For decades threat planners, the people who imagine the worst-case scenarios for business and military leaders, have strategized about potential wars fought over oil. In virtually every one of those scenarios in the last forty years, the U.S. was competing for limited resources; protecting an oil-producing ally in the Middle East, keeping supply lines open and guarding pipelines. It would be both ironic and bizarre if the actual conflict ended up breaking out because of an oversupply of oil instead of a shortage, but that’s exactly the scenario we’re facing today. The oil glut, combined with other coincidental factors, has raised the threat of serious armed conflict higher than it’s been in our lifetimes.
As oil prices continue to slide, breaking under $30 a barrel, the global energy market becomes more and more dire. With gasoline prices under $2.00/gallon in many places, most Americans hardly give a passing thought to how much we spend on energy security. Consumers won’t start to care about gas prices until they top $4.00/gallon, which could happen virtually overnight in the event of an oil shooting war; a war that’s already taking shape and, in a limited way, has already started.
Iran and Saudi Arabia
The biggest and most immediate threat in the Middle East is the conflict between Saudi Arabia and Iran. Part of the reason OPEC hasn’t scaled back oil production is to hurt Iran as it, at least publicly, gives up its nuclear ambitions and seeks to rejoin world markets. The two are also religious enemies, with the Saudis providing material support to Sunni organizations and Iran funding Shiite organizations. While neither side will admit to state funding of terrorism, there is some evidence that money and material support are filtering down to terrorist groups. The two nations are already involved in a proxy war in Yemen and, to a lesser extent, Iraq, as the region’s two dominant powers vie for superiority. Iran sits atop of one of the world’s most important shipping routes. Disrupting shipping through the Strait of Hormuz would be as easy as disrupting shipping on Lake Erie. The world would inevitably turn to the United States Navy to intervene, even though they’d be unlikely to pony up the cash to cover the bill. The bombs are already falling and it’s only a matter of time before the spark turns into a fire.
Falling oil prices are putting a serious hurt on the Russian economy and currency as well. The government has already announced cutbacks in spending, a much bigger deal in a country where, in many ways, the government is the economy. Before anyone is tempted to mock our historic Cold War opponent, keep in mind that none of us benefits from an unstable nuclear and military power, especially one which controls a significant fraction of the globe’s land mass. If Russia gets desperate enough for money, it might consider holding a nuclear warhead garage sale and perhaps entertain the idea of selling nukes to countries previously trying to grow their own, like Iran. International sanctions couldn’t make Russia much worse off than it already is and thus hold little deterrent value. A desperate Vladimir Putin is not someone you want to count on to make rational decisions in a financial crisis.
This wouldn’t be the first time the U.S. would have needed to step in and help Mexico because of falling oil prices. The Mexican government still depends on oil revenues for roughly a third of its budget. Pemex, Mexico’s state-owned oil company, has weathered the price drops better than most due to its rock bottom production costs. All the same, at $30 a barrel prices are now below even those production costs. While we’re not in any danger of being invaded by Mexico an unstable neighbor to the south, already with a healthy population of highly armed cartel gunmen, helps absolutely no one. Since the 1970s Mexico has worked to diversify its economy away from oil but it’s a slow process. A destabilized Mexico or worse, a Mexico rocked by revolution, would not be a beneficial development for the U.S., potentially exploding costs and drawing away resources as we’re forced to secure the border from a tidal wave of refugees.
While we happily binge on $2.00/gallon gasoline, the torches that could start a major fire in oil markets have already been lit. Enjoy it while it lasts because the reversal could be fast and brutal.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.