Do falling oil prices signal containment of the unrest in the Middle East and North Africa (MONA)? We doubt this very much. The uprisings and tensions seem set to continue. Libya is disintegrating into violence. The burning question is this: which dominoes are yet to fall and how will that impact oil production and strategic relationships in the region?
There is mounting concern that the oil producing countries may not have enough reserve capacity to cushion further blows. OPEC's spare capacity is less than two million barrels per day, and WikiLeaks recently revealed that Saudi Arabia may be overestimating its reserves by 40 percent.
As political uncertainty spreads, many countries will try to hoard large reserves. And once reserves are depleted, how will nations replenish them in times as turbulent as these? Everything seems to revolve around supply security. The latter largely depends on the biggest players in the game: Saudi Arabia, Iran and Iraq.
And in a supporting role? Bahrain. Immensely rich, located in a small archipelago, with just 1.2 million inhabitants, many of whom are clamoring for reform. The tiny kingdom is of high strategic value. The U.S. Fifth Fleet is stationed there. Both Saudi Arabia and Iran are avidly monitoring developments in the group of 33 islands. The country has been under the sway of Iran for a long time (in 1957, the Persian parliament still referred to Bahrain as its 14th province). Saudi Arabia also has an interest in the island group as two of its provinces used to be part of Bahrain.
Saudi King Abdullah probably regards Bahrain as a kind of "canary in the coalmine" for his own regime, as there are many parallels between the neighbors. Saudi Arabia is fabulously wealthy, its monarchy appears to be in firm control and it is in some ways a "client" of the world's lone superpower, the United States. If the regime in Bahrain falls, Abdullah may have good reason to fear that further unrest will grip his own country. The same thought will occur to the financial markets. Saudi Arabia is the most important oil producer on the planet, and the only country with enough excess capacity to absorb big shocks in the global oil production system.
Iran plays a crucial role in the region as well. It seems to see itself as the superpower of the Mideast. Two years ago, revolts broke out after tumultuous elections. In our view the riots would fizzle out, and they did. Yet once again some experts now believe regime change is possible should the revolts in the Arab world reach Iran. There have been tentative protests, but for the time being Iranian President Mahmoud Ahmadinejad seems to be master of the situation.
Iran will have mixed feelings about the Arab rebellion. On the one hand, it applauded Mubarak's downfall in Egypt. Iranian leaders jumped at the chance to become more influential. At the same time they fear that Tehran could become the backdrop for the next stage in the Arab revolution.
If Ahmadinejad manages to put down potential uprisings at home he could play a clever strategic game and trump the West by stirring up trouble in Iraq and other fragile countries. His success will partly depend on the domestic developments in other Arab countries.
But it will also depend on the craftiness and cleverness of his major opponent, the U.S. The latter aims to withdraw from Iraq and Afghanistan, but if recent experience is anything to go by it will first have to overcome a slew of problems in both countries. 2010 was the deadliest year for Afghanistan since the Western invasion. Eight years on and the country is still riddled with corruption and violence. Karzai's government has many serious shortcomings, Islam extremism is taking root and the U.S. army appears to be increasingly inclined to wander aimlessly around the country. The Afghan army is far from ready to take over from the Americans, who intend to pull out in the coming years.
In addition, the U.S. sustained a devastating blow to its reputation as a result of the wars in Afghanistan and especially Iraq. It is a fair bet to say that this will cause America to think twice about swinging into action in the Arab region. If Iran plays its cards right, it could extend its sphere of influence in the Mideast and North Africa substantially. Conditions in Iraq and Afghanistan are generally chaotic and unorganized, which will make it easier for Tehran to use both countries as pieces in its ongoing chess game with the West.
By now the Arab revolutions are about much more than getting rid of autocrats who have long overstayed their welcome. There is an increasing risk that the revolution virus will contaminate regional superpowers and oil giants. On top of that, the earth's superpower appears somewhat rudderless, whereas the future of the countries that have revolted earlier is very uncertain. Europe suffers from anxiety attacks because of stalling oil supply, as scores of refugees are washing up on its shores. All of this could drive oil prices up further.
Numerous political scenarios could unfold: Fresh crises in Egypt, uprisings in Saudi Arabia, conflicts with Iran, a full-blown and prolonged civil war in Libya leading to interventions by the international community and so on. Likely, sooner or later one of these triggers will lead to a surge in oil prices; $200 per barrel is a real possibility in the longer term.