Analysis: Chaotic Middle East causes pain at the pump in Utah
By Darin Mellott, ksl.com Contributor
September 19th, 2012 @ 11:44am
SALT LAKE CITY — Lately headlines have been full of disturbing news from the Middle East and sadly, last week the nation awoke to news that the U.S. ambassador to Libya, Chris Stevens and other diplomats were killed. In addition to the murder of ambassador Stevens, scenes were broadcast of rioters outside of the U.S. embassy in Egypt, violence in Syria continues and warnings from Israel regarding Iran's nuclear program grew louder.
While the region is no stranger to volatility, developments both on-going and new are combining to create an atmosphere that even for the Middle East can be considered highly uncertain. The most direct impact of all of these events on average Americans and Utahns will be at the gas pump.
The purpose of this column is not to advocate any policies or comment on what is right or wrong, but rather, look at what factors will affect Utahns and how. There are many complex issues in-play around the Middle East that go back many years, but now some of the elements which helped stabilize the region in recent decades are being challenged.
Acknowledging the complexities of the Middle East and many factors in-play, there are three in-particular that are influencing the region in an immediate and direct way, which will be looked at.
Arab Spring
First, the effects of the Arab Spring must be considered. The Arab Spring saw the overthrowing of governments in Tunisia, Yemen, Egypt and Libya. Along with the collapse of governments in the previously mentioned countries, demonstrations also occurred throughout the region. In Egypt, longtime U.S. ally Hosni Mubarak was pushed from office and in Libya, Muammar Gaddafi's regime collapsed as western forces stepped in to aid opposition to his government. The transition from strongmen regimes to democracies is now presenting unique challenges and there is a struggle for power.
Just yesterday, Fareed Zakaria of CNN wrote in his blog that in these countries, there are both good and bad elements. Zakaria argues that the U.S., "should try to help" moderates, because without American support "the crazies will only get stronger." While there are many who may agree or disagree with Zakaria, other factors are shaping how the U.S. can and will respond to events in the Middle East.
Limited means
The second factor is related to the Great Recession and its on-going effects, which are being felt around the world. For decades after World War II, western powers, particularly the United States used resources, both financial and military to exert influence in the region. With the United States struggling under the burden of low growth and high debt levels, while Europe struggles with recession and high debt levels, both are in a situation that limits their ability and will to exert influence in the region.
In a New York Times Op-Ed yesterday, political risk consultant, Ian Bremmer of the Eurasia Group wrote about the ability and will of foreign governments to stabilize the region, "There are no foreigners willing and able to accept the costs and risks that come with this role."
Foreign governments are now less willing than ever to bet on either the devil they know or the one they don't.
–Ian Bremmer, Political Risk Consultant
Furthermore Bremmer argues that with so many forces competing for power, "Foreign governments are now less willing than ever to bet on either the devil they know or the one they don't." In short, western governments preoccupied with expensive problems at home are not willing or entirely able to commit resources to a situation where the endgame is unclear and reliable allies are hard to find. Essentially what this means is, without meaningful intervention, in many cases developments will be left to run their course.
Regional power struggle
The third issue that should be monitored is broad and encompasses many challenges of the region. This issue is the struggle for regional power, particularly in relation to Iran's nuclear ambitions. While Iran's nuclear program is front and center and the largest single issue in this broader struggle for regional power, the fight for influence is manifesting itself in other areas such as Syria and Iraq.
For the sake of brevity, this column will focus on Iran's nuclear program itself. Israel is growing very impatient with diplomatic efforts to half Iran's nuclear program. Israeli Prime Minister, Benjamin Netanyahu said that he believed Iran's nuclear program was in a "red zone" and must be stopped. In a column earlier this year, I wrote about the potential for disruption if this conflict were to turn into a military confrontation.
Iran has threatened to close the Strait of Hormuz if military strikes against its nuclear program are carried out. This is significant, because 20 percent of the world's oil exports flow through the strait. If Iranian exports were to be completely halted during conflict, such a development alone would require and use up almost the entire spare capacity of Saudi Arabia to produce oil. Consequently, any closure of the Strait of Hormuz would ensure a huge supply disruption, which almost certainly would have the effect of rapidly pushing oil prices higher. Even the threat of strikes is enough to keep markets on edge and provide support for higher prices.
Utah affected
As the three developments mentioned above play out, markets will continue to stay on edge as the potential for supply disruption continues. In fact, CNBC's oil market sentiment poll, published last Sunday found participants unanimous in their expectation of higher oil prices this week, citing expected effects from monetary stimulus and potential for supply disruptions.
Earlier this year, analysis from JP Morgan estimated every $10 increase in the price of oil shaved 0.2 percent from GDP growth. With sluggish economic growth, that's a big deal. The bottom line is this: volatility in the Middle East is unlikely to decrease in the near-future; consequently, barring any major, rapid deterioration in the global macro-economic picture, oil and by extension, gasoline prices are likely to remain elevated.
Darin Mellott, Business Insider
Darin Mellott is a Senior Research Analyst in the Salt Lake City office of CBRE, the world's largest commercial real estate firm. Views expressed here are his own.
