As uprisings rocked the Arab world in the first quarter of 2011, Joseph Quinlan, managing director and chief market strategist at U.S. Trust, a unit of Bank of America, spoke with writer Jaime Pessin about how the volatile political situation in the Middle East could affect the global economy.
1. How will the turmoil in the Middle East affect oil prices in the near future?
Oil is a political commodity that's concentrated in the developing countries. There's a lot of underlying demand coming out of the emerging markets, as they drive more cars, work in air-conditioned offices and eat more protein. The volatility around the supply will always push prices higher. Even before (the uprisings) in the Middle East, we were looking for oil to be about $100 per barrel this year-that was the low end of our estimate-just because of the underlying demand.
2. Oil prices jumped quickly in early 2011. What are the implications of that speedy price hike?
It's the speed that catches people by surprise. It quickly filters into less disposable income for U.S. consumers at the gas pump. It's one thing for oil prices to rise dramatically, but the question is how long do they stay at these lofty levels? It was somewhat of a price shock, but $100 oil is something the consumer can adjust to.
3. How will rising oil prices affect the rebounding economy?
Employment numbers are improving, corporations are putting more money to work with hiring and investing and exports are relatively strong for the U.S. This is happening against the backdrop of an economy that's accelerating. When you have price [hikes] in a decelerating economy, the downside can be greater.
Prior to the oil price hike, there was too much complacency and no fear. Now there's less complacency and more fear, and I like that: I think that's good for the markets. People are going to put money to work in products and companies and sectors they know and believe in: energy, information technology and the industrials.
4. How should investors respond to the Middle East situation?
Despite all this talk about alternative energy, crude oil is still the lubricant of the global economy. Therefore, have some energy in your portfolio. Also, what's happening in the Middle East is very positive for globalization. The Arab world has never been part of globalization. Now you have more people demanding their rights and freedom. These are new consumers ready to join the global economy. It's going to be a sloppy transition, but the more these people participate in the economy-regionally and globally-that's a huge positive. We're overweight technology. This is a technology-led revolution. You've seen the spread of social mobility, social networking, led by U.S. companies: Google, Intel, Cisco, Facebook. That's a very powerful trend.
We still like the industrials. Saudi Arabia for instance, just anted up $36 billion to their populace for infrastructure spending, more schools, better health care and so forth. That spending will also help U.S. companies.
5. How is the political situation in the Middle East affecting China?
China is worried about the flowering of human expression and the protests. China, I think, will step on the accelerator to increase their spending on taking care of the average worker. The downside is they'll have less money to send to the U.S., because they'll consume more of their own savings at home. China is amongst the largest consumers of energy in the world, so I think it's going to galvanize China to push faster on the frontier of alternative energies. They're pioneers in this space and I think you're going to see more investment.