The Middle East and Rising Oil Prices

It seems that almost everything we see in the Middle East these days poses a threat to the stability and price of oil. We see the end result of this on a daily basis at the gas pumps.

Oil markets brace for Saudi 'rage' as global spare capacity wears thin

Goldman Sachs suspects that OPEC has been pumping far above its agreed quota since November and therefore cannot easily raise output much without cutting deep into global spare capacity.

Assumptions that OPEC has added 1.9m bpd over the last two years are wishful thinking. These new fields have been "largely offset" by attrition in old fields.

The flow of Libyan oil has so far fallen by 1m bpd. This may not sound much against global supply of 88m, but oil prices are determined by levels of spare capacity once supply tightens.

Beyond a certain point, the price spiral can kick in with explosive force until the economic damage crushes demand.

The entire political order of the Middle East has effectively disintegrated, risking of years upheaval in a region that provides 36pc of global oil supply and holds 61pc of proven reserves.

Mass protest by Bahrain's Shi'ite majority against the ruling Sunni dynasty has been a rude awakening for investors who thought oil wealth would shield the Gulf against turmoil.

And that is where this gets interesting. Bahrain seems to serve as a example of what may come:

Bahrain sits at the epicentre of the world's energy system. It is a hop to Saudi Arabia's Eastern Province, home to an equally aggrieved Shi'ite population and the kingdom's giant oil fields.

What happens on the tiny island is being watched with alarm across the Gulf. The "demonstration effect" has already led to Shia protests in the Saudi oil region. Saudi police have released a Shia cleric arrested last week for demanding a constitutional monarchy.

Yet the country's Wahabi clerics also warned against "sedition" and violations of Islamic law, while the interior ministry said all rallies were banned and warned that police would use "all measures to prevent any attempt to disrupt public order."

The threats aim to quash a "Day or Rage" planned by cyber-protesters for Friday, allegedy swollen to 17,000. A similar event in Syria was nipped in the bud by secret police.

The world's economic fate now hangs on the success of Wahabi repression. Any sign that the Saudis are losing their grip risks an oil shock large enough to derail the global recovery.

Now we see the potential ramifications of this situation:

Nobody knows where the "inflexion point" is. Bank of America says we are already in the danger zone since energy costs as a share of global GDP have reached 8.5pc, near historic peaks.

Deutsche Bank said the outcome differs depending on whether spikes are driven by booming demand or a supply crunch. It warns that a sudden jump to $150 will abort world recovery.

Former Fed chief Alan Greenspan said economists have been "bedevilled by over the years" trying to quantity the effect of oil shocks. "We don't know fully where all the channels are. My view is that when oil prices get up to this area and start to move up even higher, you do have to start to worry."

To summarize: The turmoil in the Middle East is guaranteed to drive oil prices up - and and at a certain level we could see a "tipping point" in which an "oil shock" is created and large enough to derail any possible recovery in the so-called world economic crisis.

We'll have to wait and see how this one works out. But so far, the world leaders have been woefully inadequate in dealing with any of the issues of the day, and one cannot expect this one to be handled appropriately.

Maybe its time to get the coffee thermos out again for those 5:00 am gas lines just like we had in the late '70s.