How The Arab Spring Paved The Way For A Double-Dip Recession, And Why It Might Prevent The Next One

Oil prices–which spiked during the start of revolts around the Middle East–have now come down due to low demand and a sluggish economy. Will the extra oil produced once the area calms down be enough to save the economy?


With the Libyan Civil War winding down the question on the rebels’ NATO allies minds now becomes: “When can we bring the oil fields back online?” It wasn’t until the Arab Spring arrived in Libya that worldwide oil prices really began to fluctuate, as the country’s output of light sweet crude quickly dwindled from 1.3 million barrels a day to a mere 60,000, a loss equivalent to 5% of Europe’s total supply, or more than 15% of Italy’s, France’s, Switzerland’s and Austria’s.

Unfortunately, the answer is: not any time soon. OPEC officials, oil analysts, and Libya’s former oil minister Shokri Ganem (who defected three months ago) all agree that restoring production to its previous levels will take years–until 2013 or 2014 at the earliest. With sufficient repairs, the country could produce 400,000 barrels a day in a few months, Ghanem told Platts, an oil industry publication, but that still leaves a global shortfall of almost a million barrels a day.

But the oil markets no longer seem to care. Even with continued fighting in Tripoli this week, oil futures are well off their April peaks. The problem is no longer supply, but demand. The combination of American austerity budgets, the slow-motion collapse of the Eurozone, and sluggish Chinese manufacturing growth all suggest a double-dip recession is in the offing. That, plus the Saudis running the pumps flat-out and the release of emergency barrels from the U.S.’s strategic reserve have conspired to drive prices down (for now). “Lower energy input costs are well and good, but not if they are achieved at the cost of another economic crisis,” the IEA said in its August market report. Which raises a more interesting question. Did the high prices that accompanied the tumultuous start of the Arab Spring trigger the looming double-dip?

Up to a point, yes. University of California at San Diego economist James Hamilton recently looked at 11 oil price spikes since World War II and found that “every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession.” This was especially true in 2007–2008, when the recession that technically began in December 2007 dovetailed with July 2008’s oil spike, paving the way for the economy’s implosion that fall.

Testifying before Congress in May 2009, Hamilton warned that “if demand from China and elsewhere returns to its previous rate of growth, it will not be too long before the same calculus that produced the oil price spike of 2007–08 will be back to haunt us again.”

Peak Oilers have a name for this destructive cycle of stop-and-start growth: “the bumpy plateau.” The global inability to boost production any higher in the face of growing demand produces cycle after cycle of recessionary demand destruction, only ending with the substitution of a plentifully cheap alternative (e.g. renewables, nukes, shale gas) or scenarios with names like “The Long Emergency.”


In a surprise twist that should be no surprise at all to conspiracy theorists, the best short-term solution to the bumpy plateau may be the sources of the latest oil shocks, Libya and Iraq. In a post last year on the Peak Oil discussion site The Oil Drum, now-FireEye chief scientist Stuart Staniford argued “Iraq could delay Peak Oil a decade” if it could manage to boost production from a Saddam-era 2.5 million barrels a day to 12 million in 2017–a level its ample reserves are easily capable of supporting. Iraqi officials admitted in May, however, they would miss that target by a wide margin.

The opportunity to boost production in a free and open Libya is much smaller (its production peaked at 3 million barrels a day in the 1960s) but every little bit counts as the world tries to buy time for renewables to achieve market parity. The legacy of the wars in Iraq and Libya may prove to be what their critics always said they were about: the oil.

Read more columns like this at the Butterfly Effect

[Image: Flickr user Maggie Osama]


About the author

He is the author, with John D. Kasarda, of Aerotropolis: The Way We’ll Live Next, which examines how and where we choose to live in an interconnected world.