Turkish Turning Point?

Today, Russia’s ambassador to Turkey, Andrei Karlov, was giving a speech at the opening ceremony of a photo exhibit when an assailant, who has since been identified as a standing police officer, opened fire, killing Karlov. Karlov had served in his ambassadorial role to Turkey since July 2013. He previously served as Russia’s ambassador to North Korea.

There are two relevant bits here. First, Russian politics.

I don’t mean to sound trite here, but politics in Russia are nothing like politics in the United States. In the United States there are dozens of routes to political power. The Clintons came out of local government. The Bushes out of business. Carter out of agriculture. Obama out of academia. Reagan out of Hollywood. An economically rich geography fosters a strong civil society which provides myriad paths to political power.

That’s not how things fly in Russia. The geography and political system are so hostile there is only one way to national leadership: first be a senior intelligence officer. These folks are the only ones who have a sufficiently accurate and complete view of the country that they can even attempt a national role. This makes Russia’s leadership much more intelligent and competent than the American leadership, but it also makes the Russian leadership thin and brittle. (Technically, Karlov was a career diplomat, but mere functionaries aren’t appointed ambassador to countries as politically prickly and strategically sensitive as North Korea.)

The American political class probably has around two million people. The Russian political class has but 200. With the death of Karlov they have one less. This would be bad enough under normal circumstances, but circumstances in Russia are far from normal.

Red Square in Moscow, Russia

Between the Soviet breakup and the subsequent collapse of the Russian healthcare system, the Russian population is one of the fastest aging and most diseased in the world. By 2050 the Russian population will have shrunk by one-quarter, with ethnic Russians no longer the majority. For a country where oppression of minorities is the cultural equivalent of baseball, this will prove a swampy problem.

Back to the issue of the moment, replacing skilled diplomats is hard enough. Skill sets like Karlov’s which include language competency in Russian, English, Korean and Turkish are hard to develop. Factor in Russia’s demographic hollowing out and Karlov is utterly irreplaceable.

The second issue regards Russia’s relationship with Turkey.

According to initial reports, Karlov’s assassin shouted condemnations of Russia’s policy in Syria in general and Aleppo in specific. It was just the sort of high-profile action that puts a spotlight on political policies and inspires militants of various stripes. (Imagine the fallout had a Mountie killed the American ambassador to Canada during the Iraq War.)

As regards the Turks, Turkey has been in a bit of a geopolitical deepfreeze since its catastrophic defeat in World War One. For most of the time since, the Turks farmed out control of their foreign policy to the United States in exchange for economic access and strategic cover. Of late the Turkish government has begun emerging from its self-imposed shell and started to form opinions as to what its independent strategic posture should be.

At first Ankara assumed that everyone in its neighborhood would do whatever it wanted because Turkey is so inherently awesome. This included expectations that the Israelis would pay for a fully independent Palestinian state, that revolutionary Egypt would model its government after Turkey’s ruling party, that Baghdad would subjugate its foreign and civil policy to Turkish norms, that the Syrian government would overthrow itself, and that U.S. troops would deploy to Syria to carry out Turkish desires. Needless to say, things didn’t exactly work out as the Turks predicted.

Istanbul, Turkey

Instead, Turkey found itself in a panicked argument with the Russians when a Turkish air defense battery shot down a Russian jet operating in Syria. After an initial bout of Turkish bombast, Ankara was faced with the harsh reality that they were diplomatically out of practice, utterly bereft of meaningful allies, and on the verge of a very real war with the Russians.

Enter Karlov, who has a record of successfully manipulating people as testy as North Korea’s Kim Il Sung. The result was Turkey’s ignoble Karlov-managed climbdown. Part of that climbdown was admitting (unofficially) that the Russians owned Syria and any meaningful Turkish policy there required Russian sign-off. After all, the Russians were willing to bomb anyone they thought needed bombing, and the Turks were not.

Karlov’s assassination drags Turkey’s capitulation, Turkey’s (non-)position in the Syrian war, and the broader Turkish-Russian relationship all back into the spotlight. All these things and more are now back at the top of the Turks’ internal to-debate list. It also creates a rare window. With Russia’s man in Turkey gone, the Turks have a moment to have these debates with less outside interference.

Which way will the Turks go? No idea. The Balkans hold more economic opportunity but expansion there would clash with Europe. The Caucasus hold more cultural opportunity but expansion there would clash with Russia. Syria holds more immediate military and political opportunity but expansion there means wading into a thankless civil war.

Turkey’s neighborhood is messy. For 70 years, Turkey’s quiescence has kept the region’s biggest and most capable power from participating. Don’t bet on that continuing.

Saudi Arabia Takes Stock

Deputy Crown Prince Mohammed bid Salman laid out part of his country’s strategic challenge in an April 25 interview.

“We have a problem with military spending,” the prince told Al Arabiya. “When I enter a Saud military base, the floor is tiled with marble, the walls are decorated and the finishing is five stars. I enter a base in the U.S., you can see the pipes in the ceiling, the floor is bare, no marble and no carpets. It’s made of cement. … We are the third- or fourth-largest in terms of military spending in the world, yet our army is ranked in the twenties.”

If anything, the crown prince-designate is being overly generous to his military establishment. Going back to the foundation of modern Saudi Arabia, the Saudi military has been an expensive paperweight. Riyadh has used its oil heft to purchase foreigners to fight its wars. When Saddam Hussein’s Iraq invaded Kuwait in 1990, the Saudis flat-out paid a coalition to defend their country and liberate their neighbor. In the years since, Riyadh hired so many Pakistani pilots that the Saudi air force for a time felt as Pakistani as Pakistan’s own. Even today Riyadh maintains vast warehouses packed with shrink-wrapped Abrams tanks and Apache attack helicopters awaiting foreign operators to fight wars on Riyadh’s behalf.

In the Saudi mind those operators would always be American, a people so dependent upon energy imports and so wrapped up in maintaining the global order that they would fight and die to defend the Saudi nation and way of life.

America’s shale revolution has changed all that. Shale oil production has proven increasingly cost-effective. So much so that U.S. oil output is holding steady despite the oil price collapse. This is doing more than edge the Americans towards energy independence, it is also remaking American industry. Cheap oil and nearly free natural gas is overhauling sectors ranging from petrochemicals to electricity to manufacturing and placing an extra $2000 a year per family in the citizenry’s pockets.

Between shale’s cavalcade of changes and a rationalization of America’s foreign policy that is as long-overdue as it is all-encompassing, the Americans no longer need Saudi oil and no longer really care if the Persian Gulf stays open.

And so the Saudis are taking their first (grumbling) steps towards standing on their own feet — and firing their own guns. It will be a long, hard, costly slog. Saudi Arabia has no indigenous regular military expertise, no related skill sets in logistics or industry to call upon. What they do have is loads of pre-purchased equipment and a metric butt-ton of cash to hire trainers from every corner of the globe. And even before the crown-prince-to-be’s announcement, their new stratagem is bearing fruit.

The Saudis’ primary concern is Iran, a country eager to move into the vacuum the Americans’ absence is creating. An early Iranian move helped trigger (another) civil war in Yemen, a country in southern Arabia largely irrelevant to anyone who doesn’t border it. Unfortunately for the Saudis, their country is one of the two. In the war, the Saudis have intervened directly, boldly, and at the head of an alliance of states who likewise fear the Iranian rise. The Saudi effort has been marred by a mess of mistakes: high civilian casualties, lots of friendly fire, logistical bottlenecks and outright shortages, extreme unit attrition caused by inexperience in fighting guerrilla forces, and so on.

Yet I cannot help but be impressed by what the Saudis have achieved. A year ago I felt that Yemen presented the Saudis with a chance to showcase their utter military incompetence. Instead Iran’s efforts have been heavily unwound and there is absolutely no chance that Iran’s proxies will carry on to victory so long as the Saudis remain committed. Yemen has proven to be a great test of the Saudis’ war-fighting, and it is a test in which they get a passable grade. Just as importantly, the Saudis have not been fighting alone or limited their activities to Yemen; they now lead a coalition of Gulf Arab states in Syria and Libya as well.

This military and diplomatic activity will prove great practice for the fight to come.

Iran is beginning to comprehend that the Saudis see this as a fight to the death. When that truly sinks in, Iran will realize it has to go for the throat and remove the Saudis’ primary enabler: the Saudi oil fields. That can only be done via outright military occupation. Prince Salman realized this nearly two years ago and everything — from the oil price war to destabilize Iran’s finances to the Yemen and Syrian conflicts to challenge Iran’s strategic position to today’s announcement on military rationalization — is about preparing Saudi Arabia to fend off a direct Iranian assault, and to do so without meaningful American assistance.

Iran Sanctions Lifted

On Jan 17 the IAEA gave the green-light to the Iranian nuclear industry – indicating that Tehran was implementing the U.S.-Iranian nuclear deal in both the spirit and letter. With that stamp of approval, some of the sanctions that have hindered the Iranian energy sector are immediately lifted. The Iranian government issued a flurry of celebratory statements, including one from the Oil Ministry indicating that Iranian exports would increase by 500,000 bpd within a week and by another 500,000bpd by year’s end.

Mmmmm….not so fast.

Yes, the rapprochement between the Americans and Iranians massively shifts the regional (and global) geopolitics. And yes, now that sanctions are lifting Iran’s energy output will rise, but an extra 1 million bpd of Iranian crude this year is, well, silly.

First of all, Iran’s not yet out of the proverbial woods. The next step in the normalization is that the United States has to formally lift a raft of sanctions – and the Republican-dominated U.S. Congress gets a say. Considering that the Obama administration couldn’t get a bill passed that criminalizes the president’s own Democratic Party right now if it tried, the idea that there will be any agreement on a topic as touchy as Iran is, well, ludicrous. The Republicans, unfortunately from their point of view, probably lack the votes needed to veto the deal, but they’ll do what they can to increase the controversy and to try to milk the issue for as much political capital as possible. The soonest that the United States is likely to flash its own green light will be April. Only then will non-American firms feel sufficiently confident to start sniffing around the Iranian oil patch.

Second, it isn’t as if the only obstacles to renewed Iranian oil output growth are American. Iran’s laws to facilitate foreign investment into its energy sector are, in a word, unhelpful. Until recently the Iranians used a complicated system called buy-back, in which energy producers would sink in cash, do their work, and produce crude without any ownership interest in the field or the oil. Iran then “allowed” the foreign firms to “buy back” the crude at a price that Tehran determined on a whim. Given that foreign investors have no ownership, profitability, guarantees, consistency or recourse, Iran has probably damaged its own production capacity more than U.S. sanctions. This system is in the process of being overhauled, but it will be – bare minimum – a year before it’s clear if the new system makes more sense. Or works at all.

Persian Gulf Image

Kharg Island, Iran

Third, between buy-back and sanctions, much of Iran’s oil output has been shut-in and many fields will have to be re-evaluated before production can be re-started. That process alone will take several months, and until it is done what foreign investment that manifests will be sunk into exploration, not production. Add in the fact that global energy prices are low (and seem to be going lower) and there just isn’t much reason for foreign companies to get too involved too quickly.

What work will be done in the Iranian oil patch will simply be because Iran itself can once again purchase the equipment it needs for its domestically-run projects. That’s far from insignificant, but the total for new output for 2016 will probably be in the range of one-quarter of the Iranians’ idealized numbers.

Which doesn’t mean that Iranian oil won’t hit the market. Iran probably has about 30 million barrels in storage depots and tanker ships in various places around the world. One of the sanctions that already has been lifted because of the IAEA go-ahead opens these volumes up for sale. Assuming that Iran floods the markets with this oil at the rate of 500,000 bpd, these stored volumes can flow for a full two months. Even if this pushes prices as low as $20 a barrel, that’s still over a half billion dollars in income.

Funny thing is, the world might actually get an extra blast of Middle Eastern crude this year – it just won’t be coming from Iran. Instead, the source will be Saudi Arabia and its allies in Kuwait, Qatar and the UAE. The primary reason the Saudis launched their price war in late 2014 – and doubled down on it in late 2015 – wasn’t to crush the American shale patch, but instead to crush Iran before it could fully recover from its sanctions. Iran’s commitments in Syria, Lebanon, Yemen and more all show the classic signs of costly over-leverage. In Riyadh’s mind, now that Iran’s sanctions are on the way out, the financial pressure on Iran needs to be redoubled. The result will be an intensification of Riyadh’s two-track strategy: up the money flowing to foes of Iran in all theaters and up the flow of Saudi oil to minimize interest in and output from Iran’s oil fields. Which leads us to a weird world in which oil prices go lower for longer even as the Middle East gets more violent.

Saudi and Iranian Tensions Surface

It has been quite the week-end in the Middle East, and things are just getting started.


On Jan 2nd, Saudi Arabia executed 47 Shia dissidents including cleric Nimr al-Nimr. Rhetoric from Shia-dominated Iran flowed fast and furious within minutes, with protestors setting fire to the Saudi embassy in Tehran. In retaliation the Saudis severed diplomatic ties with Iran the following day.


Despite a year of weak prices, shale output has continued to ratchet up in the United States. That, plus a mix of trade and demographic shifts as well as a long-overdue strategic realignment in the aftermath of the Cold War and the Iraq war, is nudging the United States away from actively managing the Middle East. Without the … calming effect of U.S. active involvement in the region, there is nothing to prevent Saudi and Iranian regional fears and ambitions from colliding. And so they are.


Saudi Arabia and Iran have now faced off on opposite sides in blood feuds in Syria, Lebanon, the Palestinian Territories, Yemen, and Afghanistan. Both have attempted to keep the conflict one of the cold or proxy variety.



The Persian Gulf

The execution of al-Nimr indicates that this at-arm’s-length strategy is now changing. Iran has long encouraged rebellion among the Saudis’ Shia minority in the country’s Eastern Province, with attempts to foment Shia unrest – like al-Nimr’s dissidence – as one of their chief tools.


Al-Nimr’s execution and the severing of relations indicate that the Saudis, at least, are ready for the conflict’s next stage. It’s unlikely that the rest of the world is: Eastern and Khuzestan, unfortunately, are home to the bulk of the two country’s oil production facilities.

Breaking News – OPEC dissolved as a meaningful organization at their Dec 4 summit.

Rather than adjusting OPEC’s production ceiling in an attempt to raise prices, or even generate a common policy to coordinate output, OPEC instead launched a production free-for-all. No longer will there be a quota – any quota. All members can now invest as much as they want, produce as much as they want, export as much as they want. Oil producers the world over are undoubtedly shivering in terrified anticipation. The Arab states of the Persian Gulf have by far the lowest production costs in the world, and if they do truly flood the market with low cost crudes, few – if any – have a hope of competing.


The Saudis’ goal can be summed up quite simply – force as many high-cost producers out of the oil markets as possible. This is accurate, but it is also incomplete. Yes, the Saudis would like to force its competitors to the financial breaking point, and yes, U.S. shale is an industry that the Saudis would like to wreck. But cracking apart the American shale sector is only one of many goals, and it is certainly not the primary one.


First and foremost, the Saudis are targeting Iran. With the Americans steadily stepping back from actively managing the Middle East, the Saudis are finding themselves forced to deal with their Iranian adversaries themselves. In this the Saudis are poorly positioned. While Saudi Arabia has plenty of top-notch military hardware, the Saudi people have no concept of what a military culture means. Iran has 30 years of experience building up insurgent movements and has proxies sprinkled throughout the Middle East. But the Saudis know full well that such proxies are expensive, and in a game of checkbook diplomacy the Saudis simply have more income and a bigger bank account.


Once sovereign wealth funds and less orthodox financial caches are factored in, the Saudis have – very conservatively — $1 trillion to throw at this problem, and that’s not even counting the personal assets of the royal family. The Saudis can sustain themselves in a low-price environment not for years, but for decades. Compare that to Iran’s hand-to-mouth budgeting. For the Saudis timing is critical; America’s rapprochement with the Iranians heralds increases in Iran’s oil output (albeit not likely in meaningful quantities until 2017). Best to drive prices down now and try to bankrupt Iran’s ability to wage proxy wars in Yemen, Lebanon, Syria and Iraq as well as the internal subsides that keep Iran’s population from revolting.


While Iran is clearly Saudi Arabia’s clear-and-present-danger, it is far from the only target.


Second on the list is Russia, whose oil output has risen to a new post-Cold War high. Russia is the world’s second-largest exporter, so a friendly Saudi-Russian relationship has never been in the cards. But the rivalry between Riyadh and Moscow is about more than just oil. The two have sparred indirectly for decades over the broad swath of weaker Muslim states that lie between them, and Russia’s ongoing rivalries with the United States consistently results in Russian actions that threaten Saudi interests. Russia’s intermittent sponsorship of Iran, and Russia’s involvement in the Syrian civil war opposite Saudi Arabia’s own proxies being cases in point. No wonder that the Saudis flooded the oil markets in the mid-1980s in a (successful) attempt to bankrupt the Soviet Union. No wonder the Saudis sponsored the mujahedeen in Afghanistan to gut the Soviet war machine. No wonder that the Saudis funded the Chechen rebellion in the 1990s. And no wonder the Saudi oil minister expressly called out the Russians when forcing upon OPEC the produce-as-much-as-you can policy.




The third target of the new policy is a bit more obvious – those high price oil producers that have eroded Saudi market share over the decades, all of which are the prime beneficiaries of Saudi Arabia’s yesteryear policies of reducing oil output to bolster prices. With very few exceptions, none of these countries have ever actually reduced output themselves, instead relying upon the Saudis, Kuwaitis and Emiratis to bear the entire burden.


  • Canada: the world’s highest-cost producer is likely to be the biggest loser.
  • Norway: the Saudis particularly hate how reliable Norwegian output has been the past 20 years.
  • Russia: the multi-faceted nature of Saudi Arabia’s competition with Moscow earns Russia spot in this list as well.
  • Iran: with the strategic contest heating up, Iran also earns a double mention.
  • Libya: while its production costs are not all that high, the deepening civil war there threatens to remove Libyan production from the market completely. Lower oil prices could well be the factor that forcibly devolves Libya from chaos to anarchy – and destroys the entire energy complex.
  • Venezuela: while an OPEC “ally” who has always argued for lower production levels, Venezuela has not only never willingly reduced output, its output surges are what broke the 1970s Arab oil embargo – something that the Saudis have neither forgotten nor forgiven.
  • Nigeria: like Venezuela, the Nigerians have a nasty habit of putting Saudi money where their mouth is.


Collectively these countries are responsible for over 20 million barrels of daily oil output, and that oil income is responsible for the vast majority of their export earnings as well as the social stability that is required to produce the oil in the first place. As the Saudi thinking goes, break even one or two of them and a vast quantity of crude will fall off the market.


That just leaves us with American shale. When you add in the light condensates that shale output favors that are not technically crude, U.S. oil output is now above 12 million barrels per day. Largely courtesy of shale, American imports of crude have dropped by seven million barrels per day, five million of which used to come from OPEC members. Between shale’s success and continental integration, the NAFTA trio is now only two million barrels per day of outright energy independence. And by the end of 2017 the United States will surpass Qatar, Australia and Russia to become the world’s largest natural gas exporter.




Funny thing is, the Saudis were convinced until very recently that U.S. shale was just a PR campaign. They didn’t really admit shale was for real until 2013, and it wasn’t until 2014 that they realized shale would not simply reshape global oil markets, but contribute to the end of the American commitment to Saudi security. The Saudis would love to put a bullet in shale’s head.


But that time has already passed. Sure, back in 2012 the shale producers required oil prices at $90 or more to make a profit, but after a decade of technical advancement the industry is emerging from its infancy. New technologies like multi-lateral drilling and micro-seismic are vastly improving the amount of crude produced per well while vastly reducing the per-barrel production costs. More output per well means that surface infrastructure is now comprised of fewer, larger gathering pipes rather than an expensive crazy-quilt of tiny ones. New re-fracking and re-completion techniques are resetting older wells to their original output levels – or even higher. Taken together the full-cycle break-even price for the four major shale plays – Bakken, Permian, Eagleford and Marcellus – are already below $45 a barrel. By the time these new techs fully proliferate across the industry, the shale sector’s break-even is likely to be right around $30 – and that’s likely only a year away.


Which would put the destruction of shale firmly out of Saudi Arabia’s reach. But that’s ok.


The Saudis may miss on shale, but they have a very target-rich environment in front of them. There will be plenty of casualties.

The Nuclear Deal and Iran’s Vulnerability

57The Iranian nuclear deal is moving forward as President Obama just recently secured the last vote necessary to prevent the US legislature from blocking the agreement. This agreement gives Iran some significant concessions regarding uranium enrichment and there is considerable hand-wringing in the United States over Iran’s nuclear potential.
But the truth is that I find it unlikely that Iran actually wants a bomb. Should Iran nuclearize, it would encourage Iran’s regional rivals to follow suit. As Iran is clearly the region’s superior conventional power, all nuclearization would do is neutralize its current advantage.


So if nukes don’t serve Iran’s long-term strategic needs, why bother? It’s less about the nuclear weapon and more about the nuclear program.


Having a nuclear program allows Iran to sue for terms with the US (and to a lesser degree, with Israel). And it looks like the strategy is paying off. A degree of collaboration between Washington and Tehran is in both powers’ best interest. But the Iranian nuclear deal is really a product of Iran’s vulnerability and this deal presents an opportunity to lessen that vulnerability and prepare for the next phase of the American empire.


Iran’s leverage in the global system was the result of its ability to threaten the most important oil producing region in the world. But the shale revolution is bringing an end to the era of U.S. preoccupation with oil — in the Middle East or elsewhere.


This geopolitical shift not only eliminates Iran’s leverage, but it also becomes vulnerable as so much of its economy is dependent upon maritime exports of oil. Moreover, as the U.S. withdrawal accelerates, Iran finds itself overextended – not against an easily-distracted America.
Instead Iran faces an awkwardly consolidating Iraq, an awakening Turkish giant, a frightened but focused Israel, a battle hardened Pakistan, a desperately violent Russia and a Saudi Arabia who is willing to write any check if it will weaken Iran.


The question — as in many things — is timing.


Americans haven’t yet internalized that North America’s dependence upon foreign oil is down by roughly two-thirds from what it was seven years ago, and that by 2017 that dependence will be approaching net zero. The speed at which the region is becoming irrelevant to U.S. interests will at some point be matched with a tidal shift in American policy in the region. In the latter half of 2015, therefore, we’re in this odd geopolitical moment where the U.S. doesn’t care all that much — but it does not quite yet not care at all. For Iran this means that the window to extract concessions is very, very small. If the current nuclear deal does not go through for whatever reason, the next round of talks will be with a United States that is largely immune to whatever Iran can throw at it.


Iran’s regional rivals both fear this development and are hoping/trying to reshape the regional geopolitic to create an American-style containment of Iran…without the Americans.


  • Israel is playing the emotional card to try to persuade Americans that their Middle East policy should be all-Israel, all the time. The strategy obviously didn’t fly with the Obama administration, and the groundswell of American public support Israel was hoping for just hasn’t manifested. And so Israel has had little choice but to reach out to allies old and new, most notably Turkey and Saudi Arabia.


  • Turkey thought it could convince the Americans to bear the burden of burning through ISIS. That strategy too has failed and now Turkey is reluctantly and fearfully preparing to relaunch regional imperial strategies it last used over a century ago. Any meaningful Turkish resurgence will almost by definition wreck a panoply of Iranian interests. Ankara is very ready for that shift militarily and economically, but it’s barely considered it philosophically or intellectually. Everything with the Turks these days is softly softly. But one day the dam of restraint will break and the Turks will surge. The only question is where will they surge first? As a vastly inferior power to Turkey, the Iranians are particularly obsessed with that question.


  • As a country with no military tradition worthy of the name, Saudi Arabia is by far the most terrified of American disengagement and so hopes to scuttle the entire American-Iranian entente. Not because Riyadh thinks it will keep the Americans involved, but because it will hamstring Iranian options. This strategy includes pushing full force against Iranian interests in every regional theater — Lebanon, Gaza, Syria, Iraq, Kurdistan, Yemen, Iran and Pakistan — so that Iran bleeds from a dozen cuts. It is now the Saudis — not the Chinese or Russians or Iranians — that have the most violent and aggressive foreign policy in the world.