Wednesday, December 26, 2018

The Year of the Troika

National Security Advisor John Bolton

2018 is the year that US National Security Advisor/Iran hawk/facial hair aficionado John Bolton coined the term "Troika of Tyranny", or a Triangle of Terror (I guess this is a subtitle, like "Die Hard: With a Vengeance"), to refer to socialist governments in Cuba, Nicaragua, and Venezuela in a speech in Miami.  Condemning socialism (and left-leaning politicians), he said "the problems we see in Latin America today have not emerged because socialism has been implemented poorly. On the contrary, the Cuban, Venezuelan, and Nicaraguan people suffer in misery because socialism has been implemented effectively" and that the troika was "the cause of immense human suffering, the impetus of enormous regional instability, and the genesis of a sordid cradle of communism in the western hemisphere". Bolton concluded his speech stating "Look to the North; look to our flag; look to your own. The Troika will crumble. The people will triumph. And, the righteous flame of freedom will burn brightly again in this Hemisphere".

Bolton clearly builds upon Bush 43-era Secretary of State Condoleeza Rice's 2005 speech on the "Outposts of Tyranny", in which she identified Belarus, Burma, Cuba, North KoreaZimbabwe and the broader Middle East as regions of tyranny, despair, and anger -- but Bolton, I suppose, is highlighting Vladimir Putin's role in propping up the South American socialist regimes, all the while trying to shore up the Cuban-American voting block for Trump.

Anyways, there's quite a bit to digest here.



1. Venezuela

Venezuela has been all over the news for its severe economic mismanagement and humanitarian disaster over the past 5 years, leading to thousands fleeing the country's borders every week.  Ishan Tanoor from the Washington Post calls it the biggest crisis in the western hemisphere:
According to U.N. figures, some 2.3 million Venezuelans — about 7% of the population — have left their homeland over the past couple of years. Other estimates place the number at closer to 4 million.  The exodus is the consequence of severe economic deprivation and mounting desperation among Venezuelans. The country’s economy has shrunk by half in just five years, and inflation is nearing a staggering 1 million percent. Shortages of food and medicine have led to a crisis in public health, with once-vanquished diseases such as diphtheria and measles returning and the rate of infant mortality rising sharply. U.N. officials claim that some 1.3 million Venezuelans who left the country were “suffering from malnourishment.”
The vast scope of the crisis has drawn bleak parallels. “Comparisons with Syria’s refugee crisis — the worst man-made disaster since the second world war, with almost 6 million refugees out of a prewar population of 20 million — may be inexact,” noted an editorial in the Financial Times. “In terms of scale and raw numbers, however, they no longer seem entirely far-fetched.”

Constrained by US sanctions, Venezuela has received lifeline from the other "superpowers": China and Russia.  Moscow, in particular, has doubled down on its investment in Venezuela, giving it larger influence in the western hemisphere.  Anthony Faiola (Washington Post) reports from Caracas: 
[China] has made massive investments and established deep trade ties in Latin America. But their efforts are largely economic. A major Venezuelan creditor, China has shown little interest in accumulating Venezuelan assets or strengthening political ties with [President Nicolas] Maduro’s failing regime. For the most part, it has concentrated on trying to get its loans repaid. 
Russia, in contrast, has repeatedly restructured, refinanced or taken in-kind payments from Venezuela. Just days after the [G-20] summit, Maduro traveled to Moscow to meet with Putin. The Venezuelan leader said Russia agreed to invest an additional $5 billion to improve Venezuelan oil production — much of which goes to Russia’s export customers — and $1 billion in gold mining. Separate contracts were signed to supply Venezuela with 600,000 tons of Russian wheat and to modernize and maintain its Russian-made weaponry. [...]
Russia also now owns significant parts of five oil fields in Venezuela, which holds the world’s largest reserves, along with 30 years’ worth of future output from two Caribbean natural-gas fields. Venezuela also has signed over 49.9% of Citgo, its wholly owned company in the United States — including three Gulf Coast refineries and a countrywide web of pipelines — as collateral to Russia’s state-owned Rosneft oil behemoth for a reported $1.5 billion in desperately needed cash. [...]
Maduro described Russia and Venezuela, both under heavy U.S. sanctions, as comrades in a fight against American hegemony and leading the charge toward a new, “multipolar world.”
So does it make much sense, or is it disingenuous, to blame Russia, when US sanctions give Maduro no choice but to offer the country to Putin and Xi?

2. Nicaragua

Given the CIA financial and military support for the Contras rebels (which committed atrocities including burning farms and schools, murdering women and children, and hundreds of terrorist attacks) against the Sandinista junta in the 1980s, which fueled a bloody civil war that lasted a decade, it's a bit jarring to hear a Trump official talk about Nicaragua with no sense of irony whatsoever. 

President Daniel Ortega has been de facto ruler for many decades, consolidating his power through corruption and nepotism, and maintained popular support by administering generous welfare programs for the country's poor population.  For most of the 21st century, the country was a bright spot for tourism, with a economy (although still very poor by world's standards) growing at a brisk 5% annually.   Things turned in 2017, when trading partner Venezuela stopped financial support due to its own economic collapse, and northern neighbor Honduras plagued by gang violence

Ortega responded to the cash strap by cutting social security benefits, leading to an outraged public to take to the streets.  Following the old dictators' playbook, he unleashed his security forces to crack down on the protesters, killing hundreds, leading the Washington to impose sanctions under human rights violation.  The Ortega regime is widely expected to collapse under the weight of severe economic crisis and popular disenchantment.

3. Cuba

Pointing at Cuba as part of the troika is... probably the strangest, in a speech full of very odd statements [Note: Perhaps since Bolton's is mostly a political stump speech right before crucial midterm elections, we shouldn't try to distill foreign policy out of it].  The island nation south of the Florida has been stable under former president Raúl Castro, who assumed power in 2011 from his ailing brother/socialist revolutionary icon Fidel Castro (who passed away in 2016), and its current president Miguel Díaz-Canel, who took office in April 2018 in a peaceful political transition.  Furthermore, in 2014, Castro and US President Barack Obama announced that efforts to normalize relations between the two nations would begin with the re-establishment of embassies in Havana and Washington.  The embassies had previously been dissolved in 1961 after Cuba became a close ally of the Soviet Union.

The normalization efforts were heavily criticized by conservative politicians, most notably Senator Marco Rubio (R-FL).  In a 2016 election stump speech he said:
“The Obama administration is making more concessions to the Castro regime, and the United States is getting nothing in return. Cash makes the Castro regime’s grip on power stronger, its repression harsher and its exportation of misery throughout the hemisphere, especially Venezuela, easier‎ [...] By encouraging U.S. companies to do business with Cuban military-owned entities, Obama is giving them an open invitation to violate existing U.S. law. [...] After two years of President Obama’s Cuba policy, the Castro regime has made out like bandits without lifting a finger to return the fugitives it is harboring from American justice, pay Americans for their stolen property, or allow the Cuban people to exercise their God-given freedoms. [...] President Obama’s Cuba policy puts the Castro regime’s interests first, profits ahead of America’s national security, and the Cuban people’s rights and dignity dead last.”

The Cuban economy is fragile (thanks to lingering sanctions and Venezuela's collapse), but President Díaz-Canel recently announced constitutional reform to revive its socialism-based economy.  Noteworthy changes include modest steps towards decentralization, and recognizing a role for non-state actors, including small private businesses, worker-owned cooperatives, private property and foreign direct investment. However, the extent of this opening is yet to be determined.

Sunday, December 23, 2018

Build the STEEL SLAT!


If the above Presidential directive gives you a splitting headache, Dara Lind at Vox (of course) has the lowdown:

What Trump wants: $5 billion for 215 miles of border wall 

Ultimately, the Trump administration wants to build hundreds of miles of border barriers — a lot more than $5 billion can provide. But it has identified particular stretches of the border as top priorities, and a $5 billion appropriation would allow it to blast through several of them. 
The Department of Homeland Security (DHS) estimates that if it got the whole $5 billion, it would be able to build 215 miles’ worth of barriers along the US-Mexico border. Most of this — about 150 miles — would be built where no physical barriers currently exist; the rest would be intended to replace some older and less imposing barriers.  [...]  All of this would be a bollard barrier made of steel poles, erected close enough together to prevent entry but far enough apart that Border Patrol agents can see what’s happening on the other side. ([hence] the“see-through wall” that Trump got excited about back in 2017.)  Previous administrations referred to bollards as fencing; the Trump administration calls it a wall; and Trump himself has started calling them “steel slats” because he thinks it sounds tougher. 

What the Senate has floated: $1.6 billion for 65 miles of “fencing” 

When the Senate’s subcommittee for Homeland Security appropriations in June passed a DHS budget for fiscal year 2019, it included $1.6 billion for the Trump administration to build 65 miles of barriers in the Rio Grande Valley. The subcommittee called it “pedestrian fencing,” but in practice it would be identical to the barrier the Trump administration is now calling a wall. 
This was Senate Minority Leader Chuck Schumer’s offer to Trump earlier this month, to the consternation of progressives who wanted no money whatsoever for “Trump’s wall.”  Democrats in the House have said they wouldn’t vote for even $1.6 billion in “wall money.” They may thread the needle the same way the Senate has, and decide that they are going to call it “fencing” or just “border security,” even as they give the administration money for something Trump will call a wall. Or they could decide that as long as Republicans insist on talking about $1.6 billion for a wall, they won’t vote for it[...] 
The Trump administration has gone from insisting on concrete barriers that Mexico would pay for, to trumpeting the existence of a “wall” made out of materials that were already in use before Trump [declared his candidacy].  If it wants to, it can take whatever barriers it ends up building, and declare victory. The question of how much wall is enough is much less a question of policy than of what Trump himself will be satisfied with [...]
And don't forget that Trump isn't really serious about wanting the wall, else he'd be willing to put something on the line, a compromise of some sorts -- he's just in it for the fight (which must be televised a la 90's reality shows), and Republicans know this all along.

So somewhere in Florida, Jeb! is ROTFLHAO:


Fast forward to 2020:

Thursday, December 13, 2018

Do what you Love? [Updated]

Thanks, ass hole...
[Updated from original post 6/6/18]
Recently I heard a tech startup founder during a speech, who said: "I've been taught, that if you just do what you love, the money will come."  It was mentioned in passing, very casually, probably didn't even think twice about it.  But my immediate response was: "well that's easy to say if your last name is [insert wealthy family], but most people have mouths to feed."

I'd love to see research on how enterpreneurship, especially in tech, drives wider inequality.  The 99% don't have the luxury of quitting their day jobs in pursuit of their lifelong dreams of fishing, climbing Mt Kilimanjaro, or doing Brazilian jiujitsu for a living.  Risk-taking is only remotely an option to the privileged.  Even in a rich country, almost half of all Americans can't fund a $400 emergency without taking on credit card debt or borrowing money in some other way - - so people are basically living paycheck-to-paycheck, with no savings, and no ability to take risks of any sort.

With billions of dollars sloshing around in the venture capital space, naturally the moneys flow into the hands of the elite few.  This is how 82% (US$762 billion) of all wealth creation in 2017 went to the top 1%, while the bottom 50% saw no increase at all.  Or how the 42 richest people control the same wealth as the bottom 3.7 billion Sure 90% of all startups fail in less than five years.  Perhaps they die in a fiery inferno like Webvan or Pets-dot-Com, but most likely they just can't get funding to continue, the principals lose interest, everybody understands and moves on.

Source: Bloomberg

Moreover, "Do What You Love" is just a terrible mantra.  Popularized by the late world-renowned weed afficionado/asshole-who-parks-in-handicapped-spots Steve Jobs, DWYL is basically a propaganda tool for capitalism.  From Miya Tokumitsu:

"By portraying Apple as a labor of his individual love, Jobs elided the labor of untold thousands in Apple’s factories, conveniently hidden from sight on the other side of the planet — the very labor that allowed Jobs to actualize his love.  [...] 
Think of the great variety of work that allowed Jobs to spend even one day as CEO: his food harvested from fields, then transported across great distances. His company’s goods assembled, packaged, shipped. Apple advertisements scripted, cast, filmed. Lawsuits processed. Office wastebaskets emptied and ink cartridges filled. Job creation goes both ways. Yet with the vast majority of workers effectively invisible to elites busy in their lovable occupations, how can it be surprising that the heavy strains faced by today’s workers (abysmal wages, massive child care costs, et cetera) barely register as political issues even among the liberal faction of the ruling class?"

Let's not limit ourselves to just Apple, check out the retail/commerce space.  Could Wal-Mart succeed without the prison laborers of Yingshan?  Or could you really separate Amazon's behemoth from the Somali immigrant warehouse workers in Minnesota?  In both cases, the companies say the workers are well-compensated, but these people are under pressure to clock inhumane hours or risk punishment or termination.

Now nobody is arguing that the work environment shouldn't be enjoyable.  But DWYL degrades our effort, making it less serious, valuable and worthwhile.  By masking our labor as "love", do employers expect us not to demand fair compensation & benefits, or ask for reasonable leisure and family time?

When we (employers) succeed, we earn all the credit to ourselves -- forget about all of the support workers who are "doing it for the money", not for love.  When we fail -- and as mentioned above, most likely we *will* fail -- sure everybody loses their livelihoods, but at least we're doing something we love. 

I stand corrected

Sunday, December 09, 2018

Why Trump doesn't think he'll go to jail

Merry Christmas

This week we learned that Donald Trump will probably end up in federal prison, for his crimes of a criminal conspiracy to defraud the United States of a free and fair election and of a government devoted solely to its interests.  The only question is before or after his presidency ends. (Given the state of the Senate, it's likely after).  Congress isn't in session until after the holidays, when Democrats will take over the House and chairmanship of its various committees.  In the meantime, all of the typical excuses/defenses/deflections made by Trumpkins fall apart under any sort of scrutiny.

So yeah, it's not a merry, merry Christmas for 45.

David Graham, writing for the Atlantic, made the most salient explainer on why Trump doesn't believe he's going to prison: Trump thinks jail is punishment for such crimes like murder or drug trafficking.  For brown people, basically.  Whereas collusion, according to him, isn't even a crime, because it's just creating synergies like in a business M&A.  It's a win-win for everybody!  And he's not exactly wrong, it's been like that for most of his life.

"The dirty secret about many types of white-collar crime is that they’re never prosecuted. In the top income brackets, it’s relatively easy to cheat on your taxes and, if you get caught, simply shrug, apologize, and write the IRS a check. The same is true of laws such as the Foreign Agents Registration Act. When Mueller indicted Manafort for violating the seldom-enforced statute, it triggered a panicked wave of new registrations, as people who’d been skirting the law rushed to avoid legal exposure. [...]

In 1991, with impending debt payments threatening to send Trump belly-up, his father, Fred, walked into one of his casinos and bought $3.5 million in chips, the equivalent of an interest-free loan—and a violation of state gaming laws. The younger Trump kept his gambling license in exchange for a $30,000 fine.

When, in a bid to save costs, Trump employed unauthorized immigrants from Poland to work on the construction of Trump Tower, he settled the ensuing lawsuits for $1 million. Even more brazenly, when he got into trouble with the city of Palm Beach, Florida, for violating zoning rules, he agreed to make a donation to veterans in exchange for dismissing legal problems. Yet rather than make the charitable gift himself, he directed his foundation, mostly made of others’ money, to do it. In other cases, Trump hasn’t even had to ante up to evade trouble. He has often stiffed contractors and simply refused to pay, guessing correctly that they won’t, or can’t afford to, sue him. 

For Trump, crime simply isn’t something that well-to-do men like himself, or Cohen, or Manafort do. It’s something that young men of color do. Businessmen can always find the right price to make trouble go away.

To see his former associates convicted of felonies, and the special counsel charging after him, must gall Trump, as though the earth has shifted under his feet and the rules have changed. Things that people used to be able to get away with are landing them in prison. But what has changed is not the rules, but Trump’s own position: Actions that might have escaped scrutiny for just another rich man in New York City draw much greater attention when they involve the president of the United States.

Time and again, Trump seems unable to grasp why it’s different being president. He riffs and improvises when speaking and on Twitter, the same tactics that made him a frequently entertaining guest on Howard Stern’s radio show, not recognizing that doing the same thing as part of delicate diplomatic negotiations can have catastrophic results. "

Even worse, Trump's supporters also don't believe he's done anything wrong Illegal, yes, but they think all politicians are dirty crooks anyways.  So when this orange guy says he'll bring coal jobs back, at least they like what he says.  Furthermore, he's doing the "right" set of crimes, as Peter Beinart writes for the Atlantic:
[...] Yale philosophy professor Jason Stanley makes an intriguing claim. “Corruption, to the fascist politician,” he suggests, “is really about the corruption of purity rather than of the law. Officially, the fascist politician’s denunciations of corruption sound like a denunciation of political corruption. But such talk is intended to evoke corruption in the sense of the usurpation of the traditional order.” 
Fox News’s focus on the [murder of Mollie Tibbetts in Iowa by an immigrant instead of Michael Cohen's guilty plea] illustrates Stanley’s point. In the eyes of many Fox viewers, I suspect, the network isn’t ignoring corruption so much as highlighting the kind that really matters. When Trump instructed Cohen to pay off women with whom he’d had affairs, he may have been violating the law. But he was upholding traditional gender and class hierarchies. Since time immemorial, powerful men have been cheating on their wives and evade the consequences. 
The Iowa murder, by contrast, signifies the inversion—the corruption—of that “traditional order.” Throughout American history, few notions have been as sacrosanct as the belief that white women must be protected from nonwhite men. By allegedly murdering Tibbetts, Rivera did not merely violate the law. He did something more subversive: He violated America’s traditional racial and sexual norms. 
Once you grasp that for Trump and many of his supporters, corruption means less the violation of law than the violation of established hierarchies, their behavior makes more sense. Since 2014, Trump has employed the phrase rule of law nine times in tweets. Seven of them refer to illegal immigration. 
Why were Trump’s supporters so convinced that Clinton was the more corrupt candidate even as reporters uncovered far more damning evidence about Trump’s foundation than they did about Clinton’s? Likely because Clinton’s candidacy threatened traditional gender roles. For many Americans, female ambition—especially in service of a feminist agenda—in and of itself represents a form of corruption. “When female politicians were described as power-seeking,” noted the Yale researchers Victoria Brescoll and Tyler Okimoto in a 2010 study, “participants experienced feelings of moral outrage (i.e., contempt, anger, and/or disgust).”  Cohen’s admission makes it harder for Republicans to claim that Trump didn’t violate the law. But it doesn’t really matter. For many Republicans, Trump remains uncorrupt—indeed, anticorrupt—because what they fear most isn’t the corruption of American law; it’s the corruption of America’s traditional identity. And in the struggle against that form of corruption—the kind embodied by [the alleged murderer] Rivera—Trump isn’t the problem. He’s the solution.

Ouch.  Anyways, even if everything stinks, we should at least see what the polls say.

Source: CNN/Trump Univ. [duh], n=28,392

Thursday, December 06, 2018

Wakanda-nomics, or the "Resource Curse"

"If you say one more word, I will feed you to my children.... I'm just kidding, we're vegetarians."

So I saw Black Panther back in April, and I took the time to watch it again on cable -- it really was that good.  Especially for a Marvel flick, BP easily surpassed the Avengers: Infinity War -- which I expected to be bad, but it exceeded my expectations.  What was really the point of IW, other than to make way for future sequels?

It was a stupid movie, with zero plot development whatsoever.

Anyways, back to Black Panther, the premise is quite intriguing: in the fictitious African country of Wakanda, an ample supply of super-rare metal "vibranium" (which fell to earth in an ancient meteor strike) blesses the nation with enormous wealth and the most advanced technology in the world. Having never succumbed to hostile outside forces, Wakanda has been free to develop its economy in complete isolation from the outside world.

The "Resource Curse"


So that's Hollywood. 

Now look at the real world: history is littered with economies that never escaped the Resource Curse (aka "Dutch disease"), where mineral riches keep a country poor by crowding out value-additive sectors or ushering in corrupt/predatory/totalitarian regimes.  Of course some have fared okay -- typically if they made their natural discoveries later in their economic development: Norway, which started developing its massive natural gas reserves in the 1970s, comes to mind; also Botswana, one of the largest producers of diamonds.  Angola, with its game-changing crude oil discovery in the 1960s, still struggles to diversify away from petroleum, but it has thriving young population and democratic political stability.  Angola's fate is a stark contrast to its neighboring Democratic Republic of Congo, which is:
  • most famous for its longtime president Mobutu Sese Seko (dubbed "the archetypal African dictator"), with his lavish palace in the jungle, and the great war that beset most of sub-saharan Africa between 1997-2003, killing over five million and displacing many more.
  • remains not very democratic to this day (despite its name change from previously Zaire), earning the "semi-presidential authoritarian dictatorship" status from Freedom House, under current president Joseph Kabila, who stirs ethnic violence for political gains
  • endowed with world-leading natural resources, including cobalt, an important material for batteries powering future electric vehicles
  • Despite the mineral wealth, the Congolese are among the world's poorest people, consistently having the lowest nominal GDP per capita in the world. The DRC is also one of the twenty lowest-ranked countries on the Corruption Perception Index.
 Ouch.

General Mobutu's palace in DRC, ransacked and reclaimed by the jungle

Other examples abound, as the Economist writes, "centuries of copper mining have only raised Chile [with its largest copper reserves on earth] to the level of Kazakhstan and Croatia in purchasing-power terms.  Indonesia's world-beating endowments of gold, coal, nickel, tin and copper have resulted in an income per capita somewhere between Albania and Tunisia."  Notably, resource-rich countries with large populations (e.g. Congo, Chile, Brazil, Indonesia) tend to do worse than those with smaller, more manageable population (Norway).

So how can countries escape the resource curse?  Again, it's worth taking lessons from renowned political scientist Stan Lee:

Upstream and downstream investment around natural resources

It is very tempting for resource-rich countries to be satisfied exporting raw ores, fattening their elites while citizens remain hungry.  Wakanda, on the other hand:

[...] not only mines vibranium but designs and builds a dazzling variety of downstream applications. They include a nano-tech panthersuit that absorbs blows and bullets, then echoes the energy back against its source. [...] The applications extend to weaponry and transport, such as the royal talon fighter that zips from Wakanda to Oakland, California, and the vibranium rail above which high-tech chariots levitate.

“Wakanda’s upstream, midstream and downstream mineral sector are entirely controlled by Wakanda itself,” points out Nicola Woodroffe of the Natural Resource Governance Institute, a think-tank in London. It is as if Botswana not only mined, cut and polished diamonds, but also designed and produced the world’s diamond necklaces, drills and bearings. It is as if Norway had a monopoly on oil, petrochemicals and plastics.
This is actually harder in real life: Countries blessed with natural resources are not always blessed with labor, capital, skills and infrastructure required to succeed further down the production chain. The best place to cut and polish diamonds is not Botswana, with its [small] population of 2.3m, but coastal India, which can bring many more hands to bear.

Economic diversification

For example, diversifying away from oil is a major tenet of Saudi Arabia's Vision 2030 program (lord only knows what's gonna be left of this one).  While many leaders talk about broadening their economies, it's very hard to adopt new skills, and build up industries, instead of just keep taking things from the ground. Writing about Africa for Brookings, Mariama Sow and Amadou Siy explains:
[...] mineral exports made up more than 90% of exports in Equatorial Guinea, Nigeria, and Angola. In addition, the high dependence on oil exports in certain African countries has led to misaligned exchange rates, the decline of non-resource sectors, political authoritarianism, conflict, and economic inequality.

While none of the countries cited above mirror Wakanda’s isolationism, the fictional country shares many similarities with Norway and Botswana. Indeed, in the real world, such a fate is not inevitable in every resource-rich African country. For instance, Botswana [...] has not fell victim to the resource curse and has done so by implementing a three-pronged method, as highlighted in a 2012 African Development Bank brief. First, Botswana pursued economic diversification—although with mixed success. Second, the country established a fiscal rule that separates expenditures from revenues and thus shields expenditures from fluctuations in diamond prices. Third, it invested diamond revenues for the use of future generations—using a sovereign wealth fund called the Pula Fund.  Outside of Africa, Norway has been praised for its management of natural resources, largely based on the investment in its sovereign wealth fund. In addition, Norway spends 4% of the fund on public projects. In the comics, [Wakanda] sets aside a generous portion of vibranium revenue to create a social safety net.

In addition, while oil and diamonds are not as versatile as vibranium and cannot be used individually to promote the technological advancement of resource-rich African countries, there exists a space for the revenues they generate to be reinvested in technology and manufacturing, among other sectors.

Leadership matters

Some nations have the great luck to be lead by FDR, or Lee Kwan Yew.  Others are stuck for decades with Robert Mugabe, Gaddafi, Chavez/Nicolás Maduro, or Saddam Hussein.  So the lesson to draw from Black Panther is that while mineral deposits can bring in wealth, on their own they're not enough. The real wealth of Wakanda wasn't vibranium, but its good governance.

Recently colonialism is back in style -- not the Vasco de Gama/Chris Columbus western imperialism -kind, but the "soft power" debt trap -kind.  China's Belt and Road Initiatives aim to massively build up global infrastructure to secure raw materials and logistics to ensure the country's manufacturing supremacy. The Communist Party especially likes to prey on nations ruled by authoritarian leaders or one-party rules, with lackluster checks and balances, or distressed economies with no other viable alternatives: so far there's several parts of Africa (Zambia, Djibouti), South Asia (Sri Lanka, Pakistan), Europe (Greece) and South America (Venezuela), who else wants to be a Chinese (economic and military) colony?

So we shall see during the next US election cycle, where in lieu of a boring debate, Joe Biden challenges Trump to a deathmatch next to a waterfall.


Saturday, December 01, 2018

Why crude oil remains volatile

Crude oil prices: 2014-18

The past decade has been very tough for "energy experts", with a farcical series of really really bad calls — starting in 2008 with an oil price spike to $147/barrel and a consensus that the era of low prices was over because of a fossil fuel shortage.  Instead, the shale revolution came along in North America and, by 2014, it was widely expected to usher in a US industrial renaissance.  Instead (another bad call) prices went into a tailspin, finally crashing below $27/bbl.  The carnage included dozens of energy company bankruptcies, a recession for several industries, and thousands of job losses.

In Q1 2016 market prices tanked to $30/bbl and pundits then promised the end of the commodity's volatility.   Shale, according to many, has become the new bumper: North America can pump as much as it wants when prices are high, or as low as it wants when prices are down.  Some even predict the end of OPEC monopoly power.

That was then.  Fast forward to November 2017: US crude production did in fact exceed 10mmbpd for the first time since the 1970s.  Despite the continued growth in output, just last September Brent crawled back up to $73/bbl, before inching down when President Trump announced details of his Iran sanctions, awarding 8 countries Significant Reduction Exemptions -- basically allowing them to continue importing Iranian petroleum products.

So what the heck is happening to oil prices?  The US has already exceeded the output of Saudi Arabia (although it is still a net importer), why do we still care about the Middle East? Why are those countries still affecting our prices at the pump? How can all the experts be so wrong?  Does that mean crude will continue to be volatile forever? That American shale is no game-changer?

Let's dig deeper.

Source: US Energy Information Administration

North American shale producers are private sector

Shale producers are nimble, armed with the latest drilling technology developed only in the past 10 years.  But they're *companies*.  They are solely profit-driven, and their shareholders (as well as banks, financiers) need conviction to boost production.   In fact, it's illegal under antitrust laws for independent companies to gang up and set prices OPEC-style.  And this is an issue because....

Shale isn't really as flexible as advertised

Shale oil production, using novel technology called horizontal drilling or fracturing ("fracking"), is costly, and drillers will only produce as long as selling prices exceed costs.  Worldwide average cost of production is approx $70/bbl, meaning that at current prices, at least half(?) of American production capacity may be unprofitable.  Investors decry shale producer's overreliance of low interest rates, and they are demanding more emphasis on profitability -- which would likely lead to abandoning less economical wells, thus lowering overall production.

Furthermore, shale wells are notorious for their rapidly depleting yields: producing most of the output upfront and drying out quickly after.   The top five shale fields in the US reached a monthly decline rate of -518,000bpd in September 2017 -- that's like 5% of national production lost in just one month.  

Shale fields are rapidly declining

So producers need to continuously invest in exploration, drill lots and lots of wells, just to maintain -- let alone increase -- production levels. After a lengthy period of low prices, higher cost producers are either consolidated or driven out of the market, leaving a smaller number of survivors.  Saji Sam et al writes on Harvard Business Review:

While major oil companies plan to dramatically increase shale production in the Permian Basin in Texas and New Mexico, U.S. shale production alone is unlikely to be enough to satisfy the world’s growing oil needs—especially when oil reserves in shale may only get us another 10 years of oil and not necessarily 50. Oil companies will need to develop both new conventional and unconventional crude oil resources to keep up with current demand for roughly one million more barrels of oil every year in addition to replacing the approximately four million barrels lost annually as reservoirs are naturally depleted. In total, we estimate that the oil and gas industry will have to replace about 40% of today’s oil production over the next seven to nine years. 
That means difficult decisions lie ahead for independent shale producers, national oil companies, and the major integrated companies. While they can start to tap into the global reserves of shale oil, which exist literally everywhere, developing the reserves in most places from China to Argentina will require a significant investment to develop the shale ecosystem and supply chains needed, in addition to the infrastructure to gather, treat, transport, and store the crude oil. Or they can develop conventional reservoirs where it will require long-term investments in new technologies to bring the cycle times and costs more in line with those of nimble shale producers. Most major producers with large balance sheets will likely hedge their bets and attempt both.
Most recently, even shale shows that it is not immune to low prices.  Fracking activity in the massive Permian Basin shows gradual deceleration throughout H2 2018.  “Looking at preliminary data for November, we see evidence that seasonal activity deceleration has likely started in all major plays except Eagle Ford. There has been a considerable slowdown in Bakken and Niobrara in November, our analysis shows," according to research by Rystad Energy.  The report notes that a lot of shale drillers are not profitable with oil prices below US$50/barrel; breakeven prices on the very best wells can run ~ US$30-40s per barrel, but industry-wide all-in costs translate into much higher breakeven thresholds. The rig count has also plateaued after growing sharply in H1 2018.

Saudi Arabia still holds the key 

Policy still matters.  Washington has always been ambivalent about its policy goals, whether it is energy independence or energy security, as we saw in 2007 when George W Bush signed into law the "Energy Independence and Security Act"  Well if the goal is energy independence, i.e. favoring domestic supply or imports from NorAm or European countries over Middle Eastern, the US is well on its way.  But if it's energy security, i.e. guaranteeing secure supplies at stable (=low) prices despite their origins, then it's unclear if the shale revolution is net positive or net negative towards that goal.  In recent history, policymakers have lamented the country's reliance on imported oil, while constantly bowing down to consumers' pressure and demand for cheap energy.

Furthermore, the supply-demand dynamics of oil is different from those of other commodities.  The direction of crude prices is not dependent on the amount of total production; instead it depends on the marginal producer i.e. whoever can raise or cut its output on short notice.  US and Canada are not marginal producers, because their output trends are highly predictable.

In the meantime, the Russia, Saudi and other OPEC national oil companies (NOCs) are willing to put other considerations above mere financial profits.  King Salman and Vladimir Putin (their two countries are more aligned now than ever) on their own can drive prices, increasing or decreasing production on a short lead time because of their less cumbersome traditional vertical wells.  Riyadh in particular has a lot of influence, as it is the de facto leader of OPEC and has the largest share out of the global slack capacity estimated at 2mmbpd.  More and more lately, Saudi (the country) gets credit for anything good in the oil world, while OPEC (the faceless organization) becomes a convenient enemy to be blamed for anything negative (e.g. high prices).

So beyond the economics, geopolitics becomes the important issue affecting oil prices.  Keith Johnson of Foreign Policy writes:
The United States currently produces 11.4 million barrels per day, with forecasts of more than 12 million barrels a day next year. Since the beginning of the shale boom a decade ago, the United States has essentially discovered the resource equivalent of another Iran and a Kuwait trapped in Texas and North Dakota shale formations. 
But none of that makes the United States immune to oil-price shocks or able to impose its will on other countries—or even able to add many arrows to its geopolitical quiver. Regardless of how much oil America produces, it’s still a global oil market. That means that prices for gasoline in the United States are largely determined by what happens with the other almost 90 million barrels of oil produced and consumed every day around the world. [...] 
The biggest reality check for policymakers bewitched by America’s record levels of oil production is that sheer size doesn’t matter that much. Saudi Arabia produces less oil every day than the United States, but it plays an immeasurably bigger role in the world oil market than America does or ever will. That’s because Saudi Arabia has most of the world’s spare production capacity, millions of barrels of oil that can quickly be brought on line (or shut down) as the government orders to keep prices around an elusive Goldilocks level. 
That ability to open or close the oil spigot on demand is “real leverage,” said Bordoff, who was a White House energy advisor in the Obama administration. “And that’s not something the United States has, or likely ever will. Real influence stems not just from how much you produce, but from the ability to quickly add or subtract supplies, and really that is only Saudi Arabia.” 
And no matter how much oil the U.S. pumps, that gusher alone won’t free the United States from involvement in the Middle East.  Decades ago, the United States was interested in keeping stability in Saudi Arabia and the Persian Gulf region both as a source of oil imports for itself and as a lubricant for the global economy. While America imports much less Persian Gulf oil than it ever did, it is still heavily invested in defending Saudi Arabia and other Gulf states, limiting instability in big oil-producing countries, and protecting critical sea lanes such as the Strait of Hormuz. 
“Shale oil means that U.S. dependence on imports is now much less, but an increase in gasoline prices [from a Saudi supply shock] would be very unpopular. So we have to work toward a deal with the Saudis,” Henderson said, even if it means swallowing the story that dissident journalist Jamal Khashoggi’s killing was not authorized by Saudi Crown Prince Mohammed bin Salman.