Oil Price War and the Audit of Pandemic

History in truth never repeats, but it very often reverses itself. Crown Prince Mohammed bin Salman bet heavily on repeating history when he tried to bankrupt Russia by opening the gates of unlimited oil production and exports: He will only ruin his own Kingdom of Saudi Arabia instead.

In the 1980s King Fahd of Saudi Arabia worked closely with the United States to drive down global oil prices and bankrupt the Soviet Union. At the same time Washington quietly encouraged Riyadh to pour unlimited funds and other support to the Mujahedin forces fighting the Red Army in Afghanistan. CIA-supplied Stinger missiles flowed to them as well.

Today, the opposite is happening, the Saudi high risk kamikaze strategy is targeting both Russia and U.S. oil production. The U.S. fracking industry appears to be its primary target. But in his usual wild and reckless way, Bin Salman does not appear to care about the risk he is presenting to Russia’s fundamental interests as well.

In fact, Russia is far better laced than either the United States or Riyadh to ride out a global financial crisis that is already careening out of control.

Bin Salman launched his oil price war before the coronavirus epidemic wave truly rose outside China. Now it is growing into tsunami proportions, especially in the United States. The global economy is going into a shut down and it is quite feasible that we shall not see the beginnings of any real recovery until July. By then the global oil industry will have melted down.

Russia at heart is financially sound, thanks to the cautious rebuilding policies of the Moscow government since the 2008-9 global financial crisis, But the same cannot be said of either Riyadh or Washington.

Bin Salman since seizing power after the death of his uncle, cautious, wise old King Abdullah has spent money like a drunken sailor. His merciless air war on the civilians of Yemen has cost tens of thousands of deaths and cost many fortunes. Bin Salman’s policies have pleased the giant U.S. arms contractors but no one else.

Washington too has continued its profligate way. President Barack Obama inherited the greatest financial deficit in history from dim George W. Bush. The revered Obama promptly doubled it. Under President Donald Trump for all his efforts to revive domestic U.S. industry, the federal deficit and government spending have soared again.

Right now, both Trump and Congress have joined hands in a bipartisan desperate effort to keep their economy afloat even while they forced by the coronavirus crisis to shut it down for an indefinite period.

Lord Correlli Barnett, the great historian of British imperial and industrial decline and fall, liked to talk about the Audit of Peace and the Audit of War. He was referring to the challenges that different conditions presented to a society and economy that had pursued false values with deluded policies for far too long.

Today, the liberal internationalist order that has impoverished the nations of the world for so long in the name of a fantastic and phantasm mythical “prosperity” faces the Audit of Pandemic. An order based on mindlessly open borders is forced grudgingly and far too slowly to close them simply to preserve the endangered lives of their own people. At the same time, the pandemic has triggered yet another financial and economic crisis:

Faced with this Audit of Pandemic, the U.S. economic system now confronts the famous, fearful Writing on the Wall in the mythical Biblical Book of Daniel, “Thou art weighed in the balance and found wanting.” For Mohamed bin Salman’s oil price war spells doom for Wall Street – and for him too.

Financed on junk and Triple-B rated bonds, a collapse of the fracking industry will pull the entire U.S. economy into ruin and destroy President Trump’s reelection strategy.

The Saudis want to control the world oil market. They want to reclaim the swing position they enjoyed for more than 40 years after 1967. To achieve this, they want to knock out the marginal top U.S. oil producers: They want to bankrupt the U.S. fracking and shale oil industry producers.

The key breakeven sustainability oil price for domestic U.S. shale producers is usually put at $68 a barrel. The Saudis in their price cutting wars with Russia and the United States have now driven the Brent crude spot price down to around $45 a barrel. WTI crude is now running at around $31 a barrel. Oil prices have already plunged to their lowest level since 2003 and look certain to plunge further yet. Below $68 a barrel, the United States can no longer be a major oil exporter.

The rapid expansion of the domestic U.S. fracking industry was financed by junk bonds and triple B rated bonds on Wall Street, U.S. financial analyst and former London merchant banker Martin Hutchinson points out. When Michael Milken created junk bonds, he created a $100 billion market in them. But after 11 years of effectively zero percent prime interest rates, that junk market has now swelled to a colossal $1.2 trillion. These people all borrowed too much in the junk bond and triple-B-rated bond markets,

The triple B-rated bond market is even vaster and almost as unsound. It is now worth $3 trillion. And it is very wobbly, Hutchinson estimates. Therefore a collapse in oil prices threatens both those colossal bond speculative bubbles with collapse and ruin.

Once one junk or even triple B-rated bond issue goes, the rest will topple rapidly after them, like lemmings stampeding or falling off the edge of a cliff, Hutchinson warns. Once that happens, it will prove very difficult to recapitalize the fracking industry within the United States – especially as the big banks are now all run by fashionable environmentalists who are hostile to fracking and would not know how to finance and set up a serious fracking or other oil retrieval business even if they wanted to, the analyst concludes.

Bin Salman’s price war is failing against Russia but it is succeeding beyond even his expectation against the United States. However, now the Audit of Pandemic has been imposed on Riyadh as well as Washington and Wall Street. These are days to tremble.


By Martin Sieff
Source: Strategic Culture