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The Economic Consequences of the Arab Revolt

Unstable political transitions in the Middle East could lead to high levels of social disorder, organized violence, and/or civil war. And, given the current risk-sensitivity of oil prices, the economic pain could spread far beyond the region.

NEW YORK – Political turmoil in the Middle East has powerful economic and financial implications, particularly as it increases the risk of stagflation, a lethal combination of slowing growth and sharply rising inflation. Indeed, should stagflation emerge, there is a serious risk of a double-dip recession for a global economy that has barely emerged from its worst crisis in decades.

Severe unrest in the Middle East has historically been a source of oil-price spikes, which in turn have triggered three of the last five global recessions. The Yom Kippur War in 1973 caused a sharp increase in oil prices, leading to the global stagflation of 1974-1975. The Iranian revolution in 1979 led to a similar stagflationary increase in oil prices, which culminated in the recession of 1980-1981. And Iraq’s invasion of Kuwait in August 1990 led to a spike in oil prices at a time when a US banking crisis was already tipping America into recession.

Oil prices also played a role in the recent finance-driven global recession. By the summer of 2008, just before the collapse of Lehman Brothers, oil prices had doubled over the previous 12 months, reaching a peak of $148 a barrel – and delivering the coup de grâce to an already frail and struggling global economy buffeted by financial shocks.

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