EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

The turmoil sweeping through the Middle East toppled autocratic regimes first in Tunisia and then Egypt and now threatens the same fate to Col. Muammar Qadhafi’s dictatorship in Libya.

Yet this is no North African phenomenon: serious popular demonstrations demanding economic opportunity, democratic reforms and, in some cases, regime change have also sprung up in Algeria, Yemen, Bahrain, Jordan and Iran, with signs of dissent emerging in Morocco, Saudi Arabia, Syria and other Middle East nations. 

The ultimate reach of this revolutionary fervor, and whether the implications for political stability in the Middle East and beyond are favorable or dire, remains to be seen. While the heart calls for optimism, the mind—and historical precedent—urges caution. But the economic fallout already exists and bears analysis.

In the short term, oil prices have spiked to much higher levels because of various factors, including the fear premium of political contagion, possible effects on oil production and transportation networks, a surge in precautionary stockpiling of oil and other factors.

This could, in darker scenarios, tip part of the global economy intostagflation, a combination of rising inflation and recession.

It will certainly increase inflation and reduce growth in energy- and commodity-importing countries. 

In the medium term, however, even in the event of a radical Islamic movement attaining power in a major oil producing nation, the requirements and responsibilities of government make it likely that it would seek to maintain oil production and export earnings, suggesting an eventual return to equilibrium. But the risks of short-term economic and financial volatility and of a correction in the price of risky assets are rising