In the shadows of global events, some significant developments often go unnoticed. For instance, a notable report from the U.S. Energy Information Administration in late 2023 revealed something extraordinary that many elites would prefer to overlook.
In September 2023, the U.S. crude oil production reached a remarkable 13.25 million barrels per day, an all-time high. This achievement is particularly striking when compared to the mere 5 million barrels per day reported in 2010.
The story behind this transformation is well-known: advancements in hydraulic fracturing and horizontal drilling have enabled U.S. oil producers to significantly increase output while maintaining competitive prices and utilizing fewer rigs. Remarkably, this record production was achieved despite the Biden administration’s restrictive oil and gas policies.
The surplus of U.S. oil—and its favorable market price—has led to increased exports to Europe and Asia. Notably, these rising U.S. exports were instrumental in prompting Saudi Arabia to lower its crude oil prices for Asian markets last year, highlighting the competition between U.S. and Saudi producers.
Amid various geopolitical challenges like the Russo-Ukrainian war and the Israel-Hamas conflict, the record U.S. crude oil production was a stabilizing force that kept oil prices in check throughout 2023. In effect, this development has diminished the pricing power of both Saudi Arabia and Russia, undermining OPEC+’s influence over global oil markets.
While OPEC+ could attempt another market flood similar to its 2014 strategy, which had disastrous effects for many U.S. drillers, today’s producers are more resilient due to significantly reduced production costs.
In essence, the remarkable output of U.S. oil in 2023 played a crucial role in cushioning the global economy during a tumultuous year. However, as the year closed, new challenges with deep historical roots emerged.
Supporters of God
Moses famously led the Israelites through the Red Sea over 3,000 years ago, but this body of water, flanked by warring nations, continues to be a focal point of conflict. The Red Sea serves as a vital connection between the Mediterranean and Arabian Seas, with the Suez Canal acting as the primary waterway for trade between Europe and Asia.
Strategically located between Saudi Arabia, Egypt, and Sudan, the Red Sea is one of the world’s key trade corridors, handling approximately 12 percent of global trade and nearly one-third of container traffic. Each year, around 19,000 vessels fleet through the Suez Canal, underscoring its importance to the global supply chain.
The Houthi movement, known as Ansar Allah (Supporters of God), represents one faction in Yemen’s prolonged civil war. The Houthis are backed by Iran, forming part of an anti-Israel and anti-Western coalition of regional militias.
In December 2023, the Houthis launched missile and drone attacks on numerous container ships in the Red Sea, subsequently threatening all vessels bound for Israel. Major energy and shipping firms, including BP and Maersk, responded by suspending operations in the region to safeguard their interests.
If this situation persists, it threatens significant repercussions for global trade, consumer inflation, and the stability of oil and gas markets.
The Empire Strikes Back
By late December 2023, shipping companies swiftly rerouted their vessels away from the Red Sea, opting for an alternative—an extended route around the Cape of Good Hope. This diversion adds considerable time and distance to shipping schedules, increasing demands for bunker fuel and straining the availability of vessels.
The large-scale diversion could sever supply chain connections in the short term, driving up shipping costs and impacting consumer prices. The chaos is reminiscent of the six-day blockage in the Suez Canal in 2021, which disrupted global supply chains and delayed shipments from Asia to Europe and North America.
The length of time the conflict in the Red Sea continues will determine the scale of its economic consequences. The Pentagon’s initial strategy to counter Houthi attacks, dubbed Operation Prosperity Guardian, proved largely ineffective as drone assaults persisted.
Then, on January 11, President Biden ordered a substantial retaliatory strike against Houthi targets in Yemen, including munitions warehouses and defense systems. Further strikes have occurred since, yet the Houthis have continued their attacks in the Red Sea.
The eventual outcome is uncertain but likely to be fraught with challenges.
The Rapid Closure of America’s Technological Power Gap
The crisis in the Red Sea highlights the limitations of U.S. power projection and raises questions about the role of the U.S. in securing vital trade routes. Notably, the use of drone technology by the Houthis indicates a significant narrowing of the technological power gap that the U.S. and Europe have maintained over the rest of the world for the past 250 years.
The Red Sea attacks were carried out with Houthi-operated long-range drones, specifically the Samad series, which the Houthis claim to have designed. Backed by Iran, these drones are cost-effective, with production costs around $20,000—a fraction of the price of the conventional missiles used to intercept them.
As globalization progresses, U.S. adversaries increasingly possess the knowledge and means to challenge technological dominance, rapidly diminishing the power gap that existed following World War II.
Long-range drones, akin to the Colt 45 in the late 19th century, are leveling the playing field in modern warfare. The recent tensions in the Red Sea could either de-escalate with a peace agreement or signal an ongoing confrontation that threatens U.S. interests.
While investment opportunities in U.S. military contractors may arise, the true prospects lie in understanding the foundational sources of power revealed by these events.
[Editor’s note: An effective investment strategy must consider geopolitical dynamics. I have recently finalized a detailed Special Report titled “Power Gap Cost Plunge: How to Hedge Against Geopolitical Chaos in 2024.” You can access it here for under a penny.
Sincerely,
MN Gordon
for Economic Prism
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