The oil price has touched $US100 a barrel and is at $US40 a barrel in real terms. The last two times that happened, in 1979 and 2007, there were immediate recessions.

The danger this time is that it’s rising for a combination of the reasons it rose in 1979 and 2007 — revolution and economic growth. In 1979 it was the revolution in Iran, which shut down that country’s production and led to a supply shock, and in 2007 it was rapid growth in demand from China, on top of the booming Western world.

This time the growth out of the global recession of 2008 has been surprising and led to a steady increase in the oil price from a low of $US33 in December 2008 to $US90 at the end of last year. The last $US10 has come this week as Libyan protesters followed those in Tunisia and Egypt.

And in an echo of the returns of Ayatollah Khomeini to Iran in 1979, the exiled leader of the radical opposition in Bahrain, Hassam Mushaima has announced he intends to return. As a result of the Shi’ite protests in Bahrain, the intelligence firm Exclusive Analysis now estimates that there is a 25% chance that Saudi Arabia will disintegrate. Saudi Arabia’s eastern province, where a majority of the population is Shi’ite, contains a fifth of the world’s oil.

Saudi King Abdullah this morning announced $US36 billion of new welfare measures to appease his restless subjects, but it’s unlikely those who are pressing for change in that country will be bought off that easily. They are young Arabs using the internet to mobilise — the same as those who brought down Hosni Mubarak in Egypt.

Whatever happens in Libya, Bahrain and Saudi Arabia in the short term, the oil price is likely to remain high for some time, at best denting world economic growth. The chief economist of the International Energy Agency, Fatih Birol, said last night that the oil price has now entered the danger zone for the world economy, and could put pressure on central banks to raise interest rates.

Force majeur notices to oil traders are expected to start being issued in the next few days as oil companies in Libya move their staff out; in fact there were rumours last night that the first notices have already been issued. It’s estimated that up to 500,000 barrels a day of production may already have been shut down and unless there is a swift victory for the protesters in Libya, this production could stay out for quite a while.

That’s especially true if there is civil war, but even if Gaddafi wins, there will be considerable pressure for the reintroduction of oil sanctions on Libya.

*This article first appeared at Business Spectator.

Peter Fray

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