The Pharaoh's Legacy

As Hosni Mubarak lies on his deathbed, he leaves behind a broken Egypt.

Hosni Mubarak is dead, or very close to it. The Egyptian state news agency MENA reported that the former president was pronounced clinically dead after having a stroke on the evening of June 19 -- a statement that was quickly denied by a member of the ruling military junta, who clarified that Mubarak was nevertheless in critical condition.

Whatever the case, Mubarak's final moments in a military hospital in Cairo would not be what many Egyptians had in mind when they sought justice and revenge for those who suffered at his hands. No doubt, his supporters would have preferred the pomp and circumstance of a state funeral honoring a man they believe was a transitional figure who had placed Egypt on the path of prosperity and even democracy.

For better or worse, Mubarak's predecessors, Gamal Abdel Nasser and Anwar Sadat were larger-than-life figures who accomplished big things, whether it was nationalization of the Suez Canal or negotiating peace with Israel. Once Mubarak, for all his failings, seemed larger than life himself; but he will not join their ranks. Instead, he will be remembered for the squalid politics, brutality, and repression that characterized the last decades of his long reign, and the mass demonstrations that ended it so abruptly.

Looking back over the late Mubarak period, it is hard to believe that his presidency began on October 14, 1981, with promise. Upon taking his first oath of office, it was possible to imagine Mubarak as a reformist. He struck a self-effacing tone, reached out to an opposition that had been in open revolt against Sadat, and promised to use judiciously Egypt's emergency law, which gave the government extraconstitutional powers. In another gesture at reconciliation, soon after taking office, Mubarak emptied the jails of those Sadat had imprisoned and vowed to undertake political as well as economic reforms.

Nor was the Mubarak era strictly a period of economic stagnation. The country's gross domestic product was approximately $40 billion when Mubarak entered office; on the eve of the uprising, it topped $145 billion. There were only 430,000 telephone lines in the entire country when Mubarak took power -- by 2010, it had well over 12 million. In 1981, the life expectancy of the average Egyptian was 57 years old; it is now 70. The World Bank reports that the Egyptian literacy rate was less than 50 percent 30 years ago. Today, the literacy rate stands at 66 percent, though it remains dismally low for Egyptian women. But by the later Mubarak era, Egypt's private sector was prospering, the levels of foreign direct investment were unprecedented, and the international business community began talking about Egypt as a promising "emerging market."

The statistics obscure more than they reveal, however. While the explosion of wealth and positive macro-economic indicators looked good, the working and middle class' ability to make ends meet eroded -- an ever-larger number of Egyptians were subsisting on $2 a day or less. As the wealth gap grew, popular anger at those on the top of the pyramid grew with it.

Yet the uprising that brought infamy to Mubarak was not, first and foremost, about economic grievances, but a political system that was rigged in a way to benefit Egypt's leader and those closest to him. Political change, which became a mantra of the ruling National Democratic Party during Mubarak's last decade, was a ruse.

Every reform that the state media hailed as the "strengthening" of democracy in fact only reinforced the unrivaled power of the party. For those who objected to this perverse state of affairs, Mubarak literally beat them into submission. Instead of using Sadat's emergency law judiciously like he promised, Mubarak wielded the emergency law like a club and the jails that he emptied in 1981 overflowed once again.

In the end, Mubarak, who seemed to become larger as he diminished Egypt, gave in to the temptations and arrogance of seemingly absolute power. A little more than a month before the uprising, Mubarak dismissed with a wave of his hand the opposition's efforts to establish a "shadow parliament" in protest over electoral fraud. "Let them have fun," he scoffed, sounding not unlike Marie Antoinette. It's an ironic epitaph for a man who a few weeks later fled Cairo as untold numbers of Egyptians converged on his palace demanding his ouster.

Sadly, it is not just Mubarak that is on life support at this moment -- Egypt's creaky institutions and its nascent democracy are as well. Its politics are broken, its infrastructure in disrepair, its economy near collapse, its state education system in disarray, and its public health system nonexistent. If anything, this is the legacy of Hosni Mubarak: the evisceratation of his beloved country. Egypt has not "sold out" Mubarak, as he reportedly told his jailers upon entering prison. Rather, it was Mubarak who sold out Egypt, cheapened its national dignity, and brought it to its knees.



The Coming Oil Crash

Good news! Gas prices could go down to $2 a gallon by autumn -- and that's bad news for Vladimir Putin.

My mom out in California is elated -- gasoline prices in her neighborhood are below $4 a gallon for the first time in four months. Less so are the world's petro-rulers, who are watching the price of oil -- their life blood -- plunge at a rate they have not experienced since the dreaded year 2008. Industry analysts are using phrases such as "devastation" and "severe strain" to describe what is next for the petro-states should prices plummet as low as some fear. No one is as yet forecasting a fresh round of Arab Spring-like regime implosions. But that's the nightmare scenario if you happen to run a petrocracy.

To understand why your average oil king is right to be worried at the moment, grab your calculator. The price of U.S.-traded oil fell to $83.27 a barrel on Monday, and global benchmark Brent crude to $96.05 a barrel; now juxtapose that against the state budgets of Iran, Russia, and Venezuela, which require more than $110-a-barrel Brent prices to break even, according to generally accepted estimates, and you'll see the problem.

Given this already-existing revenue gap, one might fairly wonder what would happen if, as Citigroup's Edward Morse says is possible, prices drop another $20 a barrel for an extended length of time. Oil economist Philip Verleger's forecast is even gloomier -- a plunge to $40 a barrel by November. Or finally, what Venezuelan Oil Minister Rafael Ramirez fears -- $35-a-barrel prices, near the lows last seen in 2008. In Russia, for instance, "$35 or $40, or even $60 a barrel, would be devastating fiscally," says Andrew Kuchins of the Center for Strategic and International Studies. That could damage the standing of President Vladimir Putin, since his "popularity and authority are closely correlated with economic growth," Kuchins told me in an email exchange.

With few exceptions, the same goes for the rest of the world's petro-rulers, whose oil revenue supports vast social spending aimed at least in part at subduing possible dissatisfaction by their populace. Saudi Arabia can balance its budget as long as prices stay above $80 a barrel, according to the International Monetary Fund, although projected future social spending obligations will drive its break-even price to $98 a barrel in 2016.

Of the major petro-states, only Qatar -- with a requirement of about $58-per-barrel to balance its budget -- appears to have sufficiently disciplined state spending to weather all but the most dire forecasts.

The biggest uncertainty in the global oil market isn't whether oil prices will drop further -- they seem likely to -- but how long they will stay down. In short, how long, and at what scale, are the petrocracies likely to suffer? This state of affairs is a woeful blow to petro-rulers after nine years of mostly nirvana. The year 2003 started with oil at about $33 a barrel, after which prices went mainly up, peaking in July 2008 at $147 a barrel. They bounced back nicely even after the global financial crisis sent prices plummeting below their 2003 level, to about $31 a barrel in December 2008. When the Arab Spring unfolded, first Libya and then Iran triggered worried looks on trading desks in London and New York, and the price spiked to about $128 a barrel. My mom saw the average price of gas in California rise to $4.36 a gallon. But then the concern of war between Iran and Israel all-but vanished, and prices since have been on a seemingly relentless decline.

Now, a convergence of forces is weighing on petro-rulers' nerves: Europe's economic crisis; a slowdown in Chinese growth including the demand for oil; a steep decline in U.S. oil consumption with a simultaneous rise in domestic oil production; and a determined effort by petroleum colossus Saudi Arabia to build up global inventories.

It is perhaps the last data point -- Saudi Arabia's aggressive actions to lower prices by pumping some 10 million barrels a day -- that might seem baffling given Riyadh's economic stake in the oil game. But Verleger, the Colorado-based oil economist, says the Saudi rationale is clear, and linked to the kingdom's traditional long game.

In an email exchange, Verleger pointed me to an interview he did a few days ago with Kate Mackenzie at the Financial Times. First, he explains, the Saudis are out for blood when it comes to fellow petro-states Russia and Iran, the former for failing to help calm the fury in Syria, and the latter for refusing to go to heel and give up its nuclear ambitions; in both cases, the Saudis think lower prices will produce a more reasonable attitude. In addition, Saudi Arabia is terrified of a current U.S. boom in shale oil; it is hoping that lower prices will render much of the drilling in North Dakota's Bakken Shale and Canada's oil sands uneconomical. Finally, the Saudis are well aware that low oil prices helped to turn around the global economic downturn in 1998 and 1999, and they hope to help accomplish the same now, and perhaps win new affection from the world's leading economies.

Meanwhile, though, Verleger thinks that oil prices will crash. Markets overshoot when one is trying only to fine-tune them, as the Saudis are, he argues -- which is the basis for his forecasts of $40-a-barrel oil and $2-a-gallon gasoline by November.

To the degree that such fire-sale prices are long-lived, they could cause mayhem among petro-rulers. While Verleger thinks that the Saudis can maneuver prices back up when they want, the very nature of a crash demonstrates that markets can be uncontrollable. But the Saudis are willing to suffer the consequences, knowing that their own financial reserves (some $700 billion) give them staying power. "The Saudis are able to look at the long term," Phil Flynn, an analyst with Pricing Futures Group, told me.

Citigroup's Morse thinks that prices can fall further from where they are now, but not as low as Verleger forecasts because, he told me, today's market conditions are different from 2008 -- the decline in demand is not as steep, and inventories are not as large. Morse calculates that Brent can fall into the $70s-per-barrel range and U.S.-traded oil into the $60s-a-barrel range. "There is a good chance Saudi Arabia continues to produce enough to force [a rise in oil inventories]. And there's a good chance, between Europe and China, that demand growth could come to a halt," Morse said. OPEC might respond by reducing production, but its actions would be late. "Add to the scenario no more supply disruptions (or only modest ones) and no military conflict involving Iran," Morse said, "and prices could fall another $20 a barrel fairly easily."

Low oil prices can have serious social impacts simply because, with less free cash, people tend to start more closely scrutinizing their surroundings -- and when they become unhappy with what they see, they start looking for a scapegoat. The conditions that led to the string of Arab Spring ousters were not so much the lack of democracy as widespread public dissatisfaction with personal economic prospects. Analysts see similar vulnerabilities for the rulers of Iran, Russia, and Venezuela; when Venezuelan President Hugo Chávez can no longer milk the state oil company for public payouts, for instance, his political support could be in jeopardy.

Not everyone thinks the times will be so brutal for petro-rulers. Neil Beveridge of Bernstein Research told me that conditions may push down prices as low as around $90 a barrel, but no more than that. And the Energy Information Administration (EIA) on Monday estimated oil prices in the second half of 2012 at $95 a barrel.

The latter would be a heart-in-your throat, 10 percent plunge from the EIA's previous forecast. But it would be nowhere near the cliff that brings cold chills to the world's petro-rulers. As for my mom, either of these outcomes will make her merrier cruising the 405.

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