Iraq’s Brittle Nationhood By Lisa Beyer, published June 23, 2014.

Does it still make sense to think of Iraq as a country? Did it ever? Scenes of Sunni Arab militants overrunning cities as Shiite Arabs and Sunni Kurds mobilize to fight them are a reminder that Iraqis are riven by history, religion and ethnicity. Nationhood was imposed by force and national institutions form a weak glue. The fall of a swath of north-central Iraq to rebels has raised a question that came up in an earlier civil war, fought in 2006-2007 during the U.S. occupation: Might Iraqis be better off, and the world safer, with the country split into three autonomous regions or even separate states?

Jihadists of the Islamic State in Iraq and the Levant, allied with other Sunni militias, claimed control of Fallujah in January, then Mosul and additional cities in June before advancing toward the capital, Baghdad. Extreme in its interpretation of Islamic law, ISIL — a faction strengthened by its participation in Syria’s civil war — is far outside Iraq’s Sunni mainstream. Yet some residents welcomed the group as an alternative to the central government, widely regarded among Sunnis as oppressive. Iraq’s other factions mobilized in response. Shiite militias from the south, ubiquitous and violent during the U.S. occupation, were reactivated. The Kurdish armed force, the Peshmerga, seized control of Kirkuk, an oil-rich city over which the Kurds have long fought the central government. Of Iraq’s 35 million people, 55 percent are Shiite Arabs, 19 percent are Sunni Arabs and 21 percent are Kurds.

David Fuller's view

Given Iraq’s imposed boundaries, its turbulent history including the recent invasion by Sunni jihadists, it is very questionable whether the country can be put back together in any viable, peaceful format.  The US may hope to broker a peace deal but has little to offer other than a big military, which it understandably does not want to use.  Moreover, US power and its previous involvement in the Middle East is deeply resented far more than it is appreciated by any of the various factions currently at war.  Consequently, any further US military involvement in the Middle East, which would certainly be unpopular back home, would be far more likely to unite rather than separate rival religious and ethnic factions, in their hostility against the West. 

Increased turbulence in the Middle East is currently the biggest known risk for global stock markets.  Investors have enjoyed a good run in equities which are still benefiting from generally low interest rates and aggressively accommodative monetary policies from the USA, Japan and Europe.  However, if the Middle East’s oil production is further affected, resulting in a push by Brent crude above $120, amber warning lights will be turning red.  Every 1$ gain above that level will represent an increasing headwind for global GDP growth and stock markets. 

This does not have to happen because everyone in the Middle East needs oil revenue.  However, while Kurdish production is not under threat, Shia production could easily be vulnerable if it is fought over.  This has happened before and oil importers could usually count on the Saudis to increase production in an effort to limit crude oil price spikes.  The Saudis may not respond so quickly this time.  They know that their era of dominant influence over energy prices is now waning. 

Yes, global demand for oil is likely to rise with global GDP growth over the foreseeable future.  However, oil exporters have already lost their previously biggest customer in the USA.  More importantly many other countries currently importing large quantities of crude oil should at least know that they could also produce at least some of their required oil and natural gas via fracking.  They have been slow to do so, due to inertia, political indifference, complacency and lack of fracking know how.  Higher oil prices would be a wakeup call.  This will also increase the intensity with which renewable sources of energy are developed.  For instance, there is now a Moore’s Law aspect to the annual increase in productivity from improvements in new solar panels every year.     

Europe, alas, has shown plenty of interest in renewables but also has some of the highest energy costs because it has reduced nuclear power output and largely rejected fracking.  Consequently, it remains overly dependent on Russia and the Middle East for natural gas and crude oil.  See also: A Trio of Economic Problems Haunting Europe, by Mohamed A El-Erian and published by Bloomberg.

Middle East stock markets are often late-in-the-cycle momentum plays and we have certainly seen self-feeding momentum moves, at least until recently.  These previously leading Middle Eastern Indices - Abu Dhabi, Bahrain, Dubai, Jordan, Kuwait, Qatar and Saudi Arabia - have now lost uptrend consistency and formed tops of at least near-term significance.  They should be good bellwethers for confidence in the region, and recently, capital has been leaving.