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Explanations abound as to why the Maliki government decided to upset the status quo by launching a military operation to reduce the power of the Mehdi forces operating in Basra. Most of these center on intra-Shiite power struggles and the extent of Iranian influence in Iraq’s future.

Since 2003, oil exports from Basra have only occurred with the consent of the local groups that share, officially or unofficially, in the revenues. Last week’s attack shows that the Maliki government does not have the military strength to dislodge the pro-Sadr forces from Basra and will have to acquiesce in the revenue and power sharing for the foreseeable future.

Tensions are still high in Baghdad and Basra. Many observers are worried that the increased fighting, curfews, as well as power, food, and water shortages, could threaten the Maliki government and the U.S. position in Iraq.

3. China

Reports from China make it clear that Beijing does not anticipate any significant problems from a slowing U.S. economy and expects that GDP growth in 2008 will be a robust 10.7 percent. If Beijing is correct that increasing domestic demand coupled with exports to affluent oil-exporters and other states will keep the economy humming, there are serious implications for worldwide demand for oil and coal over the rest of the year.

Chinese oil imports during January and February increased by 9.5 percent. Last week, renewed fuel shortages, the worst in three years, were spreading across China as the government struggled to overcome the problem of increased import prices vs. fixed retail prices. This situation has sparked rumors that have led to hoarding in anticipation of higher prices.

Government oil refineries, under orders to produce as much gasoline and diesel as possible, processed 407 million barrels of oil during the first two months of 2008, up 7.4 percent from 2007. Output of gasoline was up by 4.1 percent while diesel refining increased by 12.5 percent.

Despite increased imports and refining during the past winter, reports of widespread shortages in March suggest that increased imports and pressure on world markets are likely. PetroChina announced last week that it will be importing 1.7 million barrels of finished gasoline during April to help relieve the shortages. Given the importance Beijing places on having the Olympic Games run smoothly next August, it is likely the government will import as much fuel as necessary to overcome the shortages.

4. Food Shortages

Last week saw widespread reports of rapidly increasing food prices across the world that bring into question just how long government policies of increasing biofuel production will last. High food prices and shortages have already led to civil disturbances around the world and more troubles are expected.

The most serious problem is that the price of rice, which is the main food of nearly half the world’s population, has nearly doubled on the international markets in the last 3 months. Rice exporters such as Thailand, Vietnam, Egypt, India, and the Philippines are considering or have already restricted or halted rice exports.