In the last week, you have seen the world unite against Saudi Arabia like seldom before because of their killing of a journalist. Jamal Khashoggi made the wrong enemies with the inner circle of the crown prince of the kingdom. Khashoggi’s death is a tragedy that has rapidly escalated into a galvanizing force. It has turned the G7 nations of the world (and even long-time staunch Saudi ally the United States) firmly against the kingdom.
Morality of the issue aside, the repercussions of this international geopolitical incident could have profound economic consequences not only in the Middle East but also for the developed world as a whole. Though the Saudis have tried to downplay it, in their initial reaction to the unified business boycotts and arms sales bans from the likes of Germany, Britain, and France, Riyadh threatened dramatic consequences for anyone who sided against them.
The U.S. administration has tried to walk a fine line somewhere between criticism of the murder of an innocent journalist and reluctance to break or damage ties with its key Arab ally in the struggle against the ambitions of Iran for regional domination.
It is in the oil market where the global reach of the Saudis is most keenly felt. The desert kingdom produces approximately 10.5 million barrels of oil each day. This translates to over 10 percent of the entire worldwide demand for petroleum. In any given month, Riyadh exports around seven million daily barrels of oil. Thanks to these unmatched numbers, Saudi Arabia stands as a towering giant in the world oil markets any point in the year. Today their oil market production capability makes the desert kingdom even more important than usual.
With the U.S. administration moving to isolate Iran and eliminate as much of its oil exports as possible (by November 4th), this makes the Saudis the key. Iran has again become the third largest producer of OPEC. It is also the arch-nemesis of both the United States and Saudi Arabia since the Iranian Revolution of the 1970’s.
The effective isolation of Iran will require replacing their oil production per day from somewhere. Saudi Arabia remains the only real oil producing giant with sufficient proven additional supply capacity and production capability to fill in the gap.
If the Saudis are angered (or even just annoyed) and do not massively step up their production, then oil prices will skyrocket when Iran’s oil goes offline at the end of next week. You do not have to look back to the Saudi-led Arab oil embargo of around 45 years ago to find sobering examples of Riyadh retaliating economically with oil against its perceived enemies. In fact, the kingdom has a recent history of punishing its adversaries severely.
You only have to look back to Canada’s ill-fated criticism of the jailing of a women’s rights activist in the last year. The Saudis retaliated forcefully and furiously against Ottawa. They recalled their ambassador from Canada, expelled the Canadian chief diplomat to Riyadh, made all Saudi Arabian students leave Canada at once, and put a freeze on all future business between the kingdom and Canada.
Then you had the case of the de facto ruling Crown Prince Mohammed personal vendetta. He detained members of his own royal family and hundreds of wealthy Saudi billionaires only last year. Riyadh called it a “campaign against corruption.” Most analysts saw it for what it is— reprisal against the crown prince’s enemies in a bid that helped him to cement his awe-inspiring power.
These are not people who you cross lightly, whether you disagree with their handling of internal affairs or not. No one can say with certainty how seriously they will retaliate against an American congressional weapons’ sales ban to Saudi Arabia. You could be looking at the Arab Oil embargo all over again if the Saudis decided to unleash the oil sword and weaponize their oil once more.
Is Your Retirement Portfolio Prepared for Oil Market Retaliation?
Even if the Saudis do not weaponize their oil in retaliation, there are two other imminent destabilizing threats to oil markets and global energy prices. The biggest African oil producer and fellow OPEC member Nigeria is anticipating a leadership change that is likely to upset the fragile peace deal with the militants who dramatically reduced the national oil output only two years earlier. Meanwhile, Libya has elections coming up in an effort to break the four year old civil war stalemate (between rival Eastern and Western-based governments) that often interferes with the country’s oil exports.
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