Oil States have the most to gain from Middle East unrest and high oil prices

It is a bizarre irony of the wave of unrest, revolution and civil war sweeping across the Middle East that the higher oil prices that this brings actually most benefits the oil producing countries of the region. Oil at $105 fills the local treasuries.

Thus we have Saudi stocks gaining 2.3 per cent yesterday on news of the formation of a new housing ministry to oversee the building of 500,000 new homes at a cost of $67 billion. This action is only possible because the unrest has prompted the authorities to spend money, and because the unrest has boosted oil prices to pay for it.

Home building

Now as America knows when you go from building 2.2 million homes a year down to 250,000, as happened between 2006 and 2011, then your domestic economy shrinks. Conversely then when a much smaller economy like Saudi Arabia massively expands house building this will be very good for the domestic economy.

There is also talk of the new mortgage law being passed, so Saudi Arabia will become a home-owning autocracy. We already have one in the UAE, and it is a very good way to include citizens and expatriates in the future of the national economy, although Saudi is unlikely to also open its doors to expatriate home ownership.

For what the unrest across the Middle East is really challenging is a system that became a kleptocracy in many countries. That is to say a small elite took the riches of the nation while the bulk of the population lived in poverty. Think French or Russian revolutions if you want a historic parallel.

Again looking back into European history and there were those nations that had revolutions and those that avoided such nasty periods of upset, disruption and chaos. The UK executed its king in 1649 but later reintroduced the monarchy which is still there today, and avoided all later revolutions.

Spreading wealth

If the Oil States are wise now they will share more of the national wealth with their citizens. That is what Saudi is doing in building 500,000 new homes. Real estate is the linchpin for any strong economy by creating real wealth and giving owners a stake in the future.

They are after all not failed nations. Indeed, in many countries the ruling elite has done a far, far better job in developing the national economy than any shambolic democracy might ever have hoped to achieve; and where a people’s revolution has come to power in certain nations it has been an absolute economic disaster.

Perhaps we are going to see a new division in the region over the next decade or two, between nations that collapse into anarchy and failed democratic experiments, and those that adapt the successes of the past to pave the way for an economically prosperous future.

Certainly the anarchy and chaos of naive revolutionaries is a far more fearsome process, and the democratic precedent of Iraq is an abomination. The other Oil States can do much better.