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An Examination of Cultural Impacts On Pricing: Higher Oil Prices Here To Stay
An Examination of Cultural Impacts On Pricing: Higher Oil Prices Here To Stay
Newton Analytical
Introduction
Over the past few weeks, oil prices have continued to steadily climb, with Brent prices
reaching $85 and West Texas Intermediate hitting the $75 mark. A number of industry
experts are quick to assert that these prices are temporary. However, an examination of
cultural and social factors throughout petroleum-producing regions of the Islamic world
show that even with a push from North American shale oil producers, higher prices are
likely here to stay.
Executive Summary
While media outlets are blaming the rise in prices on the impending arrival of fuller
sanctions from the United States on Iran, that is missing much of the picture. The Islamic
world is at a crossroads in its collective development, brought along by years of closer
connections forged by the Internet (especially social media), as well as growing animosity
for the way that many outsiders, namely the West, China, and, to a lesser degree, Russia,
have interacted with Islamic communities around the world.
The simple fact is that while the sanctions are certainly acting as a catalyst for much of what
is afoot in Islamic regions, they are by no means the only cause of volatility and restricted
supply across a number of regions.
Complicating events is the fact that issues removed from the Muslim world are working to
create a situation in which oil prices increase. Venezuela faces a number of
well-documented structural problems that impact its ability to export oil. Meanwhile, in the
United States and Canada, a shale oil boom has outpaced infrastructure, leading to a
bottleneck that will require some time to fully address.1 While oil prices will certainly
moderate over the long term, for the next several months issues throughout the Islamic
world will be driving the price skywards.
Iranian Issues
Beyond the arrival of sanctions, Iran is essentially one country with two governments.
Reformist President Rouhani seeks warm ties with the West, save the United States, and
despite American actions, still works to find outlets for Iranian oil. Meanwhile, these efforts
are hampered by more conservative elements in the Revolutionary Guard and intelligence
services that view any opportunity to frustrate Iran’s enemies as a positive. While it is early
to describe Iran as “teetering,” the fact is that the country’s stability has a direct impact on
oil exports in the Persian Gulf and beyond.
1
https://www.reuters.com/article/us-usa-oil-record-bottlenecks-analysis/too-much-oil-texas-boom-ou
tpaces-supply-transport-networks-idUSKCN1MC1CE
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Among the Arab states of the Persian Gulf there is considerable unrest. While not a
petroleum exporter, the Qatar situation has hampered stability in the region for 16
months. In Saudi Arabia, opposition to Crown Prince Mohammed bin Salman is
increasingly coalescing into opposition for his projects, no matter their merits. Throughout
the region, distrust of a growing relationship with Israel, anger about the conduct of civil
wars in Syria and Yemen, and a shift towards private payment of previously public services
has led to an increase in animosity towards government institutions.
China is the world’s largest importer of crude oil, with nearly 50% of the country’s supply
coming from abroad. Much of that supply comes from Southeast Asia, where Chinese
policies are proving to be especially antagonist towards Muslim populations that are
gaining a sense of unity with more conservative groups throughout the Islamic world.
To the west, China faces growing tensions with its Central Asian neighbors, precisely at a
time when it needs their cooperation to build more oil and gas infrastructure. Much of this
is centered on questions of ethnicity and religion, and with prominent international media
outlets reporting on Chinese actions taken against ethnic Kazakhs and Turkic peoples in
China itself, the risks increase accordingly.
Two very different issues are arising in North Africa. In Algeria, the failing health of the
country’s long-time president creates concerns of how the country will carry on once he is
gone. These apprehensions are complicated by business entanglements with Turkish firms
that will have the potential to become political quickly.
To the east, a violently unstable Libya still possesses the ability to export oil, but concerns
over which government is the legitimate agent poses questions that go far beyond business
continuity if one militia gains an upper hand over the other. Libya’s strong men, including
those in the Libyan National Army, have ties with extremist groups.
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Iranian Issues
The sanctions being imposed on Iran later this year have been blamed for much of the
increase in global oil prices. However, the fact of the matter is that even without the
catalyst of American sanctions, Iran would continue to make oil prices more volatile due to
a number of cultural issues.
While much has been written about the arrival of sanctions, the fact is that the impact of
the sanctions themselves might well be overstated. Two close economic allies of Iran, India
and Turkey, have signaled that they will still be purchasing oil, or at least leaving
mechanisms open for companies to do business in Iran.
Much of this comes as a result of cultural connections with Iran. India, while not
predominantly Muslim, has a massive Muslim population. Additionally, similarities
between Farsi and languages spoken in India, especially Hindi, mean that India maintains a
position that animosity with Tehran is undesirable. For Turkey, while it is predominantly
Sunni to Iran’s Shiism, the desire to build a pan-Islamic counter to Saudi Arabia and the
GCC, as well as to the West, is increasingly alluring. Given that, it is perhaps surprising that
while Iran will still manage to sell its oil, the real issues that lead to global insecurity in
pricing are still apparent.
In this, the tug towards isolation comes especially from the Revolutionary Guard’s Quds
Force, with its charismatic leader Qasam Soleimani being one of the most popular figures in
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the country. General Soleimani may well be the most dangerous man in the Middle East
for Western concerns, and has made oil shipments from the GCC a primary target.
While General Soleimani is wildly popular, Iran’s own shifting demographics may see that
soon change. The issues regarding Iran’s large youth population are most clearly played
out in the controversy surrounding the use of social media. Most major international
outlets are banned in the country, but can be easily accessed through the use of VPNs.
Ironically, Twitter remains a primary mouthpiece for the ruling party, with the Ayatollah, the
President, and many ministers having official accounts. More telling is that of Iran’s 45
million internet users, 40 million of them have active Telegram accounts.
Despite this official prohibition, social media remains a primary method by which
individuals in the country are rallied to causes. The importance of this unofficial structures
in the Iranian mindset is hard to overestimate; in the 1970s, the word ‘cassette’ was
deemed prominent enough to garner an entry in the E
ncyclopaedia of Islam for its role in
fermenting revolution. Telegram or WhatsApp could be the next such iterations.
Ethnic Strife
Finally, economic and social tensions have begun to expose ethnic strife that has, until now,
played a relatively small role in Iranian daily life. After all, Iran goes as far as to offer
guaranteed representation in the Majlis. However, recent fissures have shown that such
attempts at diversity are failing. In the northwest, growing Azeri nationalism threatens
refining facilities near Tabriz as well as gas pipelines to Turkey and beyond.
It is in the south and southwest where the real danger for Iran exists. In these oil-rich areas
live much of the country’s Arab minority. Growing Arab nationalism has been to blame for
at least one attack so far, but if the Iranian government is officially blaming such behavior
on separatists, be assured that there is an elevated risk for more such action. Curiously, it
is difficult to say exactly which Arab power that these groups will identify with in the event
of further unrest or conflict in the region (most would say Iraq due to shared Shia belief,
but some Sunni populations near Bandar Abbas present an altogether different issue).
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While the situation in Iran grows increasingly less stable with each passing day, conditions
across the Persian Gulf provide little room for optimism. Given the sheer percentage of
world fuel exports that transverse the region, any unrest is cause for volatility in global
markets. Unfortunately for those who prefer calm waters, there is plenty of unrest to be
had.
The most obvious issue in the Persian Gulf right now is the continuation of hostile ties
between Qatar on one side and Saudi Arabia, Bahrain, and the UAE on the other. Doha has
long tried to run an independent agenda, something that has caused considerable
consternation in Abu Dhabi and Riyadh. While ties have been all but cut, some rather
pragmatic keys still remain in place; for example, the Dolphin Gas Line between the UAE
and Qatar remains open.
The true irony here is that Qatar is not a petroleum exporter, but instead specializes in
natural gas. Despite that, it has powerful allies in Iran and Turkey, as well as a first-rate
public relations campaign throughout not only the Muslim world, but even the West. Still,
such an affront to Saudi political leadership (and potentially Emirati financial leadership)
will not be tolerated forever.
Much of the reason for that lack of toleration comes from the Crown Prince of Saudi Arabia,
Mohammed bin Salman (often known by his initials, MBS). The Crown Prince has taken a
number of measures to bring his country into social modernity, but many of these have
been poorly received. As a result, MBS’s hold on power is much less secure than he would
prefer; reports of the monarch in waiting s leeping on his highly secured yacht abound in
the region.
However, the issue at hand is not necessarily MBS himself, but rather his desire to push
through reforms without consultation; a vital piece of Saudi political culture known as s hura
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is lost in the process. Because of this, combined with his relative youth, opposition has
become increasing vocal to his policies and his future rule.
Some of the most ardent opposition to MBS comes because of Saudi, and indeed GCC,
foreign policy regarding three hotspots. In the past two years, significant gulfs between
official policy and popular opinion have developed with respect to the Israel-Palestine
question, the conduct of the war in Syria, and the Yemeni Civil War. In Israel, heads of state
throughout the GCC have sought closer ties to the traditional enemy of the Arab world, and
in the eyes of the masses, abandoned the Palestinians in the balance.
Events in Syria and Yemen are a bit more nuanced. Regarding Syria, the desire is present
for a movement that would counter the unpopular rule of Bashar al-Assad. Instead, the
Gulf states have lost the opportunity to create this, with Turkey instead playing that role.
Additionally, the Saudi and Emirati intervention in the Yemeni Civil War is increasingly seen
as a lost cause that only leads to greater civilian deaths.
That the issues at play in Yemen are, in no small part, related to differences between
Sunnis and Shias is not lost on the average GCC citizen, many of whom are Sunni. This is
especially acute in Bahrain, where a minority Sunni ruling class has been accused of limiting
civil and political rights among the Shia majority. During the Arab Spring, riots consumed
Bahrain to the point that the ruling authorities asked for Saudi Arabia to deploy military
units on the streets of Manama, the country’s capital.
However, the rhetoric with which the Saudi government disparages Shias, either through
the Yemeni Civil War or through heated exchanges with Iran, does not sit well with a
sizeable Shia minority. Many of these Shia are concentrated in the Eastern Province, which
happens to be Saudi Arabia’s primary oil production center. Continued executions of Shia
leaders also further a status of mistrust between the ruling Sunnis and the majority Shias.
If these groups were to revolt, Saudi Arabia would face not only a security threat, but also
an economic danger that it has yet to imagine.
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Thousands of miles to the east, a power that has traditionally stayed out of Islamic affairs
has found itself interfering more than many other outsiders. Chinese interests in the
Islamic world stretch around the world, with many of China’s top trading partners in Africa
having sizeable Muslim populations. However, the real threats to be faced by China with
respect to the Islamic world are much closer to home.
Pakistan
China’s traditionally friendly relationship with Pakistan has faced considerable threat with
the arrival of a populist government under Imran Khan. Pakistan had recently agreed to a
number of capital investments under the umbrella of the China Pakistan Economic Corridor
(CPEC), a key element of the Belt and Road Initiative (BRI). However, due to concerns about
costs, many Pakistanis are clamouring for the deal to be altered. This could directly impact
China’s ability to import the oil it needs, as Gwadar is imagined as a major refining center;
already foreign powers such as Saudi Arabia are seeking to invest in the port to lessen
Chinese influence.
That does not mean that China is out of luck; instead, it will likely double down on concerns
among many Pakistanis that India is the natural rival of Islamabad. Such a move will
resonate most with the military class, and it is they who have demonstrated an ability to
seize power through any means necessary. While such a coup would eventually lead to
lower fuel prices due to decreased volatility on the route to China, it would cause
fluctuations in the short and medium term.
Southeast Asia
China’s historic involvement in Southeast Asia has been less well received than its
endeavors in Pakistan, and the growing power of political Islam in the region is well
combined with animosity towards ethnic Chinese in the region. Many ethnic Chinese in
Southeast Asia happen to be Christian, which complements conservative Islamic rhetoric
about a clash of civilizations. Additionally, jealousy over socio-economic standards enjoyed
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by such foreigners remain a point of contention for even some moderate Indonesians and
Malaysians.
However, the rise of extremist political Islam is what is truly worth noting. Shariah law’s
role is expanding in the region, well beyond Aceh (the most conservative area of the region)
to having a larger role in daily life. Additionally, political Islam is increasingly viewed as a
worthwhile political philosophy in Indonesia, where instead belief in a higher power was
once considered sufficiently guiding. Given the sheer amount of oil that traverses these
straits, the risk of extremism is simply too high to completely ignore.
Central Asia
China’s own Muslim populations, located on the routes leading to Central Asia, have the
likelihood of creating the most dramatic impacts on China’s future energy security. In
Ningxia, ethnic Chinese Muslims (though officially known as the Hui people and treated as a
separate nationality under Chinese law) are finding out that they cannot be considered
both Muslim and Chinese. As the government encourages Chinese society at large to
discriminate against not eating pork, fasting, and purchasing halal goods, many Hui people
are beginning to voice disgruntlement.
Such anger does not compare to what is currently going on in Xinjiang, a large region to the
north of Tibet that is home to millions of Uyghur Muslims, a Turkic group with strong ties to
the rest of Central Asia. Sizeable populations of Kazakhs, Uzbeks, and Kyrgyz also live here,
meaning that the impact of China’s anti-Islam policies (officially framed as anti-terrorist) are
reported throughout the region.
While the Central Asian states still struggle with democracy, some of them are looking to
find closer relationships with the West as a counterpoint to growing influence from Beijing
and Moscow. In the short term, wide open spaces with pipelines and other energy
infrastructure present easy targets if tensions continue to run high.
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Two Muslim states in North Africa further add to the volatility of oil prices at this time, as
well as the potential for pricing to rise even higher. The events of Libya are well
documented but perhaps not as well understood, while Algeria remains a teetering vase
ready to shatter at a moment’s notice.
Algeria
The overwhelming danger in Algeria is that the health of President Bouteflika, the country’s
aging leader. Real power in the country is held behind the scenes by a collective of
government, military, and business leaders known as le pourvoir, and it is unlikely that a
free and democratic transition will result. Instead, unless a clear successorship is
established soon, Algeria will likely face considerable instability.
Libya
Far more acute is the situation in Libya, where a number of governments compete for
control, each with varying levels of corruption. Many of the country’s oil fields lie in the
eastern part of the country, while the government that many Western states view as
legitimate only holds sway in the West. Meanwhile, some access to the east has been
guaranteed as a result of ties with the head of the Libyan National Army, a former CIA asset
named Khalifa Haftar, but armed gangs, some with terrorist ties, have limited his authority.
Meanwhile, many of the newest exploration has occurred in the south of the country, a
region known as the Fezzan. However, lack of law and order in the region have all but
stopped any but black market trade in oil; tribal groups control large amounts of territory
and are just as eager to extort international firms for protection money as they are to
transport sub-Saharan Africans to the Mediterranean shore to be sold as slaves to the
highest bidder.
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Scoop Curve
Assuming that oil producing governments are able to limit most popular actions related to
oil, pricing over the medium term will likely follow a scoop shape. This is assuming that oil
supply is not constricted by any abrupt international incidents and that North American
shale producers are able to scale production easily. Analysis on this eventuality remains
mixed.
J-Curve
Instead, we view a J Curve as a more likely scenario for oil prices in coming months. The
irrefutable fact is that these societies are indeed too sensitive to oil pricing, and that as
excess capacity in the market is depleted with regards to the Iranian sanctions and other
factors, any drop in prices that results from decreased volatility will in turn create greater
volatility in domestic markets. Because of this, while prices should not be classified as
runaway by any means, oil will steady climb in the medium term. Eventually, some leveling
off can be expected, but the simple truth is that there is too much societal volatility
adjacent to oil markets at this time for the impact to not be felt.
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Prices indicated above are meant solely to demonstrate shape of the curves and are not themselves indicative of any predictions beyond the general shape of the
line(s).
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To Learn More
Contact:
Kevin Newton
Newton Analytical
kevin@newtonanalytical.com
www.newtonanalytical.com
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