Synchronicity. Carl Jung wrote about it. The Police sang about it. The Anglo-American geo-strategic interests live it: past, present, and future.
Following WWI in April 1920, the Allied Supreme Council met in San Remo, Italy to decide how the petroleum resources of the Middle East would be carved up. Interestingly, this meeting occurred without American involvement, and the agreement ceded 25% of all petroleum extracted in Mesopotamia (Iraq) to France. This interest had been the Deutsche Bank share of the Turkish Petroleum Gesellschaft acquired in the Versailles Treaty. The remaining 75% would fall to the British government controlled Anglo-Persian & Royal Dutch Shell companies. Under this agreement, France granted British oil companies the right to run an oil pipeline through French Syria including tax exemption.
In March 1921, Winston Churchill (as Sec. of State of Colonial Affairs), held a meeting in Cairo of top British experts on the Middle East/Near East. Out of this meeting, Mesopotamia was renamed Iraq, power over Iraq was granted to Faisal bin Hussein of the Hashemite dynasty, and British RAF planes were based there permanently. These developments caused consternation amongst US oil interests (including Rockefeller's Standard Oil and US State Department) and fomented an intense struggle between British and American petroleum interests throughout the 1920s.
Recent events, especially between Turkey and Syria, illustrate the recurring historical patterns of statecraft and proxy war as means to both control and restrict access to energy resources. While Turkey's allegiance was solicited in recent years by both the US and Russia, recent developments suggest that the US and Western interests were more persuasive. The following actions confirm this reality: 1. recent airspace restrictions by Turkey of civilian air traffic between Russia and Syria, 2. Turkish hosting of Syrian opposition and facilitating supplies to the FSA (Free Syrian Army).
Discussion in recent years of the Nabucco pipeline arrangement from Erzurum to Europe through Turkey is reminiscent of the British pipeline through French Syria of old. Nabucco would increase energy access to Western Europe beyond the control of Russia, thus reducing Russia's political leverage. As discussed in our prior article, geo-strategic positioning is often as much about denial of resources to rivals, as it is usage of those resources. A weakened or destabilized Syria would further the Anglo-American interests in the region. One would be advised to ask the question why Turkey is involving itself in this conflict. Who stands to gain what from whom? In Turkey's case, it would appear they value an increased position of influence within NATO, EU membership, and Western favor to name a few.
As always, we face the question of how these larger geo-strategic actions affect investment. In spite of record oil inventory in the US (here), largely flat global demand (here - pdf), and global economic weakness, both Brent crude and the Brent-WTI spread (here) reflect concern that derives from global QE Perpetuity and potential supply disruption brought about by Middle Eastern proxy wars. These risks are likely to remain elevated and result in higher resource prices. Thus, observers must concern themselves with inflation and resource scarcity.
From a macro perspective, investment in oil or global integrated oil companies (relative to the US Dollar) should account for the central bank driven inflation, geo-political risk premium associated with Middle Eastern proxy wars, and the eventual return to rising global energy demand further out in time. Markets are probabilistic not deterministic, but these assets warrant some consideration especially following correction phases. The localized nature of natural gas markets, its global transport limitations, and generally non-correlated relationship to the US Dollar make investment based on these factors less appealing.
In this particular theater of the oil wars, statecraft and proxy war are the dogs of war likely to drive resource prices and scarcity higher. As we will explore in our next article, the tools used against Iran, thus far, have been the financial and propaganda breeds and pose interesting questions as relates to China.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.