Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Oil Page 4 of 6

Why We Should Want the Return of a Two World System

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On February 16, 2015

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Before the collapse of the Soviet Union, there was a two-world system. If you didn’t like the deal that US was offering you, you could go the USSR.  If you didn’t like the deal Russia was offering you could go to the US.

While the US probably offered a better deal, especially in later years, you could have a pretty decent life as a client state to the Soviets.  Cuba under Castro had a higher standard of living in practically every way than it did pre-Castro, when it was an American client state.

Equally, you could play the two off against each other, looking for the best deal.  This made it harder for them to screw you over.

As the USSR weakened, the deals became worse.  The USSR of the 80s could not offer what the USSR of 50s could.  Still, the ability to tell the superpower of your choice, who feared and hated the other superpower, that they had to treat you at least slightly right had benefits.

I certainly don’t want to romanticize the cold-war period.  There were ugly coups, torture regimes and wars.  There was famine.  But while we have less of that today, we don’t have less of it because of the end of the cold war.  Indeed, we have more failed states than we did during the cold war, because it is in no one’s particular interest to pick them up.

So one of the events that I have been tracking since the early 2000’s (as has Stirling) is when a viable second bloc would emerge.

To be viable, a bloc must be able to:

  • Provide relatively high technology;
  • Provide development: power, roads, railways, etc;
  • Provide the consumer goods people want;
  • Provide credit;
  • Feed countries which need food;
  • Provide energy (which still means oil and other hydrocarbons, though that’s changing);
  • Provide some sort of credible military aid or umbrella.

Yesterday I wrote about Russia creating its own bank payments system to compete with the West’s SWIFT. This is important, because since the fall of the USSR, the West (or more accurately, America) has increasingly used this to punish those nations it does not like.  Piss off Washington and they will shut down your ability engage with global credit markets, and even the ability of your citizens to use credit cards.  Pretty soon you can’t buy what you want, even if you have the money, or you pay a huge premium.

So the creation of a Russian SWIFT, while woefully inadequate by itself, was a first step towards meeting one of the needs of a new bloc with rivals the West.

The linchpin nation in any new bloc would be China.  China can credibly provide development, credit and consumer goods (they make much of them anyway.)  But China will also need countries which can supply oil and raw materials: Russia, Venezuela, Iran,  Argentina, and so on.  Much of South America would rather sell food and raw materials to China (or Russia, or whoever) than to the US, because they remember, well, not being treated very well by America during and after the Cold War.

Russia’s military technology, while not as good as America’s, is good enough for most purposes, and China, as is usually the case, has vast amounts of shipbuilding capacity for those who want a navy.  America’s space program is charging forward (mostly privately) but Russia still has plenty of lift capacity for satellites, and China is working hard on its space program.

The BRICS have created their own development bank, as well, so combined with an expansion of the new SWIFT, credit which can be used to buy almost anything you want, or need, will be available.

This, my friends, is the configuration in which the unipolar moment (which has lasted two and a half decades so far) ends.

It was always going to end, for all things do, the question was how soon.  American actions have accelerated what should have taken a couple decades more, significantly, by marginalizing too many countries.  Marginalizing or destroying the occasional country was acceptable, but the number marginalized is just too high, and they have too many resources.  Combined with a great manufacturing nation, they have essentially everything they need: they don’t need the West.

And they may be wondering why they are paying intellectual property taxes (that’s what they are) and interest fees to the West, when the West clearly isn’t acting in their interest.  Why have America and Britain gain all this, when they can reap the money themselves.

Oh, there are still some areas where the West is clearly ahead, from turbines to aerospace.  But they tighten by the year, and they aren’t anything necessary any more. Virtually everything you want, save a few luxury items, you can get without America or Europe being involved.

The question now, then, is the timing and the exact events.  But the broad outline is visible and will accelerate, because it is in too many countries self-interest.

The Great Game, the Great Game never ends.

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Russia Creates Its Own Payment System

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On February 15, 2015

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This is important:

Almost 91 domestic credit institutions have been incorporated into the new Russian financial system, the analogous of SWIFT, an international banking network.

The new service, will allow Russian banks to communicate seamlessly through the Central Bank of Russia. It should be noted that Russia’s Central Bank initiated the development of the country’s own messaging system in response to repeated threats voiced by Moscow’s Western partners to disconnect Russia from SWIFT.

Much of the West’s power comes from our financial hegemony. Our ability to cut people off from loans, payments and so on.  Since this new system is Russian only, it isn’t, right now, that big a deal.

But start connecting other countries to it, say China, Iran, India and so on, and it becomes a way of breaking financial blockades.  Include some calculable financial law (less of a challenge than it used to be as New York and London courts make increasingly punitive decisions), and start lending in Yuan (with which one can buy much of what one needs in the world, since the Chinese make so much of it), and you have a fully credible financial system.

The key is to get one major manufacturing country in.  Most of the nations the West is punishing these days, financially, are oilarchies ( Venezuela, Iran, Argentina).  They need the ability to buy manufactured goods.  The obvious country is China.  If China agrees to go in, Western financial hegemony is broken.  Japan could work; India could almost work, and Japan or India have a lot more to gain from it than it might seem (as we watch the Japanese economy implode.)

Even before then there are deals which can be cut.  Say Greece wants to buy Russian oil.  Russia can lend them Rubles, the use those rubles to buy Russian oil, in exchange Russia gets use of Greek ships and ports and access to the EU.

This is, then, in one sense, not a big deal.  As long as its only Russia, it’s a defensive move of somewhat limited utility.

But if it expands beyond Russia, well then, it’s earth-shaking.

Get out the popcorn and watch it develop.

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The Venezuela edition of “imports will kill’ya”

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On January 30, 2015

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So, the New York Times has an article on how Venezuelan stores are running out of basic goods, because they import so much, and with the drop in oil prices, they don’t have enough hard currency to buy what they need.

Repeat after me for the 100th time, “all resource booms end.”

All of them.  Always.  Gold, oil, rubber: it always ends.  Period.  The question is only when.

Back around 2004, myself and Stirling pointed on the late (and defunct) BOP News that Chavez was screwing up his revolution.  That’s not a way of saying I disapprove of his goals, I very much agree with what he was doing in general terms. But in specific, he was not making his country independent of high oil prices.

What a country needs it must either be able to produce, or have product it knows it can sell to someone who can produce what it needs, and who is a reliable partner. (No Western country is a reliable partner to an actual left wing revolutionary government.)

Period.

If you do not, things may go well for a long time, but you are ALWAYS vulnerable to the hegemonic economic state and its allies.  Right now that’s the West.  For a long time, if the West were jerks to you, you could run to the USSR, but right now there is no complete replacement, though China, as leader of the BRICS, is coming on strong.

Note that when the USSR fell, Russian support for Cuba almost entirely went away.

It was a huge shock, but Cuba survived it.

Chavez was a great friend of Castro’s, but he did not learn from Castro.  He did not figure out how his country could survive being cut off from what amounted to essentially it’s only source of support (in his case, oil sales).

Now Venezuelans pay the price.

Learn the lesson.

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Collapse of oil prices and the Russian Ruble

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On December 16, 2014

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These are the same thing.  Russia sells oil to the world, and their currency is based on the price of oil.  (It is for this same reason that the Canadian dollar has been sliding.)

Putin has been a competent leader for Russia in many ways, but the failure to diversify the economy from oil is his primary failure.  You might say “corruption”, but resource economies are almost always corrupt.  The only way to (somewhat) avoid it is to put the money away in a sovereign fund or the equivalent.

It is also important to not allow the currency to become a resource currency, because that crushes all other export businesses.

Why did the price of oil drop?  There are a lot of theories, from screw-ups in the futures market, to increased supply and reduced demand, to intent to destroy Russia.

What is interesting is that OPEC (meaning, in this case, Saudi Arabia) has refused to do anything to stabilize oil prices and prevent the collapse.

Saudi Arabia needs higher oil prices, they have no economy other than oil of significance, but they also have more ability to handle oil price collapses.  Saudi crude is cheap to produce, under $10/barrel.  The profit may be less, but they are making a profit.  A lot of Russian, American, Canadian and other oil is not profitable at low prices.  Letting oil prices be low for a year or two will probably help Saudia Arabia more in the long run.  Certainly it hurts their competitors more than it hurts them.

Many also believe that the US and Saudi Arabia are doing this deliberately to hurt Russia.

Of more fundamental interest is that China has been buying less and less commodities (not just oil, but metals like copper).  China is the most important economy in the world now for hard commodity prices.

The Ruble collapse is going to hurt a lot of people, most especially the Europeans.  Europe sells a lot of goods and services to Russia, and Russia is no longer going to be able to afford them.

For now, low oil prices will be good for the US, but the general commodity price drops are hammering many other countries, and that will lead to reduced demand globally.  This isn’t a good thing, however much many Americans are enjoying Russia (and Putin”s woes.)

I will note also that Russians seem to be blaming the West for the collapse of the Ruble.  That’s a good thing if they decide going supine will help them.

It’s not a good thing if they get angry about it and decide the West (meaning the US) is deliberately trying to destroy them.

Falling Oil Prices Are Mostly Bad News

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On November 5, 2014

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Yes, it’s nice to play less for gasoline and heating fuel, but while some of the decline in oil prices are a result of the new unconventional oil supplies which have come on line, much of it is that the world is going into recession—demand is down from every major economy.  That’s not good.

Yesterdays’ post showed what happened in the US job market over the last 6 years.  It never recovered for most people.  Remember, in terms of business cycle that was the recovery and the boom.  Those were the good times.

As for oil, the drops are to many conventional oil producers advantage if they can sweat them out. Much of the unconventional oil which came online is not viable below $80/barrel. The viability numbers you see for countries like Saudi Arabia are not their profit break even numbers, pumping Saudi oil costs less than $10 a barrel, rather they are what the Saudi government budget needs.  But the Saudis can handle a few years making less if it send their competitors into bankruptcy.

Remember that in the late 90s oil was under $20 a barrel.  I would want to see oil under $40 a barrel, with excess supply, to expect an economy as good as the late 90s one was.  Remember also that this is not the first time this “run a shitty economy until new sources of oil come on line” play has been tried—while the details were different, this is exactly what Carter, Reagan and the Fed of the late 70s and early 80s did. Temporize waiting for the new oil supply.

But while new oil did eventually come online, notice also that the economy never really got good ever again: you have about 4 good years in the late 90s and the rest is crap (again, for ordinary people.  The wealthy did very well).

Finally, those fools in places like Canada (my home and native land) who thought the good times would never end and that letting the mixed economy (aka. manufacturing) die, are about to reap the whirlwind.

All Commodity Booms End.  No exceptions.  Always.

Repeat that until it sinks in.

The old Canadian economy ran as follows: during times when commodity prices were high the Canadian dollar went up making our manufactured goods uncompetitive, but we used the money from selling commodities to subsidize manufacturing.  During times when commodity prices were low, the profits from manufacturing were used to subsidize the the resource producing areas of the country.

Harper, that feckless provincial incompetent and neo-liberal ideologue, has broken the Canadian mixed economy, which existed before him for over 100 years.  This is probably because he’s an economist, meaning he was indoctrinated to believe neo-liberal dogma.  Or perhaps he’s just a fool, hard to say.

The only Federal leader who understands the Canadian mixed economy is NDP leader Mulcair (Justin Trudeau, while has nice abs, is not very bright, unlike his father, who was a genius.)

It might not be too late to rebuild Canadian manufacturing during the oncoming recession.  My fellow Canadians, think carefully about who you vote for, especially those of you in Southern Ontario. Your housing values will not stay where they are if Canada’s entire economy is based on boom and bust commodity cycles and there are no jobs except in resource extraction, flipping burgers and finance.  Mulcair tried to warn you, years ago.

Learn.  Or reap the consequences.

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The First Real Russian Retaliation for American Sanctions

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On April 4, 2014

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It starts:

Rosneft has recently signed a series of big contracts for oil exports to China and is close to signing a “jumbo deal” with Indian companies. In both deals, there are no US dollars involved. Reuters reports, that Russia is close to entering a goods-for-oil swap transaction with Iran that will give Rosneft around 500,000 barrels of Iranian oil per day to sell in the global market. The White House and the russophobes in the Senate are livid and are trying to block the transaction because it opens up some very serious and nasty scenarios for the petrodollar. If Sechin decides to sell this Iranian oil for rubles, through a Russian exchange, such move will boost the chances of the “petroruble” and will hurt the petrodollar.

It can be said that the US sanctions have opened a Pandora’s box of troubles for the American currency. The Russian retaliation will surely be unpleasant for Washington, but what happens if other oil producers and consumers decide to follow the example set by Russia? During the last month, China opened two centers to process yuan-denominated trade flows, one in London and one in Frankfurt. Are the Chinese preparing a similar move against the greenback? We’ll soon find out.

The US has, to use the phrase du jour, a great deal of “privilege” because the US dollar is the standard unit of trade, most significantly, trade in oil.  If you get frozen out of the dollar, you get frozen out of a large part of the world economy.  American sanctions can virtually destroy a country, as banks, even non-American banks, won’t do business with a country the Treasury department has forbidden doing business with.

Breaking that—moving to a multilateral world, or to a world where trading in Yuan is just as acceptable, goes a long way to breaking American power. In general, the Europeans will follow the US lead, so moving to the Euro provides no protection from America.  But moving to the Yuan and the Ruble, does.  Pricing large oil transaction in rubles also helps protect the Russian currency from large moves: if the ruble drops too much, people will go into it if you can buy oil in rubles, and the Russians are opening a futures operation as well, meaning traders can make that play, even if the US doesn’t like it.

Of course, the US could go harder in sanctions, making it difficult to take those winnings and get them back into dollars or Euros, but if the trade is large enough, Chinese and Oilarchy banks will clean the money and hide the flows.  London and New York will then want to get in on it, and will, through their offshore subsidiaries in various banking havens.

Note also the poke in the eye: the deal to take Iranian oil and sell it as Russian oil, bypassing the sanctions against Iran.

All of this is far more harmful to America’s real interests than any sanction the US has so far imposed on Russia.

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The Reagan Play

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On December 10, 2012

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The Reagan play, in the last period of high oil prices was this: crush the economy and bring new sources of hydrocarbons online.

This is also Obama’s play: fracking and  other unconventional hydrocarbon sources are being ramped up massively, while austerity crushes resource demand.  China is  buying a lot less resources.

I called for falling oil prices before and was wrong about when it would happen, but I remain convinced it will happen.  The hardest thing to do is to predict not what, but when.

This does not mean that hydrocarbon prices in the long run are going to drop, they aren’t.  But in the mid terms, for a few years, they will.

This won’t do much good for ordinary Americans, because they won’t see almost any of the gains, their lords and masters will take most of it.

This crash will lead to challenges for many countries, most interestingly South American countries like Venezuela and Argentina which have been riding the resource boom and engaging in resource socialism.  They need to diversify their economies.  I doubt Venezuela will manage it, Argentina may, if the people running Argentina learn some humility.  This will also hurt the oil patch up here in Canada (primarily Alberta) and upset the political calculations of our Conservative party.  Russia, various Middle Eastern countries and so on will also have their problems.

All resource booms end.  All of them.  The question is only when.  The widespread slowdown, and especially the Chinese slowdown (which is hitting S. America hard), indicates we are likely close to the end of this boom period.

Greek election consequences and the shape of the developed world’s future

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On June 17, 2012

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will be more years of austerity, people winding up on the street, suicides and outright starvation.  In this fertile ground, the neo-nazi right will rise.  The left will most likely not compete, because they will refuse to create an enforcer class to protect their own people.  The police in Greece voted about 50% for the Golden Dawn, they will not protect the left, either, but will enable the rise of the Golden Dawn.

Under these circumstances a coup of some variety, whether military or otherwise (remember, Hitler never won a majority) is very likely to occur.  By blocking the rise of the left so that Greece can be looted, the oligarchs have created their own doom.

In general terms, we are in a pre-revolutionary period.  The supreme court coup in Egypt, the outright refusal to obey even the letter of the law let alone the spirit in the case of Wikileaks and Assange, the reign of Obama, are teaching an entire generation that you cannot fix the system from within, through the mechanisms of the old system or through even semi-peaceful protest.  The Pacific free trade deal will enshrine even more draconian IP laws and will extend NAFTA style takings regulations which give multinational companies sovereignty over governments.

This will not stand.  There will be global war, and there will be global revolution.  We are on track for it.  The question is when and how.  I would guess in less than 20 years the world will fully convulse.  Many of the current generation of oligarchs will be dead by then and will win the death bet, but their heirs will reap the whirlwind.  As for the population, I expect a billion deaths or so over the next 25 years from famine, disease, war and environmental issues.

Both populations and the oligarchs have refused, over and over again, to do what is necessary to peacefully restructure the world economy, but instead have opted to kick the can down the road.  Each kicking of the can has led to more corrupt and sclerotic economics and politics.

In the period between now and the revolution, some nations will take control of their own destinies.  Offered a choice between austerity in the international system and nationalism, they will choose nationalism.  It will not be as comfortable as being a member of the old international order from before the financial collapse, but that is not being offered.  A few nations will be able to work wedges to stay in the system and not suffer too much (Germany, France).  But most developed world nations will continue to suffer real declines in their standard of living, driven by inequality and the resource trap which we refuse to restructure out of.  The electrical economy wants to happen, but it will not happen on a wide scale until after war and revolution.  Such is the choice both our elites and the regular population continue to make.

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