The ISIS Caliphate: How Much Will it Cost the U.S., China and the Rest of the World?

In just a few weeks, Iraq has moved closer to a triangular disintegration. At the same time, the jihadists have advanced dramatically. Adverse scenarios cast a dark shadow over energy prices and growth prospects worldwide.

In late March, the IMF mission met Iraq’s government leaders, central bankers, oil chiefs and senior executives. “Iraq maintained macroeconomic stability in 2013,” the mission concluded optimistically. “Inflation declined slightly… reflecting stable world food and fuel prices. Economic activity is projected to strengthen in 2014, with GDP growth rising to over 6 percent…”

Yet, the Islamic State of Iraq and Levant (ISIL) was steadily escalating activities from Iraq to Syria and Turkish border, while moving closer to oil fields. Despite violence and beheadings, the IMF only refers to understated “security situation.”

Instead of pushing for crisis support, IMF advised Iraq to scale down excessive commitments for “security, social assistance, and pensions” in order “to preserve stability.” If the stunning advice feels out of place, it should. In fact, the mission did not even visit Baghdad. It met the Iraqi notables in Amman.

It is the same lack of sensitivity coupled with utter disregard of realities that paved way to the current chaos in Iraq.

Policy blunders

In the Bush era, the administration’s neoconservative hawks believed that the fall of Saddam Hussein would be the first domino to tip other autocratic states in the region in the glorious march toward democracy. But that domino theory reflected gross misjudgments that could violently destabilize the region over time, as I argued at the time.

In March 2003, a US-led military coalition, with some 250,000 US troops, entered Iraq from Kuwait. The regime of Saddam Hussein fell barely a month later. The total war costs were estimated at $1.4-$2.2 trillion (Congressional Budget Office) to $3.5 trillion (Joint Economic Committee of Congress).

In the subsequent years, Iraq completed a transition to a plural political system, with the beginning of elections in 2005. But its realities were more reminiscent of the post-Tito Yugoslavia.

As Ambassador Peter Galbraith argued in his The End of Iraq (2006), Iraq was disintegrating into three parts under Kurd, Shiite and Sunni leadership. Yet the idea of the partition of Iraq was not something that Washington could accept. To the Bush administration, freedom had won. To the new White House, the point was to withdraw.

Iraq was now “sovereign, stable, and self-reliant,” as President Obama put it. But in reality, Iraq was falling apart, unstable and reliant on US aid. Between 2003 and 2012, the latter exceeded $57 billion.

Predictably, old unresolved differences resurfaced in mid-2012 and turned Iraq into a battlefield between the armed Sunni (Al Qaeda, jihadists of Levant or ISIS, Naqshabandi Order, ex-Saddam military commanders, and Sunni tribal leaders), Shiite groups (Sadr faction and Shiite Militias) and the Kurds (Kurdistan Regional Government).

As political rifts erupted into a sustained uprising in December 2013, international media attention was in Ukraine. ISIL took control of several cities in Anbar Province, including the key city of Fallujah in early 2014, which paved the way to the capture of Mosul and other Sunni cities by June.

Oil concerns

Iraq has the fifth largest proven crude oil reserves in the world. In 2012, its major export destinations include both advanced economies in Europe (20%), US (19%), and South Korea (11%), and large emerging economies, including India (19%), China (13%), and other Asia (8%).

With its shale gas revolution, the US is less exposed to adverse scenarios than its major allies. In contrast, Europe, which is highly dependent on Russian oil, is already struggling with the Ukraine/Russia crisis.

From a low of $90 per barrel in January, crude oil closed at $107 last week. That’s an increase of nearly 10 percent in a month. In the US, gas prices are rising over jitters about Iraq oil. In Europe, airline shares are falling. In Asia, the price of gold is gaining. In India, oil imports are putting pressure on the rupee.

China buys about half of Iraq’s oil exports. China National Petroleum Corp, the mainland’s largest oil producer, has four projects in Iraq, which makes it the largest foreign investor there. Chinese investors are located mainly in Southern Iraq, whereas the turmoil has taken place in northern parts of the country, so far.

In the short-term, the crisis will increase oil prices in China; a longer-term scenario would compel Beijing to increase its oil imports from other producers, including Russia, Iran, and Oman.

At the recent 6th China-Arab States Cooperation Forum in Beijing, President Xi Jinping called upon Arab nations to upgrade their strategic relationships with China, by deepening bilateral cooperation from finance to energy and space. In 2013, China surpassed the US as the world’s largest net importer of crude oil and other liquid quells.

In the medium-term, US oil reliance on the Middle East is steadily decreasing, while China’s is steadily increasing. In Washington, this is seen as vulnerability because it makes China more dependent on Arab oil. In Beijing, it is perceived as an opportunity because economic interests support strategic cooperation.

The 21st century caliphate

Despite speculation about US-Iran cooperation in Iraq, Washington’s grumbling about Shiite premier Maliki led Iran’s supreme leader to reject US action in Iraq. Instead, Ayatollah Ali Khamenei accused Washington of trying to retake control of Iraq by exploiting sectarian rivalries.

Meanwhile, ISIL is tightening its grip along the Syrian border hoping to create a caliphate power base in Iraq and Syria.
In its Global Trends report a decade ago, the US National Intelligence Council (NIC) still incorporated a scenario of a “New Caliphate” in the Middle East. It followed the struggles of the jihadists in trying to wrest control from traditional regimes.

After the global crisis, the scenario was put on the back burner. Analysts felt that stability had increased in the region. Among some external observers, I argued to the NIC representatives that it was a mistake.

Perceptions at Washington had little to do with realities in Iraq. Further, the scenario would become more pressing as the aftermath of the global crisis would diminish growth prospects across the Middle East.

Currently, the jihadists are praised in Iraq, for making cities safer, providing services and freeing people from Maliki’s corrupt rule. But if ISIL has an opportunity to consolidate its rule, it is likely to apply its version of sharia with public floggings, amputations, and beheadings. That’s when a new period of counter-counter-violence is likely to follow.

Adverse scenarios

Only a year or two ago, energy analysts spoke glowingly about the Iraqi-Chinese future. By 2035, some expected 80 percent of Iraqi production to go to China. To Beijing, it would have meant greater diversification and stability of oil supplies. In Baghdad, it would have supported years of economic development, growth and prosperity.

If the Iraq crisis proves protracted, China will endure, but Iraq will split. Ironically, Washington’s anti-jihad policies have given rise to a new and ferocious generation of jihadists.

To the emerging world, that’s bad news. Unlike the advanced economies that experienced their most energy-intensive growth decades ago, emerging economies, such as China, are amidst their most energy-intensive stage, while in other cases, such as India and several African nations, that period will soon be ahead.

To the advanced world, truly adverse scenarios are intolerable because they come with price increases up to $150. In the US, it would stall the recovery. In Europe, it would push the region back into a severe recession. In Asia, it would derail Japan’s reform agenda, slow China’s growth and rebalancing, and put the rise of emerging Asia on hold.

What Iraq needs is effective stability, law and order that are enforced by multipolar cooperation – not by one or another major Western power that represent a legacy of imperialism in the region.

The original version was published by China-US Focus on June 24, 2014

One Response to "The ISIS Caliphate: How Much Will it Cost the U.S., China and the Rest of the World?"

  1. oneeye1leg   June 26, 2014 at 3:01 am

    'In the medium-term, US oil reliance on the Middle East is steadily decreasing, while China’s is steadily increasing. In Washington, this is seen as vulnerability because it makes China more dependent on Arab oil. In Beijing, it is perceived as an opportunity because economic interests support strategic cooperation. '

    How can this be an opportunity for Beijing if strategic cooperation entails dealing with a complex and volatile part of the world?