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
- "If America wants stability, it will have to create it."
- Without a hegemonic power to lead the way, chaos ensues
- Volatility in the price of oil is by American design
The lack of spare oil capacity on the global market and looming US sanctions on Iran helped push the price of oil to a fresh high last week. By early Monday, the price of oil was on the decline, however, on word that some Iranian oil customers, namely India, would continue to buy oil from the Islamic republic next month. The Reserve Bank of India, Iran's second-largest oil costumer after China, warned last week that higher oil prices and protectionist trade policies were undermining global growth.
As the world's leading economies expand, some of the more influential players are disengaging, leaving the rest exposed to risk. India's central bank warned that uncertainty was mounting and with that comes increased volatility. The Orange alert issued in The GERM Report last week was accurate as the price for Brent crude oil lost 1.75 percent to end trading Friday at $84.16 per barrel.
"Uncertainty has heightened on account of escalating protectionism and tariff wars, tightening of global financial conditions, and higher oil prices, all posing downside risks to global growth," the Reserve Bank of India cautioned last week. "The recovery in world trade is losing momentum."
No longer is the US economic policy accommodative, according to its Federal Reserve. On Monday, Federal Reserve Bank of St. Louis President James Bullard said from Singapore the US economy was growing faster than expected. But in order to continue that growth, US productivity also needs to accelerate. Growth in the US labor force, however, has been slow since 2008 and high productivity has not yet materialized, Bullard said.
In emerging economies, meanwhile, currency declines are impacting the purchasing power for most people. In India, higher oil prices mean higher fuel prices, and a decline in the value of the rupee only compounds the situation. The steep drop Monday in the price of crude oil then comes as a relief for an Indian economy that depends on Iranian oil. Access to that Iranian oil, however, is controlled in part by the United States.
US influence over the global economy emerged after World War II as part of the Marshall Plan. In order for Europe to recover from war, it needed to rebuild its economy and part of that depended on US leadership. Containing the Soviet Union was as much of an economic effort as a strategic one and the United States after the wars of the first half of the 20th century became a global balancer of sort. Referencing a "unipolar moment" with the United States ascending to the peak of the arc of power, conservative columnist Charles Krauthammer noted that global order was never a given and never the norm.
"When achieved, it is the product of self-conscious action by the great powers, and most particularly of the greatest power, which now and for the foreseeable future is the United States," he wrote in 1990. "If America wants stability, it will have to create it."
Whichever power nearly 30 years later is the preeminent superpower, it is not, as the comments from the Federal Reserve Bank of India testify, determined to create global stability. Instead, the rise of protectionism and populism hint at one of Krauthammer's other concerns -- isolationism. Without a hegemonic power to lead the way, Krauthammer warned not about the confusion of multipolarity, but of chaos.
The concerns of emerging economies stem from the chaos of retreat from the world's leading powers. Like the bottom pieces in the puzzle Jenga, it is the emerging economies that provide the stable foundation, however. When they collapse, the entire structure falls.
Spiraling inflation in emerging economies could hint at pending demand destruction even if oil prices fail to chart $90 per barrel. With uncertainty over US policies on Iran, it may be another week of volatility for the price of oil. Another Orange alert is warranted with the price for Brent crude oil moving plus or minus 2 percent on the week.
It's another data- and commentary-heavy week in oil markets. Wednesday gets us going with the EIA's short-term market report, followed Thursday by OPEC's monthly market report for September and US consumer prices. The IEA ends the week with its monthly report.