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
- Geopolitical xenophobia is fracturing multilateral ties.
- Angry political rhetoric creates angry constituents.
- Coherence is no longer evident in an era of populism.
Crude oil prices moved against an expected tide last week, declining in response to Saudi assurances of a well-supplied market after US sanctions on Iran take effect. ClipperData continues to keep an eye out for Iranian crude oil tankers sneaking out of the Persian Gulf to awaiting customers. Even if Iran does manage to skirt sanctions, there will be supply-side pressures building in November. Those supply-side pressures, however, do not seem as strong as once feared.
Meanwhile, equities markets continue to trend lower despite signs of a strong US economy. Supply pledges from Saudi Arabia and cooling signs in general brought enough pressure to push the price of crude oil lower than expected last week. The price for Brent crude oil ended the week down 2.7 percent to finish trading Friday at $77.62 per barrel. So far this month, Brent is down more than $7 per barrel.
Violence in the United States was amplified by a spate of undetonated mail bombs targeting critics of US President Donald Trump and shooting deaths at a Jewish religious ceremony during the weekend. The outbreak in violence comes a few short days before US voters head to the polls in the first major test of Trump’s political popularity. Both the alleged bomber and shooter appear to have been caught up in the partisan furor common on social media and cable news outlets. But this is not just an American theme. In Brazil, former army captain Jair Bolsonaro has used some of Trump’s political and rhetorical strategies to take the presidency of a country that represents the eighth largest economy in the world.
Populist leaders like Bolsonaro and Trump are in direct contact with “the people,” and this contact, more often than not, comes through the synthetic reality of media. The media, be it Twitter or the BBC, serves as a metaphorical window to the outside world and comes to represent a sort of social space in a way. This pseudo-place becomes the vantage point from where society views its environment and from where it learns its social habits. In a December 2016 lecture at Harvard University, political scientist Robert Keohane described populism as a establishing a sense of common identity, common language and common territorial space. When populist leaders speak through the media, there voice is the voice of authenticity because of their direct contact with “the people.”
Power, meanwhile, is the ability to influence outcomes, affect preferences and shape agendas. Through the media, the populist power is derived from negativity. Negative messaging is more durable than positive messaging because it signals the stakes are high. Negative emotions are related to things like life satisfaction and when couched in populist rhetoric, this satisfaction is determined by comparisons to those who are not included among “the people” and leads to scapegoating. Political rhetoric, therefore, is less about logical decisions and more about emotional hijacking. The persistent use of emotional rhetoric, meanwhile, evolves to shape social habits and acclimates into social reality. Because political rhetoric is usually founded on anger and fear, both of which are negative emotions, the current era is expectedly violent.
Keohane’s frequent collaborator Joseph Nye has said that populism leaves “the people” distracted by social divisions to the detriment of foreign policy. The GERM Report in a recent commentary on hegemony noted that disorder and volatility would be commonplace without clear direction set by a national power that’s able and willing to lead the way in the international arena. In populist and national agendas, the connections of global interdependence and multilateral institutions are severed. Those connections, according to thinkers like Keohane and Nye, yield shared results. Both thinkers have argued that stability increases as the density of connections in an interdependent system increases. Volatility then increases as connections are severed.
Geopolitical xenophobia is the result of populism's distaste for the multilateral institutions Keohane and Nye would advocate for global stability. Remarking on escalating trade tensions, IMF Managing Director Christine Lagarde said global GDP could drop by almost a full percentage point over next two years as globalization unravels. Inequality, meanwhile, is on the rise and has led to the erosion of trust in global and national institutions. Wage growth is also sluggish because of low inflation and weak productivity growth, according to the OECD. It’s no wonder, Lagarde said, that people feel anger and frustration, the same negative emotions that bolster populist leaders like Trump and Bolsonaro.
In the United States, tariffs imposed in the trade war with China have led to concerns about the cost of infrastructure in the energy sector, a sector that Trump has vowed to support. In Brazil, Bolsonaro has advocated for a sort of economic nationalism and gained support not only from market players, but frustrated Brazilians emerging from a long recession and corruption scandal that plagued state-controlled oil producer Petrobras. Dubbed the Brazilian Trump, any conflicting signals from Bolsonaro could undermine confidence in a market charting signs of recovery.
If Bolsonaro falters, or his populist ideas create a social space in Brazil that’s xenophobic, political unease, like present-day United States, could follow. In his 2016 lecture, Keohane added internal coherence as an element of national power, saying that coherence is no longer evident in an era of populism. And while economies may improve, they are cyclical, leaving populism’s promise unfulfilled. Keohane said these temporary gains will be outweighed by the erosion of soft power, power that Nye said was “getting others to want the outcomes that you want.”
The US economy, measured in terms of GDP, is on its strongest six-month stretch in more than four years. Much of that economic power, however, could be fleeting because of expiring tax cuts. Total US exports, meanwhile, were the weakest in two years, businesses are spending less, and the housing market is on the decline. With Saudi Arabia promising to keep the oil flowing to meet the world’s demand, remember that OPEC lowered both its global economic growth forecast and its expectations for demand. What it takes to meet the world’s appetite might not require as much effort as it did when Trump left the Iranian nuclear agreement in May.
We get a look at demand indicators right away this week with Monday’s gauge of personal spending in the United States. When measured against wages, personal spending can indicate whether consumers are living beyond their means. It’s still earning season too, with big names like Weatherford International and BP scheduled for third-quarter releases this week. On Tuesday, we get a look at GDP in the European economy, notably in Italy, which is flirting with recession. It may be wise on Wednesday to take a close look at mortgage applications in the United States to see if the bubble is still expanding. Thursday brings a flurry of data, from the Bank of England’s inflation report, to gauge of the US manufacturing sector. The week ends with US employment data for October. Expect some volatility this week, but also some dip-buying for Brent, supporting an Orange alert for the week.