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: RED
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- Democratic peace opportunities fade in Libya.
- The ideals embraced by the United States are changing.
- The global market can’t afford to lose another OPEC member.
Crude oil prices were restrained last week by tightened supplies and some weak demand signals. When fundamentals limit direction, the market becomes highly vulnerable to geopolitical shocks. Simmering since early March when force majeure was lifted on its El Sharara oil field, Libyan tensions are once again becoming the market issue to watch. Eight years ago, the members of the International Energy Agency responded to Libyan unrest by releasing oil from emergency stockpiles. Now, with Venezuela and Iran diminished by US sanctions, the global marketplace cannot afford to lose another OPEC producer.
It was a relatively quiet week despite a better-than-expected reading on Chinese GDP. Investors may have been sitting on their hands ahead of late April financial restrictions on Venezuela’s PdVSA and the guessing game over the US decision on Iranian waivers. In the end, the price for Brent crude oil barely moved, finishing up 0.6 percent to close Friday at $71.97 per barrel.
The IEA in June 2011 announced a collective decision to put strategic stockpiles on the market for only its third time in history in response to disruptions stemming from civil war in Libya. If market tightness were to continue, the agency’s executive director said at the time, the fragile state of a global economy only a few years removed from recession was in jeopardy. Four months later, Libyan leader Moammar Gadhafi would be killed and renewed optimism for the democratic momentum that began with the Arab Spring was born.
Eight years later and the democratic experiment in Libya is under threat. Slowly expanding its influence west, the self-styled Libyan National Army and its leader, Khalifa Haftar, now have their sights set on control in Tripoli. A Gadhafi loyalist who later switched sides, Haftar has been able to secure all of Libya’s onshore oil resources. Security arrangements at El Sharara in the southwest Libyan desert led to the lifting of force majeure last month and total oil and condensate exports have been relatively stable for most of the year. US President Donald Trump spoke last week with Haftar, a one-time CIA asset, praising him for his “significant role … in securing Libya’s oil resources”, adding they “shared vision for Libya's transition to a stable, democratic political system.”
US support, however, undercuts the role of the United Nations and undermines the authority of the internationally-recognized unity government in Tripoli. Haftar’s rise to power in Libya would come not through the democratic means lauded during the Arab Spring movements, but through military force supported by some of the world’s leading powers. In response to the fighting, the G7 issued a statement saying that Libyan oil and the revenue it generates must “not be used by any party for political gain.” While tacitly directed at Haftar, the statement could just as easily be targeted at any one of the national powers throwing their weight behind the LNA. Apart from the United States, Haftar has backing from Egypt, Russia, Saudi Arabia and the United Arab Emirates, neither of which have any real experience with democracy. GERM analysis in early April noted that states attempting democratization will be mired in civil war as the various players compete for power and survival. The democratic competition in Libya has lasted eight years so far and it now seems unlikely the solution to the crisis rests in the ballot box.
The United States is with strange bedfellows in its support for Haftar. Commenting on the legacy of veteran US diplomat Richard Holbrooke, George Packer of The Atlantic wrote that the soft power of the American ideal is what propelled US influence over the horizon.
“If we are good—and are we not good?—then we won’t need to force other people to do what we want,” he observed.
By that logic, other powers would want to emulate American behavior. The liberal American idea, however, is starting to fade, opening room up to nationalism, isolation and less-than democratic institutions. That, to some degree, is the natural progression of the liberal and interconnected world that overextended US power in the late 20th century. Frustration with the unanswered promises of liberalism has led to a step backward toward oligarchy and even fascism. But it’s not just an American phenomenon. Ultra-nationalism is evident in Europe too. Traditional liberal appeals and the shared values of liberty are fading in the twilight of the decade. From Packer, “are we not good?” Is the new American political machine no longer concerned about making the world safe for democracy? If the world is moving away from liberalism, is that an extension of the new American politics? The democratization that Washington saw as the answer to conflict in the Middle East instead led to civil war in Iraq, Libya, Syria and Yemen. Is a stable dictatorship better than an unstable democracy? Market tightness is once again threatening a fragile economy, as the IEA warned in 2011. With US policy restricting both Venezuela and Iran, Washington can not afford to gamble on democratic peace in Libya.
It will be a quiet week in financial data. Monday brings March figures on sales of existing homes in the United States. On Tuesday, we see how various economic hiccups and the uncertain Brexit process is influencing consumer confidence in the European Union. The Bank of Canada makes a rate decision on Wednesday. On Thursday, look to Japan for a trove of information, from the central bank’s rate decision to its outlook report on the year. And on Friday, it’s a reading of US GDP for the first quarter. Last week may have been the calm before the storm. Given the expected end to US waivers for Iranian sanctions and Libyan tensions, a red alert, the first, is in place for the week, with Brent expected to move plus or minus 4 percent.