The “Arab Spring II” is Coming Fast

by | published December 12th, 2014

There was one particularly grim matter that came up over and over again in my overseas meetings.

It’s so serious that the bankers I met with in Paris and Frankfurt discussed the sudden need to redraw their risk parameters. Meanwhile, top players in London were concerned about its potential impact on foreign oil companies.

As for my contacts in Dubai, they looked upon it as if it were the third rail.

I’m talking about the return of the “Arab Spring,” and it promises to have a nasty bite…

The Unintended Consequences of Lower Oil Prices

As I noted during the first go-round, some Middle Eastern and North African (MENA) countries were able to avoid the initial wave of dangerous unrest by essentially buying off their populations with goodies. More of their national budgets were devoted to social programs and support, easing the unrest that would have otherwise developed in the streets.

Today, those payments remain nonproductive. In short, while they help keep the peace, they do not provide any economic stimulus, provide new employment, or improve local tax bases. They do, however, accelerate prices and inflation.

But there’s more to this developing mess.

In each of these countries, the unemployment rate is increasing, the average age is declining, and the genuine alternatives to centrally subsidized survival are disappearing.

That’s because this untenable balance has been sustained by only one thing: The price of oil.

As rentier states, these countries wrestle profits from the land without developing it. As a result, they’ve remained undiversified economically, because that was always the easiest path. As long as the oil flowed, net outflows from the national coffers could be sustained.

Falling oil prices mean that balance is now ending. And with it the prospect of renewed and expanded violence is making a big comeback.

OPEC recognizes this. Saudi Arabia, the central engine of the organization, anticipates problems in nearby places like Bahrain and Yemen are only going to get worse. The seeds of discontent in both places have already sown conflict on the Arabian Peninsula.

In Bahrain, connected to the Saudi mainland by a causeway, the unrest has a most disconcerting element – a Sunni minority government pitted against a Shiite majority population.

And Riyadh is not waiting around this time. In 1979, when a Shiite revolution erupted across the water in Iran, the Shiite population rose up in the oil producing region of eastern Saudi Arabia. It had to be put down by force of arms. This same region is connected to Bahrain, making it a big worry for the Saudis.

Of course, Saudi Arabia will certainly survive, even with an aged royal family. The Saudis have a cushion of hard currency reserves, an ability to move oil out to market at a deep discount, and a population less prone to unrest. The close connection between the royal House of Saud and the Wahhabi brand of Sunni Islam will also provide support.

However, other OPEC members are less secure, as are other regional countries not in the organization such as Jordan, Oman, and Morocco. Also vulnerable are Libya (an OPEC member disintegrating as a state), Tunisia and Egypt (not members), along with Syria, which is already in a civil war.

Meanwhile, OPEC members Iraq and Iran are beset by their own problems – a war with insurgent ISIS in the first case, and significant economic paralysis (at least in some measure the result of Western sanctions) in the second.

The coming “Arab Spring II” will have fewer popular accountability aims and be more directed squarely against the bastions of power. That means it will be protracted, ugly, bloody, and uncompromising.

The Catalysts of Destruction

Over a year ago, I sat in London with ambassadors from the GCC (the Gulf Cooperation Council) in a discussion of the net results of the first Arab Spring. As I notedat the time, Saudi Arabia, the UAE, and Kuwait were the only OPEC countries able to sustain low oil prices, while still providing sufficient domestic stability.

Everybody else needed crude prices in excess of $100 a barrel or they ran the risk of not being able to withstand the next wave of unrest.

As of this morning, crude prices are way below that, and MENA (Middle East North Africa) is once again poised to explode.

But the remedies available this time around are fewer, and the scope of the unrest is almost certain to be greater than it was two years ago.

Included this time around among the most vulnerable OPEC members are Nigeria and Venezuela. Both require high crude prices to subsidize very unstable budgets.

Nigeria is already experiencing its own insurrection in the north against rising Islamic fundamentalists. Nigerian Oil Minister Diezani Alison-Madueke is the new President of OPEC, the first woman in history to fill that office. Now she’s beset with a major political gulf between what her country needs and what Saudi Arabia will allow OPEC to provide.

In Venezuela, reliance upon Chinese, Russian, and Iranian assistance to develop the Orinoco River basin following the expulsion of major international oil companies has backfired. Russia is spiraling into a recession – also primary a result of declining oil prices – and the Chinese cannot provide adequate technical assistance.

It is in Venezuela where low oil prices may have the most concerted effect. Caracas does not have a religious motivation for insurrection, nor are there any existing opposition parties that have much strength.

Rather, the unrest will rise up from a broad-based population with little prospects that is facing higher prices and the inability to acquire basic goods. Things are so bad in Venezuela that the government has forced the national oil company (PDVSA) to use proceeds from its exports to import food.

This is quickly going to produce massive unrest as the oil price remains low.

The “Arab Spring II” is coming fast and it will impact South America (Venezuela) and West Africa (Nigeria) as well, making it more than a regional event. But it will be longer and more troubling than the first version.

And the disagreement among OPEC members over production levels (thereby lowering prices) will be the primary catalyst.

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  1. ck
    December 13th, 2014 at 09:30 | #1

    So,how will this affect our portfolios? How to position??

  2. c. Kleiner
    December 14th, 2014 at 10:15 | #2

    How should I play BP?

    What will happen to Hess?

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