Lybia Breaks Down and Oil Prices are Up: Is That Unavoidable?

02_19_2011_DC Libyan Protest032.jpgLybian Protester, Feb 19, 2011 Image by messay.com via Flickr
Lybia is breaking down. According to some reports Muammar al-Gaddafi is hidden in a bunker in Tripoli and has unleashed mercenaries to try and regain control of his country. For the moment, no one knows how it will all end but one thing is certain: oil prices are spiking, pushed up by the usual culprits: speculators.

When will we get rid of speculators? The reaction in oil prices is idiotic. Lybia furnishes about 2% of world oil supplies and most of this to Italy that can easily switch to other sources. Plus, European governments all have emergency stocks for at least 3 months. Plus Saudi Arabia, which already accounts for some 12 percent of world supplies, can easily increase production at the drop of a hat because it has plenty of unused capacity.

Plus the pernicious view that Lybian-like turmoil will spread like fire to the rest of the Arab oil suppliers. I believe it's way over the top.

Sure, there are problems in Bahrein, but nowhere near the kind that has developed in Lybia. The democratic wave launched by the "facebook generation" - call it a tsunami - is threatening every dictatorship in the Arab world, but how it will play out is likely to be highly variable. In Egypt and Tunisia, we've seen relatively "soft" scenarios, with limited loss of innocent human lives. Why? Because the army was capable of maintaining order. Bahrein and Yemen, if handled well by their leadership, could play out equally "softly".

So far, Lybia is the only country that has descended into civil war. When Gaddafi's son, Saif al Islam, threatened las Monday that it would, I was surprised. Civil war? Of course, he meant tribal war. All around Tripoli are the tribes sustaining Gaddafi, whereas around Benghazi where the revolt started, are those tribes Gaddafi  never trusted. They have hated him for the past 42 years of his rule. As a result, the "Leader of the Revolution", as he likes to term himself, has never been able to develop a homogeneous, trustworthy national army and now there is none. None to maintain order and no one able to lead the opposition. For the moment, it looks like utter chaos. And there is only a trickle of news as Internet and normal news channels have been snuffed out by the regime. Indeed, Lybia may be quite different from Egypt and Tunisia: it certainly does not look like the result of "facebook generation" activism. Of course, it is too early to judge, but my guess is that we are seeing here tribal revolts.

If Lybia is such a special case, why the reaction in oil prices? Why can't the speculators be reigned in? In this particular case, I think there would be an easy way to fight them - and without resorting to the complex mechanism of regulation, always so difficult to put in place because it requires world-wide coordination.

No, there's something much simpler that European governments - starting with Italy - could do right away, with the stroke of a pen. They could adopt a system of flexible rates on the tax they apply to oil. Did you know that when you fill up your car at a gas station, government taxes slapped on oil account for an average 80% of the price you pay? Yes, that's not a typo: the real cost of oil is only about 20% (it varies somewhat from country to country, but that's the general range).

So why not adjust the tax so that price spikes in oil are absorbed? This way, one could avoid the detrimental  knock-on effects on the price of commodities and all traded goods, and snuff out inflation at its source. Naturally, governments would take in a little less money for a little while. But probably not for long (until the Lybian situation stabilizes). And the advantages would far outweigh the disadvantage: if there is no shock to the economy, there will not be the usual slowdown in economic activity which pulls down tax revenues. On the contrary,  taxes will continue to flow into treasury coffers at an unabated rate...

But, such a measure is probably too clever for our politicians. I don't know what's the problem: Is is laziness? Lack of imagination? Poor management?  What do you think?




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