Chaos threatens oil supply

Dr. Norman Bailey

As Iraq and Libya descend into anarchy, they are no longer reliable sources.

Major threats to the regional oil supply are emerging in two countries: Libya, which is moving from failed state to no state status, and Iraq, which is moving towards failed state status.

In Libya, there is no longer a government. Unlike Syria, where the state is battling various insurgent groups as well as the ethnic Kurds in the northeast, Libya no longer has a state for insurgents to attack. It has become the quintessential Hobbesian "war of all against all". The Libyan army and air force have defected en-masse to "General" Hifter (or Haftar), the miraculously resurrected former Ghaddafi army officer Two air force planes have already attacked Islamist bases near Benghazi.

Since the Libyan armed forces were weaker than the various regional, Islamist, and criminal militias, however, their defection to Hifter by no means ensures his success. To this witch's brew must be added the insurgency of the ethnic Berbers in the interior.

What is clear, however, is that given the political anarchy, the economy is crumbling, and in Libya, the economy means oil. Production and exports are already plunging and will undoubtedly decline even more. Libyan crude is light, sweet crude and not easy to replace in refineries not geared to lower qualities of crude. Strike one for the oil price.

Strike two comes from Iraq. There, the Kurdish Regional Government (KRG) just shipped its first oil exports directly by pipeline through Turkey to Europe and beyond. This deal was made between the KRG and Turkey without reference to the authorities in Baghdad. Although, unlike in Libya, there is in fact a state in Iraq, there is for the time being no government because the dominant Shiite parties can't agree on creating a coalition to elect a prime minister. According to the Iraqi constitution, the presidentmust be a Kurd, the vice-president a Sunni, and the prime minister (who has the real power) a Shiite.

In fact, the president is terminally ill and hospitalized in Switzerland. The vice-president was accused of corruption and fled the country. The KRG made its deal and began to export. In retaliation, the government in Baghdad refused to transfer funds due to Kurdistan. On top of all this, an oil tanker carrying Kurdish oil to North America apparently turned around in mid-ocean. Speculation is that the shipper or the potential buyer, or both, were threatened with legal action by Iraq.

Observers await an imminent declaration of independence by Iraqi Kurdistan, which would create a major diplomatic dilemma for other countries. Should they recognize Kurdistan in order to access its oil without fearing legal action? But if they do, what will be the effect on numerous other regional and international independence movements, including the Kurds in Syria and Turkey?

However that works out, the supply of crude from the northern fields controlled by the Kurds is now at risk, another blow to reliable supply. In light of all this, what should other countries and Israel do? The Egyptian government has apparently already decided. It is supplying "Gen." Hifter with equipment and military advisors (the Saudis are providing money) in return for privileged access to the oil of eastern Libya at a concessionary price, which would alleviate the disastrous Egyptian economic and financial situation.

And Israel? Until the oil in the eastern Mediterranean begins to flow, Israel must tie up supplies where it can, and should busy itself with converting its vehicular fleets, such as buses and trucks, to use natural gas instead of gasoline or diesel. In the MENA region (Middle East and North Africa) the unexpected can always be expected. Agility and flexibility are at a premium. Devotion to routine and "received doctrine" are fatal errors.

Norman A. Bailey, Ph.D., is Adjunct Professor of Economic Statecraft at The Institute of World Politics, Washington, DC, and teaches at the Center for National Security Studies and Geostrategy, University of Haifa.

Published by Globes [online], Israel business news - - on June 5, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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