While turbulent during the best of times, gigantic waves of change are now sweeping across the Middle East. The magnitude is such that the impact on the global price of oil, as well as world markets, is likely to be enormous.
A dramatic geo-political realignment by Saudi Arabia is in full swing this month. It's upending many decades of established strategic relationships among the world's superpowers and, in particular, is throwing the Middle East into turmoil.
So much is currently in flux, especially in Saudi Arabia, that nearly anything can happen next. Which is precisely why this volatile situation should command our focused attention at this time.
The main elements currently in play are these:
- A sudden and intense purging of powerful Saudi insiders (arrests, deaths, & asset seizures)
- Huge changes in domestic policy and strategy
- A shift away from the US in all respects (politically, financially and militarily)
- Deepening ties to China
- A surprising turn towards Russia (economically and militarily)
- Increasing cooperation and alignment with Israel (the enemy of my enemy is my friend?)
Taken together, this is tectonic change happening at blazing speed.
That it's receiving too little attention in the US press given the implications, is a tip off as to just how big a deal this is -- as we're all familiar by now with how the greater the actual relevance and importance of a development, the less press coverage it receives. This is not a direct conspiracy; it's just what happens when your press becomes an organ of the state and other powerful interests. Like a dog trained with daily rewards and punishments, after a while the press needs no further instruction on the house rules.
It does emphasize, however, that to be accurately informed about what's going on, we have to do our own homework. Here's a short primer to help get you started.
A Quick Primer
Unless you study it intensively, Saudi politics are difficult to follow because they are rooted in the drama of a very large and dysfunctional family battling over its immense wealth. If you think your own family is nuts, multiply the crazy factor by 1,000, sprinkle in a willingness to kill any family members who get in your way, and you'll have the right perspective for grasping how Saudi 'politics' operate.
The House of Saud is the ruling royal family of the Kingdom of Saudi Arabia (hereafter referred to as "KSA") and consists of some 15,000 members. The majority of the power and wealth is concentrated in the hands of roughly 2,000 individuals. 4,000 male princes are in the mix, plus a larger number of involved females -- all trying to either hang on to or climb up a constantly-shifting mountain of power.
Here's a handy chart to explain the lineage of power in KSA over the decades:
We'll get to the current ruler, King Salman, and his powerful son, Mohammed Bin Salman (age 32), shortly. Before we do, though, let's talk about the most seminal moment in recent Saudi history: the key oil-for-money-and-protection deal struck between the Nixon administration and King Faisal back in the early 1970's.
This pivotal agreement allowed KSA to secretly recycle its surplus petrodollars back into US Treasuries while receiving US military protection in exchange. The secret was kept for 41 years, only recently revealed in 2016 due to a Bloomberg FOIA request:
The basic framework was strikingly simple. The U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America's spending.
It took several discreet follow-up meetings to iron out all the details, Parsky said. But at the end of months of negotiations, there remained one small, yet crucial, catch: King Faisal bin Abdulaziz Al Saud demanded the country's Treasury purchases stay “strictly secret," according to a diplomatic cable obtained by Bloomberg from the National Archives database.
“Buying bonds and all that was a strategy to recycle petrodollars back into the U.S.," said David Ottaway, a Middle East fellow at the Woodrow Wilson International Center in Washington. But politically, “it's always been an ambiguous, constrained relationship."
The essence of this deal is pretty simple. KSA wanted to be able to sell its oil to its then largest buyer, the USA, while also having a safe place to park the funds, plus receive military protection to boot. But it didn't want anybody else, especially its Arab neighbors, to know that it was partnering so intimately with the US who, in turn, would be supporting Israel. That would have been politically incendiary in the Middle East region, coming as it did right on the heels of the Yom Kipper War (1973).
As for the US, it got the oil it wanted and – double bonus time here – got KSA to recycle the very same dollars used to buy that oil back into Treasuries and contracts for US military equipment and training.
Note that this is yet another secret world-shaping deal successfully kept out of the media for over four decades. Yes Virginia, conspiracies do happen. Secrets can be (and are routinely) kept by hundreds, even thousands, of people over long stretches of time.
Since that key deal was struck back in the early 1970s, the KSA has remained a steadfast supporter of the US and vice versa. In return, the US has never said anything substantive about KSA's alleged involvement in 9/11 or its grotesque human and women's rights violations. Not a peep.
Then Things Started To Break Down
In 2015, King Salman came to power. Things began to change pretty quickly, especially once he elevated his son Mohammed bin Salman (MBS) to a position of greater power.
Among MBS's first acts was to directly involve KSA into the Yemen civil war, with both troops on the ground and aerial bombings. That war has killed thousands of civilians while creating a humanitarian crisis that includes the largest modern-day outbreak of cholera, which is decimating highly populated areas. The conflct, which is considered a 'proxy war' because Iran is backing the Houthi rebels while KSA is backing the Yemeni government, continues to this day.
Then in 2016, KSA threatened to dump its $750 billion in (stated) US assets in response to a bill in Congress that would have released sensitive information implicating Saudi Arabia's involvement in 9/11. Then-president Obama had to fly over there to smooth things out. It seems the job he did was insufficient; because KSA-US relations unraveled at an accelerating pace afterwards. Mission NOT accomplished, it would seem.
In 2017, KSA accused Qatar of nefarious acts and made such extraordinary demands that an outbreak of war nearly broke out over the dispute., The Qatari leadership later accused KSA of fomenting 'regime change', souring the situation further. Again, Iran backed the Qatar government, which turned this conflict into another proxy battle between the two main Gulf region superpowers.
In parallel with all this, KSA was also supporting the mercenaries (aka "rebels" in western press) who were seeking to overthrow Assad in Syria -- yet another proxy war between KSA and Iran. It's been an open secret that, during this conflict, KSA has been providing support to some seriously bad terrorist organizations like Al-Qaeda, ISIS and other supposed enemies of the US/NATO. (Again, the US has never said 'boo' about that, proving that US rhetoric against "terrorists" is a fickle construct of political convenience, not a moral matter.)
Once Russia entered the war on the side of Syria's legitimate government, the US and KSA (and Israel) lost their momentum. Their dreams of toppling Assad and turning Syria into another failed petro-state like they did with Iraq and Libya are not likely to pan out as hoped.
But rather than retreat to lick their wounds, KSA's King Salman and his son are proving to be a lot nimbler than their predecessors.
Rather than continue a losing battle in Syria, they've instead turned their energies and attention to dramatically reshaping KSA's internal power structures:
Saudi Arabia's Saturday Night Massacre
For nearly a century, Saudi Arabia has been ruled by the elders of a royal family that now finds itself effectively controlled by a 32-year-old crown prince, Mohammad bin Salman. He helms the Defense Ministry, he has extravagant plans for economic development, and last week arranged for the arrest of some of the most powerful ministers and princes in the country.
A day before the arrests were announced, Houthi tribesmen in Yemen but allied with Iran, Saudi Arabia's regional rival, fired a ballistic missile at Riyadh.
The Saudis claim the missile came from Iran and that its firing might be considered “an act of war."
Saudi Arabia was created between the two world wars under British guidance. In the 1920s, a tribe known as the Sauds defeated the Hashemites, effectively annexing the exterior parts of Saudi Arabia they did not yet control. The United Kingdom recognized the Sauds' claim shortly thereafter. But since then, the Saudi tribe has been torn by ambition, resentment and intrigue. The Saudi royal family has more in common with the Corleones than with a Norman Rockwell painting.
The direct attack was undoubtedly met with threats of a coup. Whether one was actually planned didn't matter. Mohammed Bin Salman had to assume these threats were credible since so many interests were under attack. So he struck first, arresting princes and ex-minsters who constituted the Saudi elite. It was a dangerous gamble. A powerful opposition still exists, but he had no choice but to act. He could either strike as he did last Saturday night, or allow his enemies to choose the time and place of that attack. Nothing is secure yet, but with this strike, there is a chance he might have bought time. Any Saudi who would take on princes and clerics is obviously desperate, but he may well break the hold of the financial and religious elite.
This 32 year-old prince, Mohammed bin Salman has struck first and deep, completely upending the internal power dynamics of Saudi Arabia.
He's taken on the political, financial and religious elites head on. For example, pushing through the decision to allow women to drive; a provocative move designed to send a clear message to the clerics who might oppose him. That message is: "I'm not fooling around here."
This is a classic example of how one goes about purging the opposition when either taking over a government after a coup, or implementing a big new strategy at a major corporation. You have to remove any possible opponents and then install your own loyalists. According the Rules for Rulers, you do this by diverting a portion of the flow of funds to your new backers while diminishing, imprisoning or killing all potential enemies.
So far, Mohammed bin Salman's action plan is par for the course. No surprises.
The above article from Stratfor (well worth reading in its entirety) continues with these interesting insights:
The Iranians have been doing well since the nuclear deal was signed in 2015. They have become the dominant political force in Iraq. Their support for the Bashar Assad regime in Syria may not have been enough to save him, but Iran was on what appears to be the winning side in the Syrian civil war. Hezbollah has been hurt by its participation in the war but is reviving, carrying Iranian influence in Lebanon at a time when Lebanon is in crisis after the resignation of its prime minister last week.
The Saudis, on the other hand, aren't doing as well. The Saudi-built anti-Houthi coalition in Yemen has failed to break the Houthi-led opposition. And Iran has openly entered into an alliance with Qatar against the wishes of the Saudis and their ally, the United Arab Emirates.
Iran seems to sense the possibility of achieving a dream: destabilizing Saudi Arabia, ending its ability to support anti-Iranian forces, and breaking the power of the Sunni Wahhabis. Iran must look at the arrests in Saudi Arabia as a very bad move. And they may be. Mohammad bin Salman has backed the fundamentalists and the financial elite against the wall.
They are desperate, and now it is their turn to roll the dice. If they fall short, it could result in a civil war in Saudi Arabia. If Iran can hit Riyadh with missiles, the crown prince's opponents could argue that the young prince is so busy with his plans that he isn't paying attention to the real threat. For the Iranians, the best outcome is to have no one come out on top.
This would reconfigure the geopolitics of the Middle East, and since the U.S. is deeply involved there, it has decisions to make.
So given Yemen, Syria, and its recent domestic purges, Saudi Arabia is in turmoil. It's in a far weaker position than it was a short while ago.
This leaves the US in a far weaker regional position, too, at precisely the time when China and Russia are increasing their own presence (which we'll get to next).
But first we have to discuss what might happen if a civil war were to engulf Saudi Arabia. The price of oil would undoubtedly spike. In turn, that would cripple the weaker countries, companies and households around the world that simply cannot afford a higher oil price. And there's a lot of them.
Financial markets would destabilize as long-suppressed volatility would explode higher, creating horrific losses across the board. That very few investors are mentally or financially prepared for such carnage is a massive understatement.
So..if you were Saudi Arabia, in need of helpful allies after being bogged down in an unwinnable war in Yemen, just defeated in a proxy war in Syria, and your longtime 'ally', the US, is busy pumping as much of its own oil as it can, what would you do?
Pivot To China
Given its situation, is it really any surprise that King Salman and his son have decided to pivot to China? In need of a new partner that would align better with their current and future interests, China is the obvious first choice.
So in March 2017, only a very short while after Obama's failed visit, a large and well-prepared KSA entourage accompanied King Salman to Beijing and inked tens of billions in new business deals:
China, Saudi Arabia eye $65 billion in deals as king visits
Mar 16, 2017
BEIJING (Reuters) - Saudi Arabia's King Salman oversaw the signing of deals worth as much as $65 billion on the first day of a visit to Beijing on Thursday, as the world's largest oil exporter looks to cement ties with the world's second-largest economy.
The deals included a memorandum of understanding (MoU) between giant state oil firm Saudi Aramco and China North Industries Group Corp (Norinco), to look into building refining and chemical plants in China.
Saudi Basic Industries Corp (SABIC) and Sinopec, which already jointly run a chemical complex in Tinajin, also agreed to develop petrochemical projects in both China and Saudi Arabia.
Salman told Xi he hoped China could play an even greater role in Middle East affairs, the ministry added.
Deputy Chinese Foreign Minister Zhang Ming said the memorandums of understanding and letters of intent were potentially worth about $65 billion, involving everything from energy to space.
This was a very big deal in terms of Middle East geopolitics. It shook up many decades of established power, resulting in a shift away from dependence on America.
The Saudis arrived in China with such a huge crowd in tow that a reported 150 cooks had been brought along to just to feed everyone in the Saudi visitation party.
The resulting deals struck involved everything from energy to infrastructure to information technology to space. And this was just on the first visit. Quite often a brand new trade delegation event involves posturing and bluffing and feeling each other out; not deals being struck. So it's clear that before the visit, well before, lots and lots of deals were being negotiated and terms agreed to so that the thick MOU files were ready to sign during the actual visit.
The scope and size of these business deals are eye catching, but the real clincher is King Salman's public statement expressing hope China will play "an even greater role in Middle East affairs."
That, right there, is the sound of the geopolitical axis-tilting. That public statement tells us everything we need to know about the sort of change the Salman dynasty intends to pursue.
So it should have surprised no one to hear that, in August this year, another $70 billion of new deals were announced between China and KSA. The fanfare extolled that Saudi-Sino relations had entered a new era, with “the agreements covering investment, trade, energy, postal service, communications, and media."
This is a very rapid pace for such large deals. If KSA and China were dating, they'd be talking about moving in together already. They're clearly at the selecting furniture and carpet samples stage.
As for the US? It seems KSA isn't even returning its calls or texts at this point.
You Ain't Seen Nothing Yet...
All of the above merely describes how we arrived at where things stand today.
But as mentioned, the power grab underway in KSA by Mohammed bin Salman is unfolding in real-time. Developments are happening hourly -- while writing this, the very high-profile Prince Bandar bin Sultan (recent head of Saudi Intelligence and former longtime ambassador to the US) has been arrested.
The trajectory of events is headed in a direction that may well end the arrangement that has served as the axis around which geopolitics has spun for the past 40 years. The Saudis want new partners, and are courting China hard.
China, for reasons we discuss in Part 2 of this report, has an existential need to supplant America as Saudi Arabia's most vital oil customer.
And both Saudi Arabia and China are inking an increasing number of strategic oil deals with Russia. Why? We get into that in Part 2, too -- but suffice it to say, in the fast-shifting world of KSA foreign policy, it's China and Russia 'in', US 'out'.
Maybe not all the way out, but the US clearly has lost a lot of ground with KSA over the past few years. My analysis is that by funding an insane amount of shale oil development, at a loss, and at any cost (such as to our biggest Mideast ally) the US has time and again displayed that our 'friendship' does not run very deep. In a world where loyalty counts, the US has proved a disloyal partner. Can China position itself to be perceived of as a better mate? When it comes to business, I believe the answer is 'yes.'
In Part 2: The Oil Threat we couple these developments with China and Russia's recent efforts to drop the dollar from trade, especially when purchasing oil, and clearly see the unfolding of the biggest new driver of the world's financial, monetary and geopolitical arrangements in 50 years.
We also explain why, unless something very dramatically changes in either the supply or demand equation for oil, and soon, we can now put a timeline in place for when the great unraveling begins. Somewhere between the second half of 2018 and the end of 2019 oil will dramatically increase in price and that will shake the foundations of the global mountain of debt and its related underfunded liabilities. Think 9.0 on the financial Richter scale.
Let me be blunt - you have to have your preparations done before this happens. You really, really want to be a year early on this (at least). When it starts happening, the breakdown will progress faster than you can react.