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
RED: Severe (+/- 4%) ORANGE: High (+/- 2%) YELLOW: Elevated (+/- 1%) BLUE: Guarded (+/- ½%)
THE BOOSTER SHOT
- British shadow foreign secretary dethrones Trump.
- The sanctions are coming! The sanctions are coming!
- The VIX is calm, but that’s about it.
Crude oil prices reversed dramatically last week despite Washington surprising the world by announcing an end to waivers on sanctions against Iranian oil. Relatively speaking, the market was flat, with even the VIX index, the so-called fear gauge, moving well below the 20-year average. Beneath the headlines, however, are reasons for concern. Buyers can no longer use the US financial system to transact with Venezuela’s PdVSA, and while Iran will continue to cheat, its options will be even more limited from May onward. Elsewhere, strong US GDP figures masked weak consumer spending and durable goods orders, suggesting confidence is waning in the US economy. In the foreign policy arena, the system is showing signs of change as the liberal order struggles to continue without an effective international manager.
Despite Washington announcing the end to Iranian sanctions waivers, prices reversed late in the week. Meanwhile, headline numbers on US GDP failed to spur a rally as first quarter durable goods orders, a proxy for confidence, dropped 5.3 percent from the previous term. The loss of barrels from three key OPEC members was met with supply assurances from others, supposedly at Washington’s request. Instead of moving plus or minus along last week’s Red alert, the price of oil moved plus and minus, but ultimately finished the week flat, up just 0.3 percent to $72.15 per barrel for Brent.
US President Donald Trump pledged before the National Rifle Association, the nation’s powerful gun lobby, to leave the international Arms Trade Treaty, signed by his predecessor in 2013. Pointing to the constitutional 2nd Amendment right to bear arms, the president said the treaty was a tacit surrendering of US sovereignty. Emily Thornberry, Britain’s shadow foreign secretary, said in a statement that Trump’s decision “is the final confirmation that he is not the Leader of the Free World, he never has been.”
To be clear, the treaty is aimed not at regulating domestic arms, but international sales. The United States is among 29 other nations that signed, but never ratified, the treaty. But it does fit in with President’s Trump pattern of leaving multilateral treaties that he says restricts US autonomy. This aligns with the realist tendencies of the Trump White House, tendencies that view self help as the means to survival. A nation-state guided by realist principles tends to see global competition as a zero-sum game, where winning the first round is what matters for survival. This is in contrast to another school of international thought, liberalism, which sees cooperation and non-zero-sum games played over multiple rounds as the guide to strategic durability. Those nations that succeed using either doctrine are the winners and it is the winners in the international system that establish the norms.
Realism as a theory of international relations is a systemic analysis of the geopolitical arena that downplays the role of the individual. For Kenneth Waltz, one of the foremost thinkers in the field, realism is the only true theory of international relations because it views the geopolitical arena as a system. A doctrine like liberalism would be more akin to comparative foreign policy. And it is here that the two principles meet. US President George W. Bush used a hybrid of the two by pushing for democracy at the barrel of a gun. If it’s true that democracies don’t wage war with one another, then US survival, a realist interest, is ensured by democratization, a liberal interest. And here is where Emily Thornberry’s critique of Trump may be telling. Hans J. Morgenthau, the modern father of realism, noted that an effective statesman will be able to distinguish between official duties and personal wishes. The official duty of a statesman is to ensure the state, and its principles, survive. If the realist notion of survival is applied to the individual, then a statesman’s first objective is to get re-elected and Trump’s statements and actions must be seen through that lens.
Actions often have unintended consequences. In Libya, it is in Washington’s best interest to ensure stability given the importance of adequate supply on the global market. That explains Washington’s support for the Libyan National Army and its leader, Khalifa Haftar. That indicates that in Libya, Washington favors short-term, single round stability over long-term, but messy, democratization. Alternatively, however, Washington would support the long-term, but messy, democratization in Venezuela, once the main supplier of the heavy crude oil that US refiners desire. Meanwhile, rather than integrating Iran into the Western arena, US policy only marginalizes it. That could also risk harming some of the very geopolitical winners, such as India and China, whose success helps drive the momentum of the international order.
A system that is interconnected by consistent themes is a stable system that ensures each component can last. It would therefore be a statesman’s official duty to ensure that system survives. Inconsistency – democracy here, military authority there, and marginalization rather than engagement with one’s adversaries – must therefore be destabilizing. If market components like supply and demand suggest stability, then the risk factor is a geopolitical one.
Monday starts off with a year-on-year reading for personal consumption expenditures in March in the United States, where a slight increase from February’s increase of 1.6 percent is expected. Tuesday may be the day to watch. China releases its manufacturing PMI for April, which is expected to come in relatively unchanged from March. Data on first quarter GDP in the eurozone, Italian GDP, Germany’s consumer price index, as well as US consumer confidence are also released on Tuesday. On Wednesday, the Institute for Supply Management publishes data on US manufacturing and US employment in April. Also watch US crude oil and gasoline inventories. US sanctions on Iran snap back on Thursday and the week ends with CPI in the eurozone and US unemployment figures for April. Brent could be setting a new floor this week, but any major movement would be limited by a strong US dollar. Barring any surprises, the price of oil looks to be static this week, moving by about plus or minus 1 percent.