The Rapid Closure of America’s Technological Power Gap

You may not know this.  It wasn’t widely reported.  Certainly, it is something the elites in Davos would rather not acknowledge.

In late 2023, the U.S. Energy Information Administration reported that U.S. crude oil production hit an all-time high.  Reaching 13.25 million barrels per day in September 2023.

What’s especially remarkable about this new all-time high is that as recently as 2010, monthly crude oil production in the U.S. was just 5 million barrels per day.

We all know the story of this extraordinary turnaround.  Oil extraction advancements in hydraulic fracturing and horizontal drilling have allowed U.S. oil producers to deliver an abundance of oil to consumers.

These improvements in drilling efficiency have led to record production, at competitive prices, while using fewer oil rigs.  Moreover, this record production has been attained in the face of the Biden administration’s restrictive oil and gas policies.

This abundance of U.S. oil, and the price it’s being delivered to market at, has resulted in higher exports to Europe and Asia.  In fact, rising U.S. exports of crude oil to Asia were a major factor in the decision by Saudi Arabia to cut its oil prices for Asian buyers last year.  Intense competition from U.S. oil producers forced Saudi Arabia to fight for its market share.

Given the many geopolitical challenges the U.S. is facing, including the Russo-Ukrainian war and the Israel-Hamas war, record U.S. crude oil production is a critical reason oil prices remained moderate throughout 2023.  This has, in essence, neutralized the pricing leverage of Saudi Arabia and Russia over oil markets.  OPEC+ has lost its stranglehold on global oil prices.

Now, OPEC+ could always try a repeat of the 2014 strategy of flooding the oil market, which crashed oil prices and put dozens of U.S. drillers out of business.  However, at this point, U.S. drillers have already dramatically reduced their production costs and would be much more resilient to this strategy.

In summary, record U.S. oil production in 2023 was an accommodative force for what would have been a very difficult year for the global economy.  But as the year ended a new challenge with ancient origins arose.

Supporters of God

Moses may have parted the Red Sea over 3,000 years ago so the Israelites could escape the Egyptians and wander the desert for 40 years in search of the Promised Land.  Nonetheless, the Red Sea, and the nations along its shores, remains a place of enduring conflict.

The Red Sea, as a practical matter, connects the Mediterranean Sea to the Arabian Sea.  The ultimate through point is the Suez Canal, an artificial sea-level waterway in Egypt, which links the Mediterranean Sea to the Red Sea.  More importantly, this serves as the primary trade route between Europe and Asia.

Wedged between Saudi Arabia, Egypt, and Sudan, the Red Sea is one of the world’s critical trade corridors, controlling approximately 12 percent of global trade and nearly one-third of global container traffic.  Approximately 19,000 ships cross through the Suez Canal annually.  The inlet is a strategic pressure point in the energy and commodity trade.

The Houthi movement, also known as Ansar Allah (Supporters of God), is one side of the Yemeni civil war that has raged for decades.

The God the Houthi’s support takes its lineage from Abraham’s son Ishmael who was banished to the desert.  Naturally, the great rift between Ishmael and his brother Isaac continues to the present.

The Houthis are backed by Iran, and form part of Iran’s “Axis of Resistance” – an Iran led anti-Israel and anti-Western alliance of regional militias.

As you know, in December 2023, waves of Houthi missile and drone attacks were launched against numerous container ships in the Red Sea.  This was followed with threats to target all vessels heading toward Israel, regardless of if they were Israeli-owned or operated.

To avoid suffering the same fate, major energy and shipping companies, including BP and Maersk, halted their operations through the Red Sea and Suez Canal.

If this continues for an extended period it will have significant implications for world trade, consumer price inflation, and the stability of oil and gas markets.

The Empire Strikes Back

Major shipping companies quickly diverted shipping away from the Red Sea in late December 2023.  The alternate route is a much longer course around the Cape of Good Hope.

This adds 7-to-15 days and approximately 6,500 kilometers to the journey.  It also increases demand for bunker fuel to move those shipments and reduces the availability of ships and containers, as those vessels are tied up for longer to deliver the same volume of cargo.

A large-scale rerouting of trade could break supply chain linkages in the short term.  This is already driving up shipping costs, with ramifications for consumer prices.

If you recall, the six-day blockage of the Suez Canal in 2021 demonstrated the importance of major shipping lanes.  When the Ever-Given container ship ran aground in the waterway in March of 2021, the result was delayed shipments of consumer goods from Asia to Europe and North America and an intense impairment to global supply chains.

Re-routing around the Cape of Good Hope, in addition to delays and increased shipping costs, could have secondary effects on the economy.  It all depends on how long the confrontation in the Red Sea lasts.  By this, the hope of safe passage around the cape dies hard.

The Pentagon’s initial plan to repel Houthi attacks, Operation Prosperity Guardian, did little good.  Houthi drone attacks on container ships continued.

Then, on Thursday January 11, without a declaration from Congress, President Biden launched a massive retaliatory strike against Houthis in Yemen.  The strikes targeted munitions warehouses, launching systems, production facilities and air defense radar systems.

Additional U.S. strikes against Houthi targets in Yemen have occurred this week.  In return, Houthis have continued their Red Sea drone and missile assaults.

Where this all leads is a point of conjecture.  Though it isn’t a stretch to say it will be a place of ugliness.

The Rapid Closure of America’s Technological Power Gap

Regardless of how far the war escalates and its ultimate impacts on global supply chains, the crisis in the Red Sea reveals the U.S. has limitations in its ability to project power and police vital trade routes.  Perhaps it shouldn’t be doing this in the first place.

Big picture, the use of drone attacks by Houthis has pointed the spotlight on what could be a significant closure of the technological power gap that the U.S. and Europe has enjoyed over the rest of the world for the last 250 years.  In short, any technological power gap the U.S. has today is razor thin compared to that held at the close of WWII.

The strikes on ships in the Red Sea were carried out by Houthi operated long-range drones.  These include the Samad family of drones; specifically, the Samad-1, the Samad-2, and the Samad-3.  The Houthis claim to have designed and manufactured the Samad family of drones.  It is believed that they originate in Yemen, with backing from Iran.

At roughly $20,000 to produce, Samad drones are much cheaper than the conventional $500,000 missiles used to shoot them down.  They’re dramatically cheaper than fighter jets.  Lockheed Martin’s F35A, for example, has a unit cost of $82.4 million.

After 40 years of rapid globalization, more and more U.S. adversaries – or potential adversaries – have the knowhow and resources to compete for technological dominance.  The technological power gap and the cost to fill it plunges with each iteration of Samad drones.

In effect, long-range drones, like the Colt 45 of the late-19th century, are the great equalizer.

Maybe the Red Sea crisis all quickly blows over with an Israel-Hamas peace agreement.  Irrespective, the events have revealed that the U.S. technological power gap is rapidly closing.  It’s only a matter of time before a new wave of attacks are launched against U.S. interests.

Certainly, there are investment opportunities in U.S. military contractors.  But the real opportunity presented is far more basic.  It can be found in the real source of power and might highlighted at the beginning of this missive.

You can thank us later.

[Editor’s note: No investing strategy is complete without considering geopolitical factors.  For this reason, I just put the finishing touches on a unique Special Report.  It’s called “Power Gap Cost Plunge: How to Hedge Against Geopolitical Chaos in 2024.”  You can access a copy here for less than a penny.]


MN Gordon
for Economic Prism

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