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Libya Now, Iran Then: How Close Are We to 1979?

Today, the UK’s Telegraph is reporting that British government drones in Whitehall are figuring out the legal means to seize Muammar al-Gaddafi’s assets in Britain, which are said to total some £20 billion.
“Fire in Libya”: Oil fire in 2010.
Notice that’s pounds sterling—the equivalent of US$32 billion: Enough cash to plug up California’s and New York State’s deficits, and still have enough left over for a very respectable weekend at The Palms in Las Vegas.
That these assets are going to be seized is, according to the story, a done deal: The only issue seems to be the legal means by which to do so—
—which means that the British government isn’t worried about pissing off Gaddafi—
—which means that Gaddafi’s days in power are numbered: Whitehall would never dare seize his UK assets, unless they were sure that Gaddafi won’t be around to exact revenge or retribution. After all, the Brits let the Lockerbie Bomber go in 2009, in order to shore up relations with Gaddafi.
Now, for my patented History Flashback™ (All Rights Reserve, All Wrongs Deferred):

When the Shah of Iran was overthrown by the Islamic Revolution in January 1979, Iran’s oil production dropped from 5.75 million barrels a day to zero. Such was the chaos of the Revolution.

Production eventually picked back up in the days that followed, to a new average of 2.25 million barrels a day in 1980—but as they say, the damage was done: In short order, the price of crude shot the moon from $14.95 per barrel in 1978, to $25.10 per barrel in 1979—the inflation adjusted equivalent of $74.67 in today’s dollars. By 1980, even though Iran’s oil production was improving, the price situation was worse: Oil averaged $37.22 in 1980, the equivalent of $99.11 per barrel. (Data is here.)
This led—directly—to the recession of ‘79–‘83, the worst since the Great Depression. Unemployment got to double digits, as did inflation. Gold famously went up to highs never seen before, as a hedge against that inflation, and it was all Paul Volcker could do to reign it in by inflicting 20% interest rates—that’s right: 20%.
An Oil Shock is nothing to take lightly.
Today, Libya represents far less of the world’s total oil production than Iran did in 1979. As of last year, from the worldwide total of 84 million barrels per day, Libya produced just 1.79 million barrels per day, according to the CIA Factbook—that’s less than 2% of world production, compared to Iran’s 5%.
But what’s happening in Libya is not just limited to Libya: 2011 is shaping up to be the region’s very own 1848, as Anne Applebaum cleverly pointed out. What started in Tunisia and spread to Egypt has now spread to Libya. And now this morning, there are reports that of severe disturbances in Iraq (Iraq! Where the U.S. is sitting like an army of occupation, and there are popular riots!). The Saudis—conspicuously—ominously—are giving free money and promising more benefits to their people.
Even before the revolutions in the Middle East, oil prices have been steadily rising—along with food, precious metals and industrial metals—as hot money flows to commodities. Regardless of what Krugman says, this rise in commodity prices is a direct product of the U.S. Federal Reserve’s zero interest rate policy (ZIRP, otherwise known as “free money”) and Quantitative Easing 2 (QE2, otherwise known as “money printing”).
So what does this all mean?
It means that, when Gaddafi falls, Libyan oil production is going to be hurt or outright interrupted. And just as Mubarak’s fall embolden Libyan dissenters, Gaddafi’s fall will embolden more waves of unrest in other parts of North Africa and the Middle East—perhaps Iraq, perhaps Saudi Arabia, perhaps the U.A.E.—putting more pressure on oil prices.
Brent Crude is today at $112 per barrel—and poised to rise even further. If Libyan production is tripped up or outright shut down, there’s every reason to believe that oil will reach its historic high of $140. Reach it, and surpass it. And if, say, disturbances in Iraq or Saudi Arabia or any other oil producing nation trigger further falls in oil production, then the price per barrel could rise even further—and much more drastically.
In other words, we could be about to experience another Oil Shock—just like 1979.
Now, what happened after 1979’s Iranian Oil Shock? Like I said: Severe inflation, unemployment, and a Fed that had to raise rates catastrophically, in order to stop an inflation that was spiralling out of control.
But back in 1979, there was no kindling for that inflationary fire. Federal Reserve money policies were fairly responsible. The Federal government’s total debt and liabilities was less than 50% of GDP. Back in 1979, the U-3 unemployment rate was about 5%, compared to over 9% today.
Back in 1979, there was no ZIRP, no QE2, no $1.6 trillion deficit. There weren’t so many freshly-minted dollars sloshing around, looking for yields like army ants looking for dead meat. There wasn’t a total government debt that was bigger than the total gross domestic product of the United States.
In short, back in 1979, the economy, the fiscal situation and the monetary policy were far healthier than they are today.
Yet the 1979 Oil Shock brought us the worst recession since the Great Depression.
And that is very, very bad for us today, in 2011.
When—not if, but when—Gaddafi falls, the bloodiest, longest-lived dictator in the Middle East/North Africa region will be gone. And that’s a good thing.
But in all likelihood, his fall will also trigger another Oil Shock—which just might kill us.

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