At the recent OPEC meeting, Saudi Arabia decided to double down on their strategy to pump as much oil as they can in the short run. What is being missed here is who their real target is. While shale drillers get all the attention from Americentric investors, the reality is there is a lot more at play here. As I demonstrated a few weeks ago, deep water drillers and Canadian oil sands are at far more long-term risk than shale drillers due to their high cost capex requirements and a need for plays to be profitable for very long periods to be economic.
More importantly than companies that are feeling financial pain are countries that are feeling economic pain. Nations such as Iran, Iraq and Russia desperately need oil prices to be near $100/barrel. Libya, Algeria, Nigeria and Venezuela among others need much higher oil prices to make ends come close to meeting. Only Saudi Arabia and other nations of the Gulf Cooperation Council States can take these low prices much longer.
What really gets missed in this oil collapse is that Saudi Arabia’s drilling policy is a defacto economic war on Iran and Russia, as well as, a shot across the bow of both Iraq and Venezuela who both have histories of non-compliance with OPEC limits. The economic war in Iran is based upon a sincere hatred for the country and feeling threatened by them. Saudi Arabia has clear justification to feel threatened as Iran backed terrorists are knocking on Saudi Arabia’s southern door from Yemen, on top of, a long list of historical transgressions.
Causing Russia pain is a byproduct of the more targeted financial war on Iran and high cost oil producers. Saudi Arabia has reached out to Russia multiple times now because they certainly realize they are playing a dangerous game that they should try to diffuse. Ultimately, Russia will play a key role in oil prices coming back. How that manifests is uncertain. Could it be using attacks purportedly on ISIS to blow up critical oil infrastructure? Could it be supporting Iran’s terrorist network indirectly so that they can disrupt oil production and flow? I don’t know, but both ideas seem very plausible.
I’ve talked about the possibility of escalating conflict in the Middle East before. Not only do I think it is becoming more likely by the day, but I think there is more to the story. Let’s head down the rabbit hole. Hold on, it’s going to be a deep dive that will require very creative tactical thinking about outcomes and how to arrive at desired locations.
It appears to me that the United States is content to largely step aside and let the regional conflicts play out. I think the evidence largely supports my supposition. The U.S. left Iraq knowing it was vulnerable, dramatically reduced forces in Afghanistan and has been slow to react on Syria. Let’s consider Iraq.
When George W. Bush stated that the war against terrorism would be a long war, he certainly had a plan. Among the first things he did was invade Iraq and topple Saddam Hussein. The move into Iraq was purportedly to find weapons of mass destruction, however, none were ever found, although there was some evidence that some chemical weapons escaped to Syria (which now makes sense as some chemical weapons were used in Syria’s civil war). Weapons of mass destruction took center stage in the media and the debate over whether invading Iraq was the right thing to do in hindsight. I maintain that looking to confiscate weapons of mass destruction was a distraction.
The Bush’s, James Baker and others in that group had long-term relationships with Saudi Arabia. The business they did, included the creation of the petrodollar which resulted in hundreds of billions being invested into America from wealthy Saudi families. The relationships were built upon mutual economic benefit. After the 9/11 attacks happened and the Bush administration realized that most of the attackers were Saudi Arabian, there was a deep sense of betrayal. Some conspiracy theorists postulate that the Bush family conspired on 9/11. I think this is way off base to the point of tin hats.
I think the Bushes believe what I do which is that Saudi Arabia allowed extremists to develop, either by neglect, or so they could be used strategically through manipulation. Either it backfired or was simply a case of rabid dogs getting off the leash, or possibly Saudi Arabia really attacked us to deepen the with the U.S. In any case, the relationship with Saudi Arabia changed that day from one of mutual benefit to one of the U.S. seeking the upper hand. Among the Bush administration’s new goals was to become much less reliant on the Middle East for oil.
Just a few short years after 9/11, American oil shale, which had been buried since several companies explored opportunities in the 1970s, suddenly became unearthed with upgraded technology. Remember, fracking has been around for a very long time. Horizontal drilling was the breakthrough. (See this article for a history of fracking: http://oilprice.com/Energy/Crude-Oil/The-Real-History-Of-Fracking.html)
With Saudi Arabia now a suspect the U.S. needed a way to bring them back in line. One way would be to open them up to threat from Iran. The core reason for the invasion of Iraq then, was I believe to remove the wall between Iran and Saudi Arabia that America had erected. Iran could not threaten Saudi Arabia so long as Iraq was between them. Saddam was a handy villain when we needed one.
Today, the U.S. is clearly okay with more war in the Middle East. Why? The easy answer is that we don’t need them as much for oil now. If need be we can switch to domestic, Canadian, and coming soon, Mexican supplies for most of our needs if it really came to that. There’s far more to the United States drift away from being a Middle Eastern policeman and positioning with Saudi Arabia though.
Nuclear weapons are a real threat if Iran or Saudi Arabia would attain such capability. Up until the deal to lift sanctions on Iran, I always presumed that nuclear weapons would be developed by Iran and answered by Saudi Arabia. I think that is such a scary possibility that the United States, under George W. Bush, began the process of counteracting that threat. The first step, already mentioned, was taking down the security wall between Iran and Saudi Arabia that we had built, Saddam Hussein’s Iraq.
Why would that be an important step? Because it would force Iran and Saudi Arabia to either fight it out or come to a negotiated peace. I think it is clear what direction things are going. It also saps both nations of finances which could be used for developing nukes. Either way, war or negotiated peace, the U.S. and Russia will be able to assert more influence on the Middle East and keep it from going nuclear. In the meantime, both us and our “frenemy” Russia are selling billions in second rate weapons systems to Saudi Arabia and Iran, another sapping of their economic power.
This is an outline of what I think could be a compelling book. There is a lot of good material out there that backs up the thought process. Interestingly, and I haven’t read it yet, Stratfor put out its December Compass for global executives titled “The Long Road to More Oil Demand.” I’ll read it and talk about it later, but it sure seems to me that oil executives are fully aware that demand for oil is peaking.
Ultimately, Saudi Arabia is first and foremost trying to cripple Iran’s regional ambitions. But, defending its market share for oil now is also crucial since it will likely be the last time they have to do it. The path to higher oil prices won’t be nearly as long as many think, the deep water executives already know it’s a lost competition for market share that will ultimately start to collapse in about the late 2020s.
The oil collapse denouement is happening now. By summer, prices will be heading the other way. I am still putting the finishing touches on my updated oil and gas report. You can already see a very important chart I created in the forum oil and gas section that has 56 companies profiled and color coded for different financial metrics. What you’ll see is that the larger market cap companies are in better shape than smaller. I have marked companies on various levels of interest to buy this winter. I’ll add a key to the full report.