While we cannot be certain, it looks like a big sneeze is just around the corner. The exact timing is not predictable, but when it happens, investors who are in the right oil investments [see Crude Oil Strips] will profit enormously. Those who aren't will be seriously hurt.

Here's the Story

      Look at a world map from the last century and you'll find the Arabian peninsula labeled Arabia, not Saudi Arabia. This seems a small point, but it's the key to understanding what's happening.

      Saudi Arabia is a giant desert: a third the size of the US, but with only 17 million people. (The US has 258 million.) When I flew over the "Empty Quarter," I felt as if I were flying over the surface of the moon. Most of the Arabian peninsula is so dry and worthless that until this century, few tribes bothered to draw the boundaries between their territories.

      Until the early Middle Ages, the peninsula was inhabited only by a few nomadic bands. Then it was divided into numerous states often at war with each other. One of these was the Saud family dynasty, founded in the 1400s.

      In the 1500s, the Turks gained control of the area along the Red Sea called the Hejaz, and in the 1800s, the British took parts of Hasa and Oman along the east coast and Aden in the southwest tip of the Arabian peninsula.

      The wars among the tribes continued until the 1930s when ibn-Saud, backed by the British, finally conquered the other tribes. He established the state of Saudi Arabia, roughly within its present boundaries. Yemen and the other small states of the Arabian peninsula are the lands ruled by tribes the Saudis did not subdue.

Please see the latest figures and numbers on a sample "Strips" in the most current publication, visible on this site: Crude Oil Options: STRIPS, March 2001. No guarantees, but I think there is a 70% chance of something enormous happening in the Persian Gulf by the end of the decade, and 90% within five years. In EARLY WARNING REPORT I will continue keeping you informed.      -- Richard Maybury The risk of loss in futures and options can be substantial, therefore only genuine risk funds should be used. The risk of loss in buying options on futures can result in the total loss of the premium paid plus transaction costs. Past profits are not necessarily indicative of future profits. This estimate was calculated by Investors Publishing Services, Inc. (IPS). The opinions contained herein do not necessarily reflect the views of any individual or other organization. Material was gathered from sources believed to be reliable; however, no guarantee to its accuracy is made.

Why is the Name Saudi Arabia So Important?

      It causes the misleading assumption that members of the Saudi family are the rightful owners of the place and the rightful representatives of the people. It's as if a Canadian family named Ferguson had conquered Canada and had the gall to rename it Ferguson Canada, and everyone in the world including the USG (US Government) now referred to all Canadians as Fergusons. It is one of the most successful hoaxes in history.

      The Saudis are dictators who rule the other tribes with a heavy hand. If they didn't have all that oil, other cultures would regard them as just one more group of thugs in the same league as Qadaffi, Assad and Saddam Hussein.

      The key point for our investments is that the Saudi royal family is roundly hated by their subjects. The king and his tribe live in great opulence that provokes much jealously. Everyone knows the Saudi tribe has no more rightful claim to the oil money than any other tribe.

      The Saudis have two armies so that if one revolts they can pit the other one against it.

      Their primary means of preventing revolts has been to spread some of the wealth around in the theory that if the population can be kept in a kind of welfare stupor like domesticated cattle, few will have the initiative to revolt. So far it's worked.

      They allow no freedom of speech or press. Every non-Saudi knows that if he gets caught saying something unflattering about a member of the royal family, he could vanish.

      It's a big family. Ibn-Saud had 150 wives, so today a legion of 6,000 Saudi princes occupy the most important and high-paying jobs and keep the economy in a chokehold of nepotism.

      Political parties are not permitted. Activists are arrested and tortured, including electric shock and flogging. Judges are influenced by the royal family and they can be overruled by the king.

      No one in the Islamic world ever forgets that the hated Saudi conquerors sit atop 260 billion barrels of oil and they got there with the help of one of Islam's oldest enemies, Britain. Worse, the Saudis are trying to stay there with the help of Britain's ally, the US. This is a time bomb that will  go off. Count on it. The only question is when.

Now that you know about some of the turmoil brewing in the Persian Gulf, I suggest that when you invest in oil companies you make sure they are well run firms with little debt, lots of oil or gas in the ground, and little or no holdings in Chaostan. I suggest Berry Petroleum (BRY, NYSE), Murphy Oil (MUR, NYSE) and American Gas Index Fund (1-800-622-1386). You will find a list of more than three dozen investments expected to profit from the turmoil in Chaostan in the July 1997 EARLY WARNING REPORT.

Tensions Are Rising

      Despite the carloads of money earned by all that oil, the Saudis are now managing to spend it faster than they can make it. Infrastructure is going without repairs as contractors wait more than six months to be paid. Some neighborhoods experience frequent water cutoffs. Hospital beds are in short supply. New homes sit empty for lack of electrical service.

      As the Saudi welfare state crumbles, the influence of Islamic rebels is increasing. Underground faxes written against the royal family are widely read and discussed. Popular music has become openly antiroyal. A line in one song says, "Kings when they enter a country despoil it and make the noblest of its people the lowest."

      Middle class Arabs keep mental lists of the rumored prices of each royal palace.

      Jokes depict the king as a witless tyrant. This is very important. The one weapon no government can stand against is ridicule. Once bureaucrats, police and troops are embarrassed to be a part of the institution, their morale drops, they quit doing their jobs, and that's the end of it. (If you really want to fight back against the Washington power structure, compile a list of jokes about it and pass it around.)

How Hopeless is the Situation?

      Try to imagine: the Saudis have a fourth of all the oil in the world and a population of only 17 million - the same as Texas - yet they are spending the money so fast they're broke.

      The royal family's connections with Britain and the US discredit them even further since the US-UN arms embargo of the earlier 1990s in the Balkans led to the slaughter of thousands of Moslems. Said Saudi Arabia's Al-Yawm newspaper: "The United Nations bears responsibility for what is happening now in Bosnia."

      The royal family's complete dependence on the protection of the West was demonstrated in the Iraq-Kuwait war. When the ground war began on January 16, 1991, the Saudi troops immediately abandoned their equipment and fled to take cover behind US lines. A disgusted British officer said, "They bugged out."

"If the world has seemed a messy place since the end of the cold war, it has lately been getting sharply messier."      THE ECONOMIST, 1/14/95

A Nitroglycerine Combination

      As if all those historical and financial problems were not enough, Saudi Arabia also contains Mecca and Medina. These are Islam's two holiest cities. This means the shrines that are Islam's most sacred are under control of a regime that is widely perceived as Islam's most corrupt. A nitro and glycerine combination if there ever was one. Imagine how Catholics would feel if the Vatican were conquered and controlled by Al Capone.

      A popular song is titled "Islam vs. Christianity," and Moslems everywhere wonder which side the Saudi royal family is really on.

      In 1981, President Reagan pledged US protection for the Saudi regime against all enemies, internal as well as external. This means, apparently, that when the Saudi rulers finally do come under attack by their own people, their dictatorship will be protected by US troops. I wonder how many US troops realize what they've signed on for. Do they remember it was the Saudis who led the 1973 oil embargo against the US?

The End of the Saudi Royal Family

      We can never be sure about these things, but the great rebellion in Saudi Arabia may be near, due to breakthroughs in electronics.

      As with all dictatorships, the primary means the Saudis use to control their people is to control the information the people receive. For several years, Saudi police have been searching out and destroying satellite TV dishes which receive uncensored news broadcasts from space. But the dishes are being downsized; some now are as small as 18" in diameter and can be hidden anywhere. Also, phone line access to the Internet is fast becoming universal.

      So, I believe the new electronics combined with the financial crisis means the end of the Saudi royal family. My guess is that Iran's secret agents will continue working to foment revolution, and they'll do it in a way designed to prevent US intervention. The rebels will claim to be fighting for a more democratic Arabia. Once they've succeeded and are in power, they will request assistance from Iran to "stabilize" Arabia. This voluntary invitation to Iran by the new "democratic" government will be an end run that will deprive the USG of justification to intervene.

A Puppet of Iran

      The new Arabian government will be, in effect, a puppet of Iran, and Iran will get de facto ownership of all that oil. If Iran can also take the small Persian Gulf oil states in the process, they will end up controlling half of all the oil in the world.

      The USG has little understanding of Saudi Arabia. As in Iran in the 1970s, US officials deal with the English-speaking elite and get only their view of things. When the big rebellion happens, today's politicians will probably be as surprised as their predecessors when the Shah of Iran was overthrown.

      Saudi Arabia is the most thoroughly crazy place I've ever visited. A whole list of descriptions comes to mind. Weird, balmy, psychotic, Alice in Wonderland. The only thing certain is that it cannot last. Saudi Arabia will  go back to being Arabia, and the bloody transition will  cause oil prices to soar. When? We cannot know, human behavior is difficult to predict. We can say only that with the financial problems, the decline of the welfare handouts and the new advances in electronics, the stage is now set.

      In all the Islamic world, the only tribe that's despised more than the Saudis is the Kuwaitis, who also got where they are with the help of the much hated British and US. I still believe the forecast that makes the most sense is this: Iraq and Iran will continue working secretly to get the US armed forces hopelessly tangled up in the Balkans and elsewhere. Then they will foment revolutions in Kuwait and Saudi Arabia. Iraq will take Kuwait and Iran will take the rest of the Persian Gulf plus Mecca and Medina.

      Eventually - maybe immediately, maybe later - Iraqis and Iranians will fight among themselves for ownership of the whole prize, and all the Persian Gulf oil fields will go up in flames as Kuwait's did in 1991.

What to Look For

      Generally, when a government gets into the kind of trouble the Saudis have gotten themselves into, it will try to buy time by printing money. A leading indicator to watch is the value of the Saudi currency, the riyal. It's reported daily in the WALL STREET JOURNAL and other major newspapers. If we see the value of the riyal begin to decline dramatically, I will take this as a sign the big revolt is near and I should get more deeply into oil investments [see Crude Oil Strips].

      The exact timing is impossible to predict, so I keep a certain number of these investments in my portfolio at all times.

      Warn everyone you care about, it looks like the Great Chaos is about to mushroom.

Update - Saudi Oil War —March 1999 EWR

In the 2/95 EWR you received one of my most important articles, "The Coming Saudi Oil War." I explained some of the history few westerners understand, and said the US-backed Saudi dictatorship was in deep economic trouble and headed for a revolution, probably fomented by Iran.

Saudi Arabia is crucial to the world economy and our investments. The single biggest influence on oil prices, it contains 25% of the total world oil supply and, backed by Washington, dominates the Persian Gulf which contains an aggregate 65% of the oil.

On the opposite side of the Gulf is Iran, which is Persia. An ancient civilization with a population of 67 million, this is is the 400-pound gorilla of the Persian Gulf. Persia owned the Gulf for more than 2,000 years until London and Washington stole it and installed the Saudi royal family as their puppet overlords during the 20th century.

A big mystery has arisen in the Persian Gulf and the mainstream press says nothing about it.

The Saudi welfare state's finances have been deteriorating for years, and recent low oil prices have worsened the strain. The standard of living of all but the ruling elite has fallen sharply, and the poor in this once fabulously rich nation cannot even afford to buy meat.

Yet, the revolution has gone away. The flood of dissident petitions, faxes and videos denouncing royal corruption and the ties with Washington has largely dried up.4

Washington and London are delighted, of course. There have been no bombings since the 1996 Dhahran incident that killed 19 Americans.

But, the neighboring island of Bahrain, also suffering from low oil prices, grows more violent by the week, which is what we would expect.

In other words, economic conditions in the Persian Gulf are much worse than when I wrote "The Coming Saudi Oil War," yet in Saudi Arabia, the Iranian-backed rebels have grown quiet, as if they no longer want the Saudi regime overthrown. Strange.

I think Saudi King Fhad's brother Abdullah is the explanation. After the 1996 bombing, the effort to maneuver Abdullah into the throne accelerated. Fhad's health now is terrible, and by the end of 1998 Abdullah had become the de facto Saudi king.

Abdullah is known to be more friendly to Iran and other enemies of Washington.

Think about it. As Abdullah has risen, the rebels have grown more quiet despite worsening economic conditions.

My guess is that the revolution is gone because it has succeeded. Abdullah secretly capitulated and formed a clandestine alliance with Iran.

The Iranian regime does not need to take the Saudi oil fields by force, they already own them. The Saudi oil war is over, the US lost.

If I am right, what happens next?

First an observation. If the Saudi and Iranian dictators are secretly in bed together, then both sides of the Persian Gulf are now in the hands of Washington's enemies. Clinton keeps about two dozen US Navy ships in the Gulf. Ergo, two dozen US Navy ships are surrounded.

The only escape from the Gulf is through the Strait of Hormuz, which is 40 miles wide, an easy missile shot.

The shallow Persian Gulf is really an Iranian lake - a bottle with a single, narrow opening.

Fish in a barrel.

In Somalia we saw that Bill Clinton is a military genius in the tradition of George Armstrong Custer. Are we about to see it again, on a much larger scale?

Iran's goals are no secret. For two decades they have been to (1) raise oil prices as high as possible, (2) humiliate Washington and seriously damage the US economy and armed forces and, (3) take back the Persian Gulf.

If I were the Iranians what would I do? In January, when Y2K problems hit the highly computerized US Army, Navy and Air Force, I'd mine the Strait of Hormuz, launch a cloud of cruise missiles at the US ships bottled up in the Gulf, and announce that Persia has taken back the Persian Gulf including the oil.

And then there's Yassir Arafat and the cigar. Will Arafat help create terrorist attacks to augment Iran's strike?

Of course, my analysis could be wrong. We have no solid evidence of a secret alliance between the Saudi and Iranian regimes. But when it comes to the oil investments I have written so much about over the past year, and which are so dependent on events in the Mideast, it is always important to keep in mind that covert warfare was invented nine centuries ago in Iran. As my Iranian friend says, "In the Mideast, whatever appears to be happening is not what is happening, and whoever appears to be responsible is not who is responsible."

In the 6/97 EWR I wrote, "it is highly likely that within three years or so US officials will have completely lost military control of the Persian Gulf as well as every other piece of real estate they think they own." I have seen nothing to change this forecast.

Fascinating, and perhaps wildly profitable. Time will tell.

Update - Saudi Oil War — August 2000 EWR

Five years ago, in the 2/95 EWR, I wrote a lengthy analysis called "The Coming Saudi Oil War." I pointed out that when Saudi Arabia sneezes, US investment markets catch pneumonia.

Explaining some of the history few westerners understand, I said Saudi Arabia is a misleading name, the real name is Arabia. The Saudis are a tribe that conquered the other Arabian tribes, with British help. Today these conquerors dominate the other tribes and live in amazing opulence from all the oil money. Washington has replaced the British as their protectors. This is one of the main reasons Washington is not loved in the Mideast.

In that 2/95 article I pointed out that the Saudi dictators have averted rebellion by spreading the oil money around, creating one of the world's most extensive welfare states.

By 1995, the "real" (inflation adjusted) oil price was below the level of 1975, and the Saudis' ability to buy the tolerance of their subjects was evaporating.

On top of this was the fact that Iraq and Iran owned the Persian Gulf for thousands of years and they want it back.

The Saudi dictators are the "swing producers" of the oil markets. They control the world price by adjusting their oil output.

The only thing standing between the Saudis and the Iraqis and Iranians is the US Navy. Washington protects the Saudi thugs in exchange for their agreement to keep the oil price down.

The oil price is a barometer of the fickle Saudi dictators' relations with Washington. A low price means they are obeying Washington. A high price, Iraq and Iran.

In a 3/99 update, I said I thought conditions had changed. The oil war was over, the US had lost; the Saudis had secretly capitulated and formed a clandestine alliance with Iran.

Oil lately has been in the $30 range and gasoline prices are again in the headlines.

The significant news now is that $30 oil has not been enough to rescue the Saudis. The Arabian economy is creating only one new job for every three Arabs entering the work force. Poverty spreads. The south side of Riyadh has become a third-world slum, with Arabs living in tin shacks.

The Saudi dictators are under siege, receiving extreme pressure from Iraq, Iran and their own population to generate more oil revenue.

If you were the Saudis what would you do?

I could be wrong, but my guess is that any oil price declines will be only temporary, $50 oil is in the cards even if a major Persian Gulf war does not break out. If war does happen, $100.

Again, I wish I could say when. The only thing I am sure about is that Washington has lost control of the Persian Gulf. The Saudis know the anemic US armed forces can no longer protect them, so the long-term trend for oil and gasoline prices is higher, and this will lead other raw materials higher.

Incidentally, it was not so much an economic or financial analysis that enabled me to get the oil forecast right, it was a geopolitical analysis. A forecaster who is not watching the condition of the US armed forces is not watching the single most important factor in the world economy and investment markets.

------------
Saudi Arabia's population is outnumbered four to one by the Iraqis and Iranians, and we have little reason to believe the Arabian army, comprised of the conquered tribes, is loyal to the ruling family. In my view, oil below $25 means the Saudis are sliding into bed with Washington; above $30, sliding into bed with Iraq and Iran. Between $25 and $30 they are trying to keep both sides happy and probably making both sides angry. Due to the weakened state of the US armed forces, I am betting Iraq and Iran will win.

Richard Maybury, August 2000 EWR

U.S. & World Early Warning Report®. Published ten times per year.
© 1991-2007 Henry Madison Research, Inc., PO Box 84908, Phoenix, AZ 85071.
Phone toll-free 1-800-509-5400. Outside US: 602-252-4477. Fax: 602-943-2363.
Visa, MasterCard accepted. www.chaostan.com