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
- Regime change in Venezuela may be imminent.
- Trump kindly asks OPEC to please help bring the price of oil lower.
- Socialism is dead. Long live socialism.
Crude oil prices tested new heights last week, even against record-high production levels from the United States. Price support continues to come from US-led efforts to hobble Iran and Venezuela, two of OPEC’s founding members, through economic sanctions. While the 40-year-old Islamic Republic continues to hold, such durability is unlikely in Venezuela. The socialist experiment in Venezuela is likely to fail in one way or the other. Already buckling under rampant inflation, US sanctions on oil – Venezuela’s life-line – are crippling the nation’s economy. Rousseau, and later Marx, observed that conflict is bred from economic issues. Coupled with regime change, and broader economic trends, regime change in Venezuela may have widespread consequences.
The steady loss of Iranian and Venezuela barrels, coupled with OPEC+ discipline and tentative optimism that something positive will happen in US-Chinese trade talks, all stirred up Brent tailwinds last week. The global benchmark for the price of oil ended the week up 1.1 percent to close Friday at $67.25, its highest level since mid-November.
Venezuelan President Nicolas Maduro recognized the economic experiment has failed. The IMF predicts real GDP for the oil-rich country will contract by 18 percent this year. Inflation, meanwhile, is expected to hit a mind-boggling 1.4 million percent.
“The production models we’ve tried so far have failed, and the responsibility is ours—mine and yours,” Maduro said last year.
Economic power and national power are integrally linked. By that test alone, Venezuela is failing. Change, then, is inevitable. National Assembly President Juan Gauido has already declared himself the interim leader of the once-mighty OPEC nation with promises of change. Given growing international pressure, Maduro’s days are certainly numbered. But change is rarely, if ever, peaceful. And the US track record with overseeing a change of regime is anything but stellar.
US President Donald Trump spoke of the “horrors of socialism and communism” at a speech in Miami last week. Socialism, the president said, is a misguided ideology that eventually leads to tyranny.
Socialism aims in part to address the link between economic development and conflict. Rousseau wrote that one of the causes of social conflict was economic development. Conflict arises because of the competition for the limited resources that each unit in the system needs to survive. Rousseau warned that once we enter into a situation where man is bold enough to state "this is mine," society threatened by a jealous man that is "bloodthirsty and cruel." For Marx, society could only enter the “realm of freedom” if it can escape the bondage of economic development and competition.
“The freedom in this field cannot consist of anything else but of the fact that socialized man, the associated producers, regulate their interchange with nature rationally, bring it under their common control, instead of being ruled by it as by some blind power,” he wrote.
Both Rousseau and Marx felt that once competition is eliminated, or at least muted, mankind will be free. The US president has cast at least some of this vision as a blight that must be eliminated. Socialism, according to Trump, is dying. Freeing up social and corporate wealth, Trump has thrived on one of the longest stretches of economic expansion in world history. For these thinkers, competition breeds progress and there should therefore be no artificial constraints like treaties and multilateral trade agreements. Adam Smith wrote that it is not benevolence that breeds wide-spread success, but self-interest.
To facilitate the passing of socialism in the Western Hemisphere, administration officials have said all options are on the table in Venezuela. The United States will take action, said US Secretary of State Mike Pompeo, against those in Venezuela standing in the way of democracy. But the administration should heed the warnings from Elliot Abrams, the veteran diplomat tasked with vetting regime change in Venezuela.
“This crisis in Venezuela is deep and difficult and dangerous,” he warned.
US efforts in regime change, from Iraq to Libya to any number of Latin American countries, have rarely been easy and never been quick. US economic expansion, meanwhile, is winding down. The Institute for Supply Management said at the beginning of February that last month marked the 117th consecutive month of growth for the United States. The manufacturing sector, an economic component integrally linked to national power, continued to expand. But underneath, there are signs that momentum is petering out. US exports are expanding, but at their slowest pace since fourth quarter 2016, coincidentally when Trump was elected.
Respondents in the chemical products sector told the ISM that while business was good, there are growing concerns. Already, higher oil prices and a concerted effort to erase the glut of gasoline are showing up at the gas pump. US taxpayers, meanwhile, are waking up to the stark reality that feeling flush from new US tax codes means lower, if any, federal refunds. Rousseau stated that a surplus awakens greed; the more one gets, the more one desires. The opposite scenario does not, however, hold up.
On Monday, the Dallas Fed releases its report on manufacturing activity in its sector for February. Tuesday brings a handful of housing barometers in the United States. US Fed Chair Jerome Powell also testifies Tuesday before a Senate banking panel. Wednesday will be the day to watch for heightened volatility as President Trump meets in Hanoi with North Korean leader Kim Jong Un. That meeting extends into Thursday, when data on US GDP for the fourth quarter are released. Friday, the start of the new month, brings a trove of data, from Canadian and Italian GDP to consumer confidence in Japan. The summit in Hanoi, and Trump’s early Monday plea to OPEC, warrant an Orange alert for the coming week.