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What is MDEF™ Investing? Strategy before tactics. Strategic investments dictate tactical actions in the Metals, Defense, Energy & Food sectors.

- Jeffrey C. Borneman

Current Wars and Future Wars … Still About Energy

Jeffrey C. Borneman | October 24, 2016

Secretary of State Clinton’s first official trip abroad in 2009 was famous in establishing the “pivot to Asia” of American military force. And now, mere weeks before the U.S. presidential election there is almost no mention that the U.S. military is engaged in five separate Middle Eastern wars. They are: Iraq, Syria, Yemen, Libya and Somalia.

More on the pivot to Asia below but one must ask why U.S. involvement has increased and not decreased in the Middle East. A simple view of a Mid-East map shows why the U.S. is engaged in Yemen and Somalia. Oil traders and investors know the Gulf of Aden is the ocean highway for 30% of European-bound oil flows. The choke point of the Gulf of Aden is Yemen in the north and Somalia in the south while The Strait of Hormuz accounts for 35% of world oil consumption and is skirted by Iran and Saudi Arabia - the other choke point of world energy. Any shutter of free passage of tankers in these key areas would cause an immediate and heretofore unseen rise in energy prices.

The Syrian War is about who (whose ideology) controls natural gas flows to Europe. In that conflict’s simplest terms, Russia wants Iranian gas to flow to Europe through Syria under the thumb of Russia while a consortium of pro-western powers (U.S., Israel, Saudi Arabia and Qatar) prefer Qatari and Saudi gas to flow through Syria under the thumb of the U.S..

The problem is Syria’s King Assad chose Iranian and Russian partners which the West would not tolerate. Assad had to be replaced with a regime of the West’s choosing. This lead to the now-standard pattern of demonization, paid rioters, attempted coup de etat. The subsequent war between dozens of competing factions has resulted in mass casualties, destruction and millions of refugee’s. The horror’s of war matters little compared to the prize: the control of European energy and payment for same. 

Is it clear to the investor that war over oil/natural gas is ongoing regardless of the feel-good solar push?     

Far East News – Access to Energy = War Delayed?

Philippine President Duterte shocked the Pentagon this week by severing long-standing foreign policy ties with the U.S. in a speech essentially announcing a divorce from the U.S. while simultaneously announcing its engagement with China.

In what is being viewed as a tectonic shift in relations with the U.S., Secretary of Defense Ashton Carter is in shock saying only “that they would look into it” after proclaiming last month that relationship with the Philippines was ironclad.

Any new alliance between China and Duterte is a double-win for China in that China has long sought to exploit the 100 billion barrels of oil and trillions of cubic feet of natural gas in the South China Sea but could not because of conflicting claims of sovereignty. To put 100 billion barrels of oil in perspective: The North Sea has generated about 40 billion barrels in the last 40 years. The entire Far East region is heavily reliant on Middle East oil and the ongoing conflicts there only complicate its reliability and pricing.

Any agreement for a joint development around the Philippines with China could reverse the trend toward disputes and conflict at least in that section of the South China Sea and was discussed in a meeting this week between Duterte and China President Xi. Peace in the region would be a disaster to some.  

Duterte’s announcement may have a secondary and more far reaching benefit to China. It may preclude the U.S. from expanding its military might to the region putting the brakes on, if not seriously slowing, Clinton’s infamous Asian pivot.

The U.S. previously had three major military bases in the Philippines and had signed an agreement (prior to Duterte’s election) in March, 2016 to build five more. Again, looking at a map of the location of the proposed bases it’s easy to see why this loss of military hardware placement would stymie any U.S. efforts at containment including China’s ability to search for energy resources closer to home.

Almost eight years after the vaunted “pivot to Asia” which meant to decouple the U.S. from further military involvement in any Middle Eastern wars, the U.S. finds itself mired in five wars principally about future energy supplies for Europe while maintaining the free flow of energy to the Far East.

The question now seems: how many other “ironclad” allies of the West will find China’s siren song irresistible? Duterte’s pivot to China, coupled with a rejection of U.S. military expansion and allowing China a cooperative search for energy in its own sphere of influence, may serve as the determining factors in keeping the peace with China a little longer, or not.

What can investors glean from understanding these events? That energy; oil and natural gas, aren’t going to be replaced anytime soon and that wars will be fought to own and control them. 

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