National Commentary

The Peak Oil Crisis: Middle Eastern Turmoil

Some 24 million barrels of oil per day or 27 percent of the world’s daily production comes from countries in the Middle East and North Africa. Until recently the oil markets have paid remarkably little attention to the deteriorating political and security situation in the region. With the intervention of the Lebanese Hezbollah militia on the side of the Assad government and the announcement from Washington that the West was going to become more actively involved on behalf of the rebels, the situation changed, the oil markets reacted, and prices started to rise.

Developments in the region and their effect on oil exports seem likely to be critical to what happens to the world economy within the next 5-10 years. While there may eventually be increasing amounts of energy from other than fossil fuels, political and military developments in the Middle East are moving rapidly. It is hard not to imagine that some, and perhaps even a substantial portion, of the region’s oil exports will be affected by the growing turmoil in the next few years.

Keep in mind that in the last 40 years exports from the Middle East have been curtailed several times, — the Arab oil embargo of 1973, the Iranian Revolution and the Iran/Iraq War, and more recently by upheavals associated with “Arab Spring” in Libya, Yemen, and Syria. Each time there were consequences for the global economy and more seem likely to come.

Our concern here of course is with oil — how soon and to what extent exports from the region might be curtailed. There is obviously no easy answer to this question as there are many forces and players bearing on the situation so specific predictions would likely be wrong. However, of the numerous conflicts taking place in the region, several are moving rapidly and could have a serious impact within the next year or two.

Clearly at the top of the list is the Syrian uprising which has many of the great and regional powers at loggerheads. For now there is no end in sight. The level of fighting is likely to get worse before it gets better and to spread to major upheavals in neighboring countries. So far only a small quantity of Syrian oil has been lost from the export market, but the situation clearly has the potential to develop as additional countries become involved in the conflict.

Iraq is the next most dangerous situation. As an ersatz state created by colonial era treaties, it is a volatile mixture of Sunnis, Shiites, and Kurds that are already at each other’s throats. The violence is mounting and while oil production has only been interrupted for brief periods, it seems just a matter of time before sustained attacks on the oil infrastructure drive out foreign contractors from parts of the country and reduces the 2.5 million b/d of oil exports significantly.

With a new President due in August, the political situation in Iran is in a state of flux. Conventional wisdom holds that there will be few changes in major foreign policy given the constitutional limitations on the powers of the “reformist” President. However, the outcome of the election clearly showed that Iran’s people are demanding change and relief from the sanctions the President-elect has promised. Oil exports from Iran are already down by 1 million b/d and seem likely to drop further creating still more economic distress.

Tehran is up to its eyeballs in supporting the Assad government in Syria and is playing a very dangerous game with regard to its nuclear program. Either of these Iranian ventures could end in some form of military action. For now Tehran has only one strong card in its confrontation with Israel and the West which is to block the Straits of Hormuz, thereby depriving the world of some 16 million b/d of Middle Eastern oil and creating untold chaos. Clearly nobody, especially in Tehran, wants this to happen, but the recent history in the Middle East is rife with miscalculations that led to numerous disasters.

The next festering problem is Egypt which seems on the verge of economic collapse. Although the Army is likely to take over once again should the situation get out of hand, there is little it can do but maintain order. Although Egypt does not export oil, it does control the Suez Canal and accompanying pipeline that transports much of the oil going to Europe. Other than a threat to the canal, it is difficult to predict what other impacts prolonged turmoil in Egypt would cause. Its proximity to Israel and the Gaza strip obviously raises concerns. Mass emigration of even a small percentage of the 83 million Egyptians in search of food in itself would cause major problems. A major anti-government demonstration is scheduled for June 30th in Cairo.

Then we have less immediate problems such as Libya and Algeria. Both of these are major oil exporters that are far from stable and are already subject to internal dissidence. It seems likely that they will have difficulty attracting foreign investment in the next few years and we are likely to see slipping oil production if not outright unrest.

The heart of Middle East oil exports is Saudi Arabia and the Gulf states – Kuwait, Bahrain, Qatar, the UAE, and Oman. With the exception of Bahrain and small parts of Saudi Arabia, these Sunni-dominated countries have little threat from the Sunni-Shiite confrontation that is taking place in Iraq, Syria, and Lebanon. They all however have antiquated political systems in which hereditary rulers are maintained in power by spreading around their large per-capita oil revenues and efficient security forces.

Most of these states are also deeply involved in supporting the Sunni rebels in Syria. As the Syrian conflict spreads, the Gulf states and their elaborate oil producing and exporting infrastructures could easily become targets in what seem to be ever-spreading troubles. While it is impossible to say exactly what will come next, it seems a good bet that somewhere along the line oil exports from the region will be seriously affected.