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Prepare for a Middle East Squeeze

The unknown unknowns have come to the fore. Political problems in the Middle East have thrown forecasts for the world economy and all sectors of manufacturing, including high-tech, into a funk over skyrocketing oil prices.

Until Libya erupted, the impact of political upheavals in the Middle East had been limited to the displacement of despots in Egypt and Tunisia, but as crude oil prices have soared at a double-digit clip in only the last week, it's beginning to dawn on everyone that the global economy could be at significant risk this year.

I can't think of a single political prognosticator, forecaster, economist, or corporate executive who foresaw events now taking place in the Middle East and factored this into their outlook for 2011 or made plans for how these developments might affect their operations or the global economy. That's why I called them the “unknown unknowns,” borrowing a phrase from former US Defense Secretary Donald “Rummy” Rumsfeld.

We are now beginning to see how the Middle East might throw a monkey wrench into carefully laid-out plans for individuals, businesses, and governments worldwide. Oil prices have risen quickly, with crude oil delivery terms shooting past the $100 per barrel level for the first time in more than two years, topping $120. Although prices have since declined after several countries, including Saudi Arabia, assured the market they would compensate for limited deliveries from Libya by raising production, crude oil prices are still more than 12 percent above where they were only two weeks ago.

I wouldn't trust the House of Saud to help deliver the world from the economic mess that may result from higher oil prices. Saudi Arabia itself has not experienced any outward signs of political disturbance, but deep rumblings beneath the surface might still trigger an explosion that could dispel the idea that peace reigns in the kingdom. If crude oil prices could rise double-digits because of supply disruptions from Libya — the world's 12th-largest exporter — imagine the impact on the world economy of problems in Saudi Arabia.

The blowout is already huge. Transportation costs are going up as logistics services providers try to pass higher fuel costs to customers, hurting companies that rely on air freight to ship products from manufacturing centers in Asia to consumers in the West.

Consumers in Western nations are especially at risk. Only yesterday, regular gasoline retailed for about $3.09 per gallon in my area, but by this morning the price had shot up to $3.39. That's bad news for consumers and manufacturers alike. After filling my tank this morning, for instance, I began having second thoughts about the Motorola Xoom computing tablet I was hoping to buy. Yes, I'll probably still buy it but may delay the purchase for several more months. Why? It's not a necessity. I can still get by on my PC and BlackBerry.

Many other consumers may have similar thoughts, which will likely hurt the sales of high-tech items like PCs, smartphones, and computing tablets. At the corporate level, expect companies to take a second look at capex budgets and perhaps even further slow down hiring. Already tight government spending may come under pressure as well, impeding infrastructure spending, which many high-tech companies rely on to boost sales when consumer penny-pinching lowers demand for products.

It's not all doom and gloom, however. The sharp rise we've seen in recent weeks in crude oil prices may not last longer than a few weeks or months. The optimist in me wants to believe leaders like Muammar al-Gaddafi will soon be swept out of power, and calm can return to the Middle East. However, the more logical part of me also knows that the departure of leaders like this does not immediately lead to dramatic transformation and peaceful coexistence among nations. Their departure only brings to the surface the damage they've done to their nations and thereby the hard work that must be done to rebuild, repair, and help those countries rejoin the global community as peaceful players.

Events like this play out, not in weeks or months, but often in years. We may be in for a rough ride.

27 comments on “Prepare for a Middle East Squeeze

  1. AnalyzeThis
    February 25, 2011

    Bolaji, I've been following the various situations in the Middle East… and while the short-terms effects are very obvious (as you mentioned with those rising gas prices), the long-term effects are what I'm sure many supply chain professionals are interested in.

    But as you mention, things like this will take years to play out. A wave of democracy and peace could sweep the region and lead to years of prosperity… or the complete opposite scenario could play out. Realistically, it'll probably end up somewhere in the middle. But as you say, due to the high number of “unknown unknowns,” the future is especially difficult to predict here.

    I won't even attempt to speculate, but does anyone have any bold predictions for how things will play out?

    In the mean-time, I'm just glad that I'm not really working DIRECTLY with any partners or suppliers in any of these currently dramatic areas. Yet despite that, nearly all of us are still feeling the indirect effects.

    Here's hoping we don't get squeezed too hard!

  2. Ms. Daisy
    February 26, 2011

    The question to answer by all is how do you prepare for unknowns especially for the ones in a tough region like the Middle East? One sure thing is we will all get hit by this one. So fasten your sit belts for this long bumpy ride.

    Oil will be the currency on the shorterm and long term is up in the air. The fragile recovery the US has just made will be put to test if not blown out!

     

  3. seel225
    February 26, 2011

    The revolt against their country's dictator in the middle east has created a very hug impact on the oil prices and in turn on the global markets also. Across the globe mainly in the western countires, the oil prices has increased in couple of days. The unstability in the global markets will show the effects on different sectors of industry.The international community should be involved in order to establish peace and to create a stable democratic political system in the middle east countries. Anyway no one can know whats going to happen next (which is unkown).So solutions has to be found out for unknown things, even though handling the unknows is very complicated.

  4. hwong
    February 26, 2011

    Well one thing that business can do to hedge against this is to buy fixed contract to lock down the oil rate. For us individuals we can always look into oil Funds or ETFs. That way our portfolio is more diversified against the rise in oil price

  5. t.alex
    February 26, 2011

    I have seen the news recently. Some people are hopeful of a more democracy change while some are not that optimistic. In the short term, yes we wish not to involve in any of this. But in the long run, things will be better I believe.

  6. DataCrunch
    February 26, 2011

    It will be interesting to see how this plays out and what the impact will be on corporate earnings and consumer spending over the next two quarters, or if things continue, the next three quarters and even bleed into 2012.  Perhaps the rising fuel costs and the uncertainty of foreign turmoil may cause companies selling to US markets to bring manufacturing back to the US.   Thoughts?

  7. Clairvoyant
    February 26, 2011

    I agree Dave, it will be interesting to see. However, I think it may all be a little worrisome to all of us, not knowing what the future has in store. The impact with us in North American being rising costs for products.

  8. Himanshugupta
    February 26, 2011

    whenever there is a problem in middle east, we all get aware of it as the oil prices starts to go up. Middle east is not new to the problems and troubles, the world leaders would want to do anythings to keep things calm as the whole world depends on oil. 

    The relevant question is whether the jump in the price in oil will affect the supply chain and economic recovery in the long term. I do not think so. Until and unless, the middle east gets involved in a war (like the gulf war) the chances that the recent turmoil will have any impact on the strong economic recovery predicted in 2011-2012 are limited.

  9. Himanshugupta
    February 26, 2011

    whenever there is a problem in middle east, we all get aware of it as the oil prices starts to go up. Middle east is not new to the problems and troubles, the world leaders would want to do anythings to keep things calm as the whole world depends on oil. 

    The relevant question is whether the jump in the price in oil will affect the supply chain and economic recovery in the long term. I do not think so. Until and unless, the middle east gets involved in a war (like the gulf war) the chances that the recent turmoil will have any impact on the strong economic recovery predicted in 2011-2012 are limited.

  10. Ashu001
    February 27, 2011

    Bolaji,

    This is the best part of your post-Hoping against hope things will get back to normal soon and Crude Oil prices will fall to USD 100/Barrel(and lower levels) soon;without destroying whatever Growth momentum we have in the Global Economy today after 2008s recession.Unfortunately when you look at the No.1 Reason why Crude Oil prices have risen so much in the last year or so,its because of the United States Federal Reserve and their Quantitative Easing policies which are designed to only to protect the interests of Wall Street and Corporate America who control America today.Unless we see signs that the Federal Reserve withdraws liquidity from Global Markets rapidly and decisively in the next three months;there is no stopping a Global Recession in 2012 today.

    Regards

    Ashish.

    “It's not all doom and gloom, however. The sharp rise we've seen in recent weeks in crude oil prices may not last longer than a few weeks or months. The optimist in me wants to believe leaders like Muammar al-Gaddafi will soon be swept out of power, and calm can return to the Middle East. However, the more logical part of me also knows that the departure of leaders like this does not immediately lead to dramatic transformation and peaceful coexistence among nations. Their departure only brings to the surface the damage they've done to their nations and thereby the hard work that must be done to rebuild, repair, and help those countries rejoin the global community as peaceful players.

    Events like this play out, not in weeks or months, but often in years. We may be in for a rough ride.

  11. Taimoor Zubar
    February 27, 2011

    I think all your points are valid about how the rise in oil prices will firstly increase the production costs and secondly the high prices will reduce consumer spending on luxury items. I was also wondering that the turmoil in the economies of the Middle Eastern countries will have any effect on the demand for electronic goods in those countries. I think the political uprising will also worsen the economy of those areas and in turn there will be lesser demand for electronic goods in the region. Can that be a significant factor for electronic manufacturers to consider?

  12. SP
    February 27, 2011

    Looks like there is some kind of revolution going on in middle east region. First it was Egypt and now Libya. In 21st century dont know who wants to be governed under dictator. All I understand is these regions are rich because of oil and any trubulence in their political scene cause disruptions in all businesses across the world. Sometime back there was news that Abu Dhabi is going to be new silicon valley. But electronics industry is a not a natual resource, for it to develop you need stability in political ennvionment.

  13. Mydesign
    February 27, 2011

         Bolaji, Middle East countries are rich in crude oil and they are contributing more than 2/3 of the world’s crude oil requirement. So the economic turn over in these countries are fully depended up on crude oil. Due to the recent political instability in Egypt and Libya, now the crude oil prices are gone to ever high in history of more than 116/ barallel. So whenever the crude oil prices are going high, it’s had make the corresponding impact in world economy too and we had realized it during the Kuwait-Iraq war. This high price reduces the spending power and forced the countries to limit the import of crude oil. At the same time they are much depends up on the internal stock (reserve) also, for catering the oil requirements.  This problem is going to affect much during the winter and summer season.

         In my personal opinion, we have to explore the different alternate energies to avoid such scenarios in future. It’s NOT safe to depend the Middle East counties always, for the oil requirements because from the past history we had seen that there is always a political instability or war in these regions, which effect the ease movement of crude oil.

  14. prabhakar_deosthali
    February 28, 2011

    It is easier said than done that we should explore and use alternate energies. Whatever efforts we as a world may have  put in, in alternate energy generation such as Solar, wind, sea-waves, waste, we are still largely dependent on the OIL  for  our dailiy survival. And for this we all countries have to collectively build the pressure on thse countries to resolve their issues and form stable governments. America must put to use its political muscle power to resolves these issues at the earliest.

  15. Adeniji Kayode
    February 28, 2011

    Prabhakar:

    you are right on that one.

    I have been thinking what percentage of our day to day activities really depend on Oil, and I came to a conclusion that if not 100%, its almost 100%. The longer it takes for the Middle East crises to be resolved the more we should expect increase in the price of  Oil.

  16. Adeniji Kayode
    February 28, 2011

    I agree with Toms on exploring other form of energies.

    I think we have dwell so much on crude oil that we never realise that few times there is crises with the source, the impact will great on world economy.

    Though Crud oil is much more easier to process that other forms of energies but because of times like this, there is need to think about the future and find an alternative or something close to crude oil

  17. Adeniji Kayode
    February 28, 2011

    I feel the earlier the better if world leaders intervene in the matter so as to protect the ecomomic stability.

  18. Adeniji Kayode
    February 28, 2011

    I don,t think that would affect the production of Electonic goods, it can only affect the price. Our world cannot survive without the electronics,they have become part of our livess.Not having them makes life hard sometimes while increase in their prices make things dificult too.

    I agree with you that there will be decrease in demand because oh increase in price of the electronic goods but much more than that increase in crude oil affects everthing and not just electronics.   

  19. Backorder
    February 28, 2011

    Lets not be so negative in our outlook. I sense a deliberate attempt to debate the negative impact of the political changes, through this article. That is okay for discussion's sake, though I would not need to be an optimistic to say that this upheavel will only have a limited impact. In size and duration. It is very interesting however, the way you have brought out the correlation between your spending decision(Motorola Xoom) and the rising price of Gas. I would want to wait for the 4G ready version on Xoom, anyway!

  20. Ashu001
    February 28, 2011

    Backorder,

    That is okay for discussion's sake, though I would not need to be an optimistic to say that this upheavel will only have a limited impact.

    Responding to your comments here,all I can say is please look all over the world(at the scope and size of protests being triggered by the developments in North Africa.Now China has also been affected.Next stop America.

    http://globaleconomicanalysis.blogspot.com/2011/02/china-cracks-down-on-mid-east-style.html

    The reason?The one and same-Excessive Liquiidty pumped in By Global Central Banks(to save the Wall Street banks)-Led by The Leader in Chief-Ben Bernanke's Fed reserve.

    Regards

    Ashish.

  21. Backorder
    February 28, 2011

    Ashish,

    When I say limited impact, I mean the impact of these political events on the actual economics of the world. As far as the policy of Qualitative Easing and its effect on the economy, I share the same opinion as yours and feel that this is in effect driving down the world into a crisis again. Developing nations will face destabilising inrush of dollar investments putting the only engines of global growth into overdrive. Totally not required at this time of recovery.

  22. eemom
    February 28, 2011

    While I would love to conquer with the optimistic view, I can't see how the Middle East upheaval will only have little effect.  We, absolutely, need to continue research and development of alternate energy sources, but for now, we still depend greatly on crude oil.  Libya will probably fall soon, however, that does not necessarily mean that all will be good in the country just as it has not for Egypt.  The bigger question is who will take power and how will they approach “democracy” as well as cooperation with the west.  This question may take months to resolve and then years for the area to settle under new rule.  While we hope for the best, we need to prepare for the worst.

  23. Backorder
    February 28, 2011

    Okay, while we are at discussing what all could go wrong, how about the eigth largest oil producer of the world going bankrupt? Chavez, bullying the state oil firm of venezuala, choking entire private sector dead and borrowing from China at the drop of the hat, sounds like we could see another unstable oil giant sooner than we expected. Ironically, the present spike in Oil is actually making Venezuela look decent and able to match its foreign exchange requirements!

  24. Hawk
    February 28, 2011

    These events in the Middle East expose a deep fissure in our world, one many people have been pointing out for some time. The world's oil resources are largely controlled by despots who have used these to feather their own nests at the expense of their own people. The West on the other hand became dependent on oil to the extent we failed to align our most treasured beliefs — the rights to self-determination, religious freedom and freedom of speech — with what was happening in all these countries. Gadaffi, the same Libyan leader everyone now condemns, was feted in the US and in European capitals only a few months ago.

    The tumult in the Middle East will hurt the global economy. There's no doubt in my mind about that. This is because we know what the citizens of these countries want to do: They want to throw off the despots governing them. But do we (and the Egyptians, Libyans, etc.) know what or who will replace these tyrants? What kind of political systems will emerge in these countries and which new despots will emerge and how long will it take for things to return to some form of normalcy?

    What if, as you rightly pointed out, Venezuela explodes? Oil is the lifeblood of the global economy and if it gets choked off, everyone will feel the pinch.

  25. bolaji ojo
    February 28, 2011

    EEmom, Oil is only one of the factors that I see impacting the global economy this year. Right now it is playing the leading role because of the turmoil in the Middle East and the fact some of the countries affected are major crude oil exporters. I believe the greater concern for the global community should be the ripple effect of the Middle East political turmoil on other nations. I think Backorder mentioned Venezuela in his comments. We can add Saudi Arabia, some countries in Eastern Europe and in the backyard of Russia.

    The tumult in the Middle East has nothing directly to do with oil but centers on demand for political change from oppression. In order to really gauge its potential implication for other theaters, we would have to look at other nations that similarly oppress their citizens and ask whether these people can muster the will to challenge their rulers. If they do, then this year may turn out to be quite different than we currently think. Nobody wants to talk about the bull elephant in the room but China is built on precarious grounds. If the Chinese people decide they don't want a single-party “democracy” anymore, the world's economy will develop a really bad cold.

  26. eemom
    February 28, 2011

    Bolaji

    I totally agree, although it is scary to think of what the world will hold over the next year.  If Libya falls, it will send a strong message to oppressed people everywhere that the possibility of change is there.  Libya's regime (within the middle east) is considered closer to Iraq and Iran while Egypt and Tunisia are considered one step above in democracy. 

    We may not distinguish dictatorship within the Middle East, but, there is a difference among these countries and how they are ruled.  I was born and raised in Egypt and was taught those subtle differences at a young age.  While I celebrate Egypt's freedom from Mubarek, I am also scared for who may take rule and how that will ultimately affect the country.

  27. Ms. Daisy
    March 1, 2011

    eemom:

    It is this same concern expressed in your statement “While I celebrate Egypt's freedom from Mubarek, I am also scared for who may take rule and how that will ultimately affect the country.” that really scares me. I truly can feel your anxiety because this change could be for good or for worse. Many West African countries went through successions of bad military leaders that were tyranical, dictatorial, and bankrupted the states treasuries.

    Worse still for Egypt is the concern for what is going to be at stake for women and their role in society? This definitely will be determined by who takes over the reign of government. So the squeeze will not only be in terms of the physical and financial change alone. 

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