Rouble rubble, jihad and sliding oil: Here's how the west is shooting itself in the foot

For a long time now, it has been apparent that geopolitical power is shifting eastwards, from the US and Europe to Asia, especially China. Less understood is how the west is hastening its own decline as a result of its hubris-driven policy and an inability to understand that the cold war is over.

The falling price of oil — caused more by West Asian geopolitics than just plain old demand and supply factors — is driving another nail in the coffin of western dominance.

Here’s the plot: the US is trying to economically ruin Russia with sanctions and cheaper oil, and the Saudis are trying to do the same to Shia Iran (both Russia and Iran need $100—plus oil to balance their budgets). The Saudis are also trying to screw America’s shale oil producers by pushing oil prices down, says this Reuters commentary .

In this scenario, the ultimate loser will be the west, as this kind of oil politics can only send West Asia down in flames, triggering more geopolitical conflicts than can be managed. The west will simply be unable to handle the fallout, as it found out to its cost in Iraq, Syria, and elsewhere.

The first intimations of the decline of the west came with 9/11, when the strongest country in the world was humiliated by a bunch of motivated Islamist plane-stealers.

But 9/11 was only an indication of vulnerability. What really did the west in was its response to it.

Instead of opening up and challenging the world to find a better alternative to liberal democracy, the west went into a shell and closed itself to the world. The US built itself into a fortress, and tried to beat its enemies to pulp using superior military technology. It failed.

Under George W Bush, the US not only attacked the Taliban in Afghanistan, but also Iraq, even though the latter had done nothing to harm the interests of the west. It was a pure ego trip, and ego tripped the Americans.

An America over-extended in West Asia and driven to financial excess at home (Lehman, etc) began hastening its own decline. After sneering at Japan for its inability to revive itself for 20 years, Europe slid into the same self-defeating policy of closing itself up to outsiders, and adopting a common currency where the poorer parts of the Union in southern Europe suffered while the richer, northern parts (Germany, Scandinavia) benefited from the ready internal market.

Soon we had all parts of the west struggling to grow, and printing money feverishly to save themselves from another Great Depression. So far, they have achieved only the opposite: the money that was meant to ignite demand for credit and get the economies moving has largely boosted asset prices. It has left the poor and middle classes where they were: in debt and without too many jobs. The rich have gotten richer, as only the rich own assets of significance. QE1, QE2 and QE3 inflated the wealth of the rich.

Now, the west is firing more shots at its own foot by trying to fight the cold war all over again with Russia.

In order to teach the Russians a lesson for meddling with Ukraine and annexing Crimea, America and Europe are busy imposing economic sanctions against it and forcing oil prices down. Reason: Russia needs oil to be selling at over $100 to earn enough to pay its bills. The economic sanctions against Russia are also intended to hurt – and this is happening, as is clear with the reduction of the rouble to rubble over the last few months.

But it is one thing to punish an aggressor, quite another to punish him without hurting yourself. But this is exactly what Europe and America have achieved. Sanctions do not hurt only the target economy: it means you hurt yourself by not being able to do business with Russia. Most of Europe is linked to Russia through the energy trade. A collapse of Russia means one more market gone.

The dramatic fall in oil revenues has not made Russia any more willing to sue for peace with the west. In fact, it may have strengthened Vladimir Putin’s resolve to fight on. Just as the US attack on Iraq only strengthened the jihadis, the sanctions against Putin may have strengthened him. Asks Angus Roxburgh in this Guardian blog : “But what will we gain if the only effect (of the sanctions) is to destroy the Russian economy? Perhaps the hope is to destabilise the country so much that Putin is overthrown. (I detect much schadenfreude among observers, who desperately hope a collapse of the Russian economy will bring about Putin’s fall.) If so, it is a highly dangerous game of chance. Pouring fuel on Kremlin clan wars that we barely understand would be the height of folly. We have no idea what the outcome might be – and it could be much worse than what we have at present.”

A Russian economic crash and defaults will wreck global economic growth further. Does the west gain from this?

And it’s not only America that’s trying to cut off its nose to spite the face. As this Reuters report shows , Saudi Arabia is trying to ruin Iran’s economy by holding global oil prices down – a punishment for supporting Syria’s Bashar Assad in the fight against Saudi and Qatar-backed rebels. Some Islamic groups that originally came to fight Assad are now banded together under the banner of ISIS — a scourge that makes al-Qaeda seem like a bunch of boy scouts.

A collateral purpose of the Saudis is to try and kill America’s shale oil producers – who may have to start closing shop if oil prices dip below $50 a barrel. In short, the Saudis are trying to harm America’s new-found energy independence, with consequences that cannot be foreseen.

“Saudi Arabia is playing a dangerous game — there is little evidence that authoritarian regimes like Russia and Iran would change their behaviour under economic pressure. Worse, the Saudi policy could backfire, making Russia and especially Iran more intransigent in countering Saudi influence in the Middle East,” says the Reuters commentary by Mohamad Bazzi.

The problem with oil is not that its production is really unprofitable to most of Opec’s members even at current prices, but its price is important for government revenues and budget deficits. According to a  Deutsche Bank estimate , Saudi Arabia needs oil prices at $99.2 to fiscally break even - but it has enough foreign exchange reserves to not bother about that for now. For Bahrain, Oman, Nigeria, Russia and Venezuela, the fiscal breakeven prices are $136, $101, $126, $100 and $162 respectively – prices that are unlikely to be attained in the next couple of years without a sharp drop in Opec and global output (or a sharp revival in global growth). An IMF report says that Iran, Iraq and Algeria need oil prices of over $100 a barrel to balance their budgets.

So, despite the falling share or oil in the global economy, its role in geopolitics has not diminished.

So let’s repeat how geopolitics is sending oil down. America wants to fix Putin (and hence falling oil helps), the Saudis wants to fix Iran (so again oil’s fall helps), the Iranians want to fix the Saudis by fomenting Shia insurgencies everywhere and the net result is the unleashing of an ISIS on the world. ISIS is financing jihad by selling the oil under its control at even lower prices. Falling oil prices presage an even more unstable and violent West Asia.

The west is hastening its own fall by playing such games to ruin others, and encouraging its allies to follow suit, without realising that this can boomerang on itself.

If West Asia goes down in flames, and America and Europe, already clobbered by an economic downturn, are forced to spend even more defending themselves and their allies in the aftermath, who wins?