Monday, January 12, 2015

The Deep State Strategy: Burn Everyone Else's Oil First, Leave Ours in the Ground

The U.S. Deep State is in favor of Saudi Arabia's strategy of forcing production cuts on its rivals and marginal producers for two profound reasons.

It is widely presumed that if the U.S. government isn't actively concerned about the financial carnage being visited upon the domestic oil/gas sector, it should be actively concerned for self-evident reasons. These self-evident reasons include lay-offs, cratering profits and a mountain of shale-oil based debt that is in danger of default as revenues fall off a cliff.

The political class that must be re-elected to retain power is obligated to publicly express concern about the negative impact on employment, profits and domestic production. Whether the political class can do anything about the lay-offs and decline in oil/gas revenues is another thing.

But we should also keep our eye on the political system which retains power regardless of which party or politico is in office: the Deep State.The Deep State exists to maintain the essential infrastructure of global power and domestic stability. Its class of officials are paid to take the long view and consider the chessboard not from the point of view of winning re-election in two or four years but on what might unfold in the decades ahead that would challenge U.S. supremacy and the stability of the current world system and domestic economy.

From this point of view, a rapid decline in U.S. oil production and a corresponding increase in oil imports is a positive development for this basic reason: if cheap oil is becoming increasingly scarce, then it makes all the sense in the world to burn everyone else's cheap oil and keep our reserves in the ground for later use, when all the cheap oil is gone.

I have addressed autarky (national/regional self-sufficiency) a number of times: A Thought Experiment in American Autarky (January 17, 2014)

The point is that being able to produce one's own energy and food offers a kind of security that countries dependent on other nations for these essentials of survival can never enjoy.

Since cheap oil will eventually become scarce for all the reasons listed here and elsewhere many times--depletion of easy-to-pump reserves, geopolitical instability, rising domestic consumption in oil-exporting nations and a contraction in capital available to replace declining production--it makes excellent sense to consume all the oil anyone is willing to sell for $40-$50/barrel and retain one's own reserves for the time when $100/barrel has become "cheap."

If we follow this logic, then we conclude that the U.S. Deep State is in favor of Saudi Arabia's strategy of forcing production cuts (and the resulting collapse of income) on its rivals and marginal producers for two profound reasons:

1. The loss of income to rivals/enemies is a very cheap form of financial warfare that weakens their ability to maintain military forces, social welfare states and everything else currently being funded almost solely by oil export revenues

2. The opportunity to consume everyone else's cheap oil while leaving more of the U.S. oil reserves safely in the ground for later use.

It's always wise to remember the elected government is the ant riding on the Deep State elephant, grandly declaring it guides the great beast. It's also worth remembering that the Deep State is not monolithic; rather, it is a dynamic network of power-nodes, each with its own agenda and each jockeying for dominance on key issues within the Deep State.

The Dollar and the Deep State (February 24, 2014)

Is the Deep State Fracturing into Disunity? (March 14, 2014)

Admin. note: I will be off-line for the remainder of the month, other than a few moments here and there to post new content. Thank you for your readership and understanding. 

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