A month ago when Egyptians were protesting against Mubarak, Stratfor's analysts averred that Egypt would not be any kind of "domino." I wrote an article at the time, taking the opposite view, recommending investors buy oil. Since then Libya has exploded in civil war, unrest is fulminating in other Arab countries, and oil has jumped about $15/bbl.
So now it's time to re-assess the situation. Other analysts have listed oil exports of countries in the region, along with "crude" guesses about their risk. I'd like to add more color by breaking down possible events into categories that are relevant for investors:
- Political drama: events that will make lots of headlines and possibly influence lives in the region, but will have no significant, lasting effects on the global oil market
- Genuine risk: events that will affect the global oil market profoundly for a protracted period
When I see oil prices spike on political drama, I'll sell oil. When I see oil prices drop becuase political drama is subsiding, I'll buy - especially if I think the market is overlooking the genuine risks.
Let's look at key countries in the region with this in mind:
Shortly after the conflict in Libya started, the foreigners who are essential to running the oilfieds fled. Libya doesn't have the local talent to operate the oilfields or infrastructure itself, so this assured that much of its 1.6 million bopd would be offline. Whether Qaddafi wins or loses, foreigners aren't coming back anytime soon-- nor is Libyan oil production. The genuine risk from Libya has already been realized and baked in. Unless Qaddafi resorts to chemical weapons (which has been rumored), events in Libya will not have any significant further effect on global oil supply, for good or bad. From this point on, it's only political drama.
There is a significant chance of civil war in Yemen. While this will be horrible for a population that already suffers an abysmal living standard and may have a psychological impact on markets, it will have no effect on global oil supply. Yemen is geographically isolated from the the rest of the Arabian peninsula and produces an inconsequential volume of oil. Anything that happens in Yemen will only be political drama.
Despite a few protests, Sultan Qabus is quite well liked. Oman's 750mbd of exports are safe for now. However, the Sultan is 71 and has no successors. When he dies, there may be a succession problem. The Sultan is a "hands-on" ruler who will leave a huge vacuum. So the death of the Sultan (in maybe 10 or 15 years) is a genuine risk. Anything else is political drama.
Emirates, Qatar, and Kuwait
These gulf countries, which account for nearly 6 million barrels of exports, have minimal risk at this point. Kuwait has the largest Shiite population of the bunch (around 40%), but it is quiescent for now. Short of an invasion or a vast shift in Kuwait's political dynamic, anything else that goes on here is only political drama.
Jordan has no significant petroleum production. While there have been protests, the Jordanian government is actively working to defuse the causes. In any case, no Muslim country is going to toss out the great (to the 43rd power) grandson of Muhammad.
Bahrain is run by Sunnis, but its population is predominantly Shiite, and largely disaffected. While much has been made of its risk, the reality is Bahrain exports less than 150mbd. Even if the regime topples (a toss-up in my opinion), it is only political drama. The only risk is of Shiite unrest spreading to Saudi Arabia, but that is vastly overblown.
Here's where it gets interesting. A lot has been made of the restive Shiite population in the eastern oil-producing regions. Several "days of rage" have been scheduled and the Saudi government has been visibly concerned, mustering big security forces and arresting a Shiite cleric.
Shiite unrest may be a nuisance to the Saudi government but it is not an existential threat. Shiites comprise only 15% of the population and have virtually no support from the rest of the population. On the contrary, many ultra-conservative Saudis consider Shiites to be border-line idolators. Any Shiite success would rally the Salafiya (maybe even Bin Laden and his crew) to the Saudi government's side. It was Saudis after all, who gleefully destroyed Shiite shrines in Kerbala and Medina. So Shiite unrest will only be political drama.
The genuine risk to Saudi Arabia is the looming succession problem. Since 1953, Saudi Arabia has been ruled by a succession of brothers, all sons of the modern Kingdom's founder, Ibn Saud. Saudi Arabia has nearly run out of brothers, with the remaining handful being desperately old and unhealthy. After the last brother is gone, there is no clear guideline for who should succeed. The last father-to-son succession occurred 145 years ago and was a disaster that destroyed the Saudi regime of the time.
The succession has always been problematic, but it is much more so now, because the Tunisian and Egyptian upheavals have given people a sense of possibility--possibility that the current order can be overturned. Put aside the thought of a friendly, democratic, Orange revolution type possibility. That is a Western projection. The real threat to the Saudi government is not from Shiites or democratic reformers, but from people who think the government is too permissive, too tolerant, and too pro-Western. The U.S. has only seen a glimpse of these people (15 out of 19 hijackers on 9/11 were Saudi), but their ideology has much more currency among everyday Saudis than most people realize. They are now almost guaranteed to get involved at the slightest hint of succession controversy. The Shiite minority could also become an issue at that point.
The time frame for the real risk in Saudi Arabia is maybe a year or two. Both the king and the crown prince are 87 years old and in poor health; the succession after them becomes murky. Saudi Arabia is the world's oil heavyweight, accounting for nearly 8 million bopd, more than a third of all Arab production. If a significant part of that goes offline, the impact will be staggering.
Little attention has been paid to Syria. Yet, I think it represents a risk. I previously wrote that Assad's overthrow would actually be a relief for Israel. It would. But now, I think an attempted overthrow would probably fail. Since I wrote that, two Iranian ships motored through the Suez canal. The media highlighted it at the time, but there was no mention of where these ships were going. They went to Latakia, and spent a long time there. Israeli intelligence has leaked rumors that they have been working on a naval base facility.
Why Latakia, when there's a port closer to Damascus? Latakia is a stronghold of the tiny Alawite sect, to which Assad and the top leadership of Syria all belong. My speculation is Iran is attempting to bolster Assad against possible threats from Islamists, or from his uncle Rifaat (who attempted a coup during my first visit to Damascus years ago). Serious involvement by Iran in Syria could have momentous consequences that would shake the whole region and go far beyond political drama.
What to do
In short, I think most events in the Middle East in the next few weeks are likely to be mere political drama and good opportunities to sell oil at high prices. After these events blow over, it will be time to accumulate again. A king dying in Saudi Arabia or an uprising against Assad would be cause to back up the tanker and fill up.
Disclosure: I am long SDRL.