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: Yellow
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- US political elite advocate for a Leviathan.
- Marx was right.
- Protests grip some of the world’s leading oil players.
Market news was relatively muted last week. US President Donald Trump barely moved the needle in a speech Tuesday before the Economic Club of New York, though trade rumors continued to trigger algorithmic models. US consumers, meanwhile, are paying more for everything from food to healthcare, the Labor Department reported. For the global economy, the IEA reported that energy demand is slowing down and could plateau within a generation. In the short-term, Germany was able to avoid recession and US Fed Chair Jerome Powell continued to insist the world’s largest economy was doing well. Elsewhere, the world is on edge with protests rocking South America and the Middle East. Those protests have brought about political change, though power circles in Washington are advocating for even tighter control.
Crude oil prices closed the week at their highest level in two months on expectations that Washington and Beijing may finally agree on a partial trade deal. Crude oil inventories in the United States, however, continue to build. In the end, the price for Brent crude oil managed a 1.26 percent gain on the week, closing out at $63.34 per barrel.
After 14 years in office, the opposition in Bolivia had enough and forced Evo Morales, the first indigenous president, to flee to Mexico. Demonstrators in Venezuela are still vocal amid chronic inflation and fuel shortages. Hong Kong remains a very violent place. Syria is still mired in civil war. In neighboring Lebanon, the political class is at loggerheads with demonstrators demanding change. Forced to resign in April, protesters in Algeria are still angry about the remnants of the regime of Abdelaziz Bouteflika. The flow of oil continues, though OPEC-member Iraq is facing profound political choices as it remains locked in a proxy war of influence in the Middle East between the United States and Iran. And in Iran, the streets are violent as demonstrators defy authorities to express their outrage over the end to fuel subsidies.
Protests are often an expression of frustration with inequality, be it for income or political power. The International Monetary Fund reports that income inequality has declined globally, though the situation is not as clear cut in advanced economies. The IMF warns that inequality endangers social cohesion, contributes to political polarization and drags on economic growth. In the United States, political polarization is a badge of honor to some and, if we take the IMF’s stance at face value, is at least something of a contributor to slowing growth as political frustration turns to economic doubt. For oil, three of the world’s leading producers – Iran, Iraq and Venezuela – face challenges from a frustrated populace. The Hegelian dialectic dictates that evolution only comes through a clash with the status quo and, by that logic, systemic change is coming. Yet, in the chambers of influence, there is a concerted push for an even tighter hold on systemic controls.
In a speech before The Federalist Society, US Attorney General William Barr bemoaned a president rendered as the “errand boy” of the legislative branch. The executive officeholder, Barr said, should not be hijacked by the whims of the mass representation of the people but instead represent the sovereign force of the nation. Essential sovereign functions should rest in the “unity of person” who should be free to conduct foreign policy in the solace of secrecy, he said. This speaks to traditional elements of sovereignty whereby territorial integrity rests in a singular element of power, in this case the state. The sovereign, meanwhile, is the singular embodiment of this structural element of power. This vision of power was laid out by Thomas Hobbes, who in Leviathan said the state of affairs would be “bloodthirsty and cruel” without a “common power to keep them [the people] in awe.” The holder of sovereignty in this view is something of a god on earth where, in the Hobbesian world, there is no equal.
Countering this narrative were Jean-Jacques Rousseau and later, Karl Marx. Rousseau worried that the Hobbesian ruler, a ruler advocated by the likes of Attorney General Barr, would succumb to “consuming ambition” and be inspired by a “wicked tendency” to do harm. Barr in his address evoked this wicked tendency when he described a “war of resistance” against the would-be all-powerful executive, demonizing any voice of dissent. Marx later took up the mantle in his rallying cry against the elite class by warning the exploitation of the less influential would lead to revolt. Marx warned that capitalist societies would breed inequality and the solution to this was the very revolution that’s threatening regimes across the globe. Iraqi demonstrators are frustrated that vast oil riches have yet to benefit the working class. Iranians already squeezed by sanctions pressure are frustrated with additional strains on their pocketbooks, though the decision to remove fuel subsidies was advocated by the IMF. The “war of resistance” has yet to be felt in economic terms, though unrest is nonetheless endangering stability, and it’s spreading. There is little solace then in Rousseau’s warning that “most of our ills are of our own making.”
Protests may finally catch up with the flow of oil in the Persian Gulf should the Shiite Crescent succumb to the next stage of the Hegelian process. It may be something of a slow week in data, so rumors of progress in US-Chinese trade negotiations may take center stage. Watch for a reading of financial stability in the eurozone on Wednesday, when we also get another look at crude oil inventories in the United States. Meeting minutes from the US Fed’s policy committee are also out on Wednesday, so expect a volatile day. Thursday brings an economic outlook from the European Central Bank and the week ends with a policy speech from new ECB Chair Christine Lagarde. An embattled President Trump may be the market mover in a week where political theater demands a captive audience. But with a long holiday weekend approaching, the trade week may be a bit quiet one, with Brent moving in the Yellow band of plus or minus 1 percent.