In a truly alarming development, Saudi
Arabia is gearing up for all-out crude oil war in the Middle East.
Right now, the world is in a
While countless other outlets have
gone on endlessly about inflation, we have warned repeatedly in these pages
that the "D" word is not dead. U.S. Treasury bond yields, a
harbinger of deflation, have been falling, not rising. Now the broad markets
are falling too.
There is hope that emerging markets
(particularly China) will be able to bail out the world, once again, if the
West slows down and falls back into a funk. But it is a weak, false hope.
China ginned up the economic juice of
recent years through a massive 2009 half-trillion-dollar stimulus program --
far, far bigger than America's stimulus program, relative to the size of the
Chinese economy. China can't do that again without unleashing
The Federal Reserve is similarly
"out of bullets"... and Quantitative Easing 2 did not help the real
economy anyway. So now things are slowing down again, with crisis in the
wings. Deflation pressures are back, as monetary velocity threatens to stall
All of the above is very bearish for
the price of crude oil. It explains why crude oil could fall all the way back to
$60 a barrel under the right combination of events, with long-side commodity
bulls getting crushed to powder.
But there is one very big reason to be
bullish on the crude oil price -- or at least not bearish: The Middle East
could soon be in flames.
Did you watch the Lord of the Rings
movies? Do you remember the scene where the wizard Saruman
is building his subhuman army, preparing weapons in deep fire pits on a mass
Your editor was reminded of that
imagery on reading about Saudi Arabia's latest. The following, via CNN, is
from Nawaf Obaid, a
Senior Fellow at the King Faisal Center in Riyadh:
As the birthplace of Islam and the
leader of the Muslim and Arab worlds, Saudi Arabia has a unique
responsibility to aid states in the region, assisting them in their gradual
evolution toward more sustainable political systems and preventing them from
collapsing and spreading further disorder.
That the Kingdom has the ability to
implement this foreign policy goal should not be in doubt - it is backed by
significant military and economic strength.
The foundation for this more robust strategic
posture is Saudi Arabia's investment of around $150 billion in its military.
This includes a potential expansion of the National Guard and Armed Forces by
at least 120,000 troops, and a further 60,000 troops for the security
services at the Interior Ministry, notably in the special and various police
forces. A portion of these will join units that could be deployed beyond the
In addition, approximately 1,000 new
state-of-the-art combat tanks may be added to the Army, and the Air Force
will see its capabilities significantly improve with the doubling of its high
quality combat airplanes to about 500 advanced aircraft.
A massive new missile defense system is in the works. Finally, the two main
fleets of the Navy will undergo extensive expansion and a complete
refurbishment of existing assets.
As part of this new defense doctrine, the leadership has decided to meet the
country's growing needs for new equipment by diversifying among American,
European and Asian military suppliers.
Few countries are able to support such
considerable military investment, but Saudi Arabia occupies a unique position
in that it has sufficient reserves and revenues to carry out the above
Read it again. Consider the
implications. Saudi Arabia is preparing for WAR.
Mr. Obaid, taking the Saudi point of view, sees it as a good
thing that The Kingdom has the resources to implement "peace through
superior firepower" in the Middle East.
But the whole point is that the Saudis
see the need to gear up for war in the first place...
The Middle East is a long-simmering
cauldron of ancient hatreds and deadly conflicts. The two major players are
the Saudis -- who are Sunni Muslim -- and the Iranians, who are Shia.
Saudi Arabia and Iran hate each other.
They are the Hatfields and McCoys
of the region, on a far more serious scale.
And Saudi Arabia has good reason to
loathe and fear Iran. Were the Saudi power structure
to be toppled, that would leave the Sunni branch of Islam decapitated...
allowing Shia Iran to dominate.
The "Arab Spring" of
uprisings and turmoil is going to lead to war because significant interests
in the region want war. They want conflict. The turmoil and
uncertainty of toppling regimes has created a golden opportunity. Out of
chaos and rubble, new structures can emerge. New power brokers can replace
As the rich player with the most to
lose, Saudi Arabia knows all this. And the Saudis are terrified. That is why
they are ordering a thousand tanks. That is why they are building
"a massive new missile defense
The Kingdom is preparing for local
Armageddon. Too bad all that preparation won't help them, though, because
warfare is no longer broad-based and symmetrical. It is more about terrorism
and guerilla ambush than full-scale attack.
Except when it comes to one country
attacking another in response to a clearly instigated terrorist
event... like the destruction of a major Saudi oil facility...
And by the way, because we are talking
Middle East here, local Armageddon means global Armageddon (as far as crude oil prices go).
With deflationary pressures building,
Western economies slowing, and the China miracle threatening to stall, a
spike in crude oil to $200 a barrel as the Middle East erupts in a giant
fireball would be just about the worst scenario imaginable for the global
Crude oil spiking to that price would
act like a massive non-optional transaction tax. Millions of Americans would
lose the ability to fill up their cars with gas. The transport cost of goods
would go through the roof. Store shelves would be left unstocked,
as the goods became too expensive to shift and a panicked populace had
stopped buying them anyway.
It would be nice if this were all a
bad dream, or just some fantastical movie plot. But it isn't. It is very,
What the Saudis are telling us is
that, sooner rather than later, the Middle East could explode... and we
understand the rationale as to why.
Will you be
ready when the price of crude oil goes to $200 overnight? Ready or not, we
may have no choice.
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originally published here