The escalating war in the Middle East is having a rising impact on the global economy. Two recent events which include the retaliation of Jordan against ISIS (Islamic State of Iraq and Syria) and the collapse of the central authority in Yemen, are both escalations in a spreading contagion of war. The growing anxiety in Israel that Iran is on the verge of acquiring a nuclear device and the unwillingness of the United States and Europe, to roll back the terrorist state of ISIS, is making the Middle East even more unstable.
The United States has already abandoned it’s embassy in Yemen, with France and the United Kingdom to follow soon. One only has to look at the map of the region to understand what the growing instability of the peninsula means, to Saudi Arabia and the other monarchies around the Gulf. It is also another fiasco for the Obama Administration in the United States. Until recently the pro-Western government that was in power there, was pointed to as a success of American foreign policy.
The video of Iranian backed rebels driving around in cars abandoned by the American embassy staff remind the public of a similar situation that had occurred in Libya. The clenched fists and chants of death to America and Israel is the same kind of reaction that rebels engaged in, as they seized the American embassy in Benghazi,Libya.
To make matters worse the United States State Department ordered the US marines that were sent to protect the embassy, to turn over their weapons to the Yemenis as they were being evacuated. It reminded people of the ham handed policies of the Obama Administration when the embassy was stormed and taken by rebels, because an American ambassador and his staff where not adequately protected and now would not be rescued.
The closing of the United States Embassy in Yemen is the 3rd American mission to be shut down in the region since 2010, and the beginning of the Arab Spring. Libya, Syria and now Yemen, all were shuttered under circumstances that were clearly not a sign of American strength.
The United Arab Emirates rejoined the air war against ISIS after suspending their participation, when they had become uncertain of American logistical support in the wavering campaign. The nations around the Persian Gulf increasingly feel encircled by Islamic radicals and rebels that are bent on overthrowing their respective governments and reordering society.
One cannot fault the hesitancy of the few nations still at peace in the region, to trust the Americans to keep their promises and commitments. It is obvious that an unraveling of American power and prestige, is occurring in the region at an alarming rate. To have the Obama Administration insist just the opposite, does not inspire confidence in the few countries still at peace.
The growing friction between the Israelis Prime Minister and the United States President enhances the view in the Middle East, that a rearrangement in American priorities is taking place. The American President has made getting a nuclear agreement on paper with Iran more important than containing a growing terrorist threat.
That a crisis is developing is no doubt, because the only area left mostly unscathed is the major oil producing region. The question remains how long will this portion of the Middle East remain apart, from the ensuing chaos in countries all around it? How long can the governments in control of this sea of oil maintain order in their societies, when all around regimes and rebel groups are working to undermine them.
If the mire of chaos in the Middle East arrives to the Gulf, one wonders how long oil prices will remain low? Although increasingly it was American production that broke the monopoly in oil demonstrated by OPEC (Organization of the Petroleum Exporting Countries), it was the decision of Saudi Arabia to maintain output that has permitted prices to come down to their present level. The Saudis did this to punish the Russians for their foreign policy moves in the Middle East, but they also were hoping to undermine American production as well. Below a certain price level, oil from Saudi Arabia is more economical to extract, than American produced oil through fracking.
Another impact of a widening war in the region, will be the increasing need of more armaments for both defensive and offensive activities. This will be a major boost to those companies that deal in military hardware. As stocks of weapons are reduced, there will be new orders placed in some countries. In other nations for example in the Gulf, there will be attempts to stockpile arms in case the violence spills over from other countries.
There will be a surge in cash and other assets that will leave the Middle East, for safekeeping elsewhere. Already a number of investors have become very concerned, with how close the war is getting to the oil and natural gas rich states of the Persian Gulf. If foreign aggression or internal disturbances reach the Gulf, the upsurge in outgoing assets and cash will rapidly turn into a deluge.
This flight of capital will be detrimental to the economies of the area, as much as some of these funds will be welcomed in Europe, East Asia and the Americas. There will also be an increasing flow of refugees especially in the direction of Europe. Not the masses who will not be able to afford to depart, but wealthy individuals who will rapidly bid up real estate prices even further in the most desirable cities. This has been an ongoing process in places like London and Paris. New investments will be made in European, American and Asian businesses and companies helping stock markets in those countries substantially
It is important to note that most oil in the Middle East is bought and sold using USD (United States Dollar) as has been the case since the early 1970’s. The recent strength of the American dollar has already made assets in Europe, Asia and Latin America relatively cheaper already.
It is true that President Obama is now asking the American Congress for authorization to widen the war against ISIS, but it is unlikely that enough American troops will be employed to change the reality on the ground. ISIS has close to 50,000 troops and it will take an equal force or one even larger, to take back the large swaths of territory, that were conquered by the group in Iraq and Syria. They will not be easily dislodged and are growing in number and power over time.
A possible solution will be to organize an international coalition against ISIS, but this will be difficult when the President of the United States is hesitant to fully employ American power and influence. Other nations will only be willing to help, when they see a clear commitment and plan to eliminate this terrorist group along with others. In other words, they will want to know if the Americans will stay for the long haul. The past performance of President Obama on the world stage, does not inspire this kind of confidence.
What can investors look forward to? More instability and chaos in the international arena as the United States becomes less willing to enforce the international order. Part of the problem is economic. The United States can no longer afford to be the police force of the world. Defense budgets are part of the discretionary funding portion of the federal budget. It has been under sequester since 2011. That is since there have been no agreements on spending, automatic cuts have hit defense along with other parts of the budget. The reluctance of the President Obama to engage in military operations, is another handicap to building an effective coalition.
The Europeans are much in the same position. For years many countries there, have cut funding in defense to meet growing domestic needs in the budget. Numerous countries in the region would be unable to launch an effective military operation overseas. This is in addition to the financial cost and lack of popular support, for such endeavors. However, more attacks like what occurred in Paris, France might change this dynamic substantially.
Investors will find a more chaotic world in 2015, with escalating military encounters in several locations around the globe, in addition to the Middle East. There will also be more global financial instability. More nations are expected to engage in quantitative easing and currency devaluations. The number of countries experiencing domestic economic difficulties, will continue to increase. Look for accelerated volatility in foreign exchange markets, equities and stock markets everywhere. Additional terrorist attacks outside, but originating from the Middle East, may well be the game changer for international action there. Regardless, the year ahead is going to be a bumpy ride.