Geopolitical volativity and low oil prices

Written 13 February 2016

Low oil prices have not only ensured volatility for the markets, but they have also ensured geopolitical volatility. The oil-producing states of Iran and Russia are the ones who are most hurt by low prices, with Russia requiring a price of $50/barrel in order to maintain this year’s budget. With oil prices well below that, Putin is set to face very serious economic problems which if not handled could significantly decrease his base of power. This makes the increasingly embattled president even more desperate than he already may be.

As I said in a previous post, Putin’s goal in Syria is not only to sustain an ally, but also to create enough influence in the region to significantly challenge OPEC oil hegemony. For this, he has allied himself with the Iranians who possess great natural resources. As most of the Middle East’s oil lies beneath the feet of the Shia, a Russia-Shia axis would effectively replace OPEC and NATO in the Middle East.

The problem is the low oil prices. Putin’s economy is reeling from them and the Saudis are happy to keep it that way. Any negotiations one may hear about between Russia and OPEC are very unlikely to yield production cuts from the Saudis precisely because the Saudis understand the angle at which Putin is working. The Russians and the Iranians are desperate, and as negotiations continue to fail, we may begin to see force and action.

It is important to understand how much the geopolitics of the Middle East have changed in the past year. Whereas before, NATO and OPEC had complete hegemony in the Middle East, with states like Iraq, Iran, and Syria being insignificant rogue actors, the insertion of Russia into the region has changed the calculus. The Iranians can thus act more brazenly because the Russians will act in their favor.

It is also important to understand the unconventional power Iran now possesses. The Quds Force is effectively leading wars in Iraq, Syria, and perhaps Yemen, with Hezbollah being essentially a subsidiary. Iran’s power stretches far, having committed to attacks on Jews as far as in Argentina, or in London, and engaging in battles with Mossad in Thailand and India. The Iranians were able to conduct major attacks on American military targets, most notably in Beirut, but alarmingly in Saudi Arabia as well with the Khobar Towers bombing.

Ten years ago, if Iran did something to hurt America’s oil supply, America would quickly and effectively annihilate the regime. This time, it’s different. Iran can act much more courageously because they have the backing of a nuclear state which shares many of its interests. Therefore, the Iranians can act to hurt Saudi oil interests, and indeed it may in order to affect oil supply and drive up oil prices. It has significant influence in eastern Saudi Arabia and as the Khobar Towers bombing showed, it has ability to act on it.

Such a scenario would no doubt have to be approved by the Russians. If the attack happens, America will likely rattle its saber, before Putin does something much like what he did in Syria in 2013. He will urge that America consider this as an individual terrorist incident and not something which should be blamed on Iran, while promising to step in in case of an intervention. Meanwhile, Russian state media will blame American oil companies in conspiring to raise oil prices and enrich themselves. Russian military assets will begin to make a presence in the Gulf in order to safeguard Iranian oil supplies and deter Saudi and American attacks.

Such a move will no doubt cause significant escalation in the Middle East, with the Saudis increasing attacks in Yemen, and ramping up its support of insurgents in Syria. But the main victims of this attack will still be the Saudis and the American economy, whereas Russia and Iran will be the main beneficiaries. This scenario no doubt poses very significant risks, but we are going through an extremely volatile geopolitical situation. Even if this does not happen, there is no doubt that the Russians and Iranians are at least considering it.