This attack is unsurprising given the falling prices of oil. What I expect to see is an increase in acts of terorrism in export-revenue dependant oil-producing nations. The past few months have seen increases in subsidization for tanker operators as there exist net-costs for operators to transport oil to refineries, even with all the additional tax exemptions and incentives we’ve been seeing put in place over the past 2 years.
Simply, the world has too much oil to meet current demand capacity, and cutting production won’t do anything to impact that in the short-term. You’ve got 2-3 month shipment delays and refinery backlogs for deliveries already awaiting processing, with 5 years’ worth of fully-paid projects in development that you’ll have to see finished before you’ll see a natural reduction in production capacity.
Why has oil rebounded from its low around ~40 during its late-2008 & early 2009 price collapse? Several economic factors, such as provision of liquidity and direct economic stimulus increasing the perception of future demand in traders and their data systems.
One of the major bottlenecks which had been maintaining that price rebound had been energy transport capacity and shipments to refineries. Since the liquidity issues of 2008-2010, China has been over-subsidizing production of energy transport capacity through several SOEs & SOE affiliates. Until China cuts back on production of transport production, you’ll see declining prices for energy. Hell, even then there may be too much excess capacity and too many emergency deals for pipeline development in exchange for sub-market purchase agreements. For instance, in Finland you already see Russia exporting energy at a 50% markdown from market oil rates.
This is unsustainable for Russia, and they know it. So why do they do it? Desperation. What alternatives does Putin have? He can unilaterally decrease production; that results in Russian default. He can allow the ruble to hyper-inflate to meet debt servicing obligations; this likely gets him deposed at best, killed at worst. Capital controls were already imposed when Putin began his Crimean adventurism; he required 51% to 80% minimum Russian ownership of corporations, forcing firesale to Russian investors and acquiring temporary boost in foreign reserves in lieu of long-term foreign currency funding stream, which has already run out.
Putin can do a deal with Erdogan to divide black sea energy control in order to shore up domestic support in elites due to long-term development potential; in fact, I called this as likely when Erdogan received a visit by Biden earlier this year, and today I see Putin is in Ankara:
Putin could try firesale listing to the Chinese and long-term, under-price pipeline development deals, however, any increases in energy export capacity reduce energy prices due to present over-capacity issues. Simply, any deal which China takes will involve the Chinese requiring Putin to provide a hostage by listing assets in Hong Kong denominated in RMB, yet the Chinese have their own issues with foreign currency reserves and increasing rates of change.
It isn’t the absolute value of the foreign acceptable assets you hold which underpins perception of your ability to meet debt servicing obligations, its the rate at which your holdings of and liquidity with acceptable assets changes, and the rate at which Russia has been expending its foreign currency reserves has rapidly increased since 2014 Sochi Winter Olympics.
So why do I predict a rise in terrorism over short-term? Simply, there may be a snowballing of global capital flight and rapidly emerging liquidity crisis in key economic sectors for unstable nations far too reliant upon high operating margins in energy extraction, transportation, refinement, distribution, and consumption. With OPEC nations, none are in position to cut production and thereby cut rate at which foreign currency is obtained. Let’s break down why using OPEC members as examples. Since this discussion began with a terrorist attack in Nigeria, we’ll circle back there first.
Via Table 3.6, OPEC’s data:
Note, figures current up to 2013.
Nigeria, 1753.7 kilo-barrels daily
Nigeria faces increased rates of government expenditure due to upcoming elections. This lowers the value of Nigeria’s currency and lowers rate at which Nigeria acquires foreign currency. Why are elections a currency-lowering issue for Nigeria? Well, Nigeria is a corrupt country run on personal patronage networks which are heavily linked to extended family ties without institutional development through which to filter natural tendancy for humans to favor family in hiring decisions. What that translates to in practice is that Nigeria must hire extended families directly via government employment in order to secure patronage blocks and influence elections.
Further, with decreasing margins for energy shippers, due to China’s over-subsidization of additional shipment capacity as a form of economic stimulus and usual system dynamics Chinese patronage networks, Nigeria has had to increase rates at which it subsidizes energy shippers, meaning that Nigeria has reduced operating margins for its energy exports and therefore reduced government revenues, necessitating a slow-down in patronage hiring due to reduced capacity for government expenditure. In order to increase capacity for expenditure, Nigeria would be required to raise revenue via matching increase in net effective taxation rates through a progressive taxation structure to offset reductions in domestic consumption, or by engaging in a central bank monetary policy of currency devaluation (as proxy for taxation upon lenders and subsidization for borrowers’ relative value of debt servicing obligations), both of which are extremely unpopular and will cause elites to move assets through less-accountable taxation structutes willing to enforce purchase exemptions.
Again, practical terms, this means that Nigeria’s central bank and other government institutions with high gross-revenue capacity will have individuals whose power base is reliant upon the continued expansion of patronage networks using increased rates of revenue siphoned off through their official positions. However, with reduced gross revenue coming into the ministry, one advances more swiftly through investments in alternative institutional structures or via borrowing heavily and repaying debt through an ever-ballooning cycle of total obligations owed until an individual is forced into default. In a game with the stakes of Nigeria, default means death and investments in alternative institutional structures means funding insurgency operations such as Boko Haram. Examples:
The alternative? Fund State Security Service & pro-government paramilitary groups to carry out extra-judicial elimination of non-network patronage bases in order to consolidated your position:
My takeaway? Decreasing rates of patronage in authoritarian states with cultures that do not surpress family institutions are correlated with increasing rates of insurgency once insurgency begins operations and coordination with ambitious political elites.
Implications of Nigerian example for other OPEC member-states? When regional insurgencies are operationally active and have ties to your domestic elite, without excess capacity in ability to commit emergency capital infusions into patronage practices, political order begins to unravel. KSA, Kuwait, & UAE have been financing anti-islamist military government in Egypt, which has reduced state capacity to expand patronage networks to counter dissent and factional infighting during periods of declining gross revenue for key institutions essential for government revenue. Inability to implement inflationary or effective net taxation structures to generate government revenue and expand tax bases’ consumption habits forces ambitious to finance para-statal organizations as means to purchase influence and patronage networks with higher perceived rate of return than under existing state framework.
1) Energy prices declining due to excess capacity at all levels of vertically-integrated energy industry
2) Declining prices require power sharing or increased energy production to offset
3) Unwillingness or inability to institute structural reforms and share power during times of plenty forces capital flight during times of declining growth rates
4) Capital flight offset by increasing energy production
5) Increasing energy production with excess transit capacity forces prices to return to operating margins for extraction operations
6) Decrease in prices increases instability in autocratic systems of power due to higher perceived return on power consolidation through non-state mechanisms
7) Attempts at power consolidation among elites, shoring up of popular support, or policies for both will most likely result in decreased revenues with increased expenses
8) Mismatch of expenditure rates and revenue rates forces increases in revenue until global energy market is operating at-cost or operating under-cost until foreign currency reserves expended or state collapse
9) Therefore, increased rates of violence as individuals fight for larger piece of shrinking wealth rather than implementing policies to expand wealth base
Suggestions for policies to rectify structural issues within current framework of nation-states, using tools presently available:
1) Global carbon tax.
2) Institutional collapse. Results? Civil war, elite/capital flight, foreign invasion: Pick two.
3) Acceptance of energy pricing single-digit % above operating costs as “new normal”
That’s about it, and why Russia is stuck invading Ukraine, ISIL & other jihadi groups attacking more frequently, and why inflation in America is on track to remain at ahistorically low rates: Global capital flight to safest nation of them all forces deflationary trends in USD. Simply, America is safe, rich, and on trend to continue getting richer at accelerating rates as global flight to America continues and our energy costs rapidly decline.
The rest of the world? I’d highly recommend becoming an American ally.