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 - High
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- "Washington … will stab its own economy to death" if it sanctions Riyadh.
- Power is the ability to control outcomes.
- US oil production may have changed the balance of power in the oil markets.
It was largely the multiple warnings last week of a slowdown in the global economy that pulled the price of oil away from early-October highs. Losing sight of the $80 per barrel mark, the price for Brent crude oil remains nonetheless volatile in these uncertain times. In less than a month, the global market will be more or less one OPEC member short as US sanctions bite Iran. In a show of political force, however, it was the Saudi government that showed that, despite the market role for US shale or the loss of Iranian barrels, it is the one that holds a considerably strong hand in the geopolitical game of influence.
The Orange alert issued last week was too cautious. The price for Brent crude oil lost 4.4 percent, in line with a Red alert, to finish trading Friday at $80.43 per barrel.
The global reaction to the fate of journalist Jamal Khashoggi, who disappeared October 2 after entering the Saudi Arabian consulate in Istanbul, highlight some of the aspects of the balance of power in the international community. The Trump administration, keen on reaping the diplomatic and economic gains of a lucrative arms deal, said that "severe punishment" would be doled out to Saudi Arabia if the kingdom were somehow implicated in Khashoggi's disappearance. In a "60 Minutes" interview broadcast Sunday by CBS, the US president, however, stopped short of specifics on what punishment meant.
"We're gonna have to see," he said.
But Saudi Arabia was to the point. In an op-ed in Saudi-owned al-Arabiya, the outlet's general manager, Turki Aldakhil, warned of specific and dire consequences should the United States or its Western allies sanction Riyadh. Warning of the possibility of $200, or even $400, for a barrel of oil, Aldakhil hinted that Washington was the vulnerable party, not Saudi Arabia.
"The truth is that if Washington imposes sanctions on Riyadh, it will stab its own economy to death, even though it thinks that it is stabbing only Riyadh," he wrote Sunday
This warning comes even as the United States stands next to Saudi Arabia in terms of oil production. The US Energy Information Administration reported total US crude oil production was 11.2 million bpd for the week ending Oct. 5. Total US crude oil exports, meanwhile, were 2.6 million bpd, more than double the rate from the same time last year. US oil imports from Saudi Arabia for the month of September climbed to over 1.1 million bpd, a sixteen-month high.
Addressing the US House Foreign Affairs Committee in May, Samantha Gross, an energy fellow at The Brookings Institution, testified that US oil production may have changed the balance of power in the oil markets, but it has not done the same in the international arena.
"The OPEC producers can work together to move oil prices, an action that would be illegal for U.S. producers under anti-trust laws," she said in her prepared remarks. "Saudi Arabia also holds significant oil production capacity in reserve to deal with oil supply disruptions, an action that would not make economic sense for a for-profit company."
In early October, The GERM Report noted that political theorist Hans J. Morgenthau saw oil as an element of national power. Speaking of the OPEC nations, Morgenthau said their control over the price of oil was one of the main factors of instability in the world economy. Because of that control, he said, the world's leading oil exporters, like Saudi Arabia, are able to "impose virtually any condition" they wish on the market.
This puts countries that depend on Saudi Arabia for oil, including the United States, in a vulnerable position. Writing three years after the end of the Arab oil embargo in the 1970s, Robert Keohane and Joseph Nye noted that power on the global stage was the ability to control outcomes. On vulnerability itself, they said it was a measure of the degree to which an actor in the international system would suffer a cost, even after it responds with a change in policy. Movement in the price of oil after al-Arabiya's op-ed shows the global market is highly vulnerable to OPEC whims even in the presence of other non-OPEC producers.
It may be another noisy week for the broader market, and not just for commodities. Monday offers a look at US consumer spending, which came in lower than expected last month. Tuesday is a snapshot of the Producer Price Index for China and the minutes from the last meeting of the US Fed are published on Wednesday. Mark Carney, the head of the Central Bank of England, speaks on Friday in New York. Friday also brings a look at third quarter gross domestic product in China, the world's second-largest economy.
Some buy-back is expected this week so another Orange alert is warranted amid expectations of the price of oil moving at least plus or minus 2 percent.