Nothing really changed when a series of drone attacks took out half of Saudi Arabia’s oil-processing capability last Saturday. Experts have been warning for years that “soft” targets like this infrastructure are extremely difficult to defend. And drones have been proliferating in our skies for years. It was inevitable that someone would put the two together. All that’s really new is that someone has actually done it, and now the world realizes just how vulnerable it’s been all along.
If you want to read a well-thought-out nightmare featuring drones as monsters, I can recommend Kill Decision by Daniel Suarez. This is a thriller meant to scare, but the ideas are pertinent—and Suarez published them in 2012.
I’m not making light of the situation. This is bad. Very bad. I’m just a little surprised how shocked so many people are. Though, as a student of human behavior—especially in markets—I shouldn’t be.
But as Doug Casey always says, there’s opportunity in crisis. Some folks made out like bandits on oil futures yesterday. I wouldn’t chase that trade today, however. These attacks are themselves just a momentary disruption. The Saudis will have things up and running shortly. The US is dipping into its strategic oil reserves. Life will go on. Oil is down 5% already, as I type. Oil prices will likely pull back further, just as they did after the recent attacks on oil ships in the Strait of Hormuz.
That’s unless—or until—this conflict in the Middle East escalates.
I’m not a scholar of Middle Eastern studies. Nor am I a veteran or expert in military affairs. But it defies reason and precedent to imagine that the Saudis will back off their war in Yemen just because the vulnerability of their production infrastructure has been demonstrated. All the more so if it’s true that the Iranians are pulling the strings of the Yemeni rebels, as the US claims.
For decades, people have been worried that the Middle East would go up in flames one day, based on the conflict between Israel and its Arab neighbors. It would be just the way of things in our world if it were fighting between Arabic countries that caused the conflagration instead.
Things could simmer along as they have for decades, of course. But even that may not end well. What happens to the local theocratic despots funded by oil revenue when the new energy paradigm does away with their cash flow?
When petroleum becomes the smelly nuisance it once used to be, rather than the valuable commodity it is today, things will have to change drastically in most Middle Eastern countries. I doubt that will be peaceful. But without control of a large chunk of the world’s energy supply, there’s hope the trouble will be mostly a series of local conflicts that don’t drag everyone else into a new World War.
On the other hand, if the Saudis—perhaps encouraged by the US—decide to retaliate against Iran, things could get a lot hotter in the region in the near term. That would result in a great deal of tragic loss of life and destruction of vital infrastructure. Higher oil prices too.
The investment implications are obvious—and actionable for anyone convinced that the conflict will get worse, disrupting the world’s oil supply.
However, there’s a bigger picture here. This isn’t just about oil. It’s about the use of relatively inexpensive, remotely operated weapons against all sorts of soft targets. And not just in the Middle East.
If someone can disrupt flights at Heathrow with hobby drones, imagine what more determined terrorists (with or without hostile state backing) can do with more weaponized systems.
These would still be a lot cheaper and easier to deploy than cruise missiles. Individuals could wage war against nation-states that would cost them relatively little, and the states a great deal. Daniel Suarez’s nightmare may yet come true.
The world didn’t just become a more dangerous place—but more people now see how much more dangerous it’s become.
What to do?
Well, personally, I wouldn’t want to live next door to any targets for terrorists. That’s one reason I live on an island that most people forget is a US territory.
But as a speculator, oil is suddenly looking more interesting. Even the flood of shale oil the US is now producing won’t be enough if the Middle East erupts into serious military conflict. If Iran and Saudi Arabia come to open blows, we’ll likely see oil hit new all-time highs—and stay there for a long time.
I’m not ready to make that call, nor to pull the trigger on any related trades, but I’ll watch it closely. When I see a trend I’m willing to bet my own money on, I’ll let readers know.
On the other hand, whether or not the Middle East goes to war, precious metals are a great bet.
The world keeps getting scarier, and that’s bullish for gold and silver.
Specifics on how to make the most of such opportunities is what The Independent Speculator is all about.
But you have my outlook, and that’s for free.
Tuesday, September 17, 12:07pm, EST, 2019