europe.
Agricultural Goods
Consider one of the catalysts for the protests: food inflation. A number of inflationary pressures already applied to food prices independently of turmoil in the Middle East, including weather-based supply disruptions, demand growth in developing countries, increased utilization of bio-fuels, and a decline in farming productivity gains.
Attempts by Middle Eastern nations to combat economic grievances by using wealth from oil and gas exports are considered a likely course of action and are generally favored over political reform by authoritarian regimes. Because food inflation has emerged as a major concern, unpopular governments may opt to stockpile and subsidize agricultural staples in order to make food more affordable. Some countries, including Algeria and Saudi Arabia, have already begun to stockpile commodities like wheat. If this trend continues, hoarding in the Middle East could apply additional upward pressure to global food prices. In addition to the excess demand that could be created by stockpiling, reduced supply is also a possibility. Exports from Morocco, Syria, Tunisia and Iran include considerable quantities of agricultural goods. Furthermore, export disruptions in Jordan, Tunisia, and Kuwait, major miners of potash and phosphates, could create a shortage of the materials needed to produce crop nutrients and fertilizer.
Industrial Metals
In the market for metals, there is the possibility of another supply interruption, the impact of which would be amplified by already-high price levels and rising global demand. Aluminum, the most-produced metal in the Middle East and a major export of Bahrain, was lifted by the commodities boom in 2010, appreciating 31% over that year.
Widespread substitution of aluminum for copper, the prices of which have appreciated five-fold since 2001 and surpassed $4.60/pound, is expected to augment aluminum demand in 2011. Switching from copper to aluminum becomes economical when copper reaches $3.50/pound, which is well below the current price. Because of this substitution effect, if unrest in the Middle East causes a decline in aluminum supply, the result could be a continued price rally for both aluminum and copper.
Shipping and Transportation
Shipping is another factor jeopardized while the Middle East remains in a volatile situation. The region serves as a transit hub for exports and imports. The usability of the Suez Canal has become cause for concern since the Egyptian revolution began in January. The Port of Djibouti is relied upon by multiple landlocked African countries to export goods and could be impacted if further unrest occurred.
Conclusion
To summarize, the potential impact of unrest in the Middle East cannot be treated as isolated to the prices and supply of petroleum products. While oil and oil-based products constitute an overwhelming majority of regional exports, most Middle Eastern countries have attempted to diversify their economies and reduce reliance upon a single commodity. As a result, when identifying the economic consequences that regional disruptions could cause, it has become necessary to consider a wider range of exported goods and services.
Sources: NPR, BBC News, Financial Times, Bloomberg, MarketWatch, Sydney Morning Herald, Congressional Research Service, the Wall Street Journal
