The civil war in Libya continues but much of Iraq is now in the hands of the rebellion. As the revolt spreads, Qaddafi Masses Forces in Tripoli for a final showdown or a counterstrike against the rebels.

As rebellion crept closer to the capital and defections of military officers multiplied, Col. Muammar el-Qaddafi called on thousands of mercenaries and irregular security forces on Wednesday to defend his bastion in Tripoli, in what residents said was a desperate and dangerous turn in the week-old uprising.

Distrustful of even his own generals, Colonel Qaddafi has for years quietly built up this ruthless and loyal force. It is made up of special brigades headed by his sons, segments of the military loyal to his native tribe and its allies, and legions of African mercenaries he has helped train and equip.

Witnesses said thousands of members of this irregular army were massing on roads to the capital, Tripoli, where one resident described scenes evocative of anarchic Somalia: clusters of heavily armed men in mismatched uniforms clutching machine guns and willing to carry out orders to kill Libyans that other police and military units, and even fighter pilots, have refused.

But amid spreading rebellion and growing defections by top officials, diplomats and segments of the regular army, Colonel Qaddafi’s preparations for a defense of Tripoli also reframed the question of who might still be enforcing his rule.

Colonel Qaddafi, who took power in a military coup, has always kept the Libyan military too weak and divided to do the same thing to him. About half its relatively small 50,000-member army is made up of poorly trained and unreliable conscripts, according to the Center for Strategic and International Studies.

Colonel Qaddafi’s own clan dominates the air force and the upper level of army officers, and they are believed to have remained loyal to him, in part because his clan has the most to lose from his ouster.

But perhaps the most significant force that Colonel Qaddafi has deployed against the current insurrection is one believed to consist of about 2,500 mercenaries from countries like Chad, Sudan and Niger that he calls his Islamic Pan African Brigade.

Elsewhere, there were signs that Colonel Qaddafi’s forces were refortifying. For the first time, witnesses said, at least four army tanks had rolled into the streets of the capital.

Saudi Arabia King Rolls Out Reforms

Fearful of uprisings in the region Saudi Arabia King Rolls Out Reforms

Saudi Arabia’s King Abdullah returned to the kingdom Wednesday after a three-month absence for medical treatment and introduced a number of nonpolitical reforms amid regional uprisings that have toppled regimes in Tunisia and Egypt and infected neighboring Bahrain.

The social and economic overhaul, estimated to cost around 135 billion Saudi riyals ($36 billion), include housing support, funding to offset inflation and guarantee of payment for students overseas, according to a series of royal decrees published on the official Saudi Press Agency, or SPA. They come as political upheaval continues to sweep the Arab world.

“The measures are paying particular attention to housing, unemployment, education and helping the brunt of Saudis who work for the public sector be better protected from cost of living pressures. The unemployment benefits are the first of its kind in Saudi Arabia,” said John Sfakianakis, chief economist at Banque Saudi Fransi. “The message from King Abdullah is that he’s aware of the challenges facing the economy and steps are taken to address immediate and more medium-term issues.”

“Saudis want more from the king and his regime. They want more political and social freedom, more rights for women, better education and more job opportunities,” said a Saudi businessman who declined to be named. “The region is changing rapidly and the Saudis want to feel this change in their country too.”

A few hundred Facebook users called for a “day of rage in Saudi Arabia” earlier this week, demanding more political freedom and an elected leader. A few Facebook pages called for protests on March 11 in the Arab world’s largest economy, but it was too early to judge if these demonstrations will take place.

Bahrain King in Saudi Arabia to Discuss Unrest

Please consider Bahrain King in Saudi Arabia to Discuss Unrest

A day after one of the largest pro-democracy demonstrations this tiny Persian Gulf nation had ever seen, its king was in Saudi Arabia, a close ally and neighbor, to discuss the unrest engulfing the region.

The visit of King Hamad bin Isa al-Khalifa on Wednesday came just as the aging Saudi ruler, King Abdullah, returned to the country after three months of medical treatment in the United States and Morocco.

King Hamad had already tried his own payout — offering $2,650 to every Bahraini family in the days before large protests broke out more than a week ago — but the economic concession was not enough to stem the tide of opposition from the country’s Shiite majority. Sunnis, the majority in Saudi Arabia, also form the ruling class in Bahrain, where Sunnis are a minority.

In a nation of only 500,000 citizens, the sheer size of the gathering on Tuesday in Manama, Bahrain’s capital, was astonishing. Tens of thousands of men, women and children, mostly members of the Shiite majority, formed a ribbon of protest for several miles along the Sheik Khalifa bin Salman Highway as they headed for the square, calling for the downfall of the government in a march that was intended to show national unity.

“This is the first time in the history of Bahrain that the majority of people, of Bahraini people, got together with one message: this regime must fall,” said Muhammad Abdullah, 43, who was almost shaking with emotion as he watched the swelling crowd.

“It is a revolution,” said Hussein Mohammed, 37, a bookstore owner and volunteer for Al Wefaq. “It is a big revolution. It is unbelievable.”

Three Questions

  1. Given that payouts failed in Bahrain, will payouts work in Saudi Arabia?
  2. Saudi Arabia is much wealthier of course, but are Saudi concerns about money or political freedom?
  3. How long can can King Abdullah last at age 86, given he is not in especially good health?

Please note that the crown prince and next in line is Prince Sultan bin Abdul Aziz Al Saud, and if anything, Sultan is even in worse medical condition.

In 2004, [Sultan] was diagnosed with colon cancer and reportedly underwent several corrective surgeries. He underwent an operation to remove an intestinal polyp. In April 2009, it was reported that he was, again, seriously ill, and had spent several months in New York City at New York Presbyterian Hospital undergoing surgery and shuttling thereafter between the United States and Agadir, Morocco. He has spent much of the last year abroad for medical treatment and rest.

A leaked March 2009 diplomatic cable from WikiLeaks showed that U.S. diplomats view Crown Prince Sultan as “for all intents and purposes incapacitated”. Sultan, who will be eighty-seven this year, is believed to be suffering from a form of dementia, possibly Alzheimer’s disease.

Bonus 4th Question: Will the people readily accept the new king?

Violence Shakes Kurdistan

The New York Times reports Iraqi Kurdistan, Known as Haven, Faces Unrest

This is a place that calls itself “the other Iraq,” a haven of social and economic stability that largely escaped the bloodshed and chaos that have ravaged the rest of the nation.

But over the past week a wave of sometimes violent unrest has shaken Kurdistan, posing a rare challenge to the political powers that have led Iraq’s mountainous north for decades, during and after Saddam Hussein.

Thousands of people — many of them university students — have been filling the central square here to wave Kurdish flags and voice the calls for change that echo those ringing across northern Africa and the Middle East. The protests here, reflecting a long-festering anger with government corruption and partisan politics, have grown larger in recent days, and have support from this eclectic city’s legions of poets, writers, artists and unions.

“Everyone is angry,” said Asos Hardi, manager of Awena, one of the few newspapers not tied to one of the region’s political or religious parties. “Everyone from the taxi driver to the shopkeeper to intellectuals and students.”

Balance of Power Shifts Towards Iran

The New York Times reports Arab Unrest Propels Iran as Saudi Influence Declines

The popular revolts shaking the Arab world have begun to shift the balance of power in the region, bolstering Iran’s position while weakening and unnerving its rival, Saudi Arabia, regional experts said.

While it is far too soon to write the final chapter on the uprisings’ impact, Iran has already benefited from the ouster or undermining of Arab leaders who were its strong adversaries and has begun to project its growing influence, the analysts said. This week Iran sent two warships through the Suez Canal for the first time since its revolution in 1979, and Egypt’s new military leaders allowed them to pass.

The Sunni leaders in Saudi Arabia and Bahrain accuse their Shiite populations of loyalty to Iran, a charge rejected by Shiites who say it is intended to stoke sectarian tensions and justify opposition to democracy.

The uprisings are driven by domestic concerns. But they have already shredded a regional paradigm in which a trio of states aligned with the West supported engaging Israel and containing Israel’s enemies, including Hamas and Hezbollah, experts said. The pro-engagement camp of Egypt, Jordan and Saudi Arabia is now in tatters. Hosni Mubarak of Egypt has been forced to resign, King Abdullah of Jordan is struggling to control discontent in his kingdom and Saudi Arabia has been left alone to face a rising challenge to its regional role.

“I think the Saudis are worried that they’re encircled — Iraq, Syria, Lebanon; Yemen is unstable; Bahrain is very uncertain,” said Alireza Nader, an expert in international affairs with the RAND Corporation. “They worry that the region is ripe for Iranian exploitation. Iran has shown that it is very capable of taking advantage of regional instability.”

“Iran is the big winner here,” said a regional adviser to the United States government who spoke on the condition of anonymity because he was not authorized to speak to reporters.

For now, Iran and Syria are emboldened. Qatar and Oman are tilting toward Iran, and Egypt, Tunisia, Bahrain and Yemen are in play.

“If these ‘pro-American’ Arab political orders currently being challenged by significant protest movements become at all more representative of their populations, they will for sure become less enthusiastic about strategic cooperation with the United States,” Flynt Leverett and Hillary Mann Leverett, former National Security Council staff members, wrote in an e-mail.

The balance of power may have shifted to Iran, but Iran is certainly not immune from similar uprisings.

Bidding War For Light Crude?

With all that turmoil, the price of oil has once again spiked overnight. I have some charts below, but first consider Why the Disruption of Libyan Oil Has Led to a Price Spike

Crude oil prices reached $100 a barrel in the United States on Wednesday, the highest price in more than two years, as Middle East oil flows were interrupted this week for the first time since the region’s turmoil began.

Analysts estimate that as many as a million barrels of Libyan oil a day have been removed from world markets in recent days, and investors fear that more oil production could be disrupted if the unrest spreads to other crucial producing nations, like Algeria.

More broadly, economists are concerned that if oil prices stay high this year, they could slow the already fragile global economic recovery. As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of the gross domestic product by half a percentage point within two years.

Libya produces less than 2 percent of the world’s oil, and exports little to the United States. But the high quality of its reserves magnifies its importance in world markets.

Libya’s “sweet” crude oil cannot be easily replaced in the production of gasoline, diesel and jet fuel, particularly by the many European and Asian refineries that are not equipped to refine “sour” crude, which is higher in sulfur content. Saudi Arabia has more than four million barrels of spare capacity and has promised to tap it if necessary, but that capacity is mostly for sour grades of oil.

Should the turmoil in Libya last for more than a few weeks, oil experts predict that European refiners will be forced to buy sweet crude from Algeria and Nigeria, two principal sources of sweet crude for the United States. That would probably push up American gasoline prices, which have already risen 6 cents a gallon over the last week to an average of $3.19 for regular grade.

“It will force all sweet crude refiners into a bidding war,” said Lawrence J. Goldstein, a director at the Energy Policy Research Foundation, an organization partly financed by the oil industry. “Quality matters more than quantity.”

The price of the benchmark American oil, West Texas Intermediate, briefly touched $100 on Wednesday before settling at $98.10 in New York trading, up $2.68 from Tuesday. In London, the benchmark Brent crude rose $5.47, to $111.25.

A gauge of jet fuel prices, known as Gulf Coast jet fuel, soared 10.7 cents, to $2.99 a gallon in the spot market on Wednesday, putting pressure on airlines to raise fares. Meanwhile, diesel prices have risen 4 cents in the last week, to $3.57 a gallon, the highest level since October 2008.

Brent Crude Spikes Near $120

Both Brent and WTI spiked higher early Thursday morning. As happened yesterday, much of the spike retraced, only to shoot up again. Will we see yet another spike tomorrow? While pondering that, here are a couple charts.

Brent Daily Chart

click on chart for sharper image

WTI Daily Chart

click on chart for sharper image

Supply Shock on Top of Speculation

WTI has gone from $75 to over $100 since September. If that rise was a result of a strengthening economy and millions of new jobs it would be one thing. However, it’s not. Much of the rise is speculative and/or a result of a hugely overheating situation in China.

Top that off with a supply shock spike, and there is nothing inflationary about the situation at all. These oil spikes will certainly not help the European or US economies.

Amusingly I read stories that higher oil prices will force the ECB to hike. No they won’t. For starters, supply shocks have nothing to do with inflation. Second, ECB president Jean-Claude Trichet, for all his anti-inflation talk over the years, has turned out to be nothing but a pussycat. Besides Trichet will be gone in October (unless via some emergency he is asked to stay on).

Were Axel Weber to take Trichet’s spot, a genuine hawk would be in line to head up the ECB. However, Weber has bowed out of the race.

The ECB presidency is now up for grabs, and with most of the board on the doveish side, I do not see the ECB hiking anytime soon given sovereign contagion worries are still intact and now there is an oil supply shock on top of it. Nonetheless, the idea of interest rates hikes in Europe is holding the Euro firm for a moment. How long that lasts is anyone’s guess.

Mike “Mish” Shedlock
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