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
- Retreats into isolation are not so splendid anymore.
- The price of oil may seesaw as it searches for direction.
- A true pilot is needed to guide any inherently volatile system.
The focus in the market shifted away from sabre rattling in the Middle East to sabre rattling in Washington and the dimming prospects of a US-Chinese trade deal. Meanwhile, the breakdown of the liberal world order as European elections saw the momentum for nationalism continue. More than a decade ago, neoconservative political scientist Robert Kagan noted that the United States and Europe “have parted ways,” adding “Americans are from Mars and Europeans are from Venus.” Instead of the European mediator, Great Britain has retreated into a different type of isolation. Unipolarity for the United States, meanwhile, looks more like being alone than it does existing as the only superpower. The geopolitical landscape is without a true pilot to steer the course, opening the door to political elites unable to balance the quest for power with the necessity to lead. This usurpation of power invites reckless policies that rob the marketplace of the confidence necessary to thrive.
During intra-day trading on Thursday, oil prices flirted with a 6 percent loss on the back of steady builds in US crude oil inventories. Hopes for a US-Chinese trade deal, meanwhile, were dashed and another multi-billion dollar bailout for US farmers only further undermined investor confidence. In the end, the price for Brent crude oil, the global benchmark, dropped 5.3 percent from the open on Monday to finish the week at $68.69 per barrel.
Immanuel Kant believed a republican power structure where checks and balances across the political system would ensure a “perpetual peace” as each bid for control was met by a countervailing bid for control. This belief is the cornerstone of the liberal world order that keeps interconnected systems in balance. Power checks power through institutions. Instead of anarchy, liberals view the world as advancing beyond chaos and toward one where behaviors are moderated through trade and other alliances.
A republican form of political organization is not the same as democracy, Kant warned. For Kant, democracy was tantamount to despotism “because it establishes an executive power in which 'all' decide for, or even against, one who does not agree.” This speaks to the criticism that the rise of nationalism in the 21st century is xenophobic in nature as those not enjoying the promised spoils of the liberal world order ostracize the very partners necessary to make it work. Boris Johnson, the conservative leader widely expected to replace Theresa May, has been described as a nationalist. US President Trump is its poster child. Writing in the late 1990s, Fareed Zakaria coined the term “illiberal democracy” to describe a political system where elected governments steadily erode the rights not only of other elements of society, but other elements of government. This marginalization hints at trends in nationalism too. Leaders in an illiberal democracy may show a profound lack of interest in the Kantian limits on power and instead establish a “super-presidency” that successors will inevitably abuse. “Illiberal democracy,” Zakaria wrote, “is a growth industry.”
Politically, that means the centralization of power is in the hands of a single entity. That inevitably breaks the links of Kantian liberalism and leads to an uncheckable ruler. In the international arena, that tilt toward selfishness over universalism erodes the balance of power. Neither the United States nor Great Britain have an interest in serving as the balancer in the current international order. In the market, the lack of moderating forces leads to wild market swings. British economist John Maynard Keynes said the forces of economic output and demand are highly volatile and erratic. This volatility can be reduced by institutional and interconnected structures. The same could be said for national power, which can be highly volatile and erratic without a balancer. Internally, this same sense of chaos leads to deep divisions. Divisions among men, therefore, mirror divisions among states.
It may be a light week given the federal holiday Monday in the United States. Tuesday brings a reading of US consumer confidence in May. Given his recent statements on downside risks in the global economy, it may be worth paying attention to a speech Wednesday from Bank of Japan Gov. Haruhiko Kuroda. And of course US data on crude oil and gasoline inventories will be key factors driving the price of oil this week. Thursday brings readings on first quarter GDP in the United States. The week ends with Chinese manufacturing PMI and US personal consumption expenditures. Given the huge drop last week, crude oil prices will likely bounce around in search of clear momentum. An Orange alert is in place, with Brent expected to move by about plus or minus 2 percent on the week.