DR. WILLIAM J. PIKE, Managing Consultant and Contractor, National Energy Technology Laboratory, and Chairman, World Oil Editorial Advisory Board

I can’t remember a time, barring global wars, when the world was in as much flux as it is now. The Arab Spring has rolled into fall with the fate of a number of Middle Eastern states in question. The global economy trips and stumbles along, threatening to fall flat on its face. One can but wonder what the future might look like, and, coincidently, what global oil and gas activity levels and markets might look like over the next few years.

In recent weeks, the global economic crisis, and the euro crisis in particular, has overshadowed the continuing unrest in the Arab world. But that unrest cannot long be shunted to the background. It is instructive to count the number of Arab countries now in turmoil. First is Iraq, trying to rebuild following the war, in the face of continued internal opposition and age-old tribal animosity. US President Barack Obama has pledged a withdrawal next year of American troops, a force that has done much to ensure some measure of internal stability. Whether that stability will remain is questionable.

Second is Iran, unrepentant in its opposition to the West’s presence in the Arab world and highly suspected of developing nuclear weapons in opposition to the mandate of the global community.

Then there are the nations whose regimes have fallen victim to the Arab Spring: Egypt, Tunisia and Libya. While a moderate Islamist party claimed victory in the first democratic elections in Tunisia in late October, which may bode well for stability in the region, creating a functional, democratic nation in the aftermath of the uprising will be no easy feat.

In Egypt, the situation is a bit more unsettled. While the uprising brought down Egyptian President Hosni Mubarak, much of his regime remains in power. The Supreme Council of the Armed Forces, a remnant of that regime, remains in control of the country and is charged with scheduling upcoming parliamentary elections. However, many now question whether the Supreme Council and the military will fulfill their promise to hand over Egypt to civilian rule. If not, things could turn nasty again.

The latest casualty of the Arab Spring is Libya. In the wake of Muammar Qadhafi’s ouster, the National Transitional Council faces a number of challenges, not the least of which are collecting dangerous weapons from the previous regime and ensuring that any remaining pro-Qadhafi forces are under control. The council will have to accomplish this while proving that it is capable of leading the democratic transition.

Also at risk from the Arab Spring are Syria and Yemen. The situation in Syria is dramatic. President Bashar al Assad’s govern-
ment continues its brutal repression of the populace. By most counts, more than 3,400 Syrians have been killed by the regime. While the Western nations have put pressure on Assad to abandon the presidency, no intervention has occurred, or will likely occur. Thus, it remains a waiting game to see whether the protestors can outlast the regime.

In Yemen, President Ali Abdullah Saleh, like Assad, continues to cling to power despite violent protests demanding his resignation and departure. Instability in Yemen, a hotbed for terrorist groups, particularly al Qaeda, is especially troubling. If, or when, Saleh leaves power, the terrorist groups could flourish in the ensuing instability. That danger is compounded by economic and societal problems in Yemen, leaving many to doubt whether a unified government could be formed should Saleh step down.

It is unclear how the disruption that has spread over the Arab world will play out vis-à-vis oil and gas. Libyan production, temporarily suspended, is mostly restored. There has been little other disruption in oil supply from the region since the Iraq war. Still, the prospect of disruption is real, whether through destruction of production capacity, closure of export routes, or emergence of radical regimes at odds with the West. Any significant disruption would push oil prices higher, seriously exacerbating the current global financial crisis.

How bad is this crisis? While some believe that the US is staging a (very) moderate economic recovery, the situation in the eurozone is likely past the critical state. Portugal, Ireland and Greece have required massive bailouts by the wealthier euro nations to avoid financial collapse and bankruptcy, but their woes continue.

Italy is teetering on the brink. Italian Prime Minister Silvio Berlusconi recently resigned after the Italian parliament passed austerity measures. The interest charged Italy on new bond debt recently passed 7%, a figure most economists consider a tipping point: At that rate, it is likely that the country will lose access to market funds based on its probable inability to repay the debt. Should that happen, Italy’s euro partners are unlikely to muster the political will or the financial resources to bail out the world’s eighth largest economy. At that point, the great euro experiment would be toast, and Europe in economic shambles. The collapse would reverberate through the global economy. The term “very ugly” comes to mind.

What happens when you put the possible outcomes of the Arab Spring and the global financial crisis together? As noted before, any disruption in crude supply would lead to increased prices, negatively impacting an already gloomy economic landscape. At best, the global economy would worsen and demand for oil would fall. At worst, the global economy would come dangerously near to complete collapse and demand would plummet. When demand plummets, prices follow suit. It is a dark scenario, one that we all hope can be avoided. But if you are forward planning for the next three to five years in the oil and gas industry, I believe conservatism and prudence should be your mantra. When you add in the looming global natural gas glut arising from shale gas development, multiply that conservatism by a factor of two.