Welcome to The GERM Report by Dan Graeber, a commentary on the intersection between geopolitical events and the price of oil. GERM stands for Geopolitical Energy and Risk Monitoring. Our indicator is based on the expected price volatility by the end of the current trading week.
Risk level: ORANGE
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- Me-first strategies can lead to isolation.
- Beijing hits back at The Pompeo Doctrine.
- Will the IEA add its voice to the chorus of bears?
Dueling narratives on progress in US-Chinese trade negotiations made for a volatile week in trading. That oscillation spilled over to commodities markets, from metals to oil. In energy trade, it was another week of builds in US crude oil inventories, though refineries are returning from fall maintenance to eat into the surplus. In the US political realm, the public will get to hear first hand from witnesses testifying in the Trump impeachment investigation. For foreign affairs, US Secretary of State Mike Pompeo frustrated Beijing with a policy speech equating communist China with Nazi-era Germany. That posture could upend any progress in trade negotiations as editorialists in Beijing said Pompeo’s comments were a sign of further US isolation. With the trade war leaving reciprocal wounds in the world’s leading economies, any indication of a freeze will send markets reeling in the week ahead.
Crude oil prices enjoyed a relatively bullish week, though it was a 7.9 million barrel build in US crude oil inventories that ultimately tempered the rally. Brent finished the week up 1.3 percent to close trading Friday at $62.61 per barrel.
The US State Department in late October quietly rolled out a strategic assessment of communist China. Dubbed “The China Challenge,” Pompeo told an audience that included former Secretary of State Henry Kissinger that US foreign policy for decades had accommodated the rise of China while downplaying the perceived threat from said ascendance.
“We accommodated and encouraged China’s rise for decades, even when that rise was at the expense of American values, Western democracy, and security, and good common sense,” he said.
Pompeo road-tested that message last week in a speech in Germany marking the fall of the Berlin Wall. His rhetoric also doubled down on the Trump administration’s penchant for a realist doctrine in political affairs. That doctrine sees the world as a dangerous place where the potential for ascendant threats warrants a war-like posture. Realists believe that whatever foreign entity they face is inherently hostile and survival warrants a selfish pursuit of power by any means. Instead of using military conflict to deter threats, the Trump administration has been waging economic war on friends and foe alike in an effort to erase the perceived loss of prestige and respect to globalism. China, by Pompeo’s account, is trying to replace the global order that Washington helped create with a Beijing Consensus, where China’s vision reigns supreme.
Editorialists in Beijing reacted with furor to Pompeo’s rhetoric. China Daily, the mouthpiece for the Communist Party, noted it was ironic that Pompeo’s speech in Berlin was more about building walls than tearing them down.
“Intended as opportunity for people to reflect on the lessons of the Cold War, Pompeo instead chose to use it as an occasion to continue building the wall that the US hopes will protect it from all the things that the US considers to be a threat,” one editorial read.
Realism is the only true theory of international relations because of its fundamental claim that states are the highest-ranking entity in the global system. Without a more supreme entity to exert control, states are left to their own devices to find the means to survive. This helps explain the Trump administration’s emphasis on me-first strategies over collaborative systems such as multilateral trade and defense alliances. While realism works as a theory to explain the international system, it runs into problems when indoctrinated in foreign policy. Explaining the structural components of the international arena is easy in theory, but realism embeds a sense of paranoia in fear in the states that embrace it as doctrine. For an offensive realist, there are no restraints in the quest for power as only supremacy and hegemony ensure survival. For all its talk of liberty and freedom, the editorialists in Beijing observed, Pompeo’s speech “merely served to show that Washington pursues a world in which all countries are vassals of the US.”
Deliberate pursuits of hegemony rarely end in hegemony. That is one of the lessons of World War II and the Cold War. Germany during the early part of the 20th century pursued hegemony and, drunk on the prospect of the spoils of war, inevitably brought about its own demise as its growing power inspired a collective response from a global community unified in its quest for survival. That left the United States as the pre-eminent hegemonic power, crafting a liberal international order from the ashes of war. Washington was able to embrace hegemony because it was the only power left to do so. After the Cold War, the United States enjoyed a brief unipolar moment as the lone rival in the bipolar era, the Soviet Union, collapsed. The unipolar moment was the pivot point to the multipolar world of today. Managing a multilateral system is difficult and it’s this difficulty that the Trump administration is trying to avoid. The United States is still the world’s largest economy and its military might is unrivaled. Prestige, however, is waning. Waging economic war and abandoning legacy allies from Europe to the Middle East has its consequences. While the United States is less dependent on foreign powers for its energy supplies, its economy is slowing down and dragging others with it. The International Monetary Fund last month said global growth for 2019 would be the slowest in a decade. By that read, the economic Cold War between the United States and China is throttling global prospects for advancement. Stephen Walt, one of the premier scholars of realist doctrine, argued that successful foreign policy hinged on an accurate perception of the international arena. States, Walt argued, either balance – line up against the principle aggressor as they did in World War II – or bandwagon – join forces with the dominant actor. Crafting policy on the assumption that others will hop on the bandwagon when they actual pursue the rival course leads to failure. The same could be said for pursuing a realist strategy in a liberal world.
The trade week begins with a massive data dump from Great Britain, most notably a reading of GDP. Growth of 1.1 percent is expected, a downturn from the 1.3 percent growth notched in the previous reading. It is a federal holiday in the United States, however, so the market impact may be muted. Tuesday brings a gauge of confidence in the eurozone for November, with Brexit and the German economy likely souring the mood. The big market movers for oil come Wednesday, with the usual inventory data from the United States and the launch of the World Energy Outlook from the International Energy Agency. Thursday brings German and European GDP figures for the third quarter. Though a possible recession in Germany could spoil overseas markets, US markets may end the week on a high note with expectations of good numbers for retail sales for October. Expect more volatility this week on competing headlines on US-Chinese trade talks. The IEA’s global outlook will also be a major market mover. An Orange alert is in place for the week, with Brent expected to move by plus or minus 2 percent.