Middle East crisis: threat to us all

Now the North Africa and Middle-East crisis is getting really serious.

When it was only a matter of popular uprisings in Tunisia and Egypt, despite the geo-political ramifications, the energy and financial markets were relatively calm. But when the blood-stained revolts spread to Libya leaving chaos in its wake - and a threat was perceived to the stability of the Arabian Gulf - the markets began to shudder.

In past decades, going right back to the Yom Kippur war in 1973, surges in the oil price have been the bane of the Western industrial democracies. Indeed, the great inflation of the 1970s and 1980s, which caused havoc across the Group of Seven industrial nations leading to a global banking crisis that nearly brought down Lloyds in Britain and Citibank in the US, was partly rooted in oil.

At present, the oil shock this time around is nothing like it was in 1973 or in 1979, following the Iranian revolution. In 1973, oil prices doubled overnight and in 1979, they doubled over the course of a year. The inflationary shock was extraordinarily severe.

In the current crisis, there has been a rise in prices of 60 per cent but there is no predicting where it will end up.

What we do know is that the present problems across North Africa and the Gulf have not come out of the blue. Moreover, the Western economic system - on which the oil price rise is being grafted - is not in the best of shape.

It is often forgotten in all the learned debate about democracy and freedom that much of the unrest in North Africa and, for that matter across the Gulf, has economic underpinnings.

Ahead of the crisis, the price of basic commodities such as wheat, soared by more than 60 per cent in the last two quarters of 2010. This was partly the result of a poor Soviet grain harvest but also due to the rise in demand from China.

Whereas surging food prices are easily absorbed in Western countries such as the UK, where they represent just seven per cent of household budgets, in poorer nations like Egypt, up to 70 per cent of disposable income is spent on food. The higher food prices layered on top of ghastly rates of youth unemployment across North Africa was a combustible formula. The young in Tunisia have been relatively well educated but there are no jobs to go into.

In Egypt, as the International Monetary Fund recently noted, most people receiving a university education are trained to work in the public sector. Yet the only economically sustainable way of improving the economic chances for a population of 80 million is to cut back the size of government and provide more resources to entrepreneurs. This was something the fallen Mubarak regime failed to deliver.

It is not yet clear how serious the present unrest will prove for Saudi Arabia and the smaller Gulf oil-producing states. But it is fascinating that King Abdullah of Saudi Arabia returned from an operation in the West and immediately announced measures designed to pacify his own population. The steps included big pay rises for government workers to offset the impact of rising food prices, direct assistance to students and the young unemployed, and reprieves for people sent to prison for failing to pay the debts.

This was just the tip of an iceberg with the Saudi government aiming to plough some $400 billion into improving public education and healthcare over the next three years. Similar hand-outs to the population have also been arranged in Kuwait.

Whether any of this is enough to head off the tremors felt across the whole of the Middle East and North Africa region (MENA) is uncertain. But for the West, keeping the oil pipelines open is critical for the stability of the global economy.

The recovery from the crisis of 2007-09 is extraordinarily fragile. The banking system is still being supported on both sides of the Atlantic by the Federal Reserve in the US, the Bank of England and European Central Bank in the euro-zone.

The solvency crisis, which last year shook Greece and Ireland, has yet to fully play itself out and both Portugal and Spain move closer to the abyss by the day. Higher oil prices could push them over the edge.

The rise in the oil price and continued unrest across MENA is not just a danger to Middle East peace. It is a grave threat to our very own prosperity.

Alex Brummer is City Editor of the Daily Mail

    Last updated: 10:52am, March 3 2011