The conflict in Bahrain may seem small compared to Libya – the country produces only 40,000 barrels of crude oil a day, a tiny fraction of world supply, and it economy is miniscule. But the religious nature of the unrest in the country has some potentially major implications for the world economy. “If the current Sunni regime is deposed, Iran’s ability to provoke conflict will be enhanced,” notes Said Hirsh, Middle East economist for London based Capital Economics. For some time, Iran, which is largely Shiite, has been increasing its influence in the region (it is, for example, one of the major funders of Lebanon’s Hezbollah). Allies include the Shiite government in Baghdad, as well as Syria. There are other areas where Iran could increase its influence, like Yemen, which is home to Shiite rebels. That could cause conflict on the border of Saudi Arabia, which contains 25 percent of the world’s known oil reserves.
If that happens, you can bet that oil prices, dampened recently by the Japanese nuclear disaster and the knock on decrease in global energy consumption, will shoot back up, and global stock markets could become volatile. The very real nature of the threat is underscored by the fact that the Gulf Cooperation Council, an organization which includes Saudi Arabia, Kuwait, the UAE and others, intervened militarily in Bahrain on Monday. The worries aren’t new – for some time, Arab governments have been boosting their military spending and cooperation with the US, in anticipation of increasing Iranian influence in the region. The Saudis, for example, recently announced a $60 billion arms deal with the U.S. If conflict does increase, economists say the entire Middle East region could see much slower economic growth, perhaps going back to the stagnant 80s and 90s, when GDP growth averaged 2.7 percent (compared to 5 percent in the last decade). In order to create jobs and improve living conditions, which is crucial to avoiding more social unrest, these Gulf countries need 6-7 percent growth, according to Capital. The result is a tinderbox that could continue to explode throughout the region, and the world.