The Daily Reckoning Presents... March 30, 2015 Archives | Unsubscribe Oil Wars: The Final Battleground If you don't know what a "dissipative structure" is, read on... One choke point that could crimp global oil markets if fighting in Yemen spreads... Then, Byron King revisits his "Oil Wars" thesis as the final battleground -- Saudi Arabia -- opens up... Caught on Camera (SHOCKING!) You won't believe what we caught these five ordinary people doing on camera. CLICK HERE to see for yourself. >> Baltimore, Maryland March 30, 2015 Dear Reader, "To the politicians in D.C. and financiers in New York Saudi Arabia is an island of stability in a sea of chaos," writes John Robb, author of Brave New War and proprietor of the blog Global Guerrillas. To them, Saudi Arabia is "a reliable ally, willing to keep the oil flowing, year in and year out. A place that's not vulnerable to the instability that routinely guts the countries around it. "Of course, that line of thinking is utterly misguided. The opposite is true." Why that matters to your investments is the topic at hand. We left you on Saturday with Ron Paul's parting thoughts on Yemen and the possibility of what he calls the "Big War." The threat to market stability, explained Dr. Paul, isn't that Yemen descending into civil war. It made that plunge long ago. The danger is that the fighting spills over the border and engulfs the region. Today, that danger is still present and growing. "Shia fighters threaten to undertake suicide operations in [Saudi Arabia] if Saudi-led airstrikes in Yemen continue," reports Al-Jazeera. (If you've been living under a rock for the past week, our sister publication, The 5 Min. Forecast, concisely outlined the players involved in the skirmish on Thursday, right here. The 5, as we affectionately it, is a free daily supplement we reserve for paid-up subscribers to anyone of our newsletters. Consider that link above a free preview.) "Much of the chaos we see in the Middle East is due to the way Saudi Arabia avoids falling to pieces." John Robb, whom we quoted to above to kick off this episode, has implied as early as 2008 that such a conflict in and around Saudi Arabia is not only likely, but inevitable. "Saudi Arabia is extremely fragile," Robb explains, "and much of the chaos we see in the Middle East is due to the way Saudi Arabia avoids falling to pieces. Worse, we are largely to blame for this. We go along with this charade, and our willingness to play along is doing much of the damage. The key to understanding why Saudi Arabia destabilizes its region is a concept called "dissipative structures." Ilya Prigogine, a chemist, received the Nobel Prize for his work in this area. Dissipative structures provide us with "insight into how everything from how biological structures (e.g., bacteria, apes…) to natural phenomena (e.g., tornadoes) to social systems (e.g. nation-states) build order and prevent collapse," says Robb. The idea is simple, all dissipative structures avoid collapse by increasing their complexity. They "grow by exporting or expelling waste products into an external environment," Robb goes on. "In other words, they achieve 'order' by getting rid of the disorder produced by building it... "Saudi Arabia is a particularly expensive dissipative structure because it is extremely rigid, anachronistic and unchanging. To maintain this archaic structure despite the titanic forces of globalization trying to pull it apart, it must export an incredible amount of disorder (entropy) into the surrounding region." Like this: Yemen: Sick and tired of structures dissipating all over them... As we noted last week, Yemeni oil production sunk to 130,000 barrels per day in 2014 -- less than a third of its peak in 2001 -- due to disruptions and a lack of investment. To make matters more lame, Yemen is the world's 37th largest oil producer. It stands to reason that Yemeni infighting by itself isn't enough to crimp oil markets. The risk is that the chaos will spill over into Saudi Arabia, the world's largest exporter of petroleum products. An interruption of oil production there would move the needle in oil markets. There are also two so-called "choke points" -- waterways that oil tankers use to bring crude to the global marketplace. The one of interest to us today is the Bab el-Mandeb, also known as the "Gate of Tears" starred in the map below. Nearly 7% of all the crude carried by tanker ship around the world passes through Bab el-Mandeb. For the time being, traders don't seem to mind what's happening. A barrel of Brent crude goes for $55 at writing. Alas, "now that Saudi Arabia has engaged in the fight," writes our own Byron King in today's featured essay -- "dropping bombs and reportedly sending troops across the border -- we may see an oil price recovery much sooner than many people expected." As early as 2007, Byron's been forecasting an "Oil Wars" scenario that would rage across the Middle East and end in Saudi Arabia. Below, he updates you on his thesis as Yemen burns... Cheers, Peter Coyne The Daily Reckoning P.S. When Byron first laid out his oil thesis in '07, he predicted $150 crude oil when prices were still around $55 per barrel. Soon after, oil hit an all-time high of $147. For that reason alone, it behooves you to read his update... June 17, 2015: "D-Day" for Boomers? A shadowy government group -- that answers to no one -- may have launched the biggest assault against baby boomers and retirees ever. And a former brokerage executive with intimate knowledge of Wall Street's inner workings has a stark warning about 19 types of investments that may suffer horrendous losses in the coming weeks. Click here to find out how to get the full list. The Daily Reckoning Presents... Saudi Arabia is surrounded… and Byron King senses the breakdown of the regions nation states... ****************************** The Final Battleground -- Saudi Arabia! by Byron King Traders bid up oil prices last week, based on reports of major escalation of hostilities in Yemen, just south of Saudi Arabia. One way or another, it's the "Oil Wars" scenario at work, which I've discussed here in the Daily Reckoning for many years. Indeed, things are hot and getting hotter in Yemen. Now that Saudi Arabia has engaged in the fight -- dropping bombs and reportedly sending troops across the border -- we may see an oil price recovery much sooner than many people expected. What's going on? About five years ago, in my Oil Wars discussion, I headlined Saudi Arabia as "The Final Battleground." Here's the map I used, with the exact caption underneath: Suddenly, Iran has its mortal enemy, Saudi Arabia, surrounded — millions of Shia even live on top of the Saudis OWN biggest oilfields. The Oil Wars scenario was based on the strategic fact that Iran has a long-term plan to surround the Saudis. It's a matter of raw geography. That is, Iran is located northeast of Saudi Arabia. Plus, Iran has a well-entrenched presence in Syria and Lebanon, to the north of Saudi Arabia. In the past few years, Iran has moved firmly into Iraq, after U.S. forces withdrew. And now, in the past few months, we've seen rising Iranian influence in Yemen, to the south of Saudi Arabia. As the map shows above, the Saudis are surrounded. Indeed, recent developments give credence to what a well-placed energy insider told me at a conference in Houston not long ago. That is, the Saudis' primary motivation in crashing oil prices last November was to harm Iran. In other words, low oil prices are not about hurting Russia because of Ukraine; nor slowing the advance in North American fracking. The Saudi idea is to squeeze the bank accounts of the Mullahs in Tehran. Now we see the Iranian blowback. Iran-backed rebels have knocked out the former government in Yemen, which was friendly to both Saudi Arabia and the U.S. The Saudis have a full-scale religious war on their southern border, with opponents fully backed by Iran. We're in the midst of a historic breakdown of nation-states across the Middle East. What comes next? We're in the midst of a historic breakdown of nation-states across the Middle East. Former map lines that came out of World War I -- drawn by Great Britain and France, after the collapse of the Ottoman Empire -- are being erased. For now, modern notions of the nation-state are near irrelevant. Tribalism is triumphant. According to a recent analysis in the New York Times, "Corrupt and dysfunctional Arab autocracies that had stood for half a century in places like Egypt, Syria, Iraq, Yemen and Libya lost credibility because they had failed to meet the needs of the citizens. But no new (political) model has emerged; instead, an array of local players and regional powers are fighting skirmishes across the region as they vie to shape the new order, or at least enlarge their piece of it." One key player is Iran, working to become the regional hegemon; certainly as the U.S. withdraws. In a way, it also explains Iran's major effort to build nuclear capabilities -- the race for a Persian atom bomb, notwithstanding "negotiations" ongoing over delaying or deferring the actual event. Of course, this will trigger (no pun) a nuclear arms race across the region -- another story for another time. In a broad sense, U.S. Middle East policy is a crazy, disjointed, ad hoc, rambling shambles. Nothing makes sense. On the one hand, the U.S. is battling ISIS in Iraq -- even "helping" Iranian forces on the ground, with air strikes. Congress did WHAT? When I heard 84 members of Congress stuffed their money into the exact same investment, without planning it, I almost fell off my chair. Since when does Congress agree on anything? Yet 38 Democrats and 45 Republicans are rumored to have poured millions into this one vehicle. I urge you to take a look at this unusual strategy before something changes. You'll be shocked to discover what the government is up to behind your back. Meanwhile, Iranians ships challenge U.S. Navy ships at sea. That, and Iran is busily destabilizing Yemen, which used to be a partner with the U.S., and hosted U.S. forces. Then there's that nuclear "deal" with Iran, due any day. It's all very strange. Where's the strategic coherence in Washington? To be charitable to people trying to figure things out, I'll just allow that it's complex, and the world gets a vote. Meanwhile, we live with low oil prices, certainly compared with this time last year. Too many barrels; not enough demand. Can it all change? And how fast? And in what direction? Is it time to begin buying into many a beaten-down oil or oil service play? I expect Saudi Arabia to learn soon that it's harder to stop fighting a war than it is to get into one. The Saudis had better "win" quickly in Yemen, or they're in for a long slog in a snake pit. That's the way these things work over there; but the Saudis are smart and they know that. Closer to home, I still see articles and speculations that oil prices could move lower. I've seen numbers like the $20 range for a barrel of crude oil, and this from people who aren't silly or stupid. Never say never, I suppose, but I'm not losing any sleep over a further oil crash, if you know what I mean. The U.S. rig count has plummeted due to a drought of new drilling capital. Looking ahead, there are indications that U.S. oil output may cease growing in the next two or three months. The fast-climbing U.S. production curve will flatten out. The U.S. rig count has plummeted due to a drought of new drilling capital. We'll see, right? Keep in mind that U.S. oil output was (note past tense) the world's key "swing" production over the past few years. That's all about to change. Yes, we saw increased oil flow from Iraq last year, too -- which is problematic in the near future. Libya output rose last year as well; and has fallen in recent months. Civil wars will do that to an oil producing region. In other parts of the world, Russian oil output is problematic. Brazilian offshore oil isn't growing nearly as fast as optimists expected a few years ago. Canadian oil sands are flowing, to be sure, but constrained by costs and transport bottlenecks. Speaking of offshore, I've been reviewing the sector, and I'll have more to say over the coming weeks. Meanwhile, many an offshore region is transforming into a "Dead Sea" scenario, in the face of high costs and low prices. I was stunned at the rising number of idle offshore rigs, laid up and even going to scrap yards. All in all -- balancing the risks -- I'm inclined to think that there's upside to energy investing just now. More upside than risk of a major downward crash. The key is to buy into well-run oil plays, oil services and equipment plays. At current prices, I'm fine with Schlumberger (SLB: NYSE), Halliburton (HAL: NYSE) -- soon to merge with Baker Hughes (BHI: NYSE) -- Weatherford (WFT: NYSE) and Core Labs (CLB: NYSE). Meanwhile, I believe that majors will be able to keep up dividends. Look at, say, Chevron, or Total (TOT: NYSE) or Shell (RDS-B: NYSE). Regards, Byron King for The Daily Reckoning Byron King is the editor of Outstanding Investments, Byron King's Military-Tech Alert, and Real Wealth Trader. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. BE SURE TO ADD dr@dailyreckoning.com to your address book. Additional Articles & Commentary: Join the conversation! Follow us on social media: The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Agora Financial delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, feel free to click here. Please read our Privacy Statement. For any further comments or concerns please email us at dr@dailyreckoning.com. 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