Month: July 2015
Global implications of the oil price crash
The steep decline in oil prices has been one of the most significant global economic developments over the past year. On Tuesday, the Carnegie Endowment held an event on “Oil Price Trends and Global Implications” to address the consequences. The panelists included Aasim M. Husain, Deputy Director in the Middle East and Central Asia Department of the IMF and Chair of the IMF Interdepartmental Oil Group, Uri Dadush, Senior Associate at the Carnegie Endowment and Mark Finley, General Manager for Global Energy Markets and US Economics at BP. The event was moderated by Michele Dunne, Senior Associate in Carnegie’s Middle East Program.
Husain assessed that the drop in oil prices will persist in the medium-term. Initially, when oil prices fell, futures prices did not fall with spot prices. Instead, spot prices fell around mid-year while futures prices started to fall in October. Markets expect some recovery of spot prices, but because of decline in long-term oil prices, the recovery will not be full—oil prices will not go back to $90-$100 per barrel, but they can go back to $70-$75 per barrel. Futures prices are predicted to remain in the $40-$100 range.
The drop in price was a result of decrease in demand as well as increase in supply. Unlike in 1986, when Saudi Arabia’s sudden increase in supply crashed oil prices, in 2014 the world experienced the shale gas revolution, lower extraction costs for oil and lower demand. Basically, a combination of factors led to the oil price crash, although supply factors played a larger role.
Unsurprisingly, “pass-through”—the change in oil price passed on to consumers—was minimal worldwide. Since many countries regulate or fix petroleum prices, consumers did not get the entire benefit of the oil price decline. The biggest pass-throughs were in Europe at 80% and in North America at 50%. Husain claimed that if oil prices were fully passed through, global growth would increase by 1% in a year.
The beneficiaries of the low oil prices have been governments and state-owned enterprises. What they do with revenue determines the consequences of the oil price shock. Some may increase government spending, while others may save more. The losers have been oil-producing countries that are receiving lower oil revenues and therefore have less to invest in global financial markets. Fortunately, many of these countries have accumulated large buffers that will give them time to make adjustments to the price decline.
Finley attributes lower oil prices mainly to changes in supply. In 2014, global consumption was in line with the long-term historical average, but supply was exceptionally strong—global oil production grew at almost twice the historical rate. All the net growth came from outside the OPEC countries, with the US shale gas revolution leading the way. In 2014, the US surpassed Saudi Arabia and Russia to become the world’s largest oil producer since 1985. Both Canada and Brazil also saw record increases in oil production and achieved all-time record levels on average in 2014. Global demand and non-OPEC production have begun to respond to lower oil prices, but the substantial increase in oil production means that the market remains significantly oversupplied.
Like Husain, Finley believes the persistent decrease in oil prices will continue through the medium-term. However, one must keep in mind ongoing supply disruptions in the Middle East and North Africa. Finley warned that any policy must be robust across a range of prices or be able to adapt to significant and unexpected price changes in the future.
Dadush believes oil price shocks stimulate economic activity in the short-run by redistributing income towards people who consume more with a high propensity to consume. But this effect lasts only so long. There will be—and already are—significant cutbacks in energy investment. Oil is only 2% of the world GDP when one looks at production, so an oil price change even by 50% doesn’t have a huge stimulatory effect on world supply. This means the stimulus from the oil shock is short-lived even if there is high pass-through.
With regard to the Iranian nuclear deal, the panelists agreed that the return of Iranian oil will increase supply, but it is unclear by how much because of uncertainty about Iran’s capabilities and the response of other OPEC producers. Any volume of incremental Iranian production would simply add to an already oversupplied market.
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Good news shouldn’t obscure deep problems
I try not to pay too much attention to the Balkans these days, as there are much more important things going on in the world. But today’s news that the European Union has brokered an agreement that will allow Macedonia to hold early elections by April 24 next year crossed my desk at about the same time as an IRI Poll illustrating all too clearly why European mediation was necessary.
Prime Minister Gruevski, who won big in April 2014 parliamentary elections, has seen his popularity evaporate quickly. Disapproval has reached 55%. Almost half of the citizens now think the country is moving in the wrong direction (compared to fewer than one-quarter who think it is moving in the wrong direction). The single most popular solution is resignation of the prime minister. Most think the government has no plan to solve the country’s economic problems and relatively few think it is even trying to deal with corruption.
One big cause of Gruevski’s decline is the wire-tapping scandal that has bedeviled the country this year. This has generated enormous distrust in the government and Gruevski’s political party. Forty-two per cent of the population believes one or the other paid or engaged armed Albanians to stage a rebellion in May. That notion may be ridiculous, but it certainly demonstrates the level of distrust Gruevski has engendered.
The prime minister will now be required to resign so that a new government, with a different prime minister chosen by his party, can be sworn in 100 days before the election. Even before then new Interior and Labor/Social Affairs ministers chosen by the main Macedonian opposition party will enter the government, along with deputy ministers in key ministries and a new Special Prosecutor. The opposition has committed to returning to parliament. Resignation of the government 100 days before elections is supposed to become a permanent feature of the political landscape.
The cherry on this cake will be a meeting of the EU’s heretofore moribund High-Level Accession Dialogue in September.
All of this makes eminently good sense, but none of it will mean much unless the real causes of Macedonia’s malaise are identified and resolved. I would count these as
- A government and governing parties used to doing as they please with a minimum of transparency or accountability.
- Media and civil society that suffer constant harassment and threats.
- Interethnic relations that encourage Macedonians and Albanians to live more apart than together.
- A judicial system under the thumb of politicians and unable to conduct proper investigations of corruption and other malfeasance at high levels.
- An EU accession process stalled by Greek refusal to accept Macedonia’s constitutional name.
Getting rid of Gruevski and holding new elections does little to respond to these issues. He may even do well in next year’s election, despite current polling. Nor do I have a magic wand that will solve these problems, but the EU needs to recognize that a bit of reshuffling of government positions won’t cure the diseases that plague Skopje.
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Don’t take Jordan’s stability for granted
On Tuesday, the Wilson Center hosted a panel discussion on Jordan and the Challenges of Confronting ISIS Next Door. Panelists included Anja Wehler-Schoeck, Resident Director, Friedrich-Ebert-Stiftung Jordan & Iraq and David Schenker, Aufzien Fellow and Director, Program on Arab Politics, WINEP. Henri J. Barkey, the director of the Middle East Program at the Wilson Center, moderated. Both Wehler-Schoeck and Schenker agreed that the primary threat to Jordan’s stability is internal radicalization, not an external ISIS assault.
Wehler-Shoeck stated that there was a slight opening in Jordan at the beginning of the Arab Spring, accompanied by some small-scale protests. The Hirak Movement, while smallish in size, attracted Jordanians of diverse backgrounds. The Jordanian government instituted a few reforms and pursued a strategy of co-optation. The movement has now died down.Both Wehler-Shoeck and Schenker stated that Jordanians are refraining from protesting because they are wary of regional instability.
According to Wehler-Shoeck, a dominant security logic took hold in 2013. Journalists are no longer allowed to publish articles about the Jordanian military or the Iraqi-Swedish national who was recently arrested for plotting bomb attacks on Iran’s behalf. There is also self-censorship among journalists and a strict anti-terror law. Within Jordanian society, conspiracy theories about the formation of ISIS abound. Jordanians continue to the view the US critically, partially as a byproduct of the 2003 Iraq invasion.
Wehler-Shoeck asserted that many Jordanians felt conflicted in September 2014 when Jordan joined the anti-ISIS coalition. Most didn’t like ISIS but don’t support their country’s bombing fellow Sunnis. Many people in Ma’an told her that if they had to choose between a government that was fighting fellow Sunnis and ISIS, they would choose ISIS. Schenker pointed out that the leading hashtag on Twitter during this time was #This_Is_Not_Our_War. Jihadist leaders like Abu Sayyaf claimed that Jordan’s participation in the coalition would be the beginning of the end of the regime. According to a poll by the Center for Strategic Studies at the University of Jordan, a significant percentage of Jordanians did not consider ISIS, the Nusra Front or Al-Qaeda terrorist organizations. Many Jordanians viewed them as effective fighting forces against Assad.
Wehler-Schoeck and Schenker explained that the murder of Muath Al-Kasasbeh changed this dynamic. The government cleverly rode the wave of public outcry against ISIS. Schenker compared this shift to the way that Jordanian public opinion turned against AQI following the 2005 Amman hotel bombings. He speculated about how long this shift in opinion will last.
Wehler-Schoeck and Schenker discussed whether Jordan will remain stable. Schenker noted that Jordan looks great compared to much of the region. The IMF and World Bank forecasts for Jordan’s economy are bullish. Wehler-Schoeck, however, pointed out that the economy has been weakened by trade disruptions. Jordan also suffers from dependence on foreign energy.
Both Wehler-Schoeck and Schenker cited Jordan’s strong allies and increased border security. But Wehler-Schoeck stated that Israel is building a wall on its border with Jordan and is forming a new battalion to protect the border. This is telling. Schenker cited frequent reports of skirmishes on the Jordan-Syria border. Jordan spent $1.3 billion on homeland security measures in 2013. Jordan’s military is cohesive, loyal and well-trained. The US has increased its security aid to Jordan.
Wehler-Schoeck stated that both Jordan and the US have denied that Jordan is planning a buffer zone inside Syria. Jordan does not want to send ground forces to Syria. Schenker asserted that ISIS’s capture of Palmyra and Tadmor changed the debate about whether Jordan needs to be more proactive. A buffer zone would be risky. Jordanian soldiers involved in the creation of a buffer zone would be targeted by ISIS, the Nusra Front, and the Assad regime. Significant casualties could produce a backlash domestically. The Assad regime, which has so far refrained from attacking Jordan, could cause a large movement of IDPs towards the border, through actions such as bombing the power plants in Daraa. It could also sponsor terrorist attacks within Jordan. Jordan’s pro-West orientation makes it a target for both Sunni and Shiite radicals.
Both Wehler-Schoeck and Schenker highlighted the potential for radicalization within Jordan. Wehler-Schoeck cited the significant number of Jordanians who joined Al-Qaeda in Iraq (AQI) in 2003 and the fact that Al-Zarqawi was Jordanian. The jihadist preachers Al-Maqdisi and Abu Qatada are still active in Jordan. There are roughly 2000 Jordanian fighters currently in Iraq and Syria. Within Jordan, there are sleeper cells as well as outright ISIS supporters, but Jordan has a very strong security apparatus. The majority of Jordanians disapprove of ISIS but there are large numbers of unemployed men who are targets for jihadi recruiters. Even better educated Jordanians can be radicalized, as radicalization is also a search for Sunni religious identity. Many young Jordanians who went to Syria and came back frightened and disillusioned were imprisoned. This may be counterproductive, as prisons can serve as centers of radicalization.
Wehler-Schoeck noted that Jordan has tolerated the Muslim Brotherhood (MB) in the past but has taken stricter steps against it recently, such as the arrest of Zaki Bani Rushaid, the Jordanian Muslim Brotherhood (MB) deputy director. The government’s marginalization of the MB is risky because the MB has served as a platform for more moderate Islamism in the past.
Schenker emphasized that ideology isn’t confined to borders. In Ma’an, there have been several small pro-ISIS demonstrations. Ma’an is 3 hours outside Amman. Authorities are more concerned about radicalism in cities that border Amman, like Zarqa, Rusaifa and Salt. There is a large concern about ISIS sleeper cells among the Syrian refugees. Jordan hosts at least 700,000 Syrian refugees, but the true total may be closer to 1,000,000. Palestinians and East Bank Jordanians contribute about equally to the jihadi-Salafi movement. Two sons of MPs have joined the jihad in Syria. Schenker stated that anecdotally, Jordan appears far more Salafi than it did a couple decades ago. He believes there is a fine line between Salafis and jihadi-Salafis, though Wehler-Schoeck thinks there is a clear difference and that the government must engage with quietist Salafis.
Wehler-Schoeck and Schenker both believe that there is a serious risk of lone-wolf attacks in Jordan. Wehler-Schoeck cited the existence of fatwas calling for such attacks. Schenker warned that traditional targets, such as Western interests, government buildings and tourist attractions could be attacked. The threat from both lone wolves and sleeper cells is very serious. Jordan has excellent security and intelligence services, but they can’t stop all threats.
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Some people are serious, others aren’t
I’ve read two critiques of the Iran nuclear deal this morning: Rob Satloff’s published in the Daily News and Israeli Ambassador Dermer’s in the Washington Post. Rob’s is mostly serious. Dermer’s is not.
Dermer first then. Ambassadors merit precedence. He complains that the deal leaves Iran with a “vast” nuclear infrastructure and neglects to mention that it will be much reduced from its current state. He also complains that the record of international inspections is bad. That just isn’t true. No country has ever developed a nuclear weapon in a program safeguarded by the International Atomic Energy Agency. It is true that Iran has not answered the questions about “possible military dimensions,” but the first milestone in implementation of this agreement is their answers (by October 15). Dermer forgot to mention that.
Dermer doesn’t like the fact that some of the restrictions on Iran’s nuclear program last only 10 years. But isn’t 10 years better than none? The ambassador characterizes this as “paving” Iran’s way to the bomb. But without the restrictions there wouldn’t be any barrier at all and no need for paving. Why does he prefer that?
An arms race in the region is the ambassador’s next concern. But that too is more likely if there is no agreement than if there is one. Iran is already within two or three months of producing the material for a single nuclear weapon. Why hasn’t that precipitated a nuclear arms race? And why wouldn’t failure to roll Iran back be even more likely to precipitate one?
Dermer’s final concern is the only real one: the deal puts a lot of money in Tehran’s pocket. Iran is likely to do bad things with it. That is the basic trade-off here. Iran gets money owed to it and we get restrictions on its nuclear program. Reasonable people can disagree on whether that is a good deal.
But in order to believe it is a bad one you have to argue that the multilateral sanctions could have been sustained in the absence of a deal. That is hardly likely: Europe and China want the commerce with Iran that the lifting of sanctions will bring. Had the US walked away from this deal, we’d have been left with no restrictions on the Iranian nuclear program, no inspections and no sanctions.
Rob Satloff is more serious. He worries about the possible delay in getting inspectors to nuclear sites (he thinks the delay might be 24 days given the procedures in the agreement; I think it might be longer). But efforts to “clean up” nuclear sites are notoriously difficult and usually unsuccessful. They would also likely be observable by satellite.
Rob also complains that the “snapback” of sanction is the only consequence of cheating, making smaller violations immune, and Iran says snapback would free it of its obligations. Those are problems, but they are not arguments against the deal. With no deal, the Iranians would also be free of any obligations, allowing it to do whatever it wanted while we struggle to keep the multilateral sanctions in place.
Snapback would not apply to contracts already in place. This is the most serious of Rob’s arguments. He is correct that states and companies will rush to put in place umbrella agreements that can be used to protect future business with Iran. I don’t have an answer for this one. Maybe one of you does?
Also serious is Rob’s argument that the US might be constrained from imposing sanctions for non-nuclear reasons. I don’t read the agreement that way, but I’ll be interested to hear the Administration’s response on that issue.
In the end, Rob argues that the agreement represents a departure from traditional US policy:
It marks a potential turning point in America’s engagement in the Middle East, a pivot from building regional security on a team of longtime allies who were themselves former adversaries of each other — Israel and the Sunni Arab states — in favor of a balance between those allies and our own longtime nemesis, Iran.
But that imposes on history a coherence that just isn’t true to the facts. US intervention against (Sunni) dictator Saddam Hussein in Iraq on the false premise of weapons of mass destruction is not explicable in this theoretical construct. Nor is the failure to intervene in Syria in favor of a largely Sunni rebellion against an Iranian-supported dictator.
The nuclear deal does not represent a monumental and premeditated shift of US policy in Iran’s favor. It does open the door to a return of Tehran to a more normal status within the international community. That’s the price we pay for 10-15 years of serious contraints on Iran’s nuclear program. Satloff and Dermer haven’t convinced me that price is too high.
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A nomad life: Indian, Thai or American?
Middle East Intern Maithili Bagaria was born in India, raised in Thailand and is currently a rising senior at Rice University in Houston, Texas. She writes:
As I feel another spasm of pain, I grab my phone on the bedside table and call my uncle, ranting to him about my terrible stomach cramps and begging him to think of a solution. He tells me to go to the emergency room if the pain is unbearable. I tell him I think it’ll pass within the hour. He then advises me to set up an appointment with a primary care provider and asks me to make sure my insurance will cover the visit.
I put the phone down in confusion. Insurance? How was that related to anything? I begin to recall the annual health insurance charged to my father as part of college tuition. I remember the Aetna plastic card that came in the mail during the first week of classes. I furiously rummage through my wallet and locate the plastic card, grateful that I had the common sense not to throw it away. My journey in American health care is off to a good start.
Logging in to Aetna’s website, I am stormed by various tabs that mean nothing to me. After locating the “Find a doctor” tab, I’m confused as to which insurance plan I possess. I go back through my records and find that I’ve been charged for student health insurance and try searching that instead. This time I’m taken to a website that allows me to locate doctors that are partnered with Aetna Student Health.
I call a university hospital and am quickly set up for an annual physical Aetna covers. At my appointment, my doctor tells me she’ll send a prescription to the nearest CVS. When I pick up my medicines, I find my insurance covers those too. All in all, I’ve been charged $0 for my visit.
In Thailand, the hospital process would have easily cost me $100. I would have had to pay for the doctor, the medicine and the administrative fees out of my pocket. The idea of health insurance for non-Thais living in Thailand is out of the question. Even many wealthy Thais opt out of health insurance and pay the hospital fee upfront when need be. Now, it is true that medical care costs less in Thailand than the US, but health care without insurance—which is common—can easily cost hundreds, if not thousands of dollars.
In my experience, doctors in Asia–certainly in Thailand and India–are less likely to prescribe medicines for “minor pain.” Doctors in Bangkok have often told me that if I can bear the pain, I should avoid taking medicines. In Washington DC, I was told there is no need to tolerate any pain. Daily medicines can easily fix the issue. I subscribed to the American model when the pain started interfering with my work schedule.
The question of which medical recommendation is better is more than a conflict between Western and Eastern medicine. It is a conflict between disparate cultures, ideologies and histories, which I face everyday as a modern-day nomad. By giving in to my American doctors’ recommendation, am I becoming a victim of American work culture and allowing my schedule to dictate crucial health decisions? Or am I simply being practical by embracing modern-day medicine?
The people around me had no trouble trying to put me in a box. On my first day at Rice University, a member of the cleaning staff started talking to me in rapid Spanish after she saw I was dark-skinned and understood what “hola” meant. American friends attributed my vegetarianism to my religion, even though I’m a practicing Hindu in name only. Indian family members assumed I had lost respect for Indian customs and traditions as an Indian who had grown up abroad.
It seemed I could never please anyone, except I could please everyone. The disparate philosophies embedded in me allow me to relate comfortably with others. I can understand the warmth one feels from living amongst 15 other people just as much as the independence one feels from living alone. I can transition from a direct and transparent communication style to one that demands more subtlety. And most importantly, I can listen without many preconceived notions, because I know the costs of trying to put people in a box. A modern day nomad’s life is full of internal cultural conflicts, but also one of rewarding connections with other people.
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Big surprise is no surprise
The Middle East Institute published my piece this evening:
The Iran nuclear deal has only one big surprise: it is consistent with the April 2 “parameters” that preceded it and contains no surprises. No one caved. Nothing got walked back.
But there are some interesting additions. One is this: “Iran reaffirms that under no circumstances will Iran ever seek, develop or acquire any nuclear weapons.” This is a written confirmation of the Supreme Leader’s controversial “fatwa” against nuclear weapons. It was not so long ago that Iran’s critics in the United States were complaining that the fatwa was only oral and not written. I have not noticed anyone welcoming the written version.
The “reaffirmation” wouldn’t be worth the paper it is printed on except for the detailed limits and intrusive inspections that the agreement provides. No softie on Iran, Dennis Ross confirms that these fulfill previous Iranian commitments to limit centrifuges, enrichment, and enriched uranium; end all plans for separating plutonium; and no longer engage in any research and development related to a nuclear explosive device. International Atomic Energy Agency (IAEA) monitoring will be more comprehensive and intrusive than for other countries. While no system is foolproof, nuclear weapons have never been developed within an IAEA safeguarded program.
That leaves the possibility of a clandestine nuclear program outside the purview of the IAEA. There is reason to believe that Tehran had such a program until 2003, when it was allegedly stopped. Iran, which previously stonewalled IAEA inquiries on this subject, has now committed in the nuclear deal to clarifying its past nuclear activities with “possible military dimensions” by October 15, with a final assessment due from the IAEA on December 15. This will be an important early milestone in implementation (or not) of the nuclear deal. It is not the first time the Iranians have promised clarification. Beyond that date, the IAEA can request access to locations of concern. Iranian objections can be overridden by five of eight members of a joint commission overseeing implementation of the agreement. That joint commission includes five Western members (the United States, the UK, France, Germany, and the EU) as well as Russia, China, and Iran.
The agreement provides for sanctions to be lifted once Iran implements its obligations or passes certain time limits in compliance with the agreement. No sanctions get lifted without implementation, and some—like the arms embargo—remain in place for five or eight years (depending on the weapons involved). While most restrictions are lifted within 15 years, some remain in place in perpetuity, including strict IAEA safeguards and the prohibition on nuclear weapons research and development.
The question is what happens if one or another obligation is breached. There is an elaborate, but quick-paced (I count 35 days), dispute resolution mechanism. At that point, UN Security Council sanctions would be reinstated, unless the Council votes within 30 days to continue lifting them. This is a “snapback” mechanism, unprecedented so far as I know in the Security Council. It would give the United States (and other permanent members) a veto over sanctions lifting. Iran has stated that it would treat reinstatement of sanctions as grounds to cease performing its commitments.
So, is this agreement a good thing or a bad thing?
It depends on what you think the alternative might be. At worst, it would be no constraints on the Iranian nuclear program, no IAEA monitoring, and no multilateral sanctions, as the EU and China are champing at the bit to do business with a cash, oil, and gas-rich Iran. At best we might in the absence of an agreement be able to sustain the sanctions for a while but not likely the IAEA monitoring and technological constraints, giving others in the region reason to initiate their own programs to produce weapons-grade uranium or plutonium. War might set back the Iranian nuclear program for a few years, but it would also give them incentive to finish the job and unleash even more chaos than the region is currently enduring.
Relief from sanctions will unquestionably provide the Iranians with resources. Tehran is owed upward of $100 billion that will flow into its coffers, in addition to whatever its renewed exports will bring in today’s bearish oil market, likely to go down further because of Iran’s reentry into it. The Islamic Republic is a profoundly anti-Western regime that even without much available cash has managed to contribute to instability in Iraq, Syria, Lebanon, and Yemen. Its anti-Americanism may sound hollow after this agreement, which engages Iran in a continuing process involving the United States and three of its allies as well as the European Union, but unless there is a dramatic and unexpected change of heart at the top in Tehran we can anticipate more trouble from the Iranian Revolutionary Guard Corps and its proxies in the region and even beyond.
America’s friends in the Gulf will therefore be nervous about the implications of this agreement, though the United Arab Emirates was quick to say it welcomed it. Israel denounced it even before the ink was on the page. But soon enough both the Gulf states and Israel will become keen about insisting on fulfilling its every letter, as they have with the interim agreement currently in effect.
The debate in Congress will be vigorous. Most Republicans and a good number of Democrats will oppose the deal on the grounds that it licenses Iran to become a nuclear threshold state, ignoring the Obama administration’s conviction that this would happen faster and with fewer controls in the absence of an agreement. But the opponents are unlikely to muster the two-thirds majority in both houses required to override a presidential veto. The Supreme Leader is thought to have given the green light for this deal, but he has not yet pronounced on it. Assuming he says a dramatically reluctant “yes,” the Iranian Majlis will not block it.
The saga of implementation has not yet begun. It will last 10-15 years. If the agreement holds and prevents Iran from getting a nuclear weapon, it will have made an enormous contribution to peace and stability. If it fails, we will have to deal with the ugly consequences: war or a nuclearized Middle East.
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