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The real wild card – Middle East and its impact on oil

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Monday, October 24, 2011

Today all eyes are on Europe, but there is another part of the world where there are several events that have happened in 2011 and will continue to happen over the next several months that will definitely have implications globally in the medium and long term. With all headlines talking primarily about Europe the incidents in Middle-East are getting short bursts of airtime.

But, Middle-East according to me is a wild card. I can say with certainty that we will only have uncertainty in the Middle East for the foreseeable future.

There are a lot of incidents that have happened from the beginning of this rather extraordinary year starting with the vast and inspiring gathering in Tahrir Square and now a bloody end to Muammar Gaddafi. Each of these incidents in isolation will not have a global impact, but when you combine them with the fact that 60% of the global oil reserves are in the Middle-East and Africa then suddenly the scenario starts looking a bit ominous. With really no serious alternative to Oil despite years of research and billions of dollars spent on alternate energy, it is only but natural to have a secular view that Oil prices will continue to be pressured upwards. We all of course know about the demand side coming from the Emerging markets, but let us not forget the potential challenges that could erupt on the supply side.

The timeline of events in the Middle-East in 2011:

January 2011: TUNISIA: The cyberactivist group “Anonymous” announces Operation Tunisia in solidarity with the protests by striking a number of Tunisian government websites with “direct denial of service” attacks, flooding them with traffic and temporarily shutting them down. Saudi Arabia officially announces that it is hosting Ben Ali and his family for an unspecified period of time.

January 2011: EGYPT: Activists in Egypt call for an uprising in their own country, to protest against poverty, unemployment, government corruption and the rule of president Hosni Mubarak, who has been in power for three decades.

February 2011:  BAHRAIN: Anti-government “Day of Rage” in Bahrain. Bahrain police storm Pearl roundabout, the focal point of protests, on a Manama square, to clear activists camped out there. At least seven people are killed.  Bahrain declares martial law, a day after Saudi troops enter Bahrain.

Mar – till date 2011 SYRIA: In March at least 200 people march in Damascus and there are reports of at least 23 dead around the country including, for the first time, in Damascus. President Assad sacks the governor of the northern province of Hama after mass demonstration there, eventually sending in troops to restore order at the cost of scores of lives. Assad still has not fallen — and for all the expectations that he would be unable to hold out, he has held out quite well to this point.

May 2011: OSAMA BIN LADEN: In a televised address, Mr. Obama announces Bin Laden’s death after months of secret planning and operations.

Feb – Oct 2011: LIBYA: LIBYA’S National Transitional Council announced elections and the formation of an interim government and declared itself liberated after 42 years of rule by Muammar Gaddafi. It ended with his capture and death last week. It all started with the arrest of human rights activist Fethi Tarbel starts a riot in Benghazi in Feb and Anti-government militias taking control of central coastal city of Misrata after evicting forces loyal to Gaddafi. Then with NATO and U.N. Security Council combining forces it only was a matter of time for Col Gaddafi to lose control.

Feb – Apr 2011 OMAN: In Oman, Sultan Qaboos has acquiesced in protesters’ demands that he release nearly 300 dissidents arrested since the Arab Spring protests began in Oman a couple of months ago

June 2011 SAUDI ARABIA:   The kingdom is spending $130 billion to pump up salaries, build housing and finance religious organizations, among other outlays, effectively neutralizing most opposition.

June 2011 YEMEN: President Ali Abdullah Saleh wounded in a bombing on his palace in the capital Sana’a. The attack comes after widespread protests, the killing of hundreds of demonstrators and violent battles between army loyalists and defectors. Saleh evacuated for treatment in Saudi Arabia but confounds expectations by returning to Yemen, where he repeats promises to resign that few believe.

October 2011: Hamas reached a deal with Israel on Tuesday for the release 1,027 prisoners in exchange for Shalit, who was captured in 2006 and has since been held in the Gaza Strip. The Palestinian prisoners will be released in two phases.

October 2011:  Mr. Obama said Friday that the estimated 40,000 U.S. soldiers still in Iraq would return home by the end of the year, after the failure of tense and protracted negotiations with the Iraqi government to amend an existing military agreement between the two sides to allow for a contingent of combat troops in the country beyond Dec. 31.

October 2011:  U.S. agents disrupted an Iranian assassination-for-hire scheme targeting Saudi Arabia’s ambassador to the United States

There are multiple moving parts in the region and many of the unexpected events of recent weeks including the sudden peace arrangement between Hamas and Israel add to that uncertainty. But the biggest one in my opinion is the planned American troop withdrawal from oil-rich Iraq after spending close to USD 1 trillion in real money, losing 4,481 troops and having 32,195 soldiers injured with 20% of whom have serious brain or spinal injuries. Until the fall of Saddam Hussein following the U.S. invasion in 2003, Iraq was known as the “Shield of the Arabs” because it prevented Iran from expanding its influence westward. With Saddam gone, Iran will easily be able to re-emerge.

Iran is the leading conventional power in the region with more than 500,000 troops on the ground and this time around, taking very measured and careful steps.

Stratefor describes the Bahrain uprising as a test of strength for the Iranians. Shiites rose up in Bahrain against their Sunni rulers with at least some degree of Iranian support. Saudi Arabia, linked by a causeway to Bahrain, perceived this as a test of its resolve, intervening with military force to suppress the demonstrators and block the Iranians. To Iran, Bahrain was simply a probe; the Saudi response did not represent a major reversal in Iranian fortunes.

The main game for Iran is in Iraq. The Iranians will not be in control of Iraq, but they have sufficient allies, both in the government and in outside groups, that they will be able to block policies they oppose, either through the Iraqi political system or through disruption. They will not govern, but no one will be able to govern in direct opposition to them. Iraq in recent months has moved closer to Iran. Iraq, for example, has supported Iran’s right to nuclear technology and advocated U.N. membership for Palestinians. Prime Minister Maliki and his party were in exile in Iran for 10 years. Many of the Kurdish leaders, including the current president of Iraq, was in Iran. Many of them speak fluent Persian. They have long and ongoing ties. Muqtada al-Sadr, when he finds that things get difficult for him in Iraq he head backs to Iran. So all of these political officials have been nourished and sustained by Iran.

The potential rise of Iran in the Middle-East and its resulting discomfort to the US is easily demonstrated by the fact that Secretary of State Hillary Clinton warned Iran against assuming that U.S. would allow it to flex its muscles. She said that Tehran “would be badly miscalculating” if it interpreted the Iraq withdrawal as a sign of diminished American military commitment to the region. U.S. is quickly trying to make its moves by trying to persuade Europe to put tough measures on Tehran’s central bank, Iranian airlines and port companies in an effort to increase pressure on Iran.

But, as Frederick Kagan, a scholar at the conservative American Enterprise Institute who helped craft the Bush administration’s 2007 Iraq troop-surge strategy said “I don’t see how you can talk about containing Iran, when you leave Iraq to its own devices in such a way that it has no ability to protect itself. There is no upside to this decision.

President Obama used some rhetoric which was more intense than he usually does in response to the alleged assassination plot on the Saudi Arabian ambassador.

There are also reports that the United States will this week commence huge military maneuvers aimed at Iran, with a massive air fleet patrolling middle eastern skies ready to land at any time, in response to Iran’s involvement in an alleged assassination plot that experts have labeled dubious, amidst fears that US and Israeli targets could be hit by attacks.

The Arab Spring events in Middle East have been transformational, and have been led by the youth of the country who want a future, a job and above all dignity. But, how the future will shape up is not at all clear today. The uprising was really not about democracy, but all about economic development, distribution of wealth and prosperity. Will the region act more matured in its way it positions for the future and focus on co-operation and development so that the youth in the countries get a future. I guess there is a strong probability that this might be the case. But, with US leaving the region who will fill the void and ensure that the region unites?

There is a serious possibility that Iran will manage to take a dominant position in Iraq. In Iraq, Iran sees an opportunity to extend its influence westward. Syria is allied with Iran, and it in turn jointly supports Hezbollah in Lebanon. The prospect of a U.S. withdrawal from Iraq opened the door to a sphere of Iranian influence running along the southern Turkish border and along the northern border of Saudi Arabia. It will be interesting to see how the Saudi’s position themselves with Iran. They are ultimate pragmatists.

There would be a dramatic change in the balance of power in the region and it would also be something that would reshape the global balance, as the world is dependent on oil from this region and is going to cooperate with whoever has it. I am of the view that this will possibly ultimately mean that the western world will have to potentially find a middle-ground and forget the past and deal with the region on a more matured basis. Iran will possibly understand that this would be an opportunity for them to lose. They clearly have the upper hand in the region now. The ultimate solution will end up being a compromise where all sides get a fair deal, but it is unlikely that the path to that solution will be a straight line.  

To conclude, I feel that supply side issues will keep oil prices supported. In the medium term Oil price range will be higher in the USD 100 to 150 range rather than below USD 100 for a sustained period.

 

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Written by Sayanta Basu

November 1, 2011 at 5:25 pm