The recent drop in the price of oil has had widespread negative consequences for Canada and many other net oil-exporting countries. It has also had dire consequences for the United States. The fracking industry has seen lay-offs, rig closures, and the beginnings of consolidation; the smaller outfits are becoming more and more attractive to large corporate buy-outs as their over-leveraged business models are being slaughtered by dwindling margins. We have been told that lower gas prices are good for the average consumer, but how good can it be if it takes out their entire economy? The petro-dollar scheme, it would appear, is showing signs of stress.
Meanwhile, strategic reserves and storage facilities are filling up fast. It has been estimated that all the extra storage space left in the USA will be full by the end of May. According to the American Petroleum Institute (API) last month saw the biggest build-up of US oil reserves in 34 years (at least.) Most countries that can afford to buy more oil are also adding to their reserves; and who can’t at these prices? Stockpiles are at an all-time high, and not just in the USA; China is also buying a lot of oil while the prices are near record lows. When all the storage capacity is used up, oil will be dumped onto the market driving the price down even further. Yet, the algos aren’t crashing; nobody is putting much pressure on the Saudis to cut production, the markets are not in a panic, and there seems to be a laissez-faire attitude towards the whole debacle. Surely this must be temporary. Maybe things will turn out for the best, but how? We’ll get back to this in a moment.
The Arab spring has brought about many changes in the middle-east. Egypt, Bahrain, and Yemen have seen meaningful change since 2011, and they are not alone. There has been a political awakening in some parts of the region, and there are now new actors taking the stage. ISIS has become a force thanks to the backing (either direct or indirect) of the Saudi and American governments; a renewed call for a caliphate has re-awoken a new generation of Arabs who want to assert themselves internationally. There are grass-roots political movements springing up all around the region and even spilling into northern Africa. It seems that change is all around.
Afghanistan was invaded to find Bin Laden, Hussein was taken out (in part) because he started selling oil in Euros, Khadaffi was killed because he pushed for an African gold-backed currency, Assad had a problem with Israel taking more (oil-rich) land, Bahrain was invaded by Saudi Arabia, and Gaza was destroyed (again) over natural gas reserves on the Mediterranean coast. However, these were all state-sponsored acts. Popular rebellion replaced Mubarak, Saleh, and Madi amongst others.
Much like the three-hundred years of wars between Catholics and Protestants, Islam has also faced centuries of sectarian violence. This may soon be coming to a head. For over a thousand years, Sunnis and Shiites have been at each others’ throats. The roots of their modern-day rivalry can be traced to two central powers, namely Iran and Saudi Arabia; but their conflict is not purely philosophical as there is a prize which will determine the overall winner of this game: Mecca. Saudi controls Mecca, Iran wants to control Mecca, and ISIS wants to destroy Mecca. It is true, Iran has never invaded a foreign country, but they have used proxy states, and they are preparing to do so again.
2011-12 was a turning point for the country of Yemen. The Yemeni uprising saw the legitimization of the Houthi movement (which had been active since 1992) and the resignation of US ally Ali Abdullah Saleh. His replacement, Abd Rabbuh Mansur Hadi (also a US ally) was overthrown in January of 2015, also by the Houthi movement. The Houthis are funded by Iran.
Iran has a relatively strong naval presence in the Straits of Hormuz and has been sending funding and supplies into Yemen (to the Houthis) by sea. Mecca, as it happens, is only four-hundred kilometers up the coastal highway (near Jeddah) which runs through Saudi Arabia to the northwest.
What would happen if the Iranians started a war against the Saudis by using a proxy state such as Yemen? Geographically speaking, most of the Saudi population is in the southwest and most of the oil is in the northeast. Iran is just across the strait to the northeast and could easily destroy much of the Saudi oil infrastructure (wells and pipelines) if it were to launch a combined air and naval strike. This could be achieved rather quickly, but the bloodshed would largely take place on the road towards Mecca.
The global ramifications to the oil industry would be severe. Needless to say that the American forces would support the Saudis against Iran, as would Israel, but their presence in Yemen is now zero, and they were forced to leave behind much military hardware for the Houthi forces to pick up. Maybe Qatar will pick up the slack.
So who would back Iran? Henry Kissinger famously said that, “You can’t make war in the Middle East without Egypt and you can’t make peace without Syria.” Egypt would have to get involved and ISIS would likely move in from the northwest. Much of Iran’s troops (who are presently engaged in Syria) would be re-deployed to attack Saudi Arabia from the sea. Bahrain would want a piece of the action, as would Kuwait. This would leave the Houthis to attack from the south, based in Yemen and supported by Iran. All this could ease the pressure on Assad.
Have the Saudis (and other regional actors) been stockpiling oil in preparation for a war with Yemen? Have the Americans been stockpiling oil (while it is still cheap) knowing that war in Saudi is inevitable? Is war (the epitome of disaster capitalism) the only answer to save the American economy and the US shale industry? Will the destruction of Saudi infrastructure bring about a global surge in oil prices to the benefit of the USA (and, ironically, Russia) and to the detriment of China? What will happen to the US economy when oil hits $150/barrel, or more; and will it be enough to offset the petro-dollar arrangement? Will this bankrupt energy-dependant Europe?
If Europe and China are both negatively impacted by a permanent spike in oil prices, this will leave the USA and Russia as the sole players in the global game. Only time will tell; but just as things in the middle-east couldn’t get any worse, once again, they have.