The mid-1990s ushered in new and fundamental transformations in the global landscape on all three dimensions of our analysis: energy economics, Middle-East geopolitics, and financial crises. Middle-East geopolitical transformations were perhaps the most obvious, with the globalization of militant Islamism and the direct United States military intervention in Iraq. Ongoing financial transformation became more obvious in the aftermath of the Asian financial crisis, as contagion spread from Asia to Latin America and Eastern Europe at unprecedented speeds. We discuss the mechanics of globalized finance and their effect on petrodollar flows and economic cycles in Chapter 4. The current chapter is focused on the energy economics and Middle-East geopolitical components of the analysis.

A New Era of Higher Oil Prices

On the front of energy economics, the early 1990s witnessed the restoration of Kuwait's oil production and renewed Organization of Petroleum Exporting Countries (OPEC)-member infighting on market shares and production quotas, which culminated in a virtual price war. The lack of discipline in OPEC combined with the recessionary effects of the Asian financial crisis of the mid-1990s to bring about the collapse of oil prices in 1998. This collapse, in turn, taught noncooperative OPEC members a valuable lesson, and made it possible for OPEC to reorganize its production strategy in time for global economic recovery at the turn of the new millennium.

Renewed OPEC discipline combined with increasing demand for energy to shrink spare production capacity, resulting in substantial price increases and contributing to increased U.S. debt and a weakening Dollar.