Middle East

Seniors Discount? Oil Prices and Old Rulers

Today’s low oil prices are probably not the result, even in part, of elderly men ruling over the world’s major energy-exporting nations. Still, it may be worth noting that the sons of Saudi Arabia’s modern founder, Abdulaziz bin Saud, are finally nearing the end of their long royal lifespans, while the leaders of energy-endowed countries like Iran, Algeria, Angola, Oman, Kazakhstan, and Uzbekistan have now reached old age too, after multiple decades in office. Even Vladimir Putin is 63 years old, long past his judo prime. He was just 47 when he first came to power.

As Egypt’s Hosni Mubarak and Libya’s Moammar Gaddafi arguably showed in 2011, longtime aging rulers can sometimes give way to political upheaval that causes domestic oil and gas production to fall. Uncertainty over the vigour of some of the following leaders might indeed cause global energy exports to fall, and thus, perhaps, prices to rise:

Kuwait – Sabah al-Ahmad al-Jaber al-Sabah – 86 years old – In power since 2006  

Sabah’s presumed successor, Nawaf Al-Ahmad Al-Jaber Al-Sabah, is 78 years old. As recently as 2012 Kuwait was the world’s largest oil exporter outside of Russia and Saudi Arabia.

Saudi Arabia – Salman bin Abdulaziz bin Saud – 80  years old – In  power since 2015 

Salman will probably be the last king to be chosen from among the 45 or so sons of the founder of modern Saudi Arabia, Abdulaziz bin Saud. Salman’s youngest living sibling, his half-brother Muqrin, is turning 71 this year and, as of last year, is no longer the designated  Crown Prince. The Saudi Crown Prince has since become Muhammad bin Nayef, Salman’s nephew, while the Deputy Crown Prince has become Salman’s own son Mohammad bin Salman

Algeria – Abdulaziz Bouteflika – 79 years old – In power since 1999 

Bouteflika came to power during and after the Algerian Civil War of the 1990s. Today his health is in question. Algeria is estimated to be the world’s 16th largest energy producer and its fourth largest natural gas exporter.

Uzbekistan – Islam Karimov – 77 years old – In power since 1991  

Karimov first came to power at the end of 1980s, when he became President of the Uzbek Soviet Socialist Republic

Iran – Ali Khameni – 76 years old – In power since 1989 

Kazakhstan – Nursultan Nazerbayev – 75 years old – In power since 1991 

Oman –  Qaboos bin Said al Said – 74 years old – In power since 1970

Qaboos first became ruler  after overthrowing his father in a palace coup in 1970. He has no children or clear successor

South Africa – Jacob Zuma – 74 years old – In power since 2009 

Zuma was Deputy President of South Africa from 1999-2005. South Africa is a major producer of energy, and a net exporter of energy, because of its coal reserves, though it is a net importer of oil

Nigeria – Mohammadu Buhari – 73 years old – In power since 2015 

Buhari was previously Nigeria’s head of state during the 1980s

Angola – Jose Eduardo dos Santos – 73 years old – In power since 1979 

Angola, one of the fastest-growing economies of the past decade, is now the world’s third or fourth largest oil exporter outside of the Middle East

Equatorial Guinea – Teodoro Obiang Nguema Mbasongo – 73 years old – In power since 1979 

Equatorial Guinea is the 30th-40th largest oil producing country, but may have the world’s third highest per capita oil production, the highest outside the Middle East.  Both the age of its leader and the number of years he has been in power are exactly the same as in Equatorial Guinea’s relatively nearby neighbour Angola

Sudan – Omar al Bashir – 72 years old – In power since 1993

Brunei – Hassanal Bolkiah Muiz’zaddin Wad’daulah — 69 years old – In power since 1967

Brunei is the world’s 40th-50th largest oil producing country, but may have the 6th highest per capita oil production

Brazil – Dilma Roussef – 68 years old – In power since 2010

Her predecessor, Louis Inacio Lula da Silva, who literally as of today was selected to  become Roussef’s new chief of staffwas 65 years old when he left office in 2011 at the end of an eight-year term. Roussef has been facing an impeachment attempt, while Lula has been under investigation in a corruption scandal. 

United Arab Emirates – Khalifa Al Nayhan — 68 years old  – In power since 2004

The Emir of Dubai is 66 years old, meanwhile

Colombia – Juan Manuel Santos – 64 years old – In power since 2010 

South Sudan – Salva Kiir Mayardit – 64 years old – In power since 2011

Iraq – Haider al Abadi – 63 years old – In power since 2014 

Masoud Barzani, meanwhile, who has been president of oil-rich Iraqi Kurdistan since 2005 and leader of the Kurdistan Democratic Party since 1979, is 69 years old. Foud Massoum, a Kurdish politician who is Iraq’s president (a more ceremonial role than prime minister), is 78 years old and has been in office since 2014. Nouri al Maliki, who was Iraq’s prime minister from 2006-2014 and is now Iraq’s vice president, will turn 66 this June. Saddam Hussein was 42 years old during his purge of 1979 and 66 years old when the US invaded in 2003.

Russia – Vladimir Putin – 63 years old – In power since 1999

Malaysia – Najib Razak — 62 years old – In power since 2009

Mahatir Mohammad, meanwhile, is 90 years old. Malaysia is thought to be the world’s 25th largest oil producing country

Turkey – Recep Tayyip Erdogan – 62 years old – In power since 2003

While Turkey is a significant net importer rather than exporter of energy, it is nevertheless capable of impacting the rest of the Middle East, and it has hopes to become a major energy nexus at the centre of the Middle East, North Africa, and Caspian Sea region. (Similarly, Israel’s Benjamin Netanyahu, who has been prime minister since 2009 and was previously prime minister from 1996-1999, is 66 years old)

Australia – Malcolm Turnbull – 61 years old – In power since 2015

Egypt – Abdel Fathah al-Sisi — 60 years old –  In power since 2014 

Sisi was also highly influential for at least a few years before 2014, following Hosni Mubarak’s departure from office in 2011

The following graph shows how old these countries’ rulers were in any given year between 1970 and 2015, and how old they will be in 2020 if today’s rulers remain in power for the remainder of the decade:

Age oil leaders

In the graphs below, the y-axis indicates the age of today’s rulers, the x-axis indicates the number of years they have been in power, and the size of the circles indicates the relative amount of energy that is produced by their country.

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Images, Middle East

Iraqi Geopolitics

Iraq’s population is thought to be just under 35 million, roughly the same as that of Canada and greater than any other Arab country apart from Egypt, Algeria, and possibly Sudan.

Most Iraqis, and almost all Iraqis who identify as Shiite Muslims, live in the low-elevation Mesopotamian plain, the part of the map below that is coloured in the darkest shade of green.

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The only significant city to have a considerable Shiite population outside of this area is, perhaps, the city of Samarra, which is holy to Shiite Muslims. Yet Samara lies just barely beyond this Iraqi Shiite heartland, and is relatively small. It had 350,000 or so inhabitants prior to the US invasion of the country in 2003. In 2006 and then again in 2007 the Al-Askari Shrine, a mosque that was built in Samarra in 944 AD,  was bombed, leading Shiite groups in Iraq to retaliate by forcing many Sunnis to leave their homes in Baghdad.

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The largest cities in Iraq’s Shiite region are not located in the region’s centre, but rather around its outer edges. The largest by far is Baghdad, located in the north of the Shiite core region. Baghdad is perhaps 3-5 times more populous than any other city in Iraq; it may be home to nearly one in four Iraqis. It is maybe the most populous city in the entire Arab world, outside of Cairo. Historically it was the capital of an enormous caliphate, stretching from Central Asia nearly to the Atlantic Ocean, during most of the years between 762 AD and 1258 AD. Even as recently as the 1970s, before Iraq fought three major wars between 1980 and the present day, Baghdad was one of the leading cultural and commercial cities in the Arab world. 

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Baghdad has historically been the place where Iraq’s Shiite and Sunni areas meet, and where minority populations like Kurds, Christians, Jews, and Turkic peoples have all lived in significant numbers as well. Though the conflicts in Iraq during recent years and decades has changed this to a great extent, with many minorities leaving (the Jewish population, for example, has dropped from around 50,000 in 1900, which was perhaps a quarter of the city’s total population at the time, to nearly zero today) Baghdad remains the heart of the country.

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Baghdad’s existence has probably been one of the main impediments to, and arguments against, splitting the country into three separate states as many have recently been advocating for. However because of its diversity and centrality, it was also the site of many of the violent deaths during the (in some ways ongoing) civil war. Since 2003 the city’s neighbourhoods have become more divided by sect, while the share of its population that identifies as Sunni has shrunk in size due to the fleeing of Sunnis and the inward migration of Shiites from southern Iraq.

         Baghdad in 2003                    Baghdad in 2007

Baghdad_Ethnic_2003_sm   Baghdad_Ethnic_2007_late_sm

Baghdad’s geographic significance comes from being located in the only spot, apart from the swampy southern coastlands of Iraq, where the Tigris and Euphrates rivers come close to meeting one another. Around Baghdad the Tigris and Euphrates are just 30-40 km or so apart from one another, compared to about 150-200 km apart in most of southern Iraq, 120 km or so apart in the area to Baghdad’s immediate north, and 220-300 km apart in the northern Iraq-Syria region.

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Baghdad is located 530 km from Iraq’s only coast (on the Persian Gulf), 450 km from Iraq’s border with Turkey, and 475 km from its western, desert border with Jordan. It is about 700 km from Tehran, 740 km from Aleppo and Damascus, 95o km from Riyadh, and 1300-1450 km from Mecca, Dubai, Cairo, Ankara, and Crimea.

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Apart from Baghdad, the biggest Shiite city in Iraq, maybe even twice as populous as any other, is Basra. Basra is located in the only other place where the Tigris and Euphrates meet, just 95 km or so north of the coast of the Persian Gulf, and just around 20 km from the Iranian border and 40 km  from the Kuwaiti border. Because it is located just 4 metres above sea level (compared to 35 metres for Baghdad), Basra’s climate is an extremely hot one, with temperatures hitting average daily highs of around 40 degrees celsius (105-ish fahrenheit) for almost five months a year.

Could Basra soon have the world’s tallest building? 

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The fact that this southernmost area of Iraq around Basra has the country’s only direct access to the sea, and that this access is funnelled narrowly and vulnerably through a strip of land that is only about 15 km wide, sandwiched between the oil-rich Arab monarchy of Kuwait and the oil-rich Arab-inhabited Khuzestan province of southwestern Iran, was probably one of the reasons why Iraq went to war against Iran throughout the 1980s and then attempted to annex Kuwait in 1990.

Grabbing Kuwait and Khuzestan would give Iraq unfettered access to the Persian Gulf, greatly increased oil resources, and a mountainous rather than wide open border with southern Iran. Kuwait alone, in spite of having a population of just 3.4 million, produces so much oil that its GDP is thought to be roughly 75% percent as large as that of Iraq itself, and 40% percent as large as Iran’s.

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Today, however, it is not clear whether Kuwait and Khuzestan have majority-Arab populations as they likely did in the past. Two-thirds of Kuwait’s population is now thought by some to be foreign workers who have come to the country mainly from South Asia. Some have estimated that 30-40% of Kuwait’s Muslim population is Shiite, though it is difficult to be certain. Khuzestan’s population of 4-5 million, meanwhile, has perhaps become majority Persian; statistics cannot really be trusted in this area, given that they can be politicized.

The other largest cities of the Shiite region of Iraq also lie along the region’s edges rather than in its centre; they are located either along the Tigris River, as for example the cities of Amarah and Samarra are, or along the Euphrates River, as the world’s two holiest Shiite cities of Najaf and Karbala are.

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The Shiite region of Iraq is divided, in a certain geographical sense, along both north-south and east-west lines. The north-south divide is between landlocked Baghdad and coastal Basra, the region’s two major cities, with Baghdad located close to its northern extreme and Basra close to its southern one.

The east-west divide is between the Tigris and the Euphrates; the two rivers were historically separated from one another by marshlands in some places, which according to Wikipedia “used to be the largest wetland ecosystem of Western Eurasia” before being drained during the second half of the 20th century — mainly by the government of Saddam Hussein, for political reasons. “After the fall of Hussein’s regime in 2003, the marshes have partially recovered but drought along with upstream dam construction and operation in Turkey, Syria, and Iran have hindered the process”. The “Marsh Arabs“, formerly half a million strong, are themselves considered to be a unique Iraqi ethnic group.

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The Euphrates directly borders the Arabian Desert (Basra, Najaf, Karbala, and Ramadi are each located on the Arabian side of the river), whereas the Tigris runs closely parallel with Iran’s Zagros Mountains, which rise to heights as great as in the Colorado Rockies or Swiss Alps. Given its topography, Iraq has rarely been able to project force into the Zagros (though Saddam Hussein tried to do so during the deadly Iran-Iraq war in the 1980s); the Iranians, on the other hand, have often been able to influence politics within Iraq and occasionally even invade Iraq directly.

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The Zagros, in Iran’s Lorestan province near the Iraqi border

The division between Basra and Baghdad (such that it is) was seen to a certain extent in 2008, just prior to the US military withdrawal from the country, when the Shiite-dominated Iraqi government of Prime Minister Nouri al-Maliki approved a significant offensive mission by the Iraqi Army aimed at  pushing what was arguably the country’s main Shiite militia, the Mahdi Army, out of Basra.

The Basra-Bagdhad divide goes back much further in history, however. Even when Iraq was ruled by the Ottoman Empire prior to the First World War, the country was divided into three administrative “vilayets”: Basra in the south, Baghdad in the centre, and Mosul in the north. The Ottoman era often saw the Europeans intrude into or make alliances with Basra, notably the Portuguese in the 17th century, and later the British. The British would return during the recent war: they were tasked with managing Basra while the Americans focused on other areas of the country.

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Ottoman vilayets circa 1900

Iraq’s Sunni Arab region also contains both north-south and east-west divisions. It’s two largest cities by far are Baghdad, which is located at the southern tip of the Sunni areas, and Mosul, which is located just 100 km from Iraq’s northern Turkish border and is currently held by ISIS fighters. This is the basis of its north-south division; its east-west division comes from the Tigris and Euphrates being located much further apart from one another north of Baghdad than in the south (where, around Shiite Arab cities like Basra, Karbala, and Kut, the waterways almost or completely converge), with desert lying in between them.

According to Wikipedia, “The Arabic of Mosul is considered to be much softer in its pronunciation than that of Baghdad Arabic, bearing considerable resemblance to Levantine dialects, particularly Aleppan Arabic. …Mosul Arabic is heavily influenced by the languages of the many ethnic minority groups which co-exist in the city: Kurmanji Kurdish, the Shengali (Ezdiki) of Yazidis, Turkmen, Armenian, and Neo-Aramaic. Each minority language is spoken alongside North Mesopotamian Arabic.”

Arabic-Dialects-Map

You might want to take this map with a grain of salt

“…Before 2014 takeover by ISIS, Mosul population comprised roughly of 60% Sunni Arabs; 25% Kurds, 10% Turkmens and 5% Assyrian. Following the takeover by ISIS, nearly all the population who were not Sunni Arabs (coreligionists of ISIS), fled or forced out, that is, 35% of the residents or just over half a million people.”

Mosul, although not at a particularly high elevation, still receives much more rain than most of Iraq. Rainfall is close to three times that of Baghdad and over twice that of Basra”. Indeed, unlike the arid cities along the Euphrates, Mosul has a relatively  populous hinterland, as it is located next to the foothills of mountains both to its east and to its north. Mosul is just 75 km from Erbil, the comparatively successful capital city of Iraq’s Kurdish autonomous region. “After the 1991 uprisings by the Kurds Mosul did not fall within the Kurdish-ruled area, but it was included in the northern no-fly zone imposed and patrolled by the United States and Britain between 1991 and 2003″.

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The Erbil Citadel

Mosul is one of the two most important cities which lie on the border between Iraq’s Sunni Arab and Sunni Kurdish areas. The other is Kirkuk, which is less populous than Mosul but is where much of Iraq’s oil is produced. The oil in this Arab-Kurdish borderland has led to conflict during the past decade; and of course ISIS and the Iraqi Kurds continue to do battle today. According to the map below, both Mosul and Kirkuk (spelled Karkuk) are surrounded on three sides by the  Kurdish-inhabited territories, near to the mountainous Kurdish border regions of Turkey, Iran, and Syria.

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Three months ago, the Turkish military entered northern Iraq and has closely approached Mosul . A month before that, according to Dexter Filkins of the New Yorker, “Kurdish forces, backed by American airstrikes, cut the highway that connected Mosul to the ISIS base in Syria. There are still a few roads leading into Mosul that ISIS can use to resupply its fighters, but the Kurds are moving to cut them, too. Very soon, the ISIS fighters inside Mosul will be isolated.” The Kurdish position has been complicated, however, by Kurdish-Turkish relations, which have partially deteriorated of late as a result of Turkish politics and the Syrian civil war’s effect on the Syrian Kurdish group the YPG/PYD.

Mosul is located along the Tigris River, north of the place where, in Syria, the Euphrates makes a sudden sharp turn westward towards Aleppo and the Mediterranean Sea. As such, unlike in most other cities in Iraq, Mosul sits at a spot where the Tigris and Euphrates are relatively far from one another (though still only 430 km apart). This has allowed Mosul to serve historically as a sort of oasis in the desert for east-west trade travelling between northern Iran (and Asia) and the Mediterranean (and Europe). Mosul sits almost exactly between Tehran and the Mediterranean, in fact. It is also located halfway between Basra and Russia’s southern border; in other words, between the Persian Gulf and the Black and Caspian seas.

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In late 2004 the US attack on Mosul was concurrent with the one on Fallujah, the latter battle arguably being the deadliest in the entire US-Iraq War. In 2014, six month prior to the ISIS seizure of Mosul (and Kurdish seizure of Kirkuk), ISIS “retook” Fallujah, which is just 40 km from Baghdad. ISIS also took control of the large dam upriver of Mosul, which according to Wikipedia has the fourth largest reserve capacity of any hydroelectric facility in the Middle East. Kurdish forces, with help from the US and Iraqi militaries, have since captured the dam.

Iraq’s Sunni Arab region, in spite of being relatively small in population because it is located in the desert, and also landlocked, has some advantages that Shiite Iraq does not. It has proximity to the Mediterranean, as well as access to the Mediterranean via the Euphrates which in Syria reaches as close to 200 km from it. The entire distance from the Persian Gulf  to any part of the Eastern Mediterranean coast, in fact, is only about 1300 km.
This Mediterranean access, however, is partly why the Shiite Iraqis and Iranians would prefer to keep Syria’s non-Sunni Assad government and Lebanon’s Shiite group Hezbollah in place, so as to block Iraq’s Sunni Arab minority and Syria’s Sunni Arab majority from working together to export Iraqi oil to the West via the Mediterranean and hence become powerful.

The Sunni Arab region’s upriver location, moreover, provides a potential advantage within Iraq as, especially towards the south, the country is often lacking in rainfall and dependent upon agriculture that can be devastatingly flooded by the actions of northern dams. In addition, because the Euphrates winds about a lot within the Sunni region (see map below), its cities can often be surrounded on three sides by the river and on the fourth by both the desert and the incline of the walls of the Euphrates Valley,  giving them a defensible position. A series of three lakes, finally, running 200 km from north to south, helps to divide Baghdad and southern Iraq from the Euphrates’ Sunni-inhabited northwest.

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It has become very popular to point out that Iraq’s borders, and particularly the Iraqi-Syrian border, are “artificial”, imposed on the region by the British and French in the aftermath of the First World War. This statement is not untrue, but nor is it necessarily as straightforward as many have come to believe.

Those saying that Iraq’s borders are artificial often ignore a number of facts. First is that, unless Syria, Iraq, Kuwait, and perhaps Lebanon are merged into a single state (a state which, given its position linking two oceans and containing the most oil anywhere outside of Saudi Arabia, could perhaps become the top power in the Middle East), or unless a united Kurdistan declares its independence in territories that are today part of Iraq, Syria, Turkey, and Iran (a declaration that could, and to an extent already has, led to war by those countries against Kurdish forces), then “artificial” borders must be drawn somewhere through the region.

Second, they ignore the fact that Iraq’s borders are actually not as random, geographically, as they are given credit for, as we discuss further below. Third, they ignore the fact that it is not only the West  that has been responsible for messing with the “natural” borders of Arab lands. Iran and Turkey, for instance, both refused to give up Arab-inhabited regions of the Fertile Crescent they possess; a more consistent geographic or cultural rendering of Middle Eastern borders should perhaps have included Turkey handing over its province of Hatay to Syria (as Syria still officially claims it should) and Iran handing over its province of Khuzestan to Iraq.

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And fourth, they often ignore the fact that the most “artificial” aspect of Iraq’s borders is not the fact that the borders themselves are drawn improperly, but rather is that Kuwait has been allowed to exist independently of Iraq at all. Why Kuwait, with its $53,000 per capita income, its nearly-autocratic monarchy, and its position that in effect walls-in Iraq’s only direct outlet to the ocean, should be allowed to maintain its political independence from Iraq remains a question, arguably, for those claiming that the real crux of Iraq’s problem is the “artificial” international borders between Iraq and Syria, or the lack of international borders between Sunni Arab Iraq, Shiite Arab Iraq, and Sunni Kurdish Iraq.

I am not saying that Kuwait should definitely be refolded into Iraq like Hong Kong and Macau were into mainland China or like Gibraltar may be into Spain. I am saying, though, that things may be a lot more complicated where borders are concerned than they are often acknowledged to be.

Iraq-Syria: The valley of the Euphrates is generally much wider on the Syrian side of the border than  on the Iraqi side of the border. Until the river gets close to Ramadi (the capital of Anbar province, by far Iraq’s largest by territory size) and Baghdad, where the river valley widens out again, the valley generally extends less than 100 meters out from either side of the banks of the river in Iraq, whereas on the Syrian side of the border it extends around 5000 meters out on average:

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Zooming in on the border:

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It is on the Syrian side of the border that the river cities of Raqqa, the “capital city” of ISIS, and Deir al-Zour, a Syrian provincial capital that has been fought over intensely by ISIS and Syrian military forces, are located. Notably, however, the entire Euphrates valley between Baghdad and Aleppo is actually barely larger in size than Rhode Island. The maps one sometimes sees in the media of “ISIS-controlled territory” are, for this reason, somewhat misleading, as in many cases they do not differentiate between desert and non-desert areas.

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The Iraqi-Syrian border was drawn in such a way as to give Syria all of the significant tributary of the Euphrates that meets up with the Euphrates just south of Deir al-Zour (see  map below), and to give Iraq all of the large, “lonely”mountain of Sinjar (lonely in that it does not link up with any other mountain ranges), which got attention earlier in 2015 as a result of a humanitarian crisis occurring there. You can see the mountain in the image below, west of Mosul and next to Syria’s border to the mountain’s west and north. Sinjar City, in the shadow of the mountain, had a population estimated at 90,000, mainly of the Yazidi religious and ethnic minority that groups like ISIS have deemed heretical or “devil worshippers”.

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In Syria’s northeast the border with Iraq juts out eastward in order to allow the Tigris to very briefly serve as the border between the two countries. On the adjacent Turkish-Iraq border, however, the border swings back and forth from one side of the river to the other; it is a more “artificial” border, perhaps. The Iraqi-Jordanian desert corridor, meanwhile, is extremely artificial, yet it serves the useful purpose (in theory, at least) of giving Iraq a link to Jordan’s Red Sea coast or, via Israel, to the Mediterranean. Though it is across the desert, in which ISIS now has influence, Baghdad is just 785 km from Amman and 860 km from Jerusalem.

Finally, there is the Kurdish border. Though this border artificially divides Kurdish peoples from one another, with most Kurds living in Turkey (even though, from an ethnolinguistic perspective, Kurds are more similar to Iranians than to Turks or Arabs), the Kurdish borders between Iraq and Turkey and Iraq and Iran both adhere for the most part to the geographic barrier of the Zagros Mountains, as can be seen in the map below.

This does not mean that the Kurds do not “deserve a state of their own”, of course, but, given the height of these mountains, it does mean that border is hardly arbitrary. The Kurds have, in fact, many internal linguistic and political divisions themselves, reflecting the ruggedness of their mountain landscape; these internal divisions are not usually mentioned in the media outside of the Middle East, which has become generally pro-Kurdish.

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You might want to take this map with a grain of salt too

Still, Kurdish groups have, at least for the time being, been able to overcome their internal differences within the borders of Iraq. According to Martin Lewis of Stanford, “In constructing their own unrecognized state, the people of Iraqi Kurdistan have had to overcome deep divisions within their own society. In the mid-1990s, the region’s two main political groups, the Kurdistan Democratic Party (KDP), mostly representing the Kurmanji-speaking north, and the Patriotic Union of Kurdistan (PUK), mostly representing the Sorani-speaking south, fought a brief war. But although regional tensions in Iraqi Kurdistan persist, civil strife is no longer a threat. On both sides of the linguistic/political divide, most people have concluded that Kurdish identity and secular governance trump more parochial considerations. In the intervening years, the Kurdish Regional Government has managed to construct a reasonably united, secure, and democratic order”. 

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 Finally, here’s one last map for the road. It shows, again, just how complicated this region can be:

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North America

5 Challenges for Canada’s Economy in 2015

Canada, the world’s sixth largest “developed” economy, has been on an excellent run in the recent past. According to figures from the World Bank, Canada’s GDP grew at a faster pace than those of the United States or Britain during five out of six years between 2008 and 2013, and during 10 out of 15 years since 2000. It grew at a faster pace than those of Japan, Germany, and France during more than 20 out of 25 years since 1990.

In 2014, however, Canadian growth appears to have trailed that of the US and Britain, the first time since 2003 that it has lagged behind both at the same time. Now, with oil prices having fallen by more than 50 percent since just the start of October, many Canadians are worried their economy will disappoint even more during the months ahead. These fears may be justified: the Canadian economy could have to face a number of significant challenges in 2015.

Challenge #1: Oil Prices

Lower oil prices, assuming they persist, represent a fourfold threat to the Canadian economy:

1. Oil exports account for a larger share of GDP in Canada than they do in any other nation in the rich world, with the exception of Norway or the Gulf Arab monarchies. In fact, apart from Canada, Norway, or Denmark, every noteworthy developed economy in the world is actually a net importer of oil. Canada, in contrast, is the world’s 10th largest net exporter of oil, and the world’s 5th largest net exporter of oil outside of the Middle East.

As of August 2014, the value Canada’s oil exports were the equivalent of approximately 3.6 percent of Canadian GDP, which means that the 50 percent reduction in the price of North American crude oil that has occurred since August should lead, all other things being theoretically held the same, to a 1.8 percent contraction in Canadian economic output. By comparison, during the “Great Recession” of 2009, Canada’s (and the US’s) GDP shrunk by an estimated 2.7 percent, which is the only year Canada’s GDP has contracted since 1991, when it shrunk by 2.1 percent.

2. Canadian oil sands projects, which in 2013 accounted for roughly 60 percent of Canadian oil production, are on the higher end of the production cost range, with average break-even costs estimated (by some) to be around $80-85 per barrel. This, of course, is without even taking into account most of the environmental costs associated with its production, which tend to be substantially higher than those of other oil projects as well. Newfoundland, meanwhile, which accounts for around 9 percent of Canada’s oil production, also has high break-even costs, since it is primarily engaged in offshore drilling.

3. Most Canadian oil is of the heavy or extra heavy variety, and has a high sulphur content. There are currently very few refineries capable of handling this type of oil; most of the ones that are able to refine it are located either in the US Midwest or along the US Gulf coast. The rapid growth of oil production from shale deposits, however, which is ultra-light oil and “sweet” (meaning it has a low sulphur content), and which in most cases has lower production costs and does less damage to the environment than Albertan oil sands production does, is causing some of these refineries to be retrofitted to handle light, sweet oil instead, potentially leaving much of Canada’s oil output less valuable.

4. None of Canada’s most important trade partners are likely to be among the main beneficiaries of falling oil prices. Canada has one primary trade partner, which is the United States, and three secondary trade partners: China, Mexico, and Britain. The US accounts for more than half of Canadian trade, while China, Mexico, and Britain combined account for close to 20 percent of Canadian trade.

None of these four countries, however, are significant importers of oil, or of energy in general. Net energy imports account for less than 15 percent of the US’s total energy use, and net oil imports were (as of August) equal to just an estimated 1.6% of US GDP, both much lower than in most other developed economies (see graph below). In fact, if oil prices continue to fall, they might drop below the break-even prices of US shale production, Alaskan oil production, or offshore oil production in the Gulf of Mexico, which could hurt the US energy industry and grant oil market share back to the lowest-cost producers such as Saudi Arabia and the other Gulf Arab monarchies.

Developed Economies Energy and oil importsWhat is more, the US is a leading exporter of a number of commodities that may see their prices fall as a result of lower oil prices, such as coal and food. Compared to Northeast Asia or Europe, the US is also barely dependent on importing most important minerals, such as iron ore, copper, or aluminum, the prices of which often correlate with oil prices as well to a certain extent. The US is a net exporter of iron ore, in fact, which has the largest international market of any commodity apart from crude oil, and which has seen prices fall by around 30 percent in the past six months and 50 percent in the past year. (Canada, meanwhile, is the world’s fourth largest net exporter of iron ore). The United States’ wealth of natural resources could prevent it from benefiting too much from falling oil prices.

While China, Canada’s second largest trade partner, has become the world’s largest oil importer, it is actually not too dependent on its oil imports either (see graph), since it produces so much coal domestically, and coal continues to account for over two-thirds of its overall energy consumption. China is actually the world’s fourth largest oil producer, sixth largest natural gas producer, fifth largest nuclear power producer, and largest producer of hydroelectricity, wind power, and energy from biomass. Energy imports account for only around 10-15 percent of China’s total energy usage, which is many times less than in most other economies in Asia, or than most countries in the developed world.

20150123103628Britain and Mexico are not significant net importers of oil either. Britain, unlike other large European economies, is only a very minor importer of oil (it is actually one of the world’s top 20 oil producers, because of the North Sea), while Mexico is the world’s 15th largest net exporter of oil and, despite importing more natural gas from the United States than it ever has in the past, also remains a net exporter of energy in general.

Thus, Canada’s main trade partners are not likely to be among the leading beneficiaries of falling oil prices – at least, not unless their populations respond to cheaper gasoline prices by going out and spending far more money than they otherwise would have. As a result, Canada should not necessarily expect these trade partners to boost their purchases of its exports during the months ahead.

[Note: Japan’s trade with Canada may actually be a little bit larger than Britain’s or Mexico’s. However, this is only because the Japanese economy is much larger than Britain’s or (especially) Mexico’s. Per dollar of its GDP, Japan buys significantly less from Canada than Britain, Mexico, or the US do relative to the size of their own economies (see graph below). This means that British, Mexican, or American economic growth might be more likely to have a stimulative effect on the Canadian economy than the same amount of Japanese economic growth would. Similarly, Mexican growth would probably help Canada more than growth in any country apart from the US would, so it is a shame for Canada that Mexico is a net exporter of both energy in general and oil in particular]Canadaian exportsChallenge #2: Other Commodities 

The price of oil is often correlated with the price of commodities in general, since bulk commodities tend to require a lot of energy to produce and a lot of fuel to transport. This presents an additional risk for Canada, given that Canada is not only a massive exporter of oil, but also of many other commodities. Commodities other than oil account for an estimated 20-30 percent of all Canadian exports. Most of Canada’s most important non-oil commodities have prices that tend to correlate at least somewhat with oil prices. These include not only natural gas and coal, but also industrially used metals like nickel, copper, and iron ore, as well as nonmetal commodities like potash (used for fertilizer) and timber (which in Europe accounts for half of all energy produced from “renewables”), both of which Canada is the world’s largest exporter of. Canada is also the world’s third largest net exporter of electricity, trailing only France and Paraguay, and the world’s largest uranium producer apart from Kazakhstan.

Canadian natural gas, which is by far the most valuable Canadian commodity export apart from oil, has recently been fetching prices far below the global average, since natural gas is costly to ship overseas, and since the US market is already over-supplied because gas is coming up as a by-product in shale oil production. Coal prices, meanwhile, have been hurt by a combination of falling oil and gas prices, slowing Chinese industrial growth, and concerns over pollution in various countries (China included). While coal in Canada receives little media attention because of the prominence of Canadian oil and gas, it nevertheless remains one of Canada’s top four or five commodity exports.

Canada is also the world’s second or third largest exporter of wheat, trailing only the US and maybe France. Canadian grain production tends to have relatively high break-even prices, a result not only of the latitude and climate of farmland in the Prairies, but also of the fact that the Prairies are landlocked and have no access to commercially navigable waterways (unlike US, European, or Argentinian farmland, for example), which are necessary to reduce costs given that grains are bulky goods which even today are expensive to transport long distances overland. In Canada, therefore, export revenues might be hurt more by falling grain prices than they would in other significant grain-exporting countries. The Food and Agricultural Organization of the United Nations estimates that in 2014 global food prices fell by 3.7 percent, the biggest fall since 2011, led by grain prices which fell by around 12.5 percent, with nearly all of that fall occurring during the past six months.

Finally, there is marijuana, which, though it is difficult to be certain, arguably accounts for more of Canadian export revenues than any commodity apart from oil or natural gas. Indoor marijuana production, which is responsible for a large share of Canadian production, is an extraordinarily energy-intensive enterprise, such that falling energy prices may cause Canadian producers to save on input costs. On the other hand, there is the legalization of marijuana in Washington state, which is just across the border from marijuana-growing British Columbia, as well as in states like Colorado and, most importantly, California. Legal marijuana production in the US has taken off in the past year or so, and it will probably squeeze the value of Canadian (and Mexican) marijuana exports.

Challenge #3: China 

The relationship between Canada and China is based around more than just exports of Canadian natural resources to China and imports of Chinese manufactured goods to Canada. British Colombia  in particular has a close economic relationship with China, the result of Vancouver’s (and Victoria’s) Pacific coastline and physical isolation from most of the rest of the Canadian and North American markets. British Colombia sends approximately 35 percent of its overseas exports to China, which is almost twice the share that the rest of Canada does, and 2.5 times the share that the United States does.

Partly as a result of this British Columbian transpacific relationship, Canadian exports to China are equal to roughly 2.5 percent of Canada’s GDP, whereas US exports to China are equal to only 1.3 of the US’s GDP. In addition, there are social and financial ties between Canada and China that are economically significant, albeit difficult to measure precisely, reflecting the fact that roughly 11 percent of British Columbia’s population and 5 percent of Canada’s total population are of Chinese origin — compared to just 1.2 percent for the US’s population, 0.3 percent for the European Union’s population, and 4 percent for Australia’s population.

All of this is to say that Canada will feel the effects of an economic slowdown in China, and not only because of the effect such a slowdown would have (and has already been having) on commodity prices. Canada could be particularly affected by a crisis in southeastern China, if one were to occur, since because of the historical connection between Canada and Britain, most of the Chinese immigrants in Canada have come from Hong Kong and adjacent parts of southeastern China (and spoke southeastern Chinese languages like Cantonese, even though Cantonese is only spoken by approximately 60 million people within China, compared to nearly a billion Mandarin speakers).

Notably, eastern Chinese provinces have had the slowest growth in China every single year since the global financial crisis. Meanwhile, Hong Kong’s economy has slowed immensely in recent years and had an especially difficult 2014, and mainland southeastern China was the slowest-growing major Chinese region in 2014. This could potentially wind up being bad news for the Canadian economy this year.

Challenge #4: The United States   

According to most Canadian economic analysts, Canada’s saving grace in 2015 is likely to be the US economy, which has been rebounding to a certain extent from its relatively poor performances in 2007, 2008, 2009, 2011, and 2013, and which had particularly strong growth in the third quarter of 2014. While this assessment is probably true, it is nevertheless important to point out that the American economic recovery has not been occurring in the areas of the US that have the greatest impact on the Canadian economy.

Most of Canada’s exports to the US go to states in the Northeast or Midwest, on the borders of the Atlantic or, especially, the Great Lakes. Michigan, New York, Ohio and Illinois together receive around one-third of all Canadian manufacturing exports to the US, for example. Yet most states in this region have not performed very well during the years since the financial crisis.

With the exception of states like North Dakota, which have economies based around the production of commodities like oil and agriculture and compete directly in these industries with neighbouring Canadian provinces in the Prairies, most of the best-performing US states have not been near the Canadian border. Instead, they have been in southern or western states, most notably Texas. Ohio, Michigan, and Illinois, meanwhile, were among the slower-growing economies during that same period. These trends have largely continued during 2013 and 2014 (though, on a more positive note for Canada, the economy of Michigan has been doing decently in the past two years, and Michigan is the single largest importer of manufactured goods produced in Canada).

In addition, upstate New York, the only part of the US which borders both Ontario and Quebec, has performed far worse than the New York City metropolitan area through these years. In Michigan, similarly, growth has been stronger in the western part of the state, which does not border Canada, than in the northern or eastern parts of the state, which do. And in Ohio, growth has been stronger in southern cities like Columbus or Cincinnati, which are relatively far away from Canada and the Great Lakes, than it has been in northern, Lake Eerie cities like Cleveland or Toledo.

Falling Energy Prices and US State Economies

In spite of auto-related manufacturing in states like Michigan and Ohio, the US’s Northeastern and Great Lakes states will not necessarily be among the main beneficiaries of the fall in energy prices. New York, for example, consumes the least amount of energy per capita of any state apart from Rhode Island. Northeastern states like Vermont, New Hampshire, and Massachusetts, which have close ties with Canada, are extremely energy-efficient. The Pacific northwestern states, Oregon and Washington state, which are economically integrated with British Columbia, are also energy-efficient. And the Great Lakes are for the most part only partially energy-intensive economies (apart from Indiana, which is quite energy-intensive). Michigan consumes the 16th least amount of energy per capita, while Pennsylvania is 20th, Illinois is 25th, and Ohio is 28th.

Moreover, the area in and around the Great Lake states is one of the major energy-producing regions of North America, and therefore may not benefit as much from cheaper energy as some other parts of the US will. Pennsylvania produces significantly more energy than any state aside from Texas or Wyoming, and much more natural gas than any state other than Texas. The West Virginia-Pennsylavania-Kentucky-Illinois-Indiana-Ohio region accounts for around three-quarters of all the coal production in the US outside of Wyoming; coal production which is being squeezed by falling natural gas prices as a result of fracking.Ohio, Illinois, and to a lesser extent Michigan also produce a decent amount of oil themselves, and Michigan has the largest natural gas storage capacity of any state in the country.

Meanwhile, the shale gas basins in this region, namely the Marcellus basin and the (more geologically challenging and expensive to develop) Utica basin, have had by far the fastest productivity growth in recent years of any major basins in the United States (see graph below). In the case of the Utica, which contains significant amounts of both oil and natural gas, the basin encompasses not only Pennsylvania, as the Marcellus does, but also other areas near Canada, like eastern Ohio and upstate New York.

utica gas

us_shale_map

In spite of their historical reputation for loving and making cars, none of the Midwestern states even remain among the top ten states in terms of per capita vehicle ownership. Even Michigan now only ranks around 15th in terms of per capita vehicle ownership. The Great Lakes/Midwest is also one of the leading ethanol-producing, iron-ore producing, and food-exporting regions in the entire world, which could hurt as food, fuel, and mineral prices have been falling.  Finally, cheaper oil could make it cheaper for people living in northern cities like Buffalo to fly south or west, spending more time and money in sunnier states, or in the Rocky Mountains.

It may also be worth mentioning that, even as American growth is generally a good thing for the Canadian economy, the fact that the US is growing at a decent pace at a time when countries like Russia, Japan, Germany, Brazil, and possibly even China and Mexico are all flirting with recession means that US national power might increase at a pace that could become uncomfortable for some of the economies that have to deal with the Americans most often, potentially including Canada.

Indeed, given that US election season is approaching, American politics could perhaps become relatively erratic during 2015. The Republican-controlled Congress, the Democratic-controlled White House, or various US state governments could, for instance, place indirect restrictions on imports from various provinces or industries within Canada in order to provide a short-term protectionist boost to American employment growth. They might also run political attacks against the Albertan oil sands during the year leading up to the election: the Democrats in order to energize their environmentalist base; the Republicans (and in some cases the Democrats) in order to divert environmentalist ire away from American coal production, offshore oil production, or fracking.

Challenge #5: Canadian Politics

There is a federal election in Canada in 2015. In most countries, investors usually have a clear idea of what they want to see from an election. They want the victory of a competent, “market-friendly” candidate, with a majority government and no significant regional divisions displayed in the country’s voting patterns. This is, in fact, what they got out of the most recent Canadian federal election, in 2011: the right-of-centre Conservative Party won a decent-sized majority government (which was Canada’s first majority government since prior to 2004), winning in Ontario, British Colombia, and the Prairies, while at the same time Quebec abandoned its independence-minded Bloc Quebecois en masse in favour of the NDP, which also became the largest opposition party by a large margin in Ontario, British Colombia, and the country as a whole.

From the perspective of investors, it is unlikely that the 2015 election will be much more favourable than the current situation that exists in Canada. Even if the Conservatives were to win an even larger majority than they have now, which seems unlikely, this would still only be a continuation of the status quo, and would therefore be unlikely to generate any excitement among Canadians or foreign investors. Plus, given that the Conservative leader Stephen Harper has been Prime Minister for just short of ten years now, this status quo may start to become tiring even for investors and Conservatives. It would certainly not induce any sort of “hope and change” optimism that could potentially help stimulate markets in the short-term. In fact, Harper’s opponents will likely be spending the election campaign trying to convince Canadians that their economy has been brought to the brink of recession.

In contrast, it is not very difficult to imagine that the elections could make Canada less appealing to investors. Here’s one scenario that would be much worse from an investor’s view: the Liberal Party, led by 43-year old Justin Trudeau (the son of a former Canadian Prime Minister) wins a minority government in parliament, while, on a provincial level, the country is regionally divided in its voting patterns, with Ontario going primarily for the Liberals, Quebec voting primarily for the NDP, the Prairie provinces voting primarily for the Conservatives, and British Columbia roughly splitting its vote between the Liberals and the Conservatives.

In such a scenario, Canada would have changed from having a “market-friendly” majority government led by an experienced Prime Minister, and having no regionalist tendencies reflected in its voting patterns, to having a left-leaning minority coalition government led by an inexperienced Prime Minister and having significant regionalist divisions between eastern Canada and western Canada, as well as between Quebec and the rest of the country, reflected in its voting patterns.

If the NDP defeat the Conservatives instead of the Liberals, meanwhile, which is also possible (the NDP are currently the second largest Canadian party in parliament by far), it would bring to power a party that has never been in power before in its history, which until relatively recently was viewed by many conservatives as being “far left”, and which has a leader who is only in charge because of the tragic death of the former leader of the NDP following the party’s unprecedented success in the Canadian election of 2011. (Though notably, he is more experienced than the Liberal party leader).

Even worse, a staunchly provincialist party like the Bloc Quebecois, which is currently polling at around 10-20 percent in Quebec, could theoretically end up becoming the kingmaker in a split between the Conservatives and a Liberal-NDP coalition. Investors could turn on Canada to a certain degree if they begin to think that an increasingly fragmented result such as this is likely to occur. Thus, while the defeat of Stephen Harper’s Conservative Party or the loss of its majority position in parliament would not necessarily be bad for Canada over the longer term, it arguably represents a short-term challenge for the Canadian economy – and in particular, for Canadian financial markets – during the election year ahead.

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