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: Yellow-Elevated
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- Saudi Arabia says no new oil embargo
- Shale oil does not give the United States much leverage
- The power of nations mirrors internal economic momentum
The international conversation is centered on the fate of Washington Post journalist Jamal Khashoggi. The gruesome narrative on the last hours of Khashoggi, a critic of Saudi Prince Mohammed bin Salman, has exposed fractures in the international system that could lead to ever-widening rifts. The fluid explanations from Riyadh, meanwhile, raise questions about authority and commitments to reform inside the kingdom.
Against all this is the question of leadership and the lack of civil diplomacy in the international community. Without these things, there is a lack of clarity and a lack of trust. Without these things, there is little reason for a state to trust its counterparts and lines of interdependency begin to break. When this happens, the system changes and change is always volatile.
Rising US crude oil stockpiles balanced against declines in output from economically-crippled Venezuela and sanction-strapped Iran to leave the price of oil relatively stable last week. Though a scornful eye was cast on OPEC leader Saudi Arabia, the price for Brent lost ground last week and was less volatile than expected, ending the week down 0.81 percent to close Friday at $79.78 per barrel.
The 33-year-old Saudi prince has been accused in some circles of silencing a critic. The First US Continental Congress in 1774 in a letter to the residents of Quebec advocated for freedom of the press, describing it as the “diffusion of liberal sentiments” about the administers of government so that “oppressive officers are shamed or intimidated into more honorable and just modes of conducting affairs.” This noble sentiment was fleeting. Less than 25 years later the US House and Senate passed the Sedition Act, which penalized “scandalous and malicious writing” against the government, lest such writings stir up the “the hatred of the good people of the United States.”
Hatred cuts both ways. In the United States, and elsewhere, hatred from the good people has led to the rise of populist and nationalist tendencies. In Saudi Arabia, it was the shaming of the Saudi prince that allegedly led to the silencing of the “diffusion of liberal sentiments” relayed by Khashoggi.
All this comes as US President Donald Trump watches the clock tick toward the implementation of oil-related sanctions on Iran. The GERM Report last week noted that political theorist Hans J. Morgenthau said that because OPEC nations have influence over the price of oil, they have the luxury of imposing “virtually any condition on the market” they wish. The United States, even with its vast shale oil reserves, cannot afford to critique Riyadh too strongly, especially ahead of elections in November, because of the political consequences of higher oil prices. While some voices are calling for sanctions on Saudi Arabia, given the political and economic issues at stake, it's unlikely Washington would, as stated in a recent Al-Arabiya editorial, “stab its own economy to death.”
A joint statement Sunday from the British, French and German governments expressed doubt over the Saudi explanations of the death of Khashoggi, but did little else of consequence. And with the United States sidelined by political and economic interests, there are few global voices with the ability to intimidate leaders that may succumb to what Rousseau described as “insatiable ambition” into “more honorable and just modes of conducting affairs.” Clearly, there is no power to lead the way and, if we prescribe to the thinking of Thomas Hobbes, life is “nasty, brutish and short” without such a leader.
The power of nations, by some accounts, follows a cyclical pattern that usually follows internal economic momentum. One power, or group of powers, emerges from war with a monopoly over military capability and with economic might. That nucleus of power establishes a new world order and comes to lead the global community. As power grows, so too does influence. Power, however, inevitably declines and the international system goes through a phase of imbalance and flux. When power declines, the ability or willingness to lead begins to fade. Forced into new roles, once-powerful nations become uncertain and likely to over-react. When they over-react, miscalculations are common. The trick to international politics is not only knowing your relative position, but the relative position as others.
The death of Khashoggi has raised questions over Western strategic priorities in the Middle East, the economies of the world’s leading superpowers and the moral responsibilities of world leaders. It’s also left the freedom to shame through the popular press wounded and bleeding. This is about change on a global scale, change is structural and change that is volatile.
In an interview Monday with Russian news agency Tass, Saudi Energy Minister Khalid al-Falih said there is no intention to repeat the Arab oil embargo of the 1970s, though the mere mention of the possibility serves as a reminder of the kingdom’s ability to impose “virtually any condition on the market” it wishes. On the political crisis surrounding Khashoggi, the minister noted that “this incident will pass.” How it will pass will be telling of the condition of the current political era.
The front-end of the week is relatively a quiet one financially speaking, leaving room for the Khashoggi situation to simmer. On Thursday, the European Central Bank is scheduled for a rate decision against the backdrop of a slowing German economy and stagnation in Italy. Data for September durable goods orders offers a snapshot Thursday of long-term faith in US economic growth. On Friday, we get a look at US gross domestic product for the third quarter.
Not much volatility this week is expected as the price for crude oil starts to look a little range-bound. There’s a Yellow alert for the week of October 22, with movement of plus or minus 1 percent expected.