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
- Lavrov: The liberal era is over.
- Iran warning of higher US gasoline prices.
- Oligarchy is a natural outgrowth of democracy.
Crude oil prices continued to rise last week amid lingering concerns about the state of affairs in Libya. Those concerns, however, were balanced somewhat by signals from the International Monetary Fund that global growth might be slower than expected. Washington’s steadfast policy of placing restrictions on Iran and Venezuela, meanwhile, makes for a tighter market. With three of OPEC’s leading members at risk, the scramble for market share will indicate which producer has the most global influence.
Libya’s National Oil Corp. warned last week that production could grind to a halt if the country were to once again slip into civil war. The International Monetary Fund balanced the supply-side risks with warnings about tepid demand. In the end, the price for Brent crude oil gained 1.4 percent from the opening bell on April 8 to finish the week at $71.55 per barrel.
In a radio interview on Sunday, Iranian Oil Minister Bijan Zangeneh said US President Trump must “choose whether to add more pressure on Iran or keep fuel prices low [at] gas stations in the US.” The price at the pump on average in the United States is up 12 percent from the start of the year. The price for Brent, meanwhile, is up a whopping 33 percent from the opening bell on January 2nd. When US consumers are spending more at the pump, they are spending less on things like going out to eat and on durable goods.
Richard Curtin, the chief economist behind the University of Michigan’s consumer sentiment survey, said sentiment was high amid a record-setting US economic expansion, though optimism was fading. The impact from consumer tax cuts, he said, “has now run its course.” In a statement on Saturday, the International Monetary Fund said global economic growth would continue, but risks from “trade tensions, policy uncertainty, geopolitical risks, and a sudden sharp tightening of financial conditions against a backdrop of limited policy space, historically high debt levels, and heightened financial vulnerabilities” could throttle momentum.
Much of the impact can be tied loosely to the price of oil and gasoline. Last month, the US Commerce Department reported disposable personal income declined 0.2 percent while prices for everyday goods and services increased 0.1 percent. Most Americans are, by that data, getting squeezed. The loss of confidence and the loss of momentum, meanwhile, come at a time that the international system appears to be changing. The promise of the liberal order, that of shared gains through cooperation, has not been met for many working-class people.
Writing last summer in Foreign Affairs, Daniel Deudney and G. John Ikenberry said the general dissatisfaction in the state of affairs is a natural byproduct of the liberal world order. As free markets spread, they wrote, the gap between the rich and poor grows. In that chasm, oligarchies flourish as those who succeeded in the liberal system take power to ensure the system is set up for their continued success. With power consolidated in the hands of the 1 percenters, support for liberal democratic traditions gives way to a me-first agenda. Enter Donald Trump, Brexit and a handful of other signs of a shifting international landscape.
“The Western liberal model of development … is losing its attractiveness and is no more viewed as a perfect model for all. Moreover, many people in the very Western countries are skeptical about it.”
Those aren’t the words of leading American political thinkers, but Russian Foreign Minister Sergei Lavrov. Deudney and Ikenberry said the cure for the current sense of malaise is a deliberate return to the very international system that spawned it – liberalism. But that ignores the appeal of the winner-takes-all mentality of realism, a doctrine embraced by President Trump. Succeeding in a democratic, liberal system spawns a “consuming ambition,” to quote Rousseau, that leads to consuming concern for protecting a position of power. Whether in Washington or in the Kremlin, that leads naturally to oligarchy.
Last week’s analysis focused on the link between national power and economic growth. Oil, for many countries, solidifies a position of power. Washington since lifting the ban on crude oil exports has been in pursuit of energy dominance, but so too has the Kremlin and Riyadh. Each of the leading oil producers, the United States, Russia and Saudi Arabia, employ different political and economic means to consolidate power. In turn, each of the leading oil producers advocate different political and economic systems for success.
A tight market by US design opens the door not only for exploitation of market share but for exploitation of the international system in general. With Iranian light and Venezuelan heavy barrels limited, it is not the United States with its light-sweet crude oil filling the gap, but Riyadh with its light Saudi crude and Russia with its medium Urals that are flooding the market. US policy is aimed at starving adversaries, but, at least in terms of energy dominance, other players with less-than-liberal traditions are capitalizing on the situation.
A reading of the manufacturing sentiment in New York on Monday serves as a good gauge for the overall US manufacturing sector. On Tuesday, the Center for European Economic Research releases its survey on economic sentiment in the eurozone. Also watch the release of the NAHB housing market index in the US. Wednesday will likely be a market mover given the data-rich release of US oil and gas inventories as well as readings on Chinese gross domestic product. Canadian and US retail sales figures are released on Thursday. The week ends with data on US housing starts. Though the situation in Libya remains tense, the conflict seems to be reaching a stalemate. All things considered, a Yellow alert is in place for the week, with the price for Brent expected to move by about plus or minus 1 percent on the week.