Amendment written 26/2/2011
When I wrote this peace Libya's protests were still in their infancy and Gaddafi still had Libya firmly in his grasp. In the last 7 days however the situation has worsened considerably and he is loosing his grip on power quite rapidly. Some political commentators both from Libya and abroad are already calling his regimes demise all but a certainty.
But I digress, this amendment to my original piece is not about the political ramifications for Libya but about the economic ramifications currently echoing around the world and how this and similar events could have on the world at large. Oil prices have spiked dramatically rising by over 10% in the past month alone despite Libya producing only 2% of the worlds oil, the Saudi's have made assurances that they will make up any shortfall yet prices stay high at least for the time being.
If these events that took place in Libya and Egypt were to take place in a country that provided a much larger portion of the worlds oil for instance Saudi Arabia, that supplies over 12% of all the worlds oil the effect on the world economy could be catastrophic. Oil prices would skyrocket forcing inflation higher crippling the fragile economic recovery in the Western world and perhaps even the stronger recovery in fast growing developing countries like China and India.
Stagflation could once again be a reality for the West (Stagflation being low economic growth coupled with high inflation) making an already difficult situation worse. For instance US economic growth is predicted to be roughly 3% and with oil at $100 according to analysts that can knock off roughly 1% of GDP growth, if it were $120 you could knock off 2% of GDP growth.
With growth stunted by high energy prices and then in turn high inflation the future may not be so rosy for the world if Saudi Arabia does undergo a revolution and does close the oil taps, the worlds volatile recovery would be stunted. The growing political and social divisions may rear their ugly heads with greater force and frequency than they have already on a small scale in both the U.S and in Europe.
This sort of scenario only reinforces my previous point about the Obama administration needing to become pro-active in the Middle East, pre-empting these criseses with talks of democratic reform and also a plan B if there is another round of whirlwind revolutions.