The Spreading Mideast Upheaval: Is it Containable?

Morris Segall      Geopolitical threats, rising commodity prices and inflation, risk aversion and weak stock markets, uprisings in the Middle East

In a local TV interview on the unrest in Egypt in early February (See WBAL TV interview, February 3, 2009, SPG in The News, www.spgtrend.com), I warned about the spread of the Egyptian turmoil from Cairo to the Suez Canal and other countries in the Middle East and the negative implications that would have for world commodity prices and foreign policy in the region for the U.S. and its Western European allies. Since that interview, the uprising in Egypt has led to the  fall of the Egyptian government and its long time leader, Hosni Mubarak. Similar popular revolts that began in Tunisia have spread to Jordan, Yemen, Bahrain, Morocco and now Libya, threatening to overthrow governments in those countries similar to the results in Tunisia and Egypt. The massive upheavals in the region are becoming apocryphal. The long standing authoritarian regimes of North Africa and the Middle East are being threatened and toppled by a  spreading populist revolt against the very authoritarianism that has led to high levels of poverty, unemployment and poor standards of living with bleak futures. No one could have predicted the massive spread of populism that has engulfed a region that has never experienced popular democracy.

While the initial reaction to these populist uprisings is one of exhilaration at the movement of these autocratic countries towards democracy, the reality is the removal of the autocrats is leaving a void filled with chaos and increased economic deprivation for the populations of these countries. During the demonstrations, the economies in these countries have ground to a halt. Banks, businesses, schools, government offices are closed. Vital necessities such as food and fuel, which had already risen dramatically in price, are even more expensive as supplies dwindle due to the breakdown of distribution networks.

 Now, the populist revolutions have hit Libya over this past weekend with stunning impact. In less than a week, the unthinkable is happening. Muammar Gaddafi, one of the most durable of Middle Eastern dictators is on the verge of being outsted from power. Libya’s military and government officials are deserting the government and Benghazi, the nation’s second largest city is in the hands of the revolutionaries. Unfortunately the spreading of popular revolt to Libya is having a new, negative impact on world commodity and capital markets. Libya is one of the world’s top ten oil exporters and has the largest oil reserves in Africa. The chaos in Libya has shutdown a substantial portion of the country’s oil production and as a result, oil prices over the last 24 hours have jumped to over $100 per barrel in Europe and approaching that level in oil futures in the U.S. As a result, stock markets in Europe declined today and Asian markets are declining this evening. Stock futures on the major U.S. indices are already down significantly, signaling a lower Wall St. opening tomorrow, after the President’s day holiday. Escalation of oil prices from these levels will not only depress world stock markets but start to affect worldwide economies that are still fragile in their recoveries from the 2007-2009 recessions. Worldwide inflation, which has already escalated to dangerous levels overseas, will become worse and negatively affect economic growth in the emerging markets which have paced the economic recovery since 2009.  Rising inflation in the U.S. threatens to slow the recent acceleration in economic growth seen in the closing days of 2010 with continued promise in 2011. The removal of Libya’s leader and his exile from the country may quell the current violence and restore enough calm to restart oil production and shipments. That may allow oil prices to recede.  

In the meantime, risk aversion will reappear with money flowing into safe havens, i.e. U.S. Treasuries, the U.S. Dollar, gold and oil.

However, the current upheaval in the Middle East and North Africa must soom be contained before it threatens the entire world economy with rising commodity prices, inflation and reduced economic growth.  A spread of the current populist uprisings to other oil producing states in the United Arab Emirates or worse, to Saudi Arabia, will be catastrophic not just economically but also geopolitically. The events in the region have already placed the U.S. and Western Europe in positions of impotence to shape the course of events and the ultimate outcomes in the change in governments. Already, Iran is attempting to capitalize on the vacuum of power and enlarge its footprint in the region. A replacement of the Western allied autocrats with anti-Western regimes would be disastrous to the balance of power in the Middle East and increase tensions to the point of war. The U.S. could lose valuable strategic military assets to fight terrorism and Israel would find itself in a potentially untenable position.

The current events of the last two months will take years to garner solutions. Countries with no democratic institutions or political parties or active Parliaments will need to develop them. In the meantime, the economies and economic hopes of the disenfranchised populations that rose up in rebellion will have to be refurbished. Failure in these areas will lead to continued unrest and dissatisfaction with the goals of establishing popular democratic governments and may result in the loss of these countries as democracies.

Morris R. Segall