By Rene Sotolongo:
Contrary to what major news outlets are reporting, the U.S. government is not doing anything to stop the war in Syria. In reality, Washington is doing everything it can to increase the conflict. In fact, we already wrote several articles on the war in Syria and the horrific humanitarian crisis. So why is Washington making the situation worse? And why should we even care?
First of all, contrary to all reports, the war in Syria has nothing to do with terrorism or Syria’s supposed strategically important (geographic) position. But it does have everything to do with oil and the precarious position that “Wall Street” now finds itself in. To understand what is happening, and why, we need to go back a few years.
For several years, the US attempted to become a global market leader in the oil business. And the leading industry in that fight was the American shale industry. In the beginning stages, the method of fracking was hardly competitive with classical techniques of oil extraction and the shale industry was largely ignored. However, after OPEC’s (Organization of the Petroleum Exporting Countries) decision to capture a larger market share, U.S. oil producers had to fight for survival. As a result, they are a much leaner industry and able to produce oil and much lower prices than many of their Middle Eastern counter parts.
And during this same time period, U.S. shale oil producers lowered their breakeven production costs by around 35%. And so we saw an unprecedented drop in oil prices. So much so, that OPEC had to back off its plan to capture market share and actually started limiting production. In fact, in September of 2016, OPEC gathered in Algiers with a proposal to cut oil production down to about 32 to 33 million barrels a day. This was over 700,000 barrels less than their original estimate.
Why? Because OPEC is broke.
Consider the reality that Saudi Arabia, once the world’s largest oil producer, relies on oil extraction to fund their economy and represents around 45% of their GDP. Their desire for higher prices comes as second-quarter growth in the country is running at a paltry 1.4% year over year rate. That compares to 4.02% in the same period last year. Saudi Arabia faces deteriorating fiscal conditions and a growing budget deficit. This comes as oil revenues make up 90% of the country’s budget. Then there is Iran, who is committed to ramping up crude oil production to recover from financial devastation caused by western sanctions. The worst of the lot is Venezuela, with a worthless domestic currency (bolivar) and an estimated crude oil breakeven cost of $120.00 per barrel. So OPEC is desperate to raise prices. But any rise in oil price results in US oil flooding the market. In fact, by some estimates, higher oil prices could boost U.S. shale oil production by as much as 5.5 million barrels per day. So it is the proverbial “catch 22” for OPEC. And all of this has dire consequences for Wall Street.
A Huge Problem for Wall Street: The Price of Oil.
The first thing one must realize is that the price of oil is never set by production. It is almost always determined by “Futures Contracts.” And this is where one needs to look to see what is really happening “behind the scenes.” In fact, between January 2015 and July 2016, 90 oil and gas producers have already gone bankrupt and left behind more than $66 billion in debt. So if oil production is being cut and oil prices continue to go lower why is there an incredible demand for oil futures? If one takes a look at US shale junk bonds, one will see that there has not only been a rise in demand, but what could almost be called a run on these bonds over the summer of 2016? For example, PDC Energy, whose creditworthiness is four levels beneath ‘creditworthy’ were offered $1.5 billion for bonds that are only actually worth about $400 million. Also, premiums on credit default swaps for junk bonds have fallen by over 30% since February. IN fact, strategists at Bank of America and Meryl Lynch called the summer of 2016 “one of the best as far as high-yield foreign-funded loans were concerned.” The only reason that is credible for this “run” on oil is if there is an expected “rise” in price.
By now it is clear that most of the investments in the Oil industry were based on a massive miscalculation. Since these loans were most certainly reinsured through credit default swaps, they must have left considerable holes in the balance sheets of major US banks. Thus, by the end of this year (2016) or next, the US financial system could be threatened by a crisis approximately the size of the Dotcom bubble. But our financial system still has not recovered from the fall of Lehman Brothers 16 years ago or even eight years after being artificially propped up. In fact, the financial system is more instable than ever. The Fed has pumped trillions of dollars into the system and its interest rate is close to zero. Risk exposure in the derivative markets is at record levels, and excessive speculation has led to huge bubbles in the bond, stock and real estate markets. In an environment like this the problems of the shale industry could very well become the spark threatening to blow up the financial system.
Thus Wall Street finds itself in a position in which an increase of the price of oil is more urgent than ever. But Wall Street is out of options. They cannot jack up prices by furthering demand, nor can they reduce production because OPEC is already broke. OPEC needs to either increase production or raise oil prices. Wall Street can no longer manipulate prices by buying and holding the oil because there simply is no place to put the oil. There is only one option left:
“The escalation of the war in Syria and the destruction of a large number of oil wells in the Middle East.”
And that would give every reason for “big investors” to expect a rise in demand for oil and explains the unexplainable buy up of oil futures.
The ‘war on terror’, the ‘struggle against radical Islamists’ and the ’destruction of Isis’. But the reality is that all three catchphrases are nothing more than a pretext for putting a fuse to the oil keg, (pun intended) which is the Middle East.
Neither Trump nor Clinton will ever mention the fact that America’s allegedly biggest enemy has been supported and supplied with money and weapons by the US.
And neither Trump nor Clinton will ever mention that the coming escalation of the war and the human catastrophe it brings with it will be caused for one single purpose only: To once more satisfy the insatiable greed of Wall Street.
Rene C. Sotolongo is an OpsLens Contributor and a retired U.S. Navy Chief Petty Officer who served for over twenty years as an Information Systems official. Sotolongo also specialized in homeland security and counterterrorism.
