Growing Middle East Turmoil Could Turn Into Global Meltdown, Roubini Warns

If Western nations continue to ignore the real problems of the Middle East region, or try to solve them militarily, versus using diplomacy and financial resources to support growth and job creation, the instability in the region will further deepen and will thus impact the global economy for “decades to come”, warns Noriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics.

Roubini warns in a recent article for Project Syndicate that among today’s geopolitical risks, none is greater than the long arc of instability that stretches from the Maghreb to the Afghanistan-Pakistan border.

Instability along this arc is growing — as Libya has become a failed state, Egypt has returned to authoritarian rule, and Tunisia is destabilized by terrorist attacks — and now the violence is spreading into Sub-Saharan Africa, Roubini says.

As in Libya, civil wars are raging in Iraq, Syria, Yemen, and Somalia, all of which increasingly look like failed states, he says.

The U.S. and its allies in their pursuit of regime change in Iraq, Libya, Syria, and Egypt have helped to fuel the turmoil across the region, Roubini says, adding that the turmoil is also now undermining previously secure states like Jordan, Lebanon, and even Turkey.

Roubini says that fluid situation in the region is also further aggravated by a proxy struggle for regional dominance between Sunni Saudi Arabia and Shia Iran, which is playing out violently in Iraq, Yemen, Bahrain, and Lebanon.

Roubini notes that most remarkably — even as most of the region began to burn — oil prices collapsed instead of spiking and that there appears to be no “fear premium”.

And yet, remarkably, even as most of the region began to burn, oil prices collapsed. In the past, geopolitical instability in the region triggered three global recessions. The 1973 Yom Kippur War between Israel and the Arab states caused an oil embargo that tripled prices and led to the stagflation (high unemployment plus inflation) of 1974-1975. The Iranian revolution of 1979 led to another embargo and price shock that triggered the global stagflation of 1980-1982. And the Iraq invasion of Kuwait in 1990 led to another spike in oil prices that triggered the US and global recession of 1990-1991.

This time around, instability in the Middle East is far more severe and widespread. But there appears to be no “fear premium” on oil prices; on the contrary, oil prices have declined sharply since 2014. Why?

The most important reason, Roubini explains, is that, unlike in the 1970-80’s, the current turmoil in the Middle East has not caused a supply shock and that a global oil glut — amid the U.S. shale-energy revolution, Canada’s oil sands, and the prospect of more onshore and offshore oil production in Mexico — has made North America less dependent on Middle East supplies.

Indeed, there is a global glut of oil. In North America, the shale-energy revolution in the US, Canada’s oil sands, and the prospect of more onshore and offshore oil production in Mexico (now that its energy sector is open to private and foreign investment) have made the continent less dependent on Middle East supplies. Moreover, South America holds vast hydrocarbon reserves, from Colombia all the way to Argentina, as does East Africa, from Kenya all the way to Mozambique.

As the U.S. is on the way to achieving energy independence, there is a risk that they and their Western allies will consider the Middle East less strategically important, Roubini says, but warns that this belief is “wishful thinking as a burning Middle East can destabilize the world in many ways”.

Here are his three key risks:

First, some of these conflicts may yet lead to an actual supply disruption, such as in 1973, 1979, and 1990.

Second, civil wars that turn millions of people into refugees will destabilize Europe both economically and socially, which will likely impact the global economy “hard”.

Civil wars that turn millions of people into refugees will destabilize Europe economically and socially, which is bound to hit the global economy hard. And the economies and societies of frontline states like Lebanon, Jordan, and Turkey, already under severe stress from absorbing millions of such refugees, face even greater risks.

Third, misery and hopelessness for millions of young Arabs would create a new generation of jihadists who blame the West for their despair and set the stage for terrorist attacks in the U.S. and Europe.

Third, prolonged misery and hopelessness for millions of Arab young people will create a new generation of desperate jihadists who blame the West for their despair. Some will undoubtedly find their way to Europe and the US and stage terrorist attacks.

Should the West continue to ignore the growing turmoil in the Middle East or address the region’s problems only through military force, the region’s instability will only worsen, a choice that “would haunt the U.S. and Europe – and thus the global economy – for decades to come”, Roubini concludes.

So, if the West ignores the Middle East or addresses the region’s problems only through military means (the US has spent $2 trillion in its Afghan and Iraqi wars, only to create more instability), rather than relying on diplomacy and financial resources to support growth and job creation, the region’s instability will only worsen. Such a choice would haunt the US and Europe – and thus the global economy – for decades to come.

Read Roubini’s full article titled “The Middle East Meltdown and Global Risk” on Project Syndicate