Investors are remarkably sanguine about the events in Tunisia and Egypt...
Oil actually fell yesterday to $88.27. The Dow has been on a hot streak and is up again today — as it has been for months — to 12,149.
History suggests events in the Middle East go from bad to worse.
According to the Democracy Index put out by The Economist, there are no “established democracies” in the region.
Israel is listed as a “flawed democracy.” Lebanon and Turkey were listed as “hybrid regime,” along with Palestinian territories, Pakistan, Armenia, and Iraq (Lebanon is now run by Hezbollah). The rest are categorized as “authoritarian regimes.”
The last free vote saw Hamas sweep the Palestinian elections in 2006.
Hamas started as an offshoot of the Muslim Brotherhood in Egypt. On gaining power, they started lobbing rockets into Israel. In 2007, the Battle of Gaza was fought between Hamas and the Palestinian security forces.
Hamas is listed as a terrorist organization in most G-20 countries.
In the aftermath, Israel and a Hosni Mubarak-ruled Egypt imposed an economic blockade on Gaza that is still in effect.
Population and scarcity
Jack Andrew Goldstone points out in his book, Revolution and Rebellion in the Early Modern World, that all revolutions from the French to the Russian, from China to Japan, occur where there is a rising population and diminishing resources coupled with an inflexible ruling party. (Note: The population in Russian doubled between 1850 and 1913.)
Today, the Arab world has the fastest growing population on earth — and the youngest.
In Yemen, the average age is 17.9 years with a birth replacement rate of 2.71, which puts it at number 23 in the world.
The United Arab Emirates is in fourth place with 3.56, Kuwait is fifth with 3.50, the Gaza strip is six with 3.29.
Libya, Chad, Egypt, Oman, Syria, and Iraq all make the top quintile.
These young people will be the next rulers of the largest oil-producing region within the next ten years — mostly because all of the current leaders are in their 80s... with the exception of Qaddafi, who is only 62, but has suffered a series of strokes.
1973-1974: The last time there was chaos in the Middle East
Larry Elliott, economics editor of The Guardian, wrote a great article where he compared the high inflation, dubious U.S. wars, and LBJ's Great Society of forty years ago to today's Obama administration.
This situation is alarmingly similar — and proved disastrous for the global economy at the time.
Elliott writes:
... as a result of the Arab-Israeli war, via a boycott of the west by producers in the Opec cartel and a fourfold rise in the cost of crude oil. The crisis, though, had deeper roots: the inability of the US to anchor the international financial system, given the cost of the Vietnam war and Lyndon Johnson's Great Society programmes, a steady increase in price pressures over the previous half-decade, and the easy availability of credit as politicians tried to keep the long post-war boom going.
It's about food
We must remember that the revolution in Tunisia started as a protest over restrictions on selling vegetables; in the French Revolution, fishmongers marched on Versailles.
Since June 2010, wheat prices have gone from $149 a metric ton to $308.
Libya and China are seeking to buy up farms in the Ukraine or otherwise secure food for their people.
Today Sysco (SYY), the large U.S.-based food distributor, “missed fiscal-second quarter profit expectations as high inflation pressured operating expenses and margins.” They went on to say: “accelerating and significant food cost inflation negatively impacted our customers purchasing budgets.”
India's food inflation hit 17% this month.
Not all revolutions are good
Despite U.S. ideals, most revolutions end badly.
Lenin, Bonaparte, and Mao lead the short list of guys who made things worse.
And let's not forget the fact that Arabs don't really like the United States...
The younger generation has seen a host of failed U.S. policies, most notably the invasion of Iraq and the Abu Ghraib torture pictures. Nor do they think Egypt got the fair end of the deal in the Camp David treaties.
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The Federal Reserve and its compatriots around the globe have been on an easy money kick for two years now.
Printing money always creates bubbles and inflation. Food, real estate in China, oil, the U.S. stock market, and copper are all examples of inflation.
This inflation hits those most venerable in poor countries. It just so happens that these countries are demographically slanted toward youth.
Arab states have no history of creating functioning democracies. Egypt has been autocratic since before the Pharaoh Ramses. The Arab “street” has consistently expressed itself as anti-Israel and anti-U.S.
Egypt has the best army in the area with the possible exception of Israel. They have U.S. built F-16s and Abraham tanks. The force is 948,000 strong, and has been trained by the U.S. for thirty years.
We have seen “blowback” in Afghanistan, Iraq, and Nicaragua, among other places...
In the absence of a morally qualified opposition leader (Lech Walesa, Nelson Mandela, etc.), those who use the most brute force the fastest tend to win.
I would love to think that the Arab world will progress to liberal capitalist democracies — like the former states of the Soviet Union or the Asian countries in the late 1990s — but there is no historical evidence that confirms this will happen.
In fact all evidence points to the contrary.
It is most likely that we will get a nationalist strong man who rattles sabers at the West in general, and Israel in particular.
What happens to the price of oil when these countries re-arm the Sinai?
The Wall Street Journal is reporting the Bedouin tribes have already started to increase arms smuggling to Gaza in light of disappearance of Egypt's border guards.
No one knows what's going to happen...
But we do know the last time there was large-scale chaos in the Middle East, the price of oil quadrupled.
All it would take is one firebrand coming to power in Egypt.
Even if there is a smooth transition, the price of oil will go up due to inflation and an increase in global GDP growth.
I've been buying oil plays all year to great profit. I will continue to do so.
Sincerely,
Christian DeHaemer
Editor, Wealth Daily
