Spiking Oil, King Abdullah, and the World

If unrest continues in the Middle East, a sustained disruption of oil supply could lead to a worldwide recession. Saudi Arabia, the second largest producer of oil in the world after Russia, could save the globe from that fate. It has the capacity to fill in the oil gap that is occurring now and that could continue for same time. That is, if it is up to the task, which, of course, requires its own political stability.

The king of Saudi Arabia, 86-year-old Abdullah, is trying to maintain steadiness. In the face of potential uprising in his own country following unrest elsewhere in the region, he announced concessions to his people, including education and housing subsides, plus more than a thousand new jobs and a 15% pay raise for government employees.

The problem for the king and, in a secondary way, the entire world, is that many of his subjects view this compromise as a bandage, and a child-sized one at that. What young Arabs are looking for is political change, not social improvements, as is being offered now. His subjects want to participate in the government, held almost totally in the grip of the royal family. They want a voice and a vote.

Now, they have neither. This is a problem. By report, the unemployment rate for 20- to 24-year-olds in the Kingdom is 40% -- leaving lots of time for this historically restless age group to think about new directions for the country, ones that might not please the current ruler. The youth’s creative thinking is easily fueled by Internet chatter and news, especially now that the entire region is in upheaval.

Whether or not Abdullah and his family can contain calls for political change in his country is anybody’s bet. For Americans, the best we can hope for is that not too much happens too soon. We desperately want to avoid a short supply of oil, which would only result in higher prices, thereby damping economic growth and potentially leading to another widespread recession. I’m personally hoping Abdullah can scare up triple antibiotic and a gauze pad, something more substantial than the bandage he’s offering up now.

This chart shows the recent relationship of crude oil in blue (Power Shares DB Oil, or DBO) to the U.S. stock market, represented by the S&P 500 index in green (S&P500). Note that as the price per share of crude oil increased, the S&P 500 index moved in reverse.