US’s Saudi Oil Deal from Win-Win to Mega-Lose


By F. William Engdahl

Who would’ve thought it would come to this? Certainly not the Obama Administration, and their brilliant geo-political think-tank neo-conservative strategists. John Kerry’s brilliant “win-win” proposal of last September during his September 11 Jeddah meeting with ailing Saudi King Abdullah was simple: Do a rerun of the highly successful State Department-Saudi deal in 1986 when Washington persuaded the Saudis to flood the world market at a time of over-supply in order to collapse oil prices worldwide, a kind of “oil shock in reverse.” In 1986 was successful in helping to break the back of a faltering Soviet Union highly dependent on dollar oil export revenues for maintaining its grip on power.

So, though it was not made public, Kerry and Abdullah agreed on September 11, 2014 that the Saudis would use their oil muscle to bring Putin’s Russia to their knees today.

It seemed brilliant at the time no doubt.

On the following day, 12 September 2014, the US Treasury’s aptly-named Office of Terrorism and Financial Intelligence, headed by Treasury Under-Secretary David S. Cohen, announced new sanctions against Russia’s energy giants Gazprom, Gazprom Neft, Lukoil, Surgutneftgas and Rosneft. It forbid US oil companies to participate with the Russian companies in joint ventures for oil or gas offshore or in the Arctic.

Then, just as the ruble was rapidly falling and Russian major corporations were scrambling for dollars for their year-end settlements, a collapse of world oil prices would end Putin’s reign. That was clearly the thinking of the hollowed-out souls who pass for statesmen in Washington today. Victoria Nuland was jubilant, praising the precision new financial warfare weapon at David Cohen’s Treasury financial terrorism unit.

In July, 2014 West Texas Intermediate, the benchmark price for US domestic oil pricing, traded at $101 a barrel. The shale oil bonanza was booming, making the US into a major oil player for the first time since the 1970’s.

When WTI hit $46 at the beginning of January this year, suddenly things looked different. Washington realized they had shot themselves in the foot.

They realized that the over-indebted US shale oil industry was about to collapse under the falling oil price. Behind the scenes Washington and Wall Street colluded to artificially stabilize what then was an impending chain-reaction bankruptcy collapse in the US shale oil industry. As a result oil prices began a slow rise, hitting $53 in February. The Wall Street and Washington propaganda mills began talking about the end of falling oil prices. By May prices had crept up to $62 and almost everyone was convinced oil recovery was in process. How wrong they were.

Saudis not happy

Since that September 11 Kerry-Abdullah meeting (curious date to pick, given the climate of suspicion that the Bush family is covering up involvement of the Saudis in or around the events of September 11, 2001), the Saudis have a new aging King, Absolute Monarch and Custodian of the Two Holy Mosques, King Salman, replacing the since deceased old aging King, Abdullah. However, the Oil Minister remains unchanged—79-year-old Ali al-Naimi. It was al-Naimi who reportedly saw the golden opportunity in the Kerry proposal to use the chance to at the same time kill off the growing market challenge from the rising output of the unconventional USA shale oil industry. Al-Naimi has said repeatedly that he is determined to eliminate the US shale oil “disturbance” to Saudi domination of world oil markets.

Not only are the Saudis unhappy with the US shale oil intrusion on their oily Kingdom. They are more than upset with the recent deal the Obama Administration made with Iran that will likely lead in several months to lifting Iran economic sanctions. In fact the Saudis are beside themselves with rage against Washington, so much so that they have openly admitted an alliance with arch foe, Israel, to combat what they see as the Iran growing dominance in the region—in Syria, in Lebanon, in Iraq.

This has all added up to an iron Saudi determination, aided by close Gulf Arab allies, to further crash oil prices until the expected wave of shale oil company bankruptcies—that was halted in January by Washington and Wall Street manipulations—finishes off the US shale oil competition. That day may come soon, but with unintended consequences for the entire global financial system at a time such consequences can ill be afforded.

According to a recent report by Wall Street bank, Morgan Stanley, a major player in crude oil markets, OPEC oil producers have been aggressively increasing oil supply on the already glutted world market with no hint of a letup. In its report Morgan Stanley noted with visible alarm, “OPEC has added 1.5 million barrels/day to global supply in the last four months alone…the oil market is currently 800,000 barrels/day oversupplied. This suggests that the current oversupply in the oil market is fully due to OPEC’s production increase since February alone.”

The Wall Street bank report adds the disconcerting note, “We anticipated that OPEC would not cut, but we didn’t foresee such a sharp increase.” In short, Washington has completely lost its strategic leverage over Saudi Arabia, a Kingdom that had been considered a Washington vassal ever since FDR’s deal to bring US oil majors in on an exclusive basis in 1945.

That breakdown in US-Saudi communication adds a new dimension to the recent June 18 high-level visit to St. Petersburg by Muhammad bin Salman, the Saudi Deputy Crown Prince and Defense Minister and son of King Salman, to meet President Vladimir Putin. The meeting was carefully prepared by both sides as the two discussed up to $10 billion of trade deals including Russian construction of peaceful nuclear power reactors in the Kingdom and supplying of advanced Russian military equipment and Saudi investment in Russia in agriculture, medicine, logistics, retail and real estate. Saudi Arabia today is the world’s largest oil producer and Russia a close second. A Saudi-Russian alliance on whatever level was hardly in the strategy book of the Washington State Department planners.…Oh shit!

Now that OPEC oil glut the Saudis have created has cracked the shaky US effort to push oil prices back up. The price fall is being further fueled by fears that the Iran deal will add even more to the glut, and that the world’s second largest oil importer, China, may cut back imports or at least not increase them as their economy slows down. The oil market time bomb detonated in the last week of June. The US price of WTI oil went from $60 a barrel then, a level at which at least many shale oil producers can stay afloat a bit longer, to $49 on July 29, a drop of more than 18% in four weeks, tendency down.

Morgan Stanley sounded loud alarm bells, stating that if the trend of recent weeks continues, “this downturn would be more severe than that in 1986. As there was no sharp downturn in the 15 years before that, the current downturn could be the worst of the last 45+ years. If this were to be the case, there would be nothing in our experience that would be a guide to the next phases of this cycle…In fact, there may be nothing in analyzable history.”

‘October Surprise’

October is the next key point for bank decisions to roll-over US shale company loans or to keep extending credit on the (until now) hope that prices will slowly recover. If as strongly hinted, the Federal Reserve hikes US interest rates in September for the first time in the eight years since the global financial crisis erupted in the US real estate market in 2007, the highly-indebted US shale oil producers face disaster of a new scale. Until the past few weeks the volume of US shale oil production has remained at the maximum as shale producers desperately try to maximize cash flow, ironically, laying the seeds of the oil glut globally that will be their demise.

The reason US shale oil companies have been able to continue in business since last November and not declare bankruptcy is the ongoing Federal Reserve zero interest rate policy that leads banks and other investors to look for higher interest rates in the so-called “High Yield” bond market.

Back in the 1980s when they were first created by Michael Milken and his fraudsters at Drexel Burnham Lambert, Wall Street appropriately called them “junk bonds” because when times got bad, like now for Shale companies, they turned into junk. A recent UBS bank report states, “the overall High-Yield market has doubled in size; sectors that witnessed more buoyant issuance in recent years, like energy and metals mining, have seen debt outstanding triple or quadruple.”

Assuming that the most recent downturn in WTI oil prices continues week after week into October, there well could be a panic run to sell billions of dollars of those High-Yield, high-risk junk bonds. As one investment analyst notes, “when the retail crowd finally does head for the exits en masse, fund managers will be forced to come face to face with illiquid secondary corporate credit markets where a lack of market depth…has the potential to spark a fire sale.”

The problem is that this time, unlike in 2008, the Federal Reserve has no room to act. Interest rates are already near zero and the Fed has bought trillions of dollars of bank bad debt to prevent a chain-reaction US bank panic.

One option that is not being discussed at all in Washington would be for Congress to repeal the disastrous 1913 Federal Reserve Act that gave control of our nation’s money to a gang of private bankers, and to create a public National Bank, owned completely by the United States Government, that could issue credit and sell Federal debt without the intermediaries of corrupt Wall Street bankers as the Constitution intended. At the same time they could completely nationalize the six or seven “Too Big To Fail” banks behind the entire financial mess that is destroying the foundations of the United States and by extension of the role of the dollar as world reserve currency, of most of the world.

F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.

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10 Comments on "US’s Saudi Oil Deal from Win-Win to Mega-Lose"

  1. Naiveté isn’t becoming, especially to “journalists”. Since when do our G.O.s make ANY deal for the good of their nation/people? They don’t gauge success on whether or not the people benefit, silly. “Success” is gauged on how much money goes into the “proper” pockets…. how well the appointed puppet performs before they need to “Hussein” his ass and replace him and how much ends up in the G.O.’s “re-election” fund. If somehow, a few pennies end up in the pockets of their work-a-day folk? Ah well, they’ll watch a tad closer next time…. won’t they?

    • “….Washington realized they had shot themselves in the foot. They realized that the over-indebted US shale oil industry was about to collapse under the falling oil price….” WHICH WAS INTENDED ALL ALONG !!!

      Yes, some “journalists” think we are idiots !
      “Washington realized” – WHAT A NONSENSE !

      • Absolutely, and the KSA royals kowtow to their evil overlords just like all the others do. They wouldn’t dare step out of line.

    • Good catch! Sometimes reverse engineering a preconceived notion leads one into Hologram Rabbit Holes. As brilliant as Engdahl is, narrow European-centric Socialism lenses still cloud his vision from time to time. It’s another case of not seeing the theater behind the globalists’ game of N-dimensional chess and naively not understanding the Russian Oligarchy is already part of the globalist mafia. What does Occam’s Razor tell us is behind the plunge in oil prices THIS TIME AROUND? Think about nonstop dollar debasement, debt, inflation, and QE. There has been a hyperinflationary scenario skewing and decimating the spending habits of working and middle class Americans and a tipping point was nearing. The plunge in oil prices acted as a deflationary release valve to keep Westerners (and particularly Americans) asleep as the 1984 bioemetric tracking paradigm comes online. One clue is an Activist Post article from last year about the dramatic drop in gasoline consumption after the recession that did not come back to pre-2008 levels. Establishment efforts to sharply increase the minimum wage and construct exits for student loan debt repayment are two more clues.

  2. “….to eliminate the US shale oil “disturbance” to Saudi domination of world oil markets….”

    Saudis do not dominate ANYTHING !
    The U.S. does dominate EVERYTHING !

    Have you EVER seen this ? No ?
    Then look at this SMALL part :

    • My friend you have this right on the U.S.. Our time is coming to an end as other countries are tired of our selfish, greedy and corrupt policies toward them and others. Our politicians are in the pockets of special interests and large corporations. The petro-dollar is done.

      • Well put! The only frightening unknown in all this is the fact that (thx to the west in general, the U.S. in particular), the demonic Central Banks, along with rabid “Israel firsters” have been force-fed to nearly all nations catching the eye of Rothschild et al. Many of these central/eastern European nations were victims of the Bolsheviks and “Uncle Joe” Stalin from the Schiff take-over of Russia right through WW2 up to now but they will have major problems in taking back their respective governments from the clutches of the U.S./west puppets before they can restore sanity to their own people. We don’t put ourselves in the “poor house” by installing & maintaining +/- 700 combat ready military bases in over 125 nations around the globe for nothing…

  3. “….A Saudi-Russian alliance on whatever level was hardly in the strategy book of the Washington State Department planners….”

    How do you know, William ?
    Who told you it is not ?

  4. If as strongly hinted, the Federal Reserve hikes US interest rates in September for the first time in the eight years since the global financial crisis erupted in the US real estate market in 2007, the highly-indebted US shale oil producers face disaster of a new scale.

    If the Fed hikes interest rates our whole economy will face disaster on a new scale!

  5. The Fed is not “owned” by the federal government. It is a private corporation primarily owned by the same folks that own private European central banks. Thats why it’s called a cartel

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