Global financial markets appear to be remarkably relaxed about a cautious recovery. Share prices are roaring away on the back of optimism about the growth prospects of the world’s two biggest economies, China and the US. With Dow Jones hitting the highest peak for a record number of years now averaging 12,300 mark. Financial markets are rallying, perhaps influenced by waves of over-confidence interspersed with bursts of panic.

The good news for Asia is that most of the region’s monetary authorities are, in fact, tightening policy and China is typically raising interest rates to calm down inflationary pressures. The bad news is that leaders have been generally slow to act. The markets appear to expect a good deal more monetary tightening in Asia – at least that’s the message coming from sharply appreciating Asian currencies, which seem to be responding to prospective moves in policy interest rates. Asia, with its export-led economies, can’t take currency appreciation lightly – it undermines competitiveness and risks eroding the country’s share of the global market. It is true that the Western world is currently in a confident mood.

At present, the mood is one of supreme optimism, marked not just by a willingness to shrug off events in Egypt but also to downplay evidence of overheating in Asia and the intense commodity price speculation encouraged by the cheap money policy. Ironically, this will lead to even higher oil prices and even dearer food, increasing the chances of an eventual hard landing.

In Malta we are seeing a constant increase in energy costs, milk, bread prices and other essentials. It is well known that imported commodities such as cereals are more expensive and this alone will result in higher food prices. Really and truly, the true cause behind the hike in oil prices is not the social unrest in the Middles East but what is going on in China and the US. Surely we should still be concerned because we cannot bear facing a double dip recession due to run away inflation. Should history repeat itself, the result will initially be higher inflation as companies mark up prices resulting in dearer food and energy, coupled with claims from workers for compensation.

This will be followed by deflation caused by a squeeze on corporate profitability and tightening of monetary policy as central banks seek to bring inflation down again. For example, emerging markets, particularly Asia, find themselves in a classic policy trap, dragging their feet on monetary tightening while risking the negative impact of stronger currencies, in contrast to the dwindling value of the dollar. Asia aside, we cannot ignore the unprecedented events that are currently unsettling the people of the Middle East. Can we ignore the unrest in the Middle East as this adds fuel to the fire that is leading to more volatility in oil prices particularly if this will lead to a slow down in tanker traffic via the Suez Canal?

All is rather confusing and contrasts with the positive trend in advanced economies such as that of US and Germany. This optimistic view of a quiet revival of the export market however, is based on a series of assumptions, some more plausible than others. The first is that there will be a peaceful transition to democracy in Egypt. The second is that there will be no ripple effect across the oil-producing states of the Middle East. The third is that, even if the protests do spread to, say, Saudi Arabia, oil flows would be relatively unaffected.

Sceptics lament that the US is only just slowly recovering from the credit crunch that hit the banking sector culminating in the bankruptcy of Lehman Brothers in 2008. Others comment that its economy is suffering from massive state bailouts culminating in record state deficits.

All this is severely impaired by military over-stretch in Iraq and Afghanistan, high unemployment marred by the bursting of its housing bubble. Its unemployment rate has eased down a notch to nine per cent (from 9.8 per cent) but is still stubbornly high. Could we blame this to rising inflation which has seen the cost of food prices go up, copper at $10,000 a tonne, and Brent crude hitting a level above $100 a barrel?

The answer is that the rising cost of oil and food act as an unfair tax on consumers, leading to inflationary pressures and a disincentive to create jobs. Tightening policy by pushing up interest rates could simply turn a slowdown into a recession, particularly in countries such as Britain, where high levels of personal debt mean individuals are vulnerable to higher interest rates. At the moment, interest rates are likely to be left unchanged in the eurozone but events in the Middle East have added to an already tricky policy dilemma. Those pressing for monetary tightening argue that our leaders learnt nothing from the lesson of the 1973-74 saga when the oil-producing cartel simply doubled oil prices and sent the world into a deep recession. Then double-digit inflation became embedded in the price structures, which forced Britain to devalue its currency. So with Asia showing early signs of increased inflationary pressures, can we risk doing nothing in Europe?

Doing nothing runs the risk of even more air being pumped into asset bubbles, which will eventually burst, leading to a double dip recession. All this is happening while a phenomenal general social unrest is hitting the Arab nations. The people across North Africa and the Middle East are waking up and claiming their rights and liberties. We saw the masses down in the streets in a number of countries starting with Tunisia, then Yemen, Jordan, Egypt and perhaps Algeria. It goes without saying that a bloody transition to democracy across the region is a high price to pay to improve geo-political stability. Will the events in Tunisian and Egypt have a domino effect in other Arab countries with all clamouring for true democracy in a bloodless coup?

The protests are forcing a transition to democracy in countries that have long been deprived of basic needs such as staple food and a decent job. All this heightens their view that the dismal low standard of living is due to unbridled sleaze, cronyism and corruption. The stark truth is that popular uprising is being fomented in a region that directly or indirectly sits on a large portion of global oil supplies. All this culminates in the resolve of the masses who are spending days and nights protesting in Egypt and other countries facing rubber bullets, the brutal force of motorised water guns, the wrath of police rattling their batons and lastly the military who took over from the hated police corp. The streets were grim with a chilling picture of military driving among the protestors in tanks. Over one million citizens camped overnight in Tahrir Square in Egypt for more than 14 days, shouting for the President to resign.

This is not a politically or Islamist driven revolution. It is a popular uprising in an over populated country brimming with 85 million workers some living on a paltry $2 a day. It is inevitable yet regrettable that a number of fatalities were recorded. Yes, the protest worked in Tunisia culminating in a smooth transition of power as the leaders of the regime hit the road and ceded to popular pressure with the president, his family and cronies fleeing to take asylum in Saudi Arabia.

Nor is it inevitable that other regimes will crumble so easily. High food prices and chronic levels of unemployment affecting a young population are as evident in Saudi Arabia as they are in Egypt, but high oil prices mean that in the short term the government is rolling in money and would seek to buy off the dissent. But that will not alleviate the poverty of the masses.

The current situation in the Middle East is perhaps somewhat anomalous to that which occurred in Eastern Europe in 1989. Protestors for equality saw the mighty Soviet Union break down with the symbolic toppling of the Berlin Wall. This marked the end of communism, but the Middle Eastern regimes are not likely to topple that easily, irrespective of unprecedented mass protests. It is history in the making. So is this instability going to escalate if Mubarak refuses to resign?

Uncertainty pushes prices up but for oil supplies to be seriously affected, the unrest would have to spread and lead to regimes willing to use their crude stocks for political purposes. There has been a spike in oil prices, but at the moment that is all it is. There is no logical reason why events in Egypt should see the cost of crude approaching the record levels of almost $150 a barrel seen in 2008, even though oil-producing countries predicted that oil prices will continue to rise on the back of political unrest in the Middle East.

A Kuwaiti oil official said it would go up to $110 and beyond if the key Middle East nation continued to be paralysed by protests calling for regime change. Iran’s oil minister said oil was not overpriced at the current $100 a barrel for Brent crude and he ruled out any need for the oil cartel Opec to discuss increasing quotas even if the price hits $120.

To conclude, while consumer countries are concerned about the effect the upheaval in Egypt will have on the price of oil, the real problem is oil production. Very little oil has been found in the past 30 years and the prospect of finding much more is dim, and it’s not for lack of looking. Obviously, oil must be found before it can be produced. Some of the world’s oil producing regions have already experienced steep declines. It happened in the North Sea in 1999. Pessimists believe that production has passed its peak. Optimists say it may be 20 years or so away. Wherever the truth lies, we hope that a remedy is found in the short term for alternative energy sources so that the green-eyed monster of inflation can be tamed.

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