Monday, 2 September 2013

Syrian Implications

A couple of thoughts on the potential impact that an escalation in Syria might have as it relates to the POD:

Syria itself poses little systemic risk, or is even likely to have a marginal impact on the global economy. However, events are playing themselves out in a sensitive area of the world, with a cast of major players. Events could conceivably escalate into an event with global implications.

At this time, its difficult for me to spin a story where countries like China and Russia involve themselves directly in this conflict. My feeling is that the US will proceed with targeted military strikes regardless of how congress votes or what the UN investigators reveal. The content of the investigation will determine how much latitude these dissenting countries will allow themselves in their condemnation. However, I don’t see this dissent taking the form of anything beyond political posturing at this time.

With the major players out of the way, this leaves Syria’s longstanding ally Iran as the sole actor with the clout and capability to undertake actions that would exert influence on events outside of the region.

Here is how I imagine such a scenario playing out:

The US proceed to launch targeted strikes in Syria, Hezbollah or some faction of the Syrian government launches retaliatory strikes significant enough to provoke in-country intervention with the stated goal of regime change. The Iranian regime worries that they will be next. A fully military response ensues. Recognizing their limitations, the Iranian regime falls back on their proximity to, and the importance of the Hormuz Straights in order to inflict as much damage as possible on the west.

Possible? Sure. Plausible? I don’t see it. First, I honestly believe that American strikes will be limited to the responding directly to the alleged use of chemical weapons. Second, the Iranian regime is in a precarious situation. Such events would surely bring about the end of the regime. There would simply be too many parties, with too much at stake to allow such events to transpire. Despite lots of rhetoric to the contrary, this regime has never acted in the crazy and irrational manner that might warrant a pre-mature escalation of this crisis.

Barring actions that would lead them to worry for the continuity of their regime, I have a tough time spinning a plausible scenario that would see them escalate the crisis into the wider region.

Thus leaving as a best guess:  as tragic as this crisis is, the impact on energy markets and global markets will likely be of a transient nature (with risk premium's globally on oil), and the long term impact will be non-existent.

As far as the potential impact for us in Canada. The only real downside might be for the eastern refineries that will be facing a risk premium, for some period of time, on the brent priced crude they rely on. While I don't see any long lasting impact on the horizon, I would expect markets to keep a small premium for the time being. For Albertans selling into WTI markets I don't see any upside unless a long-lasting spread between WTI and Brent (both will likely see some risk premium but WTI's should dissipate quickly) increases the probability of getting more oil to the West Coast (via the Kinder Morgan expansion or Enbrdige's Northern Gateway) or hastens the development of the Energy East Pipeline.

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