What Motivates Iran

Iran has an apocalyptic regime with a great deal to be apocalyptic about. As I have argued in these pages since 2005, no poor country in the entire troubled history of the world has seen its fertility rate plunge from 7 children per female just one generation ago to only 1.6 children per female today. There is no explanation for mass rejection of a nation’s demographic future except for deep cultural pessimism. Islamism, whether of the Sunni variety propounded by Sayyid Qutb or the Shia version of Ayatollah Khomeini, rejects modernity, which it views as corrosive of Muslim society.  Its unsuccessful engagement with modernity has left a childless country plagued by social pathologies, including some of the world’s highest rates of opium addiction, venereal disease, and prostitution.

As a matter of arithmetic, Iran will have an elderly dependent ratio worse than Europe or the United States one generation from now, with one-tenth the per capital GDP. Demographic problems which barely are soluble in rich countries are a death sentence for a poor country. This is a train wreck that cannot be averted.

As a matter of arithmetic, Iran can sustain a third of its population as elderly dependents only by acquiring the wealth of its neighbors, for example, Eastern Province of Saudi Arabia, which has a Shia majority, and where Iran already is attempting to subvert the Saudi monarchy. That is why Iran is aggressive, and why no negotiation will contain it.

via Ha’aretz Attacks My ‘Civilizations’ Book Without Addressing My Core Argument | Spengler.

Why Yemen Matters

The Middle East witnessed something radically new two days ago, when the Kingdom of Saudi Arabia responded to a plea by Yemen’s president and led a 10-country coalition to intervene in the air and on the ground in the country. “Operation Decisive Storm” prompts many reflections:

Saudi and Egypt in alliance: Half a century ago, Riyadh and Cairo were active in a Yemen war, but then they supported opposing sides, respectively the status-quo forces and the revolutionaries. Their now being allies points to continuity in Saudia along with profound changes in Egypt.

Arabic-speakers getting their act together: Through Israel’s early decades, Arabs dreamt of uniting militarily against it but the realities of infighting and rivalries smashed every such hope. Even on the three occasions (1948-49, 1967, 1973) when they did join forces, they did so at cross purposes and ineffectively. How striking, then that finally they should coalesce not against Israel but against Iran. This implicitly points to their understanding that the Islamic Republic of Iran poses a real threat, whereas anti-Zionism amounts to mere indulgence. It also points to panic and the need to take action resulting from a stark American retreat.

Arab leaders have a long history of meeting but not cooperating. From the right: King Hussein of Jordan, Gamal Abdel Nasser of Egypt, Yasir Arafat of the PLO, and Muammar Qaddafi of Libya in September 1970.

Yemen at the center of attention: Yemen played a peripheral role in the Bible, in the rise of Islam, and in modern times; it’s never been the focus of world concern – until suddenly now. Yemen resembles other once-marginal countries – the Koreas, Cuba, the Vietnams, Afghanistan – which out of nowhere became the focus of global concern.

The Middle East cold war went hot: The Iranian and Saudi regimes have headed dueling blocs for about a decade. They did combat as the U.S. and Soviet governments once did – via contending ideologies, espionage, aid, trade, and covert action. On March 26, that cold war went hot, where it’s likely long to remain.

Can the Saudi-led coalition win? Highly unlikely, as these are rookies taking on Iran’s battle-hardened allies in a forbidding terrain.

Islamists dominate: The leaders of both blocs share much: both aspire universally to apply the sacred law of Islam (the Shari’a), both despise infidels, and both turned faith into ideology. Their falling out confirms Islamism as the Middle East’s only game, permitting its proponents the luxury to fight each other.

The Turkey-Qatar-Muslim Brotherhood alliance in decline: A third alliance of Sunni revisionists somewhere between the Shi’i revolutionaries and the Sunni status-quotians has been active during recent years in many countries – Iraq, Syria, Egypt, Libya. But now, in part thanks to diplomacy initiated by the brand-new King Salman of Saudi Arabia, its members are gravitating toward their Sunni co-religionists.

King Salman of Saudi Arabia has done something unprecedented in putting together a military coalition.

Isolated Iran: Yes, a belligerent Tehran now boasts of dominating four Arab capitals (Baghdad, Damascus, Beirut, Sana’a) but that’s also its problem: abrupt Iranian gains have many in the region (including such previously friendly states as Pakistan and Sudan) fearing Iran.

Sidelining the Arab-Israeli conflict: If the Obama administration and European leaders remain obsessed with Palestinians, seeing them as key to the region, regional players have far more urgent priorities. Not only does Israel hardly concern them but the Jewish state serves as a tacit auxiliary of the Saudi-led bloc. Does this change mark a long-term shift in Arab attitudes toward Israel? Probably not; when the Iran crisis fades, expect attention to return to the Palestinians and Israel, as it always does.

American policy in disarray: Middle East hands rightly scoffed in 2009 when Barack Obama and his fellow naïfs expected that by leaving Iraq, smiling at Tehran, and trying harder at Arab-Israeli negotiations they would fix the region, permitting a “pivot” to East Asia. Instead, the incompetents squatting atop the U.S. government cannot keep up with fast-moving, adverse events, many of its own creation (anarchy in Libya, tensions with traditional allies, a more bellicose Iran).

Impact on a deal with Iran: Although Washington has folded on many positions in negotiations with Iran and done the mullah’s regime many favors (for example, not listing it or its Hizbullah ally as terrorist), it drew a line in Yemen, offering the anti-Iran coalition some support. Will Iran’s Supreme Leader Ali Khamene’i now stomp out of the talks? Highly unlikely, for the deal offered him is too sweet to turn down.

American diplomats meet again with their Iranian counterparts to capitulate on yet another difference.

In sum, Salman’s skilled diplomacy and his readiness to use force in Yemen responds to the deadly combination of Arab anarchy, Iranian aggression, and Obama weakness in a way that will shape the region for years.

Mr. Pipes (DanielPipes.org, @DanielPipes) is president of the Middle East Forum. © 2015 by Daniel Pipes. All rights reserved.

via Why Yemen Matters :: Daniel Pipes.

the world is getting much, much better

26 charts and maps that show the world is getting much, much better 

The press — and humans in general — have a strong negativity bias. Bad economic news gets more coverage than good news. Negative experiences affect people more, and for longer, than positive ones. So it’s natural for things like Russia’s incursion into Ukraine or the rise of ISIS or the Ebola outbreak to weigh on us more than, say, the fact that extreme poverty has fallen by half since 1990, or that life expectancy is increasing, especially in poor countries. But it’s worth paying some attention to the latter factors. The world is getting much, much better on a whole variety of dimensions. Here are just a few.

via 26 charts and maps that show the world is getting much, much better – Vox.

Solar at grid parity within 2 years

In their 2015 solar outlook, investment bank Deutsche Bank is predicting that solar systems will be at grid parity (when an alternative energy source cost is lower or equal to that of electricity from the electrical grid) in up to 80 per cent of the global market within 2 years, Renew Economy notes.

That’s because grid-based electricity prices are rising across the world while solar costs are still falling. “Leading analyst Vishal Shah predicts solar module costs will fall another 40 per cent over the next four to five years, [so] even if electricity prices remain stable, two thirds of the world will find solar to be cheaper than their current conventional energy supply.”

Shah says the collapse in the oil price will do little to slow down solar use because oil accounts for just 5% of global electricity production.

Deutsche Bank says unsubsidised rooftop solar electricity costs anywhere between $US0.13 and $US0.23/kWh today, which is well below retail price of electricity in many markets globally.

Solar demand in the U.S. is expected to jump five fold to 16,000MW in 2016, making it the biggest market in the world ahead of China (which is expected to be about 13,000MW a year).

via Solar at grid parity in most of the world within 2 years | KurzweilAI.

There Will Be Blood In The Oil Market: Where Will It Flow?

 

Oil’s rapid decline over the past six months has taken the global financial community by storm. There has probably been more written on oil since November than the previous 5 years combined.

The discussion around oil goes much further than whether or not to buy energy related assets because oil prices can impact entire economies both positively and negatively.

Negatives: Oil price declines hurt oil producing nations. Countries like Russia depend on oil exports for a large portion of their country’s revenue. The energy boom in the United States has been responsible for a large part of the new jobs created since the financial crisis and many of these jobs are high paying. As shale producers can no longer open new drills, job expansion may slow or even reverse in this sector. The price declines will lead to economic pain in both Russia and the United States.

Positives: Oil price declines help other sectors of the economy. If people are spending less on gas, they have more disposable income to spend in other sectors (restaurants and malls). This makes the cost/benefit argument go two ways for the United States as many have argued the economic pain from the energy sector will be offset by the economic boost in other areas. This is true, but the question is how much? My guess is overall it will be a net negative for the United States. However, for an emerging market like India or a developed nation like Japan it will certainly be a net positive on their overall economy.

There is another part of the oil discussion I find a bit more interesting, which is centered around where the losses will be incurred? In other words, who is in trouble?

When the U.S. housing market began to roll over back in 2006, forecasters could do a quick back of the envelope calculation on how many subprime loans were issued, which then provided a baseline estimate of how widespread the damage could be. However, it was thesecondary impacts and the hidden losses that were impossible to know, mostly because the financial world existed (and still exists) in a dark shroud of balance sheet secrecy (especially in the world of derivatives which we will discuss in a moment).

When David Einhorn was railing into Lehman Brothers on conference calls in the spring of 2008, asking for more information on the depths of their real estate exposure, even he at that point could only guess how bad it was (he guessed right and shorted the stock all the way to zero). No one knew entering the fall of 2008 that AIG had insured the bulk of the subprime mortgages across the planet and held essentially no capital reserves to cover losses (the Fed stepped in with a $190 billion backstop for AIG to keep the financial system from imploding overnight in September 2008).

The reason I take this walk through memory lane is because people seem to be so sure today exactly where the losses are sitting following oil’s recent decline. The United States poured $5.4 trillion into the exploration and drilling (fracking) sector of the United States over the past 8 years (this number is larger than the entire suprime mortgage market at the peak of the crisis). A large portion of these drilling start up costs were financed through junk bonds.

When a young team of frackers approached the bank for a loan they presented their business plan with a price of oil included in that plan. With oil hovering above $100 over the majority of the recent boom they may have used a number like $90 (to be conservative). The bank probably asked, “how can you guarantee you’ll be able to sell the oil you produce at $90?

Here’s how: Oil producers can set up swap agreements with major banks. The banks promise to pay the producers $90 for every barrel they produce. If oil falls to $47 (where it his this week) the bank must write a check for $43 for every barrel produced to cover the difference. This safety net allowed the massive amount of junk bond insurance in the U.S. energy sector to occur over the past decade.

You can see how any banks that set up this swap agreement are incurring huge losses right nownot the frackers or the bank that initially lent them the money to begin their operation. The mine is still cash flowing beautifully at $90 a barrel.

Why would a bank set up a swap agreement like this? They collect on the upside. If oil rose to $120, as everyone in the world expected it to over the next few years, the banks captured a $30 profit on every barrel of oil produced and they didn’t have to lift a finger to get it out of the ground.

“Aha!” you say, “we have found the losses!” Not so fast. After the banks set up these swaps they could then (and most probably did) go out into the derivatives market and hedge a large portion of the contract to limit their own potential losses. Another entity, essentially betting on an oil rise and not believing it was possible for it to fall below $80 a barrel, may have stepped in to take this “no risk” bet. This entity could have been a major hedge fund using an enormous amount of leverage. If the price of oil fell below 75 it could instantly wipe away their entire capital base due to the massive leverage in the position.

Is this where the losses will occur? No one knows. The point of going through this thought experiment is to show there is not a direct correlation between oil’s decline and where you can expect something to blow up. Everything is interconnected in the financial system so if a trip wire is cut in a Texas oil field a bomb may go off in a hedge fund building in London or Tokyo.

There will be blood, but we’ll have to wait and see where it will flow.

via There Will Be Blood In The Oil Market: Where Will It Flow? | The Future Tense.