Weaponized Oil. A new way to fight economic war?

There have been plenty of wars where the objective is to control resources, as we all know, oil really is black gold, it brings huge wealth and power to those who control it. Here however, I want to look at things from a slightly different perspective.

I have been watching the plummeting price of oil with great interest over the last few months. This year we have seen the price drop from a high of over $105 per barrel to a low, so far, of about $81 per barrel for WTI Crude. It seems the price still has further to go before it bottoms out. There are two immediate reasons for this, the first is the global economy, it isn’t particularly robust at the moment, the second, is the fact there is a now a glut of oil. Oil production in the USA is now at the highest it’s been in decades. The world is now awash with the black stuff.

Oil as a weapon

Oil as a weapon

So where does economic war come into all of this? Market share and geo-politics is the simple answer. The producers are having to battle to maintain their market share in this time of abundance and falling prices. OPEC, led by Saudi Arabia, has decided for the time being not to cut production as a way of pushing up prices. It appears it is happy to let the price fall rather than risk losing customers, add to this the fact that its cost of production, for the moment, is the lowest of all the oil producing nations. It can afford to see the price fall for a while as a way of squeezing other producers.

The boom in Fracking in the USA doesn’t come cheaply. Evironmental concerns aside, it costs a fortune to produce oil this way. The vast majority of Fracking companies are taking on huge amounts of debt, billions of Dollars, to finance their operations. As the global price of oil falls the pressure is being increased. If the price of oil remains this low for any period of time then it would appear many of these companies could become bankrupt. Could it be the next big bail-out in the USA will be for these companies? Will taxpayers be expected to take another hit as they did when the banks were given their money for free? I wrote in more detail about the economics of Fracking in the article, Fracking a Ponzi scheme?

The US government might decide helping them to keep producing and building energy independence is a price worth paying as it wants to see Russia’s Vladimir Putin suffer. For sure, current prices are now below breakeven costs for Russian oil. With sanctions now biting in Russia, it is more than ever dependent on oil revenues to prop up its system. It is developing closer ties with China to aid economic development, but there too its economy is slowing. If anything China will be the senior partner in that relationship, its economy is so much bigger and can dictate the terms. Russia will have little choice but to go along, it needs the cash too much. Looking ahead, I don’t see Russia making any big gains out of this partnership.

What this all amounts to is economic warfare. Saudi Arabia wants prices to fall in the hope of putting severe economic pressure on those countries whose production costs are much higher, maybe forcing them to close operations so it can increase its market. The USA is happy to see prices fall because of the huge financial burden it puts on Russia, even if it could well mean a bail-out for its own Fracking industry. There is a race to the bottom going on, to see who will blink first, with the winners being able to take the spoils. If that isn’t war by other means then I don’t know what is!

ISIS in Iraq and Syria. Who is it good for?

I know that many will disagree with what I am about to write here but I want to give you another point of view to think about. When you dig under the surface of what ISIS is doing you will see it is of huge benefit to certain countries.

When I talk to contacts in the middle east, all come to the conclusion that Iran is behind the incredible growth and expansion of ISIS. Kurdish media also agrees that it has Iranian backing (Kurdish News Article in English)

ISIS began their expansion in Syria, mostly in the north and east of the country. When the Free Syrian Army fought back against them in the winter, many ISIS fighters ran for cover in Syrian regime held areas before they were able to fight back and regain lost territory. Also, what is interesting is the fact that ISIS are not trying to push towards Damascus, rather they are trying to take over territory held by the FSA. They also paint their headquarters with their colours and have huge flags waving above, yet not once have they been bombarded by the Syrian airforce. So many of my contacts in Syria have told me about this. There is a lot of circumstantial evidence coming from the modus operandi of ISIS, that it is working in collaboration with the Syrian government, which itself is backed by Iran. If ISIS is collaborating with Bashar al Assad and Iran is his main supporter then there must be a connection, ISIS have to get their funding from somewhere and Saudi Arabia will not support a group which is helping Assad.

Then we come to Iraq. The Shia majority government of Nouri Maliki is known to have very close ties to Iran. The last few years have been spent buying the latest military hardware from the USA so that it could defend itself after the US army fully withdrew. On paper it has, or should I now say had, a standing army of about 900,000, yet when fewer than 10,000 ISIS fighters advanced on Mosul, the second city of Iraq, they fled, leaving behind all their equipment and bases. They didn’t even try to resist, despite the huge advantage in numbers and weapons. Then at this time of crisis the government couldn’t even get enough votes to declare an official state of emergency. Neither did they ask the Kurds to send their well armed and experienced Peshmerga forces to help. Everything about this is suspicious. Considering how close Maliki is to Iran could it be that it was all a plan, a way of being able to arm ISIS with all the latest military hardware?

But why would Iran, which is Shia, help an extremist Sunni group? The answer is simple, to create havoc and chaos in Sunni dominated areas. Over time you will see that ISIS will not concentrate on trying to capture Shia areas. Baghdad is mixed between Sunni and Shia so they may try to take it but it is unlikely. However, the south-east of Iraq is by far majority Shia, I will be very surprised if they try to push into this part of the country. It will give a further strong indication that they are working with Iran.

Of course, to keep up appearances, Iran will make a show of helping Iraq to resist ISIS but it is more likely that Iraqi Sunni militias will be created from the remains of the army and other groups. It will end up similar to Syria, where the FSA while fighting the government, is also spending a lot of time trying to fight back against ISIS. The entire region will descend into a state of perpetual conflict, with only the Shia areas of Iraq remaining quiet. This is what Iran wants. The danger of using a proxy such as ISIS is that you have to keep control of it. Has Iran got ISIS on a short enough leash? Time will tell.

The question that comes to my mind is why has this happened now? The simple answer is oil, or rather the price of oil. Over the last year, oil has spent a lot of time below $110 per barrel often closer to $105. The chaos created by ISIS has pushed the price up to $113 at the moment. Iran and Russia are very close, Russia has been using a lot of its cash reserves to prop up its banking system as capital flight increases, people and businesses are taking their money out of Russia. Oil and gas are the main sources of income for the Russian economy but it needs a price of about $117 per barrel to have enough to top up its cash reserves and keep the economy going. Could it be that Iran has arranged events in Iraq to help its closest ally Russia? Of course this helps all oil-producing countries but the main benefactor is Russia, it is desperate for cash and the events in Iraq could not have come at a better time. Iran also benefits greatly, the war in Syria has cost it a fortune as it supports Bashar al Assad, extra money is always needed. Of course Saudi Arabia also benefits but they already have a mountain of cash, the increased income while welcome will not really change anything for them.

As I said in my previous post, Saudi Arabia is attempting to improve relations with Iran. It can see the coming tsunami of chaos which is about to engulf the region, I think it finally understands that Iran has the upper hand in what is going on. As a result I think we will see a deal between Saudi Arabia and Iran with regards to Syria, they will settle on a division of the country. In return Saudi will get assurances that ISIS will not invade, this has to be one of their greatest fears. ISIS could make havoc, especially as it now has a huge amount of modern American made military hardware. This all depends on Iran maintaining control over ISIS, if it loses control then all bets are off.