A truce between Israel and Hamas holds for now, but the recent carnage could herald further geopolitical instability in the MENA. As a result, oil price will stay high and damage the global economy, which is already "at sea".
In the past decade the oil price quadrupled, but high oil prices were not such a problem then. However, conditions have changed. First, the global economy is stuttering and current prices rises are often connected to political uncertainty. That is to say, the triggers are on the supply side rather than on the demand side. In contrast, the oil price surge during the first decade of the 21st century happened on the back of soaring demand in the emerging economies. At the time, growth was robust so the world could withstand high oil prices.
Second, in the 2000s the authorities managed to convince people that oil price surges would not automatically send inflation higher. But now inflation fears are creeping up. In addition, central bank actions have contributed to oil price surges. They have flooded the financial system with liquidity. This money had to go somewhere; among others it flowed to the speculative commodity market. Oil prices also spike because QE by the Fed weakens the dollar.
Third, oil states are now inclined to "stockpile" their money or use it to mollify their own populations instead of investing it in western bonds.
Fourth, many countries may use oil more sparingly but demand in the emerging nations is still on the rise. They are less energy efficient than the industrialized countries.
Finally, in the coming decades at least, oil will continue to be indispensable to the global economy.
So the world is increasingly exposed to oil price rises. In the last century, price rises frequently occurred on the back of political crises in the MENA countries that led to oil supplies dropping by 7-10% during crises.
Oil prices will not remain impassive in the face of restiveness in the area on an ongoing basis. Which is all but inevitable; the MENA has not exactly been an oasis of peace and quiet over the last few years. Uncertainty and instability in the region has created a bottom line for oil prices. The price of a barrel of Brent oil would drop $20-$30 without tensions in MENA. There are numerous potential powder kegs in the region. Particularly as the individual countries are closely interconnected in complex ways. In other words, fuses to set the tinderbox off are everywhere and chain reactions may unfold.
Persistent uncertainty is likely in connection with Israel and Hamas, an ongoing nuclear impasse between Iran and the international community and the coming elections in Iran, internal chaos in Iraq, a potential for internationalization and escalation of the Syrian civil war, lingering aftereffects of the Arab Spring in Yemen, Bahrain, and Jordan, and restless Kurdish feelings on autonomy. Meanwhile, America is distancing itself from the region as it proceeds to woe Asia.
Political instability, western sanctions, low investment, clouds hanging over energy transports, and uncertainty regarding regulations and government interventions ... In combination, such factors contribute to high oil prices.
In addition, the oil-producing countries need high prices in order to balance their budgets. The OPEC states can "make do" with prices around $100 per barrel (Brent). Saudi Arabia and other regional countries depend on oil earnings as a means to finance higher wages, subsidies, and jobs. Fearful of disorder in the wake of the Arab Spring, the Saudis have pulled out all the stops to "pacify" its population. With reserves worth $500-$600bn, the world's largest oil producer should be able to hold out for another while. However, it needs a price of $100 to break even in 2013.
In the first instance, the MENA countries will try to fix a bottom price for oil. This will not be easy if the euro crisis deepens, the Chinese economy continues to weaken, and the US recovery disappoints. Under such conditions, the oil states will need more money to keep their citizens happy and/or suppress feelings of dissatisfaction. This has been difficult enough with a price near $125 per barrel, let alone if global economic weakness drives it down to $80. Civil disturbances could erupt in countries like Bahrain, Yemen, Sudan, and Nigeria but even Saudi Arabia could fall prey to unrest. If so, prices will start to soar.
Substantial oilprice drops are unlikely and if they occur at all, the MENA will become more restive, which will cancel out any positive effects of lower prices. This means high oil prices will contribute to the world economy navigating rough seas for the foreseeable future.