Saudi Arabia and Pakistan Sign A Mutual Defense Treaty

Shaking Hands after Political Negotiation | Photo licensed by Envato Elements

Saudi Arabia and Pakistan signed a mutual defense treaty last week. And no, you’re not the only one thinking, “Hmmm, why would two countries with mismatched security concerns enter into a defense pact?”

The idea that Pakistan would ever launch a nuclear strike on Saudi Arabia’s behalf is far-fetched to say the least. However, buying some influence with a nuclear power and keeping a clear path to acquiring a nuclear weapon from the Pakistanis (should that need ever arise) isn’t the worst idea for the Saudis.

This pact is the first of its kind, breaking from post-WWII norms of only US-led “all for one” alliances. With the US pulling back on its security commitments, more of these pacts are likely to follow. This means we’re entering a period more reminiscent of pre-WWI commitments and alliances, and that should scare the s*** out of everybody.

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Transcript

Hey, all. Peter Zeihan here. Coming to you from Colorado. Today we’re going to discuss something that happened on the 17th of September. The Saudi Arabians signed a mutual defense treaty with Pakistan. Now, these two countries do not border one another. And the countries that they consider their number one foes. In the case of Saudi Arabia, it’s Iran. 

In the case of Pakistan, it’s India. Don’t line up. But they have basically tried to convince everybody that if somebody threatened Saudi Arabia that the Pakistanis will nuke them. Well, that would be interesting. A couple things to keep in mind here. Number one, in many ways, Saudi Arabia subsidizes the existence of Pakistan. They provide them with debt relief. 

They provide them with below market prices, oil supplies, most people, myself included, has said that, to some degree, this is to ensure that at the end of the day, if Saudi Arabia really needs a nuclear weapon, that the Pakistanis will be open to the conversation of just selling them one. I don’t think that logic has changed, but the idea that Pakistan will just nukes someone on Saudi Arabia’s behalf. 

That fits with the arrogance of Saudi society, especially the ruling House of Saud, probably does not match reality. Second thing to keep in mind is the relatively unprecedented nature of this. If you remember your history, you go back to World War One. Cross linking alliances of mutual defense were kind of the norm. And if somebody attacked country A and country, he had a alliance with country B, country B would then attack the attacker. 

And that led to World War One being a lot nastier than it needed to be, because a lot of these countries had alliances with one another that they didn’t tell anyone about. So when the defense classes were activated, it was kind of a surprise to everybody. Italy definitely fell into that category since then, people take alliances a lot more seriously. 

Number one, World War one sucked. No one had a good time. And number two, we are now in the nuclear age. So an attack on one on this attack on all has a lot more consequences. So in the world since 1945, when the Second World War ended, no countries have initiated or participated in any sort of all for one, one for all alliance, unless it was initiated by and headed by the United States, which remains the only country in the world that really has large scale global deployment capability. 

Saudi Arabia can barely deploy within its own country, and Pakistan. Everything is obviously on the eastern side of the country, facing down India. Neither of them could get troops to the other in a situation where there was real shooting. So the idea that the first meaningful mutual defense pact with a nuclear angle is between two countries with non-overlapping security concerns. 

I don’t find that very serious. And if nukes were not involved, I wouldn’t even bother talking about it. But nukes are involved, and the United States is getting out of the mutual security business. So places especially like Saudi Arabia that have money suddenly are looking for some alternatives, especially since just a few days ago, the Israelis launched missiles over Saudi Arabia to strike a different Arab country. 

Gutter balling to that here. So you know what that is all about. So we should expect to see more and more things like this. And I’m not saying that any particular one of them is serious. What I’m saying is everyone is experiencing it with things that are new and that under normal circumstances, would just be tossed out out of hand. 

We’re not in that world anymore, and we need to think a lot more about like, what things were like in World War one, when you might have a security deal that you don’t tell anyone about because behind the scenes it gives you some chits. It’s a very different system and one where wars will happen a lot more.

What’s Up with the Middle East: Saudi Oil Slips

Photo of black oil barells

Oil has been the secret sauce for the Middle East for ages, but that’s beginning to change.

The Chinese are now the top importer and consumer of oil, driven by all that energy-intensive industrialization. US oil consumption is dropping, although exports of refined products have masked this a bit. The US shale boom has also made American energy independent and competitive, which isn’t great for Saudi manipulation and control of oil markets.

Which means Saudi Arabia is losing some of its influence; the US doesn’t need the crude, Saudi Arabia’s costs are rising, and more competitors continue to pump oil regardless of market signals. But the Saudis aren’t completely out of options…they could always just use a little terrorism to destabilize their rivals.

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Transcript

Hey, all, Peter Zeihan here coming to you from Zion National Park. This is Zion Canyon. That is the infamous Angel’s Landing, which I will not be doing a video from. But we continue our coverage in the Middle East today talking about what makes the whole region matter. And of course, that is oil. We’ve got a lot of crosscurrents going on, and international oil markets right now. 

We’ll start with demand. Then we’ll go to supply. Demand is weird. The United States has largely completed its transition to a services economy. And so we’re becoming more and more efficient for every dollar of GDP that we make. And so in terms of actual oil demand, we’ve actually seen demand drop in the United States. I’d argue for the last 15 years. 

Now, you’re not going to see that in the data, because the United States has massively increased its production and export of refined products. So technically, we’re still absorbing crude turned into things like jet film gasoline and then sending it out for a profit. But in terms of our normal consumption, it’s actually gone down by quite a bit. 

The second big factor, of course, is China, which is pricing sensitive and factor insensitive. They basically expand their money supply in order to give everybody a job. Most of those jobs end up being in the industrial space, which is relatively energy intensive. And so they need every drop of the stuff they can get from everywhere. So China has overtaken the United States as the world’s largest oil importer by far. 

And if you look at the numbers the way I do, they’re clearly the world’s largest oil consumer as well. But unlike, the Chinese, the United States has an ace in the hole, and that’s the shale revolution. So now we talk about supply. The United States has gone from producing less than 5 million barrels a day as recently as 20 years ago to, now, something closer to 15 million barrels a day. 

Most of that increase has been in the shale fields, where it’s relatively light, relatively sweet, fairly easy to refine, but not necessarily geared towards the American preferences when it comes to refinery infrastructure. So we end up exporting a lot of that stuff as well, and then bringing in some heavier, more sour stuff from Canada in particular. From the Saudi point of view. 

All of the math is out of whack. The Saudis are completely incapable of defending themselves in a real war. And their plan has always been to lean on the United States for security support. And they do that by making sure that the United States always has as much oil as it possibly wants. But now the U.S. really doesn’t care on a systemic basis about oil markets at all, because everything that we need to either get at home or within our continent, or worst case scenario, within our hemisphere, and the Saudis are kind of left dragging, they would love to have a new security guarantor, but it’s not clear who that 

could be. The Chinese don’t have the reach or the longevity. The French and the Brits don’t have the punch. And the Turks may be closer, but they are on the wrong side of Mesopotamia to make it work. It leaves Saudis in quite a lurch. And the Saudis, from an economic point of view, are struggling with new problems. 

It used to be 20 years ago that OPEC could dominate oil markets by increasing or decreasing. The Saudis always had problems getting countries to follow their quotas. But because Saudi Arabia and their relatively close ally, the United Arab Emirates, always basically agreed on oil policy. You had this huge chunk of spare capacity that could be turned on or off relatively quickly. 

They’re facing two challenges to that now. First, the spare capacity is largely gone. Everyone’s been pumping full out for quite some time. And then second, with shale, you can bring on a new shale. Well, in a matter of weeks, as opposed to having pre invested billions of dollars into spare capacity in Saudi Arabia, which still takes months to turn on. 

So any time that the Saudis would try to flood the market. The shale folks just proved to be a little bit more competitive than the Saudis would have liked. And whenever the Saudis tried to push up prices by gutting the market, the shale folks would just take the market share. And that happened over and over and over and over and over again. 

Second problem the Saudis are facing are is the former Soviet Union, because while Saudi from time to time can bully some of the other producers, into changing their oil policy to meet with the Saudis, one and two, they’ve never been able to do that with the Russians. A lot of the Russian production is in Siberia. It’s very high cost to get out of the ground. 

The Russians have no intention of ever turning it off. A big problem these days is Kazakhstan, where a couple major projects called Tengiz and Kasha gone have really come into their own and made Saudi Arabia more important to oil markets than Kuwait. And they’re never turning that stuff off either. And then Azerbaijan has finally hit its stride with its offshore production. 

So you got three significant players that are just dumping more and more crude on the market. And there’s really not a lot that Saudi can do, which means it’s time for a different sort of strategy. Some people in Saudi thought they could build a giant linear city that everyone would come invest in. Well, that was a stupid idea. 

And so now the Saudis are probably going to rediscover some of their militant roots that they put down in the 1980s with al-Qaida. We have a lot of moving parts in the Middle East. Syria’s one. Iran is one. But what the Saudis really need is for some major oil producers to go off line. And the only tool the Saudis have that is even remotely reliable outside of Europe, opening the spigots is terror attacks. 

This is something the Saudis are very good at. Their own population is basically former horse raiders that decided to settle down and substitute mass rapes and killings for, domestic violence. And now they’re in a position where the only way in the midterm that they can drive oil prices up is to drive someone else out of the market. 

They haven’t decided what the target is yet. But we should expect significant policy change out of Saudi Arabia over the course of the next year, especially now that it’s become apparent to the Saudis that the American relationship really is over. 

When Donald Trump came to Riyadh, recently, he didn’t ask for crude. First time, an American president hasn’t had some conversation with the Saudi royal family about crude oil. He simply said, you need to invest money in the United States if you want us to be involved at all. $600 billion is my number. So I don’t have $600 billion. The idea of them being a cash cow for whatever project in the world is long gone. 

Their population is much larger, their subsidy system for their population is much larger, and their cost for just holding the line are much larger. So the U.S. will be lucky if it gets 150 billion. And the Saudis simply need to change the rules of the game if they’re going to continue with their system in its current form.

Will Saudi Arabia Start an Oil Price War?

Image of the Nabawi Mosque, Madina, Saudi Arabia

My crystal ball is working overtime trying to figure out what the future of oil prices will look like. You’ve already heard one of the scenarios, but here’s another POTENTIAL way this could play out.

The Saudis could get frustrated with other oil producers not cutting production, and flood the market with oil. We’re talking 3 million barrels per day, which would drive prices down below $50 per barrel. This would have an outsized impact on higher cost producers like Angola, Venezuela, and Nigeria.

These countries could face economic instability because of this, but they’re not getting the worst of it. The Russian oil fields are hard and expensive to operate, should production drop during a price war, it may never recover. Oh, and the US will be fine thanks to low-cost shale production.

Okay, I’ll go get the popcorn and you grab the sodas.

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Transcript

Hey everybody. Peter Zeihan here. Coming to you from Fort Worth, Texas. And, I spoke with you recently about what I consider to be the highest risk we’ve had in a long time to the Middle East for crude oil supplies. But remember that I pointed out the possibility of Iran striking at Saudi Arabia’s energy complex and Israel taking out Iran’s, for that matter.

I said 1 in 4 to 1 in 3 chance. It’s not that I think it’s a majority chance. In fact, you know, there’s obviously other scenarios. I’m going to share another one with you today, which takes us the absolute opposite direction and probably has about the same chance of happening just to confuse anyone who wants to play some money in the market.

So you know, you have fun with this. So the idea is that Saudi Arabia is getting a little cheesed off that it has been restricting its own production in an attempt to boost oil prices. Specific. While my hair is out of control here, in order to get prices up, above $100 a barrel. And with the exception of the United Arab Emirates, no one else in OPEC, much less this broader OPEC+ group, has been cutting production at all.

In fact, everyone else has been putting as many barrels in the market as they possibly can. And of course, the U.S. shale producers continue to produce. That’s something that by any other standards would be record levels. But by their standards, like, oh no, only went up a million barrels a day this year, which, you know, is bonkers that it is now and done that for eight of the last 15.

Anyway, the Saudis have very clearly gotten annoyed, and they’re indicating that they’re willing to put a lot more oil on the market, maybe as many as 3 million barrels a day, and that they’re going to try to drive prices down quite a bit in order to grab market share. And that the number of $50 a barrel or lower has been floated. Doing something like that is well within the Saudis’ capability, assuming that global politics are favorable, which is always a little touch and go anyway. Whenever the Saudis have done this, it causes a lot of ruckus around the world among all of the other oil producers, specifically those that

have higher breakeven costs. So places like Angola or Venezuela or Ecuador or Nigeria and especially in places that are really, really dependent on oil flows, like places like, say, Libya and Nigeria in that category, because if they’re getting a lot less income, you know, obviously they face social malcontent. And if their crude isn’t profitable at that point, then they have to shut those production levels in.

And sometimes it can take years, if not decades, for that to be rebuilt. One country I’m not worried about is the United States. We’re now in a situation where the vast, vast, vast—over 80%—majority of the oil that the U.S. produces comes out of a shale well, and pretty much everybody is profitable below 50.

In fact, you’d have to go down to below, probably 35, before you’d see a meaningful impact on existing production. Keep in mind that once you’ve drilled your shale well, its production costs for operating purposes drop below about $10-15 a barrel in most places. So you might not drill new wells, but you’re going to maintain what you’ve got.

In fact, it costs money to shut it in anyhow. The last three times that the Saudis have done something like this, we’ve seen a little blip, oftentimes, in American shale output. But then you see it surge back very quickly, because from the time that a shale operator starts working on a well to the time that it actually starts producing is usually only about two months or less. With some of the new technologies, that might be a little longer, but it’s still less than three months anyway.

So whenever you’ve got market share up for grabs, the Saudis, of course, try to take it, but the U.S. shale guys do as well. So the Saudis have to do all the work, and they don’t have to split the benefits with the U.S. shale players. Now, this time, there is one other thing in the mix that is going to make this particular potential price war a little bit more exciting.

And that is Russia. Russia’s fields are deep. They are thousands of miles from international markets. They require over a thousand miles of pipes. Even the ones that are close to international markets, most of them are in the permafrost. And the Russian educational system for generating petroleum engineers collapsed back in the 1980s. So the only people in Russia who are capable of doing the work are a small cadre of Russian citizens who, in the 2000s, were basically trained abroad.

There’s just a few dozen people, because of the Ukraine war, because of the sanctions regime. The people who would normally do this work, typically Americans, Brits, Dutch, and Germans, are all out, and the Chinese don’t have the capability to work in this sort of technically demanding environment. They just haven’t learned those skills yet. So if you have high-price producers like Russia who lose production, this time around, they’re actually out of the market for good.

A lot of the fields aren’t simply old and complicated and far away and deep; they’re also very, very mature. So it would take a huge amount of investment and technology the Russians simply don’t have in order to get it back up and running on the backside of any sort of trade war. And they can’t do that themselves.

So, how is that for two bookends for what can possibly happen? A conflict in the Persian Gulf that sends oil prices skyrocketing, or a price war that removes a major player from the market permanently? Both of these could happen. In fact, it’s entirely possible that we’re getting some mix of the two, where the Saudis start with the price war, and then the Iranians have an economic reason to take out Saudi energy prices.

And if this is just too wishy-washy for you, well, welcome to my world. This is what geopolitics often is.

Saudi Arabia and Israel Want a US Security Deal

Mohammed bin Salman, the Crown Prince of Saudi Arabia, has seen the ongoing engagement and security guarantee that the US has with Japan, and he wants a similar deal for Saudi Arabia. MBS will have to offer something pretty attractive to get the US involved in the region again.

As of now, the only offer on the table is formal relations with Israel (in exchange for some undefined concessions to the West Bank Palestinians) and the ~high honor~ of having troops stationed in Saudi Arabia. That’s probably not going to cut it, but it does highlight how concerned the Saudis are about the US pulling out of the region.

Israel is on board with any US involvement, as it would take some weight off their struggling coalition government. But the absence of the Palestinians in all talks up to this point brings into question the seriousness of these negotiations.

This region of the world has been a thorn in the side of the US for decades, and jumping back into the thorn bush won’t be on the calendar anytime soon. If Saudi Arabia and Israel really want to make a deal happen, it’s time to head back to the drawing board.

While some speculate that Xi is moving away from G20 in favor of BRICS, he didn’t even show up to the opening ceremony of the BRICS business forum. So, this announcement doesn’t indicate any political angle; it’s just a reminder of Chinese leadership’s ongoing and accelerating failure.

Xi has purged the Chinese political system of anyone who can form thoughts and potentially challenge his power, leaving him as the judge, jury, executioner, and everything else of importance in China. Even if Xi happened to be the smartest person in the world (which I won’t even comment on), he is still human.

Xi can only do so much alone, and the lack of competence across the Chinese system means that policy stalls wherever Xi is not. While Xi will send a replacement to the summit, concerns over China’s leadership capabilities are mounting, and the question remains – what is next for the Chinese people?

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Transcript

Hey Everybody. Peter Zeihan here coming to you from Colorado. And a lot of you have written in asking about ongoing conversations among the Americans, the Israelis and the Saudis about some sort of broad spectrum political and security deal. At the moment, there is it one. It’s not imminent. It’s not even clear what it would be. But the talks are absolutely going on.

So I would just wanted to kind of give you an idea of what is so much at stake, but what the players are thinking. So this is all Saudi Arabia’s idea specifically. Remember Mohammed bin Salman, who was the crown prince? He’s the guy who’s in his thirties who’s running the place. His father, King Salman, is the one who’s probably mentally a vegetable at this point.

So the crown prince really is already in charge of everything. There’s a lot of generational disputes going on which are shaping the talks. But ultimately, what the Saudis want is ongoing American engagement to give them a security guarantee that is on the scale of what the Americans have with the Japanese. The idea is that you station some forces in-country.

Therefore, an attack on the country is considered an attack on the United States and will raise the ire of the military forces of the United States in order to take off and destroy the attacker, who in this case would most certainly be Iran. It’s not clear that the United States is interested at all after 70 years, the United States is finally getting out of the region.

Global war on terror is over. The U.S. is broadly happy with that situation. So in order to get brought back in, the U.S. would have to be offered something fairly significant. And what the Saudis are offering is normalization of relations with Israel. And it’s not that that’s not interesting, but that’s just not anywhere near enough to justify the United States putting its soldiers in harm’s way and beating Iran into a war.

In addition, the Saudis are thinking that just the honor of having military forces in Saudi Arabia would be so high that the Palestinians could get tossed in as a side benefit, with Israel being forced to recognize some sort of shift in authority when it comes to things like the West Bank. This is a long shot. The United States is largely done with the region and the Saudis are basically etching out a position where most other players are the ones who have to give something just for the honor of having a deal with Saudi Arabia.

It screams of Saudi arrogance, specifically by Crown Prince and by himself. Remember that NBC has basically established himself as a bit of a cult of personality, and he’s steadily edged everyone with experience and the older generation out of the system. The talks are being managed by, I believe, one of his brothers. But this is Saudi Arabia. He has like a billion brothers, so that doesn’t necessarily mean anything.

In fact, it means that if the talks go sideways, he can always execute his brother and just move on as if nothing happened. So I don’t have particularly high hopes that this will happen. But it is interesting from a few points of view because it shows how insecure the Saudis are as the Americans are pulling back from the region.

Now, on the Israeli side, they think that this is all great. Anything that brings the Americans more enmeshed into the region to something that Israel’s broadly going to support, because that means that their troops don’t have to do it. And Israel is a country of less than 8 million people. So having the superpower do things for Israel is something that Israel’s always been a big fan of, but the U.S. hasn’t.

Now, specifically with the Israelis and the Americans right now, relations are not great, largely because the Kurd government of Israel is a little wackadoo. It’s made up of a series of populist and nationalist and religious parties that are somewhat either hateful or stupid. And the Prime Minister Netanyahu is fully aware of that. He had to make a lot of compromises in order to cobble together this coalition.

He knows it’s not working very well. And if he can get a deal with the United States on anything, it would relieve some of the pressure that Washington has been putting on his government versus Palestinians of housing issues and military deployment and economics and and intellectual property theft. There’s a long list of irritants in the relationship right now.

Anyway, that’s where everyone kind of stands with one other a little bit that indicates that you shouldn’t expect this to get resolved very soon and that it’s not clear from the Saudis just how serious they are or are not about looping the Palestinians into the abyss. The older generation, the one that’s in the process of being shown, the door by members.

They’re the ones who are reasonably dedicated to the Palestinian cause. And if in whatever final communique comes out of this deal, Senate, it works. The Palestinians are included. Then you know that in the U.S. is not nearly as powerful as we all thought, and the older generation still has some breath and life left in them. If the Palestinians get at most a cosmetic concession or not mentioned at all, then you know that NBS is large and in charge because he doesn’t care about Palestinians at all.

And weird because this is the Middle East and this is how it works. At this point, the Palestinians haven’t even been consulted or invited to the negotiation table, which is ironically how, you know, that this may be a serious series of talks. All right. That’s it. If something more comes of this, I’ll let you know. Take care.

US and Saudi Arabia Relations: Part 2

Yesterday we covered the key players in the US and Saudi relations. Today we’ll look at the strategic implications of this relationship over the past 40 years and what it looks like moving forward.

Saudi Arabia matters to the US more than many other US allies. Not only are the Saudis massive oil exporters, but they also have strong ties to the world’s Muslim population.

Over the past few decades, the US and the Saudis have partnered up to tackle a handful of critical situations; from stalling the Soviets to the war in Afghanistan to spurring economic growth in Europe and Japan, this relationship has proven vital.

The bottom line is with major players like Russia and China already in motion, the US and Saudis won’t allow ugly politics to get in the way of geopolitical relations. Saudi Arabia is a power center and doesn’t need to be under the American wing, but there’s still a mutually beneficial relationship on the table.

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US and Saudi Arabia Relations: Part 1

We’re talking US – Saudi relations. This will be a two-parter, but today we’re focusing on the key players.

US National Security Advisor Jake Sullivan went to Saudi Arabia to lay down the framework for a new set of relations. As of late, relations have been less than ideal.

The National Security Advisor is really the manager of American foreign policy – even though the State Department gets all the credit. So seeing the hyper-competent Jake Sullivan leading the charge here is indicative of just how critical this is.

Biden’s push to Greentech has caused riffs in the relationship, but the other side has played a role too. MBS, the crown prince, is – for lack of a better term – an ass. And as anyone who’s dealt with someone like that knows, you have to put up with a lot of crap.

However, with Russia and China making moves against the US, Biden is starting to realize that Saudi Arabia is a very useful partner to have.

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Is Saudi Arabia Ditching the US Dollar?

The Saudis have relied upon the US for military protections for years, but as the US reduces its naval presence in the Persian Gulf, Saudi Arabia will have to find those protections elsewhere.

As the world’s largest oil exporter, Saudi Arabia has learned a few tricks to curry favor from different countries. Their most recent endeavor is accepting the Chinese Yuan as payment for a few hundred million barrels of oil…and that’s not an insignificant amount.

This move isn’t happening because the Saudis are worried about de-dollarization; it’s solely a move to win the Chinese over and establish a new external military guarantee. Still, this remains the only meaningful shift away from the USD, even though it’s from one country, for one commodity, and for one reason.

I’ve said it before, and I’ll say it again…the US Dollar ain’t going nowhere.

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First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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TRANSCIPT

Alright. So the country that matters here, the only country that, in my opinion, is doing anything meaningful when it comes to moving from the dollar to something else. Is Saudi Arabia. Now Saudi is the world’s largest oil exporter, and they have started to accept payment from a number of Chinese government entities in yuan. And we’re talking here about, you know, a few hundred million dollars of cargo. So it’s hardly an insignificant issue. There’s no sign that they’re changing the reserves. And I wouldn’t expect that to happen because there’s a specific rationale here.

Now, the Saudis military on paper is great. They’ve got a lot of top notch equipment, but they have demonstrated over and over and over in recent decades that the Saudi military is incapable of operating its own equipment at scale, much less in any sort of coordinated manner. I mean, they can fly their planes and bomb things, and that’s about it. They have always, since their independence, relied on an external security guarantor in order to keep them alive. At first that was the Brits. And for the last several decades, especially under globalization, it has been the Americans. Now, the Saudis think a little bit differently. They basically have modeled themselves off of a medieval fiefdom. And so they think that bribes work really well in order to get what you want. This is one of the reasons why they got along so well with former American President Donald Trump. They saw the world through basically the same lens when it came to operating procedures.

So what they’ve done with the United States is they’ve bought a number of refineries on the U.S. Gulf Coast and shipped crude from Saudi Arabia to the U.S. Gulf Coast. And if there’s a time when the Americans look like they might be facing high energy prices or some pressure in the market, they sail additional cargoes and just let them park off coast until they’re called for. Now, it’s not like the United States, you know, thinks this is bad thing, but the United States gets the vast, vast, vast majority of its oil always has from the Western Hemisphere, with traditionally Canada and Mexico being our largest suppliers. Now, of course, with the shale revolution of the last 15 years, the United States is a net exporter. So the Saudi angle here is very, very small from an American point of view. But for the Saudis, this was never about the economics. It was about currying favor with the guy who’s supposed to defend you. Wellll, in the last few years, the United States has moved more and more of its forces out of the Persian Gulf, and we no longer even have a carrier group that’s there on a regular basis. So the Saudis are a little scared. They are concerned that without the Americans guaranteeing their security, that they’re screwed. And, you know, that’s a reasonable position. So they’ve been looking about for a replacement and they’re discovering that there isn’t a really good, clean one. 

The French and the Brits could theoretically project power into the Persian Gulf, but definitely not as reliably as the United States. Turkey certainly could, but they would have to conquer Iraq first. And, you know, the Saudis have a lot of opinions on a lot of things going on in Iraq, but they’d really rather not have a regional superpower right on their border. India is probably in the long run the most likely outcome, but they’re not Muslim. So the Indians tendency to meddle in political events in places where they have military forces, especially in like Afghanistan, has really soured the Saudis. Japan’s a possibility, but Iran has other options as well. Most notably, it has gotten in bed with the United States and can access the energy of the Western Hemisphere. That just leaves China. Now, the Saudis aren’t all that hot on China. The Chinese navy really can’t project power, and the Chinese have no experience projecting power and military terms beyond their own neighborhood, much less going the 5000 miles it would take to get to the Persian Gulf. There’s also low confidence in Saudi Arabia that if a fight broke out that the Chinese would side with the Saudis against their primary regional rival, Iran. But if there’s one thing the Saudis have, it’s money to spare. So they have gone into China and bought up a few refineries, entered joint ventures with Chinese state energy firms, and are shipping crude to China like they used to ship it to the United States. Now, from the Saudi point of view, this might actually work better in terms of currying favor than it ever did with the Americans, because the Chinese actually need the crude they import three quarters of their total, of which roughly three quarters comes from Africa and the Persian Gulf. And so they’re paying for that in Yuan and in order specifically in their mindset to bribe the Chinese to come to their aid when the rubber hits the road. This is not an economic decision. This is a political decision being made not because they don’t like the dollar, but because they think the dollar doesn’t give them the military guarantees that they thought it once did. So this is Saudi making the decision because of military strategy as shaped by their own culture, not because they think the U.S. dollar is going anywhere.

But still, this is the only example I’ve seen out there of a meaningful shift away from the dollar. And it’s only for trade with one country for one commodity. Alright. That’s it for me.

MbS and the Long Reach of Saudi Leadership

The Kingdom of Saudi Arabia exists as an odd mish-mash of geography and geology. It’s large, desert frontiers are remarkably ill-suited to economic activity. Before the discovery of oil, the main financial rainmaker was the annual Hajj. What we now know as Saudi Arabia’s primary significance to the region was its role as the birthplace of Islam and the bedrock of Bedouin culture.

Fast forward a few centuries and enter the British, who not only empower the region’s local tribes to oust the Ottoman-backed tribal leadership of Mecca but also discover vast oil deposits. Saudi Arabia today is a wealthy, centrally-located key petroleum supplier to pretty much every industrialized economy who wants to be a buyer. And it has not been shy about using its vast cash and oil reserves to shape events on the ground as it sees fit–from wreaking havoc in oil markets to funding transnational jihadism.

At the center of the Saudi Arabian system is the vast, multigeneration House of Saud. Much elevated in stature from their days as desert brigands and bloody rivals of the Hashemite dynasty, they haven’t forgotten their roots. The size of the ruling family, its material resources, and ability to transition to a younger generation gives the Saudis an advantage rarely seen in most dictatorships: longevity.

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

CLICK HERE TO SUPPORT MEDSHARE’S EFFORTS GLOBALLY

OPEC Production Deal, or Price War 2.0?

After the better part of five days of marathon negotiations spearheaded by Saudi Arabia with the goal of eliminating coronavirus-induced overhang in oil supply, global oil producers hammered out April 12 an agreement to reduce oil output by a record 8.5 million barrels a day.
 
The short version is the deal is a joke. I could spam readers with a full newsletter on just how much a joke it is – it relies upon cuts from countries who have never cut before, not all OPEC states are participating, it expects the Russians to cut as much in exports as Kuwait exports in total, the plan is to not begin the cut until May and then start rolling it back only two months later – but really it comes down to something far more basic:
 
Oil traders, the folks who probably have the best feel for just how much demand has dropped, estimate the global oversupply is now between 30mbpd and 35mbpd. Simply the reduction in demand for jet fuel is probably about 5mbpd. The OPEC cut is only for 5.6mbpd with another 2.9mbpd coming from non-OPEC members. Even if everyone plays along, this just isn’t enough to make a difference.
 
Which pushes the discussion to other directions. The world is running out of storage capacity. We’re really not quite sure how much spare storage exists in the world since everyone measures it a bit differently, while countries like Saudi Arabia and China are notoriously squirrely about just how much they have stashed around the world. Industry guesses as of the end of March ranged from 1 billion to 2 barrels, so I’m just going to split the difference and call it 1.5 billion.
 
If everyone sticks to the OPEC plan and if that 1.5 billion figure is correct and if the oil traders know what they are talking about, then all global storage is filled to the brim by early June at the latest. Should the OPEC deal collapse and everyone just keep pumping, zero-hour moves forward to roughly mid-May.

Or maybe sooner.
 
The quick and dirty of the backstory is that in addition to the coronavirus-induced demand collapse, the Saudis are engaged in a price war with the Russians. In every agreement the Saudis have hammered out with the Russians since the Soviet collapse, the Russians have never actually cut and simply made the Saudis eat the difference. Similar attitudes have prevailed in Venezuela, Iran, Nigeria and Iraq – the first two of whom are not even included in the cuts agreement.
 
Ok, on with the show.
 
On April 13 the Saudis announced sales prices for their crude shipments. They added $5 a barrel to their asking prices for American deliveries, but cut their asking prices for Asian deliveries.
 
US President Donald Trump has been aggressively lobbying the Saudis for a significant production cut in order to help US shale producers. While the April 12 OPEC agreement will likely keep Trump off the Saudis’ back for the time being, the change in contract prices is far more significant. They suggest the Saudis are going to stop dumping crude oil on the US market, so that the shale producers don’t drown quite so quickly. Add in that roughly half of all remaining (known) oil storage is in the United States, and most American shale producers won’t be facing chock-full infrastructure until at least late-summer. Any sort of output reductions in the American shale patches, whether caused by rapid well-decline rates or deliberate shut-ins, will extend that deadline out further.
 
But simultaneously, any Saudi crude that is not being shipped to the Gulf of Mexico will instead be steaming towards Asia, intensifying Saudi Arabia’s price war in countries where Russian and Iranian and Nigerian and Iraqi crudes feature. So the price war lives on, just in a more constrained economic geography. We could see a complete overload of Eurasian storage capacity in a matter of a few weeks.
 
All in all it’s a pretty shrewd play by Riyadh. Lead an agreement you know the Russians will violate in order to provide political cover. Reduce flows to the United States to get Donald Trump off your back. But redirect those flows to places that will really hurt your Eastern Hemispheric competition.

While things look rough for oil futures, it’s not all bad news! One area where the US supply chain is particularly resilient is regarding its agriculture. US farmers, food processors and grocer/retailers are in the strongest position in the world to continue delivering food supplies to American consumers. While consumption patterns and panic-induced hoarding will continue to empty shelves at local stores, all elements of the US supply chain have been able to continuously restock — and will continue to do so. 
 
If you have more questions about the resiliency of the US Agricultural supply system in the face of pressures due to COVID-19, join Zeihan on Geopolitics’ Peter Zeihan for an in-depth seminar on April 20, 2020. 

REGISTER HERE

Future planned invents include:

  • Transport and Supply Chains
  • Manufacturing
  • Industrial Commodities

The Shattering of Global Oil

Oil demand is relatively inelastic. That’s a fancy-schmancy economic term that means people and firms’ energy demand doesn’t vary very much from day-to-day or even year-to-year. Driving to work is perhaps the most accessible example. You do it every work day. If you don’t, you don’t work. And so you drive. Your gasoline demand is stable. Inelastic. Doesn’t matter much if gasoline sells for $1 or $4.
 
On the price side, this means the “normal” rules of supply and demand barely apply. Even minor shifts in supply or demand have wildly outsized impacts on price. We’re used to seeing this as a shortage. China booms and oil prices go up. Iran and Iraq go to war and prices go up. Derivatives trading enters the world of oil and prices go up.
 
But such lopsided impacts also work the other way. In 1991 when it became apparent that the first Gulf War would be a cakewalk and threats to oil supplies were not going to manifest, prices collapsed. They did so again at the beginning of the 2007 subprime real estate crisis after being on a multi-year tear.
 
And now coronavirus is introducing the greatest shift in oil pricing in history. Based on who is making the guess (because no one really has good data yet), coronavirus-instigated quarantines have reduced global oil demand by somewhere between 15 million and 35 million barrels per day out of a pre-crisis level of 100 million. Global prices have plunged to as low as $20 a barrel thus far, and they have (a lot) further to go.

In the past, OPEC has often attempted to micromanage oil markets by adding or subtracting bits of crude. But never before have such changes occurred on anything but a multi-month time-frame, and never before have such changes shifted the balance by more than a couple million barrels at a time. Coronavirus’ impact is already an order of magnitude more than OPEC’s greatest action, and it all happened in just three weeks.
 
This evisceration of demand, the sheer scale of imminent producer collapse is only the beginning. Deepening economic dislocation combined with the greater regionalization of a post-COVID world means oil demand – and global energy markets – will never recover. Join Peter Zeihan April 10 for an exploration of the path forward for the global energy sector, with a heavy emphasis on which producers might be able to stay the course, and which we may not hear from for years.

REGISTER HERE

Future planned invents include: