Tuesday, July 25, 2017

The Coming War in the Middle East

It may be a bit naive to say that a war in the ME is coming, because by many indications, it's already at war. But this is a war alike to many modern conflicts, mediated through proxies, clandestine action, and doublespeak.

The current landscape is divided generally into two groups:

1) Pro-Western powers: Saudi Arabia, Israel, Iraq.
2) Pro-Islamic powers: Iran, Qatar, Turkey, Syria, Yemen

The war in Syria, and the violence in Yemen, are connected very deeply to animosity between Saudi Arabia and Iran (a mirror reflection of US-Iranian diplomacy). There are several proxy wars raging in the ME, and they are spread across various regions, including Libya, Syria, Nigeria, Yemen, Afghanistan, Iraq, Gaza, and others.  There is a distinct front comprised of US allies and “Islamist” opponents.  Adding into the complexity, Russia is stymying US efforts to overthrow Assad by arming ISIL. Woven into this tapestry of violence, deceit, and profit-taking, is an underlying religious, geopolitical, and cultural struggle that spans thousands of years and is marked by significant divides in ideology between Shiite and Suni muslims.
Recently, countries in the Western bloc have increased rhetoric and proxy aggression toward Iran, including Saudi Arabia, whose crown prince and former defense minister made statements about curbing Iranian influence in the region (Yemen, Syria) by “bringing the fight to Iran.” This came a few months before a major arms deal between the US numbering in the billions (as well as deals with the UK for the less substantive but still significant arms deal of nearly 300 million euros).
Added to this, nations in the Western bloc have also now blocaded and severed all political ties with Qatar, which had positioned itself as a de facto Switzerland for many years in the region (while also funding various terrorist activities, according to the Western bloc).
There are four notable centralizations of tension in the ME – located in Yemen, Syria, Iran, and Israel. The last, but not least of this list, bears a significant symbolic barometer of tensions between jews and palistinians, including settlements in the West Bank, aggression between Israel and Gaza, and orthodoxical Jews looking to build the Third Temple and seize the Dome of the Rock – one of the holiest sites in the Islamic faith. 
Each one of these nexuses is a place where aggression is funneled, either through strategic cooperation initiatives such as the Iron Dome, or more clandestine or commercial support through arming and funding insurgents and militants. This was especially egregious when ISIS militants were seen using UN armaments.
Surrounding all this is the nebulous spectre of oil.  Many of the nations in question depend quite significantly on oil for revenue to balance their budgets, including Iraq, Iran, Saudi Arabia, Gaza (LNG), Russia, Syria (gas pipeline to Europe from Russia), and Qatar (to a lesser extent of 100 000 BPD). 
There is a mutual entanglement such that many countries will face austerity of oil prices decline to levels as were seen at $20/bl in recent history.  Saudi Arabia is preparing for an IPO of Aramco, their largest oil producing company, with a price tag in the trillions. But this depends quite significantly on oil prices being in the $50-60 range.  Efforts to manipulate price have been made by OPEC, who agreed to cut production last year, and extended that production cut into 2018. However, the market has been uninspired by these efforts, posting the most significant drop in prices in recent times.  This has spurred some panic and desperation among E&P investors and large institutions that fund US Shale.
When analyzing the likelihood of all-out war, it’s important to measure the economic impact first and foremost.  Historically, humanitarian interventions on the behalf of the United States are almost always a sham for yielding some geostrategic or economic advantage.
With extreme pressure on the Saudis to influence the price ahead of the Aramco IPO, and facing possible austerity – while shale in the US is highly leveraged with large debts – we’re seeing a situation where Wall St and large banks will require a war to achieve profits in the shale boom. Furthermore, massive reserves in the Middle East pose a long-term threat for energy hegemony for a fairly recently emerged US oil production sector – and this is not limited to the ME. South America also poses a threat, with countries like Venezuela (the largest proved oil reserves on earth at 300 billion barrels) – who by no coincidence are facing sanctions from the US from importing oil – at a time when oil prices have pushed the country to the brink of revolution.
Once again, we are facing a geopolitical landscape centered on profit and energy hegemony, as well as strategic positioning to supply the EU with liquefied natural gas (US hegemony of which is threatened by Gaza, Syria, and Russia).  Even more critically, the red sea, Persian gulf, and mediterranian are crucial shipping lanes for oil, and in which violence has escalated – with Yemeni attacks on Saudi refineries and ships. 
The political landscape isn’t much better, with Trump selling billions to the Saudis in weapons that are assuredly used to kill Yemeni people, and his plans to scrap the nuclear deal, and a dramatic increase in US war propaganda against Iran, the chances of an all-out war are exceedingly high, given the historical trend for these factors as major catalysts for conflict.
A large war between fairly significant coalitions is emerging, one which some have warned could lead to WWIII.  I just want to alleviate those concerns briefly, by pointing out that a ME war would be beneficial to Russia, who would love to see oil prices reach $100/bl (a very real prospect if all-out war with Iran occurs). Added to this fact is the very real possibility of mutually assured destruction and the end of the human race itself – and war between the US and Russia becomes extremely unlikely on the order of a fraction of a fraction of a single percentage point.  For all his flaws, Putin is a rational optimizer who fears this outcome (with good reason).
The conflict is also isolated, to a certain extent, by the confines of Western Europe past Turkey, and Asia, with India making statements of neutrality, and China looking merely to continue its meteoric GDP growth and booming manufacturing.  The US and China are too interconnected to risk war – the loss in profits would be pronounced, and is an outcome that is considered extremely undesirable for both sides.
This leaves at most a dozen nations pitted against each other – many of them small and considerably weaker than US, Saudi, and Israeli military and economic might.
Looking forward, expect a number of catalysts to be influential on this outcome:
-         Terrorist attacks
-         Oil services sabotage
-         Proxy violence
-         False flag attacks
-         Iranian failure to meet OPEC compliance
-         Significant drops in oil prices (which cause Austerity, which cause Unrest, which cause parochial dictatorships to arise).
-         Tensions in Israel, Gaza, and the West Bank.

For investors, oil and gas is a good play right now, especially US Shale. The risk of war is understated by pundits, and should be considered extremely likely in the next 12 months. Another place to invest is defense, such as Raytheon or Lockheed. It is also recommended to hedge into utilities and commodities as market instability may catalyze a significant decline in the value of the FANG (facebook, amazon, Netflix, google) stocks.