Oil and Petroleum Products

U.S. presidential jawboning about oil prices has continued to grab headlines this week, with President Trump telling Fox News on Sunday that the Organization of Petroleum Exporting Countries (OPEC) is manipulating the oil market and “better stop it.” The statement followed a previous tweet explicitly confirming a phone call with King Salman of Saudi Arabia regarding the kingdom’s agreement to put even more oil on markets than announced last week to counter turmoil inside Iran and Venezuela. The U.S. president’s unconventional approach contributed to an almost $2 drop in the price of international benchmark Brent crude Monday, as market psychology appeared to shift. That will likely be viewed favorably from the White House. But the transactional discussion offered on U.S. television that oil producing allies should offer accommodative oil export policies because “we are protecting them” laid bare a quid pro quo that could be problematical down the road given recent escalation of regional proxy wars. The United States may be encouraged by ongoing protests in Iran but turmoil can be unpredictable, and U.S. national interests can vary in certain respects from those of its allies. Close study of recent pernicious effects of cyclical swings in oil prices lends itself to sympathy for President Trump’s frustration. Given the circumstances of the financial turmoil and oil price collapse that followed the oil price spikes in 2008 and 2014, it should be pretty unnecessary to have to remind kings, presidents and emirs that an unstable oil market is bad for everyone, including their own people. For all the talk about resource wars, no shots were fired over oil when prices were rising in 1973, nor when prices hit $147 in 2008. That’s probably because for all of the handwringing about the oil “weapon,” commodity prices eventually correct themselves naturally like gravity, even in the face of politically inspired cutoffs. For OPEC, history seems not to be a teacher. Fuel switching, new drilling techniques, and structural destruction of long run demand reassert themselves when oil prices go up. That was certainly the explanation of the price collapse in 2014 to 2016. Moreover, in the future, countries like the United States and China are increasingly more likely to invest in alternatives rather than go to battle over resources either diplomatically or literally, especially in today’s digital revolution, where the potential for success is so high. The fact that few countries are willing to spend a trade chit on Iranian oil is a sign that times have changed. Oil producing countries are under budgetary pressure but, at least in the case of the Gulf countries and Russia, not enough to reverse course on high military spending and foreign adventurism. Venezuela should be the poster child for what could go wrong when governments raid the coffers of their national oil companies. The sad truth is that such suffering doesn’t actually seem to lead to regime change, just more repression. U.S. neoconservatives don’t seem to be learning that lesson either.   That said, I believe oil prices have entered a new phase where the traditional features like business cycles and geopolitics that normally dictate the ups and downs of oil prices are now intersecting more integrally with structural technological change. Digital disruption could bring a long run downward trend in energy costs over the coming decades, but that doesn’t necessarily mean “lower for longer” oil prices will be true for any particular month or year. If anything, digital innovation could be making the swings of the oil boom and bust cycle worse by shortening the time scale between up and down oil price phases. Private oil companies can bring new oil fields online with a rapid pace. Demand saving technologies are also readily available. To the extent that digital innovation does both simultaneously and seals a negative fate for individual national oil companies that cannot compete effectively in this new global context, it could bring higher oil prices at sharp intervals as oil supplies get disrupted from places where new investment is lagging, like Angola and Venezuela. In recent years, many important national oil companies (NOCs) have found themselves a victim of deteriorating budgets or violence—industries in Libya, Yemen, Syria, and Venezuela have been decimated. NOCs in Mexico, Brazil, and China have succumbed to localized corruption problems. The list is likely to expand over time. During periods when a major oil supplier goes down, OPEC (or some other group of oil exporters) are bound to find themselves with market power. That is why a volatility thesis based on the idea that producers can no longer interfere in markets is also likely incorrect for the time being, and the U.S. administration is smart to think about how to handle manipulation. Volatility can still come from exporter consortium attempts to goose prices. It may just be lumpy as technology continually improves to make itself felt and more frequent as digitization of everything from oil well development to energy efficiency gains pace. But if and when another major producer goes down (this time likely Iran), those left standing may attempt to garner some short-lived revenue as OPEC just did on the backs of Venezuela’s collapse. In the current upward business cycle, which has been stronger than expected, OPEC has certainly been able to jack up prices temporarily, unfortunately in all likelihood ensuring current global economic prosperity won’t last for long. For Russia, a culture that experiences long suffering of everyone together, instituting a downward global economic cycle could feel cathartic. For Iran’s hardliners, the temptation to push prices too high through acts of violence is likely a reflex to proving to others (read, American neocons) that they are still a force to be reckoned with. In the grand scheme of things, blowing things up to raise the price of oil will hasten the return of low oil prices which hurts the Iranian economy. Iran’s government has been preaching solidarity towards a resistance economy, albeit that message is looking increasingly uphill. Still, exigencies being what they are, the United States needs to be prepared to consider policies beyond calling upon Saudi Arabia, whose oil industry has struggled in recent years to add extra capacity. It is yet another reason why the United States should stay the course on advanced automobiles and other energy efficiency policies as well as modernizing the U.S. Strategic Petroleum Reserve. Rising U.S. oil production is not the same quality of oil as that of the Middle East, Venezuela, and Mexico so net flows in and out of the United States are necessary based on the current equipment in the U.S. refining industry which was designed to run imported oil. Sadly, recent consolidation of the SPR has left the United States in a worse position to help U.S. Gulf coast refiners. That problem needs to be revisited next time oil prices cycle down.   By the way, I am not conceding that the structural lowering of energy costs through digitization won’t be material. But it could entail a multi-year process. Every time oil prices go up, as they inevitably will repeatedly in a cyclical fashion, the deployment of new advanced technologies will accelerate accordingly, not only because we are in a period of revolutionary technological change, but also because other imperatives, like climate change and energy security, will give forward looking governments even more compelling reasons than the oil cycle to diversify away from oil. The United States needs to take that on board in considering its long run economic competitiveness. The U.S. Department of Energy’s new program for regional energy innovation, while underfunded, is a good start. Energy producing countries are starting to consider this digital structural change in their official thinking because the higher oil prices go, the more likely China and India are going to hasten policies to eliminate future oil demand, raising the chances of lower oil demand by the time 2025 or 2030 arrives. Governments are putting the infrastructures in place to ban the sales of internal combustion engines. European populations and their capitals care about climate change but renewable energy has also lessened the exposure to Russian energy. China is considering a ban on gasoline cars as part of its industrial policy. OPEC officials can say officially that they don’t believe in the peak oil demand narrative but a rise in oil prices above $100 now makes it all the more plausible than a drop to $20. At $100 a barrel, a ride sharing app that calls forth an electric ride will increasingly make sense in a world where new technologies are driving down the costs of solar, batteries, and even natural gas and clean coal. I am guessing that Saudi leaders understand this long run oil cycle threat. That is why they keep talking about decadal agreements with Moscow to stabilize oil prices. That’s good news for Vladimir Putin. But not because he believes he can ameliorate the oil cycle. He is just guessing that being the senior partner in an OPEC-like grouping will restore Russia to the stature it deserves. He is likely correct about that. It’s getting him yet another reset summit with the United States as energy has done several times before. The bad news for U.S. jawboning on the price of oil is this: There are two ways to get out of this painful pattern of oil price shock repetition and neither is likely to happen any time soon. Oil producers could start by spending more of their oil cycle windfalls on economic reforms, education, food and water security, and not buy as many armaments. For its part, the West, China, India, and ASEAN could make sure digital innovations like advanced and autonomous vehicles, drones and online shopping lower the oil intensity of their economies instead of the opposite effect so that economic growth does not promote as sharp an upward oil price cycle as in the past. I am not optimistic about either of those two things happening right away. For the time being, it will be hard for any of the parties concerned, to eliminate the oil cycle, including the U.S. president.  

At first glance, last week’s Vienna Group meeting—that is the Organization of Petroleum Exporting Countries (OPEC) plus non-OPEC producers including Russia—seemed to have resolved some thorny issues. The producer group confidently announced it would increase oil production to stabilize the global oil market. Iran, which had previously threatened to boycott any agreement in protest, appeared to acquiesce to the joint OPEC production increase communique. That may have seemed like a win for the Trump administration, which had hoped to box Iran in to the negotiating table on a host of issues, including conflict resolution in Yemen and Syria, when it cancelled the nuclear deal and reimposed sanctions on Iranian oil exports. Iran had suggested OPEC take a more strident stance on the U.S. policy. Not unexpectedly, U.S. Gulf allies, under pressure from U.S. President Donald Trump’s tweets and back door diplomacy, offered a moderate approach, which will include significant production increases by Saudi Arabia, among others. For those who might construe Iran’s relatively mild public statements following the OPEC session as a sign that Iran had no real cards to play, a glance at regional conflicts might indicate otherwise. Immediately following the OPEC meeting, Syria’s army, which has a history of on the ground collaboration with Iran, broke a standing cease fire agreement with the United States and Russia and advanced on the southern province of Daraa. At the same time, Iranian-backed Houthi rebels from Yemen fired missiles into the Saudi capital city of Riyadh. Both could be taken as a sign that pressure on Iran to deescalate its participation in regional conflicts isn’t producing immediate results, increasing the probability that the Trump administration will actively press allies to buy less oil from Iran.  These events raise important questions about what Tehran’s response will be in the coming days and months and what leverage the United States really has to alter facts on the ground. Granted, a twitter report suggested that Iran was unhappy with Russia’s collaboration with Saudi Arabia at OPEC and Russia’s stated posture on southern Syria. Ironically (or maybe not ironically at all) the whole complex situation could be an oil win-win for Moscow. Russia’s deal with Saudi Arabia to increase oil production achieves multiple benefits for the Kremlin. It demonstrates a willingness to consider U.S. interests but at a low cost to Russia. It helps preserve Russia’s long run influence on Saudi Arabia. And the chances that Russia will lose revenue as a result look slimmer, if Iran is dissatisfied with the situation. Russia is likely making a good bet that frustration in Tehran could lead to an escalation of Mideast conflicts, which in turn keeps oil prices lofty, giving Russia even more money since it is increasing its export volumes. A disappointed Iran could also be less apt to participate in conflict negotiations with the United States, leading to tighter sanctions enforcement, which ultimately reduces competition to Russian oil and gas companies from Tehran in long term natural gas markets for Europe. In recent weeks, French firm Total, which is likely pulling the plug on its South Pars natural gas project in Iran as a result of U.S. sanctions, ventured to Russia to sign a deal to participate in Novatek’s LNG-2 Arctic gas project. Europeans firms that are no longer active in Iran are also partners in the controversial Nord Stream 2 natural gas pipeline proposed to extend from Russia to Germany. That begs the question: What next moves make sense for Iran? The Iranian government remains under pressure from its own citizens, who took to the streets again in large numbers this week. But even with this intense internal pressure, it’s hard to see the logic behind the belief that the Iranian regime might simply just fold its cards on its regional ambitions. Even if Iran would consider reopening political negotiations with the United States and its neighbors to satisfy popular domestic sentiment—protesters have been chanting their government should spend more money at home than abroad—the ruling hardliners will likely want to gain negotiating leverage before doing so. That conflicts, for example, with the thesis that the battle for the Yemeni port of Al-Hodeida could set the stage for successful peace negotiations. Iran has many tactics at its disposal via its regional proxies and via asymmetric warfare that could be utilized to make its own interests appear more salient. Oil prices jumped back up again early this week despite reports that Saudi oil production is surging to 10.8 million barrels a day (b/d), partly on news of an oil production snafu in Canada. But realistically, that loss of Canadian barrels was small at 350,000 b/d and temporary through July. More likely, markets are jittery because it’s hard to construct a narrative on how Iran, Saudi Arabia, the United Arab Emirates, Israel, Russia, and the United States will navigate conflicts on the ground in the coming months.   

This is a guest post by David R. Mares, the Institute of the Americas chair for Inter-American Affairs and professor for political science at the University of California San Diego and the Baker Institute scholar for Latin American energy studies at the James A. Baker III Institute for Public Policy at Rice University. Mexico’s energy reform has taken important first steps but to come to full fruition, several additional critical reforms remain to be designed and implemented, including another constitutional reform. The task of adopting and implementing new reforms is all the more difficult because not only did the government of Enrique Peña Nieto oversell the short-run benefits of the package of reforms, including energy, adopted at the beginning of his term but also his administration is linked with other, broader political failures, including corruption scandals and the mishandling of the economy. Peña Nieto’s missteps have wrested credibility from the political system and make it unlikely that a mainstream candidate could put together a governing coalition with sufficient political support to adopt the next stage in Mexico’s energy reform. That’s why a political outsider would be more uniquely positioned to further energy reform, should that be a credible political choice. Once Andrés Manuel López Obrador (AMLO) wins the election, he could have the credibility to put together a coalition with the support of the Mexican people that could justify the next stage in Mexico’s energy reform.  Whether he will do so remains an open question, but the next stage of the energy reform is unlikely to happen without him. Stage III of the Mexican Energy Reform The first stage of the energy reform in Mexico was President Calderon’s 2008 reform that was designed to strengthen Pemex without breaking Pemex’s monopoly position. After a fractious national debate, the reform was adopted because it was promised it would make Pemex an effective national oil company. The failure of that reform led to stage two in Mexico’s energy reform, which was the constitutional reform instituted under President Peña Nieto. This constitutional reform was intended to make Mexico’s energy sector more efficient and able to meet the power, gas and oil needs of a growing economy, with a small nod to generating more clean energy. By design, it allowed Pemex to lead the process by permitting the national oil company (NOC) to select the best properties for its own exploitation in Round Zero before opening the bidding process to companies other than Pemex. The first auctions for oil and gas blocks did not go well, partly due to falling oil prices and partly because terms reflected Mexico’s relative inexperience with auctions. However, more recent auctions have gone extremely well. Foreign capital has committed to investment over the life of their contracts of almost $150 billion, and some new fields have already been discovered. Winning bids including seventy-three companies from twenty countries attest to the interest in Mexico’s energy future. There’s been less success in developing the infrastructure to get new energy and more imported energy to end users and the government has not solved the theft from Pemex oil pipelines or Pemex’s CAPEX and its pension liabilities. Given Pemex’s dominant position, the company needs to develop a better business model. To generate capital, it needs to take the steps taken in Brazil, Colombia, authorized in Peru, and maintained in Argentina after the renationalization of YPF: privatize some stock in the NOC. The sale of the stock would require a constitutional amendment, but would not put Pemex in the hands of private equity holders and its stock price would provide a basis for evaluating how well Pemex was reforming. The government and Pemex have already modified the weight of the Petroleum Workers’ Union on Pemex’s governing structure and balance sheet, but the pension obligations that were made with Pemex need to be restructured and funded through other mechanisms. Building a New Political Coalition for Energy Reform While these necessary reforms have a technocratic nature, they cannot be adopted by technocrats or political leaders by simple decree. The first two stages of Mexico’s energy reforms rested on the backs of strong political coalitions behind them. The next stage will also require a political coalition. Unfortunately, the political system that generated the first two reforms has been discredited in the eyes of the Mexican people by actions both within and outside the energy sector. The clearest sign of disappointment with the process is AMLO’s widely expected victory in a few weeks. AMLO represents a new political coalition. López Obrador will need to convince that new coalition that when his government continues to attract private capital into Mexico’s energy sector, the benefits of a strong and efficient energy sector will benefit the Mexican people and not go into the hands of corrupt officials or the economic elite. His restructuring of Pemex needs to emphasize that the company is a means to promote the country’s interests in a rejuvenated energy sector, not to benefit oil workers and the PRI party at the expense of Mexican society. So What Will AMLO Do? The three pillars of the Mexican economy over the past decades have been manufactured exports under NAFTA, remittances from Mexican migrants to the United States, and oil exports. AMLO has an ambitious agenda for generating public goods as well as rewarding the groups who supported his victory. The income earned from manufactured exports under NAFTA will likely stagnate, if not actually decrease, even if NAFTA is successively renegotiated, and could decrease more substantially if NAFTA is terminated. Remittances have probably peaked because Mexico’s demographics and growing economy result in fewer Mexicans going to the United States for work; U.S. policy will likely enhance that decline. Oil exports have fallen as reserves and production have been falling, and it will take up to ten years for significant new reserves to be discovered and produced. Those efforts will require companies following through on their promised investments as well as new investment.  AMLO will need an energy sector that generates revenue during his six-year term and credibly paves the way for greater future benefits that will be distributed to the Mexican people. Such nationalist messages could strengthen his political coalition as he implements his reforms of what has become an illegitimate political system. AMLO’s political discourse radicalized when López Obrador and half the Mexico electorate believed that he had been deprived of previous presidential election victories in the extremely close and controversial election in 2006 and a close second in 2012. But when López Obrador was mayor of Mexico City from 2000-2005 he was pragmatic, worked with the private sector, and was perceived as an effective leader. Analysts say lack of technology and funds required to modernize Mexico’s oil sector could lead to an additional output plunge of 700,000 b/d by 2020, unless the next administration takes some definitive action. Output is expected to rebound slightly this year and is currently averaging 1.9 million b/d, down roughly 5 to 10 percent from 2017. Pemex is targeting 1.95 million b/d for 2018. Pemex’s natural gas production has also been declining, and fuel theft has plagued the country’s refining sector. López Obrador has said he will not seek a constitutional change to reverse the 2014 energy reform and will respect the legitimate contracts signed under the reform. There is hope that AMLO can be like President Lenín Moreno of Ecuador and implement reforms from the left with a significant role for the private sector. Will AMLO take this path? We won’t know until he begins to govern, but the Mexican economy and the Mexican people need him to enact reforms that allow Mexico to reap the benefits produced by their energy sector.

As energy ministers from major oil producing countries gather in Vienna this week to discuss the stability of global oil markets, the variables that will dictate outcomes have rapidly shifted. Pre-meeting narratives that previously focused on the appropriate level of external private investment—either too much, in the case of U.S. shale producers, or too little, in the case of private sector international oil companies—look woefully inadequate to explain current oil market conditions. Instead, how to deal with the accelerating political and institutional breakdown of several national oil companies across multiple continents now stands out as a pressing structural challenge for the Organization of Petroleum Exporting Countries (OPEC) and U.S. policymakers alike. I highlighted this problem vis a vis Venezuela last March. Stated intentions to replace lost barrels from Venezuela and potentially Iran has brought acrimony back into the OPEC fray. U.S. plans to sanction Iran’s oil exports are the most recent publicly visible geopolitical irritant, but the history has shown that eliminating the endogenous geopolitical swings in the oil cycle takes more intervention and planning capability than even the most well intended partnerships can master, much less nation states whose relations have been punctuated by direct military threats or proxy wars. Talk of a sustained Saudi-Russian alliance that would be effective in eliminating the factors that could cause gyrations in oil prices seem overstated. All of OPEC’s fourteen members have flagship national oil companies (NOCs), that is, state-controlled entities that oversee their nation’s energy industry. Other important oil producing countries such as Brazil, Mexico, and Russia also have NOCs that dominate their oil and gas sectors. Many of these national firms are facing structural budgetary, corruption, or other internal political challenges, including attacks on facilities by local rebel groups, criminal gangs, terrorists, cyber hackers, and/or armed combatants in ongoing military conflicts.   As a result of these ongoing NOC difficulties, supplies from several OPEC countries, Venezuela, Libya, Iraq, Iran, Nigeria, and Angola have been volatile in recent years. In particular, the collapse of Venezuela’s oil industry and a slide in deep water oil production from Angola have been more instrumental to the market success of OPEC’s agreement with Russia and other non-OPEC oil producers than the producer group’s “planned” cuts in reducing excess inventories by almost 200 million barrels since early 2017 and pushing Brent oil prices up from about $55 to $75 a barrel. Cornerstone Macro noted in a recent report that oil stocks in industrialized countries experienced a counter seasonal decline of three million barrels in April, as compared to the more customary twenty million buildup on the heels of reduced global supplies and more robust than expected U.S. and global economic growth. While Saudi Arabia, Kuwait, the United Arab Emirates, and Russia did make promised output reductions to help tighten oil supply over the course of 2017, unintended production declines continue to be more material. Not only did oil output declines from Venezuela, Algeria, Angola, Ecuador, and Gabon amount to losses of close to one million barrels a day since early 2017, according to Citibank, markets have come to expect accidental supply disruptions from conflict prone oil regions in Libya and Nigeria. That reality prompted one prominent energy columnist to conclude that OPEC has become “an increasingly unreliable supplier of an essential commodity.” Whatever the outcome of the OPEC-non-OPEC Vienna group’s deliberations this week, it could turn out to be only a temporary fix to this more structural NOC problem than generally understood. Right now, OPEC spare productive capacity is highly limited. Saudi Arabia and Russia together would probably have difficulty adding much more than 1.5 million barrels a day to markets through the end of the year. Ongoing problems in Libya and Venezuela, combined with renewed sanctions on Iran, could possibly take more than that off the market. And what if a new supply problem emerges? Saudi Arabia and Russia are discussing longer run cooperation. What would that look like in a world where uncertainty plagues many national oil companies around the world, including, perhaps, their own firms? Does budget-constrained Saudi Arabia agree to divert billions in tandem with Russian firms to expand additional oil fields’ productive capacity down the road to capture future market share that could be available as NOCs in other countries continue to fail? If Saudi and Russia make capacity expansion pushes, what becomes of OPEC as a coherent organization? Will the Vienna group need to shrink in number? Conversely, if Saudi Arabia and Russia choose to make only a quick stop-gap measure just to keep markets from overheating in the next few months and don’t invest in new capacity, will they sacrifice future revenues to private oil and gas investors who can bring on capacity more quickly if NOC capacity continues to falter? The 2014-2015 price collapse has proven that a year or two of low prices won’t be sufficient to knock out growth in U.S. tight oil. That means restarting a price war in the short run isn’t an ideal option for OPEC, especially if those flooding the market do not appear to be able to survive the prolonged revenue drop that would make a price war option an effective threat. And my guess is that low oil prices also aren’t likely to be sufficient to knock out capital investment by the major international oil companies (IOCs). Those companies have started to pivot their strategies to direct their capital spending to activities that will be more productive than those pursued over the last decade when booking new large reserves was the priority. Rather, companies are focused on spending programs that can bring higher production more quickly, such as directing capital spending to shorter cycle field extensions and satellite field developments that can bring first oil into the market rapidly within one to three years (as opposed to mega-projects that took near a decade to develop). Companies are also developing new techniques to reduce the cycle time and costs on challenging green field projects.  Moreover, innovation in the private oil and gas sector is increasingly de-risking the landscape for future oil and gas investment for private investors. As technology improves, companies are going to be able to squeeze more barrels out of all kinds of existing known in place source rock, not just oil and gas from shale formations. The most recent example is the Austin Chalk where U.S. companies are rushing to test new drilling techniques to positive results.   There’s an additional rub. Saudi and Russian efforts could have trouble influencing intermediate oil demand trends. Even if the Vienna group takes production increase decisions this week that staves off any economically crippling oil price shock that could have sent oil demand into a tailspin, caution signs are already emerging that oil prices even at $70 a barrel are creating some economic headwinds. Markets are already nervous about trade wars. Reports are emerging that high fuel prices are hindering economies within the Euro zone and elsewhere. Rising fuel prices are visibly creating economic and political problems in India and other developing economies. And the United States needs strong demand growth elsewhere to manage its own economic issues. In the case of an unexpected global economic slowdown, OPEC supply disruptions could take a back seat again to “lower for longer” story lines about failing oil demand (potentially in the midst of rising U.S. production in 2019), which could make any discussion of a more permanent, workable Saudi-Russia oil alliance even harder to envision.

It is often said, perhaps with some hyperbole, that Iran’s nuclear deal with world powers was the best hope for conflict resolution in the Middle East. Its architect John Kerry argues instead that the 2015 deal’s limited parameter of closing Iran’s pathway to a nuclear weapon is sufficient on the merits. The Trump administration is taking a different view, focusing on Iran’s escalating threats to U.S. allies Israel, Saudi Arabia, and the United Arab Emirates. Those threats, which have included missile, drone, and cyberattacks on Saudi oil facilities, are looming large over the global economy because they are squarely influencing the volatility of the price of oil. One could argue that the U.S. decision to withdraw from the Iranian deal, referred to as the Joint Comprehensive Plan of Action (JCPOA), has injected an even higher degree of risk into oil markets, where traders now feel that the chances of Mideast conflict resolution are lower. But, the Trump administration could argue otherwise. From its perspective, the United States extended to Iran $6 billion in frozen funds, opened the door for a flood of spare parts to be shipped into Iran’s suffering oil and petrochemical sector, and looked the other way while European companies rushed in for commercial deals. In exchange, it’s true, Iran began to implement the terms of JCPOA, but as Secretary of State Pompeo laid out in a major speech on the subject, the nuclear deal has failed to turn down the heat on the wide range of conflicts plaguing the Mideast region. Rather, Secretary Pompeo explained, Iran’s proxies have raised the stakes for U.S. allies, and regional conflicts have been dangerously escalating. U.S.-Iranian exchanges in Syria are also on the rise. The deal could still move forward, according to Secretary Pompeo, but not until Tehran addresses a laundry list of U.S. demands. Washington expects its action and rhetoric to spur more productive negotiations that would allow the United States to link restoring the nuclear deal with political negotiations to de-escalate conflicts. Since re-imposition of renewed oil sanctions doesn’t take hold for several months, wiggle room still exists for such diplomacy. But markets reflect doubt about those chances, reflecting the view of many respected commentators. Oil prices hit $80 a barrel and even the five-year forward oil price rose above $60 for the first time since the end of 2015. Speculators are still holding substantial long positions and industry has been slower to hedge, lest oil prices go higher still. In the world of oil, it’s hard to compartmentalize complex geopolitical conflicts. In condemning the Trump administration’s move, Iran’s hardliners actually accused the United States of withdrawing from the JCPOA to raise the price of oil and called on the Organization of Petroleum Exporting Countries (OPEC) to raise its production to resist the United States. In a tweet from the Iranian Oil ministry via @VezaratNaft on May 11, Iranian oil minister Bijan Namdar Zangemeh is quoted as saying “President Trump playing double game in oil market. Some OPEC members playing into U.S. hands. U.S. seeking to boost shale oil production.” Simultaneously, Iranian media promulgated a spurious rumor that Saudi leader Crown Prince Mohammed bin Salman had been assassinated. The context for both was dialogue between the United States and its regional Arab allies (kicked off by a Trumpian tweet on OPEC) on the need to cool off the overheated oil market with higher oil production to ensure that the re-imposition of sanctions did not destabilize markets further. In seeking “better terms” for the Iranian nuclear deal, the Trump administration is counting on the fact that the Iranian government faces more internal opposition from its population than it did when the deal was negotiated back in 2015. That popular discontent is palpable and explains why the Iranian rhetorical response to the U.S. withdrawal announcement has been relatively mild compared to historical precedents. But this is no cakewalk, since Iran is counting on Europe and other major trading partners to resist U.S. sanction efforts.   In recent years, China has established its own networks of financial channels and institutions that could be used to allow Chinese companies to pay Iran in its currency, the yuan, in a manner that avoids the Brussels-based SWIFT financial messaging system, which can be subject to U.S. tracking and intervention. China has already tested using the yuan to pay for imports from Russia and Iran via China National Petroleum Corporation’s Bank of Kunlun. The Tehran-based business daily The Financial Tribune suggested that other countries, including Europe, could tap “alternative Chinese financial networks.” But the practicalities of China taking the lead on behalf of Tehran when other U.S.-China bilateral trade issues loom large is more complicated now than it was back in 2012. In 2012, China agreed to meet the Obama administration’s request that it cut its Iranian imports by the minimum 20 percent. As robust a response as the United States may now say it wants from Beijing on Iran, Washington similarly has to consider other priorities on the table with China right now, including negotiations regarding North Korea. Iran has been exporting roughly two million barrels a day (b/d) of crude oil. Europe purchases over a quarter of that volume and is—if push comes to shove—likely to go along with U.S. policy if no diplomatic progress can be made. For now, European leaders are trying diplomacy to keep the nuclear deal alive separately from the United States and to press Iran to address some of the common concerns on Secretary Pompeo’s list. Back in 2012, Europe cut virtually all of its oil imports from Iran. Japan had already conservatively lowered its purchases from Iran in March and even India’s oil giant IOC is now saying publicly that it is looking for alternative barrels to replace its 140,000 b/d of purchases from Iran, suggesting the oil will be made available to India from Saudi Arabia. South Korea is also expected to wind down its purchases from Iran given the imperative to display common ground with the United States; Seoul has already reduced purchases from 360,000 b/d last year to 300,000 b/d more recently. In sum, although Iran can conduct oil for goods barters with Russia and Turkey, it could potentially lose one million b/d of sales or more, if it the current geopolitical stalemate stands. But more is at stake for Iran than short run oil sales since Tehran has learned it can get those back eventually if the political will towards sanctions wears off over time. The curtailment again of international investment in its natural gas industry is a bigger setback for Tehran, which needs natural gas not only to inject into its oil fields to drive production but also for residential and commercial use. If the United States manages to drive French firm Total back out of the important South Pars natural gas venture, the chances of Iran reestablishing itself as a major liquefied natural gas (LNG) exporter dissipates once again, possibly this time for decades given potential U.S. exports and other market conditions. China, which is also an investor in South Pars, does not have experience developing LNG exporting projects. Unfortunately, the global natural gas stakes could make it harder to draw Russia along with any U.S.-led conflict resolution effort. Even if Tehran was willing to cooperate in Syria or Yemen, Russia—a major natural gas exporter to Europe and Asia—benefits from U.S. sanctions that block competition from Iranian exports. Motivating the Kremlin into any diplomatic deal that restores U.S.-Iranian cooperation could be a heavy lift.   Russia is expected to begin supplying natural gas by pipeline to China via the Power of Siberia pipeline by late 2019 but Russia’s Gazprom has had difficulty locking down sales to China from additional pipeline routes. Successful negotiations on the Korean peninsula could help in that regard, since one potential fix to North Korea’s energy needs could be a Russian gas peace pipe. But the availability of direct natural gas exports to China and South Korea from the United States muddies the waters further. Beyond holding Iran out of the long run natural gas market, Russia could similarly be unwilling to agree to conflict resolution in Yemen and Syria because of the benefit it enjoys from keeping Saudi Arabia under financial and political pressure. Riyadh’s economic pressures, driven in part from its high military spending in Yemen, have made Saudi Arabia all the more willing to collaborate with Moscow on managing oil markets—a geopolitical reality that has strengthened Russia’s global standing significantly. It’s hard to see what would motivate the Kremlin to let Saudi Arabia off the hook given that a resumption of a tight alliance with Washington and Qatar is a material danger to Russia’s geopolitical and economic well-being, as demonstrated when the three countries collaborated in the early 2010s to weaken Moscow’s grip on European energy markets. Russia’s posture is not the only barrier, however, to conditions that would allow progress on U.S.-Iranian conflict resolution. Even if the economic penalty of the re-imposition of U.S. sanctions were sufficient to motivate Iran back to the negotiating table, it remains unclear to what extent Tehran can influence its own proxies who have independent goals that could not align fully with any conflict resolution deal Iran could strike with the United States and its allies. Moreover, it is similarly unclear whether the United States could draw Saudi Arabia into a workable political settlement for Yemen. Thus, while the United States could have a strategy in mind that could improve upon the status quo in the Middle East, a deeper dive into the energy realpolitik of the matter shows the complexities that stand in the way of progress. With so much at stake, an incredibly disciplined and patient hand will be necessary to work through the wide host of internecine, interconnected issues.  

For the seventh year in a row, Forbes has calculated that Aliko Dangote is Africa’s richest man, worth around $12.2 billion. He is also the only African that Bloomberg includes in its list of the world’s “fifty most influential people.” Yet, outside of business and financial circles, Dangote is not well known in the United States. Perhaps that is largely because his business interests—banking, cement, sugar, salt, agriculture, and manufacturing—are centered in Nigeria and Africa rather than overseas. He is currently expanding into fertilizer and oil refining. However, up to now, his wealth has not been based on oil production, nor is he involved in the information technology industry. Bloomberg describes him as “self-made.” While this appears technically to be accurate, Dangote comes from a wealthy Kano trading family and an uncle provided him with start-up capital. Like other members of his family, he primarily traded commodities in the beginning of his career, but shifted to manufacturing in 1999 with a focus on providing basic products and the building blocks needed by Nigeria’s huge population. In an interview with Bloomberg, he seems to be proud of his risk-taking, which appears successful. According to Bloomberg, Dangote’s publicly traded companies provide about one-third of the market capitalization of the Lagos Stock Exchange.  Dangote is a practicing Muslim and uses the title of “Al Haji,” reflecting the fact that he has made the pilgrimage to Mecca and Medina. However, there is no evidence of religious fanaticism of any sort, and he employs Nigerian Christians at all levels in his enterprises. He is a graduate of Al-Azhar University in Cairo. He prides himself on being quiet and low key. According to various Nigerian websites, he has been married and divorced several times and has many children. Despite his seemingly austere image, the Nigerian media reports that he has a private jet, a yacht, and a fleet of luxury cars. Pictures of his primary residence in Abuja show a mansion in the style of an American plutocrat of the Gilded Age before the First World War. Nevertheless, unlike other African plutocrats, he does not appear to own luxury property outside of Nigeria, such as in the plutocratic favorites of London, New York, or Marbella. He also has established a philanthropic foundation and has pledged $500 million over five years to address malnutrition in Nigeria.  While Dangote expresses little interest in politics, in Nigeria as in much of the developing world, politics and big business overlap. The Nigerian media states that he provided significant financial support for Olusegun Obasanjo’s presidential election campaigns while the latter was chief of state and for the People’s Democratic Party (now the opposition party), though whether that continues is unclear. The bottom lines would appear to be that Dangote’s empire-building resembles that of the great American industrialists before World War I. Dangote himself expresses admiration for them. There is little question that he is a powerful force for the diversification of Nigeria’s economy away from oil and gas, a necessary transition if the country is to develop economically.  

This post is co-written by David R. Mares, the Institute of the Americas chair for Inter-American Affairs and professor for political science at the University of California San Diego and the Baker Institute scholar for Latin American energy studies at the James A. Baker III Institute for Public Policy at Rice University. Venezuelans are due to go to the polls on May 20, in an election that is seen as problematical for the largest members of the Organization of American States (OAS). Last month’s OAS summit was inconclusive on how to respond to the deepening humanitarian crisis inside Venezuela that has spurred 230,000 refugees to cross the border to Colombia and oil workers to abandon their posts. This week’s news included an announcement that Chevron was withdrawing executives in light of the arrest of two company employees who were arrested for refusing to participate in official corruption. Chevron’s announcement follows the exit of major U.S. oil drilling service companies. Oil production from areas such as Chevron’s operations were a bright light in a rapidly declining sector. As the Venezuelan oil industry collapse accelerates under the rule of Major General Manuel Quevedo, oil production is likely to continue to crater, perhaps at a faster rate. Eventually, the industry’s performance will be so debilitated that it will render the option of U.S. sanctions against Venezuelan oil exports less relevant.   The prospects that General Quevedo will run Venezuela’s oil industry into the ground raises the specter that the ranks of the country’s military could consider a coup against President Nicolas Maduro. That will present a different kind of challenge for the United States and the OAS.  Opening Pandora’s Box – Again? The U.S. government’s response to Venezuela’s situation will complicate a broader Latin American response. Former President Barack Obama’s designation of Venezuela as a threat to U.S. national security alienated most of Latin America with its harkening back to Cold War unilateralism. The recent thinly veiled calls by high U.S. officials including Senator Marco Rubio—chairman of the subcommittee on the Western hemisphere—for a military coup to oust President Maduro raises fears of a return to Latin American militaries as the arbiters of politics. The fact that some members of the Venezuelan political opposition also support the call for the country’s military to intervene is also troubling, as significant minority opinions in Latin America’s past supported military coups that were followed by severe repression and suspended democracy for years. A Checkered History of Efforts to Defend Democracy in Latin America  Latin America has committed itself in multiple international fora to defending democracy. In the twenty-first century they have acted in concert multiple times to isolate governments that came to power through irregular or highly questionable means (e.g., Venezuela 2002 and Honduras 2009) or to effectively mediate government-opposition conflicts (e.g., Bolivia 2007-2008). But today Latin America is divided regarding how to respond to the political, economic, and humanitarian crisis engulfing Venezuela. The Lima Group of fourteen countries (including Canada, Guyana, and Saint Lucia as non-Latin American members) is pressuring the government of Nicolás Maduro for credible commitments to free elections and reforms, but several members of the OAS call for a hands off approach. Even the Lima Group is divided regarding how much to pressure Maduro: Peru told Maduro that he was not invited to the 2018 Summit of the Americas, but Chile publicly stated that all governments were invited to the inauguration of President Sebastián Piñera. The reasons for this disunity are not simply ideological disagreements, dependence on Venezuelan oil, or kowtowing to Washington. Rather, they are rooted in the region’s history of political instability, frustrated social change, and experience with the heavy and clumsy hand of the United States, all of which have led to the region prizing sovereignty and generally opposing interference by other nations in domestic affairs. Drawing the Line - Where? OAS leadership, both the current Secretary General Luis Almagro and the former Secretary General Jose Miguel Insulza, have sought to make the organization live up to its responsibilities under the 2001 Inter-American Democratic Charter, and to critique the intransigence of the Maduro government. The United States, Brazil, Colombia, and Argentina all supported this approach at the OAS summit last month in Lima.  But the OAS has not been effective in delivering a clear and consistent pro-democratic message for complex reasons. First, there is no agreement in Latin America beyond periodic elections on what constitutes “democracy,” and therefore it is diplomatically difficult to get agreement on where the Maduro government sits on the spectrum where beyond which politics is no longer democratic. Second, the great discrepancies in political and social inclusion that remain in Latin America reproduce the domestic political polarization and instability at the regional level. Populist governments in Ecuador and Nicaragua still support the Venezuelan government.  Worse still, Latin American governments agree that if the military participates in an overthrow—even if asked by governing institutions to do so (e.g., Honduras)—that it is a coup against democracy. But if riots in the street seek to force a president to resign and thus impose the vocal minority’s will over the results of elections, Latin American consensus breaks down with governments that favor the opposition calling for mediation and those sympathetic to the government supporting the electoral calendar. Similar divisions reveal themselves when one branch of government uses its constitutional powers to remove the leadership of another branch or stop a proposed policy (e.g., Paraguay, Brazil, Venezuela in 2015). This pattern suggests that Latin America’s defense of democracy is not a mature process tied to law and institutions, but still rooted in individuals, ideology, and politics. Looking for Clean Hands Who has the standing to critique Venezuela? Maduro’s popularity in Venezuela is far greater than President Michel Temer’s in Brazil where few voters likely believe that Temer and his administration are more honest than Luiz Inácio Lula da Silva or Dilma Rousseff who are under investigation. Among the mediators selected by the opposition is Mexico—a country with the highest murder rate for journalists, where the government is suspected by international NGOs of being involved in much of the violence against citizens and wallowing in corruption. Colombia is one of the leading voices for sanctioning Venezuela’s government, but Colombia’s bona fides are compromised by the fraying of the peace agreement and the lack of security for FARC candidates in elections. Peru’s President just resigned in the face of serious financial and political corruption scandals.  All this makes the U.S. decision making about Venezuela extremely difficult. If the goal of U.S. intervention is to restore democracy to Venezuela, imposing U.S. sanctions against the country’s oil exports could be overkill, given the decline coming to the country’s oil sector in any case. Targeted sanctions against the Venezuelan military would have limited real effects given Russia and China’s commitment to the current regime and would only reinforce officers who hold anti-U.S. nationalist views. The U.S. government should consider two major points in preparing for the next stages in the evolution of the Venezuelan crisis. First, if the United States is seen as taking the lead in bringing about the collapse of the Maduro government, it will discredit the democratic transition in the eyes of significant segments of Venezuelan and Latin American public opinion. Secondly, United States credibility for providing reconstruction aid and supporting an open and non-discriminatory transition process is low in the region.  With these points in mind, there are some efforts the United States could make in a supporting role to the Lima Group. Colombia has called for a reconstruction plan for Venezuela; the United States should encourage a Latin American conference to develop that plan with clear U.S. commitments. The United States also needs to adopt an active and visible role assisting Brazil and Colombia to deal with the refugees. This would not only be in line with U.S. disaster relief efforts in the past but could constitute a way of getting humanitarian aid to Venezuela, bypassing the government, if enough aid is provided by the United States, the Lima Group, and the EU to enable people to bring some back into Venezuela. While not the ideal means to provide humanitarian aid inside Venezuela, smuggling is a well-established activity and effectively closing the border to the influx of such aid would significantly add to the discredit of the Maduro government. The United States also needs to consider how it would respond to a sudden military take-over and change of leadership. In this case, the United States should coordinate with Latin American governments in an immediate call for a firm date for the restoration of freely organized elections and in which chavismo, minus government officials implicated in corruption and abuse of power, would be free to compete. Only a stable democratic Venezuela will be able to utilize its vast oil and gas resources for the benefit of its people and global energy markets.

This is a guest post by Isidro Morales, a professor of the School of Government at Tecnológico de Monterrey, Santa Fe (Mexico City) campus. On Sunday April 22, the first of three presidential debates took place in Mexico City, gathering the five candidates out of which three are sponsored by their respective political parties, and two are running as independent contenders. Slightly more than two months ahead of election day on July 1, polling indicates the choice will be between Andrés Manuel López Obrador and Ricardo Anaya Cortés. López Obrador is sponsored by Morena, the political party he founded himself, in coalition with two other parties, the center-left Partido del Trabajo (PT) and the center-right Partido Encuentro Social (PES). Anaya is supported by the center-right Partido Acción Nacional (PAN), in coalition with two center-left parties, Partido de la Revolución Democrática (PRD) and Movimiento Ciudadano. A few days before the first debate took place, Reforma, a Mexican leading newspaper, published a poll showing a major lead by López Obrador on electoral preferences: 48 percent, while Anaya held 23 percent of the preferences and Jose Antonio Meade, the Partido Revolucionario Institucional (PRI) candidate, only 14 percent. The polarization in voting preferences is not surprising. López Obrador has been successful in exploiting the frustration and disaffection of most parts of the Mexican population against the PRI, the party which lost the presidential election in 2000 after ruling Mexico for more than seventy years and which came back to power in 2012, with Enrique Peña, whose presidential term became highly disappointing. Indeed, the presidential election of July 1, will take place in a country in which public safety is fragile, political corruption is widespread (various PRI’s former governors are either prosecuted or law fugitives), and NAFTA is being renegotiated with uncertain outcomes. The backdrop on energy issues is that oil production continues to fall while gasoline prices increase, in spite of a major energy reform which opened to private participation (national and foreign) to all production chains of the industry. The first presidential debate did not cover the energy issue, which is slated for later sessions focused on economic issues. However, the energy reforms have not been successful enough to help the PRI with its reelection. With a historically low record of popularity reached by Peña’s administration, it looks difficult for Meade, the current PRI candidate. In spite of his good record as a public administrator, he seems unlikely to narrow the gap he still has vis-à-vis Anaya. Despite the widely touted energy reforms, the Mexican oil industry still faces a host of challenges, not the least of which is increasing theft and violence against oil facilities that have endangered the lives of oil workers. Announcements to begin developing Mexico’s vast shale resources in the state of Tamaulipas have also been greeted with some skepticism since the region is dominated by the Zetas and Gulf drug cartels and it is unclear how the government would address any security issues that could plague drillers.     While the margin is still large between López Obrador and Anaya, it could eventually be narrowed and eventually reversed, depending on how electors scatter their choices among the independent runners, and how the two major contenders attract or disappoint their respective constituencies. The outcome of the first debate, for example, seems to have played to the benefit of Anaya, at least this is what another survey published by Reforma shows slightly after the debate was over, including the opinion of leading voices from academia, politics, business, and civil society. Indeed, López Obrador was vague on critical issues during the debate while Anaya was assertive and specific in his attacks regarding important proposals and against some controversial members included in Lopez Obrador’s party (i.e., Manuel Barlett, blamed for being the orchestrator of an electoral fraud favoring the PRI during the 1988 elections, when he was Secretary of Government). Two contentious issues of the debate are particularly salient to Mexican voters. The first one is the amnesty previously announced, while campaigning, by López Obrador to Mexican drug barons in case he becomes president, as a means to end the “war on drugs” initiated by former president Felipe Calderón, in 2006. Anaya and most of the other candidates have rejected this possibility, highly sensitive in a country in which more than 120,000 people have lost their lives since the armed confrontation against drug traffickers started. During the debate, Anaya confronted his rival on the issue, asking him whether he continues to support the amnesty. López Obrador rather provided for a diffuse answer, suggesting that organized crime activities is the result of social and economic conditions prevailing in the country, and that the final decision will be taken after consulting a group of experts. The second hot confrontation in the debate was on the means for making more transparent and accountable Mexico’s public policy, including the performance of the Presidency. Anaya was clear in advancing his proposal for creating an independent prosecutor, elected not by the president in power (as it is currently the case) but by the congress, with the mandate to prosecute the corruption of public officials, including the president. According to rules still prevailing in the country, the president cannot be impeached, unless there is an alleged cause of “treason to the Nation”. The proposed change would make impeachment by mismanagement possible for all public officials, if the Mexican Constitution is changed and an independent prosecutor is established. By contrast, López Obrador calls for abating corruption and tackling government accountancy by putting himself as the model of good governance when he arrives to the presidency. He promises to rule with austerity and transparency, by emulating the political and social performance of past national heroes—such as Benito Juárez, the president who repelled a French intervention; Francisco Madero, the president who restored democracy after the fall of the Diaz dictatorship; and Lázaro Cárdenas, the president who nationalized the oil industry in 1938—and putting in place a sort of referendum, every two years, in order to ask the electorate whether the president should continue in power or step down. The first debate also revolved around security and political issues, while coming debates will deal with economic, social, and foreign policy aspects. However, the electorate is already anxious to know, whether López Obrador will remain vague and diffuse as he was in this first debate, concerning other controversial issues of his campaign. A critical question is his ultimate position on the reversal of the energy reform incepted by the current administration, which needed a constitutional amendment requiring at least two thirds of the votes of the legislators and the support of at least half of the state congresses. According to Alfonso Romo, the would-be chief of staff in the case that López Obrador becomes president, the reform will remain in place and contracts signed by the current administration with private companies will not be cancelled. However, according to Rocío Nahle, current leader of Morena in the Chamber of Deputies, and potential secretary of energy if López Obrador becomes president, the reform could be revisited and private contracts cancelled in case evidence of corruption is found. Will López Obrador call for a group of experts once he is in power in order to decide the future of his energy policy, as he said he will do for confronting organized crime? If he does, how will the group of experts be formed? It is up to López Obrador and his team to clarify their position in this hot issue during the following two months of the presidential campaign. If the ambiguity is maintained, López Obrador risks losing part of his constituency to the benefit of the rest of the candidates.

Geopolitical risk is always a major feature of global oil and gas markets, but the interplay of wars without end, powerful non-state actors, and the proliferation of new weapons technologies across the globe is raising that risk. Energy Realpolitik sits down with Council on Foreign Relations (CFR) National Intelligence Fellow Michael Dempsey to discuss a host of risks that might impact the energy sector in the coming years. Topics are drawn from recent discussions by CFR fellows at Columbia University's Center for Global Energy Policy.  What are some broad trends that could influence the energy sector’s outlook in the next few years?       Mike Dempsey: First, it’s clear that the underlying conditions that brought us the Arab Spring in 2011 have not been resolved.   Just consider, according to the most recent Arab youth survey, youth unemployment remains at around 30 percent in the Middle East, and countries in this region by 2025 are projected to have a population of nearly 60 million between the ages of 15-24.    That’s a sizeable slice of the region’s population, and one-third of them are likely staring at long-term unemployment, especially if regional growth rates stay mired in the 1 to 3 percent range.       The young are not only restive, they are connected. So, during Iran’s protests in January, Iranians used forty-eight million iPhones to spread the word, and the protests spread to more than eighty cities across the country.  In 2009, estimates are that 15 percent of Iran’s population had iPhones; today it’s about half.   Just ask yourself, would we have imagined last December that protests in countries as diverse as Tunisia and Iran would be sparked by many of the same underlying conditions?    That’s not, of course, to say that there aren’t some positive trends in the Middle East (the increasing influence of women, a renewed focus on education and technology, etc.) but the negative trends are still dominant, in my view, and are likely to trigger rapid, unexpected crises in the future of the sort that we’ve experienced in recent years.   Second, a more serious debate is underway in the Middle East and beyond about the future of Political Islam. This issue is obviously being discussed in Saudi Arabia—with some encouraging signs, but also concerns—and is playing out in different ways in Egypt, Iran, and across the globe from parts of Africa to Indonesia, Malaysia and beyond. How this debate is resolved will obviously have profound implications for future political stability.   Third, if evolving economic and religious trends are shaping global stability, so too is technology. I won’t go into detail on all of the widely recognized positives that flow from recent advances in technology—energy experts certainly know the effects on the sector better than I do—but there are emerging risks that also have to be considered.  Recall on the security front: a decade ago, the U.S. military was the only country operating armed drones over Iran and Syria. Today, there are more than a dozen countries and non-state actors such as ISIS and Hezbollah that are doing so.  In fact, during the U.S.-backed coalition advances on both Raqqa and Mosul, ISIS used armed drones against U.S. forces.         And consider press accounts concerning armed drones being used in Syria only three months ago.   During the evening of January 5 and into the next day, the Russian military reportedly faced two separate swarm attacks using miniature drones against two of its bases. In total, thirteen drones were used by the attackers, each carrying ten bomblets; ten drones targeted the Russian airbase in Latakia, three the Russian naval base in Tartus.   According to press accounts, the drones each carried an explosive charge weighing about one pound, and included strings of metal ball bearings that were intended to harm individuals in the open. There are reports that several Russian fighter jets were damaged on the ground, though Moscow denies this.    Most of the individual components in the drones, including the motors, are commercially available. The drones used an onboard GPS system for navigation, but again, this technology is easily available for purchase online.   So, is it really hard to imagine in the next few years that similar attacks will be launched at other bases or sensitive oil infrastructure facilities around the world?   And here is the final kicker to the Russian story. To this day, it’s impossible based on open source information to determine who conducted the attack. So, how attractive could this type of plausibly deniable operation be to terrorists or even criminal elements in the future?   One final word on drones, if you’ve ever seen drone races you’ll know that the tiny drones used fly at great speeds—more than 150 mph—and with incredible maneuverability. That type of speed and maneuverability already poses a clear and present threat to those charged with protecting important government and commercial facilities.   And while we are discussing security threats, consider that in Yemen, as many of you are well aware, the Houthis within just the past few months have struck a Saudi tanker in the Bab-al-Mandeb Strait and fired drones and missiles of increasing accuracy and range into Saudi Arabia, producing the first casualty in Riyadh.   So, how different would the global energy outlook be tomorrow if a barrage of Houthi missiles hits Riyadh?  Would that not trigger a broader regional conflict?   Or how about if Houthi missiles penetrate Saudi air defenses and strike Aramco?       I don’t mention these threats because I think they will happen, but I, unfortunately, absolutely believe they could.   I could go on about other threats, including cyber intrusions and the long-term threat posed by autonomous weapons, but here is the bottom line: technology is going to make working in the energy sector in the future much easier, but also, in some ways, perhaps much harder.    Fourth, while I am always worried about sudden country-specific crises that could influence the energy market, I’m frankly also concerned about a growing number of transnational challenges and their potential to trigger broader instability. Some of these challenges include the rapid spread of preventable diseases, as well as today’s unprecedented human displacement crisis.   Today, more than sixty-seven million people (or one of every 110 or so humans on the planet) is a displaced person, which is fueling instability in countries from the Middle East to Western Europe. I fear we are losing entire generations of young people in countries such as Syria, and the long-term effects on regional and international stability will be profound.    This trend is especially worrisome because it’s largely owing to the international community’s inability to end the conflicts that are driving instability and displacement—witness our seventeenth year of conflict in Afghanistan, seventh in Syria, and fourth in Yemen.   So, conflicts and threats that should be preventable or bounded, now seem to grind along into deeper crises with pernicious effects that we often don’t recognize until it’s too late. Just recall how the flow of people fleeing violence in Afghanistan, Libya, and Syria have affected Western Europe’s political landscape.    This challenge is made even more difficult by the inward turn of Western states. In my view, this is an especially problematic time for the West to retreat from the world stage and to turn its focus inward.  A fifth trend that will certainly affect the energy sector surrounds issues of transparency and corruption.   The push for greater transparency around the globe is a hugely positive development, in my view, that could eventually increase business and government efficiency, improve governance at many levels, and deepen public confidence in both government and business. As you know, the pernicious effects of corruption are well documented. For example, the IMF estimates that the cost of bribery alone (one subset of corruption) costs between $1.5 and $2 trillion a year, equal to about 2 percent of global GDP.   This cost has been evident in many countries for some time. Venezuela is a good example of this, where PDVSA has been raided for years both to pay for government expenses and as a patronage cash cow, all while the company’s infrastructure was neglected. Indeed, the fight against corruption is now a first-tier issue in countries of significant importance to global energy markets, from Brazil to Mexico and from Nigeria to India.    In the short-term, the anti-corruption fight could generate increasing political instability, but if it eventually leads to more transparent and better governance in these countries, I’m certain that it will invariably help their economic performance in general, and the energy sector in particular.      So, in my view, these are five critical trends that will influence the world’s energy market in the coming years.   Are there any current developments that you are following that could influence energy prices in the near-term?    MD: Sure. These include the outlook for the Iran nuclear deal after May 12, the prospects for the upcoming U.S.-North Korea Presidential Summit, Libya’s lack of progress toward political reconciliation and the recent terrorist activity against the country’s energy industry, and the ongoing negotiations concerning the global trade agenda, especially the near-term outlook for NAFTA.   How do you then view geo-strategic trends and the likely effects on global energy prices over the next year or two?   MD: I’d say the geo-strategic backdrop for the near-term leans heavily toward increased risk, with the potential for worrisome surprises—and potential oil flow disruptions—across a range of countries including Iran, Libya, Nigeria, Venezuela, and Saudi Arabia. But I hope I’m wrong!  Do you have any final advice/tips for energy analysts or those tracking the industry?  MD: Yes. In my view, the international environment is quite fraught at the moment, which means it would be a good time to:  Routinely challenge your underlying assumption about the energy market. There are enough gathering threats (from simmering regional conflicts that have the potential to spike on short notice to asymmetric threats such as cyber and other non-traditional weapons) that this isn’t a good time for analytic complacency.  Think deeply about the quality of leadership and governance in the countries you’re following. It’s always amazing, after the fact, to examine how signals were missed and how seemingly stable countries (and companies) can experience unexpected periods of profound turmoil. As a useful exercise in humility, for example, it’s worth going back and reviewing the leading investment banks’ economic forecasts in 2006-2007, right on the eve of the Great Recession. In both the intelligence and business sectors, then, it’s worth remembering that it’s easy to develop analytic blind spots, fall victim to straight-line analysis, discount worrisome alternative scenarios, and underestimate critical drivers of change.    Along these lines, I really would encourage everyone to look hard at physical and data security issues and to constantly re-evaluate how they are postured against the next generation of challenges.   And finally, I would urge folks to think broadly and systemically about the issue of risk. Is protecting one particular company good enough today? Or do industry leaders need to cooperate more in protecting the whole system they operate in? For example, if a cyber attack cripples one energy company, isn’t it possible that attackers will learn from that experience and attack others, and that the public’s confidence will be undermined in all parts of the industry?  The issues we face today are less about competitive advantage than about preventing systemic risk or failure. 

During his visit to the United States, Saudi Crown Prince Mohammed bin Salman inopportunely noted in an interview with Reuters news service that Saudi Arabia was “working on moving from a model agreement [for oil collaboration with Russia] for a year to a longer term—10-20 years.” In fairness to the Saudi leader, he could have imagined that the oil market stability implied by a long lasting oil deal with Moscow would be welcome news to the White House, whose energy dominance policy (and many U.S. jobs) depends on the economic success of the American shale boom. After all, the goal of a permanent oil alliance with Russia would be to eliminate the costly boom and bust cycle in oil that both destabilizes Saudi Arabia and underpins the historical cycle of global financial crises.  But last week when the details of what continued OPEC-Russian cooperation on oil could look like emerged, that is, oil prices nearing $80 a barrel or even $100, President Trump took to Twitter to make clear his view. “Looks like OPEC is at it again…” the President tweeted. “Oil prices are artificially Very High! No good and will not be accepted!”  Significantly, the President’s tweet did not come in the immediate aftermath of the Crown Prince’s interview with Reuters on decadal oil agreements with Russia or even after private indications of the Crown Prince’s hope that oil prices would rise to $80 a barrel to help along his initial public offering (IPO) of Saudi Aramco. The backdrop to the President’s first tweet about OPEC came as OPEC and non-OPEC ministers began their scheduled meeting in Jeddah amid overly ambitious statements about lofty oil price goals. Saudi oil minister Khalid al-Falih, in particular, galled some long time oil commentators by declaring, “I haven’t seen any impact on demand with current prices,” and added for emphasis that the world has more “capacity” for higher oil prices given declines in the energy intensity of global economic growth. The minister’s comment echoed similar Saudi statements made in 2006 just before the economically crippling rise in oil prices to $147 a barrel. Highly respected Bloomberg oil strategist Julian Lee's article with a chart showing that history was tweeted out with the apt twitter caption: “Down in Saudi Amnesia, They’re partying like it’s 2008.”  As often with President Trump’s tweeting, it has put forth a firestorm of commentary reading between the lines. Let’s break such speculation down, idea by idea. First is the issue that the White House was probably working on the assumption that his U.S. tour had convinced the Crown Prince to delay his IPO plan. The IPO has been an albatross around the neck of Saudi oil policy, which the White House might think needs greater maneuverability. That’s on top of the fact that $100 oil isn’t a solution to the problem of marketing 5 percent of the Saudi state oil firm. Markets would certainly not believe $100 was sustainable, even if that price could be reached again briefly. Such high prices even worry the U.S. shale industry. “We are going to lose demand. It’s going to move more toward alternative energy,” was how Scott Sheffield, chairman of the board of shale powerhouse Pioneer Natural Resources characterized $70 or $80 oil in response to a question from the moderator of an energy conference panel last Thursday.  Secondly, in constructing his OPEC tweet, the President could have been thinking about the important series of decisions that are on the U.S. president’s agenda for May, any one of which could affect oil markets. Most important, the United States is due in May to decide whether to take steps that would effectively re-impose oil sanctions against Iran. Historically, the Saudis have strategically increased oil production ahead of U.S. undertakings that might be a risk to oil market stability. Notably, they offered that courtesy to President Obama back when stronger sanctions were being mooted on Iran to pressure Tehran to accept negotiations towards a nuclear deal. Washington is also considering additional punitive measures against Venezuelan leader Nicolas Maduro, who has dismantled democracy and fostered a domestic humanitarian crisis through failed economic policies. Saudi Arabia has been mum on increasing production, should Venezuela's oil production problems get worse. If President Trump typed in his tweet just after his morning intelligence briefing, he could also have been thinking about the lack of wisdom for Saudi Arabia to be tightening the global oil market against the backdrop of the escalating Saudi military campaign against Iranian backed, Yemeni militias, which has increasingly put regional oil and gas facilities and trade routes at risk to asymmetric warfare. Saudi defenses recently foiled a Houthi drone that threatened the Saudi oil refinery at Jizan.  But there is no question that President Trump is aware that important U.S. geopolitical decisions that could affect oil prices are coming in the month of May, the kickoff to the U.S. summer driving season. The anti-OPEC tweet was presumably popular with the President’s base who care deeply about gasoline prices. That begs the question: Would a return to relatively high oil prices still hurt the U.S. economy? The answer is yes, but like many things, it’s complicated.  Energy economist James Hamilton, who is among the most cited academics on the subject of oil price shocks and the U.S. economy, noted in a pivotal 2009 paper that the high oil prices of 2007-2008 had significant effects on overall consumption spending and especially on purchases of domestic automobiles. With Detroit increasingly offering U.S. consumers high profit margin, gas-guzzling SUVs, high oil prices could be problematical for American car makers. Hamilton concluded that the 2007-2008 period of high oil prices can be added to “the list of recessions to which oil prices appear to have made a material contribution.” Along similar lines, economists at Deutsche Bank are forecasting that higher gasoline prices would erode the financial benefits low-income households gained from the tax cuts.  The other problem with rising oil prices is that they can create a deterioration in consumer sentiment, by signaling the possibility of economic slowdown or crisis. Research shows that there is a significant negative correlation between gasoline price increases and perceptions of individual well-being in the United States. With U.S. mid-term elections around the corner, Republicans could find it tougher to sell the President’s economic agenda in a sharply rising gasoline price environment.  Economic research from the U.S. Federal Reserve shows a more nuanced picture for oil prices in recent years, as the shale boom has been found as a driver to increased employment across many regions of the United States (Decker, McCollum, Upton Jr.) Fed economists have also touted improving energy efficiency and better monetary policy as an important factor that will inhibit negative economic effects from rising oil prices. But so far, the recent oil price rise has been gradual and has yet to hit tipping point levels that have, in past times affected consumer driving behavior.   If OPEC doesn’t heed the U.S. President’s call for more moderate intervention in oil markets, President Trump has several policy options at his disposal that go beyond twitter. The U.S. administration could opt to “loan” heavy oil from the U.S. Strategic Petroleum Reserve to specific U.S. refiners to protect them from any loss of supply from the deteriorating situation in Venezuela or the imposition of sanctions. Such a policy could be beneficial in two ways, by at least temporarily shielding American consumers from worsening supply problems in Venezuela and by replacing at the margin a similar quality of oil that has not been forthcoming from Saudi Arabia. It would also give the president political gains as being proactive on the domestic gasoline front, something several of his predecessors have done in similar circumstances.  More controversially, President Trump could choose to accommodate French President Emmanuel Macron by delaying a decision on Iran beyond May, waiting instead for the next decision juncture, which will come in July. Such a decision could be justified as giving European allies time to try to “fix” the Iran deal, before a final decision is taken whether to scupper it. That would also give the administration time to test whether it could press for a political fix to de-escalate the conflict in Yemen, leaving open a possible incentive for Tehran for cooperating. But any broader Mideast negotiation will invite Russian interference, which will be hard to counter without some assistance from U.S. Gulf allies who might leverage their close relations with Moscow on oil – hence yet another reason that President Trump’s tweet was strategically well-timed.         

U.S. Secretary of State nominee Mike Pompeo said yesterday at his Senate confirmation hearings that he would actively try to “fix” the Iran deal, working with U.S. allies to “achieve a better outcome and a better deal.” The oil market didn’t appear to believe he would succeed. While Pompeo was laying out his views, Brent prices topped $72 a barrel amid reports that there had been an unsuccessful drone strike on Saudi Aramco’s Jizan refinery in southwest Saudi Arabia. The foiled drone attack by Yemeni Houthi rebels was unnerving for two oil-related reasons. Firstly, it was yet another indication that the proxy war between Saudi Arabia and Iran in the region was both escalating and continuing to target oil related facilities. Secondly, and perhaps even more disturbingly, it was a sign that “asymmetric warfare” posed a greater threat to oil than could have been previously understood. Increasingly, there has been evidence that sub-national groups can build make-shift drones that can deliver payloads into hard to reach targets. The Jizan refinery attack was the first time a makeshift drone attack has been widely reported to have targeted an oil facility. The drone onslaught follows a serious cyber breach that has plagued a commercial safety system used in oil refineries. Both means of warfare pose serious risks not only to the Saudi oil industry but to Western and other regional facilities as well, upping the ante on a host of conflicts that involve Iran.  The United States is due in May to decide whether to take steps that would effectively re-impose oil sanctions against Iran. During his visit to Washington, Saudi Crown Prince Mohammed bin Salman lobbied the Trump administration to reopen the Iranian nuclear deal and pressure Iran for better terms that would ensure Iran never obtains nuclear weapons, rather than the publicly announced terms which reduces the number of Iran’s centrifuges and limits the level of uranium enrichment to 3.67 percent, far below weapons grade, for fifteen years. Under the nuclear deal, Iran is tasked to remove the core of its heavy-water reactor at Arak, capable of producing spent fuel that can yield plutonium.  Last month, European leaders were sounding out the possibility that fresh sanctions be imposed on Iran aimed to moderate the country’s ballistic missile program and its role in regional conflicts in a manner they hope would maintain the Iran nuclear deal. Saudi Arabia is likely to oppose that approach. The Saudi diplomatic message regarding the Iran deal could put the kingdom under pressure to offer to replace Iranian oil that would be lost to buyers, should a re-imposition of oil sanctions against Iran become necessary. Saudi Arabia has failed to act to replace declining Venezuelan oil production, as it could have done in past decades, preferring rather to replenish depleting financial resources by tapping higher oil prices. That has led to divisions within the Organization of Petroleum Exporting Countries (OPEC) on what could constitute too high an oil price that would begin to harm oil demand.  Rather than talk publicly about replacing any “sanctioned” barrels, Saudi Arabia has been pushing a plan to have “decadal” cooperation with Russia regarding oil prices. Saudi leaders would like to structure a long lasting agreement that could eliminate the debilitating cyclical swings in oil prices. But it remains unclear how that would be accomplished, short of coordinating investment rates for most of global oil production capital spending, as was tried (also relatively unsuccessfully) by the Seven Sister oil companies back in the post-World War II era. One alternative suggestion, said to be a non-starter among fellow OPEC members, would be to return to the fixed oil price system of the 1970s. That system was undermined when OPEC members were forced to cheat behind each other’s backs using non-transparent, complex price discounting schemes such as barter deals, secretive tanker freight discounts, and extended credit terms to ensure their oil wasn’t replaced by sales by producers offering spot market related pricing.  The appointment of more hawkish foreign policy members to the Trump administration's national security team has already affected Tehran, which has had increased difficulty marketing its oil in recent weeks and is now offering additional discounts to sway buyers who are worried about the effects of future sanctions policy. European companies are considering contingency plans, and Japan reportedly curtailed its oil imports from Iran in March. Some loss of Iranian volume is probably built in to current price levels, but the geopolitical ramifications of escalating conflicts could create more uncertainty in oil markets.  At this particular juncture, from the U.S. point of view, the oil aspect of Iranian sanctions policy could be more tangential compared to concerns about Iran’s role in the various Mideast regional conflicts. The United States has tried to counsel Saudi Arabia to find a way to deescalate the conflict in Yemen but so far, little progress has been made. The United States also would like to fashion a Syria strategy that limits Iran’s role in the Levant. One lever in that process is that neither Russia, Turkey, or Iran are in a financial position to pay for Syria’s reconstruction, creating a possible starting point to assert influence by the United States and its allies. Commentator Hassan al-Hassan argues that now is the ideal time for the United States to make a strong response to test whether the current facts on the ground render President Bashar al-Assad as suddenly more dispensable to his own supporters. He suggests whatever actions the United States takes be designed to force parties to abandon the military option. U.S. sanctions moves that recently cratered $12 billion in the wealth of Kremlin insiders and hampered their ability to work with large commodity traders were a step in the right direction.    

Years ago, Wanda Jablonski, the famous energy journalist and newsletter publisher, gave me an important piece of professional advice. Be careful how many conflicts you take on at one time.  Wanda’s admonition was intended to instruct me about how to be effective within the complex oil politics of the Middle East. But lately, I have been reminded of her wise counsel as I read the news. The Trump administration should heed her words in deliberating on the vast array of trade and oil sanctions issues that need to be considered by the White House. While it is true that chances are any individual policy that could affect oil and gas trade can be accommodated easily by markets, it could be a different calculation to impose multiple policies all at once. Oil markets are watching closely all of the various energy related trade and sanctions policies on the table. Right now, any tightening of oil sanctions against Iran are viewed as the most impactful upside market risk, with the U.S.-China trade war swinging sentiment in the opposite direction.    U.S. oil and gas exports are on the rise and that has been good for the United States geopolitically. U.S. energy exports help promote American influence while at the same time reducing the U.S. trade deficit. So far this year, U.S. energy exports have exceeded expectations and that is paving the way for some beneficial outcomes. Besides serving as a bulwark against Russian manipulation and Mideast supply disruptions, greater availability of U.S. oil and gas could make it easier to convince European countries they can afford to agree to renewed sanctions on Iran. They also up the pressure on Russia’s oligarchs by potentially shrinking the pie they have to split. One could even argue that rising U.S. shale production is playing a role in convincing Saudi Arabia’s new leaders to institute needed social and economic reforms by creating uncertainty about long run oil prices. In another example, high U.S. oil refinery exports are replacing lost Venezuelan refined products. This could pave the way for United States regional diplomacy, should it make greater efforts, to gain more support within the Organization of American States (OAS) to isolate the Maduro government, which is no longer in a position to provide finance or free oil to Caribbean and Central American countries. Right now, OAS Secretary General Luis Almagro has expressed support for a case against Venezuela’s leader Nicolas Maduro for “crimes against humanity” before the international criminal court in the Hague. Perhaps in time, as the lingering effect of Venezuela’s defunct Petrocaribe oil aid program fades however, OAS could be able to reach a majority decision to declare foul on Venezuela’s actions to dismantle its democracy and thereby strengthen diplomatic pressure on Caracas.  The United States should add stronger diplomatic effort in this direction, before it resorts to unilateral oil sanctions on Venezuela. Banning sales of U.S. tight oil to Venezuela should be used as a last resort measure only. That’s because the whole concept of U.S. energy “dominance” is based on the diplomatic gain that comes from the U.S. reputation as a pivotal free market oil and gas supplier that would never cut off another nation. Albeit Venezuela could be considered a situation that is sui generis given the humanitarian suffering of the Venezuelan people, but some international backing from OAS or the United Nations would give the United States better standing with other buyers for imposing restrictions on U.S. tight oil exports to Caracas. The United States is well positioned to leverage that fact that U.S. exports of refined products are supplying Latin America and the Caribbean in the face of the decimation of the Venezuelan refining industry, which was rumored last month to be about to indefinitely shutter three of the country’s four largest refinery complexes.      In addition to mooting sanctions against Venezuela, the United States is due in May to decide whether to take steps that would effectively re-impose oil sanctions against Iran. During his visit to Washington, Saudi Crown Prince Mohammed bin Salman lobbied the Trump administration to reopen the Iranian nuclear deal and pressure Iran for better terms that would ensure Iran never obtains nuclear weapons, rather than the announced terms which reduces the number of Iran’s centrifuges and limit the level of uranium enrichment to 3.67 percent, far below weapons grade, for 15 years. Under the deal, Iran is tasked to remove the core of its heavy-water reactor at Arak, capable of producing spent fuel that can yield plutonium. The Saudi crown prince told the New York Times that “Delaying it and watching them getting that bomb, that means you are waiting for the bullet to reach your head.” Last month, European leaders were sounding out the possibility that fresh sanctions be imposed on Iran aimed to moderate the country’s ballistic missile program and its role in regional conflicts in a manner they hope would maintain the Iran nuclear deal. Saudi Arabia is likely to oppose that approach and the Saudi diplomatic strategy regarding Iran could press the kingdom to offer to replace Iranian oil that would be lost to buyers during any re-imposition of oil sanctions against Iran. Iran has had increased difficulty marketing its oil in recent weeks, offering additional discounts to sway buyers who are worried about the effects of future sanctions policy. European companies are considering contingency plans, and Japan reportedly curtailed its oil imports from Iran in March.  Any U.S. moves on Iran will have to be taken in the context of the desire to take similar moves against Venezuela, which like Iran exports heavy crude oil (in contrast with rising U.S. production, which is of a different lighter quality). The U.S. strategic petroleum reserve has some heavy crude oil stored in its caverns. Worst comes to worst, a loan to a particular U.S. refiner hard hit by sanctions could be made.  The U.S.-China trade negotiations are yet another backdrop to U.S. energy issues to consider. As a recent Citi brief to clients notes on the latter, it is “clear that energy specific trade with China continues to improve in the U.S. favor.” The bank’s rough estimate is that the U.S.-China net oil export balance rose from +$2.8 billion in 2016 to +$8.2 billion last year and could reach $11 billion in 2018 if January trends can be sustained. This trade has implications for the direction of the U.S.-China trade balance that will need to be kept in mind by the Trump trade team.  But the complexities go beyond oil, U.S. exports of liquefied natural gas (LNG) are also finding a profitable opportunity window in the global market based on higher than anticipated demand from China, South Korea, and Taiwan, aided by economic growth and new policies aimed to reduce coal use and fight air pollution across Asia.  As it accelerated its policies to promote coal-to-gas switching, China’s LNG imports rose almost 50 percent in 2017 and have continued to be strong this winter, including purchases of six cargoes via the U.S. LNG export terminal at Sabine Pass. South Korea surpassed Mexico as the largest buyer of U.S. LNG in the first quarter of 2018, and a boost in the long run appetite from South Korea for LNG is expected, given President Moon Jae-in’s pledge to curb use of coal and nuclear in favor of cleaner, cheaper renewables and natural gas.  In other words, growing U.S. LNG exports intersect with several ongoing trade negotiations, namely with China, Mexico, and South Korea. S&P Global Platts is forecasting U.S. LNG exports to increase by 8.1 billion cubic feet per day (bcf/d) by 2020 and another 4.9 bcf/d by 2025, a factor that needs to be considered in trade negotiations. Sales to Mexico are particularly important for the Permian Basin, where excess natural gas is already being flared at high levels.    China’s threat to impose a 25 percent additional tariff on U.S. propane (which is an important component of the liquefied petroleum gas or LPG used in Asia as a residential heating and cooking fuel and as a feedstock to China’s growing petrochemical industry) won’t affect U.S. propane producers all that much. That’s because the largely fungible commodity will be sold elsewhere, with rising supply from Iran and Australia likely to replace the U.S. LPG in China, along with other Middle East supplies. As that shift takes place, U.S. sellers will shift to non-Chinese buyers.  The bottom line is that markets will likely still rebalance in the wake of turmoil created in the coming weeks from any disruptive new trade and sanctions policies, leaving it a little less clear whether prices are facing headwinds or tailwinds. For U.S. energy dominance, it could also be a mixed bag, with commercial availability of U.S. oil and gas only part of the equation. As the upcoming events could show, even fully free market oriented production can face a geopolitical context in a world in disarray.