- New Science in old markets -

Can they please all lose?

There is a proxy war heating up in Syria, like those seen often in the Cold War. In those far-off times some unfortunate country, usually with a warm climate would find itself chosen as a battleground for a contest between Communist allies on one side and the US and Western Powers on the other. This was a regular feature of life from the 1950s through the 1980s and probably acted as a safety valve to keep Russian/American rivalry from exploding into full war. Not so good for the Koreans/Vietnamese/Angolans and the rest, but at least there was no nuclear exchange to melt the planet into a ball of slag. Each of these conflicts had local roots but escalated when the big players involved themselves.

Now, the Syrian civil war is the scene for fresh rivalries. On one side there is the Assad family representing the ruling minority that has been in control since roughly the mid 1960s when they took control in a series of coups. This group embraces a minor branch of Islam that no-one else much likes but is more agreeable to the mainstream Shias of Iran. Iran is aligned with the Assads through some of its other allies in tiny neighbouring Lebanon and also now more directly since the war intensified. Russia also supports the Assads, now actively. On another side is the rebel grouping backed by Saudi Arabia, Turkey and the US who lack a memorable collective name and are instead milkily described as 'moderates' - this group sometimes includes the local Al Qaeda affiliate, so the term 'moderate' is relative. There may be a thousand different sub-groups, so it is hardly unified. They are all opposed to Assad but also to the third main group which is ISIS - the head-chopping, slave-owning, black-flag-waving magnet for disaffected youth that gets all the headlines. ISIS have no governmental allies but they do have a lot of private support from Saudis and other rich Gulf Arabs and they hold swathes of territory in Syria and Iraq, acting as a government where and when they can. This includes collecting revenues from oil and conducting criminal activities such as ransoming hostages and selling black market antiquities. ISIS has other names but we will stick to this one here.

The Syrian war grumbled on from 2011 with varying intensity with the overall effect that ISIS were obviously winning despite earnest denials from their opponents such as Mr Obama, who has little credibility in the region. In the meantime Saudi Arabia also joined in a civil war in Yemen, with whom it shares a long border. The Saudis' opponents in Yemen embrace yet another variety of Islam loosely like the Shia kind and are also backed by Iran.

Middle east map

This is a recipe for paranoia. From the Saudi government's point of view they are sandwiched between two wars, North and South of their territory. In both, their chosen side is opposed by Iran or by Iranian allies with guns, money and the cunning experience of long guerilla wars. The situation in Iraq also remains precarious where a similar 3-cornered fight has currently gone quiet but could flare up again soon - there Iran is an even more direct participant and so the Saudis could be forgiven for feeling surrounded by malign Iranian influence - there is a history of antipathy going back centuries between Persian Iran and the more numerous Arabs.

In the second half of 2014 the Saudis decided to use the 'Oil Weapon'. As OPEC's self-appointed 'swing producer' Saudi Arabia has long used its immense production capacity to vary output to keep oil prices trading in a range - high enough to satisfy producers while not beggaring consumers. Restraining price rises also prevented the threat of new supply from prodigious US and Canadian Shale and Tar Sands deposits which are only worth extracting at high prices. When the Saudis lost their grip of the market in 2008 and crude prices reached almost $200 then this supply started to emerge. Shortly after that the technological breakthrough now called 'fracking' brought even more supply to market and the Saudis faced a complete loss of their commanding position.

Their confused response was last year's output increase, together with some public statements about their new policy designed to 'talk the market down'. At the time we (among others) pointed out that this was unaffordable as their financial reserves were vulnerable, despite being apparently enormous - see our article 'On Oil' in the archive. Nonetheless, the pumping continues and oil prices are at multi-year lows. This has harmed the nascent fracking industry in the US, as was no doubt intended and has also succeeded in the aim of harming the Iranian economy that was already in shocking condition after prolonged US sanctions over Iran's nuclear program. Bad can always get worse and Iran pumps over 3m barrels per day so the drop from $100 to $50 (Brent prices) is costing Iran around $50bn in missing cash each year - a lot for a country whose GDP is only $400bn.

Russia's situation is also parlous. The world doesn't want anything Russia makes except some military hardware so it is utterly dependent on energy sector exports for prosperity. It too built up its reserves during the period of high energy prices but not by much and they are also now falling sharply. The situation of reserves in the two countries compared (Saudi figures are in Riyals, Russian in US$.  The fall in Saudi reserves is from a high point equivalent to $737bn to currently $630bn, falling fast):

Saudi reserves
Russia reserves

Russia's decline in reserves is worse (the scale goes down to zero) and its routine financial needs are greater so the situation is nearer crisis there than in the Saudi case. Now these two find themselves on opposite sides, increasingly engaged in an escalating war in Syria. It is certain that the military situation will intensify and so will the costs. Saudi Arabia will be able to call on its small but rich Gulf allies for financial help no doubt, but a modern war is astonishingly expensive as the first world countries who were combatants found in Afghanistan and Iraq. A seemingly generous cushion of reserves can simply melt away under the unlimited potential for escalation offered by this complex war. There is also the very real consideration that the governments of both these countries pay their people to remain in power (in different ways). If there were to be any prospect that the money to do this might run out, it could easily result in the ruling elite bolting with the remaining loot long before it is all spent. What would come next we can only imagine - it would probably be even worse than the present sorry bunch, in both countries.

Iran's case is a bit different but the underlying weakness in both the oil price and its own economy will not restrict its actions as much. Iran has great experience in supporting factional fighting in the region at minimal cost (it is happy to expend people, not money) so it will probably maintain its efforts for the foreseeable future even though this course of action will get more expensive.

So, we have these three unlovely governments scrapping in the cockpit of Syria, each hampered by the low oil price that was clumsily engineered down by one of them in the belief that they would somehow win a fight for market share. Not only was this foolish at the time but the Saudis present involvement in two wars on their borders means that they cannot reverse direction and reduce output to boost oil prices without giving comfort to their enemies, Iran and Russia. It's becoming a race to see whose reserves last longest.

This can only get worse and the conflict could easily spread. These financial restraints on the players are to be welcomed by the rest of us as it keeps oil prices down and will reduce the risk of a full-blooded regional war. The situation is reminiscent of the blood-soaked Iran/Iraq war of the 1980s of which Henry Kissinger remarked "It's a pity they can't both lose". Quite.