Back in the day, I know how the Bush family would handle this.
By Quiscalus Texicanus
A lifetime ago or maybe just on April 9, we told you the bottom was about to drop out of the price of crude. In another article — we, meaning me, Quiscalus the Texas Grackle — also told you to “cheer up, it only gets worse.”
Because you should. You should cheer up because everything is going to get much, much worse, at least according to global strategist Peter Zeihan, a fellow who really has the Grackle’s ear these days.
First, Zeihan believes that oil prices have yet to bottom out, even after yesterday’s surreal sub-zero odyssey. “All” that represented, Zeihan writes, was what happens when a single storage facility runs out of future leased capacity for a single month. Now multiply that by a factor of…basically eleventy billion, which is what happens when the entire world runs out of storage capacity everywhere. Which is set to happen by sometime before the summer solstice:
Numbers are fuzzy in this corner of global oil markets. In part because everyone classifies and categories their oil storage capacity differently. In part because they should (gasoline storage is functionally different from raw oil storage). In part because some countries don’t share data because they’re lazy or secretive. But no one thinks there’s a whole lot of storage capacity left. Global oversupply of crude right now is over 20 million barrels per day (with 30mbpd seeming to be the “average” guestimate). Most folks in the know are now musing that what storage remains will be filled up completely sometime in May or early-June.
And filled up it will be, because that is the express goal of the world’s largest oil exporter, Saudi Arabia.
Right now, the Saudi-initiated price war is playing out very well indeed. Perhaps too well, as we shall see. But in the short term, the Saudis will press pretty much every other oil-producing nation to the brink. Even as I type, according to Zeihan, 24 supertankers are bound for Houston, Freeport, Port Arthur and elsewhere on the Gulf Coast, carrying 50 million more barrels of oil we don’t need, can’t use, can barely find a place to stash. Similar massive cargoes are steaming toward other refining centers internationally, places like Rotterdam and Suez and South Korea.
Given Saudi wealth, Zeihan writes, this is not a bad strategy at all. Push prices negative and keep them there for a spell, and you will obliterate a great many competitors.
“And then Riyadh will have what it wants: the ability to raise prices as much as it wants and to reign supreme over the world of oil for at least several years,” Zeihan writes. “(There are still a veritable swarm of flies that will need to be dealt with in that particular ointment, but the Saudi plan seems sure of generating plenty of ointment nonetheless.)”
Among those potential flies: Iran and Russia, and Russia’s former vassal states Azerbaijan and Kazakhstan. Also, Iraq, which Zeihan believes will be plunged into full-on civil war under the pressure of negative pricing. He predicts that it will become “a ward of the Arab states of the Persian Gulf.”
All of this is going to happen very fast, he believes, and some countries — notably Venezuela — will not survive, period. In others, despots will fall:
“Oil has been a panacea for all sorts of inefficient, compromised, and in some cases evil regimes for decades. Huge demand in the West and Northeast Asia allowed a raft of previously insignificant or morally reprehensible leaders and societal situations to effectively print dollars out of the ground and count the industrialized world as a hungry customer. Not anymore. Demand patterns have shifted, the United States is now an exporter of crude oil and products, and the petro-economy that has kept ayatollahs and ideologues afloat is crumbling.”
Sounds great, right? Maybe? Maybe not.
Zeihan ends on a word of caution: “Before anyone cheers it’s worth remembering that things will get a lot uglier before they have any hope of improving.”
And Quiscalus would also add — does this brotha really believe that Iran and Russia are simply going to lay back and watch their countries get destroyed? For that matter, will Big American Awl let Muhammad bin-Salman make them his bitch?
Could America, Russia, and Iran unite against a common enemy — the KSA?
And would Israel let us, even if we asked pretty please?
Back in the day, I know how the Bush family would handle this. Perhaps much as they did the previous Oil Glut of the 1980s.
Follow along, chillun, as I blow your minds with tin foil hattery most dank:
Back in 1990, the Saudis and other Persian Gulf elites also had the world by a string, much as Zeihan envisions MBS in the catbird seat next year.
Sitting on vast heaps of cash, they were plowing it into various European currencies, bidding up the Deutsche Mark one month, crashing it the next, bidding up the Swiss franc the following month, and crashing it the next, and so on through Sterling, Italian lira, Dutch guilders, French francs, what have you.
It was a perpetual money machine, but it was playing hell with western Europe’s economy and way of life. Their leaders asked the Saudis to stop. The Saudis scoffed. They asked the Americans to ask the Saudis to cut it out. Perhaps this time the Saudis said they would take it under advisement that time, but the result was the same: they kept on manipulating European currency markets, printing themselves money, and causing havoc in Europe.
Meanwhile Saddam Hussein raises his head up and asks our ambassador, April Glaspie, if he could just go ahead and re-annex what he claimed was the wayward province of Kuwait. Whatevs, Glaspie (on orders from that old gray fox James Baker) told Saddam. These intra-Arab matters are of no concern to America.
So Saddam duly invades, sending the price of oil through the roof (remember, this was during a time of glut), and scaring the royal shit out of the Saudis, who are suddenly interested in what we and the Euros think of their currency manipulation.
You know what happened next: Deserts Shield and Storm. Somewhere along in all that mayhem Kuwait’s oil fields got torched, either by the departing Iraqis or somebody who might have wanted to teach them a lesson and create jobs for oil field firefighters back in Texas. The price of oil was restored to a level Bush’s buddies in the C-suites here in downtown Houston could deal with.
And, the beauty part — we got the Saudis and their buddies to pay for the whole thing. They even ponied up for our Lee Greenwood Extravaganza ticker-tape victory parade. (As an epilogue: Europe set aside its differences and hastened the introduction of the Euro; perhaps MBS sees that unraveling as potential to put the old currency manipulation band back together.)
And somewhere along in this there also lies the continuation of the petrodollar. Will oil continue to be priced in US dollars? That’s a question for another story.
As is the question of how Trump’s (Deep) State Department will handle this Mother of All Shitstorms. I mean, I don’t fucking know, do you? Anything between Trump marrying off Barron into the House of Saud and nuking Mecca seems in the cards with that lunatic at the helm.
So yeah, get your foul weather on and hit the deck — there’s a wee breeze blowing in from the east.