Falling oil prices will aid ISIS growth and also boost anti-India terror

The Islamic State of Iraq and Syria (ISIS), the terrorist caliphate created by Sunni extremists by conquering parts of Iraq and Syria, could not have timed its murderous arrival on the world scene better.

For two reasons.

First, it has rightly calculated that no country, from the US to any one in Western Europe with the capacity to defeat it, will actually put boots on the ground. Without soldiers in the theatre of war, it is not possible for anyone to capture or hold territory. The ISIS strategy, and also that of other jihadis, is now to hold territory , now that America is in retreat. Since the Iraqi army is a weak force, it can at best hold on to territories vital to Shia Islam. And Iran, the other power that has an interest in taking on ISIS, is constrained by global sanctions. It will enter the fray only if it feels the Shia-led Iraqi regime will collapse. It will not seek to fully destroy ISIS. The IMF estimates that Iran’s economy shrank by 7 percent in the last two years - and so Iran hardly has the wherewithal for prolonged warfare.

Second, with the world in recession, no Islamic country is in a financial position to take on ISIS even if had the will (of which there is no sign anyway). With the US achieving near self-sufficiency in energy on the back on a rising output of shale gas and oil, demand for West Asian oil is down, and Brent crude prices are ruling at $82 a barrel now - a level at which most Opec members (mostly Islamist) are struggling to make ends meet. Their budgets are heading for huge deficits.

Since most West Asian regimes keep their own restive populations quiet by doling out huge welfare subsidies financed by oil exports, the sharp drop in oil will make it difficult to sustain those handouts in future. This will make their citizens vulnerable to ISIS propaganda.

According to a Deutsche Bank estimate , Saudi Arabia needs oil prices at $99.2 to fiscally break even. 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.

What this implies is that most Islamist authoritarian regimes in West Asia will be faced with internal dissent as their ability to bankroll extensive welfare schemes starts reducing. (We are not talking about the non-Islamist regimes of Russia and Venezuela here because they are not immediately relevant to the potential growth of ISIS, though they have their own challenges. While Russia is spending hugely on military support to breakaway groups in Ukraine, Venezuela is facing the possibility of a debt default due to the drop in oil revenues).

A rising tide of internal discontent in West Asia, where Sunni Saudi Arabia and Shia Iran are in geopolitical conflict for supremacy, provides the perfect backdrop for extremism. In Nigeria, the Islamic fundamentalist Boko Haram already holds some territory in the north-east; and if the country finds its ability to defend territory reducing due to falling oil revenues, Boko Haram will feel emboldened to expand its recruitment and territorial gains.

In short, as oil prices fall further, the Islamic world - already roiled by extremism and terrorism - will be in further turmoil, where the likes of ISIS will find new opportunities for growth.

In theory, a fall in oil prices should not affect countries where oil production costs are low and oil reserves very high. Pumping oil out will be profitable for some Gulf countries even if oil falls to $20 a barrel, But, as a Bloomberg report notes quoting Jamie Webster , a Washington-based analyst, “Opec members are countries, not companies, so they don’t look at the profitability of wells; they look at their revenue for a fiscal or current account standpoint.”

The difference is this: in most countries, a drop in prices means oil companies may make less money (or even losses), but inflation will fall and the overall economy gains in different ways. In West Asia, entire economies sink when the oil price head south.

For countries like India, the weakening of global oil prices may be a godsend in combating inflation and the current account deficit, but the same phenomenon will stoke further Islamic extremism in the neighbourhood - and inside India itself.

We should expect two things to happen in the next five years, depending on how oil prices rule.

One, all West Asian regimes will become more unstable as Islamic extremism gathers steam. If ISIS is not defeated quickly - and there appears to be no chance of that - it will grow into a Frankenstein, assuming it is not one already. All current borders in West Asia will become irrelevant as new extremist forces start gaining territory and resources.

Two, an internal fight in West Asia could stoke a sharp Shia-Sunni battle for supremacy, where Iran and Iraq ally to take on the Saudis for global influence. Remember, the Saudi oilfields are all in areas where Shias dominate, and so is the case with Bahrain, where the Saudis had to send an armed force to put down a Shia insurrection in 2011. Shias are the majority community in Bahrain, and low oil prices can make the discontent come to the fore once more. Libya, Syria and Iraq are already battlegrounds for intra-Islamic warfare. Saudi Arabia and Bahrain could be next. One can no longer be sure that the conservative Saudi monarchy will survive if oil prices dive further downwards and ISIS makes bigger territorial gains.

A Shia-Sunni fallout will roil Pakistan, where extremist elements are already trying to damage Shia mosques. There will thus be a fallout in India too, since we have both types of Muslims here. Relatively speaking, Indian Shias are more prosperous than Indian Sunnis, since many of the Indian Shias - especially in Gujarat - are from the mercantile classes.

As America withdraws steadily from Afghanistan, our own presence there for development work will be unsustainable as Pakistan pushes the Taliban to take over in order to gain what it calls “strategic depth.” It will be pushing terrorists both into Afghanistan and India to achieve its geostrategic objectives. India should expect more Pakistan-based terrorism in the coming years.

One hopes Narendra Modi and his National Security Advisor Ajit Doval are aware of the link between oil prices and terrorism.