(May 31, 2013) Who stands to gain financially from war and unrest in the Middle East? Arms exporters? Yes, but their take is as nothing compared to the main profiteers from war – oil exporters. The more war looms, the higher the premium they fetch.
This article was first published by the National Post.
The civil war in Syria illustrates how arms profits pale next to those from oil. Russia is one of the world’s largest arms exporters, with annual sales of about $12-billion; the Syrian regime, thought to be Russia’s largest arms customer, accounts for almost 10% of Russian sales, or a compelling $1-billion a year. Some see these sales as a dominant reason for Russian President Putin’s staunch support of Syrian President Assad.
But these sales are not nearly as compelling as the revenue from the premium on oil – known to economists as a “fear premium” or a “war premium” — which these days is estimated at $20 to $30 per barrel. Because Russia exports a little over 7 million barrels a day of oil, the extra profit its exports fetch from this premium – between $140-million and $210-million – would in a single week match or exceed Russia’s entire annual arms sale to Syria. Put another way, if Syria couldn’t pay Russia for any of the arms it acquires, a cynical Russia could nevertheless justify arms shipments to Syria as a lucrative loss leader.
So, too, with oil exporter Iran, another major backer of the Syrian regime and more than any other country a brazen player of the fear card. Iran’s president Mahmoud Ahmadinejad has often threatened major conflagrations in the Middle East, whether by shutting down the Strait of Hormuz – a chokepoint for much of the world’s oil — or destroying Israel. Oil markets respond on cue, sometimes spectacularly. In 2008, oil prices spiked from $95 to $147 per barrel largely on worries that war might break out. Two years ago, oil options approached $200 a barrel while some were predicting war could send oil to $300 a barrel, or even $500.
As everyone fretted, and paid more at the pump, Ahmadinejad pocketed the proceeds. So did another major oil exporter on the other side of the world, Ahmadinejad’s comrade Hugo Chavez of Venezuela, who didn’t let his remoteness prevent him from being a player in the Middle East. Until his death earlier this year, Chavez played an outsized role in keeping Assad in power – and the war in progress — when many were predicting Assad’s fall. Some viewed Chavez’s support for Assad – shiploads of diesel fuel – as grandstanding or as repaying a favour for his buddy, Ahmadinejad. It may have been that, or it may have been rational marketing designed to keep up the fear premium.
Those who arm and finance the anti-Assad rebels — Saudi Arabia and Qatar – are also major oil exporters. Like their pro-Assad counterparts, their cost of keeping the war going is dwarfed by the extra revenue they earn through the fear premium. These oil exporters also stir other pots, and have for some time. Qatar has been instrumental in promoting the Arab Spring and the terrorist organization Hamas; Saudi Arabia funds Wahabi extremists worldwide. Before their demise, Muammar Gaddafi in Libya and Saddam Hussein in Iraq, other major oil exporters, also promoted and profited from terror and regional unrest.
Money, of course, is not the only motivation spurring so many oil exporters to finance unrest in the Middle East – their leaders act with what they see as high-minded virtue, be it nationalistic, ethnic, religious, or geopolitical. But their virtue is also born of necessity, as seen in an analysis produced last year by Pierre Sigonney, chief economist of the French oil giant Total SA. Most of the major pot-stirring governments not only depend overwhelmingly on oil revenues but also need oil prices to stay high to keep themselves afloat.
Saudi Arabia, for example, produces oil at about $10 a barrel but needs oil prices in the $80 to $95 a barrel range to balance its budget – otherwise it wouldn’t be able to maintain the lavish social programs that tamp down opposition and keep its populace content. Similarly, Sigonney estimated, the government of Iran needs oil to be in the $85 to $100 per barrel to balance its budget while Russia needs oil prices as high as $105 per barrel and Venezuela needs them as high as $110.
Among the governments in all these countries, the threat of a prolonged peace is existential – if prices plummet because the fear premium disappears, the governments know that they themselves are at risk. But peace need not be feared, not when unrest can so profitably be bought.
Peace sometimes can be had. Egypt and Jordan both signed peace treaties with Israel in decades past, and Turkey for decades was allied with Israel. But then, none of those four had any oil to export.