It is quite self evident that global financial markets have not yet properly discounted what is going on in the Middle East and North Africa. That is because apart from the $100-plus oil price, nobody has a clue what is happening here, and those that do are too preoccupied fighting wars or dealing with the unrest and revolutionary fervor.
To some extent this is understandable: If you don’t know then doing nothing is a perfectly common position. It can also be a very expensive one. Getting rich through sheer ignorance does not often happen. So down on the ground in Dubai, and last night in Deira for the launch party of the Movenpick Hotel’s excellent Wok In restaurant, what are people saying?
Well, we heard about the organiser of the conference in Bahrain last year sponsored by ArabianMoney. He has just upped and moved to Dubai with his family. Apparently Bahrainis are also leaving for Dubai. The worry is that the situation in Bahrain looks awfuly like Belfast in 1969 when the British army arrived and stayed for almost 30 years.
Of course, the bombing was not confined to Northern Ireland. In time the U.K. mainland was a target. Indeed, your editor’s old office was blown up on the night of the party to celebrate his leaving London for Dubai in 1996.
That is the problem with the politics of suppressing protests, or for that matter policing a sectarian divide: The British army did not want to be in Belfast and the government did not want it there either but circumstances necessitated it to avoid a civilian bloodbath. Can Bahrain function as a weekend resort for partying Saudis or a regional financial centre in these circumstances?
But then at least the problems seem to be contained in Bahrain and have not spread to Saudi Arabia. Local stock markets hit a major low a couple of weeks back in advance of a planned Day of Rage in Saudi Arabia and have rallied since because it was a flop (click here).
Then again Yemen is worrying, particularly because owning firearms is a national passion with an estimated three weapons per capita. However, there is one thing that foreign observers and the conspiracy theorists just cannot understand about this whole region.
It is still mainly a tribal society. Loyalty to this social unit comes above any sectarian divide between Sunni, Shia and other minor Muslim sects. So what happens when the strong national leadership model is overthrown is a descent into warring tribal factions, not a spontaneous evolution into a democratic state.
Just look at Libya, with the rag-tag rebel army like something out of the film Mad Max and everybody vying for Mel Gibson’s role as leader. It is a hopeless anarchic mess. The rebels are more of a danger to themselves with their lack of training than Gaddafi’s professional army. They may well lose and then the world has a rogue state on its hands. And if they win it could be worse.
None of this is going to be good for oil price. Libya’s 1.5 million barrels per day is turned off, so is most of Bahrain’s 350,000 barrels per day. The Syrian president has just sacked his government in a ruse to please protestors, and there is another 500,000 barrels per day at risk there.
And what is really worrying, and where markets have got this totally wrong, is that this new regional geopolitics cannot be rolled back quickly. Most likely it cannot be rolled back at all and we have a new situation of permanent instability in the world’s main energy supply.
How will the West respond? Impose a no-fly zone over the whole region? Occupy some of the oil fields for humanitarian’ reasons? Actually it will have to do something because the lights will go out without oil.
Higher oil prices mean higher rates of global inflation, and eventually higher interest rates. They are a tax on consumers and a tax on global growth. Some oil companies and cities like Doha, Abu Dhabi and Dubai will do well out of this but for the vast bulk of global companies this is very bad news for profits, and ergo their share prices.
Saudi Arabia, Oman and Kuwait should also do very nicely with higher energy prices, if their populations can be successfully appeased. It will be back to the stagflation of the 70s for everybody else.
We are definitely going to see higher oil and gas prices and higher prices for gold and especially silver (click here). Oil cities will boom, others are going into a nasty recession with unrest like we saw in London this week. Stocks, bonds and property will all be toast. In the 70s cash, oil and precious metals were king and it will be the same this time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.