Trump's treacherous economic moment
The US President’s oil gamble comes at just the wrong time for the world economy, writes Ambrose Evans-Pritchard Late last year it was still possible to view rising oil prices as benign, the result of a booming world economy. This year it has turned mali
Donald Trump could hardly have chosen a more treacherous economic moment to tear up the “decaying and rotten deal” with Iran. The world crude market is already tightening fast. Joint production curbs by Opec and Russia have cleared the four-year glut of oil. There is no longer an ample safety buffer against supply shocks. The geopolitical “premium” on prices has returned.
The Maduro regime in Venezuela is entering its last agonies, and the country’s oil industry is imploding. North America has run into an infrastructure crunch. There are not yet enough pipelines to keep pace with shale oil output from the Permian Basin of west Texas. The prospect of losing several hundred thousand barrels a day (b/d) of Iranian oil exports would not have mattered much a year ago. It matters now.
It is the confluence of simmering political crises in so many places that has driven Brent crude to US$77 a barrel, up 60 per cent since last June.
“We believe an oil price shock is looming as early as 2019 as several elements combine to form a ‘perfect storm’,” said Westbeck Capital. It predicts US$100 crude in short order, with US$150 coming into sight as the world faces a crunch all too reminiscent of July 2008.
The fund warns that the investment collapse since 2014 is about to deliver its sting. Declining fields are not being replaced.
Output from conventional projects has until now been rising but will fall precipitously by 1.5m b/d next year. By then global spare capacity will be down to a lethally thin 1 per cent. US shale cannot plug the gap.
“The mantra after 2014 of lower for longer has lulled oil analysts into a torpor,” it said. Needless to say, a spike to US$150 would precipitate a global recession. The US might hope to weather such a traumatic episode now that it is the world’s biggest oil producer but it would be fatal for oilstarved Europe. Such a scenario would test the unreformed euro to destruction.
Britain, France and Germany may earnestly wish to preserve the Iran deal but they can do little against US financial hegemony and the ferocity of “secondary sanctions”.
The US measures cover shipping, insurance, and the gamut of financial and logistical support for Iran’s oil industry.
Any European or Asian company that falls foul of this will be shut out of the US capital markets and dollarised international payments system.
The EU has talked of beefing up the 1996 Blocking Regulation used to shield European companies from extraterritorial US sanctions against Libya. But this is just bluster. No European company with operations in the US would dare flout the US Treasury.
“A choice for corporate Europe between the US and Iran is unequivocally going to fall the way of the US,” said Richard Robinson from Ashburton Global Energy Fund. He said Europe will have to slash its imports from Iran by 60 per cent because groups such as ENI or Total will refuse to ship the oil, whatever the strategic policy of the EU purports to be. This dooms the nuclear deal ( JCPOA) since Iran will not abide by the terms if the EU cannot deliver on its rhetoric, let alone come through with the US$200b of foreign investment coveted by Tehran. David Fyfe from oil traders Gunvor said we do not yet have enough details from Washington to judge how quickly companies will have to act.
He estimates that sanctions will cut Iran’s exports by up to 500,000 b/d later this year. “It could well be much more in 2019,” he said.
Late last year it was still possible to view rising oil prices as benign, the result of a booming world economy. This year it has turned malign. Global growth has rolled over. The broad IHS index of raw materials has been falling since February.
Europe’s catch-up spurt fizzled out in the first quarter. Japan’s GDP probably contracted. The higher oil price is itself part of the cause.
Even at current levels, it acts as an extra US$500b “tax” this year for consumers in Asia, Europe and America. Not all of the windfall enjoyed by the petro-powers is recycled quickly back into global spending.
One cause of the slowdown is the credit squeeze in China, which is ineluctably feeding through into the real economy with a delay. Proxy indicators suggest that true growth has fallen below 5 per cent.
My own view is that monetary tightening by the US Federal Reserve — and declining stimulus from the European Central Bank — is doing more damage than widely presumed.
Higher US interest rates are pushing up borrowing costs for much of the world.
The Fed is shrinking its balance sheet, draining international dollar liquidity at a quickening pace.
This has already caused a marked slowdown in the M3 money supply. If the Fed is not careful, it will tip the US economy into a stall.
Ominously, we are seeing the first signs of a dollar rally, tantamount to a “short squeeze” on Turkey, Argentina and Indonesia, among other emerging market debtors. The combination of a slowing economy and an oil supply shock is toxic, even if the “energy intensity” of world GDP is now half the level of 30 years ago.
Opec and Russia can lift their output cap at any time, though that alone will not restore the full 1.8m b/d of original curbs. Venezuela is now in unstoppable free-fall.
The Saudis have pledged to uphold the “stability of oil markets” and to
help “mitigate the impact of any potential supply shortages”. Kuwait and Abu Dhabi could add a little. Yet cyclical forces may be moving even beyond their control.
In the end, there are infinitely greater matters at stake than barrels of oil. Trump is throwing US power behind Saudi Arabia in the epic SunniShia battle for dominance over the Middle East, and behind Israel in its separate battle with Iran.
Both conflicts are on a hair trigger. Israel attacked an Iranian air base in Syria last month and killed seven revolutionary guards.
This is a dangerous escalation from proxy conflict to direct hostilities. The JCPOA nuclear deal may be all that restrains the Iranian side from lashing out.
Saudi Arabia’s impetuous young leader Mohammad bin Salman is itching to settle the score of all scores with Iran, the Iranian revolutionary guard are in turn itching to launch a one-year dash for nuclear weapons, and Trump is itching for regime change.
What can go wrong?