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Trump is Already Changing the Middle East – and Oil Markets, Too

by | published November 22nd, 2016

As you’re reading this, I’m in Abu Dhabi to attend a series of meetings with colleagues from across the energy world.

Now, I thought I knew what I was getting into, what with recent events in the U.S. and abroad.

But I wasn’t prepared.

You see, the storm clouds are settling in and fast, coming from several different directions, threatening to upset the Middle East’s fragile political order, and likely to require a massive redrawing of U.S. security interests.

On Saturday morning, there were even actual storm clouds rolling in from the Persian Gulf.

And it briefly rained… right here, in the desert. Looks like even the natural order of things may be undergoing pressure.

As for the region’s political order, everything is in flux right now.

For you, as an energy investor, it means things are about to get very messy…

Energy and Security are Butting Heads

Each time Marina and I arrive in the United Arab Emirates (UAE), I marvel at how much is being built here. Some years ago, an international engineer told me that Dubai then housed over 12% of all the world’s building cranes.

These days that same phenomenon is underway down the coast in Abu Dhabi, a jewel comprising three main islands now connected to the mainland.

A federal system of seven emirates, the UAE Presidency is de facto hereditary to the emir leading the Al Nahyan clan of Abu Dhabi while the Prime Minister position belongs to the emir of the Al-Maktoum family in Dubai. That makes these two titular heads the holders of national  political power.

UAE Presidential Palace as seen from our hotel suite

But it is Abu Dhabi that is both the center of government power and the next location for the rise of major economic development. The money has been here for some time.

A while back when Dubai ran into financial difficulties, the emir of Abu Dhabi (and UAE President) lent it the money to get out of hock.

The development underway in the city today is staggering. Take our hotel, which is celebrating its fifth birthday.

Five years ago, nothing surrounding it or comprising the astonishing Etihad Tower complex, even existed:

Etihad Towers, Abu Dhabi
(Marina and I are staying on the 59th floor in the center building)

Given its centrality to the expanding UAE interconnection between oil and broader global finance, Abu Dhabi is becoming the new center for international energy projects. That is not always proving to be an easy path.

And if the past few days are any indication, it is going to be a rocky ride. In the process, two disparate parts of my life are (yet again) converging.

My earlier career in intelligence had in large measure brought me into the world of energy. Now the energy world is bringing me back to my security roots. This version of what we used to call the “operational shuffle” is the result of a collision between a range of oil and energy issues arising here in Abu Dhabi and the recent U.S. presidential election…

The Persian Gulf isn’t Wasting Time After Trump’s Win

Back home, Americans are still working out the implications of a yet unknown Trump Administration. That process will unfold for weeks as the population digests cabinet and personnel appointments in advance of Trump’s January 20 inauguration.

Not here.

The Persian Gulf is already reacting. In keeping with the tenor of how these matters play out, there are two layers. The outside one – called the exoteric in the trade – continues a calm demeanor and noncommittal approach by local ministers, oil folks, and broader global banking and finance interests. That is, what is projected by the guys I’m meeting.

That level is for public consumption.

The other is the esoteric. This concerns the policy implications arising and the real meaning of the response. On this level, I am experiencing the most pronounced reactions in quite some time.

Frankly, I expected some concerns over the change in political direction back home, expressed in private conversations. But nothing like what I am hearing.

The geopolitical implications of possible changing American postures have trumped (every pun intended) everything else.

My meetings here have been dramatically changed as a result…

The Middle East Is Already Being Reshaped by Trump’s Election Win

You need to understand who the people I regularly meet with are.

They do not overreact. They are knowledgeable, well-seasoned veterans of the energy space. Rarely nonplussed, these professionals are architects of huge projects, oversee access to large investments, and have witnessed just about anything you can think of.

In fact, the ten people sitting at the table below (sorry, none of them allow their photographs to be taken) have a combined 238 years of energy sector experience.

Our Meeting Room, Executive Club, 45th Floor, Jumeirah at Etihad Towers
(that’s a Picasso on the back wall)

Notwithstanding, our meeting agenda has been significantly revised, with two broad battle flanks developing in response.

The first is on the oil front.

OPEC and the international coterie of moneyed interests that accompany the cartel are not waiting for the government to take shape in Washington. Trump has pledged to make the U.S. energy independent. The move is hardly a new one. We have been talking about that prospect for several years here in Oil & Energy Investor.

But the new administration is going to expedite that (although nobody has yet told us how). Nonetheless, the writing is on the wall. And it’s enough to prompt some major reversals in policy here.

The Saudis have already laid down a gauntlet. Energy Minister Khalid al-Falih has warned that OPEC will not tolerate any cuts in U.S. oil imports.

The reason is simple: these days the oil market is genuinely globally integrated. And any move to change dynamics in one location will have consequences elsewhere.

Think of the crude oil sector as a balloon. Squeeze it in one place, and it will just bulge out somewhere else.

But in the current environment, OPEC is likely to experience internal difficulties, as the cartel puts forward a production cut or cap in a market it no longer effectively controls. As I have said before, controlling 40% of the world’s oil supply just doesn’t buy what it used to.

Combine this with the cartel’s big three (Saudi Arabia, the UAE, and Kuwait) moving to diversify their revenue bases, and it’s clear that OPEC is rapidly becoming a two-tier organization.

That is going to be very destabilizing to the whole region. But that’s not even the most serious, or immediate, new matter on my agenda here in Abu Dhabi…

Pulling Out of the Iranian Nuclear Deal Could Destabilize the Region

This second issue arises from Trump’s victory.

On the campaign trail, the Trump campaign often pledged that they would throw out the Iranian nuclear accord. For this region of the world, that has immediate and significant consequences – for crude oil as well as each country’s view of national security.

Now, there’s been an ongoing debate in the U.S. over whether the accord should have been signed in the first place. However, if that agreement is now invalidated, Tehran begins another arms race with a strengthened Russia ensconced in nearby Syria and an already strong position in the Iranian nuclear energy industry.

Flash points like Syria to the north and Yemen to the south quickly intensify. Even a weakened ISIS does not bring about much encouragement in Iraq. That merely allows the Sunni (with Saudi support) and Shiite (with Iranian backing) domestic disagreement to unravel Iraq.

The other main Iraqi ethnic division – the Kurds currently inhabiting the autonomous region of Kurdistan in the northeast of the country – will formally declare independence in the face of such instability.

In turn, Kurdish populations in eastern Turkey, southeastern Syria, and northeastern Iran will then create escalating problems for those three countries, as their borders come under renewed assault.

A similar sectarian problem has been festering in the tiny state to the north of where I am now – Bahrain. There a Sunni royal household has been at odds with a Shiite majority population. The popular unrest has been intensifying with Iranian support.

Meanwhile, Saudi military forces are ready to move across the causeway connecting the island to the Saudi mainland to support the government.

This entire regional is a tinder box and one needs to be careful not to add to the kindling – for their sakes, ours, and the stability of the price of oil.

And it’s just another reason why you’d be wise to look at U.S. shale rather than Middle Eastern oil companies.

In short, what I’m hearing here means that the run-up to the November 30 OPEC summit in Vienna, where many of these regional rivalries (including Saudi Arabia vs. Iran) are playing out, will be very interesting.

You’ll get the latest as I hear it, right here.

In the meantime, I hope you have a happy Thanksgiving.

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  1. Joe shangraw
    November 22nd, 2016 at 17:22 | #1

    We will all be lucky if their stupidity doesn’t destroy us all.

  2. Robert in Vancouver
    November 22nd, 2016 at 21:58 | #2

    Here’s an easy way to solve US oil and geo-political problems at the same time. The US can make a long term deal to buy Canadian oil in whatever amounts it needs to displace the oil it imports from OPEC countries. Then the US can tell OPEC to bugger off.

  3. LucidTransition
    November 24th, 2016 at 03:09 | #3

    @Robert in Vancouver
    Already in the plans.

  4. Richard Washburn
    November 24th, 2016 at 08:59 | #4

    I am wondering if you are of the opinion that Iran has stopped there nuclear program as a result of accord with the U.S. Everything I have read leads me to believe at best it has just slowed it down.

  5. Malcolm Rawlingson
    November 24th, 2016 at 22:59 | #5

    Interesting observations. Since Canada has the largest oil reserves outside of Saudi Arabia, Roberts view here is entirely on the cards. In fact Canadian oil has already been displacing oil imports from Venezuela, Nigeria and to some extent Saudi Arabia. When Mr. Trump allows Federal Lands to open up to oil exploration I expect US oil independence to occur quickly. However, I consider the ramifications to be much broader than that. US oil producers now have the capability to export oil – something they have been prohibited from doing for many years. That places US and Canadian oil production (to the extent the US still imports oil from Canada) in direct competition with OPEC – a situation that is unprecedented and could not have been countenanced 20 years ago. Middle Eastern oil producers have no option but to keep oil prices low or they will lose even more market share. The US also has enormous reserves of shale gas and many offshore areas that have yet to be explored for both oil and gas. I expect that not only will the USA become fully independent of oil imports it will also become a major oil and LNG exporting nation.
    Also be aware that shale technology is in its infancy and that means there is plenty of opportunity for cost reduction still to come. The pressure on oil prices will remain intense.
    Additionally almost every car maker in the world is moving towards electrically powered vehicles which require no oil at all….not even lubricants. Every electric car that rolls off the production line is displacing oil consumption. Even the aircraft industry is going to face competition from new technologies. Vacuum trains which can travel at supersonic speeds without a sonic boom (there is no air because it travels in a vacuum)are already in production and can easily beat aircraft travel times once constructed. These trains can carry many hundreds of passengers without all the hassles of air travel.Only intercontinental travel will require airplanes. And these trains are all electric…no oil required.
    So I see oil markets under increasing pressure from slowing demand due to electric and hybrid electric vehicles, continuing fuel economy improvements and the use of alternate fuels. With the USA as a big and growing oil exporter and many OPEC nations in dire economic straits…the oil business is going to be an interesting story to watch unfold. I see little appetite amongst most OPEC members to curtail production because the USA will move into those markets as soon as deliveries are reduced.

    We are witnessing a watershed in energy and both oil and coal stand to lose the most. Some jurisdictions (Ontario Canada comes to mind) no longer use coal or oil as fuels for power plants having made a complete switch to nuclear power, natural gas and renewable energy.

    This is an energy revolution of epic proportions and I do not see OPEC faring very well as a result. Their dominance in the world of oil is diminishing and their market share will decrease well below the current 40%. I suspect the USA will reduce that share to 10% in a decade.

    Interesting to watch it all unfold.

  6. Bob Schubring
    November 26th, 2016 at 16:25 | #6

    Responding to Robert in Vancouver, buggering off isn’t an option for the US. Unlike Canada, the US Dollar is shored up by the flow of Arab oil (traded in USD) to Japan (where JPY are traded for USD) and China (where Yuan are traded for USD). American soldiers aren’t dying in the Mideast, to put fuel in American engines. Rather, American soldiers are dying in the Mideast, to prevent the price of gold from rising to $32,000 an ounce and the total, catastrophic collapse of all US social insurance payments, which is what will happen if dollars cease to be used to trade the rest of the world’s oil.

    Buggering off, or as it was politely termed, “energy independence”, sounded almost reasonable in 1981, when the entire US National Debt was only 35% of Gross Domestic Product. It would have been politically painful, but feasible with massive spending cuts.

    Today, the national debt is bigger than the Gross Domestic Product.

    Borrowing from Japan’s banks, a key feature of the Carter national energy plan, isn’t useful either. Japan’s national debt is 248% bigger than their gross domestic product. They’re even more broke than Washington is.

    The likely scenario is that the US follows Russia’s lead, and becomes a third-world country with nukes, that exports condensate and naphtha oil to Canada for mixing with tar-sands oil exported to China.

    Will a Canadian loonie be worth $10 US in the near future?

  7. Norman Eva
    November 28th, 2016 at 16:54 | #7

    The information points out many problems areas but the one that appears to me to have the potential to create the most havoc in the region would be if the Kurds declare independence. With large Kurdish populations in turkey, Iran, Iraq. and Syria joining in, this would create chaos, in an area that is inherently unstable, with each country trying to protect it’s borders.

  8. opal
    November 30th, 2016 at 02:45 | #8

    I am happy that is Saudi arabia built on the blood and toils of other laboring class brought from overseas is in dire straits because of oil price on which its fortunes have rested for last 65 yrs, the ruling class a idiot family of utter fools filled with immense pride and hubris

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