Valerie Marcel
Associate Fellow, Energy, Environment and Resources
The oil price collapse and deteriorating security situation signals pain for Middle East producers.
Smoke billows from the Khubbaz oil field, west of the Iraqi city of Kirkuk, on 2 February 2015, days after Kurdish Peshmerga forces and police retook the area from Islamic State. Photo by Getty Images.Smoke billows from the Khubbaz oil field, west of the Iraqi city of Kirkuk, on 2 February 2015, days after Kurdish Peshmerga forces and police retook the area from Islamic State. Photo by Getty Images.

It will be a tough year for Middle East oil exporters. Depressed oil prices, emboldened jihadi groups and the uncertain outcome of political successions top the list for geopolitical upsets in the Middle East in 2015.

Several states are weakened by insurgencies and civil wars, while their neighbours try to manage the spill over. In Libya, Syria and Iraq the central states do not exercise sovereign control over the territory, including some of its oil facilities and export infrastructure.

Libya’s oil exports struggled in 2014 through seven months of civil war but proved surprisingly resilient. Now, as Islamist, pro-government and anti-government forces battle to control the eastern oil facilities, it is unlikely that Libya’s exports will continue to be spared.

As a result, oil markets are likely no longer counting on exports from Libya, but the greater risk there lies with lost state revenues should 300,000 barrels a day of exports be lost. What is left of the state depends on these revenues to pay for civil service salaries and to secure political support. Control of oil facilities by breakaway groups will further erode the state and strengthen militant fighters.

Chaos in Libya offers a breeding ground for jihadi movements, which could spill over into neighboring Algeria. In response to these transnational threats, Algiers has hosted reconciliation talks between warring factions in Libya, but with limited success. Pragmatically, it has also stepped up its military presence along its porous borders with Libya and Mali and debated a military intervention in Libya.

Another risk looms, should prices stay in the $50-$70 range for a long time: disaffected youth in the 36 million strong country could show their disenchantment — a real scenario for Algeria, with a fiscal break-even price of $130 a barrel.

A similar spill over has poured out of the chaos in Yemen, with serious security implications for Saudi Arabia. And the Syrian civil war has allowed Islamic State (IS) to spawn into a pseudo-state, controlling swaths of Iraq and Syria. The group, which has caught the world’s horrified attention for its brutal tactics and swagger, struggles to maintain effective public services in the areas it controls. Fuel products and food are growing scarce in Mosul. The group no longer controls as many oil fields and its crude production and smuggling operations are now limited. What crude it produces is likely refined, in order to satisfy the needs of its war machine, but also the 6-8 million people living in the areas it controls.

Islamic State's inability to provide essential services in these areas will likely cause its downfall, especially if the new Iraqi government can demonstrate greater inclusiveness of Sunni interests. But the battle is not yet won. Baghdad’s hand will be weakened if it must cut back on public spending in response to sustained low oil prices (its breakeven price is $109 a barrel).

IS will likely live on in the form of multiple cells across the region. The greatest danger therein for the oil sector will be in potential attacks against oil facilities in the GCC and Algeria. Beyond the potential supply disruption, any such attack would deal a blow to these states’ legitimacy. Especially those in the throes of political succession.

While King Salman of Saudi Arabia quickly asserted his intention to maintain the policies of his predecessor, Abdullah, uncertainties remain about the potential impact this succession —  and especially the next one — could have on the management of the petroleum sector. Until now, a trusting, arms’ length relationship existed between the ruler, the oil minister and Saudi Aramco, the state-owned oil company. The prospect of a double succession, involving both oil minister Ali Al-Naimi and King Salman, can change that balance.

The current oil policy, which aims to recoup market share, is a dramatic departure from the long-established policy of stabilizing markets. The Naimi-Abdullah duo had rallied to the view increasingly held in Riyadh that Saudi Arabia should not bear the costs of a swing producer role. Continued political support of the new policy depends on how it impacts Saudi interests.

The decision not to intervene to could be interpreted internally as a political win, if it has a demonstrated impact on Iranian policy. Reduced export revenue will certainly hurt Iran. It has already tightened its belt under the constraints of years of sanctions, but certainly cuts could be made to its assistance of the Syrian regime. A complete Iranian withdrawal from Syria is unlikely however, as it has demonstrated unwavering commitment to its proxy in the Levant. The return of Iranian crude to the market may prompt the Kingdom to hurt Iranian interests by defending further its market share in Asia.

The outlook is unsettling. The security vacuum in Syria, Yemen, Iraq and Libya is being filled by groups which are able to control and operate some of the oil installations. And there is clear danger at the border for neighbouring states already under economic and political strain.

This article was originally published by Bloomberg.

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