Every day, the world consumes 93 million barrels of oil, which is worth $4.2 billion.
Oil is one of the world’s most basic necessities. At least for now, all modern countries rely on oil and its derivatives as the backbone of their economies. However, the price of oil can have significant swings. These changes in price can have profound implications depending on whether an economy is a net importer or net exporter of crude.
Net exporters, countries that sell more oil abroad than they bring in, feel the sting when prices plunge. Less revenue gets generated, and this can impact everything from balancing the budget to the value of their currency in the world market.
Net importers, on the other hand, benefit from lower prices as it decreases input costs for production. For example, a country like Japan only meets 15% of its energy needs domestically, and must import 3.5 million barrels of oil each day. A lower oil price significantly decreases these costs.
For many major net exporters of oil, changes in oil prices are highly correlated with their currencies. With oil prices crashing over the last year, currencies such as the Canadian dollar and Russian ruble have been highly impacted in terms of USD.
For example, the ruble is down over 40% since the price of oil began to crash in 2014. With a breakeven cost of $105/bbl, the dropping price of crude as well as dwindling ruble have sent ripples through the Russian economy.
The impact of oil on currency depends on how central banks approach policy:
Floating exchange rate: The exchange rate is determined by supply and demand.
Fixed exchange rate: Countries with fixed exchange rates continuously arrange intervention to keep the rate the same.
Managed float: The central bank occasionally intervenes to “smooth out” the exchange rate.
The price of oil typically has the largest effect on countries with floating exchange rates such as Canada, Norway, or Mexico. Over the last 15 years, the loonie (-0.42), krone (-0.46), and peso (-0.31) have all had large negative correlations in exchange rates (paired with USD) against the price of oil.
Meanwhile, countries that have pegged their rate tend to feel the impact of oil price swings elsewhere in their economy. This is because such countries have to buy or sell currencies on the open market to maintain the currency peg. Another method that can be used is to enforce a particular exchange rate by making it illegal to trade currencies at other rates, but this can often create a black market.
As a result, countries with fixed-rate policies such as Venezuela, Saudi Arabia, and Qatar have little to no correlation in their exchange rates (paired with USD) against the price of oil.
Words matter in seeking to explain the actions of states and individuals and to divine the response that would best protect the national (or business or personal) interest. Complexities abound, and assertions based on minimal facts often must be made.
Oversimplification is frequently a necessary step to explain and understand the motivations — whether compulsions or constraints — of the various actors. That simplification, which accounts for complexity but peels away these layers to a core "truth," may not be entirely nuanced. But it does allow for more effective communication, and thus for building a more reasoned preparation or response.
There are risks, however, to moving from the simple to the simplistic. Complexities are often ignored in favor of a single reason for actions, frequently relying on moral judgments rather than reasoned understandings.
One term analysts, journalists and government officials use that frequently falls into the simplistic, rather than simple, category is "provocation." In itself, the term is not problematic. It can, however, become a catchall for describing anything one's political, military or cultural opponent might do. A highly moralized term, it frequently denies any justification for the actor's action and fully justifies any response from the recipient of the action.
In a simple sense, a provocation is an act designed to engender anger in, or trigger some response from, another. In a legal sense, provocation provides cover for the provoked entity to respond, even if the return action is violent: An assertion of provocation can reduce a murder charge to voluntary manslaughter, for example.
But what does provocation mean in the daily balance of power among states? Has the meaning of the term changed? Does it still hold the same significance it once did? Is it a viable term of explanation, or is it marked by moralism and simplicity? Are analysts and policymakers risking coming to the wrong conclusions, and thus making flawed assessments and policies, based on the misuse or overuse of "provocation?"
At one point, provocation was seen as a direct attempt to provoke some immediate response, usually a negative response. One would talk of agents provocateurs seeking to turn a rally violent to trigger and justify a harsh security crackdown. Provocations could also be small violent actions aimed at triggering a military response by the opponent in order to justify a larger counter-action by the provocateur. The initial actor's escalation thus appeared to have been caused by his opponent. But provocation now is rarely used with this same meaning in mind.
Although not the only case, explanations of North Korean actions embody perhaps the most excessive application of the current use of provocation. For example, a joint statement issued Oct. 16 by the White House following President Barak Obama's meeting with South Korean President Park Geun Hye begins:
The United States-Republic of Korea alliance remains committed to countering the threat to peace and security posed by North Korea's nuclear and ballistic missile programs as well as other provocations. We will maintain our robust deterrence posture and continue to modernize our alliance and enhance our close collaboration to better respond to all forms of North Korean provocations.
North Korea's ballistic missile and nuclear programs are specifically cited as provocations. Other forms of provocation are not specified (though they certainly appear to be contributing factors to the developing political and security relationship between South Korea and the United States). Little sense of the levels of significance of the so-called provocations can therefore be had. If North Korea launches an Unha rocket and places a satellite in orbit, that would be a provocation, but so apparently would be the test of a short-range anti-ship missile. If North Korea carries out an underground nuclear test, that would be a provocation, but Pyongyang claiming it could turn Seoul into a "sea of fire" would be, too. North Korean soldiers firing a few rounds across the border would be a provocation, but so would North Korea sinking a South Korean navy corvette in South Korean waters. Thus, there apparently are no bounds to what the term provocation can cover.
A quick look at geopolitical language in the past few weeks illustrates similar overreach in the use of provocation. Russian armed military aircraft flying over Turkish territory near Syria is a provocation. Turkey claiming that its military shot down a Russian drone is a provocation (not because the drone crashed, but because Turkish military reports suggested it was Russian and that Turkish warplanes shot it down). The United States warns China against provocations in the South China Sea via its militarization of artificial islands. China has warned the United States not to carry out provocations in the South China Sea via naval patrols. Protesters in the Czech Republic have called the visit of the Russian Army Choir a provocation. The Ukrainian Foreign Ministry has said the visit of a group of Polish children to Crimea is an act of Russian "political provocation." Taken together, provocation apparently can mean anything from letting children visit a place to violating national sovereignty.
There is an inherent moralizing in the use of the word provocation in its current context, and this can quickly lead to false or simplistic assumptions. It is not that morality has no place in foreign policy, but that in analysis one needs separation from moral or cultural impositions on the subject. By relying on provocation as a catchall phrase, the assertion is that whatever "they" have done is wrong and without justification, while whatever "we" do in response is right and justified. But if one fails to take the time and effort to understand the motivations and constraints of "they," then one risks creating an entirely counterproductive policy response. While moral and cultural elements may come into play in choosing the "right" response from the options available, without the initial nonjudgmental assessment of the opponent, the viable policy options may go unidentified.
(At this point, contrary forces emerge against the analyst: Those who seek to explain the "other's" actions beyond simply labeling him evil or crazy risk being accused of supporting the opponent.)
Another defect in calling everything a provocation is that all acts receive the same significance no matter how large or small. The North Korean case is illustrative again. There is an assumption that North Korean behavior has little purpose beyond provoking a response. Where provoking the largest guy in the bar can be expected to end badly, with North Korea the assertion is that provocations are designed to yield talks and concessions. While North Korea could be pursuing this strategy, it is rather risky.
If the generally accepted assessment that the South Korean and U.S. forces are far superior to the North Korean forces is correct, and thus any war would yield a U.S.-South Korean victory, why would North Korea continue to provoke its much stronger opponent? Moreover, if North Korea has had to escalate the provocation chain up to testing nuclear weapons and sinking South Korean ships, just how extreme must provocation become to force a positive response without triggering a negative response?
Labeling each action a provocation therefore can leave analysts misled by their own simplicity into considering each event as isolated, or if not isolated, as tied more to the desire to engender an immediate political response than as part of a broader, longer-term strategic plan. By relying on the shorthand of provocation, the only perceived continuity is the propensity toward provocative behavior. Provocation thus becomes an end unto itself, and all policy based on provocation becomes short-term policy.
In the case of North Korea, the persistent propensity toward provocations must mean that the North Korean leadership is illogical or even unpredictable; illogical because it continues to try to provoke a much larger power with limited gain, and unpredictable because provocations are seen as ends unto themselves, and thus can take any shape or level of severity and any time. In the case of Russia, the assertion is that President Vladimir Putin is crazy or bent on domination and that all the provocations by Russia are just a sign of the personality leadership of the Russian president. Provocations by Russia reflect Putin's subjective desires, and thus have little objective reality behind them.
The failure to assess logic in the opponent, or to seek objective realities that may compel or constrain actors such as North Korea's Kim or Russia's Putin — or America's Obama for that matter — leaves the opposite policymaker struggling for any cohesive long-term counter-strategy aside from concession or containment. There is no room for negotiation, no alternative path for engagement or resolution, because it has already been determined that the opponent is bent on provocation, and provocation is unjustifiable.
So how does the analyst, at least, avoid falling into this trap? Part of the process is to allow the analyst to be an analyst, to be free, during the analysis, from moralizing and judgmental assessments. While this requires the cooperation of the ultimate end-user of the analysis, first and foremost it requires strict discipline by the analyst.
One tool that can overcome the simplistic overuse of catchphrases is empathetic analysis. This is not "feeling" for the subject of study, nor is it determining what you would do in another's place. Rather, it is seeking to understand what the other will do in the other's place. Empathetic analysis seeks to understand the forces shaping and constraining the subject, from cultural and historical influences to bureaucratic structures, education, and personal experiences.
It is not a psychological profile, but rather a cultural and historical assessment coupled with an understanding of the relationships of power and authority, the structures of influence, and the forces that propel or drag on decision-making. Empathetic analysis is an ongoing process, one that must re-examine the subject as circumstances change. Done right, it can often "predict" behavior and responses before the actor decides, because it looks both at the actor and the objective realities around him to see not the myriad options, but rather the limited number of options.
As one tool in an analyst's toolkit, empathetic analysis provides a check on the tendency to oversimplify the complex to the point of simplistic assertions. But even without that level of rigor, it is important to be aware of the overuse of popular terms and phrases to "explain" actions. For provocation is just one of many words that have evolved and led to oversimplifications in analytical and journalistic assessments and political discourse, depriving the observer of valuable insights into decision-making.
"Geopolitics and the Pitfalls of Provocation is republished with permission of Stratfor."
The United States has had the world’s largest economy for about 140 years, and it roughly accounts for 22% of global GDP. However, in recent times China has overtaken the US by at least one measure of total economic strength, which is GDP based on purchasing power parity (PPP).
Either way you slice it, the economies are the two strongest globally in absolute terms.
That’s where the similarities end. While comparable in total size, the makeup of each economy is totally different. United States is a sophisticated and highly diversified economy that is based on services, finance, and consumption from the middle class. China has similar aspirations in the future, but right now it is resource-intensive growth engine making the transition from a manufacturing hub to a consumer-driven economy.
Today’s infographic looks at the economic differences between each country: total reserves, foreign direct investment, demographics, imports, exports, GDP per capita, energy, education, and much more.
Original graphic by: SCMP
House Republican leaders were slated to propose a bill this week linking a debt ceiling increase to conservative issues. Under the new proposal, the debt ceiling would be increased from $18.1 trillion to $19.6 trillion, and would likely extend through 2018.
However, new reports out of Washington suggest that internal support for the bill from Republican lawmakers is divided, and it is unlikely to go to the floor. Where things go from here are unclear. If it gets down to the wire, Republicans willing to play ball may have to seek Democrat support, but this would likely void any concessions to spending as originally proposed.
Congress is likely on the brink of another deadlock, similar to 2011 or 2013, in which debate will rage on even past the Treasury’s deadline of November 3. The end result is obvious: the limit will be increased. However, in the meantime, there is likely to be no shortage of brinkmanship as both parties do their song and dance.
This week’s chart shows the parabolic increase to the statutory debt limit from 1970 until today. The chart also includes the potential $19.6 trillion ceiling as described in the most recent proposal, as well as the lawmakers in control during each time period.
What is clear from this data is that over the past, the debt limit will increase no matter who is in control. While there may be minor differences, the ceiling as well as federal debt have reached unprecedented levels as a result of both parties. That is why the United States now has 29% of total sovereign debt and also the 2nd highest national debt when measured in terms of debt-to-revenue.
If a compromise isn’t reached, at some point the United States government would become unable to make payments on spending it has already committed to. The result would be a default on its debt obligations.
By the time you finish reading this infographic, there will be 3,810 new devices connected to the Internet of Things.
That’s because there are 328 million devices being connected to the internet each month. It’s also why researchers estimate that there are going to be 50 billion devices connected by 2020.
In fact, the future looks very different as we adopt to these technological trends. Already, 71% of Americans using wearable technology claim that it has improved their overall health and fitness. Imagine what will happen with more immersive analytics, a preventative mindset, more metrics of useful health functions, and integration into the health system.
The connected lifestyle means that there could be 500 devices in each home connected to the web by 2022. Every lightbulb, lock, thermostat, appliance, and item with an electronic circuit could be networked together, finding synergy. As strange as it may seem, by 2020 researchers even expect 100 million lightbulbs and lamps to be connected to this grid.
Entertainment and convenience are driving the “smart home” concept, which is expected to be worth $56 billion in 2018. However, there is also the benefit of creating a more energy efficient world. It’s already expected that street lamps could save energy costs up to 80%, so why can’t that be the case in the home as well? Self-adjusting thermostats, lights, and appliances will increase the efficiency of homes to make a big impact on net efficiency.
Original graphic by: Mobile Future
China’s rapid pace of growth is slowing, and no one knows if India can become the next China. So who will lead global economic growth?
Today’s infographic looks at the emerging markets of the future, or to say more confusedly, the “emerging” emerging markets.
The data speaks for itself. By 2050, Nigeria will be the 9th biggest economy in the world when measured by purchasing power parity (PPP). Pakistan will jump to 15th, and countries such as the Philippines, Bangladesh, and Vietnam will make big leaps to help round out the top 25.
The Asia-Pacific region, which currently makes up only 4.8% of the world’s middle-class spending, will balloon to the biggest spender by far in 2030 at 32.6%. For comparison, North America will jump from 5.5% to 5.8% in that same time period.
There is plenty of money to be made as well. Ultra high net worth individuals, defined as people with over $30 million in assets, will soar in these countries in the coming years. For example, in Africa as a whole, the amount of these individuals will grow 59% over the next decade, compared to the average global rate of 34% growth.
Original graphic by: Raconteur
The recent battle over a plan to relocate asylum seekers across the European Union did little to appease the already deep fault lines among member states. The proposal was eventually approved, but only after a succession of threats, unilateral moves and violations of EU rules. During the negotiations Berlin was unusually uncompromising — an attitude it also showed during the discussions over Greece's third bailout program.
Although the economic crisis has made Germany the single most powerful country in Europe, Berlin is often unwilling or unable to completely shape the direction of the Continental bloc. Germany tends to lead its relatively weaker partners without having complete control of the process. In recent months, Berlin has decided to take a more visible role in decision-making in the European Union, increasing frictions with other member states.
Changing power relationships and polarities have defined Europe's geopolitical history; the Continent traditionally has had multiple power centers competing and sometimes cooperating with each other. Situations where a single power controls the rest are very rare. Berlin's recent behavior therefore raises questions about the future of the distribution of power in Europe.
This has been a strange year for Germany. It began with a political defeat for Berlin, when the European Central Bank announced plans to purchase debt from eurozone members. The German government in general, and the Bundesbank in particular, had been skeptical about the idea, which Mediterranean Europe had long defended.
Germany faced new problems when the left-wing Syriza party won Greek elections on a campaign to end austerity measures and restructure the country's debt. The first weeks of Syriza's government were defined by a strong anti-German rhetoric and constant references to the country's Nazi past.
Germany eventually won the battle with Greece, as Athens accepted a third bailout package and the formerly rebellious Prime Minister Alexis Tsipras rebranded himself as the custodian of Greece's agreement with the creditors. But before an agreement was reached, things got very nasty for everyone involved. During the tough discussions over Athens' third bailout program, German Finance Minister Wolfgang Schaeuble suggested Greece's membership in the eurozone be suspended.
Whether or not this idea makes sense financially is irrelevant. The important aspect of Schaeuble's suggestion is that Germany — a country that for historical and strategic reasons is interested in preserving the unity of the European Union and the eurozone — decided it was time to question the so-called irreversibility of the common currency. Berlin may have won the battle with Athens over economic reforms, but it certainly lost the public relations war. The dispute between the two governments resurrected old stereotypes of "the ugly Germans" and their alleged attempt to impose their views on Europe.
If Germany thought the second half of the year would be calmer, it was wrong. Shortly after Athens accepted the third bailout, a new crisis erupted — a massive increase in the arrival of asylum seekers in Europe. Germany's first reaction was to announce it would take an unlimited number of Syrians, allowing Berlin to show the world a friendly face after the Greek negotiations. But it soon led to significant problems, including an increase in the number of people trying to reach Northern Europe through the so-called Balkan route, which links Greece, Macedonia, Serbia, Hungary and Austria, and conservative German leaders' questioning the financial and social impacts of Berlin's decision.
As with the Greek crisis, things had to get ugly before new policy could be decided. In the weeks leading to the meeting to debate the immigration crisis, German officials suggested EU structural funds should be suspended for countries not participating in a plan to distribute asylum seekers across the bloc. It was mostly an empty threat, because Berlin does not control the EU budget or the allocation of structural funds. But, just like during the negotiations with Athens, Berlin suddenly found itself making public threats to its EU partners.
The strategy worked, at least in the immediate term. Countries such as Spain and France, which were originally skeptical of introducing mandatory quotas of asylum seekers, eventually supported the idea. Most notably, Poland, which held several meetings with Hungary, the Czech Republic and Slovakia to define a common strategy against the plan, decided at the last minute to approve it as well.
But if the proposal to relocate migrants across Europe was controversial, the mechanism chosen to approve it was even more so. As EU members failed to reach a unanimous decision, the issue was put to a vote. Romania, the Czech Republic, Slovakia and Hungary voted against it, while Finland abstained.
A point could be made that voting is both legal and democratic. After all, member states accepted that most policies would be decided by a vote when they joined the European Union and enhanced voting procedures during several reforms of the bloc's treaties. More important, voting is the clearest expression of Continental integration. The system seeks to equate the European Union with any parliamentary democracy, where political minorities have to accept the decisions of the majority.
The problem is that the European Union is not a country, and its members cannot be compared to the states of a federal system. National governments preserve their national interests and are still accountable to their domestic constituencies. Attempts by unelected institutions in Brussels and by large economies such as Germany to impose policy across the Continent will continue to encounter resistance, even though all member states committed themselves to the principle of an "ever-closer union" when they joined.
Naturally, Germany's actions are also dictated by domestic concerns. In both the negotiations over the Greek bailout and the discussion about immigration quotas, conservative forces at home pressured Berlin not to squander taxpayers' money in poorly planned rescue programs for Greece or in hosting an unlimited number of asylum seekers.
These developments are noteworthy because they suggest a change in Germany's behavior. Berlin has known for a long time that, whether it likes it or not, its actions are key in steering the Continental bloc. But for historical reasons, Germany feels more comfortable operating in a system where decision-making is shared among many different national and institutional powers. If Germany decides it's time for more unilateral leadership in Europe, it will open a new era in the Continent's balance of power.
Since the consolidation of nation-states at the end of the 17th century, Europe has had several different power structures, most of which were based on a balance between multiple states. For example, a balance of power between the Austrian Empire, France, Prussia, Russia and the United Kingdom emerged after the Napoleonic Wars. The end of World War II started an unusual phase because the bipolar structure that dominated Europe during the Cold War involved a non-European power, the United States, and a partially European power, the Soviet Union.
The reunification of Germany in the early 1990s led to a brief period of European bipolarity, combining France's political and military leadership with Germany's economic might, as the European Union originally intended. However, the financial crisis put an abrupt end to this balance of power, for two reasons. First, France's economic decline reduced its political influence and made Germany the most powerful nation in Europe. Second, the financial crisis forced Berlin to protect the unity of the European Union while also defending its national wealth.
Germany did not react immediately. Berlin sought to preserve the image of a co-leadership structure with Paris during the early stages of the crisis, as exemplified by the "Merkozy" tandem between German Chancellor Angela Merkel and then-French President Nicolas Sarkozy. This structure did not hold for long, however, and in recent years Berlin has been alone at the top of the European political process.
Amid the European crisis, the Continent's power structure has taken the shape of what political scientist Samuel Huntington would call a "uni-multipolar system," in which a relatively strong power (Germany) tries to lead relatively weaker nations, but without having absolute control of the process. Huntington used this theory to describe the global system, but parts of it can be applied to Europe.
A key element of this system is that neither side is entirely happy with the status quo. The dominant power would prefer a structure it could shape according to its needs, while the subordinate powers would prefer a multipolar system. According to Huntington, this situation is stable only to the extent that these conflicting desires can be balanced. But in a political construction that includes Germany and France — two countries that tend to have different views about the future of Europe — and also Portugal and Estonia — two nations whose geopolitical imperatives have little in common — both consensus and imposition are problematic.
Should Germany decide to take an even more active role in deciding the direction of the European Union, resistance will follow. But should Berlin abandon its role as the Continent's main political force, the bloc's already visible fault lines will continue to deepen.
While the European Union is unlike any political structure Europe has seen before, history offers a few interesting precedents of attempts to bring together multiple political entities. During the Holy Roman Empire — a multiethnic group of territories in Central Europe that existed between the early Middle Ages and the early 19th century — an elected emperor was supposed to rule over hundreds of small political entities that had different levels of wealth, power and autonomy. The system lasted for almost a thousand years for the simple reason that the emperor's powers were extremely limited and most of the time the participating entities were left alone.
The Holy Roman Empire proved to be incredibly durable, but it was also chaotic and ineffective. And in the few cases where the emperor tried to impose his will on the empire, revolt followed. The most notable example of this is the Thirty Years' War, which was partially the result of the emperor's attempt to impose Catholicism on Protestant lands.
The Habsburg Empire, an unofficial name for the multiple territories that were ruled by the Austrian branch of the House of Habsburg, offers a precedent of a slightly more institutionalized attempt to rule a multinational state. By the late 19th century, the empire included, among others, Austrians, Hungarians, Italians, Bosnians, Croatians, Poles, Serbians and Romanians, in addition to Muslims and Jews of different origins.
Unlike the Holy Roman Empire, the Habsburgs ruled over peoples who, in the final years of the empire, had a clear notion of their national identities and resisted foreign control. In the early 20th century, a group of intellectuals close to Archduke Franz Ferdinand devised a plan to create the "United States of Greater Austria," a confederation of semi-autonomous and ethnically coherent states. The idea died with the archduke in 1914, and World War I led to the collapse of the empire. It is impossible to know whether the United States of Greater Austria would have worked, but it's fascinating to think that almost a century later intellectuals would discuss whether the "United States of Europe" would be viable.
A key lesson from the Greek and migration crises is that a successful European Union cannot be built on threats to incompliant countries. Before the crisis, the promise of economic prosperity was the glue keeping the bloc together. To a certain extent, fear of the unknown and threats of retaliation have replaced prosperity as the force maintaining cohesion in Europe. This will progressively weaken Europe's balance of power and create more resistance to Germany's attempts, whether real or perceived, to control the European Union.
The big question is what the Continent will look like in a decade. There are basically three options. The first is that Europe will evolve into a true federation (the "United States of Europe"), with a central government in Brussels and member states that are no longer sovereign. The second option is more in line with the United Kingdom's view of Europe: a community of nations that are linked by free trade but preserve most of the features of the nation-state. The third option implies that Europe goes back to its pre-World War II status: a group of nation-states where cooperation and competition coexist in a power structure that is permanently changing and where conflict is always latent.
The federal option is virtually impossible in the current circumstances. The third option is also unlikely, because returning to a system of fully sovereign nation-states would require European populations to forsake the benefits of decades of integration.
The second option, or different versions of it, seems more probable. In recent months, basic tenets of the European Union, such as the free movement of people, have been put into question. The events of 2015 proved that it's not unthinkable that countries could leave the eurozone or temporarily reinstate trade barriers in times of deep crisis. It is also not unthinkable that countries could decide to protect different aspects of their sovereignty if they feel the European Union, or another member state, is threatening their strategic imperatives. One thing is certain, however: The current power structure in Europe is becoming harder to sustain.
"The Next Phase of European Power Politics is republished with permission of Stratfor."