The Libyan effect

If any supplementary lessons were needed about the acute interdependency of economies in our globalized reality, then Libya is teaching them with fury.

By
February 24, 2011 05:43
3 minute read.
Libya square

Libya square 520. (photo credit: Associated Press)

If any supplementary lessons were needed about the acute interdependency of economies in our globalized reality, then Libya is teaching them with fury.

Just days ago, the Israeli public was moaning about its pain at the pump, and the government backtracked from its latest excise hike on gasoline. It wasn’t a significant discount, but it was our local version of “people power.” That achievement looks like dissipating soon. This time, no domestic pressure will help because, in this case, our treasury is powerless.

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The very suggestion that beleaguered Libyan despot Muammar Gaddafi might sabotage his own oil pipelines should his position become hopeless sufficed to send shockwaves through international markets. No notion, apparently, is too bizarre in the Libyan context and commodities traders are taking nothing in stride.

Even without gigantic flames licking the Saharan skies, the Libyan turmoil has already destabilized the international commercial system and we will all pay the price, regardless of our distance from and lack of involvement in Libya.

Libya’s importance as an oil producer perhaps explains the different reaction to its upheaval compared to that of its Egyptian neighbor. Though the cost in human casualties was nowhere as horrific in Egypt, world leaders quickly and explicitly called for Hosni Mubarak to step down. Condemnation of the Libyan bloodletting notwithstanding, there hasn’t been similar pressure for Gaddafi’s personal removal.

THE LIBYAN riots have upset stock markets worldwide like no other recent regional mayhem. In a mere two days early this week, oil prices spiked by 12 percent, and they keep climbing. In absolute terms, Libyan oil is hardly indispensable. It accounts for some 2% of the overall world supply, an amount which other OPEC countries can easily make up. The Libyan output is some 1.6 million barrels daily. Saudi Arabia alone can up its production by 3 million barrels a day if required.

But Libya is far more important in the European perspective, and its European customers are wary. While analysts watched Egypt’s drama with relative equanimity and half-ignored Bahrain’s internal strife – despite the potential impact on its Saudi neighbor – Libya finally shattered global composure. Gloomy predictions forecast a spiral that will take us to $140 a barrel.

A decade ago, excessive oil prices were somehow tolerated, but today’s economies are barely hobbling out of the recent recession. Game-changing price hikes might well throw the entire international financial complex back into a state of frantic flux.

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Although Israel did better than most Western economies during the credit-crunch years, we can afford no smugness here either, especially in view of the “people power” euphoria. The public must be reliably apprised of evolving conditions.

Much as governments are disposed to singing their own praises, the time has come to present the populace with a bleak assessment. Inordinate optimism leads to foolhardiness. We are already witnessing its twin worrisome features: the bloated real estate bubble and growing demands for wage rises.

With inflation lurking ominously, the Bank of Israel was obliged to raise interest rates. However, that made the shekel yet more attractive to investors/speculators. An artificially overvalued shekel cuts deep into exporters’ profits, and runaway oil prices are sure to add to their misery. This could well result in bankruptcies, plant closures and massive layoffs.

With disproportionate self-congratulation and hubris, we collectively kidded ourselves that we were economic miracle-workers and could surmount any hurdle. But this is a dangerous presumption, one whose direct upshot is the inflationary threat. Our government would do well to abandon its feel-good PR line and warn the citizenry fairly and earnestly of what’s ahead.

Any increase beyond the already high $100-a-barrel mark will redirect all national reserves everywhere to pay for energy. The immediate consequence is that Arab-sphere instability is bound to affect all raw materials and manufactured goods prices everywhere. This means inflation and higher interest rates.

For Israel specifically, it must not mean insatiable appetites at home that would upset the very delicate equilibrium so painfully and painstakingly maintained here, against the odds. Greed could turn us into another Greece.


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