In the global war against market-states, al Qaeda can rely on hedge funds to amplify the economic damage of their attacks. If well executed, these attacks could result in catastrophic damage to the global economy. As an early example of this, Al Qaeda's campaign to destabilize the world's oil market is going well. The price of oil rose from April's average of ~$33 to a spot high of over $42 a barrel in May. The following factors made this rise possible:
- Rapidly growing global demand. Particularly from China and the US.
- Little excess capacity. Current demand for oil is nearing the limits of current capacity.
- The fear of a future al Qaeda attack on Saudi facilities that could impact production.
Hedge Funds
These factors, taken by themselves, are insufficient to explain the rapid run-up in oil prices. Al Qaeda has not proven they can disrupt Saudi oil production and excess Saudi capacity is more than sufficient to cover the vast majority of potential threat scenarios (from my red-hat review of the potential of attacks). The real cause of the run-up in oil prices were that actions of speculators, in the form of hedge funds armed with complex derivatives. The results of this were:
- A huge transfer of wealth. These hedge funds, and not in large part the oil producers themselves, have been able to extract upwards of $600 m a day throughout May 2004 from the oil market -- a total of ~$19 billion for May alone.
- Inflation pressure on the world economy just as it is climbing out of recession.
- Significant damage to key industries that are heavily dependent on oil prices -- for example, the airlines.
Future Dynamics
This example indicates that al Qaeda has an important new ally in their war on the global market-states: Global hedge funds. Global guerrillas, which al Qaeda is an early example of, will use the speculative power of global hedge funds to leverage their disruption into economic damage. The upper bound on this damage is unknown. Experience with the failure of Long Term Capital Management (LTCM) implies that this damage could be extreme.