If you’re historically oriented, you know that the more things change, the more they remain the same. Can companies really make money selling a product for less than it costs to make – even in volume? Ask Buffett why he sat out the tech boom….

Today I’m passing along a piece from George Friedman, Chief Intelligence Officer at Stratfor. He makes the absolutely compelling argument that issues of war and peace follow these same guidelines. There are ebbs and flows, but war between countries is an inevitable part of history, and it’s driven by simple geography. The recent war between Russia and Georgia was precisely such a “reversion to the mean,” double-entendre fully intended.

Navigating financial markets requires an understanding of the geopolitical issues – the war & peace – that drive them. What does this war mean for Russian gas supplies to Europe? What does this war mean for the future of the BTC pipeline? Does this war make Iranian inclusion in global markets more or less likely? Is Russia just “vertically integrating” its control of energy flows with less-than-subtle tools?

You may have seen Stratfor quotations recently in the New York Times, Bloomberg, and Barron’s. But personally I need more than just snippets. Quite simply, George’s team is the best out there, and I encourage you to take advantage of the special offer that George makes available for my readers. The old Cold War is heating up, and this is no time to be without intelligence on what’s coming next and analysis of what it means.

Read the analysis below and get a solid reminder that it’s not different this time – or any other.

John Mauldin, Editor
Outside the Box

The Real World Order

By George Friedman

On Sept. 11, 1990, U.S. President George H. W. Bush addressed Congress. He spoke in the wake of the end of Communism in Eastern Europe, the weakening of the Soviet Union, and the invasion of Kuwait by Saddam Hussein. He argued that a New World Order was emerging: “A hundred generations have searched for this elusive path to peace, while a thousand wars raged across the span of human endeavor, and today that new world is struggling to be born. A world quite different from the one we’ve known. A world where the rule of law supplants the rule of the jungle. A world in which nations recognize the shared responsibility for freedom and justice. A world where the strong respect the rights of the weak.”

After every major, systemic war, there is the hope that this will be the war to end all wars. The idea driving it is simple. Wars are usually won by grand coalitions. The idea is that the coalition that won the war by working together will continue to work together to make the peace. Indeed, the idea is that the defeated will join the coalition and work with them to ensure the peace. This was the dream behind the Congress of Vienna, the League of Nations, the United Nations and, after the Cold War, NATO. The idea was that there would be no major issues that couldn’t be handled by the victors, now joined with the defeated. That was the idea that drove George H. W. Bush as the Cold War was coming to its end.

Those with the dream are always disappointed. The victorious coalition breaks apart. The defeated refuse to play the role assigned to them. New powers emerge that were not part of the coalition. Anyone may have ideals and visions. The reality of the world order is that there are profound divergences of interest in a world where distrust is a natural and reasonable response to reality. In the end, ideals and visions vanish in a new round of geopolitical conflict.

The post-Cold War world, the New World Order, ended with authority on Aug. 8, 2008, when Russia and Georgia went to war. Certainly, this war was not in itself of major significance, and a very good case can be made that the New World Order actually started coming apart on Sept. 11, 2001. But it was on Aug. 8 that a nation-state, Russia, attacked another nation-state, Georgia, out of fear of the intentions of a third nation-state, the United States. This causes us to begin thinking about the Real World Order.

The global system is suffering from two imbalances. First, one nation-state, the United States, remains overwhelmingly powerful, and no combination of powers are in a position to control its behavior. We are aware of all the economic problems besetting the United States, but the reality is that the American economy is larger than the next three economies combined (Japan, Germany and China). The U.S. military controls all the world’s oceans and effectively dominates space. Because of these factors, the United States remains politically powerful – not liked and perhaps not admired, but enormously powerful.

The second imbalance is within the United States itself. Its ground forces and the bulk of its logistical capability are committed to the Middle East, particularly Iraq and Afghanistan. The United States also is threatening on occasion to go to war with Iran, which would tie down most of its air power, and it is facing a destabilizing Pakistan. Therefore, there is this paradox: The United States is so powerful that, in the long run, it has created an imbalance in the global system. In the short run, however, it is so off balance that it has few, if any, military resources to deal with challenges elsewhere. That means that the United State s remains the dominant power in the long run but it cannot exercise that power in the short run. This creates a window of opportunity for other countries to act.

No matter where you’re looking at putting your money today, the impact of energy prices simply can’t be overstated. The commodities trade, US and foreign equities, debt and interest rates, everything is being driven by energy prices right now. Whether you’re trying to factor energy as a direct input into the price and consumption of manufactured goods or dealing with monetary policy’s impact on the dollar and debt markets, you’re implicitly making an energy trade.

I’ve said it before and I’ll say it again, if you’re trying to trade today’s markets without geopolitical intelligence, it’s like trying to trade the juice futures market without a weather forecast. You can do it, but good luck to you.

George has kindly passed me the article that was the basis of the Barron’s story. You’ll notice right away that unlike many of the so-called experts out there, Stratfor doesn’t airily dismiss underlying logistics in favor of handwaving. But better than taking my word for it, click here to get your own Stratfor Membership at the discounted rate for my readers. Every day you’ll receive the same forecasts and intelligence guidance that I use to shape my thinking on where the world is going – and especially on energy prices.

John Mauldin, Editor
Outside the Box

On June 20, The New York Times published a report saying that more than 100 Israeli aircraft carried out an exercise in early June over the eastern Mediterranean Sea and Greece. The article pointed out that the distances covered were roughly the distances from Israel to Iranian nuclear sites and that the exercise was a trial run for a large-scale air strike against Iran. On June 21, the British newspaper The Times quoted Israeli military sources as saying that the exercise was a dress rehearsal for an attack on Iran. The Jerusalem Post, in covering these events, pointedly referred to an article it had published in May saying that Israeli intelligence had changed its forecast for Iran passing a nuclear threshold — whether this was simply the ability to cause an explosion under controlled conditions or the ability to produce an actual weapon was unclear — to 2008 rather than 2009.The New York Times article, positioned on the front page, captured the attention of everyone from oil traders to Iran, which claimed that this was entirely psychological warfare on the part of the Israelis and that Israel could not carry out such an attack. It was not clear why the Iranians thought an attack was impossible, but they were surely right in saying that the exercise was psychological warfare. The Israelis did everything they could to publicize the exercise, and American officials, who obviously knew about the exercise but had not publicized it, backed them up. What is important to note is that the fact that this was psychological warfare — and fairly effective, given the Iranian response — does not mean that Israel is not going to attack. One has nothing to do with the other. So the question of whether there is going to be an attack must be analyzed carefully.

The first issue, of course, is what might be called the “red line.” It has always been expected that once the Iranians came close to a line at which they would become a capable nuclear power, the Americans or the Israelis would act to stop them, neither being prepared to tolerate a nuclear Iran. What has never been clear is what constitutes that red line. It could simply be having produced sufficient fissionable material to build a bomb, having achieved a nuclear explosion under test conditions in Iran or having approached the point of producing a deliverable nuclear weapon.

Early this month, reports circulated that A.Q. Khan, the former head of Pakistan’s nuclear program who is accused of selling nuclear technology to such countries as Libya, North Korea and Iran, had also possessed detailed design specifications and blueprints for constructing a nuclear weapon small enough to be mounted on missiles available to North Korea and Iran. The blueprints were found on a computer owned by a Swiss businessman, but the reports pointedly said that it was not known whether these documents had been transferred to Iran or any other country. It was interesting that the existence of the blueprints in Switzerland was known to the United States — and, we assume, Israel — in 2006 but that, at this point, there was no claim that they had been transferred.

Clearly, the existence of these documents — if Iran had a copy of them — would have helped the Iranians clear some hurdles. However, as we have pointed out, there is a huge gap between having enriched uranium and having a deliverable weapon, the creation of which requires technologies totally unrelated to each other. Ruggedizing and miniaturizing a nuclear device requires specializations from materials science to advanced electronics. Therefore, having enriched uranium or even triggering an underground nuclear device still leaves you a long way from having a weapon.

That’s why the leak on the nuclear blueprints is so important. From the Israeli and American point of view, those blueprints give the Iranians the knowledge of precisely how to ruggedize and miniaturize a nuclear device. But there are two problems here. First, if we were given blueprints for building a bridge, they would bring us no closer to building one. We would need experts in multiple disciplines just to understand the blueprints and thousands of trained engineers and workers to actually build the bridge. Second, the Israelis and Americans have known about the blueprints for two years. Even if they were certain that they had gotten to the Iranians — which the Israelis or Americans would certainly have announced in order to show the increased pressure at least one of them would be under to justify an attack — it is unclear how much help the blueprints would have been to the Iranians. The Jerusalem Post story implied that the Iranians were supposed to be crossing an undefined line in 2009. It is hard to imagine that they were speeded up to 2008 by a document delivered in 2006, and that the Israelis only just noticed.

In the end, the Israelis may have intelligence indicating that the blueprints did speed things up, and that the Iranians might acquire nuclear weapons in 2008. We doubt that. But given the statements Iranian President Mahmoud Ahmadinejad has made over the years, the Israelis have to be planning based on worst-case scenarios. What the sum total of their leaks adds up to is an attempt to communicate widely that there is an increased urgency in dealing with Iran, based on intelligence that the Iranian program is farther along than previously thought.

The problem is the fact that the Israelis are communicating. In fact, they are going out of their way to communicate. That is extremely odd. If the Israelis were intending to strike Iran’s nuclear facilities, they would want to be absolutely certain that as much of the equipment in the facilities was destroyed as possible. But the hard truth is that the heart of Iran’s capability, such as it is, does not reside in its facilities but in its scientists, engineers and technicians who collectively constitute the knowledge base of Iran’s nuclear program. Facilities can be replaced. It would take at least a generation to replace what we already regard as an insufficient cadre of expertise.

Therefore, if Israel wanted not simply to take out current facilities but to take Iran out of the nuclear game for a very long time, killing these people would have to be a major strategic goal. The Israelis would want to strike in the middle of the workday, without any warning whatever. If they strike Iran, they will be condemned widely for their actions. The additional criticism that would come from killing the workforce would not be a large price to pay for really destroying the Iranian capabilities. Unlike the Iraqi reactor strike in 1981, when the Israelis struck at night to minimize casualties, this strike against a more sophisticated program could not afford to be squeamish.

There are obviously parts of Iran’s nuclear capability that cannot be moved. There is other equipment that can be, with enough warning and with more or less difficulty, moved to unknown locations. But nothing would be easier to disperse than the heart of the program — the people. They could be moved out of harm’s way with only an hour’s notice. Therefore, providing warning that an attack was coming makes very little sense. It runs counter to basic principles of warfare. The Israelis struck the Osirak reactor in Iraq in 1981 with not the slightest hint of the attack’s imminence. That was one of the reasons it was successful. Telegraphing your punch is not very smart in these circumstances.

The Israelis have done more than raise the possibility that an attack might be launched in 2008. They have publicized how they plan to do it. Based on the number and type of aircraft involved in the exercise — more than 100 F-15 and F-16 fighter jets — one Israeli attack scenario could involve a third of Israel’s inventory of fourth-generation strike aircraft, including most of its latest-model F-15I Ra’am and F-16I Sufa fighter bombers. If Greece were the target in this exercise, then the equivalent distance would mean that the Israelis are planning to cross Jordanian airspace, transit through Iraq and strike Iran from that direction. A strike through Turkey — and there is no indication that the Turks would permit it — would take much longer.

The most complex part of the operation’s logistics would be the refueling of aircraft. They would have to be orbiting in Iraqi airspace. One of the points discussed about the Mediterranean exercise was the role of Israeli helicopters in rescuing downed flyers. Rescue helicopters would be involved, but we doubt very much they would be entering Iranian airspace from Israel. They are a lot slower than the jets, and they would have to be moving hours ahead of time. The Iranians might not spot them but the Russians would, and there is no guarantee that they wouldn’t pass it on to the Iranians. That means that the Israeli helicopters would have to move quietly into Iraq and be based there.

And that means that this would have to be a joint American-Israeli operation. The United States controls Iraqi airspace, meaning that the Americans would have to permit Israeli tankers to orbit in Iraqi airspace. The search-and-rescue helicopters would have to be based there. And we strongly suspect that rescued pilots would not be ferried back to Israel by helicopter but would either be sent to U.S. hospitals in Iraq or transferred to Israeli aircraft in Iraq.

The point here is that, given the exercise the Israelis carried out and the distances involved, there is no way Israel could do this without the direct cooperation of the United States. From a political standpoint in the region, it is actually easier for the United States to take out Iran’s facilities than for it to help the Israelis do so. There are many Sunni states that might formally protest but be quite pleased to see the United States do the job. But if the Israelis were to do it, Sunni states would have to be much more serious in their protestations. In having the United States play the role of handmaiden in the Israeli operation, it would appear that the basic charge against the United States — that it is the handmaiden of the Israelis — is quite true. If the Americans are going to be involved in a strike against Iran’s nuclear program, they are far better off doing it themselves than playing a supporting role to Israel.

There is something not quite right in this whole story. The sudden urgency — replete with tales of complete blueprints that might be in Iranian hands — doesn’t make sense. We may be wrong, but we have no indication that Iran is that close to producing nuclear weapons. Second, the extreme publicity given the exercise in the Mediterranean, coming from both Israel and the United States, runs counter to the logic of the mission. Third, an attack on Iran through Iraqi airspace would create a political nightmare for the United States. If this is the Israeli attack plan, the Americans would appear to be far better off doing it themselves.

There are a number of possible explanations. On the question of urgency, the Israelis might have two things in mind. One is the rumored transfer of S-300 surface-to-air missiles from Russia to Iran. This transfer has been rumored for quite a while, but by all accounts has yet to happen. The S-300 is a very capable system, depending on the variety (and it is unclear which variety is being transferred), and it would increase the cost and complexity of any airstrike against Iran. Israel may have heard that the Russians are planning to begin transferring the missiles sometime in 2008.

Second, there is obviously the U.S. presidential election. George W. Bush will be out of office in early 2009, and it is possible that Barack Obama will be replacing him. The Israelis have made no secret of their discomfort with an Obama presidency. Obviously, Israel cannot attack Iran without U.S. cooperation. The Israelis’ timetable may be moved up because they are not certain that Obama will permit an attack later on.

There are also explanations for the extreme publicity surrounding the exercise. The first might be that the Israelis have absolutely no intention of trying to stage long-range attacks but are planning some other type of attack altogether. The possibilities range from commando raids to cruise missiles fired from Israeli submarines in the Arabian Sea — or something else entirely. The Mediterranean exercise might have been designed to divert attention.

Alternatively, the Israelis could be engaged in exhausting Iranian defenders. During the first Gulf War, U.S. aircraft rushed toward the Iraqi border night after night for weeks, pulling away and landing each time. The purpose was to get the Iraqis to see these feints as routine and slow down their reactions when U.S. aircraft finally attacked. The Israelis could be engaged in a version of this, tiring out the Iranians with a series of “emergencies” so they are less responsive in the event of a real strike.

Finally, the Israelis and Americans might not be intending an attack at all. Rather, they are — as the Iranians have said — engaged in psychological warfare for political reasons. The Iranians appear to be split now between those who think that Ahmadinejad has led Iran into an extremely dangerous situation and those who think Ahmadinejad has done a fine job. The prospect of an imminent and massive attack on Iran could give his opponents ammunition against him. This would explain the Iranian government response to the reports of a possible attack — which was that such an attack was just psychological warfare and could not happen. That clearly was directed more for internal consumption than it was for the Israelis or Americans.

We tend toward this latter theory. Frankly, the Bush administration has been talking about an attack on Iran for years. It is hard for us to see that the situation has changed materially over the past months. But if it has, then either Israel or the United States would have attacked — and not with front-page spreads in The New York Times before the attack was launched. In the end, we tend toward the view that this is psychological warfare for the simple reason that you don’t launch a surprise attack of the kind necessary to take out Iran’s nuclear program with a media blitz beforehand. It just doesn’t work that way.

By George Friedman

Source: Mediterranean Flyover: Telegraphing an Israeli Punch?

Now I want you to see their Intelligence Guidance which they publish each Friday for the upcoming week; last week’s edition is below.

The Intelligence Guidance is an internal document that guides their intelligence team for the upcoming week. It’s not a forecast of what’s going to happen (more on that in a minute) but a list of potential inflection points that bear close scrutiny. On a short term basis, these are the critical items that can move policy in one direction or another. I put this side-by-side with my calendar of Fed meetings, statistics releases, and earnings announcements to get a holistic picture of what’s going to be driving markets and plan tactics. I highly encourage you to click here for a Stratfor Membership, at special prices available to my readers, and add Stratfor’s Intelligence Guidance to your weekly thinking.

Now about that forecast. Stratfor is just about to issue their third quarter forecast, and you definitely want to incorporate this thinking in your strategic planning. Stratfor’s past calls on everything from the Asian currency meltdown to China’s internal problems have proven to be eerily prescient. And I should point out that they also provide a scorecard that makes it very clear where their calls have been off, too. The Quarterly Forecast is included free as part of your Stratfor Membership, so click this link for the special deals available to my readers and make sure that you don’t miss out on this important look ahead.

Intelligence Guidance Summary:

The following are internal Stratfor documents produced to provide high-level guidance to our analysts. These documents are not forecasts, but rather a series of guidelines for understanding and evaluating events, as well as suggestions on areas for focus.

Analysis

All guidance from last week remains in place (see those below). Supplemental guidance:

1. The situation in Iraq: Let’s spend next week focusing on something that is not happening: the war in Iraq. The bombing in a Baghdad market really drove home how few there are. So did indications that Iraq is going to open the oil fields to investment. We need to review the status of the war carefully. Our perception has been that the war is winding down and the general outlines of the resolution are in place. Time to do a net assessment re-evaluating our position.

2. China and oil prices: China has lifted the caps on oil prices, the Saudis are promising to raise output and consumption appears to be dropping. That would indicate that oil prices will fall, but that is not our business. Our business remains figuring out what higher energy prices do to the international system. The China watch remains essential. That is the center of gravity of the problem. They are still trying to ride it out with subsidies. Questions like “What is the status of their cash reserves?” and “What is happening to export profit margins?” become very interesting. They are spending real money to keep these caps on to keep those margins up. We do not know where prices will go but we know where they are. Let’s drill into the reserve and margin question.

3. Venezuela and Cuba: Venezuelan President Hugo Chavez tried to create a police state then backed off. Next thing we hear are stories the he is giving sanctuary to Hezbollah, which we assume is psychological pressure from Washington. Then he turns up in Havana for talks with Fidel and Raul Castro. In the meantime the European Union drops whatever sanctions are left on Cuba. Cuba needs Venezuelan help on oil. But it also seems to want to get out of its isolation. It’s not all that interesting what Chavez said to the Castros, but it would really be interesting to find out what Raul said to Chavez. Fidel cranked him up. Is Raul following the old line with Chavez, or telling him to calm down?

4. Israeli domestic politics: What is holding Israeli Prime Minister Ehud Olmert up? In any other country the allegations alone would have bought him down, not to mention Ehud Barak, a coalition partner, calling for his resignation. With the Syrian talks clearly proceeding and Hamas agreeing to a truce with Israel, things are at a crucial point. Since this is the Middle East, that’s usually when disaster strikes. Olmert’s fall would seem to derail everything, but he does not fall. Let’s dissect the Israeli situation and see what we can learn.

5. Zimbabwe and South Africa: Zimbabwe is not important in itself. South Africa is, or more precisely, the degree to which South Africa plans to exercise power in Africa. With commodity prices high, Africa becomes important, and as the Chinese increase their presence, the South Africans could use their longstanding close ties to move in as well. It would make geopolitical and business sense to do that. Zimbabwe is the test for South Africa. If either South African President Thabo Mbeki or African National Congress President Jacob Zuma can help pull Zimbabwean President Robert Mugabe out of office, his authority in the continent will be solid. Mbeki and Zuma have the power, but it isn’t clear they have the will. If they do not have the will in Zimbabwe, they will not have it to create a sphere of influence elsewhere. The Zimbabwe crisis is in a quiet phase but that won’t hold indefinitely. We need to watch South Africa to see if it will act.

Ongoing items:

1. Oil and food markets: Oil and food prices remain at the top of the list. We need to be watching carefully what the Arabian Peninsula is doing with its money and what the Russians are planning to do. In the immediate, we need to be following global crop forecasts. Unseasonable rain in the U.S. Midwest has threatened to bring the corn harvest down by about 10 percent this year. Flooding is hitting China’s harvests right now as well, and corn crops in Mexico have been threatened by unseasonably dry weather. As other crops see seasonal disruptions worldwide, we could see increased fluctuations in the prices of these goods. Particularly vulnerable to increases in the price of corn are Japan, South Korea, Mexico and Egypt. Mexico and Egypt are particularly prone to food-related civic unrest, a development that must be monitored carefully. Along those lines, all food crops around the globe must be carefully monitored as prices continue to climb. This is much more immediately significant than oil prices right now. If there are crop failures larger than the U.S. corn crop looming, prices are really going to soar. That is not going to result in a one or two point drop in gross domestic product; it can result in chaos in large parts of the world. We don’t know if this is going to happen, but we need to be on top of this whole process hour by hour.

Recently, we have seen startling rises in the price of food, particularly grains. Apart from higher prices, there have been disruptions in the availability of food as governments limit food exports and as hoarding increases in anticipation of even higher prices.

Oil and food differ from other commodities in that they are indispensable for the functioning of society. Food obviously is the more immediately essential. Food shortages can trigger social and political instability with startling swiftness. It does not take long to starve to death. Oil has a less-immediate — but perhaps broader — impact. Everything, including growing and marketing food, depends on energy; and oil is the world’s primary source of energy, particularly in transportation. Oil and grains — where the shortages hit hardest — are not merely strategic commodities. They are geopolitical commodities. All nations require them, and a shift in the price or availability of either triggers shifts in relationships within and among nations.

It is not altogether clear to us why oil and grains have behaved as they have. The question for us is what impact this generalized rise in commodity prices — particularly energy and food — will have on the international system. We understand that it is possible that the price of both will plunge. There is certainly a speculative element in both. Nevertheless, based on the realities of supply conditions, we do not expect the price of either to fall to levels that existed in 2003. We will proceed in this analysis on the assumption that these prices will fluctuate, but that they will remain dramatically higher than prices were from the 1980s to the mid-2000s.

If that assumption is true and we continue to see elevated commodity prices, perhaps rising substantially higher than they are now, then it seems to us that we have entered a new geopolitical era. Since the end of World War II, we have lived in three geopolitical regimes, broadly understood:

• The Cold War between the United States and the Soviet Union, in which the focus was on the military balance between those two countries, particularly on the nuclear balance. During this period, all countries, in some way or another, defined their behavior in terms of the U.S.-Soviet competition.
• The period from the fall of the Berlin Wall until 9/11, when the primary focus of the world was on economic development. This was the period in which former communist countries redefined themselves, East and Southeast Asian economies surged and collapsed, and China grew dramatically. It was a period in which politico-military power was secondary and economic power primary.
• The period from 9/11 until today that has been defined in terms of the increasing complexity of the U.S.-jihadist war — a reality that supplanted the second phase and redefined the international system dramatically.

With the U.S.-jihadist war in either a stalemate or a long-term evolution, its impact on the international system is diminishing. First, it has lost its dynamism. The conflict is no longer drawing other countries into it. Second, it is becoming an endemic reality rather than an urgent crisis. The international system has accommodated itself to the conflict, and its claims on that system are lessening.

The surge in commodity prices — particularly oil — has superseded the U.S.-jihadist war, much as the war superseded the period in which economic issues dominated the global system. This does not mean that the U.S.-jihadist war will not continue to rage, any more than 9/11 abolished economic issues. Rather, it means that a new dynamic has inserted itself into the international system and is in the process of transforming it.

It is a cliche that money and power are linked. It is nevertheless true. Economic power creates political and military power, just as political and military power can create economic power. The rise in the price of oil is triggering shifts in economic power that are in turn creating changes in the international order. This was not apparent until now because of three reasons. First, oil prices had not risen to the level where they had geopolitical impact. The system was ignoring higher prices. Second, they had not been joined in crisis condition by grain prices. Third, the permanence of higher prices had not been clear. When $70-a-barrel oil seemed impermanent, and likely to fall below $50, oil was viewed very differently than it was at $130, where a decline to $100 would be dramatic and a fall to $70 beyond the calculation of most. As oil passed $120 a barrel, the international system, in our view, started to reshape itself in what will be a long-term process.

Obviously, the winners in this game are those who export oil, and the losers are those who import it. The victory is not only economic but political as well. The ability to control where exports go and where they don’t go transforms into political power. The ability to export in a seller’s market not only increases wealth but also increases the ability to coerce, if that is desired.

The game is somewhat more complex than this. The real winners are countries that can export and generate cash in excess of what they need domestically. So countries such as Venezuela, Indonesia and Nigeria might benefit from higher prices, but they absorb all the wealth that is transferred to them. Countries such as Saudi Arabia do not need to use so much of their wealth for domestic needs. They control huge and increasing pools of cash that they can use for everything from achieving domestic political stability to influencing regional governments and the global economic system. Indeed, the entire Arabian Peninsula is in this position.

The big losers are countries that not only have to import oil but also are heavily industrialized relative to their economy. Countries in which service makes up a larger sector than manufacturing obviously use less oil for critical economic functions than do countries that are heavily manufacturing-oriented. Certainly, consumers in countries such as the United States are hurt by rising prices. And these countries’ economies might slow. But higher oil prices simply do not have the same impact that they do on countries that both are primarily manufacturing-oriented and have a consumer base driving cars.