Do you remember Stormin’ Norman Schwarzkopf?
He was the guy in charge of Operation Desert storm. The first Gulf War under President George Bush Senior in 1991.
I remember him quite well.
I was in my teens and it was the first real war of my lifetime. The excitement of it all was palpable. Like most people at the time I thought we were the ‘goodies.’
The media told us Saddam was an evil dictator. He gassed his own people. There were stories of torture chambers for political enemies.
Now he had gone too far and invaded his peaceful neighbour, Kuwait. The world must do the right thing and act.
The ‘war’ lasted little more than a month.
The alliance of countries headed by the USA — which included the UK, Saudi Arabia and Egypt amongst others — lost around 358 casualties all up.
Iraqi deaths on the other hand were estimated to be as high as 200,000.
What’s this got to do with our week of Trump related investing ideas you ask?
I’m getting there…
Because the real story behind this war — and most wars since — is very relevant.
It’s a major story of the 20th century — the American century…
War, what is it good for?
It’s only when I got older and wiser that I realised the real reason for the initial Gulf War. There’s no shortage of brutal dictators in the world.
The West ignores most.
But not those in oil rich states.
Like a lot of the wars in recent memory, this was really about oil.
The US dominated the oil industry for most of the 20th century.
American reliance on imported oil began during the Vietnam War and the economic boom period of the 1950s and 1960s.
In turn, this provided Arab countries and OPEC (formed in 1960 to counter Western oil companies) with increased power to control oil prices.
In the 1970s the pendulum of pricing power swung firmly in OPEC’s favour.
The US reacted to counter this.
Over the next few decades, American military activity in the Middle East ‘coincidentally’ ramped up. Alliances shifted in the region like desert sands. And America was at the centre of it all.
For the whole of the 1980s Saddam was actually friendly with the US. But he got too big for his boots. And his invasion of oil and gas rich Kuwait would threaten the US allies in the region including the biggest oil producing nation on the planet, Saudi Arabia.
So, we had the first Gulf war. And the second under George Bush Junior in 2003 supposedly over weapon of mass destruction (WMDs). The WMDs turned out to be phantoms. That didn’t matter, it was really about oil once more.
Control over oil — along with the US dollar and military strength — are central planks of US global power.
Which brings me finally to the recent Trump-Putin Helsinki Summit…
Guess who the second biggest exporter of oil in the world today is?
This is one reason for Trump’s move toward Russia and away from China.
In Trump’s mind, one has something Trump wants, the other is getting richer off American debt and know-how.
The USA owes China a lot of money.
As of May 2018, total debt owed to China was US$1.18 trillion. That’s around 20% of total US debt owed to foreign countries.
Through the trade deficit, the Chinese grow wealthier every year thanks to the American consumer and their burgeoning debt.
Russia on the other hand has the means to keep the oil pumps flowing. And to keep the key producers in the Middle East pumping too. This is the strategic reason for Russia’s military deployment in Syria.
In my opinion, Trump prefers an alliance of military strength with Russia to control the flow of oil while he tries to renegotiate the terms of trade with China.
That way cheap oil keeps the US consumer happy as well as business costs low.
Check out this table…
1. Saudi Arabia: US$133.6 billion
2. Russia: $93.3 billion
3. Iraq: $61.5 billion
4. United Arab Emirates: $48.8 billion
5. Canada: $41.2 billion
6. Iran: $40.1 billion
7. Kuwait: $38.2 billion
8. Nigeria: $33 billion
9. Angola: $30.5 billion
10. Kazakhstan: $26.6 billion
11. Norway: $25.2 billion
12. Venezuela: $23.1 billion
13. Mexico: $19.9 billion
14. Libya: $15.7 billion
15. Qatar: $15.6 billion
The US has few friends on this list. But with Russia onside, the dynamics look a lot better.
A whole new ball game
This brings me to Trump and Europe.
Europe is a big net importer of energy. And in the past, they’ve been able to ride the coattails of US foreign policy here without too much worry.
US control of oil has benefited Europe too. And with American forces keeping Russia at bay to the east they’ve had it pretty sweet.
There’s definitely some merit in Trump’s arguments about Europe taking advantage of the US, no matter how crudely he puts it.
Trump’s play with Russia is to secure oil supplies and keep prices down.
He knows this will benefit Europe too. But this time he wants some protection money. And as he pointed out, Europe already relies on Russia for gas so he wants Europe to increase its spending on the military to 2% of GDP.
It’s the price of his peace so to speak.
Europe has two choices now.
Do as they’re told and spend more money on defence in the hope that the energy markets remain open and cheap into the future.
Or, change their energy strategy. Not ramping up military spending seems like a bad move now, no matter what happens next.
I think European policy makers now realise they can’t rely on benevolent US power anymore.
A German official said Trump’s deference to Putin was ‘frightening,’ and yet another example of why Germans — for the first time since 1948 — see the need for a ‘US strategy,’ which treats Washington as a potential adversary.
‘The thinking now is Europe needs to close ranks now to address US threats,’ the official said.
This means a radical re-think of energy policy. As well as a re-think of defence policy.
In the short-term, Trump will get his wish.
European countries will no doubt increase spending on the military.
This throws open investment opportunities for you in big US companies such as Northrop Grumman [NYSE:NOC] and Raytheon [NYSE:RTN] or potentially European companies such as BAE Systems [NASDAQOTH:BAESY].
Over the longer term though, the huge reliance on imported oil and gas into the EU is a severe strategic weakness that they will now need to deal with.
Renewables and nuclear power may be the industries to benefit from this strategic shift.
Renewables are already on the rise in Europe:
Despite what we hear in Australia, the technology behind renewables is only getting better and cheaper.
Promising renewable investment opportunities include lithium and vanadium miners, as well as tech companies in solar and wind.
The other potential beneficiary of the Trump effect is the nuclear industry. Again, if I’m right, that’s good for a number of ASX listed stocks in uranium mining.
Nuclear power was once the pride of France.
Lacking significant domestic reserves of fossil fuels or big rivers for hydroelectric dams, nuclear was the only way for France to achieve energy security and independence from foreign suppliers.
But since the Fukishima disaster in Japan in 2011, support for nuclear power is waning. It still makes up 40% of the energy mix but growth was severely in doubt.
Germany has also been staunchly anti-nuclear in recent times and has put pressure on other European countries to be too.
In my opinion, the Trump effect has changed the dynamics here overnight.
Trump has labelled Germany a ‘foe’ and has instilled great uncertainty into the old NATO alliances.
Security of energy may trump other concerns going forward. And you’d think a tech savvy country like Germany could build and manage powerful cutting edge nuclear power plants.
In fact, I think nuclear will be back on the table for every middle power now unsure about American support.
It’s all up in the air
There’s no question that Trump’s actions are changing the dynamics of the energy industry. It’s not just re-runs of the same old ‘oil wars’ we’ve seen in the past.
Because the alliances behind these wars, are crumbling.
Trump’s USA only respects power.
For countries dealing with this new model of American power — especially allies — they are in for a radical rethink of accepted norms.
And new strategic plans.
I think energy markets will be the centre of this battle. There’s an opportunity for you if you can work out how it all plays out.
Contributing editor, Market and Money