Terrorists have struck in the heart of Indonesia; the uber violent Boko Haram is rampaging across Nigeria; and ISIS is … everywhere. While the knee-jerk reaction is to ask how geopolitical chaos affects oil prices, we might ask how low oil prices cause instability that feeds terrorism.
ISIS may be earning less revenue than it could because oil prices are so low, but overall, the slump is good for terrorism the world over, because it creates economic and political instability.
Last week, a terrorist attack in the center of the Indonesian capital, Jakarta, killed eight people—four of which were attackers believed to be linked to the Islamic State. Related: $329 Billion Invested in Clean Energy in 2015
In Nigeria, Boko Haram is reaping the benefits of a weakened state. Petroleum exports account for 90 percent of Nigeria’s total overseas revenue, and the country is awaiting a doubled budget deficit next year. Consumption is at an all-time low, employment at a high, and salaries at risk of going unpaid. It’s an economic meltdown of which Boko Haram will take full advantage.
It was, after all, the original chaos of Nigeria and its massive corruption and income disparity between the predominately Muslim north and the oil-rich Christian south that fostered the rise of Boko Haram, one of the most violent terrorist groups in the world. Now, the state’s growing inability to fund the fight against this pervasive terrorism is being hindered by low oil prices.
Indeed, the country’s new government is now accusing the former president of having siphoned over $2 billion in oil funds that were originally intended to fight Boko Haram and redirecting it to his failed election campaign. Related: OPEC Still Sees Oil Markets Balancing This Year
Enter ISIS, which has fully adapted to the geopolitical realities of oil. The chaos of Syria gave them a convenient base, and the falling price of oil gave them the regional instability to spread across many borders. Most recently, it’s moved into Libya, where chaos reigns in the form of two rival governments.
Saudi Arabia, which refuses to cut oil production in the name of stabilizing the market, is in financial trouble.
Here’s the cliffhanger: If the low oil prices weaken the Saudi monarchy too much, ISIS will be able to run amok even more than it is now.
While oil money from the wealthy Gulf States—most notoriously, Saudi Arabia—has been the main funding source for Sunni radical groups, ISIS has broken the mold. It’s organized its own continual source of funding through the sale of oil out of Syria, and is now clearly eyeing Libya. Related: Oman Offers to Slash Oil Production If OPEC Follows Suit
At the same time, sanctions against Iran have been lifted, and it’s preparing to unleash another 500,000 bpd into the already glutted market. Iran already has significant control over Shi’ite radicals, and its new oil money will make this even easier.
OPEC-leader Saudi Arabia was hoping that by maintaining production levels, it would retain market share and hit back at the U.S. shale boom that threatens their position in the market. Unfortunately for the Saudi’s, this increase in production has failed to box out U.S. shale producers. But it has succeeded in creating dangerous economic and political instability.
To stay afloat, Saudi Arabia has had to issue a bond package—its first since 2007—and it is expected to report an $82-billion drop in revenues for 2015. The IMF predicts a deficit equivalent to 20 percent of GDP for 2015, and the risk of deficit as far ahead as the next decade.
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This is the door to chaos that ISIS is looking for, and the Saudis need to help close it.
By Julianne Geiger of Oilprice.com
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