Why low oil prices is good. Saudi was scared by riots in its neighborhood.
High oil prices lead to high food prices, and a recent study shows that high food prices are associated with riots. So the high oil prices required to produce the difficult-to-extract oil are likely to sow the seeds of governmental overthrow (repeat of “Arab Spring”) and political instability in MENA countries.
Figure 6. Comparison of FAO Food Price Index and Brent Oil Price Index, since 2002.
Figure 6 shows the correlation between food and oil prices. A person would expect food and oil prices to be highly correlated because oil is used in the production and transport of food products. The FAO Food Index relates to imported food, such as is often used in MENA countries. Because this food is often transported long distances, a person would expect its cost to be especially affected by oil prices.
A recent academic study called The Food Crises and Political Instability in North Africa and the Middle Eastby M. Lagi, K. Bertrand, and Y. Bar-Yam shows this graph:
Figure 7. Figure showing correlation between riots and high food prices, as measured by FAO Food Price Index from http://arxiv.org/pdf/1108.2455v1
The authors show that there is a high correlation between high food prices and riots. They say, “If food prices remain high, there is likely to be persistent and increasingly global social disruption.” They also point to the possibility of the situation getting much worse, in the 2012-2013 timeframe, as a result of a continuing rise in food prices.
We saw in Figure 6 that rising oil prices are associated with rising food prices. Thus, the fact that oil prices are rising because the “Easy Oil” has mostly already been extracted, and we now are moving on the more expensive oil, could contribute to riots. This association is likely to make it more difficult for MENA to raise oil production, because riots lead to political instability, and without political stability, it is difficult to increase or even maintain current levels of production.
http://oilprice.com/Energy/Crude-Oil/IEA-Wrong-To-Expect-Oil-Production-Growth-To-Come-From-MENA.html |
