Will Events in the Middle East Spark a Renewable Energy Revolution?

One area of the financial markets most impacted by recent events in the Middle East and North Africa is the price of crude oil.  Since the majority of global crude reserves are concentrated in this part of the world, political unrest or disruption to production can often send prices soaring.

While the unrest was originally isolated to Tunisia and then Egypt (two countries with limited oil reserves), the resulting domino effect has inspired public uprisings in many other countries in the region, including Libya, which sits on the largest oil reserves in Africa.  As the citizens of these nations continue to take to the streets and topple the autocratic governments once in control, investors are bracing for a period of widespread political turmoil not seen for decades in this part of the world.

Brent crude oil now trades at approximately $114 per barrel, a rise of over 20% since the beginning of the year.  Some oil analysts speculate that crude oil could reach as high as $220 per barrel if conditions in Libya and Algeria continue to deteriorate.  If unrest spreads to Saudi Arabia, the largest oil producer in the world, prices could spike even higher.

When oil experiences major price shocks like we’re now seeing, the topic of America’s reliance on it as the lifeblood of our economy inevitably comes to the fore. Before the Great Recession hit in 2008, Brent crude oil had reached over $140 per barrel and there was a very public debate over how best to address this issue (remember “Drill Baby Drill” anyone?).  It was at this time that renewable energy was rapidly gaining traction as a necessary and economically viable alternative.

Once the recession took hold, however, oil prices collapsed.  And suddenly, the idea of weaning America off foreign oil and shifting our energy infrastructure towards cleaner alternatives was quickly relegated to the back burner, replaced by other issues deemed more pressing by our elected officials: unemployment, the real estate market implosion, bank scandals and universal healthcare.

Since falling below $40 per barrel in early 2009, Brent crude oil prices have steadily climbed in the past two years due to a weakening dollar and a pickup in global demand.  More recently, in response to the events in the Middle East, these gains have accelerated and its impact will hit US consumers where it hurts most: their wallets.  If this spike proves to be long-lasting rather than temporary, it will likely be an enormous drag on our economy, possibly crippling the fragile recovery underway.  According to an economist at Deutche Bank, a $10 increase in oil prices translates into roughly a 25 cent increase in retail gasoline prices. Every one penny increase in gasoline is then worth about $1 billion in household energy consumption.

If political instability continues in the Middle East and North Africa, higher oil prices will likely be with us for the foreseeable future.  And perhaps these higher oil prices is just what our elected officials in Washington need to move conservation and the reforming of our national energy policy back to the top of the agenda.

Image Credit: Vattenfall