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Thoughts On Middle-Eastern New Year

January 5, 2016 on 12:59 am | In Opinion | No Comments

The last few days’ events in the middle east, those that started with the Saudi execution of Shiite cleric Nimr Al-Nimr, the peculiar response and escalation that followed from the reminder of the Gulf states, and lastly the conveniently timed attack on oil terminals in Libya, have forced me to think there is something more at play here.

I will first state that I do not subscribe to the school of conspiracy theories. I categorically refuse to believe in any of them. Yet, I can’t help but tie the dots in this specific case. I do not think this is a conspiracy theory, as much as it is a last ditch, coordinated, effort to try to bolster oil prices.

Some Background

It is no secret that oil prices have been declining over the past year, collapsing from $100-105 at the end of 2014, to $35-40 by the end of 2015. It is also no secret that the majority of oil producing countries, especially in the Gulf region, rely very heavily on oil revenues to finance their budgets and their economies.

This collapse in prices has had a severe impact on the countries of the region, ranging from dipping into savings in the case of the Gulf countries (Kuwait, Qatar, Bahrain, Saudi Arabia, and Oman), dependence on foreign debt to finance its budget in the case of Iraq, to a shrinking economy in the case of Iran (that was already depressed by western sanctions). There are even some who are predicting that, at current levels, countries like Saudi Arabia will have exhausted their savings by 2020 or 2022. I do not think, at least not yet, that things will turn to be so dramatic, but its technically a possibility.

Nimr Al-Nimr

The dissenting Saudi Shiite cleric Nimr Al-Nimr was arrested by Saudi authorities and has been in custody since early 2009. Saudi authorities took their jolly time and didn’t bring him to trial until 2012. Then, again, they took their jolly time and, in a country known for swift trials where the judge has an almost cart-blanche to rule as he pleases, took over two and a half years until he was sentenced. The sentence, quite unsurprisingly, was the death penalty. That was in October 2014. The case was appealed in early 2015, and then went on to the Supreme Religious Court. The sentence was upheld in October 2015. So, it’s been almost three months since the sentence was upheld.

Timing and reaction

The Saudis chose to execute Al-Nimr right after the new year. Granted, Saudi Arabia doesn’t celebrate the Gregorian new year, but the timing is peculiar nonetheless. It was probably intended to get the west off guard, during the holidays season, and hence maybe avoid western pressures to postpone the execution, or even spare Al-Nimr’s life and just keep him incarcerated.

That would have been the end of the story, if it wasn’t for the swift reactions in the region towards the execution. It’s not Iran’s reaction, or the reaction of Shiites in Iraq that was anything unexpected. Where things start to get interesting is the quick, swift reactions by other Gulf states, namely Bahrain and the UAE, in joining the Saudis in cutting their diplomatic relations with Iran.

The official story is that the Saudis cut their diplomatic ties due to the attack that followed the execution on their embassy in Tehran. But the fact that both the Saudis and the Iranians were quick to point that no one was present at the embassy means an evacuation had taken place, and with the full knowledge and cooperation of the Iranian government. The lack of worry by Saudis about any ceased documents also indicates the evacuation wasn’t a hasty one.

It is hard to think the Saudis did not foresee the possibility of an attack on their embassy in the aftermath of the execution, else they wouldn’t have had evacuated beforehand. The Iranian regime could have also protected the embassy premises, had it wanted to do so, or had the Saudis stayed put and asked for protection.

Then, as if Bahrain and the UAE cutting ties wasn’t enough, Sudan joined the party and announced it too was cutting diplomatic ties with Iran. The two countries don’t even share a continent! Sure, the Sudanese regime was most probably bribed into, or threatened with diminishing investments by Saudi Arabia if it did not, cut its ties with Iran. But that’s also a very peculiar choice of escalation by the Saudis.

And then, to top it off, none other than the Islamic State, known for its close financial ties with Saudi Arabia, conveniently chose to attack Libya’s Sidra port, the country’s largest oil terminal, on the same day the Gulf countries and Sudan announced they were cutting their diplomatic ties with Iran. Libya, whose oil production has gone from 1.5 million barrels per day in 2013 down to 400 thousand barrels per day in 2015 relies heavily on the Sidra port to export most of its dwindling oil production.

Coordinated Effort

Again, I categorically reject conspiracy theories. However, I cannot help but wonder whether this whole shebang is a coordinated effort led by Saudi Arabia, to induce some uncertainty in oil markets in an effort to bolster oil prices up after months of continuous declines.

Whether this was coordinated with the Iranian regime is anyone’s guess. Whether the Saudis bet on Iran really escalating or getting the message and playing along is also anyone’s guess.

Market Impact

Historically, whenever there was any tension in the middle east, oil prices tended to move upwards, to reflect uncertainty and worry at whatever events were unfolding in the middle east. However, whereas the Gulf region produced 25% of global daily oil output 25 years ago, OPEC’s entire share of the pie today is about a third of daily global oil output, with the Gulf countries share in the high teens.

Which is why, probably to the disenchantment of Saudi Arabia, market reactions today to this whole debacle was mute, at best. Volatility increased a bit, but that was after a prolonged weekend due to the new year coinciding on a Friday. News of declining stock prices on the year’s opening session in China may also have contributed somewhat to the volatility.

But even without the new year and the stock declines in Shanghai, the market’s reaction was nothing to talk about, and prices were down to previous session levels by lunch time in New York.

Iran, which is only a few weeks away from meeting the requirements for the first round of lifting of international sanctions, has too much at stake to risk being dragged into a serious escalation in the Gulf. At stake are not only sanctions on the export of oil (they have stated several times they are prepared to increase production by 500 thousand barrels per day the day sanctions are lifted, with the possibility of adding another 500 thousand within a few months if market conditions allow for it), and the import of goods, but just as importantly tens of billions of dollars in foreign investment that has been preparing to pour into the country over the past year, as soon as sanctions are lifted.

Then, there is the shale oil boom United States, which rendered it into a much larger oil producer than it was 20 or 25 years ago. Shale Oil production is categorically different from conventional oil in that while it is considerably more expensive per barrel to produce, once the technology to extract it was developed during the heydays of $140 per barrel, it doesn’t require the large capital expenditures nor the extended timeframes conventional oil projects require. Then, there is the fact that this shale boom happened in the US, the largest global oil consumer. This means refineries and consumes are only a few hours’ drive by truck or train from the oil producing wells.

While it is still early to know what the final outcome will be, it is no surprise that oil markets reacted quite indifferently to the events unfolding over the past three days in the Gulf region.

It will take far more destabilizing actions to force oil markets to react, and its questionable whether such destabilizing actions are in the interests of the parties that would benefit from more volatile oil prices.

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