Middle East crisis - will history repeats itself!

The present situation seems very familiar. Against the background of ever-rising inflation, the Middle East descends into chaos, sending the oil price surging and the global economy into recession.

Back in 1973-74, this is exactly what occurred as a result of the Arab-Israeli war, and the western regions boycott by producers in the OPEC cartel as well as a fourfold rise in the cost of crude oil. The crisis, however, had deeper roots: the inability of the US to secure the international financial system, given the cost incurred by the Vietnam War, a steady increase in price pressures over the previous half-decade, and the easy accessibiliy of credit as politicians worked to keep the long post-war boom going.

This trend has been present across the years; 1973-74 to 2010-11. The period since 2007 has witnessed an international financial crisis. The US has been severely impaired by the military over-stretch as well as the bursting of its housing bubble. The abundance of cheap money in the global market has quickened the economic recovery, but at the cost of record food prices, and others; copper at $10,000 a ton, and Brent crude back above $100 a barrel.

Now the scales are shifting across North Africa: yesterday it was Tunisia, today it is Egypt, and tomorrow perhaps it will be Algeria. These being the equally undemocratic regimes of the Middle East, sitting on a large chunk of global oil reserves.

If history repeats itself, the initial result will be higher inflation as companies increase their mark up prices and workers seek higher wages. This will be followed by deflation produced by a shrink on corporate profitability and consumer real incomes from dearer food and energy, united with a tightening of monetary policy as central banks seek to bring inflation down again.

Financial markets, it has to be said, appear remarkably relaxed about this entire scenario. Share prices are soaring up on the back of optimism about the growth prospects for the world's two biggest economies, China and the US. Bond markets also have apparently ignored the risk that policy-makers may soon start to increase the cost of borrowing.

But,however, for oil supplies to be seriously affected today, the unrest in the Middle East would have to spread to other regimes who are willing to use their crude stocks for political purposes. There has been a spike in the prices of oil, but for present that is all. There are long-term reasons explaining high oil prices, but no apparently obvious reasons to satisfactorily explain why events in Egypt should witness the price of crude  oil approaching the record levels of almost $150 a barrel seen in 2008.

The reasons for the high expense of oil reflects what is happening in China and the US rather than Egypt and Tunisia, but we should still be concerned. Why? Simply because each of the four major recessions since the early 1970s have been lead by a leap in oil prices.