It’s always about the oil, stupid!

The insurgency – killing, stealing, lying – is ALL ABOUT THE OIL

Don’t think the rise of Iraq’s, and Syria’s, Allah Akbar fanatics is not about oil. It is, and in more ways than one. First consider who benefits from Iraq’s oil losses, as the IS is bent upon doing. Since at least 2012, it has been the second largest OPEC producer. And first US occupation and then Maliki government promises of raising producing from Saddam era 2.5 million barrels per day to six million barrels was set to make it a good 70 per cent contributor to the cartel’s basket.

That, for Saudi Arabia, meant more shi’a oil. With Iran and Iraq leading oil sales, and wielding political influence courtesy the shi’a crescent – one of the unintended consequences of the Iraq war – Riyadh was fuming for years, hence its proactive interest in Libya (home of rare light sweet crude), Syria and Iraq.

But with oil rich Mosul now part of the international caliphate, it is in back in the sunni oil fold. And with the insurgency threatening to advance to the capital and all the way south to Basra, home to three-quarters of the country’s oil production, things could get much worse.

So far Mosul has caused only minor oil fluctuations. Last month prices rose no more than four per cent. But any more production bottlenecks will undoubtedly strain markets and push up prices. And just like the Libya, Saudi Arabia is again poised to not only to pick up some slack (ensure alternate production) but also benefit from rising prices.

So far Mosul has caused only minor oil fluctuations. Last month prices rose no more than four per cent. But any more production bottlenecks will undoubtedly strain markets and push up prices.

Oil and the uprising

Oil is primarily to blame for Baghdadi’s momentum too. That the new shi’a government, after suffering decades under sunni minority rule, chose discrimination in place of reconciliation would not have surprised anyone familiar with the Arab mindset. Life was bad enough after the US occupation cut oil subsides and drove much of the previous working middle class into poverty. But when Maliki’s promises of sharing oil wealth for national reconstruction, particularly addressing sunni grievances, proved hollow, the discontent began rising.

Hopes were raised when production crossed three million bpd and exports rose, but with little trickling down to the sunnis, a rebellion was inevitable. This was around when al Baghdadi had become head of al Qaeda in Iraq, and was busy taking advantage of the security lapse in the wake of the Syrian rebellion. Leveraging the sunni discontent, he timed the Iraqi uprising to perfection, striking first at security and oil personnel and infrastructure, before taking majority towns and threatening a march on the capital itself. The ISIS, now IS, also reportedly partnered with former Saddam number-2 Izzat Imrahim al-Douri’s Naqshbandi army, who had infiltrated the security forces over the years, and engineered a remarkable military retreat of Mosul from the outside, helping lay the foundation of the caliphate.

Oil now

For now, Basra and the south is safe and few believe the IS has the wherewithal to successfully storm the capital and continue with the march down south to Basra. But taking cities and disrupting oil supplies are two very different things. And going by al Qaeda’s known modus-operandi of operating large numbers of suicide bombers and sleeper cells, it would not be too difficult to disrupt security arrangements and bomb important oil facilities in the south.

Markets respond primarily to sentiment and the oil market did just that mid-June when it rose to nine-month high levels. Now, with OPEC spare capacity diminishing and an Iraqi supply constraint on the cards, Saudi’s position is considerably enhanced.

Markets respond primarily to sentiment and the oil market did just that mid-June when it rose to nine-month high levels. Now, with OPEC spare capacity diminishing and an Iraqi supply constraint on the cards, Saudi’s position is considerably enhanced.

It could, as it often does, increase production and help keep international prices in check. Or, considering how its relationship with the west, especially the US, is probably as its lowest point ever, it could cite internal rising demand, etc, and enjoy windfall profits from high prices for a little time. There could be a partial replay of the ’73 oil crises, with the White House either in tense confrontation with Riyadh, or just playing into the sheikhs’ hands.

Remember that Saudi is also the principal funding agency for Iraqi and Syrian rebels. And for all intents and purposes it is all for a rebel push to the south of Iraq and disturbing the oil plants.

The interest in Syria was for a similar reason. In addition to being the principal anti Israeli alliance, it was also at the centre of the anti-sunni, anti-GCC bloc. But most importantly, it is a gateway to Turkey, EU, Lebanon and the Mediterranean. It also touches Iraq, Iran and Jordan. Qatar’s initial interest in destabilising the country owed to its desire for a pipeline to deliver its gas to the EU. How that changed over time is another story.

But, coming back to Basra, in case there is successful disruption of even one-third of Iraq’s southern oil supplies, global spare capacity will be completely wiped out, meaning international prices could rise to the $150 per barrel mark. And since that would definitely send the American economy into another recession, perhaps oil is what it will take for Washington to finally revise its alliances in the Middle East, and end this proxy jihadi project once and for all.

As always, it’s always about the oil.