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UPDATED: April 11, 2011 NO. 15 APRIL 14, 2011
Ripples From the Arab World
Turmoil in the Middle East sparks global economic concerns

Economic blows

SURGING OIL PRICES: A man refuels his car at a gas station in Vienna, Austria, on March 14. International oil prices soared in the wake of the Middle East turmoil (XU LIANG)

The political turmoil has made it even more difficult for countries in the Middle East to follow through with economic restructuring. It also caused natural resources industries to decrease as well or even halt production. In February, Libya's crude oil output dropped to 1.39 million barrels a day from 1.58 million barrels a day in January. Before foreign military intervention started on March 19, this number fell to below 400,000 barrels a day, less than a quarter of its normal output.

The tourist industry in the region has all but collapsed, with international and domestic travelers seeking safer, less tumultuous destinations. Construction of houses and bridges, as well as water pipelines, stopped. Young skilled workers, along with foreign workers essential to the normal operation of the local economies, fled away, as did foreign capital.

To make matters worse, previously suppressed anti-Gaddafi forces were able to rebound. After escalating violence forced almost all foreign companies, along with millions of foreign workers, out of Libya, extremist forces shifted their attacks against sub-Saharan Africans living and working in Libya. The UN News Center said Libyan rebels were compelling sub-Saharan Africans to leave the country. Many sub-Saharan Africans' passports and official work documents were confiscated and destroyed.

Foreign companies—including but not limited to oil and natural gas companies, telecommunications companies and engineering contractors—played an indispensable role in Middle East countries' economy and society.

The turmoil has already put the countries' economic future in jeopardy. Before starting to rebuild their economies, they will have to compensate foreign companies and residents for their losses. If the chaos continues, they will suffer even bigger losses.

Spillover effects

The impact of the situation rippling through the Middle East will soon be felt on the international commodity market. Capital will flow away from Arab countries, seeking safer havens. The turmoil will also cast more uncertainties over regional and global political situation.

Had the civil war in Libya not escalated into an international conflict, commodity prices, especially oil prices, would have dropped. If the West had not intervened, Gaddafi's loyalist forces would have occupied rebel stronghold Benghazi and ended Libya's civil war quickly, thus eliminating the surge in oil prices by providing security to Libya's oil resources.

As a result of the intervention, the war will be prolonged, as will the negative impact on Libya's oil production. If the West's bombing damages Libyan oil fields and transportation facilities, international oil supply will certainly take a hit. Although Libya's oil exports account for only 3.1 percent of the world's total, this gap will still be huge and not easily filled by Saudi Arabia or other oil exporters in the Middle East.

The European market will be hit the hardest, since it's a major destination for Libyan oil. Many European oil refineries are made to use Libya's light crude oil, as opposed to oil produced elsewhere.

Since the surge in oil prices in the 1970s, petrodollars from Arab countries have become a significant force in international financial markets. If the political disturbance continues in the Middle East, large amounts of capital will find markets elsewhere in the world. This will definitely have an impact on international financial markets—impacts that will be shown in exchange rates and asset prices.

The author is an associate research fellow with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce

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