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From Energy Core to Currency War

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A multi-spectrum war is being waged against Moscow by Washington. If there are any doubts about this, they should be put to rest. Geopolitics, science and technology, speculation, financial markets, information streams, large business conglomerates, intelligentsia, mass communication, social media, the internet, popular culture, news networks, international institutions, sanctions, audiences, public opinion, nationalism, different governmental bodies and agencies, identity politics, proxy wars, diplomacy, countervailing international alliances, major business agreements, non-governmental organizations (NGOs), human rights, prestige, military personnel, capital, and psychological tactics are all involved in this multi-spectrum war.

On a daily basis this struggle can be seen playing out on the airwaves, in the war theaters in Ukraine and the Middle East, through the statements and accusations of diplomats, and in the economic sphere.
Additionally, the debates and questions on whether a new cold war—a post-Cold War cold war—has emerged or if the Cold War never ended should be put to rest too. The mentality of the Cold War never died in the Washington Beltway.

From the perspective of Russian officials, it is clear that the US never put down its war mace and continued the offensive. The dissolution of the Warsaw Pact, defeating the Soviets and Eastern Bloc, and seeing the Soviet Union dismantled into fifteen republics was not enough for the Cold War warriors in the US. The newly emergent Russian Federation had to be placated in their views.
Petro-politics have been a major feature of this multi-spectrum war too. [1] Not only have energy prices been a factor in this struggle, but so are financial markets and national currencies. The manipulated decline in the price of energy, which has been driven by the flooding of the global market with oil, is now being augmented by a siege on the value of the Russian ruble.
This is part of what appears to be a deliberate two-pronged attack on the Russian Federation that seeks to cut Russia’s revenues through market manipulation via economic sanctions and price drops. It is what you would call a «double whammy». While sanctions have been imposed on the Russian economy by the US and its allies, including Australia, Canada, the European Union, and Japan, offensives on Russia’s main source of revenue — energy — and its national currency have taken place.

Currency Warfare and Inflation
The price of the Russian ruble begun to drop in December 2014 as a consequence of the economic siege on the Russian Federation, the drop in global energy prices, and speculation. «Judging by the situation in the country, we are in the midst of a deep currency crisis, one that even Central Bank employees say they could not have foreseen in their worst nightmares». Interfax’s Vyacheslav Terekhov commented on the currency crisis while talking to Russian Preisdent Vladimir Putin during a Kremlin press conference on December 18, 2014. [2] Putin himself admitted this too at the press conference. While answering Terekhov, Putin explained that «the situation has changed under the influence of certain foreign economic factors, primarily the price of energy resources, of oil and consequently of gas as well». [3]
Some may think that the drop in the Russian ruble’s value is a result of the market acting on its own while others who recognize that there is market manipulation involved may turn around and blame it on the Russian government and Vladimir Putin.

This process, however, has been guided by US machinations. It is simply not a result of the market acting on its own or the result of Kremlin policies. It is the result of US objectives and policy that deliberately targets Russia for destabilization and devastation. This is why Putin answered Terekhov’s question by saying that the drop in the value of the Russian ruble «was obviously provoked primarily by external factors». [4]
Both US Assistant-Secretary of State Victoria Nuland — the wife of the Project for the New American Century (PNAC) co-founder and neo-conservative advocate for empire Robert Kagan—and US Assistant-Secretary of the Treasury Daniel Glaser told the Foreign Affairs Committee of the US House of Representatives in May 2014 that the objectives of the US economic sanctions strategy against the Russian Federation was not only to damage the trade ties and business between Russia and the EU, but to also bring about economic instability in Russia and to create currency instability and inflation. [5]
In other words, the US government was targeting the Russian ruble for devaluation and the Russian economy for inflation since at least May 2014.

It appears that the US is trying to manipulate the Kremlin into spending Russia’s resources and fiscal reserves to fight the inflation of the Russian ruble that Washington has engineered.
The Kremlin, however, will not take the bait and be goaded into depleting the approximately $419 billion (US) foreign currency reserves and gold holdings of the Russian Federation or any of Russia’s approximately 8.4 trillion ruble reserves in an effort to prop the declining value of the Russian ruble.

In this regard, while holding a press conference, President Putin has stated the following on December 18, 2014: «The Central Bank does not intend to ‘burn’ them all senselessly, which is right». [6] Putin emphasized this again when answering Vyacheslav Terekhov’s question by saying that the Russian government and Russian Central Bank «should not hand out our gold and foreign currency reserves or burn them on the market, but provide lending resources». [7]
The Kremlin understands what Washington is trying to do. The US is replaying old game plans against Russia. The energy price manipulation, the currency devaluation, and even US attempts to entrap Russia in a conflict with its sister-republic Ukraine are all replays of US tactics that have been used before during the Cold War and after 1991.
For example, dragging Russia into Ukraine would be a replay of how the US dragged the Soviet Union into Afghanistan whereas the manipulation of energy prices and currency markets would parallel the US strategy used to weaken and destabilize Baathist Iraq, Iran, and the Soviet Union during the Afghan-Soviet War and Iran-Iran War.
Instead of trying to stop the value of the ruble from dropping, the Kremlin appears to have decided to strategically invest in Russia’s human capital. Russia’s national reserve funds will be used to diversify the national economy and strengthen the social and public sectors.
Despite the economic warfare against Russia, this is exactly why the wages of teachers in schools, professors in post-secondary institutions of learning and training, employees of cultural institutions, doctors in hospitals and clinics, paramedics, and nurses—the most important sectors for developing Russia’s human capital and capacity—have all been raised.

The Russian Bear Courts the Turkish Grey Wolf
The Kremlin, however, has an entire list of options at its disposal for countering the US offensive against Russia. One of them involves the courting of Turkey. The Russian courtship of Turkey has involved the Russian move away from the construction of the South Stream natural gas pipeline from Russia across the Black Sea to Bulgaria.
Putin announced that Russia has cancelled the South Stream project on December 1, 2014. Instead the South Stream pipeline project has been replaced by a natural gas pipeline that goes across the Black Sea to Turkey from the Russian Federation’s South Federal District.
This alterative pipeline has been popularly billed the «Turk Stream» and partners Russian energy giant Gazprom with Turkey’s Botas. Moreover, Gazprom will start giving Turkey discounts in the purchase of Russian natural gas that will increase with the intensification of Russo-Turkish cooperation.

The natural gas deal between Ankara and Moscow creates a win-win situation for both the Turkish and Russian sides. Not only will Ankara get a discount on energy supplies, but Turk Stream gives the Turkish government what it has wanted and desired for years.
The Turk Stream pipeline will make Turkey an important energy corridor and transit point, complete with transit revenues. In this case Turkey becomes the corridor between energy supplier Russia and European Union and non-EU energy customers in southeastern Europe.
Ankara will gain some leverage over the European Union and have an extra negotiating card with the EU too, because the EU will have to deal with it as an energy broker.
For its part, Russia has reduced the risks that it faced in building the South Stream by cancelling the project. Moscow could have wasted resources and time building the South Stream to see the project sanctioned or obstructed in the Balkans by Washington and Brussels.
If the European Union really wants Russian natural gas then the Turk Stream pipeline can be expanded from Turkey to Greece, the former Yugoslav Republic (FYR) of Macedonia, Serbia, Hungary, Slovenia, Italy, Austria, and other European countries that want to be integrated into the energy project.

The cancelation of South Stream also means that there will be one less alternative energy corridor from Russia to the European Union for some time. This has positive implications for a settlement in Ukraine, which is an important transit route for Russian natural gas to the European Union.
As a means of securing the flow of natural gas across Ukrainian territory from Russia, the European Union will be more prone to push the authorities in Kiev to end the conflict in East Ukraine.

In more ways than one the Turk Stream pipeline can be viewed as a reconfigured of the failed Nabucco natural gas pipeline. Not only will Turk Stream court Turkey and give Moscow leverage against the European Union, instead of reducing Russian influence as Nabucco was originally intended to do, the new pipeline to Turkey also coaxes Ankara to align its economic and strategic interests with those of Russian interests.
This is why, when addressing Nabucco and the rivalries for establishing alternate energy corridors, this author pointed out in 2007 that «the creation of these energy corridors and networks is like a two-edged sword. These geo-strategic fulcrums or energy pivots can also switch their directions of leverage. The integration of infrastructure also leads towards economic integration». [8]
The creation of Turk Stream and the strengthening of Russo-Turkish ties may even help placate the gory conflict in Syria. If Iranian natural gas is integrated into the mainframe of Turk Stream through another energy corridor entering Anatolia from Iranian territory, then Turkish interests would be even more tightly aligned with both Moscow and Tehran.

Turkey will save itself from the defeats of its neo-Ottoman policies and be able to withdraw from the Syrian crisis. This will allow Ankara to politically realign itself with two its most important trading partners, Iran and Russia.
It is because of the importance of Irano-Turkish and Russo-Turkish trade and energy ties that Ankara has had an understanding with both Russia and Iran not to let politics and their differences over the Syrian crisis get in the way of their economic ties and business relationships while Washington has tried to disrupt Irano-Turkish and Russo-Turkish trade and energy ties like it has disrupted trade ties between Russia and the EU. [9]

Ankara, however, realizes that if it lets politics disrupt its economic ties with Iran and Russia that Turkey itself will become weakened and lose whatever independence it enjoys
Masterfully announcing the Russian move while in Ankara, Putin also took the opportunity to ensure that there would be heated conversation inside the EU. Some would call this rubbing salt on the wounds. Knowing that profit and opportunity costs would create internal debate within Bulgaria and the EU, Putin rhetorically asked if Bulgaria was going to be economically compensated by the European Commission for the loss.

The Russian Bear and the Chinese Dragon
It is clear that Russian business and trade ties have been redirected to the People’s Republic of China and East Asia. On the occasion of the Sino-Russian mega natural gas deal, this author pointed out that this was not as much a Russian countermove to US economic pressure as it was really a long-term Russian strategy that seeks an increase in trade and ties with East Asia. [10]
Vladimir Putin himself also corroborated this standpoint during the December 18 press conference mentioned earlier when he dismissed—like this author—the notion that the so-called «Russian turn to the East» was mainly the result of the crisis in Ukraine.
In President Putin’s own words, the process of increasing business ties with the Chinese and East Asia «stems from the global economic processes, because the East – that is, the Asia-Pacific Region – shows faster growth than the rest of the world». [11]
If this is not convincing enough that the turn towards East Asia was already in the works for Russia, then Putin makes it categorically clear as he proceeds talking at the December 18 press conference.

In reference to the Sino-Russian gas deal and other Russian projects in East Asia, Putin explained the following: «The projects we are working on were planned long ago, even before the most recent problems occurred in the global or Russian economy. We are simply implementing our long-time plans». [12]
From the perspective of Russian Presidential Advisor Sergey Glazyev, the US is waging its multi-spectrum war against Russia to ultimately challenge Moscow’s Chinese partners.

In an insightful interview, Glazyev explained the following points to the Ukrainian journalist Alyona Berezovskaya—working for a Rossiya Segodnya subsidiary focusing on information involving Ukraine—about the basis for US hostility towards Russia: the bankruptcy of the US, its decline in competitiveness on global markets, and Washington’s inability to ultimately save its financial system by serving its foreign debt or get enough investments to establish some sort of innovative economic breakthrough are the reasons why Washington has been going after the Russian Federation. [13]
In Glazyev’s own words, the US wants «a new world war». [14] The US needs conflict and confrontation, in other words. This is what the crisis in Ukraine is nurturing in Europe.

Sergey Glazyev reiterates the same points months down the road on September 23, 2014 in an article he authors for the magazine Russia in Global Affairs, which is sponsored by the Russian International Affairs Council—an think-tank founded by the Russian Foreign Ministry and Russian Ministry of Education 2010—and the US journal Foreign Affairs—which is the magazine published by the Council on Foreign Relation in the US.
In his article, Glazyev adds that the war Washington is inciting against Russia in Europe may ultimately benefit the Chinese, because the struggle being waged will weaken the US, Russia, and the European Union to the advantage of China. [15]

The point of explaining all this is to explain that Russia wants a balanced strategic partnership with China. Glazyev himself even told Berezovskaya in their interview that Russia wants a mutually beneficial relationship with China that does reduce to becoming a subordinate to Beijing. [16]
Without question, the US wants to disrupt the strategic partnership between Beijing and Moscow. Moscow’s strategic long-term planning and Sino-Russian cooperation has provided the Russia Federation with an important degree of economic and strategic insulation from the economic warfare being waged against the Russian national economy.

Washington, however, may also be trying to entice the Chinese to overplay their hand as Russia is economically attacked. In this context, the price drops in the energy market may also be geared at creating friction between Beijing and Moscow.
In part, the manipulation of the energy market and the price drops could seek to weaken and erode Sino-Russian relations by coaxing the Chinese into taking steps that would tarnish their excellent ties with their Russian partners.
The currency war against the Russian ruble may also be geared towards this too. In other words, Washington may be hoping that China becomes greedy and shortsighted enough to make an attempt to take advantage of the price drop in energy prices in the devaluation of the Russian ruble.

Whatever Washington’s intentions are, every step that the US takes to target Russia economically will eventually hurt the US economy too. It is also highly unlikely that the policy mandarins in Beijing are unaware of what the US may try to be doing. The Chinese are aware that ultimately it is China and not Russia that is the target of the United States.

Economic Terrorism: An Argentina versus the Vulture Funds Scenario?
The United States is waging a fully fledged economic war against the Russian Federations and its national economy. Ultimately, all Russians are collectively the target. The economic sanctions are nothing more than economic warfare. If the crisis in Ukraine did not happen, another pretext would have been fund for assaulting Russia.

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Both US Assistant-Secretary of State Victoria Nuland and US Assistant-Secretary of the Treasury Daniel Glaser even told the Foreign Affairs Committee of the US House of Representatives in May 2014 that the ultimate objectives of the US economic sanctions against Russia were to make the Russian population so miserable and desperate that they would eventually demand that the Kremlin surrender to the US and bring about «political change».
«Political change» can mean many things, but what it most probably implies here is regime change in Moscow. In fact, the aims of the US do not even appear to be geared at coercing the Russian government to change its foreign policy, but to incite regime change in Moscow and to cripple the Russian Federation entirely through the instigation of internal divisions.

This is why maps of a divided Russia are being circulated by Radio Free Europe. [17]

According to Presidential Advisor Sergey Glazyev, Washington is «trying to destroy and weaken Russia, causing it to fragment, as they need this territory and want to establish control over this entire space». [18]

«We have offered cooperation from Lisbon to Vladivostok, whereas they need control to maintain their geopolitical leadership in a competition with China,» he has explained, pointing out that the US wants lordship and is not interested in cooperation. [19]
Alluding to former US top diplomat Madeline Albright’s sentiments that Russia was unfairly endowed with vast territory and resources, Putin also spoke along similar lines at his December 18 press conference, explaining how the US wanted to divide Russia and control the abundant natural resources in Russian territory.

It is of little wonder that in 2014 a record number of Russian citizens have negative attitudes about relations between their country and the United States. A survey conducted by the Russian Public Opinion Research Center has shown that of 39% of Russian respondents viewed relations with the US as «mostly bad» and 27% as «very bad». [20]
This means 66% of Russian respondents have negative views about relations with Washington. This is an inference of the entire Russian population’s views.
Moreover, this is the highest rise in negative perceptions about the US since 2008 when the US supported Georgian President Mikheil Saakashvili in Tbilisi’s war against Russia and the breakaway republic of South Ossetia; 40% viewed them as «mostly bad» and 25% of Russians viewed relations as «very bad» and at the time. [21]

Russia can address the economic warfare being directed against its national economy and society as a form of «economic terrorism». If Russia’s banks and financial institutions are weakened with the aim of creating financial collapse in the Russian Federation, Moscow can introduce fiscal measures to help its banks and financial sector that could create economic shockwaves in the European Union and North America.
Speaking in hypothetical terms, Russia has lots of options for a financial defensive or counter-offensive that can be compared to its scorched earth policies against Western European invaders during the Napoleonic Wars, the First World War, and the Second World War.
If Russian banks and institutions default and do not pay or delay payment of their derivative debts and justify it on the basis of the economic warfare and economic terrorism, there would be a financial shock and tsunami that would vertebrate from the European Union to North America. This scenario has some parallels to the steps that Argentina is taken to sidestep the vulture funds.
The currency war eventually will rebound on the Washington and Wall Street. The energy war will also reverse directions. Already, the Kremlin has made it clear that it and a coalition of other countries will de-claw the US in the currency market through a response that will neutralize US financial manipulation and the petro-dollar.

In the words of Sergey Glazyev, Moscow is thinking of a «systemic and comprehensive» response «aimed at exposing and ending US political domination, and, most importantly, at undermining US military-political power based on the printing of dollars as a global currency». [22]
His solution includes the creation of «a coalition of sound forces advocating stability—in essence, a global anti-war coalition with a positive plan for rearranging the international financial and economic architecture on the principles of mutual benefit, fairness, and respect for national sovereignty». [23]

The coming century will not be the «American Century» as the neo-conservatives in Washington think. It will be a «Eurasian Century». Washington has taken on more than it can handle, this may be why the US government has announced an end to its sanctions regime against Cuba and why the US is trying to rekindle trade ties with Iran.
Despite this, the architecture of the post-Second World War or post-1945 global order is now in its death bed and finished. This is what the Kremlin and Putin’s presidential spokesman and press secretary Dmitry Peskov mean when they impart—as Peskov stated to Rossiya-24 in a December 17, 2014 interview — that the year 2014 has finally led to «a paradigm shift in the international system».
 

Repost from the MD’s partner the 4th Media.
 
NOTES
[1] Mahdi Darius Nazemroaya, «Oil Prices and Energy Wars: The Empire of Frack versus Russia,» Strategic Culture Foundation, December 5, 2014.
[2] Official Kremlin version of the transcribed press conference — titled «News conference of Vladimir Putin» (December 18, 2014)—has been used in quoting Vladimir Putin.
[3] Ibid.
[4] Ibid.
[5] Mahdi Darius Nazemroaya, «Psychological War In The Financial Markets And The Sino-Russian Gas Deal,» Mint Press News, May 29, 2014.
[6] Supra. n.2.
[7] Ibid.
[8] Mahdi Darius Nazemroaya, «The ‘Great Game’ Enters the Mediterranean: Gas, Oil, War, and Geo-Politics,» Global Research, October 14, 2007.
[9] Mahdi Darius Nazemroaya, «Oil Prices and Energy Wars,» op. cit.; Mahdi Darius Nazemroaya, «Turkey & Iran: More than meets the eye»RT, January 20, 2014.
[10] Mahdi Darius Nazemroaya, «Psychological War In The Financial Markets,» op. cit.
[11] Supra. n.2.
[12] Ibid.
[13] Sergey Glazyev, «Alyona Berezovskaya interviews Sergei Glazyev,» Interview with Alyona Berezovskaya, Ukraine.ru, July 17, 2014: .
[14] Ibid.
[15] Sergey Glazyev, «The Threat of War and the Russian Response,» Russia in Global Affairs, September 24, 2014.
[16] Sergey Glazyev, «Alyona Berezovskaya interviews,» op. cit.
[17] Mahdi Darius Nazemroaya, «WWIII aimed to redraw map of Russia?» Strategic Culture Foundation, September 10, 2014.
[18] Sergey Glazyev, «Alyona Berezovskaya interviews,» op. cit.
[19] Ibid.
[20] Всероссийский центр изучения общественного мнения [Russian Public Opinion Research Center], «Россия-США отношенияв точке замерзания» [«Russia-US Relations at Freezing Point»], Press release 2729, December 4, 2014: .
[21] Ibid.
[22] Sergey Glazyev, «The Threat of War,» op. cit.
[23] Ibid.

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Energy

Oil and gas geopolitics and its end

Giancarlo Elia Valori

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Let us see how oil barrel prices have really fluctuated in recent weeks: in April, in fact, the European and Asian Brent benchmark, in parallel with the US West Texas Intermediate (WTI), decreased by about 1 U.S. dollar per barrel a day. 

 The WTI, however, is a mixture of different light and sweet American crude oil and is refined especially in the Midwest and on the Gulf Coast.

 The benchmark known as Brent, instead, is oil extracted in the North Sea and it has greater and faster access to large markets. It is therefore used as a common benchmark for the broader oil market, while the WTI is now used above all as a reference for the American market.

 It should be noted, however, that in the previous month of March, the two benchmarks had fallen by 26.5 U.S. dollars per barrel and 24 U.S. dollars per barrel respectively.

In short, the imbalance in the oil market fully affected the March futures prices in particular, while the April fluctuations were mainly due to the OPEC plus agreement reached on April 2, setting the price at 26.03 U.S. dollars per barrel. 

 The breakdown in negotiations between Saudi Arabia and Russia led to a Saudi super-production – at first of 10 million barrels a day and then immediately of 12 million barrels a day – with a subsequent choice by OPEC to agree on a “fall” in the oil barrel price at 60 U.S. dollars, given the Covid-19 pandemic crisis.

 A mistake, but probably a too classically macroeconomic forecast that does not consider strategic and internal competition assessments within OPEC, which are often essential to set prices.

 Later the oil barrel price increased immediately to 34.44 U.S. dollars per barrel on April 9, then to 16.04 U.S. dollars per barrel on April 22 and finally closed at 25.04 U.S. dollars per barrel.

In mid-April the WTI opened at 20.48 U.S. dollars per barrel, then reached 28.26 U.S. dollars and finally closed at 19.29 U.S. dollars, after having also reached the negative and paradoxical price of -37.63 U.S. dollars per barrel on April 20, 2020.

Moreover, on April 14, the International Monetary Fund published a forecast from which it could be inferred that the world GDP would decrease by 3% in the remaining period of 2020, while on April 15 the International Energy Agency published its own analysis which estimated a reduction ofthe oil demand by 9,300,000 barrels per day by the end of 2020.

Hence the WTI futures for May delivery, immediately collapsed to -37.63 U.S. dollars per barrel. Here, however, the real problem is storage.

 Short-term contracts do not envisage it at all.

 In fact, as many industry analysts maintain, this caused the fall in prices.

 It is no coincidence, in fact, that U.S. commercial oil stocks have risen significantly, from 469,193,000 barrels on March 27 to 527,631,000 barrels on May 24. Hence, in all likelihood, the U.S. ETF Oil Fund – which plunged by 15% in the April 27 session alone, after the announcement of major changes in the composition of its portfolio – has fallen due to unexpected overstocking.

 In other words, the U.S. Fund has stated it plans to remove all WTI contracts expiring in June from its portfolio and replace them with longer-term contracts, with obvious immediate losses.

 Therefore,the US Oil Fund will be broken down as follows: 30% of the portfolio will be WTI contracts expiring in July; 15% of the portfolio will be WTI contracts expiring in August; then contracts expiring in the following month up to the remaining 10% expiring in June 2021.

 The losses of the U.S. Fund are now -87% since the beginning of this year.

The U.S. Fund has an estimated value of 3 billion U.S. dollars. A financial phenomenon that has made it similar to other funds specializing in oil futures.

 It is clear that this behaviour has contributed to the bearish trend of recent months and this has certainly not favoured Donald J. Trump’s election campaign.

Furthermore, the WTI decline can also be explained by the structural logistical shortcomings that characterize the oil transport system within the United States.

Nevertheless, based on the ideas of the current Algerian Chairman-in-office, OPEC predicts that the oil barrel price will be equal to 40 U.S. dollars at the beginning of the third quarter of 2020 and that, in any case, the oil market will return to balance before the end of this year. A very unlikely hope.

The new OPEC plus plus agreement, however, entered into force on May 1, 2020.

 The first phase of the agreement signed on April 12, 2020envisaged that all OPEC members plus the others would reduce production by 9,700,000 barrels a day until June 30, 2020.

 At the beginning of May, the Russian Federation and Saudi Arabia brought their production to 8,750,000 barrels a day (with a decrease of 2 million barrels per day), with the further intention of bringing their output to the limit of 8,500,000 barrels a day.

 The first phase of the bilateral agreement signed on April 12 also envisaged that the producers nor belonging directly to OPEC would “voluntarily” cut production by at least 5,000,000 barrels a day over the same period of time.

It should be recalled that these important non-OPEC producers include Norway, Canada, Brazil and, obviously, the United States.

Nevertheless, the non-OPEC total cuts have reached – with some difficulty – just 4,100,000 barrels a day.

Indeed, according to Standard & Poor’s calculations, the United States decreased production by as many as 11,600,000 barrels a day and only for the week which ended on May 8.

Hence a decrease of 1.5 million barrels a day, compared to the level of 13,100,000 barrels a day reached on March 13, 2020.

Therefore, for the first time since February 2019 the U.S. production has fallen below 12,000,000 barrels a day.

 Moreover, on April 30, 2020, the U.S. strategic oil reserves reached 636 million oil barrels, compared to a total maximum capacity of 714 million barrels.

According to the Oxford Institute for Energy Studies, however, global oil demand will decrease by as many as 11,400,000 barrels a day throughout 2020, before slightly increasing by 10,600,000 barrels a day in 2021.

Despite all possible statistical tricks, however, the unemployment rate has currently reached 14.7% in the United States and it is rising quickly.

This leads to a fall of about 30% in U.S. oil consumption, but the Russian Federation records a 4-6% GDP drop at least until the end of 2020.

Moreover, on April 24, the Russian Central Bank cut rates by 50 basis points to 5.5%, while the Russian inflation rate is expected to rise by 4.8% until the end of this year.

According to data of April 30 last, China shows an increase in the composite index (manufacturing + services) from 53 to 53.4, while the index of services alone has grown from 52.3 to 53.2.

However, the index of Chinese purchases in the manufacturing sector alone has decreased by two points, while the CAXIN index – which measures Chinese private SMEs – points to a small recession.

 Chinese oil imports in April, in fact – driven only by public enterprises – increased by 4.5% year over year.

 Chinese imports from Saudi Arabia, however, decreased by 90,000 barrels a day while, despite U.S. sanctions, Chinese purchases of Iranian oil rose by 11.3% as against the previous year.

 Therefore, we are faced with a new distribution of geopolitical and oil control areas.

The alternative for China is between Iran, the core of the new Silk Road, and Venezuela, although both Russia and China have agreed to give Russia a primary role in Venezuela.

Hence the global geopolitical games are postponed to the return of a robust oil demand after the Covid-19 crisis, which will end only with a vaccine or a universally accepted therapy. On a geopolitical level, however, it will probably concern a new agreement between China, the United States and the Russian Federation.

 An agreement that this time could see a real role of mediator for Italy, involving both ENI and governmental and private technical structures.

There are many issues to be considered in the relations between the United States, China and Russia: Russia’s alleged penetration into the North American electoral and political machinery and apparata; the commercial negotiations between the United States and China which, coincidentally, exacerbated during the oil price crisis; finally, the infra-US conflict regarding the reduction of local oil production.

It has to be said that if there is a recovery of the oil market, demand could reach 90-95 million barrels a day, but the country recording the greatest loss of production will certainly be the United States, which has the highest cost of oil barrel production.

Meanwhile, in its anti-coronavirus aid programme of April 30 last, the Federal Reserve envisaged direct support to U.S. oil and gas companies.

As many analysts maintain, however, several companies of the shale sector, which live only on high prices, would go bankrupt by the end of 2020.

 In terms of global assessments, however, world oil demand is estimated to fall by 19,000,000 barrels a day during this quarter of 2020 and by 8,600,000 barrels a day throughout 2021.

 Global oil supply is expected to decrease by 12,000,000 barrels a day since May to 88,000,000 next year.

 OECD stocks have increased by 68,200,000 barrels a day to a total of 2,961,000,000, well over 46,000,000 barrels a day above the average of the last five years – a quantity worth 90 days of average demand.

Non-conventional crude oil production in the U.S., however, declined by 183,000 barrels a day with a peak until March 13, before falling by approximately 12,000,000 barrels a day on May 8.

 There are currently 374 drills operating in the United States, of which 292 oil and 80 gas ones, plus 2 mixed ones.

 They are 228 fewer than those recorded on April 9, 2020, the minimum level since 1940.

 In short, the Covid-19 pandemic is redesigning all geopolitical scenarios, through oil, above all, but not only through it. Here not only energy counts, but rather the whole economic system which, however, is still currently oil-dependent.

The G20 has already put forward international cooperation proposals to cancel the debt of some of the poorest countries and for a coordinated response against the pandemic by the most technologically advanced countries.

Hence any radical transformation of energy systems entails a paradigm shift at geopolitical level.

 According to the International Monetary Fund, no oil-producing country can make money with an oil barrel price at 40 U.S. dollars. Only Qatar barely can, but every country in the Middle East needs prices of at least 60 U.S. dollars per barrel.

However, there is more than the tax or productive breakeven point: the producing countries’ economic diversification is essential.

 From this viewpoint, only Mexico, the Russian Federation and the United Arab Emirates could survive, while some others with less differentiated economies can still ask for loans or temporarily stop public spending.

Nevertheless, this depends not only on macroeconomic evaluations, but above all on political and structural issues: the presence of foreign manpower that can be easily sent away (Saudi Arabia); the possibility of using other forms of energy (Morocco) or the negative impact of some old Welfare State on the oil price (Algeria).

 Other countries are, instead, particularly vulnerable: Iraq, which is currently also one of Italy’s main suppliers; Oman, Algeria, Nigeria, Ecuador, Angola, Surinam, not to mention Iran and Venezuela, where the oil issue is part of a severe international political crisis.All these countries can shortly fail or fall into an indefinite crisis, with unpaid salaries in the public sector and primary services largely reduced, as well as military crises and great political instability.

In some cases, this may lead to the expansion of “terrorism”, more exactly of the “sword jihad”, which can drive a wedge within the hotbeds of crisis and rule the States or the areas left by the old legitimate governments. It may also lead to the uncontrolled expansion of the great international crime, which can turn the failed States into bases to attack the still relatively healthy economies of some Western countries, and to connect the areas of illegality one another and hence turn the crime territories into a new great geopolitical player.

 A further possibility – not to be ruled out at all – concerns the mounting of regional tensions, which could become a not entirely irrational option, at least for some producing countries.

Just think of the oil barrel price crisis triggering a final showdown between Iran and Saudi Arabia.

 There will also be Asian or African countries that will benefit from the vertical fall in prices.

It should be recalled, however, that on April 20 last, the West Texas Crude contract expiring in May fell to -40.32 U.S. dollars.

The countries which will benefit – to a certain extent – from the fall in prices include Argentina -which is currently already prey to yet another default, but which will pay much less for energy imports- as well as the Philippines, India, Turkey and South Africa.

 These countries will no longer be burdened by the cost of oil imports, but will also attract less investment from producing countries, whose availability of capital will collapse quickly.

 Previously oil prices had fallen due to the expansion of the shale market in the United States, to lower global growth and to the slow, but stable shift to renewable energy in most consumer countries.

 Then the Covid-19 pandemic broke out, which accelerated all these factors and, in fact, blocked the economy and saturated oil inventories and warehouses.

 The world economy will not “recover” soon or, more exactly, will no longer be as it was before the pandemic.

 Global Value Chains will become much shorter and many mature, but essential productions will go back to the countries which, in the times of rampant globalization, moved everything – except for high technology and finance – to countries with low labour costs and low taxes.

 The producing countries’ adaptation to the new context will certainly be slower than needed.

 The large solar energy basin planned by Mohammed Bin Salman’s Vision 2030 was stopped indefinitely last November, while the privatization of Saudi Aramco has now proved to be a failure.

 Once the profitability of the Saudi oil has ended – and hence the special relationship between the United States and Saudi Arabia, as well as the U.S. penetration in the Middle East -currently a phase of great instability in the relations between Saudi Arabia and Iran is beginning, in which Iran could play other cards besides the purely military ones.

However, the Iranian oil extraction cost is higher than the Saudi one.

 The Russian Federation “falls” at an oil barrel price of 40 U.S. dollars and, if it cannot control its internal areas and the border with China and the Caucasus, it is very easy to imagine what could happen.

 Even the United States is not in a better situation.

 Shale oil is the biggest source of employment in Michigan, Arkansas and Ohio. These are essential States for the re-election of Donald J. Trump and surely the President will do everything to support the workers-voters and these States.

 The end of the oil economy is near – or probably it has already arrived – and no one can imagine what will happen to energy markets and to our economies in the near future.

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Energy

The greening of China’s industrial strategy

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The prominence of China’s role in the global green shift currently underway may seem a paradox. Whilst it has been despoiling its own environment and that of some other countries in pursuit of the same fossil-fuelled industrialisation strategy that made the West wealthy, China has also emerged as a renewables superpower, dwarfing other countries in its building of renewable capacity and the speed of its transition to innovations such as electric cars, trucks and buses. China is betting big on renewables and on a circular economy. Indeed, the success of its development depends on this wager succeeding. Scale is the key to understanding its strategy: China’s industrialisation is a process taking place at a scale without historical precedent.

Like all previous industrial powers, China initially depended on fossil fuels for its industrialisation. It has paid a terrible price for this – far more than earlier industrialisers, including its predecessors in East Asia. As China became the largest manufacturing power on the planet, it created a huge domestic market that provided a first port of entry to global industry for its manufacturing and service firms, on a scale that exceeded its East Asian predecessors. China was able to utilise its domestic banking system to channel flows of savings to firms as they sought to catch up with international rivals. In these ways, the strategy has followed earlier patterns of industrialisation, with emphasis on manufacturing, state guidance and state-derived finance, while exhibiting some differences in emphasis, such as the use of its own domestic market, its own finance and foreign reserves, and a combination of national and provincial state involvement and guidance.

But a feature of China’s industrialisation that is decidedly unique is its strategy for supplying the energy needed for its industrialisation efforts. Alongside China’s “black” industrialisation strategy, powered by fossil fuels, has been a “green” strategy, focused on renewables and circulated resources – again, at unprecedented scale. China has been greening its energy and resources system at a furious pace, while maintaining a dependence on fossil fuels that is steadily diminishing. The chart below reveals how China has been ramping up its green electric power system to become the largest green electricity producer on the planet. The shift in electric power generation towards water, wind and sun as sources is clear – a 15% green shift in capacity in just the past decade, an enormous change for such a huge technoeconomic system.

What is driving this green trend?

If China were to proceed with the typical industrialisation strategy – based on fossil fuels and the plunder of raw materials – then it would face insuperable problems. These would not just be problems of shortages of resources and immediate environmental problems, but most centrally problems to do with the geopolitical limits to a fossil-fuelled strategy relying on virgin materials. To put it bluntly, China would face entanglements in oil wars and resource wars if it were to pursue such a strategy at the scale of industrialisation it is managing – not to mention the burden on its balance of payments as it sought to raise its imports of these fossil fuels. It would mean a horrendous 21st century – for China and for everyone else.
 

As interpreted by China, a green growth strategy is not so much about a return to nature, but instead involves a clear reliance on manufacturing of energy, as well as greening of food supply through increased reliance on enclosed urban agriculture. The advantage for China of renewables technologies is that they can be manufactured domestically and enjoy economies of scale and cost reductions associated with the manufacturing learning curve.

It is not lost on China that these are all potentially the mainstream energy, transport and food production industries of the future, where the country’s state agencies clearly anticipate it will emerge as world leader, at the technological cutting edge. While the United States under President Trump battles to maintain the supremacy of its fossil fuel industries, China is forging ahead to dismantle its coal, oil and gas dependence and build strong renewables and resource recirculation industries based on its manufacturing strengths. This is what may be interpreted most accurately as China’s green growth industrialisation strategy.

No alternative

When one looks at the scale involved in its industrialisation, China really has no alternative to a green strategy. And in the typical no-nonsense approach of the Chinese government, their leadership has adopted it with determination and ambition. As China adopts this green shift strategy, so it drives down costs for itself and for all – and makes such a strategy more accessible to other industrialising countries like India, Brazil or nations in Africa. And so the green shift that is initiated by China becomes a global green shift – even if it is complicated by further investments by Chinese state-owned enterprises in coal power as part of the Belt and Road Initiative. This in turn opens opportunities for companies and countries nimble enough to take advantage of them – including companies based in the US, the EU or Japan.

As China’s economy emerges from the Covid-19 pandemic, it can be expected to focus even more on this green growth strategy. After all, this is where China holds decisive competitive advantages in terms of manufactured exports and energy as well as resources security. The 14th Five Year Plan can be expected to place primary emphasis on both features of China’s industrialisation in the 2020s – the greening of its energy, transport and industrial systems, and the growing levels of resource recirculation (e.g. “urban mining” of electronics materials) as it pursues circular economy strategic initiatives.

At the time of writing, oil prices have hit a record low (even moving into negative territory) and so no doubt some tactical purchases are being made by China. But it would be a serious error to regard these purchases as deflecting China from its long-term strategy of green growth, and the energy and resource security it brings with it.

From our partner chinadialogue

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Energy

The oil market crisis

Giancarlo Elia Valori

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The Covid-19 pandemic triggered a crisis or rather a real collapse in the oil barrel price, down from approximately sixty US dollars just before the coronavirus spread to the current twenty dollars – with downward peaks before the end of April 2020, still significantly lower than the current twenty dollar average.

The origin of the price collapse is obvious, i.e. the closure of the purchasing countries’ economies and the major crisis in the car market, in particular, with the lockdown of all public and private mobility.

 Moreover, for many producing countries, twenty dollars a barrel is a price well below break-even points and sometimes below the mere production cost.

Fifty-sixty US dollars a barrel is less than the cost of oil extraction in the Arctic, for example, and less than what is necessary to break even European and Brazilian biofuel production, but also US and Canadian shale oil. In Great Britain the oil barrel cost is 52.50 US dollars, while in Saudi Arabia the cost for producing an oil barrel is still 10 US dollars approximately.

Saudi Arabia, however, also needs much higher prices, at least from eighty US dollars per barrel upwards, to rebalance its public budget and seriously invest in production diversification, not to even mention the social stability of this country and, in other ways, that of the Russian Federation.

 World demand has therefore plummeted, with a reduction of 29 million barrels per day from the over 100 ones a year ago.

This also means that storage capacity has reached the saturation point, with countries selling directly at sea, with a view to avoiding the high and unpredictable costs of overproduction and, by now, even at direct agreement low prices.

 According to some specialized analysts, oil production will fall by at least 9.3 million barrels per year, until the time in which the coronavirus epidemic stops significantly. But this is a very optimistic forecast.

As is already seen, the most predictable effects of collapse in oil prices will most likely be the bankruptcy of small and medium-sized oil companies in the United States and Canada, where the banks had also strongly supported these companies with debt.

 The economic, financial and social repercussions on these countries’ productive systems will be immediate and hard to manage.

 Some extraction of US and Canadian “zombie” companies has continued, in view of cashing immediate liquidity, but, obviously, this cannot last very long.

It is hard to speak about public support for oil companies, considering their international corporate structure and, above all, because of the large mass of liquidity that would be greatly needed and would inevitably be drawn from other budget items, which are more socially necessary and with a strong psychological and hence electoral impact.

Nevertheless, the whole economy of producing and of typically consuming countries – which, for various wrong or short-term choices, have never established their own “OPEC” – will be severely affected by the vertical fall in oil prices, even though the US IAEA supported and legitimized the cut in production last April. The initial sign of an inevitable agreement between producers and consumers in the future, also at financial and investment level.

Furthermore, some producing countries have considerable financial funds to stand up to the fall in the oil barrel price, probably even until the end of the pandemic, but this is certainly not the case with other producers.

 Saudi Arabia, the UAEs and Kuwait can last relatively long, albeit stopping their plans for economic expansion and diversification in the short term. Just think here of the Saudi Vision 2030 plan.

 Iraq, Iran and Venezuela – with Iraq which is currently one of Italy’s largest exporters – will certainly have to withstand periods of extreme social crisis and even political legitimacy.

 In Africa, Nigeria and Libya will face further political and social crises of unpredictable severity – in addition to internal wars by proxy, as in Libya.

 China itself, the current largest oil buyer, has stopped as many as 10 oil shipments by sea from Saudi Arabia.

The tax break-even point reveals the complex internal dynamics and trends of manufacturers: Saudi Arabia is at 91 US dollars; Oman at 82; Abu Dhabi at 61; Qatar at 65; Bahrain at 95. Iraq is currently at 60 US dollars, but it should be noted that Iran is now at 195 US dollars, Algeria at 109 and Libya at 100- to the extent to which Libyan oil exports can work after General Haftar’s closure of oil wells- while Nigeria is at 144 US dollars and Angola has only acost + tax per barrel of 55 US dollars.

Currently Russia has a strong need for a tax per barrel of at least 42 US dollars, while Mexico 49 and Kazakhstan 58 US dollars.

 In order to survive, the US, Canadian and Norwegian oil companies need an oil barrel cost of 48, 60 and only 27 US dollars, respectively, to simply break even.

 Russia will probably be able to survive(“for ten years”, as it says, but probably exaggerating) a pandemic crisis, which has also hit its own population hard, by using its Strategic Fund, which is currently worth 124 billion US dollars.

Every year of crisis, however, is likely to cost Russia 40-50 billion US dollars.

 Not to mention jobs, which could be reduced by over a million in Russia.

 Saudi Arabia, too, is very liquid, and predicts a loss of over 45 billion US dollars at the end of the pandemic.

 If Saudi Arabia makes another deal with Russia and manages to raise the oil barrel price to 40 US dollars, it is supposed to reduce losses to 40 billion US dollars annually.

Iraq, the second largest Middle Eastern exporter, covers 90% of its public spending with oil revenues.

 In Iran and Iraq, the closing down of private companies has caused the almost total closure of oil production since last March.

Moreover, Iraq has no sovereign funds. Mexico has already started to implement “austerity” measures, although it has stated there will be no closures or staff cuts in the public sector.

 The Nigerian GDP will certainly go below zero. Nigeria was the economy recording the greatest development rate in Africa, but since May it has had 50 million barrels unsold.

 The unemployment rate will rise from 25% to well over 25 million people, but Nigeria has a very small Sovereign Fund that owns 2 billion US dollars.

There are very large differences among producing countries. There are countries with a financial power potentially able to further stand up to the collapse of oil prices and countries with an internal social and economic situation on the verge of collapse, as well as other economies floundering in a very severe crisis.

Just think of the Lebanon, which had already defaulted before the fall in oil prices. Obviously neither Saudi Arabia nor Iran will help it any longer.

 This means that the producing countries with a more “liquid” financial situation can start buying oil assets – not at a very low cost – from their fellow OPEC competitors or even outside that OPEC protectionist framework, while the countries without long or short liquidity, will quickly be economically colonized by the strongest ones and this would make their economic autonomy irrelevant. Especially if they are, like Iraq, truly oil dependent countries.

 The GDP for the current year, however, is expected to slightly decrease in Kuwait (-1%) while Algeria and Iraq are expected to immediately fall to a -5%, which could be fatal not only for their economy but also for their social stability.

 Libya, just to remind us of a key country for our security, as well as for oil, will record an expected fall in GDP of almost -58%. 

 It is easy to understand what will happen and how much impact it will have on Italy.

  The International Monetary Fund has also predicted a quick rebound in prices beyond the oil break-even point for the whole oil area between Africa and the Middle East as early as 2021, but the forecast seems to be completely unfounded, given the multi-year length of the buyers’ crisis and hence the inevitable fall in producers’ prices.

 Even if the coronavirus crisis were to end in a month, which is highly unlikely, the economic outlook would not change radically even for 2021.

 The fact is that, according to all the most reliable projections, the GDP of non-producing countries will fall even faster than that of oil-producing countries.

 Certainly there is the temporary relief and redress of public accounts in the Middle East and North Africa (MENA) non-producing countries, which is estimated at around 3-4% of their GDP, but these are countries like Morocco and Jordan having little economic weight in their respective geo-economic regions.

 There is also another factor to consider: the producing countries’ crisis adds to the much longer-standing crisis in the African countries exporting not oil, but food products.

I am here referring to Jordan, Mauritania and Morocco – which is still a leading country in the world production of citrus fruits, with companies cooperating with the United States – and to the wine-producing Tunisia.

 The FAO sugar index has fallen to -14.6% – more than ever over the last 13 years.

 The FAO index for vegetable oil is -5.2%. The dairy prices are currently falling by 3.6% and meat prices by 2.7%. Wheat prices, however, are expected to remain stable, although storage, and hence the future final cost, will increase from now on.

Certainly the “rich” producing countries, i.e. those with greater liquidity reserves, have already begun to inject liquidity and implement tax rebates.

 Saudi Arabia has tripled VAT from 5 to 15%. It has also issued 7 billion US dollars of public debt securities that will fall due in 5, 10 and 40 years respectively, with a 5% planned restriction of public spending, and as many as 13.3 billion US dollars in support of small and medium-sized enterprises, with the nationalisation of 14,000 jobs in the most technologically advanced sectors.

Just to give an example of the most capitalized oil exporting country.

 It is not even said that soon the Saudi and Emirates’ sovereign funds do not want to acquire – at selling-off prices – even the U.S. and Canadian shale oil industries undergoing an evident crisis.

Both in countries in crisis and in those with greater financial resources investment will be well diversified in the health or in the large infrastructure sectors. Investment will be made also in research and in the expansion of the oil sector, which will certainly start working again – as and probably more than before – at the end of the pandemic.

 There will probably be an economic and financial rebalancing between the United States and Saudi Arabia, which have similar interests, both in the purchase of shale oil companies in crisis, obviously, but also in a closer direct financial relationship, considering that Saudi Arabia still holds 177 billion US dollars of North American public debt securities.

 A record amount which could increase rapidly.

 Obviously, in the darkest phase of the crisis, the objective of the financially sound OPEC countries will be diversification from oil to more technologically advanced and expanding sectors, such as health and pharmacology, particularly abroad, but again without neglecting the oil sector.

 While maintaining the same – or almost the same – current investment in the oil sector, which cannot but take off again in the short to long term.

 For the other less financially sound countries, it will be about implementing great political reforms, which may at least stabilize the countries floundering in severe economic crisis, or having their oil assets quickly sold by the richest Arab countries, which will thus have a much greater power of pressure vis-à-vis consumer countries when the oil recovery starts.

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