The economics of the war in Syria

by on August 27, 2013 at 6:56 am in Current Affairs, Economics | Permalink

The Dubai market just crashed seven percent, image here.  Here is a longer story.  The Saudi market is falling too; in theory that market is soon opening up to foreign investors.  There are rumors that the Saudis are offering the Russians goodies to back away from supporting Assad.

The price of oil is going up.

1 dearieme August 27, 2013 at 7:53 am

The War of Obama’s Face.

2 Andrew' August 27, 2013 at 9:17 am

You say that now, but had you not backed away from the compromise table we could have had a better war. So, it’s really your fault.

3 JWatts August 27, 2013 at 9:33 am

No, it’s Bush’s fault. Any regrettable but unavoidable action that President Obama must take is always a result of failed Bush era policies, of course.

4 Andre August 27, 2013 at 10:50 am

How would the war get any better than us not being involved and no Americans dead? The oil price is more than 10% lower than in 2008. The Dubai stock market is up 57% year to date, and it ‘crashed’ 7%? Since when is the American President supposed to care about the Dubai stock market?

Are we lowering the bar on policy disaster in the Obama era?

5 TMC August 28, 2013 at 12:09 pm

You are correct. And these things are pretty insignificant to the normal Obama f/u.

6 Ray Lopez August 27, 2013 at 8:33 am

Scott Sumner would say you cannot “crash” seven percent, since a “crash” means the price level *never* recovers to the peak. Think Citibank, Fannie Mae, the old Yankee stadium, Brooklyn Dodgers, etc.

7 Andrew' August 27, 2013 at 9:42 am

The better term might be to “gap-down.” I would also not want to use crash because that kind of implies over-valuation. However, as long as we are being pedantic *never* is a long time and price recovery kind of depends on your definition of price. Have we never had a stock market crash?

8 Rahul August 27, 2013 at 10:10 am

I’m skeptical of reading too much into these market crashes. Most often they crash 7%, make headlines about it and then over the next 30-60 days slowly recover all lost ground. But of course that recovery is ~0.5% at a time so it never makes it to the headlines.

The market seems to panic and crash every time someone sneezes and then slowly recover when they realize the sneeze wasn’t an evil omen of impending disaster.

9 HM August 27, 2013 at 10:18 am

“The market seems to panic and crash every time someone sneezes and then slowly recover when they realize the sneeze wasn’t an evil omen of impending disaster.”

As you have found a regular pattern allowing you to make a 7% return in 30-60 days, an annualized return of 50%-125%, I suggest you leave blog commenting and found the world’s best hedge fund.

10 Andrew' August 27, 2013 at 10:41 am

And short snuff!

11 Salem August 27, 2013 at 12:52 pm

To be fair, he didn’t say or even imply that.

12 JWatts August 27, 2013 at 5:16 pm

As you have found a regular pattern allowing you to make a 7% return in 30-60 days, an annualized return of 50%-125%

He didn’t say the market crashed 7% every 30-60 days, so there wouldn’t be any 125% annual returns.

13 Sam August 27, 2013 at 11:52 am

To crash in every day usage refers to an abrupt change with negative connotations. It gets used in business coverage to contrast a sudden change in the price with a slow erosion of market value. I don’t think it has any other technical significance than that.

14 Z August 27, 2013 at 9:05 am

The fight has nothing to do with the political makeup of Syria. The fight is over natural gas. The Iranians want to run a pipeline from the gas field they share with Kuwait through Syria into Russia. The Saudis and GCC nations want to run the pipeline through Saudi Arabia into Turkey. That’s the economics at play here.

15 vak August 27, 2013 at 10:06 am

Why would anyone want to run a pipeline from the #2 country with largest gaz reserves to the #1 country with largest gaz reserves?

16 Z August 27, 2013 at 10:21 am

The game is about who controls the supply to Europe, particularly Germany. Gazprom controls about a third of the supply currently, with eastern Europe almost wholly dependent on the Russians. The way around this is the through Turkey. In theory, gas could come out of the Caucasus as well as the Gulf.Israel is also sitting on a big gas field, but is years from developing it.

17 Keith August 27, 2013 at 10:59 am

I don’t doubt there is a lot at play in this situation, but your particular theory sounds implausible. Why would anyone start this fight in Syria in order to run a pipeline through that country? Syria is toast for 10 years at least. There won’t be any pipelines run through there at all by anybody. Besides, Iran and Saudi + GCC all have access to sea lanes to transport liquified natural gas. A liquified natural gas plant is only a few billion dollars, much cheaper than starting and sustaining a war, plus it is a sure thing. And then there is the very real possibility that the unrest will spread to your own country. Saudi Arabia, the GCC and Iran don’t want that.

On top of all that, they know the US, the Australians, Greeks, Cypriots, Israelis etc. will all be exporting natural gas soon. It’s not like they will own the market if they just complete one pipeline. The incentives are not that strong for this.

18 yo August 27, 2013 at 12:18 pm

The Greeks? Surely you must mean olive oil.

19 Rahul August 27, 2013 at 12:36 pm

For anything shorter than 3000 km or so, I think pipelines end up being cheaper than LNG carriers.

20 Z August 27, 2013 at 12:57 pm

The facts on the ground say otherwise. The big prize is control of the pipelines into Europe. The Russians want their South Stream project on-line now. That puts everyone else out of the game. That allows them to work with the Iranians to tap into the gulf gas fields. Those lines will run north through Iran and terminate in either the Black Sea or Syria or both. Having Assad as a client helps for a lot of reasons. One is it pleases the Iranians. the other is they get to use Tartus for their Mediterranean fleet.

21 Keith August 27, 2013 at 2:00 pm

There are facts on the ground, but that doesn’t mean your thesis is right. I am sure these countries want energy issues to swing their way, but if we are just talking about the economics of this situation, the return on investment for any pipeline is long gone. Syria, for example, will now be spending all of the money it would get from a pipeline just to rebuild the country and placate the populace, if it still exists as a country.

It just doesn’t make sense especially when sea lanes are available.

22 anon August 27, 2013 at 11:00 am
23 ElamBend August 27, 2013 at 11:02 am

The gas goes to that big market west of Russia and North of Africa. By running the pipeline through Syria, Gazprom keeps a strong control over gas into Europe (as opposed to running a pipeline through Turkey).

I don’t support the theory that this fight is just about the pipeline, though.

24 vak August 27, 2013 at 11:17 am

but that market is all but shut down to iranian exports. International pipeline finacing is a 10 year project (from initial agrement to first flow) that normally involves all three party (the seller, the buyer and whichever country lies in the path).

25 Cambias August 27, 2013 at 11:11 am

I just looked at a map. Syria doesn’t border Iran. Nor does it border Kuwait or Russia. Azerbaijan is between Iran and Russia, and has good relations with Iran, making it a much more suitable candidate for this theoretical pipeline.

Saudi Arabia doesn’t border Turkey, either.

26 Z August 27, 2013 at 1:00 pm

You’re also missing the point. Russia’s interest in Syria is about energy, not the Syrians. Saudi interest is about energy. The French and Brits are interested because of pipeline politics. Again, the economics of this conflict are over energy.

27 Ak Mike August 27, 2013 at 2:30 pm

Notice how Z’s story has changed. At 9:05 (s)he said “Iranians want to run a pipeline from the gas field they share with Kuwait through Syria into Russia.” At 12:57, having possibly looked at a map and noticed that his(her) comment made no sense, Z says that instead the Iranians “get to use Tartus for their Mediterranean fleet.” In short, Z’s claim about natural gas being the driver of the Syrian disturances is malarkey.

28 Z August 27, 2013 at 3:18 pm

Yeah, the Russian, Iranians, Saudis, Qataris and now Europe and the US are involved because….well…you have no idea. You seem to be the sort of fellow who enters a room and everyone wonders who just left.

29 j r August 27, 2013 at 2:50 pm

To what fight are you referring? There are certainly some underlying natural gas issues, but those issues are far from being central. The underlying conflict is a plain old civil war.

30 Wade August 27, 2013 at 12:58 pm

“The fight has nothing to do with the political makeup of Syria. The fight is over natural gas. The Iranians want to run a pipeline from the gas field they share with Kuwait through Syria into Russia. The Saudis and GCC nations want to run the pipeline through Saudi Arabia into Turkey. That’s the economics at play here.”
I disagree. Large numbers of people do not risk their lives in a fight over rights to some gas pipeline. They do, however, risk their lives to feed their families. The Syrian conflict is a result of years of successive crop failures caused by declining rainfall in the entire region and depleting aquifers to grow wheat for export. The conflict in Egypt is also about the rising cost of bread.
Any nation that wants to stop the fighting just has to ship them food. Unfortunately, they will just respond, as they have done for the past 20 years, by having more children. Please take a look at the country’s demographics and food production, and then give me a cogent argument for why a possible gas pipeline in the future might be a reason for family members to fight and die for the last few years.

31 Rahul August 27, 2013 at 1:31 pm

I say neither food nor water nor gas.

It’s the time-honored, ancient tradition of a rival faction edging out a perceived weak incumbent once opportunity presents.

32 The Anti-Gnostic August 28, 2013 at 12:16 pm

I think Syria is instructive on the politics of multiculturalism.

33 anon August 27, 2013 at 2:19 pm

Energy and geopolitics explain state sponsorship of one side or another, not the reasons for the factions themselves fighting.

Crop failures have forced Sunni rural people into the cities, which are populated with the Alawites. This has increased sectarian tensions.

34 Hadur August 27, 2013 at 2:23 pm

There is a massive assumption being made by the “war for gas” crowd here: that a new Syrian regime would pursue a different economic agenda than the old Syrian regime. What if a nation’s economic interests are determined not by the beliefs of its leaders, but by the structure of the outside world?

I say this: having a major pipeline running through your country is beneficial regardless of whether you are a Baathist or a Islamist.

35 Bill August 27, 2013 at 5:01 pm

From the same article:

“Dubai’s DFM General Index plunged 7 percent for its worst decline since 2009 and biggest decline among more than 90 global benchmarks tracked by Bloomberg. Emaar Properties PJSC, the United Arab Emirates’ biggest publicly traded developer, lost the most since January 2010, and Gulf Navigation Holding, whose tanker fleet ship oil and gas, slid 9.4 percent. The seven Persian Gulf benchmarks fell.”

Is the price of oil increasing, or the price and risk of transport.

36 albatross August 27, 2013 at 5:02 pm

Wasn’t there an almost identical story going around about the “real reason” for the US invasion of Afghanistan?

For what it’s worth, if I personally were putting my own money into an expensive, easily sabotaged, hard to defend thing like a gas pipeline, I’d really want to put it someplace very stable. I claim no deep expertise on Syrian politics here, but it’s hard for me to imagine Syria being that country anytime in the next few years, especially if Assad loses power, and the coalition of people fighting him suddenly have to decide who gets to be in charge, lots of former rebel and regime fighters with weapons and years of bloody ruthlessness suddenly are out looking for ways to make a living, the losers are being ethnically cleansed or mass-murdered, etc.

37 Ape Man August 27, 2013 at 7:20 pm

I find it difficult to imagine that Russia would find much strategic usefulness running a pipeline within easy striking range of both Turkey and Israel. S-300 might make any operations more costly, but they would not protect a pipeline. Nor do I understand why Russia would want to give Iran a stick to beat them with. The Russians have a realistic view of the world.

Russians have two good reasons for doing what they are doing. The first is that access to a port on the Mediterranean is very valuable to them even if they have no intention of terminating a pipeline there. The second is that there is good press of a sort in letting everyone know you never abandon your friends.

38 Wade August 27, 2013 at 8:37 pm

“there is good press of a sort in letting everyone know you never abandon your friends”
especially when those friends owe you a considerable amount of money.
Before the western-assisted “revolution” in Libya, the Libyan government owed Russia a great deal of money. Those debts were cancelled by the new, western-backed government in Libya, and the west did not encourage the government to pay those debts. Russia fears that the same thing will happen in Syria, and they have every right to be concerned for the repayment of their debts, given the west’s previous actions.

39 Keith August 27, 2013 at 9:13 pm

How much we talking here? And is it more than the cost of propping up Assad for years?

40 DK August 27, 2013 at 10:06 pm

Propping Assad for years is very profitable – he buys a lot of ammo.

41 ThomasH August 28, 2013 at 9:35 am

The Dubai rulers have too much invested in one small unstable Gulf country.

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