Brussels Is Bombed, Oil Crashes Below $30, Saudi Arabia and Iran Sever Ties and North Korea Tests a Hydrogen Bomb

Jamaica Homes Global Conflict & Caribbean Impact Review | Published 3 April 2016 | Reporting Period: 3 January – 2 April 2016

Quarterly Briefing

• Saudi Arabia executes Shia cleric Sheikh Nimr al-Nimr on January 2; Iran’s Revolutionary Guard stormed the Saudi embassy in Tehran; Saudi Arabia and several Gulf states sever diplomatic relations with Iran on January 3–4.
• North Korea conducts what it describes as a successful hydrogen bomb test on January 6; seismic monitors record a 5.1-magnitude tremor, though international analysts debate whether it was a full thermonuclear device.
• Oil prices fall to $27 per barrel in January 2016, the lowest level since 2003, as OPEC maintains production despite a global supply glut; Brent partially recovers to around $38 by late March.
• Suicide bombers strike Brussels airport and a metro station on March 22, killing 32 people in coordinated ISIS attacks carried out by the same network responsible for the November 2015 Paris attacks.
• Iran and the P5+1 implement the JCPOA nuclear deal on January 16; international sanctions on Iran are lifted and Iranian assets frozen since 1979 are released.
• A US-Russia brokered ceasefire takes effect in Syria on February 27; the truce holds partially, excluding ISIS and Jabhat al-Nusra, enabling UN humanitarian access to some besieged areas.

Prologue: Oil’s Deepest Fall and the Gulf’s New Confrontation

The first quarter of 2016 opened with two events on consecutive days that defined the quarter’s character: on 2 January, Saudi Arabia’s execution of Shia cleric Sheikh Nimr al-Nimr triggered Iranian protesters to attack Saudi diplomatic premises, leading within 24 hours to the severing of Saudi-Iranian diplomatic relations — a fracture between the Gulf’s two largest powers whose consequences would reverberate through oil markets, regional security and the Syrian civil war for months. The following day, North Korea announced it had detonated a hydrogen bomb, adding the world’s most unpredictable state to the list of apparent thermonuclear powers. Through January, oil fell to levels not seen since 2003, removing the theoretical protection of lower fuel import costs while simultaneously devastating Venezuela’s capacity to maintain any version of PETROCARIBE. The quarter ended with Brussels burning and a partial Syrian ceasefire holding tentatively. As this edition publishes on 3 April, early reports of an extraordinarily large document leak from a Panamanian law firm are just beginning to circulate.

The Saudi-Iran Rupture

The execution of Sheikh Nimr al-Nimr — a prominent Saudi Shia cleric who had spoken out against Saudi Arabia’s treatment of its Shia minority and who was convicted of inciting sectarian strife — as part of a mass execution of 47 prisoners on 2 January immediately inflamed sectarian tensions across the Middle East. Iranian protesters attacked and set fire to the Saudi embassy in Tehran and the Saudi consulate in Mashhad. Saudi Arabia announced it was cutting diplomatic relations with Iran; Bahrain and Sudan followed; the UAE downgraded its relationship. The rupture had immediate implications for OPEC coordination, for the Yemen conflict in which Saudi Arabia and Iran backed opposing sides, for Syria’s war and for the prospects of any diplomatic resolution to the region’s multiple crises. With the two powers now in open diplomatic confrontation, the Gulf’s chronic instability entered a new and more explicit phase.

For Caribbean energy markets, the Saudi-Iran confrontation introduced a new source of uncertainty. OPEC’s already-strained cohesion — Saudi Arabia and Iran had been competing for market share even as prices fell — became structurally harder to manage. Iran, newly freed from sanctions following the JCPOA implementation in January, was expected to restore its oil production rapidly and add supply that would further depress prices. Saudi Arabia signalled it would not cut production to accommodate Iranian recovery. The prospect of coordinated OPEC supply management appeared remote.

Oil at Thirteen-Year Lows: Caribbean Relief with Caveats

Brent crude fell below $27 per barrel in January 2016 — its lowest price since 2003 and a decline of over 75 per cent from the 2014 peak. The fall was driven by a structural imbalance: US shale production had surged, OPEC had declined to cut output, Iran was preparing to increase its own exports, and global demand growth was slowing as China’s economy decelerated. For Caribbean oil importers including Jamaica, the theoretical benefit was significant: lower import costs, lower electricity generation costs and lower inflation. The Bank of Jamaica’s own inflation tracking showed the welcome effect of lower energy prices on the consumer price index.

The caveat was Venezuela. PETROCARIBE, which had provided preferential oil financing to Caribbean nations, was now essentially inoperative: Venezuela’s own production was falling under the weight of mismanagement and the country’s economy was collapsing under oil prices far below what its fiscal breakeven required. The programme that had provided an energy cushion for a generation was gone, and the Caribbean nations that had accumulated PETROCARIBE debt faced their payment obligations without the counterpart arrangement from which the debt had originated.

North Korea’s Nuclear Escalation

North Korea’s announcement of a successful hydrogen bomb test on 6 January — its fourth nuclear test overall — was met with scepticism from international analysts who questioned whether the seismic signature was consistent with a full thermonuclear device; the yield appeared lower than a true hydrogen bomb would produce. Whether a boosted fission device or a true H-bomb, the test represented a clear progression in North Korea’s weapons programme and prompted a new round of UN Security Council deliberations that would eventually result in additional sanctions. In February, North Korea also launched a satellite on a long-range rocket, demonstrating ballistic missile technology applicable to an ICBM. The Korean Peninsula’s security situation was deteriorating and the tools available to the international community to change North Korea’s calculus were evidently insufficient.

Brussels and Syria’s Partial Ceasefire

The March 22 attacks in Brussels — two at Brussels Airport’s departure hall and one at the Maelbeek metro station near EU institutions — killed 32 people and wounded over 300. The attackers were connected to the same ISIS network that had carried out the November 2015 Paris attacks; Salah Abdeslam, the Paris attacks’ surviving planner who had been captured in Brussels on March 18, may have accelerated the timing of the Brussels operation. The attacks were the deadliest in Belgium’s history. Coming four months after Paris and amid the European refugee crisis, they intensified political pressure on governments across the continent on migration, border security and the capacity of intelligence services to monitor radicalised individuals.

In Syria, the US-Russia ceasefire that came into effect on 27 February was partially holding by the end of the quarter: fighting between government forces and mainstream opposition groups reduced significantly in some areas, though both ISIS and Jabhat al-Nusra were excluded from the truce and hostilities involving them continued. UN humanitarian convoys accessed some besieged areas. The Geneva peace talks resumed in March but made no breakthrough on fundamental political questions. The ceasefire was fragile and its sustainability deeply uncertain.

Looking Ahead

As this edition is published on 3 April, early reports suggest an enormous cache of documents from a Panamanian law firm has been leaked to international journalists — the full implications are not yet clear but the scale appears extraordinary. The Syria ceasefire will be tested in the coming weeks. Iran’s oil re-entry to global markets will keep downward pressure on prices, which may benefit Caribbean importers but tests the cohesion of an already fractured OPEC. The US presidential race is narrowing: Donald Trump leads the Republican field; Hillary Clinton is ahead for the Democrats. The Brexit referendum is set for June 23. The second quarter of 2016 begins with as many unresolved questions as the first ended with.

Jamaica Homes Global Conflict & Caribbean Impact Review is published quarterly, examining how wars, geopolitical tensions and major international crises have shaped Jamaica, the Caribbean and their economies.

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