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
- The status quo may be slowly changing.
- US policy confusion challenging confidence in US leadership.
- Market priorities don’t always intersect with policy priorities.
US President Donald Trump may be slowly tearing the principles of the Carter Doctrine to shreds. Instead of the “careful thought, steady nerves, and resolute action” outlined for the Middle East during Carter’s tenure, the Trump administration has sown confusion over its commitments in the region with its stance on Syria. Though the US secretary of state plans a regional tour rimming the southern arc of the Shiite Crescent, the Trump doctrine of confusion leaves allies questioning intent. Previous US policies were founded on firm and consistent principles, which reassured the world. Trumpian uncertainty now is leaving its mark in areas outside of geopolitical commitments.
President Carter’s national security advisor, Zbigniew Brzezinski, outlined a clear position on US strategic interests in the Middle East just as the Russian belt of influence was expanding west from Central Asia.
“Let our position be absolutely clear,” Brzezinski wrote for the president. “An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.”
The US role in the Middle East had similarities to Britain’s role as the regional balancer at the beginning of the 20th Century. Wary about the rise of a hegemonic power in continental Europe, and seeking to check Russian advances in the shrinking Ottoman Empire, the British government warned any adversarial advance in the Persian Gulf would present a “very grave menace” to its raisan d’etat.
Under Trump, the US raisan d’etat is unclear, and perhaps deliberately so. A less-than-explicit policy could encourage Middle East solutions to Middle East problems, finally bringing regional Arab powers off the bench. Washington now may be looking to follow another British course of action, that of the “splendid isolation” that preceded its direct intervention in European affairs in the early 1900s. That said, and not forgetting the US military presence in Bahrain, with the Kurdish population considering a pivot toward Russia, US State Department officials, as well as National Security Advisor John Bolton, are walking back the president’s call for an immediate withdrawal from Syria. That only adds to the questions surrounding presidential rhetoric versus presidential action.
Uncertain US policy leads to a lack of confidence in leadership. That vacuum could invite powers such as Russia, which already has energy infrastructure in place, to gain long-desired regional influence. Meanwhile, a Syria controlled fully again by President Bashar Assad would leave the window open for Iran. The Middle East in 2019 may very well be less stable than it has been in years as Washington re-examines its role as the regional balancer. A US step-back leaves the status quo in doubt as emerging powers such as China or Russia set their sights on establishing a new consensus.
A system in transition is a volatile system, and the start of the year for crude oil is Exhibit A. Saudi Arabia, one of Washington’s strongest allies in the Middle East, is showing politics and OPEC commitments to export less are independent things. That’s putting wind in the sails of the price of crude oil. Meanwhile, a sense that the US-Chinese trade war may be approaching a truce indicates it may be time to stop looking for the sky to fall. A lingering US government shutdown, however, only adds to the sense of confusion as policymakers and the president show little desire for governing.
It may be all eyes on the US Fed this week. Fed Chair Jerome Powell may have come to terms with a slowing economy. We’ll get a closer look on Wednesday when the Federal Open Market Committee publishes its December meeting minutes on Wednesday. On Thursday, Powell speaks to The Economic Club of Washington, a speech that comes on the same day as the latest glimpse of consumer inflation. If the short history is any indication, level Orange seems likely, with crude oil prices moving by at least 2 percent in either direction this week.