While following the re-election of Hugo Chavez this week in Venezuela, we reflected on the fact that approximately one-third of the largest energy producing nations (United States, Canada, Mexico, Brazil, and Venezuela) are in the Western Hemisphere. Additionally, production in the US is at/near fifteen year highs. Both geography and technology now offer all nations of the west the opportunities to develop their own energy resources and trade with regional neighbors to meet energy needs. This is no more true than for the United States.
Of the top ten crude export countries to the US, only two are in the Middle East (Saudi Arabia and Iraq). This skew in the data begs the question, if the United States does not import the majority of its oil from the Middle East, then why the pervasive foreign policy involvement in Middle East affairs? Enter the Petrodollar.
Long before the War on Terror, the United States and Britain were focused in a geo-strategic way on the Middle East. This focus was a result not of Islamo-fascism and terrorist threats but rather the rise of German industrial power in the early twentieth century and the emergence of petroleum as the key resource for such development. These realizations predated WWI and were integral in how this conflict was fought evidenced by the obstruction of the Berlin-Baghdad railroad project and the destruction of WWI. France's Senator Henri Berenger, Director of France's Comite General du Petrole, following WWI stated that oil was the "blood of victory".
The British geo-strategic policy was just as much about the denial of access to resources of its rivals, most critically Germany, as it was about securing resources for its own economic and industrial development. This policy approach is echoed both in the US monetary & foreign policy of today. US actions in the Middle East center around two objectives: firstly, to enforce the US-Petrodollar payment standard and secondly, to deny rivals, most notably, Russia and China access to Middle East energy. The US uses the global reserve currency status and petrodollar status as weapons.
The US stands to lose considerable political capital and suffer economically should the rest of the world develop functional bilateral payment mechanisms for energy or a non-US Dollar reserve system. Historically, it's usually a sign of the endgame when a nation/empire must use force via both financial and military warfare to sustain the status quo.
So, how do such larger geo-strategic issues affect investment? In a world which is certain to see these financial and military conflicts within the backdrop of a global fiat currency devaluation, we may infer that the US will do everything in its power to maintain this status quo. This includes massive military spending and continued debt monetization to finance the enforcement of the Petrodollar standard and denial of resource access to rivals.
While markets are probabilistic not deterministic, these realities suggest the asymmetric risks are inflation and resource scarcity, and therefore, protections from inflation would be prudent. In an environment with such a narrative, investment in commodities and resource based economies should be considered. These would include but are not limited to energy, precious metals, agriculture and the resource based economies of Australia, Brazil, and Canada as examples.
The geo-strategic games of a century ago continue to play out with a few changes in the scenery and dramatis personae. In all, "Just a little case of history repeating...."