The Middle East Meltdown and Global Risk
OCT 1, 2015
NEW
YORK – Among today’s geopolitical risks, none is greater than the long
arc of instability stretching from the Maghreb to the
Afghanistan-Pakistan border. With the Arab Spring an increasingly
distant memory, the instability along this arc is deepening. Indeed, of
the three initial Arab Spring countries, Libya has become a failed
state, Egypt has returned to authoritarian rule, and Tunisia is being
economically and politically destabilized by terrorist attacks.
The violence and
instability of North Africa is now spreading into Sub-Saharan Africa,
with the Sahel – one of the world’s poorest and most environmentally
damaged regions – now gripped by jihadism, which is also seeping into
the Horn of Africa to its east. And, as in Libya, civil wars are raging
in Iraq, Syria, Yemen, and Somalia, all of which increasingly look like
failed states.
The region’s turmoil (which the United States and its allies, in their pursuit of regime change
in Iraq, Libya, Syria, Egypt and elsewhere, helped to fuel) is also
undermining previously secure states. The influx of refugees from Syria
and Iraq is destabilizing Jordan, Lebanon, and now even Turkey, which is
becoming increasingly authoritarian under President Recep Tayyip
Erdoğan. Meanwhile, with the conflict between Israel and the
Palestinians unresolved, Hamas in Gaza and Hezbollah in Lebanon
represent a chronic threat of violent clashes with Israel.
In this fluid
regional environment, a great proxy struggle for regional dominance
between Sunni Saudi Arabia and Shia Iran is playing out violently in
Iraq, Syria, Yemen, Bahrain, and Lebanon. And while the recent nuclear
deal with Iran may reduce the proliferation risk, the lifting of
economic sanctions on Iran will provide its leaders with more financial
resources to support their Shia proxies. Further east, Afghanistan
(where the resurgent Taliban could return to power) and Pakistan (where
domestic Islamists pose a continued security threat) risk becoming
semi-failed states.
And yet, remarkably,
even as most of the region began to burn, oil prices collapsed. In the
past, geopolitical instability in the region triggered three global
recessions. The 1973 Yom Kippur War between Israel and the Arab states
caused an oil embargo that tripled prices and led to the stagflation
(high unemployment plus inflation) of 1974-1975. The Iranian revolution
of 1979 led to another embargo and price shock that triggered the global
stagflation of 1980-1982. And the Iraq invasion of Kuwait in 1990 led
to another spike in oil prices that triggered the US and global
recession of 1990-1991.
This time around,
instability in the Middle East is far more severe and widespread. But
there appears to be no “fear premium” on oil prices; on the contrary,
oil prices have declined sharply since 2014. Why?
Perhaps the most
important reason is that, unlike in the past, the turmoil in the Middle
East has not caused a supply shock. Even in the parts of Iraq now
controlled by the Islamic State, oil production continues, with output
smuggled and sold in foreign markets. And the prospect that sanctions on
Iran’s oil exports will be phased out implies significant inflows of
foreign direct investment aimed at increasing production and export
capacity.
Indeed, there is a
global glut of oil. In North America, the shale-energy revolution in the
US, Canada’s oil sands, and the prospect of more onshore and offshore
oil production in Mexico (now that its energy sector is open to private
and foreign investment) have made the continent less dependent on Middle
East supplies. Moreover, South America holds vast hydrocarbon reserves,
from Colombia all the way to Argentina, as does East Africa, from Kenya
all the way to Mozambique.
With the US on the
way to achieving energy independence, there is a risk that America and
its Western allies will consider the Middle East less strategically
important. That belief is wishful thinking: a burning Middle East can
destabilize the world in many ways.
First, some of these
conflicts may yet lead to an actual supply disruption, as in 1973, 1979,
and 1990.
Second, civil wars that turn millions of people into refugees
will destabilize Europe economically and socially, which is bound to
hit the global economy hard. And the economies and societies of
frontline states like Lebanon, Jordan, and Turkey, already under severe
stress from absorbing millions of such refugees, face even greater
risks.
Third, prolonged
misery and hopelessness for millions of Arab young people will create a
new generation of desperate jihadists who blame the West for their
despair. Some will undoubtedly find their way to Europe and the US and
stage terrorist attacks.
So, if the West
ignores the Middle East or addresses the region’s problems only through
military means (the US has spent $2 trillion in its Afghan and Iraqi
wars, only to create more instability), rather than relying on diplomacy
and financial resources to support growth and job creation, the
region’s instability will only worsen. Such a choice would haunt the US
and Europe – and thus the global economy – for decades to come.
Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics,
was Senior Economist for International Affairs in the White House's
Council of Economic Advisers during the Clinton Administration.
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