Markets oblivious to geopolitical risks

Washington’s military action and democratization efforts in the Middle East are creating unprecedented instability in the most important oil-producing region in the world – instability that will likely increase during 2006.

Growing instability in the Middle East has made global geopolitical risk extreme. Investors worldwide have yet to link

extreme global geopolitical risk with high global economic growth risk, as evidenced by the very modest impact these rapidly rising risks have had on the world’s financial markets. Risk perception may finally meet actual risk this year, sending interest rates soaring and stock markets plummeting around the world.

..The most prominent impact of extreme geopolitical risk in the Middle East on the global economy thus far has been ever higher international oil prices. Since the end of 2001, benchmark crude-oil prices have jumped by about 140%. Though some of this increase can be attributed to growing oil demand in China and India, the primary factor driving international oil prices higher has been very weak investment in new oil production caused by instability in the Middle East.

Without new oil sources, natural production declines in the world’s aging oilfields have reduced global oil supply. At the same time, supply shocks in countries such as Nigeria have become more frequent. These shocks can also be partly attributed to instability in the Middle East arising from the “war on terror”. By strongly influencing international oil prices, extreme geopolitical risk in the Middle East is having a global impact, pushing global economic growth risk higher, making extreme geopolitical risk a global phenomenon.

Asia Times