Three Flashpoints to $220 Oil

With oil sitting comfortably at $73 a barrel this morning, we cast a nervous eye toward the Middle East…where three little-noted developments are setting the stage for a return to triple-digit prices. Maybe very soon.

1) On the surface, this looks like a pretty routine Iraq story: An ambush there yesterday killed six members of a Sunni militia known as the “Awakening Councils.”

But the background the media didn’t supply makes this much more interesting – and ominous. See, the Awakening Councils are Sunni Muslims the US government paid off in 2007 so they’d stop shooting at US troops.

This was part of Gen. David Petraeus’ “surge” strategy: He promised the militiamen that in return, they’d get a seat at the table in Iraq’s new government, dominated by Shia Muslims. Problem is, Petraeus never got the Shia to buy into this.

What’s more, Iraq’s new Shia leaders have close ties to Shia-dominated Iran; in fact, several of them lived there in exile during Saddam Hussein’s rule. Our eyes perked up a bit at the location of the attack yesterday – within spitting distance of the border.

Map of Killed Sunni Militia

We don’t want to jump to conclusions about who’s to blame for this attack. Still, we take note because Iraq is the first of three flashpoints Byron King has identified in what he sees as a “New War” shaping up between Sunnis and Shia in the Middle East.

We might be willing to chalk this up to coincidence, except that…

2) It’s looking more and more as if the United States and Iran are waging a proxy war in Yemen. Again, this is something the mainstream media ignores: The news we get from Yemen is all about al-Qaida sympathizers like the guy who tried to blow up the jet flying into Detroit last Christmas.

But Yemen’s Sunni-led government is also waging war against Shia rebels in the north, who say they’re victims of discrimination. The fighting has displaced 350,000 people in the last six years.

There’s word this morning of a truce, but truces have broken down before. That may be because, according to hawks in both Israel and the United States, Iran gives aid to its fellow Shia in Yemen. Iran “controls bodies that function as a state within a state, in Lebanon, Yemen, the Palestinian Authority, and other places,” according to Israel’s deputy foreign minister Danny Ayalon.

Get the picture? The United States is backing the Sunni government in Yemen, and Iran may be backing the Shia rebels. That’s why it looks like a proxy war. And it just so happens Yemen is the second of those three flash points Byron King is alerting us to. Should it blow up, he sees this Sunni-Shia war sending oil well past the record $147 set in July 2008.

3) We’re a bit late on this news, but we see President Obama has just sweetened an arms deal his predecessor cut with Saudi Arabia…throwing in 130 attack helicopters, to bring the total value of the package to $60 billion over 10 years. That’s the biggest US arms sale overseas ever.

The Pentagon makes it pretty plain: Part of the rationale for this deal is to “deter Iran.” Why? Because Sunni-ruled Saudi Arabia is home to restive Shia who happen to live on top of the country’s most productive oil fields.

Thus, the White house seeks “to beef up the militaries of Arab allies as a counterweight to Iran,” explains The Wall Street Journal. “Saudi Arabia, home to the birthplace of Islam, claims leadership of the Sunni world, making it a rival of Iran, which is predominantly Shia.”

And Saudi Arabia is the third and final flash point Byron identifies in the “New War” between Sunnis and Shia. Or rather, a new phase to a very old war that’s been raging for 1,300 years.

In this context, Iran’s nuclear program is something of a sideshow. “Even if the go-ahead to build a nuke never comes from Iran’s top cleric” says Byron, “the more immediate danger is a wildfire of Shia-Sunni unrest…starting in Iran’s new hotbeds of Shia support…and spreading across the rest of the Sunni-run oil states…with the richest oil fields in the world’s richest oil nation as the final battleground.”

Byron’s worst-case scenario: Oil at $220 a barrel, and gasoline close to $8 a gallon.

Dave Gonigam
for The Daily Reckoning