Category Archives: Middle East

Shale’s victory could spell the end of the US-Saudi alliance

“Nothing is more powerful than an idea whose time has come.”

–Victor Hugo

Amidst the endless sturm und drang of the present unholy political risk trinity of Trump, Brexit, and Europe, perhaps an even more important systemic change has gone largely unnoticed. The victory of America’s shale revolution—and the failure of Saudi Arabia to strangle it at its birth—means that the global price of oil will never be the same, with a permanent ceiling being placed over energy prices. This has almost incalculable geopolitical and macroeconomic consequences for a world that has largely missed its monumental significance.

The Permian Basin in west Texas, accessed through the fracking engineering revolution, is estimated to have as much oil beneath it as Ghawar, the largest field in Saudi Arabia. Further, the oil is cheaper to extract than are the riches in most countries within OPEC. It is estimated the bounty could last for 100 years. Almost overnight, the United States has risen phoenix-like from energy mendicant to one of the global big three–along with Russia and Riyadh, a setter of the global price of energy.

Coupled with the tar sands of Canada and the liberalisation of Pemex, Mexico’s heretofore state-controlled oil company, North America now stands as close to energy self-sufficiency as it is possible to be in the modern, interdependent world. This US does not have to worry overmuch—and with such tragic results—about the Middle East for the first time in modern history. At last, a policy of off-shore balancing vis-a-vis the snake pit of the region is possible.

If fracking is unambiguously good news for the US, it is a long-term threat to Saudi Arabia, America’s ultimate frenemy. Since World War II, the US-Saudi alliance has been based on a simple trade: America provides Riyadh with strategic stability while Saudi Arabia manages the steady and reliable flow of energy across the globe. With the advent of the shale revolution, and the relative diminution in Saudi power it underlines, however, the basic contours of this deal are being called into question as they never have been before in modern times.

While the Trump administration seems to have gormlessly fixed on a return to the pre-Obama stasis in the region—supporting repressive Sunni states such as Egypt and Riyadh instead of Shia-champion Iran—over time it is highly doubtful as to whether this old wine will retain its potency.

First, it was the Saudis themselves who have mightily tried to destroy America’s shale bounty, by pumping oil in ever higher volumes to drive the global price downwards, effectively negating the incipient shale revolution. This unfriendly economic act has failed. Shale rigs can be turned on and off like a tap, coming back online far more easily and at negligible cost compared with the fixed rigs of the Saudi desert. Thus, all the gormless Saudis have managed to do is make shale the ceiling of the overall global energy price, with shale coming back online whenever the price rises.

Second, while the Saudi’s John D. Rockefeller strategy (as we have coined it) did drive some US shale firms out of business, Riyadh—with its state-controlled oil company—knows precious little about how private American energy companies work. Throughout all of modern Texas commercial history, small-time Texas wildcatters with vision have been driven out of business, only to be replaced by East Coast money. The ownership of the energy may change but the drilling goes on. While the Saudi Rockefeller strategy has made life miserable for some wildcatters, it has not managed to destroy the thrust of the shale revolution at all.

Of course, unfriendly Saudi economic acts have been matched for years by murky political practices, from the country’s internal medieval repression, to funding radical madrassas throughout the world, to 15 of the 19 perpetrators of 9/11 being Saudi. Given the country’s litany of hostile acts, the shale revolution finally allows America to cut the doleful ties that bind it to such a treacherous ‘friend.’ Such a break would be world altering, indeed.

Published in City AM Money, March 24, 2017

Why Trump presidency is radically different for the Middle East

Introduction: The world has actually changed

Far too often, modern political risk analysts cleave to the intellectual shore in a desperate search for analytical safety, when events have already shaken up the comfortable world they have grown used to describing. Knowing when a game-changing event has occurred (for instance the recent, decades-long economic rise of China), and how it changes the old rules, is invaluable for any world-class political risk analyst.

With the election of Donald Trump now is such a time. For rather than playing the old strategic game of favouring either Iran or Saudi Arabia, a Trump administration will clearly favour neither, either in terms of Congress’s adoption of the JASTA law or the Iran nuclear deal. The world has truly turned upside down.

But hold on a minute, will bleat every self-satisfied, mediocre risk analyst, surely Trump’s rhetoric is just hot air. In the end, the realities of American interests and longstanding commitments will make a Trump foreign policy in the Middle East much like that of any other US President. But such nonsense is lazy, wrongheaded analytical whistling by the graveyard.

For Trump’s ideology is not an act. Better than pretending the world has not changed, it would be far more useful to analyse the new president’s worldview, particularly over the Middle East, rather than pretending his election did not matter.

Trump’s Jacksonian Nationalism

Donald Trump’s overall foreign policy views are not the mystery the highly-discredited commentariat presently make them out to be. He largely hews to what Walter Russell Mead calls the Jacksonian nationalist strain of American foreign policy, long a minority (if important) view in both American political parties.

Espousing a form of realism, the Jacksonians believe that the US should pursue a very limited but overriding view of the American national interest, seeing that every US foreign policy initiative furthers American interests to the exclusion of all other competing imperatives.

The idea that America is somehow impelled to ‘lead’ over any specific issue such as the Middle East as the global ordering power strikes Jacksonians as dangerous claptrap of the highest order, just another example of global elites caring about esoteric issues (global warming, pandemics, nuclear proliferation), all the while ignoring the concrete economic plight of their own workers, the Springsteen Democratic base which actually elected Trump president.

As such, Jacksonians are deeply distrustful of alliances, fearing the US too often allows itself to be shackled to the wishes of others, who may have quite different interests from those of America. While Jacksonians are not against NATO or any other bi-lateral alliances in the Middle East per se, they are only for such commitments in transactional terms, if America ‘gets a good deal’ out of them.

Jacksonians are not isolationists; they will do things in the world that they believe suit them and their interests. To ask them to do anything beyond that—as America regularly has as the global ordering power for the past 70 years—is not going to happen anymore. At its essence this is what Trump means when he talks about ‘America First’, a laser-like focus on American national interests to the exclusion of all else.

Jacksonians favour using force, but only when it is clear that a winning strategy is at hand, and never in the interests of esoteric goals, such as ‘upholding the international community’, ‘humanitarian intervention’, or to ‘nation-build’ others. Any nation building that occurs ought to be for the Springsteen Democrats, rather than (rightly in my view) wasting literally trillions of desperately-needed dollars in swamps like Iraq around the world. Again, with his focus entirely on American nationalism, Trump—weirdly echoing the very different Barack Obama—wants nation-building to begin at home

However, should America decide that the use of force is in its interests, Jacksonians are for prosecuting war, regardless of what others—including international institutions like the irrelevant UN or the smug and hopeless EU—might say. As Jacksonians believe so fervently in American nationalism, they readily accept that other countries might also wish to use force, and are not over-worried by that reality, as long as American interests are not threatened.

Hence, Trump’s blithe unconcern for whatever President Putin gets up to in either eastern Ukraine or Syria. America has no primary interests in either place so Jacksonians like Trump—to the horror of the international rules-loving Wilsonian elite—simply don’t care.

To put it mildly, this Jacksonian tilt will force the rest of the world to think about America again, in a way few have bothered to do over the past several generations, as Jacksonian precepts, world view and policy prescriptions are so entirely novel to foreign eyes.

Jacksonianism in the Middle East

What this means is that after seventy years, American foreign policy will decisively shift, as we have never had a Jacksonian-inspired presidency in the modern era. Not seeing primary American interests at play in Syria—and more determined than even President Obama to stamp out ISIS—Trump will find tacit common cause with Russia, Iran and the puppet Assad regime it supports, tilting the conflict strongly in their favour. In turn, he will work with Moscow to decimate what is left of the dwindling would-be caliphate.

But this is not a tilt towards Iran, either. The Trump White House is determined to hold Tehran’s feet to the fire over the nuclear deal, either rescinding it outright (which would cause a firestorm of controversy with America’s European allies) or just as likely harrying the Iranians endlessly over the legal details of the accord, hoping hard-liners in Tehran convince Grand Ayatollah Khamenei to walk away in disgust.

In turn, The Trump administration is bad news for Saudi Arabia as well. Trump strongly supported the JASTA legislation while running for president, and is unlikely to back-track on that populist pledge. Likewise, in the pursuit of energy independence, Trump means what he says in cutting back on Saudi energy imports to America.

Instead, look for a Jacksonian America to position itself in the Middle East as the off-shore balancer of last resort, not nearly as concerned with the day-to-day goings-on in the region as American presidents have been in the past and only roused to action when primary American interests—such as the destruction of ISIS—are in play.

Like it or not, Trump’s Jacksonianism means the Middle East will be increasingly left to its own devices in a way it has not been for several generations.

Printed in Al Arabiya online, November 21, 2016

Saudi Arabia’s gormless cheerleaders have failed to spot the looming crisis

“Some people without brains do an awful lot of talking.”

–The Wizard of Oz

Conventional political risk wisdom is falsely sanguine about yet another looming crisis. The House of Saud, bullish proponents blithely declaim without giving the matter too much thought beyond simplistic headlines, has proven surprisingly supple and enduring. Yet in reality, Saudi Arabia is so much less than meets the eye.

Investors would seem to follow the commentariat lemmings over the analytical cliff. Just a week ago, Riyadh managed a successful bond offering of $17.5 billion, a record issue for an emerging market country. With its ambitious Vision 2030 plan for a diversified economy, a new dynamic de facto ruler in King Salman’s favoured son, Deputy Crown Prince Mohammed bin Salman, and even OPEC showing signs of life, Saudi Arabia is currently a ‘buy’ in terms of conventional political risk analysis.

Continuing their almost unbroken record for getting everything of significance wrong lately (Iraq, Lehman, Brexit, Columbia), look for the global chattering classes to be off base about this as well. For once we look beneath the analytical hood in terms of the economic and political fundamentals, in every case Saudi Arabia is in worse shape than recent headlines lead us to believe.

Riyadh’s disastrous effort to drive shale from the global energy market has boomeranged, inflicting maximum damage on its own one-crop economy (90% of government revenue comes from oil). The Saudi deficit has exploded from an average of around three percent to a gargantuan 16% in 2015, hardly a symptom of health.

While still not in the danger zone, Saudi reserves have plummeted from $740 billion as recently as mid-2014 to around $550 billion in October 2016. Even a government as flush as the House of Saud can’t continue burning through its abundant reserves at the present pace forever.

Nor are the political fundamentals of the regime anywhere near as secure as they look. Prince Mohammed has no obvious credentials to be my intern, let alone the de facto ruler of one of the Great Powers of the Middle East. He is only in that position for the precarious reason that he is the favoured son of the aging, ailing present king.

Prince Mohammed has overseen the disastrous war with Yemen. He has put himself in charge of Vision 2030, the most recent plan to economically modernise the country (store rooms are littered with previous failed attempts to do so). He is running the state-controlled oil industry. A man of prodigious genius—say Alexander Hamilton—could not manage to stay on top of all these demanding positions. A man with absolutely no background in running anything is going to be in for a rough ride.

Even barring these policy realities, Prince Mohammed’s position is far from secure. Given the challenges the opacity of Saudi internal political decision-making present for analysts, my political risk firm had long believed the best way to study Saudi politics is to look at the ruling family’s decisions through the prism of Ottoman Empire harem politics. The jockeying for power between the many family factions is the best indicator of Saudi outputs. By this yardstick, Prince Mohammed would do well to perpetually look over his shoulder.

For Mohammed’s father, King Salman, has overturned ruling family precedent by leapfrogging his son over literally dozens of claimants for the throne, a shocking departure in a system that has traditionally prized stability, harmony between the family factions, and venerated age as prerequisite for ruling. Because of all this, there are a lot of people within the House of Saud who would not shed a tear should Prince Mohammed fail.

Also, given King Salman’s unsure health, and the Delphic silence of experienced, canny Crown Prince Mohammed bin Nayef, there is absolutely no guarantee that the Deputy Crown Prince will not be thrown out on his ear when his father—his sole credential for holding power—departs the scene.

Even the recent ‘success’ of Saudi-dominated OPEC is more mirage than reality. The September 28th agreement in Algiers to finally limit cartel production is underwhelming. Specific cuts from individual members have yet to be agreed on, which means the current agreement is no agreement at all. Even for this exercise in public relations, Saudi Oil Minister Khalid al-Falih had to exempt Iran, Libya, and Nigeria from participation, making the deal not worth the paper it is printed on.

So beneath the cheerleading, Saudi Arabia remains a one-crop economy in economic difficulties, with an untested and politically vulnerable Deputy Crown Prince temporarily at the helm, manifestly unable to resurrect a corpse-like OPEC. I think we can hold off on the champagne for now.

Published in City AM London, October 24, 2016