On Earthquakes and Upheavals

The tragic 6.3 magnitude earthquake which hit New Zealand’s largest city on February 25^th added an eerie element to the series of man made upheavals in north Africa. In short order, the governments of Tunisia, Egypt, and imminently Libya, fell as a spontaneous and explosive wave of street protests forced out their long time rulers. The common themes among the ousted governments is that each country was governed by a long standing dictator, the level of corruption and special privilege among the elite was visible and increasingly resented, and the level of repression of any opposition was severe. Interestingly, the revolutionaries generally were middle class, young, and educated. Unemployment, however, is high in every case, and opportunities are limited.

Egypt and Tunisia are now run by care taker governments, while Libya is in the throes of a violent and vicious response by Gadhafi: Other repressive governments in a region full of police states are certainly threatened by these events. The ultimate outcome of these upheavals will not be known for a long time, adding to the angst around the world, and enormously complicating U.S. foreign policy, not the least because we have supported some of the most repressive regimes among them.

The events are news worthy, and volumes have already been written about them. There is a great deal of speculation about the effects on the world economies and the financial markets. Many of the predictions seem extreme and are unlikely to be realized. Some trends are discernible through the fog of uncertainty, however. Eurozone countries generally import most of their energy needs from OPEC including Libya and Russia. Potential disruptions of supply and higher prices only make it harder for the eurozone countries to stabilize and grow their economics, especially the weak states on its southern periphery. China will become more aggressive in securing its needs by increased drilling and purchase activity. It must be said, however, that $120 per barrel for oil, as has been speculate upon, is not in OPEC’s interest, just as it is not in the world’s interest. Non OPEC producers such as Canada and Russia clearly benefit from the higher oil price.

Aside from geopolitical considerations the U.S. economy is less affected by the upheavals in north Africa. Although we import large quantities of oil our sources of energy are more diverse, including abundant natural gas, and potentially significant amounts of additional supply from a hope-for resumption of drilling in the Gulf and other secure areas. U.S. economic growth is predominantly consumer based. With employment and income improving steadily economic conditions will continue to strengthen. The flight to quality caused by insurrections and instability, and the deflationary influences of higher energy prices, ultimately benefit U.S. financial markets, and the value of the dollar. The geopolitical dangers are very clear, but the threat to the U.S. economy is limited.