Letter to Prospect, June 2007.

Edward Luttwak’s argument that the Middle East doesn’t matter (The Middle of Nowhere, Prospect, May 2007) is bunk. While some of his points about the chronic Israel-Palestine problem ring horribly true, his willful denial of the real significance of the wider region, and of Iran in particular, is astonishing. To coin a phrase, it’s the oil, stupid.

Luttwak claims the Middle East is irrelevant because it produces little but petroleum. Hasn’t he heard that oil provides 95% of all transport energy and that spikes in the oil price have precipitated every major recession in the last thirty years? He also claims the region is irrelevant because, despite its oil resources, it accounts for just 4% of global GDP. So by his logic, global agriculture, which also accounts for 4%, must be equally trifling. Small problem; without it we’d all starve. Oil is just as fundamental to the modern economy, and similarly undervalued by financial markets.

Luttwak gets it so wrong because all his statistics are backward-looking and irrelevant. Middle East production may have fallen to 30% of world supply, but this is unlikely to last. Non-OPEC production will peak by 2010 or soon after, according to the International Energy Agency, the US Department of Energy, ExxonMobil, Shell and PFC Energy. So if business-as-usual demand forecasts are to be satisfied, OPEC will soon have to provide a much bigger proportion of global supply – almost 50% by 2030 according to the IEA – mostly from the Middle East. That is, if it can.

However there well-justified fears that OPEC output will also peak within the next decade – PFC Energy has briefed Dick Cheney it could happen by 2015 – so dragging global oil production into terminal decline. Since OPEC controls 75% of known reserves – overwhelmingly concentrated in the Middle East – this can only make the region more critical, not less. Particularly if the issue of who gets to consume the remaining oil is decided by some mechanism other than financial markets.

On Iran, Luttwak plays down the risks of its retaliation to any attack on its nuclear facilities by disparaging its armed forces, apparently failing to realize that its real WMD is oil. If attacked, the first thing Iran will do is close the spigots, depriving the market of 2.5 million barrels per day. Iran produces and exports less than it did in 1979, when it played the oil weapon before. But in those days the world had spare production capacity to make good the deficit. Today there is next to none. A small squeeze on the oil supply has a disproportionate effect on the price. A 2.5mb/d hole would be devastating. Look out $200 oil and the deepest recession since the 1930s.

Luttwak is right if he means us to stop invading the Middle East for its oil, but ignore it? I can only assume this article was intended for the April 1st edition and the author missed his deadline.

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