The New Cold War Battlefield… And How It Will Affect the Energy Markets

What is transpiring in geopolitics prompts me to recall the depths of the Cold War. Back then, the two superpowers – the U.S. and Russia – contested for leverage wherever they could. But the primary battlefield was Africa.

That may not seem obvious until you consider the following: Much of the conflict (especially the part I was involved in) dealt with limiting the other side’s ability to operate. And most of that ended up in what was called “D&D” – denial and deception.

Overall (“big picture”) objectives had two major avenues in these “adventures.” One involved using puppet governments and insurgencies to fight “hot” wars instead of deploying American and Soviet ground forces to face off against each other.

The other encompassed identifying weak links in command and policy structures, exploiting them, and advancing objectives at the expense of the other side.

Both strategies ended up being played out in Africa, resulting in a good deal of the misery that followed. Major powers rarely structure policy with a primary interest in limiting collateral damage.

We targeted Soviet embassies in Sub-Saharan Africa because they had the weakest security (and often the least capable personnel). In turn, Moscow targeted the U.S.’s overcommitment to some very suspect domestic leadership

In both cases, it was the locals who paid the price in hardship and death. It was a chess game with live pieces.

Well, déjà vu is now kicking in.

Here’s where the new Cold War is being played out… and how it’s going to influence the energy markets…

A Rising Power Vacuum in the Crude Heartland

Today, what’s happening in Syria is paralleling that history. In the process, the new Cold War is starting to look very much like the last one. In point of fact, I don’t believe the “old” one ever ended.

Back then, Washington would prop up suspect dictators (in the name of stability) while Moscow would champion liberation movements (in the name of an international class revolution). But today there’s a twist: Russia supports the Assad government in Damascus while the U.S. aids those attempting to displace a dictator.

A reversal of roles but the same ongoing drama.

What happens in the Middle East has always had a rather direct impact on energy prices and the prospects for investing in the sector. But the geopolitics surrounding the region often marches to a different drummer.

However, one major difference separates the Africa of 1960-1985 from present-day Syria. Africa had very little to do with energy in general and oil in particular. Syria, on the other hand, is a rising power vacuum right smack in the middle of the largest concentration of global crude production.

Thus far, this simple fact has been discounted by pundits and analysts. Rather, the prevalent theme has been to regard the largess of U.S. shale and tight oil as an offset for whatever happens abroad.

Why the Talking Heads Keep Getting It Wrong

The Syrian effect on oil has been minimal. But as it continues to follow the “failed state” model I used for years as a poli-sci professor, that becomes more problematic. Such political circumstances suck in the major powers. If they are on their own path to competition, that makes the situation even worse.

TV talking heads do not understand the relationship between a situation like this and the resulting access to and pricing of energy. That’s because they continue to use a myopic way of looking at oil.

One of the biggest misreadings is still thinking the price of crude oil or its knock-on effect for natural gas and renewables is an isolated market phenomenon. Yes, there are other things going on in the world, but somehow they have only an intermittent connection to oil.

Yet real-world energy matters do not play out in a vacuum. They are hardly theoretical exercises taking place in a classroom or an experiment under controlled conditions in a laboratory.

Many in the media consider the pricing matter to be dictated by internal tugs of war among supply, demand, excess volume, the exchange value of the dollar, and rig counts with each variable subject to instantaneous analysis. Of course, the conclusions reached in such an exercise are of little overall value… unless you are advising short artists and derivative paper runners.

This seems to be the mantra these days: Come up with a 30-second sound bite that succeeds in moving prices immediately. Worry about the saliency later.

Of course, that bears no real connection to the real underlying factors.

Syria Is the Latest Battlefield

And it is no longer reflective of what is unfolding and the impact it is likely to unleash. The problem with including geopolitics among the factors in the equation is the “black swan” regard it engenders – the element that is a genuine outlier, incapable of advanced calculation.

The assumption is wrong. Geopolitics is the environment in which the oil drama is revealed. It is not an external element pressing from the outside; rather, matters like Syria have an irritating habit of becoming the focus of oil assumptions moving forward.

The reason is rather straightforward. The Syrian tragedy is not unfolding in isolation – Saudi Arabia, Iran, Iraq, Kuwait, the United Arab Emirates, and Turkey have been pulled in.

And it is now the latest battlefield in which resident pawns are being laid out in the renewing Cold War chess match between the U.S. and Russia.

A few in the media have begun to see this. Interestingly, two similar views emerged this morning from two very different sources – China’s largest newspaper, The People’s Daily, and The New York Times.

Both see Syria as a U.S.-Russian Cold War danger.

Moving forward we shall need to address energy issues with a look back over our shoulders at rising strategic tensions.

The volatility that is emerging will require a broader – and more realistic – regard for the connection.

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