"The Middle East - Tensions Intensify"

Sydney M. Williams

Thought of the Day

“The Middle East – Tensions Intensify”

June 1, 2010

The quietness of the City that greeted my return yesterday was, I hoped but feared not, an omen for a gentle June. May was the worst month since the “Annus Horribilis” that was 2008, in terms of the severity of its decline; the magnitude of its volatility was the worst since early 2009.

The “flash crash” of May 6 put the fear of God into the psyche of investors; as well it should, since the authorities have yet to lay blame. They have told us who is not responsible – fat fingers, hackers or terrorists – but have not yet determined the culprit. However, it seems to me that there is little question that high frequency traders (either through omission or commission), and their treatment of stocks as casino chips, played a significant role.

While the participation of these players must be addressed to restore confidence in our markets and to permit the markets to function smoothly as raisers of capital, of more immediate concern, in my opinion, is the heightening tensions in the Middle East – this time stemming from Israel’s boarding of the Turkish-flagged Mavi Marmara, reportedly bringing humanitarian aid to Gaza. Failing to heed repeated calls to turn back and a warning that commandos would board the ship, Israel’s naval seals boarded and were attacked by a knife and pipe-wielding crew, with at least one being tossed overboard. Subsequently Israelis opened fire and nine crew members were killed.

It has become politically correct to trash the one Democracy in the Middle East. Israel is already considered “Peck’s Bad Boy” by Europe and a growing constituency in the United States. The decision by the Turkish group, Insani Yardim Vakfi, to run Israel’s blockade was a case of “kicking the dog while it is down” and was a deliberate and provocative action designed to place Israel in a “no-win” situation. For ten years, since the Al-Aqsa Intifada broke out in September 2000, Israel has had in place a naval blockade of Gaza. Hamas, which governs Gaza, has pledged to eliminate Israel. Nevertheless, humanitarian goods are shipped daily to Palestinians in Gaza, via both Israel and Egypt. The goods are inspected for the possibility of weapons that can be used for bombardment of Israel.

Turkey has been anxious to play a bigger role in the region, as we recently saw in their (and Brazil’s) agreement with Iran for nuclear fuel. In contrast to Israel, for Turkey this looked like a “win-win” situation. If the flotilla reached Gaza, the ten-year-old blockade could be deemed to have failed. If the ships were attacked, Israel would find itself increasingly isolated. And Turkey’s standing in the world would rise.

The seriousness of the situation can be seen in Turkey’s withdrawal of their Ambassador to Israel and Israel’s statement urging their citizens in Turkey to leave. Prime Minister Netanyahu returned home, thereby delaying a planned visit with President Obama.

The U.N. Security Council met yesterday and condemned Israel’s action, but did not impose sanctions; they ordered an investigation into the matter. The United States urged Israel to conduct its own investigation.

The importance of the Middle East to our energy needs remains critical and, despite the fact that neither Israel nor Turkey is important in that regard, any flare-up will have consequences. British Petroleum’s spill in the Gulf is another visible manifestation of what will continue to be our dependency on imported crude; for it is obvious all deep-water drilling has been tabled. And with regulation tightening everywhere, all drilling is going to become more expensive. There are no free lunches. With many shallow-water wells and the Anwar Oil Fields off limits and adequate alternative sources of energy, such as solar and wind, years in the future, our dependency on imported energy will remain.

Tensions in the Middle East have again intensified – not a positive factor in a fragile global economy struggling to rebound.