Home > Main > Too late, Saudi Arabia Opens the Spigot to prevent a wave of Regime change

Too late, Saudi Arabia Opens the Spigot to prevent a wave of Regime change

February 1, 2011

Highest production in 2 years is due to Tunisia/Egypt Overthrows

The transfer of government that is about to happen in Egypt was expected to have a bigger fallout in the markets than it did. So far the result have been a bit higher in oil, but all the other markets have shrugged their shoulders and got on with whatever they were doing before.

But we cannot pretend that this transfer of power will go unnoticed.  China has noticed.  Jordan dismissed their cabinet and is looking to hold on to power.  But undoubtedly the biggest risks in the world right now are Saudi Arabia and Iran.  Each of these countries face have something like a dictatorship, lots of oil, and a population that is grumbling and not exactly happy with the current arrangement.

Saudi Arabia is in better shape than Iran simply because they have spread the some of the wealth to the average citizen.  But that doesn’t mean that they are immune to the threat of overthrow.

To be clear – these protests/riots/overthrows have been due to high food inflation.  Without food inflation, these revolutions wouldn’t be happening.   Food inflation hits poor people and countries much harder, because a much higher percentage of income goes for food.  Egypt spent more of their income on food than anywhere else in the world, with nearly 40% of the average persons budget going to food.  So for richer countries, food inflation is not a risk.

Saudi Arabia has been setting the price of oil and letting the quantity adjust. This strategy created oil prices in a band from $70 to $90.  Unfortunately, it has also created substantial food price inflation.  Oil at these prices makes food production expensive.

Much of the cost of food production is dependent upon the price of oil with modern farming techniques. There is exactly 1 country that is able to swing their production of oil enough to impact world oil prices.  That is Saudi Arabia, and they have turned on the spigot.  The amount supplied last month was the highest in nearly 2 years – since Saudi arabia started pumping (again late) to try combat the price spike.

However, a reduction in oil prices will take weeks and months to begin to impact food prices.  Food price inflation tomorrow will not be contained through pumping oil last week.  Food price inflation in Q3 and Q4 will be impacted through beginning to supply more oil to the market today.

Saudi Arabia moved too late to prevent the wave of regime change due to food price inflation. We’ll have to see now what happens.  I am not an expert on this type of risk, but the markets are still very relaxed about the entire situation.  So far, most people are not worried about significant supply disruptions – otherwise the price would be $15 right now.

I fully expect Saudi Arabia to continue to flood the market with oil in an attempt to head off more price increases in oil.

China is only slightly richer on average than Egypt. However, it is common knowledge that there are wide disparities in wealth in China, and that the rural countryside is extremely poor.  What happens now with China?

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