http://www.guardian.co.uk/business/2011/feb/08/saudi-oil-reserves-overstated-wikileaks
If you copy and paste the above link into your address bar you will find that the Guardian have obtained information that US diplomats are concerned that the Saudi's may have been overestimating their reserves- possibly by up to 50%. Obviously this comes as no surprise to anyone who has ever studied the oil industry. All OPEC members are thought to have wildly overstated their reserves due to the fact that production limits in the cartel are allocated according to stated, rather than audited reserves.
The recent instability in the Arab world, with revolutions in Tunisia and now Egypt, highlight the risk of our over dependence on oil. One of the concerns with Egypt is that the Suez canal, which acts as a vital supply route for middle eastern oil could become disrupted. Fears such as this have sent the oil price spiraling to well over $100 a barrel in recent days before falling back slightly.
Looking ahead, there are two options for the world economy. Either we will witness a slow down due to the inflationary pressures of high oil and commodity prices, or growth will continue, further accelerating prices until there is an even deeper crash, perhaps sparked by an escalation of the Eurozone Debt crisis, which for the time being seems to have gone into a state of winter hibernation.
What is certain at this point is that something will have to budge, we just don't know what. There is an outside chance that the political stalemate in America could result in Congress refusing an extension of the "debt limit", forcing the treasury to default, and sending the financial system into a crazed tailspin- but this in unlikely. The Republicans are prepared to use the "threat" of refusing to extent permission to borrow more money, but only as a political bargaining tool. It will probably remain just a threat.
Then there is the more real threat that China starts to overheat- indeed, the central bank had to raise interest rates this week in order to stem creeping inflation. If China's domestic economy stalls then industrial output may fall, affecting the wider world. The other risk with China is that they may start "dumping treasuries". What this means is selling the dollar denominated bonds they have collected during their lending binge that fueled much of the US' deficit spending over the last decade. This threat is very real, but is unlikely to materialize immediately. Inflation in the US is rising above the interest rate paid on government debt, meaning that China is making a real terms loss on some of the money it loaned to America. However, the Obama administration will have to start cutting government spending eventually, which may curb inflation and make the holding of US debt more attractive again. Then again, this would also hit the US economy. More deficit spending however will only reduce confidence in the dollar. Either way, the healthy financial marriage between US and China is doomed to break down eventually.
In Europe, we should be concerned about the surprisingly bad growth figures starting to emerge as well as government's inability to reduce the deficit as a percentage of GDP despite brutal austerity. What seems to be happening is that some European governments have caught themselves in a debt trap where debt accrued over the previous 3 years in an attempt to prop up flailing economies is starting to feed through to higher interest repayments, meaning that there is either less money in the budget to spend on public services, or even higher interest repayments further down the line where governments still stick to Keynesian style borrow and spend fiscal regimes. Yet neither option seems to be working. Economies are not growing because real GDP gains are non existent due to rising inflation. Stimulus has simply driven prices up rather than boosted GDP because supply side growth has been non-existent.
Eventually the markets (either the bond markets or the stock markets) will loose faith and the supply of paper will dry up, leaving the widening cracks in the wall of our economic castles unprotected.
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