Saudi Arabia Dealt Its Energy Cards But Forgot All About Its Security Cards
Every country has its cards to play.
In Monday’s Geopolitics and Markets Review, I wrote about Saudi Arabia's current energy policy. I think it's leading to them pivoting to China and BRICS (Brazil, Russia, India, China and South Africa). And in turn, becoming more integrated with China’s Belt and Road Initiative.
It turns out that Saudi handed out all its energy cards in its pivot to the east. But the east had no security cards to give them. So now they’ve got none. But the US has lots, so that’s where Saudi Arabia has turned.
Saudi Arabia is known for its sway in energy, especially oil for which it exported $81B in 2020.
That was during COVID and led to a growth loss in 2020. But oil prices were low on demand shocks as nobody was going anywhere. Now we live in a new world, where oil is becoming one of the world’s most important commodities once again. This gives Saudi Arabia, and the rest of OPEC, power in the energy markets.
Saudi Arabia hasn’t been shy about its opinions on the United States emptying its Strategic Petroleum Reserve to keep oil prices down. In the end, this move will be in vain, with potential conflicts breaking out all around the globe. Oil is a necessity. And higher prices of oil will allow Saudi Arabian growth to continue at high levels. They are set to be one of the largest growing countries in the world this year in GDP. This comes on the back of high oil prices and massive exports to countries affected by Russian energy being removed from western markets.
But, I made a mistake. I only considered energy. What about security? The Middle East in the past has been a tense environment. Iran is showing increased action towards preparing for a conflict with Saudi Arabia. Why would Iran do this? They are currently experiencing protests that are getting close to 50-days after the death of Mahsa Amini. How can they distract people from what’s happening in their own country so they can deal with it? By causing chaos in the Middle East by attacking a neighbour. Iran accuses Saudi of interfering in these protests by provoking Iranian youth through media.
Oil prices would soar. Iran would be flying over the Persian Gulf to attack Saudi Arabia. Look at the Black Sea and how difficult it has been to get any grain deal to stick. The Russians recently tried to pull out until Turkey and Erdogan convinced them otherwise. In the contested Persian Gulf, with more countries having strategic interests in the area, I don’t think a deal to get oil out of the Gulf will come. Iran will close the Strait of Hormuz. This will be a massive trend in the coming decade. Whoever controls massive global ocean trade routes has power. Look at Turkey’s influence growing because of the Bosporus Strait that links the Aegean into the Mediterranean from the Black Sea. Straits will be critical in the coming decade for global trade routes, and the security of the world’s oceans. Look at the global trade chaos when someone parked their tanker in the Suez Canal. Watch global supply chain pressure skyrocket again just like it did during COVID.
So, in the face of this conflict, where did Saudi Arabia turn? The US as the world's global policeman has another job. With all the things happening in the world of geopolitics, I’m starting to think it can’t be one policeman. He’d be overworked and underpaid if it was! Weeks after stating there will be consequences for the US in lowering oil prices through their reserves, they need the US for protection.
From the points of view of the three players:
The US – In the European energy crisis caused by the separation of cheap Russian energy, oil out of the Persian Gulf is an absolute necessity for global energy security. Whether we like it or not, oil is still the most important energy commodity in the world. And we can’t stick up enough wind turbines and solar panels or build nuclear power stations without time. We need oil. It's in the US’ interest to stop the energy crisis in Europe from spiralling out of control. The US has too much interest in maintaining stability in the Middle East. With the energy crisis, and they are wanting to refill its oil reserves back up when the price gets below $72, they have direct and indirect interests. By the current futures contracts on crude, this will happen in March 2025. A lot can happen before then. And if an Iran-Saudi hot war breaks out, good luck seeing prices at the level they’re currently at.
Saudi Arabia – The Saudi-Iran conflict could be argued to have started back in 1979. It turns out that having that much oil, which is a global necessity, and many countries in a compact space, can cause some of them to want more control. This current conflict was reignited in 2011 by the Arab Spring. We saw the civil wars in Libya and Syria and intense instability in the region. The aftermath led to Saudi Arabia vying for more power through the Gulf Union. The Gulf Union was rejected as the other countries knew this would lead to more Saudi influence in the area. Saudi’s pivot to the east could also be explained by their lack of trust in the US as a security guarantor. Countries act in their own self-interest.
Iran – Currently they are experiencing protests getting close to 50 days. Iran could do with a distraction to attempt to calm tensions. Calls for regime change will be lost in the media shuffle and would be easier to squash if a war were to break out.
It is the Saudis who shared knowledge with the US about Iran’s potential attacks on crucial energy infrastructure in their country. Iran has stated these claims are untrue and “baseless”. Russia said the same before Ukraine, and look where we are 9 months later.
Either way, a conflict between the two would lead to massive spikes in oil prices. But the players who would usually win from higher prices will be fighting a war and bringing instability to the entire Persian Gulf. I can’t see who wins here.
Global trade is reducing. Supply chains are shrinking. And it’s a good job because you’re not going to be able to get anything from the other side of the world anyway. Not without navigating many key straits, controlled by countries where tensions are escalating. Get a wind turbine in your garden, and a group of 6 private security guards to protect it.