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The nations of the Arab world have entered an extended period of instability as repressive regimes, both royal and dictatorial, struggle to either quash or meet the growing political aspirations of their peoples. Calls for democratic reform are not just sweeping the Arab world, they are also percolating in sub-Saharan Africa where populations watch what is happening to the north as they harbor similar demands for political and economic reform. While some states may succeed over the short-to-medium term in repressing those aspirations, the reform genie is out of the bottle in others, and the first step in the messy long-term process of developing multi-party systems and constitutional monarchies has begun. Should the reform movements fail to meet the basic but growing expectations of their citizenry, the countries and regions will become increasingly unstable and radicalized. This, in turn, will raise the premium on the price of oil, gas and many other raw materials, just as demand and growth begin to accelerate in the developed economies.

During the late winter and spring of 2011, much of the world was riveted by protests in the Maghreb, Levant and Gulf regions. For the first time in decades, entrenched regimes – Tunisia and Egypt – fell in response to peaceful mass protests while others – Libya, Syria, Bahrain and Yemen – fought back using brutal force. In sub-Saharan Africa, Ivory Coast appeared on the verge of civil war, long-term unrest in the oil producing Niger Delta continued, and the Democratic Republic of Congo faced illegal mining and instability in the east as a result of a weak and corrupt central government.

While demands for reform in each country reflected unique circumstances and grievances, a recurring theme among them – often representing the disenfranchised majority of the population – was less oppressive government, greater political freedom and an economic future that offered the prospect of prosperity. The current question confronting transitional governments, both those born from peaceful or brutal revolutions, is whether the political reforms and economic progress demanded by the populace can be achieved. The answer is that some countries have a higher chance of success than others, but in no instance is success guaranteed.

Of all the Arab states dealing with political reform, Egypt is the bellwether and the most likely to succeed. Unlike most Arab states, Egypt’s military is held in high regard by the populace and is viewed as the defender of the nation. The Egyptian people are generally moderate and favor secular institutions. Constitutional reforms are underway that appear likely to result in the official emergence of the Muslim Brotherhood and other parties in the national political dialogue. This development is central to Egypt’s long-term stability and may prove to be a model for other Arab states to follow.

Mubarak’s party, the National Democratic Party (NDP), also seems destined to remain a major player in Egyptian politics for the foreseeable future. If elections are held too quickly and the smaller parties do not have time to develop, the NDP could do very well, and this would be a blow to those who demonstrated in Tahrir Square against the dominance of the NDP since the days of Anwar Sadat. While legislative elections are slated for September 2011 with presidential elections two months later, the Chairman of the Supreme Council of the Armed Forces, General Tantawi, who is the de facto Egyptian head of state, is prepared to delay elections for up to one year to give the nascent political parties sufficient time to organize themselves.

A diverse political representation in Egypt will provide an effective counter to Islamic extremists that flourish in unstable environments or under repressive regimes. Perhaps the greatest threat to groups like al-Qaeda is the political reform underway in Egypt. However, should the reform process fail and the expectations of the populace turn to frustration, organized extremist elements are likely to surface and exploit the widespread disaffection. Such a development would have profound repercussions throughout the Arab world and increase the risks for oil and gas companies operating in the region. The consequences of weak and unstable governments include diminished rule of law, greater corruption, potential reviews of established contracts, and increased physical risk to capital investments and personnel.

Unlike in Egypt, Libya’s Muammar Qaddafi demonstrated a readiness to tear his country apart by civil war to stay in power, which resulted in a virtual shutdown of oil exports. While Libya produces only a small fraction of the world’s oil (1.6 million barrels a day), it is a major supplier to Europe. Even though Saudi Arabia was able to increase production to meet demand, events in Libya demonstrated the vulnerability of western energy interests in a war-torn country and the immediate need to cover supply requirements elsewhere. If scenarios similar to Libya materialize simultaneously in other oil and gas producing states, such as Algeria, Nigeria, the Gulf region or eventually Jordan with its newly found gas reserves, it is not clear that Saudi Arabia or other non-OPEC producers could meet demand.

While Bahrain, with its Shi’a majority and Sunni monarchy, lacks significant oil, it is of particular strategic importance to the United States because it is the home port of the U.S. 5th Fleet and has been considered a relatively moderate Gulf state. The dilemma confronting Bahraini, and by extension Saudi leaders, is how much can they compromise to meet the legitimate aspirations of their populations before jeopardizing the monarchy, even a potential future constitutional monarchy as in the case of Bahrain. How the demands of the Shi’a majority for political reform and involvement are met will determine whether the nation will experience increasingly violent unrest that will be harder to control.

The greatest concern of the United States, Bahraini and Saudi governments is that a Shi’a majority could come to power and Bahrain would become a surrogate of Iran. The loss of Bahrain would significantly hamper the ability of the United States to project military power in the Gulf region. It is highly unlikely that the United States could use its naval base in Bahrain to launch attacks against Iran, should that become necessary.

The degree to which Saudi Arabia viewed developments in Bahrain as a long-term existential threat to the House of Saud was evidenced by the deployment of Gulf Cooperation Council forces – to include more than 1,000 Saudi troops – to Bahrain. This deployment was the first by Saudi forces and marks a significant shift in Saudi Arabia’s defense posture.

Saudi Arabia, the world’s largest oil producer and the only one with meaningful excess capacity, endeavored to calm internal unrest by “buying off” its population. More than $100 billion was allocated to social and health programs since demonstrations began in Egypt. While most of the country appears to be secure, unrest in the oil-rich Eastern province, with its Shi’a majority, remains a concern to Saudi authorities. The larger question for Saudi leaders is the speed at which greater political reform is introduced into the kingdom. A battle has been waged for years between conservative and reformist elements over the pace of reform.

If the conservatives win and slow the reform agenda, the rumblings of discontent will become increasingly pronounced. Saudi Arabia is not likely to experience the tumult of Egypt, Libya or even Bahrain, but without reform, Saudi Arabia will become less stable, and this will have a direct and immediate impact on the price of oil.

Yemen, located on the southern flank of Saudi Arabia and adjacent to the Red Sea and Gulf of Aden shipping lanes, has been controlled by President Ali Abdullah Saleh for more than 30 years. Like Bahrain and Saudi Arabia, Yemen has been a strategic ally of the United States in the war against terrorism. President Saleh’s days in power are numbered, but if forced from power, civil war could envelop the country and terrorism networks could find refuge. Under these circumstances, al-Qaeda in the Arabian Peninsula would have a secure base from which to launch attacks on Saudi Arabia, the repercussions of which would push oil prices higher.

Recent discoveries of substantial amounts of natural gas in Jordan will eventually provide King Abdullah II the financial resources to address the economic and social demands of his nation. Abdullah has recognized the need for reform in a country whose majority is Palestinian by dismissing his cabinet and appointing a new prime minister. Abdullah favors a constitutional monarchy. His dilemma is that the nation’s tribal leaders reject such a course of action, because they fear the potential democratic power of the Palestinian majority. Abdullah’s principal task is to push the country towards a constitutional monarchy while allaying the fears of the influential tribal leaders. It is not clear that he will succeed.

Jordan is a major ally of the United States, and Abdullah’s removal from power as a result of internal unrest would be a significant setback for U.S. foreign policy objectives in the region, particularly as it relates to the elusive Israeli-Palestinian peace accord.

Although many Arab states not mentioned here are experiencing calls for democratic reform, the trend lines and probabilities of success remain the same and seem to portend more instability for the oil and gas industry. Few Arab states are likely to experience a relatively smooth transition to some form of democracy or greater political and economic freedoms for their citizenry. Even Iraq has taken almost eight years to achieve some semblance of democracy, which has only been possible because of massive U.S. involvement. That is not a model that the United States or Arab states want to replicate.

The Arab world is at the beginning of a tumultuous period as aspirations tied to a largely unsophisticated understanding of democracy sweep the region. Although the reform genie is out of the bottle, it is not clear that the wishes or timelines of the peoples of the Arab world are going to be easily met. A failure to meet these expectations will likely result in greater instability throughout the region and create opportunities for extremist Islamic elements to exploit.

If there is any constant in the Arab world, it is that political instability and its associated threats to the strategic and commercial interests of the Western world will continue, if not intensify.

An extended period of uncertainty in the Arab world has complex implications for the oil and gas sector globally. Potential new regions for energy exploitation are few and those that exist are often in geographically isolated and difficult environments, making extraction costs high. Beyond the premium on oil and gas prices and the need for companies to replace or expand reserves for market valuation purposes, the growing energy needs of the developed world and China will encourage the exploitation of non-Arab fossil fuel supplies in regions such as the Gulf of Guinea where Ghana is just coming on line, Russia and Latin America. Within the United States there will be increasing political pressure to recommence deep water drilling in the Gulf of Mexico and in previously protected habitats, such as ANWAR. More broadly, there will be a greater push to find alternatives to fossil fuels. The energy debate, already enlivened by unrest in the Arab world, is complicated even further by the nuclear disaster in Japan that has negatively impacted public acceptance of a nuclear renaissance in the United States.

The only certainty for oil, gas and mineral extraction companies operating in the Arab world, sub-Saharan Africa and other unstable regions is that they will spend an increasing percentage of their time attempting to understand the multitude of risks, both present and future, that could turn productive operations into a write-off.

William Green founded TD International, LLC (TDI) in 1999 with the conviction that a discreet, strategic advisory and risk management firm can better respond to the needs of international corporate clients, global investors and governments than large, inflexible information providers. Green’s clients include multinational energy and chemical companies, aeronautical and defense firms, financial institutions, technology firms, public relations firms, the food industry, non-governmental organizations, wealthy individuals, and law firms. A former U.S. diplomat specializing in multilateral affairs within the United Nations, NATO and the European Union frameworks, Green served in Geneva and Paris and participated in the management of the Anglo-American and U.S.-Canadian intelligence relationships. For more information, visit www.tdinternational.com.