Wednesday 2 February 2011
The price of oil is breaking the Middle East; What will OPEC do?
Of course, the way that this wealth has remained tightly controlled is an issue for the people in these Countries, but that has not made them riot and protest in the past.
What is different today and since 2008 is the swift rise in the price of Oil. This matters not because it makes the wealth gap worse, but because oil is intrinsically linked to the price of food. When oil goes up so do food prices. There was a tough spike in 2008 which blew off because of the Global Financial Crisis. Now though we are back with oil over $100 and many predict it is not going to go lower again. This, along with crop failures, has pushed up the price of wheat in 2010/11.
Arab Countries are deserts as a rule, so they have to import most of their food from abroad. This makes them especially susceptible to global price changes in soft commodities and they have become acutely aware of the problem. One solution for the Arab leaders may be to increase their food subsidies and lower the fuel subsidies they give their populations.
Another solution which no one is yet discussing is for OPEC to increase oil production to lower the price of oil. To date all comment has been about worries of supply disruption, but sooner or later it should dawn on them what the solution is.