A lot has transpired since the last time I shared my thoughts on the region which was highlighted by my downgrading of the threat/risk level down to near zero due to my early identification of a true detente between Saudi Arabia and Iran. As recent headlines have verified this prognostication of mine that is nearly 1.5 years old, I have been thinking forward to try and determine what exactly this peace agreement will mean as it has no precedent in the region. 

 

I won't go into too much detail about the background of the issue, but to summarize the nature of the animosity between the two factions, it was Saudi Arabia that was not genuinely using their back channels to develop a roadmap to reconciliation with Iran. Their excuse or reason, depending on whose side you lean on, was that Iran was not reliable and not up to their word.

 

The reality is that there was tremendous ongoing pressure from the Brits and the US to maintain the status quo, whereas Iran really did not benefit at all from a continuous standoff with Saudi Arabia. With the previous die-hard pro-American Saudi regime in power, this meant that there was no chance of a thawing of relations with their neighbours. However, with MBS now running the show, the possibilities were much wider. 

 

And to his luck, a confluence of events dramatically created opportunities for MBS. First, the US got distracted with a myriad of worldwide events, stand-offs and conflicts. Much of this distraction, in my opinion, is self inflicted but I don't want to digress. The point is, the US turned its attention away from the region. Not just the Persian Gulf, but Afghanistan, Pakistan, East Africa and even Turkey.

 

The second factor is related to the first. This perceived (and real) weakness of US foreign policy was viewed by countries in the Middle East with bewilderment. Since Kissinger first proposed the defense for oil/treasury buying deal to the Saudis, America had never taken its eye off the ball. And here we had a situation where America went AWOL lock, stock and barrel. 

 

Now this wasn't viewed as a disappointing development by all in the region. For example, Oman's new sultan is no fan of the West and Kuwait's opposition is very strong and generally hostile to the West. For the first time in a long time, those who did not like US presence in the region sensed blood in the water. I'll come back to this point later.

 

MBS was no king Abdullah or Fahed before him. He was not the passive, submissive, visionless ageing monarch to benefit from a "stable" but static security state. MBS was young, brash and ambitious. He had his OWN vision and the impatience that drove his development plans. He had the funding for these plans and by sharing his vision with his citizens and showing how efficient an executive he was, he also gained the backing of his people. At least the younger generations - but that's all he needs if you take a look Saudi Arabia's demographics.

 

Because the US had a desire to maintain the Saudi Arabia that always was - a dependent, loyal subject who fed the military industrial zip codes in D.C. while providing cheap crude, a misalignment was inevitable.

 

Because of the decades of interdependence, the Saudi-US relationship is still rather strong. It is built into their defense infrastructure, their youth still aspire to go study in California, the nation needs the west and its technology and its pop culture. But things have nevertheless changed irrevocably and with momentum that I suspect will see Saudi Arabia gradually reverse its interdependence with the US in particular, but to a great degree also the UK and Europe. It does not seek to eliminate it, but rather to displace it with a more representative balance of economic, social and diplomatic elements from around the world. 

 

Which leads me to the third factor. The absconding of US leadership in the Gulf has created a vacuum that is being taken advantage of. Primarily with China, but also by Russia and by non-state actors like the fledgling BRICS group. And also a renewed sense of sovereignty and self-determined destiny.

 

I believe that the Ukraine conflict supercharged matters. The more the US pushed people to back their anti-Russia stance, the more discomfort was felt by these nations. They saw how the West confiscated hundreds of billions of dollars (extra-legally I might add) overnight. From a nuclear power. If they can do that to Russia, what makes the GCC nations any less vulnerable? The angst in the Middle East was palpable. I sensed it with the lay person. Imagine how Arab leaders felt. They had the most to lose. Not only their wealth but their lives. If the rug they stood on was pulled from underneath them, they'd be lynched. What happened to Saddam and Ghaddafi could happen to them.

 

But there's another very powerful dynamic at play here that westerners may not be familiar with. I said I'd return to a point I made earlier that not everyone in the region was a fan of American hegemony.  And for the first time since the Cold War they saw American hegemony in east Europe being challenged while the Americans were not paying attention in the Middle East.

 

There's a good reason that all political hell broke loose over there. The entirety of accumulated misgivings against western hegemony in the region gave way in the form a flurry of independent diplomatic initiatives, at first, and then China intervened and took the lead in formalizing the restructuring of the region and its politics. Yes, it is early days, but unlike the west with its bureaucratic "democracies," civill institutions and loud media, things work at light speed and without friction over there. If a decision is made, it is a matter of quick formalities that separate the ribbon cutting from shovels in the ground. 

 

MBS in particular, took upon himself to turn the tables on those who named him a pariah. He went from playing with an Xbox a few years ago to a master chess player. Finally extending a genuine hand of friendship to Iran was a game changer. The Chinese involvement was overstated by our western media. This was a decision that was made in Riyadh. All it needed was a platform and China provided it. 

 

It was much more of a chess move than meets the eye. MBS's biggest enemy is Qatar. The Saudi's actually were prepared to invade Qatar (in order to depose the current ruler who illegally deposed his own father through a US/British planned coup) under Trump's tenure and with Trump's blessing. After all, Trump understood that Qatar was harbouring every naughty organization from Hamas, to the Brotherhood, to the black flagged nut jobs. But the D.C. establishment put a stop to that plan and MBS had to watch as Qatar not only survived, but quickly (and successfully) countered with strengthened economic ties with Saudi's rival Iran and military defence pact with Saudi's other rival Turkey.

 

But that was then. Fast forward to today. Saudi Arabia brushed aside Qatar and went directly to Iran. The UAE is also now quickly trying to follow in Saudi's footsteps lest it be left behind. Bahrain is a satellite of Saudi Arabia. Oman is now much closer to Saudi given the latter's changed stance.

 

So suddenly Saudi Arabia is the centre of not only the gulf, but also the Middle East. And its only remaining enemy in the region, Qatar, is isolated and surrounded by nations admiring Saudi leadership. Iran is no longer a leverage play for it. And Turkey is too distracted to come to its defence. To add to Qatar's woes, Russia (which always disliked the Qatari Emir) included Saudi Arabia in its multilateral negotiations with Turkey and Iran on the Syria issue.

 

For Saudi Arabia, this helped mend strained ties with Erdogan, built it regional clout, and actually brought another previous "enemy" around. Assad's visit to Saudi Arabia was a powerful one. He was welcomed with a lot more pomp than Biden was. MBS now has neutralized just about every threat around him. And he only cares about what's around him at the moment. He smiles wryly every time Biden admonishes him or sends his CIA director or Secretary of State to threaten/beg for something, bides his time and when that Airforce two planes takes off the tarmac, MBS goes about doing what he wants to as if nothing happened.

 

He is playing the game with the ice cold nerves of an Englishman and the long-game mindset of a Chinese war planner. I have to hand it to him. When I first wrote about him on this board a few years ago I said he would either turn out to be a disastrous experiment or, if he matured, he could use his energy and ambition to transform Saudi Arabia. Well he did that and much more. Even my most optimistic projection has been surpassed. 

 

The reason I am focusing on MBS is because he truly has made himself the centre of power in the region. Traditionally, Egypt (and Iraq before it was destroyed) was viewed as the centre of power in the region mainly due to its deep history, central geographical location, and large population.

 

But MBS has thrust himself at the forefront of regional leadership. This is not my hubris. This is reality. I have seen a massive change in the common parlance amongst people from the region. He was disliked and dismissed as a buffoon when he first came to power. What he did to other royals by shaking them down and consolidating power was viewed favourably as nobody likes a nation with 20,000 entitled, splurging princes. So he began to gain favour but still people were skeptical. The Khashoggi debacle was a big setback for him and it cost him a few years of bad PR. But I would argue that it also benefited him. He was viewed as someone serious about his mission. He was respected more in the region, not less. Not all respect is garnered through noble work. Some of it, the best of it perhaps, comes from fear.

 

But while everyone in the west wrote him off ever making a comeback, he made the biggest comeback imaginable. He is now very popular not only in Saudi Arabia, but in the Middle East and he has a lot of momentum. I am not referring to the downtrodden masses in the street who look up to any leader that shows initiative. I'm talking about VCs and bankers, lawyers, diplomats, captains of industry. If you ask why that is, it is because you have probably never heard his commanding speeches about how his goal is to transform the entire region. To bring back a golden age that the region once enjoyed. His words, not mine.

 

Lest you think I am a groupie of his, I don't think all is well and dandy in Saudi Arabia. They still have an exploding population, lots of poverty (yes, even in Saudi Arabia), antiquated infrastructure that needs investment and my biggest issue with Saudi plans are their White Elephants. I capitalize these words because the magnitude of the projects being undertaken deserves highlighting.  I have been privy to some of the unannounced plans and strategies and I am concerned that they are too ambitious. I wouldn't be surprised to see world record breaking cost overruns on some of these projects being planned. 

 

What is the point I am trying to make here? Besides the absolutely dumbfounding political malpractice of Biden's state department and his own White House, is there something to apply to our energy thesis? Yes. There is a big point to be made. I have made it umpteen times before, and I will make it again.

 

All of the aforementioned ambitions and plans requires Saudi Arabia (and its competing GCC members) to maintain as high an average price of crude as is politically tenable without permanent demand destruction through substitution.

 

I call it the Saudi put but really it is the GCC-led OPEC+ put. It all starts in Saudi Arabia and the man MBS put in charge of this is even shrewder and more unrelenting than MBS. ABS is playing his hand carefully. He is not impulsively reacting to the asinine cat and mouse SPR games nor is he asleep at the wheel. Saudi Arabia looks at the average price of oil for their annual budget to balance. So far this year, they have realized less than their required average. Which means that they will need a sustained higher price in H2 to average out according to budget. After all, ABS's cousin the Prince now wants to transform not only Saudi Arabia, but the entire region. And that's going to take a lot of mullah. Mullah that can only be secured through sustained higher oil prices.

 

*Here's the Fine Print... There is one caveat to my drastic downgrading of risk in the region. My assumption is that there is zero chance of another Iranian/Houthi drone attack on Saudi facilities. I also believe that the geopolitical risk related to Syria and Iraq (which was a proxy battlefield for Saudi and Iran) is now down to zero. 

 

However these developments have actually significantly raised the risk/threat level between Iran and Israel. The latter now finds itself very isolated. The main reason for the UAE, Bahrain and Saudi Arabia to open up to Israel was their common enemy. Now that enemy is solely Israel's. Therefore it is, practically speaking, all alone. Saudi Arabia has solved its neighbourly issues and deems itself neutral from here on. And everyone around Saudi Arabia is following in its footsteps. 

 

Iran knows that and finally it has no distractions with the Arabs. The Shiite crescent is now focused on the north half. All resources and focus will now be transferred to the tip of Iran's spear and that is south Lebanon. Israel knows this and is preparing accordingly. It won't just deal with this as a simple border issue with Lebanon - it will take this fight to Iran proper. and I believe it will do so proactively. I cannot emphasize the risk of an explosion on this front. It is nearly certain in my view that we will have a very serious conflict and sooner than most people think.

 

Unlike in previous flare ups or the limited war between Hezbollah and Israel where the US, Europe and Russia could and did intervene, today it is everyone for themselves. The US will definitely come to Israel's defense, but Europe cannot afford another front. It can barely afford the economic and political fallout from Ukraine and that is only getting worse. Russia may welcome the opportunity to arm Iran with increasingly potent weapons if the US gets involved just as the US is aiding Ukraine. And unlike previous flareups, China may not sit this one out either. 

 

To summarize, the implications for energy are very bullish.

 

The Saudi put is a reliable tailwind that will support the price of crude for years to come.

 

And the potential for massive disruption to oil production/distribution out of the straight of Hormuz due to an Israeli-Iranian conflict is now the highest it has ever been in my estimation.