Would becoming a petrostate change the American character?

• MOZAMBIQUE
  Shake Up Putin's World
• ENERGY
  Is a Petrostate Un-American?
• UNITED STATES
  The Need for Clean Technology

Posted By Steve LeVine  Tuesday, March 27, 2012 - 2:28 PM 

 

If the largest consumer of oil on the planet abruptly does two things -- doubles its own liquids production and cuts its imports in half -- one might find a big chain-reaction in both macroeconomics and geopolitics. This is precisely what many of the country's top industry analysts suggest is happening in the United States -- that the country will soon account for almost all its own oil requirements, and be in the position of exporting some of it. Count me as a skeptic, but since so many serious analysts are not, it merits looking under the hood.

Yesterday I raised the potential for a U.S. political shakeout if the oil-abundant theorists are correct: If the U.S. truly does become effectively self-sufficient in oil, political support for clean-energy would be seriously undermined.

Today, the Obama Administration imposed super-strict standards on the emissions from coal-fired power plants, incentivizing the development of carbon-capture technology, as well as the use of natural gas. This demonstrates that aggressive public policy can keep the goals of the clean-tech edifice alive; but it cannot be taken as a template, since policy ebbs and flows, and any future Republican administration, for example, is unlikely to embrace the same philosophy.

What about the economic wrinkles of a shift to oil as a trigger of a new U.S. Industrial Revolution, as forecast by Citibank analyst Ed Morse? Low-price energy provides a big advantage to U.S. makers of chemicals and plastics, since the feedstock -- natural gas -- is so cheap. Yet would this edge flow up the line to high-end technologies, the foundation of the overall U.S. economic advantage?

I exchanged emails with Michael Klare, a professor at Hampshire College and the author of The Race for What's Left. Klare thinks that oil abundance could have a fundamental impact on the character of the United States. He said:

I see this as making the United States more like a Third World petro-state -- we will see increased economic benefits in some quarters and among certain specialized labor sectors. But we will become more like a basic commodity producer that must lower its environmental standards in order to boost production, and less like a modern high-tech country like Germany and Japan.

A key geopolitical dividend for the U.S. if the abundant-oil crowd is correct would be the ability to distance itself from nefarious petrostate rulers, and scale down its naval patrols of Persian Gulf sea lanes. Citibank analyst Ed Morse suggests that this dividend could materialize -- "with such a turnaround in its energy dependence, it is questionable how arduously the U.S. government might want to play those traditional roles," he writes.

We have previously plumbed this question. Among those saying the opposite are Michael Ross, a professor at the University of California at Los Angeles and the author of the new book The Oil Curse: How Petroleum Wealth Shapes the Development of Nations. In an email exchange from Cairo, where Ross is currently on his book tour, he cited detail from a New York Times piece last week by Clifford Krauss and Eric Lipton. Ross:

I think the impact on U.S. foreign policy will actually be rather small, even negligible. Since 1970, there have been wide swings in the degree of U.S. energy dependence. According to the figures in the Krauss/Lipton article, imports rose from 28 to 60 percent of U.S. liquid fuel use from 1982 to 2005. But I can't discern any resulting changes in the role of the U.S. in protecting sea lanes, intervening in oil-producing countries, ensuring the security of friendly governments in the [Persian Gulf], etc. So I don't see why movement back towards 28 percent fuel dependence will change our role.

Yet if U.S. oil production creates more global supply overall, and global oil prices drop as a result, one impact could be to make petro-dictators less powerful by thinning out their money flow. Ross:

The political effects of oil wealth in [resource-rich, developing countries] certainly depends on the global oil price, which will be affected by U.S. production levels. Hence, to the extent that higher production in the U.S. eases global prices, it could help alleviate the dictator-entrenching, and economy-distorting, consequences of oil exports.

These 4 Huge Economies are in Deep Trouble

Published on StreetAuthority (http://www.streetauthority.com)

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By David Sterman

Published 03/06/2012 - 13:00

It's time to stress-test all of the companies in your portfolio. It's crucial to determine their geographic exposure right now, because a handful of major economies are possibly headed for a long-term unwinding.

#-ad_banner-#Each of these countries is beset by stunningly-large budget deficits, unfavorable demographics, a too-strongcurrency [1] and weakening consumer demand. Before things get better (and they will) they may get a lot worse during the next few years. A portfolio with exposure to these economies may underperform [2] the broader market [3].

I'm talking about four of the 12 largest economies in the world, which accounted for a combined $11 trillion in economic activity last year. That's 35 times larger than Greece, to put things in perspective. Simply put, U.S. companies with exposure to these economies will need to shrink their operations in these trouble spots, lest they see spiraling losses in coming years.

The four countries in question: Japan (the world's No. 3 economy [4]), the U.K. (No. 6), Italy (No. 8), and Spain (No. 12). Let's take a closer look.

1. Japan
Roughly 18 months, I laid out the sobering challenges this country faces [5].

As this chart shows, the yen has rallied against the dollar, from $1.20 to a recent $0.81 during the past five years (meaning, one yen was worth $1.20, and is now worth $0.80).

A strong currency always impacts trade flows. And Japan generated a trade deficit [6] in 2011 for the first time since 1980, thanks to the rising yen. At this point, it's hard to see the country again becoming a net exporter [7] as long as the yen stays strong, especially now that the country has decided to de-emphasize nuclear power rely on massive amounts of imported oil and natural gas.

In response to the strong yen, major Japanese exporters such as Toyota (NYSE: TM [8]) and Canon (NYSE: CAJ [9]) have begun the process of closing domestic factories and expanding capacity abroad. Japan has always been a nation of nearly full employment, with most citizens contributing to the tax base. Looking ahead, unemployment looks set to rise and income tax [10]receipts may steadily fall without structural reform.

This comes right at a time that Japan is rapidly aging. As many citizens retire, they are creating a fiscal drag on the government as benefit spending surges. Adding insult, the government has been forced to spend billions on reconstruction in the area devastated by last year's tsunami.

Thanks to years of overspending on roads and bridges that were simply political pork, Japan already has the highest debt-to-GDP ratio of any country in the world, with its borrowings equaling close to 240% of annual GDP [11]. The country has always benefited from a strong domestic savings rate, enabling the government to offer very low interest rates on the debt. But as more consumers head into retirement, Japan looks set to pay steadily higher rates to find new buyers of existing debt as it gets rolled over. Until this downward spiral is resolved, Japan's economy will get worse before it gets better.

2. The United Kingdom
A decision to cut spending in the face of a staggering debt load [12] seemed like a wise move in the U.K., but it was done at a time when the economy was on very tenuous footing. As a result, sharply reduced government spending threatens to turn a weak economy into a shrinking economy as negative feedback loops spread across various sectors. For example, weaker consumer spending leads to reduced government tax receipts, which leads to even weaker government finances.

The International Monetary Fund (IMF) [13] had been hopeful that the U.K. economy could grow a modest 0.6% in 2012, but that forecast was made before it was reported that it shrank 0.2% in the fourth quarter of 2011. The odds are rising that the economy will continue to contract, making it harder for the government to collect sufficient tax receipts to make a meaningful dent in the government's finances. And the U.K. can't export its way out of this mess: The country's industrial sector is largely uncompetitive, which explains why the U.K. has run trade deficits every year since 1997. This is a country that is wobbling now, but could easily enter into a downward spiral with a few bad breaks.

3. Italy and 4. Spain
These countries both suffer from aging populations, distressed consumer spending as a result of high unemployment (a stunning 23% in Spain), and look hard-pressed to reverse their debt woes as long as they are tied to the strong euro. More efficient economies such as Germany are simply too advanced for Spanish and Italian companies to gain a foothold in many European economies.

Italy has announced far-reaching austerity plans, which may create the scenario outlined in the U.K.. And concerns are rising that Spain's targeted budget cuts won't materialize, perhaps turning this country into Europe's next trouble spot. The Spanish economy is 450% larger than the Greek economy, and the risks of a financial mess are that much larger for the beleaguered European economic union.

 Risks to Consider: It's hard to find "upside risks," meaning catalysts that will materially improve the fortunes for these countries.
Action to Take --> A wide range of companies in the S&P 500 relies on these countries for a decent chunk of their sales. Japan, in particular, is a huge market for the likes of Nike (NYSE: NKE [14]), Coca-Cola (NYSE: KO [15]), McDonald's (NYSE: MCD [16]), and Tiffany & Co. (NYSE: TIF [17]) and so many others.

The U.K., Italy and Spain account for roughly 35% of Europe's economic output, but key trading partners such as France and Germany would also feel the pain of deep economic retrenchment in these countries. You can find the degree of economic exposure [18] to these countries by perusing the annual reports of the stocks you own (the 10-K [19] filings sent to the Securities and Exchange Commission [20] at the end of each fiscal year [21]). If any of the stocks you own has considerable exposure to any of these countries, then you'll need to reassess whether it belongs in your portfolio.

[Note: If you haven't heard about this unique opportunity, then I want to tell you about it now. StreetAuthority has staked me with $100,000 of real money to invest in my absolute best ideas. For a limited time, you'll be able to follow along with me completely free. Go here to learn more [22].]

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. 
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

Iran Watch: Oil, oil everywhere

• IRAN
  What's With All the Wheat?
• NEW GUINEA
  Who's the Boss?
• RUSSIA
  Romney's Gaffe?

Posted By Uri Friedman  Friday, March 30, 2012 - 4:00 PM

With all the talk about an April 13 date being set for nuclear talks between Iran and the world's top powers, another important milestone got lost in the shuffle: today, March 30, when President Obama is required by a U.S. sanctions law to determine whether, as Reuters puts it, "the price and supply of non-Iranian oil are sufficient to allow consumers to 'significantly' cut their purchases from Iran." If the answer to that question is yes, then, beginning in June, the United States can proceed with its effort to isolate Tehran by sanctioning foreign banks that continue to purchase Iranian oil.

Obama's conclusion? There may not be oil, oil everywhere, but there's enough of it to green light sanctions. The Associated Press has more:

"The president said he based his determination on global economic conditions, the level of spare oil capacity, and increased production by some countries, among other factors. He said he would keep monitoring the global market closely to ensure it can handle a reduction of oil purchases from Iran.

With oil prices already rising this year amid rising tensions over the nuclear dispute between Iran and the West, U.S. officials have sought assurances that pushing countries to stop buying from Iran would not cause a further spike in prices.

That's particularly important for Obama in an election year that has seen an increasing focus on gas prices."

Iran meter: Obama's decision clears a path for the administration's aggressive sanctions strategy, which it favors over military conflict.

But there's a wrinkle. Globalization has proven a double-edged sword for sanctions regimes. As scholars Steve Smith, Amelia Hadfield, and Tim Dunne note, an interdependent world economy can make countries more vulnerable to international sanctions. Yet globalization also means that countries facing sanctions can seek out alternative markets and suppliers.

This reality has been on vivid display recently. Bloomberg takes a look today at how China and India are evading U.S. and EU financial sanctions by buying Iranian oil in exchange for local currencies or goods such as wheat, soybean meal, and consumer products. During a meeting in New Delhi this week, the BRICS group of emerging world powers -- Brazil, Russia, India, China, and South Africa -- declared that they would continue trading with Iran in defiance of U.S. sanctions.

This doesn't necessarily mean Western sanctions are doomed. Turkey, the fifth largest buyer of Iranian oil, announced today that it would cut imports of oil from Iran by a tenth in the face of U.S. pressure. And the Congressional Research Service's Kenneth Katzman tells Bloomberg that Iran's "junk-for-oil" program with countries such as China and India is economically unsustainable. "Iran cannot stabilize the value of its currency with such unorthodox payment methods," he explains.

But the big question is whether, come June, the United States will actually sanction Chinese and Indian banks -- an action fraught with political landmines. Obama's announcement today doesn't get us much closer to answering that question.

For more support for keeping the Iran meter at Natanz to Worry About, check out Amir Oren's argument for why Israel may be postponing an attack on Iran and Karl Vick's report on Israel's intelligence services scaling back covert operations inside Iran. (And for a gripping account of how an Israeli strike might play out, read Gary Sick.) 

Note to readers: Earlier this month, I dismissed the importance of Azerbaijan's pledge to prevent any country from using its territory as a launching pad for an attack on Iran, arguing that Israel probably wouldn't strike Iran through its neighbor to the north anyway.

This week, Mark Perry reported at Foreign Policy that Azerbaijan has granted Israel access to airbases near its border with Iran, which could heighten the prospect of an Israeli strike. Authorities in Azerbaijan have denied the allegations, and some others have expressed doubt that Israel would actually use Azeri airbases as part of an attack. But the report does raise the question of whether my headline -- "You can stop worrying about Azerbaijan" -- needs revising.