Crude oil movements underpin markets

As the lifeblood of the modern economy, oil is a vitally important commodity for every market in the world.

Crude oil futures have been on a tear recently, as the spread of revolutionary activity and unrest across the Middle East continues to worry investors, analysts and politicians. Before the latest unrest flared up in Libya, the demonstrations hadn't affected major oil-producing nations; Tunisia is a fairly minor player, economically and politically, while Bahrain and Egypt are still relatively small compared to developed economies.

Now, however, the demonstrators marching on Tripoli to unseat the dictatorial Colonel Muammar Gadhafi may come into conflict with armed loyalist forces at Marsa el-Brega, one of the nation's oil exporting  terminals.

That fight is likely to shut off Libya's oil exports completely, depriving the world supply of about 1.5 million barrels per day. In addition, that crude is a relatively light, sweet variety, while much of the spare capacity in Saudi Arabia and other nations is of the heavy, sulfurous type. Nigeria, which exports a fair amount of low-sulfur crude, has benefited from this supply shock, as traders buy up the African nation's production.

"Growth in global diesel demand combined with tightening environmental regulations will put increased pressure on demand and prices for light sweet crudes," Philip Verleger, an energy economist, told the Financial Times. "This could be 2008 all over again."

Of course, the big concern is Saudi Arabia. While no protests have yet rocked the Kingdom, there are rumors of a major demonstration in the coming weeks. With its massive oil reserves, Saudi Arabia is able to keep its people relatively comfortable with generous social programs and welfare. However, political life and freedoms are essentially nonexistent and youth unemployment is staggeringly high – a volatile mix, especially in such troubled times.

The Saudi stock market dropped, sliding to the lowest level in 22 months today. On Facebook, Saudi activists have posted messages and pages calling for protests on March 11 and March 20, paralleling the organization of the demonstrations in Egypt and Tunisia.

"There's a protest planned for the Eastern Province, which is where the Shi'ite minority and the oil are, and this sparked selling," an anonymous Dubai-based analyst told Reuters.

It's no coincidence that this week, King Abdullah announced a program of $37 billion targeted at education, unemployment aid and housing subsidies for the Saudi people. Rising commodity prices have put pressure on a nation that imports two-thirds of its food, even though these supplies are heavily subsidized by the government as well.

On the IntercontinentalExchange, Brent crude oil futures for April delivery jumped 1.224 percent to $116.83 per barrel; West Texas Intermediate crude rose 1.842 percent to $101.50 per barrel.

Protests in Saudi Arabia could send the price of oil past the records it set in 2008; the result could well be a worldwide recession. All eyes will be on the Persian Gulf for the next few weeks – and the consequences of any action there is will probably be  extreme.