The USA's new Nuke - Shale oil

Interesting things happened in March of 2014. Russia invaded Crimea and the world waited with held breath to see how the world would respond. The response would come rather quickly in the form of sanctions. Sanctions that on the surface looked rather mild. Echoes of Georgia 2008 were feared. As was the case then it appeared now that the West was too preoccupied elsewhere to deal properly with Russian aggression.

The sanctions quietly struck at Russian energy expansion aspirations. One of the results of which is the recent halting of the South Stream Pipeline. Behind the scenes something else was happening in the United States. Shale oil production began pumping at an unprecedented rate. Global production had dropped significantly, but U.S. shale production picked up the slack.

On March 24th the leaders of the G8 decided to suspend Russia's membership effectively becoming the G7. 4 days later Barrack Obama would meet with King Abdullah in Saudi Arabia. The public reason for the meeting was that Obama wanted to "reassure" the King on U.S./Saudi relations. He wanted to make it clear that the United States wold not pursue a "bad" nuclear deal with Iran. Whatever else said or discussed was off the record. My guess is that Obama warned his ally of the impending "Shale Boom". They must have discussed their mutual benefit from it.

Some say that the Shale Boom is anything but a benefit to the Saudi Kingdom. In fact the recent OPEC decision not to cut production was seen as a direct attack on shale production. The theory is that the cost to extract shale oil is too expensive to maintain at a low Price Per Barrel (PPB). With both U.S. Shale and OPEC production high the PPB would be so low that Shale producers couldn't keep up.

So who are the losers and who are the winners in this situation? The Saudis have the only reserves in the area large enough to maintain production at such a reduced PPB. The Iranians simply don't. King Abdullah must have smiled at the thought of prolonged and extended nuclear talks with the west. As long as the talks are extended and sanctions are in place the low PPB can effectively hemorrhage the Iranian economy. It's no coincidence that the clear advantage this gives the Saudis over Iran is similar to the advantage this gives the West over Russia.

Think about it. The only people that can play this game and win from it are the Americans and the Saudis. The economies of both Russia and Iran are nearly solely based off of hydrocarbon sales. In time their currency and economies will buckle.

Eventually the low PPB would have an effect on Shale production...but it would take awhile. But let's say that happens. The shale producers will pull back on production, the PPB would rise and that would reopen the profitability to start production again. This model has effectively turned the United State's Shale production into the modern day economic nuclear weapon. Rather than NORAD the frackers now have their thumbs on the "red button". Ready and willing to press it should they have to. Should a country such as Russia or Iran step out of line the U.S. and Saudi Arabia could tank the global PPB again.

We all noticed when Regional powers such as China, Russia, India, Pakistan, Iran, etc began building up and modernizing their armed forces. The development of new weapons of war has been reported on every front page for the past decade. As tanks roll into Eastern Ukraine, S300 missiles ship to Syria, and satellites enter orbit the most potent weapon of them all was being developed in Southern Texas. The United State's new weapon of war has been developed, tested and as of March 2014 has been deployed on the battlefield. Companies such as Exxon, Marathon and Conocophillips have joined the likes of Lockheed, Boeing and Northrop.

With the Saudi ability to maintain high production regardless of cost and the U.S. ability to manipulate production based off of high or low PPB a new oil production model has been created. That model effectively weaponized Shale oil. But maybe the bigger story here is the diminishing role OPEC will play going forward. You could make the argument that OPEC has been broken by this. Oil is entering a market where those that can manipulate it have changed. Nations that haven't diversified their economies enough will find themselves on uneasy ground.

Why is Oil Crashing? - What can history tell us?

James Fairgrieve was a British geographer and geopolititian in the early 1900’s. One of his theories was that imperialists throughout history had been primarily driven by the search for energy. Over the centuries the political center of the world usually shifts toward which source of energy is relevant at that time.

The 1970’s showed the world just how important hydrocarbons had become to the global economy. The Middle East became the political center of the world. OPEC would reduce oil output and embargo the West for supporting Israel. On top of that, the overthrow of the Shah in Iran would all but hault oil production for Tehran.

1970’s Oil Crisis

The result - oil prices went through the roof. Heavily industrialized countries that depended on oil saw stagnant economic growth. The world found themselves grouped as such:

1. Heavily dependant on foreign oil supplies. Recession imminent. (Western Europe)
2. Partly reliant on foreign oil mixed with a steady domestic supply. (United States)
3. Domestic oil production is the primary source of GDP. (OPEC countries and USSR)

Oil became an extremely powerful tool the world’s geopolitical players would use to impose their foreign policy and ensure their interests.

History would later see Kissinger persuade the Israelis to leave the Sinai and the Golan Heights. The oil embargo would soon be lifted. Oil production would normalize and with that the Brent crude price per barrel would go down.

1980’s Oil Glut

Ronald Reagan would use the 1970’s energy crisis as a playbook for economic warfare. It’s rumored that President Reagan sent CIA director William Casey to Saudi Arabia in 1981 to initiate a lethal strike aimed at the Soviet Union’s pocket book.

The deal - Saudi Arabia was weak in military hardware. They were threatened on every border by Iraq, Iran, and the USSR. The Soviets had coveted the Middle East since before WW2.

Soviet Foreign Minister Molotov traveled to Berlin in 1940 for a meeting with Hitler. The reason? Hitler wanted to lure Stalin into an alliance. He knew that the best way to win a war in Western Europe was to ensure he didn’t have to fight the Soviets on his Eastern flank. Hitler and Mussolini both figured that Stalin wouldn’t intervene. Stalin wouldn’t risk spilling Russian blood for the sake of the English and French.

Hitler decided to dangle the idea of inviting Russia into the trio of Germany/Italy/Japan. A “Four-Power Pact” rather than the “Three-Power Pact”. Hitler’s meeting with Molotov was to discuss these terms and to divvy up the spheres of influence they would each inherit after the war.

What was Stalin’s primary condition for joining with Hitler? Straight from Molotov’s mouth:

“The first protocol, dealing with the spheres of influence, must recognise that the area south of Batum and Baku in the general direction of the Persian Gulf is recognised as the centre of gravity of the aspirations of the Soviet Union.”

The Russians were basically quoting James Fairgrieve. They recognized that the Middle East was now the “political center of the world”. It was the Russian “center of gravity”. The German’s, however, invented geopolitics and would never agree to this. Hitler never replied to Stalin’s conditions and the Soviets would never join the Three-Power Pact.

CIA Director Casey and President Ronald Reagan believed the Soviet’s still saw the Middle East as their “center of gravity”. The Saudis believed this as well. The deal was simple. The United States promised military backing and equipment so that Saudi Arabia could solidify their borders. In return the Saudis promised to defy OPEC and over flood the market with oil. The United States would also ramp up production. The result - The 1980’s Oil Glut. Oil prices dropped so low that the USSR lost billions per day. They would never recover and the Soviet Union inevitably would collapse.

There’s the history. What does that show us today?

Has anyone noticed their gas prices lately? Why on earth are oil and gas prices going down in a world that is ripped by instability? Here is a graph that shows oil prices over the past 6 months:

As you can see there’s been a dramatic drop in the price per barrel since mid June. What’s the catalyst making this happen?

1. Dramatic increase in production from the U.S.
2. Dramatic increase from Libya (despite internal turmoil).
3. Saudi Arabia increases production despite OPEC objections (sound familiar?).

First of all, who benefits from this? Who gets hurt?

Russia

It’s hard for me not to quote Sean Connery from The Hunt for Red October, “Once more, we play our dangerous game, a game of chess against our old adversary.”

We’re pulling the same levers we’ve pulled in the past. It’s amazing that the Russians haven’t diversified their economy away from hydrocarbon sales. Reagan furiously opposed the Urengoi pipeline that began Western Europe’s dependency on Russian gas. He warned the Europeans that Russia would gain a significant strategic advantage over them, but the pipeline was built regardless.

We’re seeing the result of that today in the proxy war in Eastern Ukraine. It’s not a coincidence that as the Russians began to support the separatists in Eastern Ukraine the price of oil began to drop out of the cellar. The Ukraine crisis and this modern day “oil crash” happened one after the other. The United States has played this move before and the Russians know they have little to counter it with. Washington D.C. sent a clear message to Russia. That they’re not only willing but completely able to crash Moscow’s economy if provoked to do so.

Putin now has to try and increase demand so that the PPB (price per barrel) goes back up. Look for them to increase cooperation with China. China has the demand to effect the PPB. My guess is that we’ll see news come from that in the near future.

Iran

Tehran is in an interesting predicament here. Their heavily sanctioned economy is also primarily driven by hydrocarbon sales. At the same time they’re locked in intense negotiations regarding their nuclear program. This gives the U.S. and Saudi Arabia a lot of leverage. It may force Iran to make considerable concessions.

It’s important to note that, just like in the 80’s, we must have promised the Saudis….something. The Saudis main struggle right now is Iran. Proxy battles between the Iranians and Saudis are being fought all over the Middle East. In Yemen, Eastern Saudi Arabia, Syria, Iraq, etc. Even the Iranian/U.S. rapprochement itseIf is a major setback for the Saudis. If a deal was indeed made look for progress on one of these fronts. Would the U.S. consider backing out of the Iranian nuclear talks all together to appease the Saudis? I guess we’ll find out soon.

Libya

The situation in Libya is interesting. Quite frankly I’m shocked that Libya has been able to produce as much oil lately as they’ve been. The central government has had to relocate as militias have gained more and more power daily. Somehow, Libya was able to flood the global oil market with a billion barrels per day.

Where is the Libyan oil coming from? Primarily from the Waha oil field. The Waha oil field is operated by 3 companies: ConocoPhillips, Hess Corp, and Marathon Oil. All U.S. based companies. Draw your own conclusions there…

Conclusion

James Fairgrieve made an observation in the 1900’s that very well could have influenced Russian geopolitical thinkers for the entire century. What was theory in Fairgrieve’s time became very much the reality in the 1970’s and 80’s. The players back then are the same today. The conflicts are a bit different but the circumstances are remarkably the same. The biggest difference from the old Cold War to our new one today is in the timeline. Economic warfare such as this was Reagan’s knock out final blow. The United States this time has used it as their opening salvo.

American Foreign Policy - A Blueprint to Return to the Monroe Doctrine - Part 1

This article kicks off a series on American foreign policy over the next few decades. The United States has entered a period of disengagement. This disengagement should have taken place after WW2, but the emergence of the Soviet Union necessitated a more involved U.S. foreign policy on the “World Island”. Before we take a look at where we’re going it’s important to first look back and see how we got here.

U.S. foreign policy for the framers was pretty easy to define. Two quotes come to mind:

“It is our true policy to steer clear of permanent alliance with any portion of the foreign world"                                                           

                                                                                    George Washington

"Peace, commerce, and honest friendship with all nations-entangling alliances with none."

                                                                                            Thomas Jefferson

It was quite obvious that those who founded the Republic wanted a clear separation between the old and new world.

Fast forward to December 2nd 1823. President James Monroe would deliver his seventh annual State of the Union address to Congress. The contents of this speech would be dubbed the “Monroe Doctrine”. The United States declared political sovereignty over all of the Americas and warned the old world European powers to stay out.

An argument can be made that this was orchestrated by Great Britain in order to secure an economic and political foothold in South America. Whatever the ulterior motives the old world now had to deal with an assertive United States in their sphere of influence. From Monroe’s perspective this would help keep the corruption and age old feuds of Europe out of the Americas. Where as Manifest Destiny would orient the U.S. from east to west the Monroe Doctrine would orient the country north to south. The U.S.’s prosperity would center around the economic and political relationships among the nations of the America’s. A clear separation from the bickering millennia-old rivalries in Eurasia.

In 1918 we had the end of World War 1. With Russia’s exit from the war the threat of German dominance over all of western Europe was too great to ignore. At that moment the United States was forced into the affairs of the old world. It was indeed necessary. One nation in control of all of Europe threatens the balance of the entire planet.

The main problem is that the United States should have disengaged after the end of the war. Instead, Woodrow Wilson took the lead in European affairs and issued his “Fourteen Points” as a basis for a truce. The fourteenth and final point was his globalist ideal for a one world governing body called the League of Nations.We’ll get into the specifics of how Wilson’s Fourteen Points and the Treaty of Versailles can be attributed to much of the current problems in the world today in follow up articles. Right now the main point is that Wilson put us on a course of deeper involvement with the old world. Involvement that our founders warned us about.

WW2 once again showed that the ramifications of one nation attempting to control Eurasia were too critical to ignore. The United States had to intervene despite trying desperately to stay out. A Nazi dominated Eurasia could theoretically dominate the world. The U.S. absolutely did the right thing by entering the war. The problem is that in the devastating aftermath of the war we could not disengage. The Soviet Union now stood on top of the ashes that Hitler wanted to control. Hitler fell but Stalin was right there to pick up the pieces. The threat of one nation controlling Eurasia was still in play.We had fought WW2 to stop Germany from dominating Eurasia. We would now fight the Cold War to stop the Soviet Union from doing the same.

As mentioned before, the U.S. was on a course of orienting from East to West and then North to South on the American continent. However, two catastrophic wars set off a series of moves that would distract American foreign policy up until the present day.

We should have disengaged after the Soviet Union fell in 1991. Instead we remained upon occupied territories, and continued the cold war strategy of spreading democracy throughout the world in order to undermine foreign governments.

This series will focus on providing a blueprint to return to the Monroe Doctrine. To continue our plans to orient North to South on the American continent.

A Tale of Two Asian Economies...

I’m going to start this by describing a country. See if you can guess who I’m talking about…

This country lies in East Asia. After much turmoil it was able to pull itself out of the gutter by building a huge export economy. Labor cost was low so outside businesses were quick to invest. No one paid much attention at first but before long everyone was intrigued by this nations back to back to back years of double digit economic gains. Money supply came in tidal waves.

View from the outside world

Pretty soon this country is dubbed the next great power of the world. Destined to overtake the United States and then some. This nation begins buying up property around the world including many well known landmarks in the United States. People start saying things like “They own the world” and “everything is made there”.

Meanwhile inside the country

Asset prices are soaring. It becomes so expensive to own property in the major cities that most people don’t even try. The state bank floods the banks with cash and credit increases at a large rate. The currency appreciates faster than anticipated. This makes their export goods not as competitive to the rest of the world and the economy slows down. A major economic crash hits the entire world and the export driven economy is dealt an even larger blow.

Who is it?

It depends on what generation you primarily grew up in. If you’re 35 or over you’re probably thinking this is Japan. If you’re 30 or under you’re most likely thinking China. The truth? You’d all be right.

The Japanese economy in the 80’s was a dynamic powerhouse. Sony bought CBS Records, Columbia Pictures , and Mitsubishi bought Rockefeller Center! Japan was surely buying up the U.S. brick by brick. Archived Article

Pretty soon we’d all be speaking Japanese right? Wrong. The Japanese asset price bubble popped (http://en.wikipedia.org/wiki/Japanese_asset_price_bubble) and their economy came crashing down. In fact most of Japan’s frenzy of buying up and investing in United States assets came just 2-3 years before the final collapse. Those “in the know” knew this was coming. They were buying and investing in anything they could OUTSIDE of Japan because there was literally no hope on the mainland.

Likewise, the Chinese economy these days is all the rage. And from where it began it’s come a long way. China’s GDP has risen rapidly over a short period of time (like Japan). Right now it sits at about half of the U.S. economy at around 8 trillion. However, this is no different than the rise of the Japanese or even the South Korean economy during their heydays.

If you look at the Japanese problems in the early 90’s and the current Chinese economy you’ll see some striking similarities. Currency appreciation, soaring asset prices, investing out of country rather than in, etc.

Now, each of these Asian economies have had their issues during their rapid rise. China, however has some pretty scarey and glaring problems. To start, their banking system is totally screwed. Check it out. The state runs the bank, the bank gives credit to state run companies to manufacture goods in large bulk. What happens when the world economy is down and no one is buying their cheap goods? Those state run companies don’t turn a profit and default on their state granted loans. In fact net domestic credit (state granted loans to state companies) is said to equal 140% of their GDP. They’re massively overleveraged. To make matters worse China doesn’t include any of this on their balance sheets. As the economy slows down this will become an even greater problem as the state will not be able to pump money into their banks to keep their state run businesses afloat.

A Chinese problem that Japan didn’t have to deal with is a massive social disruption. Foreign companies can’t afford to stay in China. They’re beginning to move their factories to places like Vietnam, Mexico, and Ethiopia. As jobs disappear and cash flow dries up what’s going to happen to China’s 1.3 billion people? Especially in China’s interior where it is the least developed. Civil unrest could reach epic proportions.

You can bet that the Chinese government is watching the current protests in Thailand intently. Likewise, the citizens of China are doing the same. In the past the Chinese government has used nationalism to divert the attention of the populace away from their current problems and toward countries like Japan and the U.S. They’ll most likely do the same in the near future. Look for China to get more aggressive towards her neighbors and for their businessmen to invest heavily outside the country. Those two signs alone will tell you more than “official state released economic numbers”.