Arab Spring and Oil Prices

NEW YORK ( -- Crude oil prices hit a four-month high this week on the back of rising tensions in the Middle East and North Africa and the unfortunate murder of the U.S. ambassador to Libya.

Added impetus on the upside was given to oil by the announcement of more money printing (QE3) by the Federal Reserve, which said it would launch an open-ended  commitment to purchase $40 billion of mortgage-backed securities monthly.

The global benchmark for oil, Brent crude oil, jumped to about $117 a barrel. It maintained its roughly $18 premium to U.S.-based WTI crude oil, which was trading at $100 a barrel on a couple days ago.

Non-futures investors can easily participate in the oil market through the use of exchange-traded funds. The ETF that tracks Brent crude oil futures is the United States Brent Oil Fund ( BNO) and the ETF that tracks WTI crude oil futures is the United States Oil Fund ( USO).

The real story behind the story in the oil market, however, is the ongoing Arab Spring, which is sweeping throughout the Middle East and North Africa, pushing aside some regimes and threatening others. The countries whose governments feel threatened by popular uprisings, such as Saudi Arabia and the other Gulf states, are where investors should put their focus.

Saudi Arabia, in particular, is key because it accounts for more three-quarters of the world's spare oil production capacity. So it is very important to note that the kingdom is no longer a price "dove" in OPEC as it has been for decades. It has joined Iran, Venezuela and others in being a price "hawk."

The reason behind the change in attitude is simple...Arab Spring.

Like its neighbors in the Gulf region, Saudi Arabia has gone on a public spending spree to appease its restless citizens. It has sharply increased outlays on subsidies for items like food, fuel and housing in an attempt to appease its citizens. In 2011, the kingdom raised its domestic spending by $129 billion -- the equivalent of more than half its oil revenue.

Much of this increased spending will go toward upgrading the country's infrastructure. Take electricity, for example. Saudi Arabia has revealed plans to spend more than $100 billion on power plants and distribution networks by 2020. The kingdom has also set a goal to electrify 500,000 new homes that are being built in an attempt to mollify political unrest among its population of 27 million people.

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