Tag Archives: Global economy

Britain, Economic, Government, Iran, Politics, Russia, Saudi Arabia, Society, United States

A winter of global discontent beckons

GLOBAL ECONOMY

Intro: As energy and food prices soar, we face a winter of global discontent facilitated by the West being run by failures of truly historic proportions

Houthi rebel forces have swept down the western coast of Yemen, seizing the strategic Red Sea port of Mokha (long renowned for its global coffee trade) then Dhubab, another port, before taking Perim Island at the mouth of the narrow Bab al-Mandab Strait that connects the southern end of the Red Sea to the Indian Ocean.

Many will say these are far off places of which we know nothing and care even less.

Perhaps. But what has just happened there is about to hit us even harder at the petrol and diesel pumps, the supermarket checkout counter, in monthly mortgage payments, bank loans, and household food and energy bills. Bab al-Mandab is Arabic for “The Gate of Grief” – and grief is what the global economy is in for this winter.

Oil and gas prices have already soared since Donald Trump’s war on Iran resulting in Tehran seizing control of the Strait of Hormuz, a development the President managed somehow not to foresee.

Since then the US Navy has been deployed to wrestle back control, with mixed results.

Before Trump attacked Iran, around 25 per cent of global seaborne oil trade passed through the Strait of Hormuz and 20 per cent of global liquified natural gas (LNG). Oil flows are now less than half of that (perhaps no more than a third) and almost no LNG at all is getting out.

It’s hardly surprising, then, that oil and gas prices have soared. But nothing like the trebling and quadrupling of prices in previous energy crunches: that’s because several workarounds were instigated, none more important than the East-West pipeline from Saudi Arabia’s oil field heartlands to the oil port of Yanbu on the Red Sea.

The Saudis built this 750-mile pipeline in the 1980s, as the Iran-Iraq war was raging, precisely as a contingency for the Strait of Hormuz being shut. This year it became the most important piece of energy infrastructure in the world, its daily capacity of 7 million barrels doing its bit to mitigate the rise in oil prices.

No longer. Which brings us back to the Houthis.

Just as the Islamic Revolutionary Guard Corps (IRGC) threatened all vessels trying to transit the Strait of Hormuz, so the Houthis, Shia insurgents funded and armed by the IRGC, now threaten all shipping attempting to pass through the southern exit of the Red Sea.

The two most crucial maritime chokepoints in the world are now under the thumb of a hardline Iranian regime and a proxy doing its bidding. It would be hard to think of a more disastrous outcome from Trump’s war on Iran. But there’s worse.

As the Houthis pushed south to take control of Bab al-Mandab, the Saudi East-West pipeline came under attack from drones dispatched by Iraqi Shia militia, yet more Iranian proxies.

Even the dim-witted can surely see a pattern here.

The drones took out pumping stations, forcing the Saudis to close the pipeline for at least six weeks for repairs. This has crippled Saudi oil exports in the process, a harbinger of the global spike in oil prices to come.

This week the benchmark Brent crude oil price hit almost $110, the highest since May, before falling back a bit. Aramco, the Saudi national oil giant, told European refineries there would be no deliveries next month. The prices of what’s refined from crude oil – jet fuel, petrol, diesel – are rising fast.

Tehran has, in effect, opened a second front in its war with America, with huge consequences for the global economy – and Trump, still struggling to escape from the first front (which he started), has no idea what to do about it.

The Saudi crown prince, Mohammed bin Salman, has pleaded with the US President for military help to repel the Houthis. Washington will likely be reluctant to assist, mindful that the Houthis survived a massive US bombing campaign, lasting over 50 days and involving 1,000 airstrikes, in the spring of 2025.

The Saudis are certainly in no position to dislodge the Houthis on their own. The group already controls a big chunk of northern Yemen, including the capital, Sanaa, despite previous Saudi military interventions on behalf of the beleaguered Yemeni government.

Now that the Houthis have their foot on the Saudi oil-export windpipe, they are going nowhere fast.

TWO

Sometimes it really doesn’t rain but it pours. The coming global energy crunch will be compounded by the fact that Ukrainian drones have taken out a third of Russian diesel-refining capacity. Russia is now having to import diesel from India, pushing up global prices even further.

Russia is retaliating by sending its drones to hit Ukrainian grain infrastructure and exports going through the Black Sea, seriously hindering the amount of grain getting out from one of the world’s great bread baskets.

It’s a prelude to the soaring food prices to come. Farm machinery is powered by diesel. So that cost is rising. So is the cost of fertiliser. Around 20 per cent of global supply used to come through the Strait of Hormuz. Not now. The upward pressure on food prices will become relentless.

Suddenly we’re looking at the prospect of soaring energy and food prices, as oil and grain markets buckle. A new broad-based inflationary surge is coming down the pike.

The Bloomberg commodity index has already risen by 48 per cent this year. That’s now working its way into consumer prices.

UK inflation is back over 3 per cent – with more rises to come. European gas reserves are at historic lows, with time running out to replenish them for winter. So, gas is about to become much more expensive, too.

OFGEM’s energy price cap is forecast to rise by as much as 25 per cent in January.

We are now moving into a world of higher interest rates. The European Central Bank increased its benchmark rate last week; the US Federal Reserve did the same just days ago. The Bank of England kept its rate on hold. But it’s only a matter of time before it starts raising rates too. Now that inflation is back, it will have no other choice.

We are looking at higher interest rates for as far as the eye can see. The chance of reviving the housing market is non-existent. While all this unfolds, politicians on both sides of the Atlantic debate and promise irrelevancies while ignoring what really matters.

Britain has been consumed by rows over political donations which in the grand scheme of things barely matter a jot, but allow politicians to posture at their hypocritical worst.

America has a President – who’s caused much of the global economy’s turmoil – trying to bribe voters with a $5,000-a-head “dividend”. France has a lame-duck President who talks a lot and does nothing as his country sinks into a fiscal morass.

German Chancellor Friedrich Merz might not survive next week following a series of bad results in elections.

The markets, of course, know exactly what’s happening. Inflation is coming back with a vengeance, the war on Iran is being lost, and the global economy is at the mercy of Islamists bent on our destruction.

It should come as no surprise the bond vigilantes demand ever higher interest rates. A risky world means ever-rising risk premiums.

We face a winter of global discontent with a political leadership missing in action, obsessed with an agenda that means little and is of a self-serving discourse, wholly inadequate to the challenges about to confront us. When the IRGC and the Houthis hold the upper hand, nobody can be in any doubt we’re being run by failures of historic proportions.

Standard
Economic, Financial Markets, Government, Politics, Society

The global economy and the threats it faces…

FLASHPOINTS AND THE GLOBAL ECONOMY

Never has the world been subject to a constant flux of shifting alliances as it is in modern times. The world is once again in turmoil, from Iraq to the West Bank and from the Ukraine to the South China Sea. The geographical stakes and risks are extraordinarily high leading some strategic thinkers to compare the global landscape to that which preceded the First World War a century ago.

When the International Monetary Fund (IMF) produced its April 2014 forecast of 3.6 per cent global output for the current year it added an important caveat. It warned that geopolitical factors, at the time mainly thought to be the turmoil in Ukraine, posed a potential threat to its projections.

There are, however, five major geopolitical flashpoints which currently pose a threat to economic stability:

  • The ISIS advance in Iraq

That a small ragtag of some 30,000 jihadists born out of Syria’s civil war could be a threat to Iraq, with its American trained forces and weaponry, would have seemed inconceivable just a few weeks ago.

But ISIS is well funded, as a result of wealth created from kidnappings on the Turkish border, secret donations from Sunni Gulf states and the seizure of bank deposits in Mozul. It is also battle hardened from Syria.

Its seizure of refineries in Northern Iraq threatens the country’s oil production of 3.4m barrels a day or 11 per cent of the world’s current supply.

Brent Crude has exceeded, once again, $113 a barrel. So far the valuable fields of Baghdad, including those operated by BP, remain in operation. But that cannot be guaranteed even with any form of US-led intervention.

  • Middle East peace process

The recent unification deal between Hamas and the Palestinian Authority led by Mahmoud Abbas led to deadlock with Israel over future negotiations. Then came the kidnapping of three Israel youths from a bus stop on the West Bank; murdered in haste after being wrongly identified as Israeli soldiers. Tit-for-tat followed which has ultimately led to high level tensions in the Middle East with the Government of Binyamin Netanyahu amassing 40,000 troops who appear ready for a land invasion and incursion into the Gaza Strip.

The risk now is of Israel escalating the current difficulties into a much wider conflict with the threat, for example, to Middle Eastern oil lanes and production.

  • Iran nuclear talks

The July 20 deadline set for Iran to relinquish its nuclear ambitions fast approaches.

Despite some rather conciliatory language from President Rouhani of Iran, intelligence suggests little ground has been given on vital issues such as reducing the numbers of centrifuges and ending experiments with intercontinental ballistic missiles.

The US tilt at diplomacy with Iran has been met with heavy resistance in Congress. President Obama has been finding it hard to persuade Capitol Hill to ease the financial and economic sanctions that brought Tehran to the bargaining table in Geneva.

Western oil and banking interests are champing at the bit for an end to sanctions that could re-open Iran as a lucrative market.

  • Ukraine-Russia

Flashpoints continue on the borderlands of Western Europe. President Putin shows no signs of backing down from his efforts to infiltrate and recolonize Russian speaking enclaves in Eastern Ukraine.

The so-called ‘Putin doctrine’ – the idea that Moscow is planning to retake areas of vital Russian interest reaching into the Baltics – is almost certainly a myth because that would mean directly confronting NATO.

But the threat to gas supplies following cut-offs to Ukraine is a clear and present danger that will become worse as time moves on.

The crisis already has led to a Russian pivot towards Asia in the shape of the Chinese natural gas deal in which London-based Glencore is involved in financing.

Creating a secure environment in Ukraine, in which Western assistance is co-ordinated by the IMF (where monies can be released), is proving extraordinarily difficult to enact.

  • South and West China Seas

Many strategic experts see this as the theatre for the next great strategic rivalry with China and the US – that has moved much of its navy into Pacific waters – eventually clashing.

At present the dispute is manifesting itself in proxy stand-offs between Japan and China and Vietnam and China.

There are overlapping claims to islands such as Senkaku in the Okinawa Sea that are claimed by both China and Japan.

Similarly, South Korea and Japan have clashed following large scale Korean naval operations in the region.

There are fears that a collision of war ships, an attempt to run blockades or guns fired in error could provoke an all-out war.

The tensions, serious as they are, could be unexpectedly good news for BAE Systems and other defence firms as surplus Asian nations rebuild their rundown defences.

Nevertheless, a conflict in the region – the locomotive of manufacturing output – could be devastating for Western economies.

General Western Outlook

The immediate highest risks for Western economic output come from an interruption of oil supplies in the Middle East and gas supplies from Russia via the Ukraine.

However, America’s increased oil and gas fracking activities together with new gas finds – such as those off the coast of Israel – make the world a little less vulnerable than it was after the Yom Kippur war in 1973 and the first Iraq war of 1990-91.

More serious long-term threats come from the China seas where a battle for hegemony, not dissimilar to that which caused two world wars, looks to be underway.

Globalisation has produced rich rewards in terms of fast economic development, industrialisation and prosperity.

But it has also brought with it profound new strategic concerns that could damage confidence and crush output at a time when the West is still recovering from the financial and Eurozone crisis.

Standard
Britain, Economic, European Union, Financial Markets, Government, Politics, Russia, Society, Ukraine, United States

What will happen next following the crisis in Ukraine?

ECONOMIC REALITIES

Intro: Economic havoc and a global slump could materialise from the crisis in the Crimea

So far, financial markets in the West have remained remarkably undisturbed in the face of the crisis unfolding in Ukraine. Following Crimea’s referendum at the weekend, which effectively sealed Vladimir Putin’s grip of the Ukrainian peninsula, sanctions were always likely to follow. Whilst, then, we may anticipate just how long the sanguine calm will continue, Western leaders should also be careful of supplanting diplomacy with threats to Russia that they are unwilling or unable to back up. The decision by the European Union and United States to impose sanctions on several Russian officials is a limited response to the breach of international law that has taken place in Crimea. The measures include travel bans and the freezing of assets against individuals who were deemed to have played a major role in the referendum – a vote, officials say, in which 97 per cent of voters backed a breakaway from Ukraine and, instead, opted to join the Russian Federation.

In the years since the dissolution of the Soviet Union, Russia has steadily become more integrated into the global economy. We know that many rich Russians have shifted their gains (ill-gotten or otherwise) into more stable and secure environments, such as investing on the London Stock Exchange or by diversifying their stocks in the UK property market. In actual fact, more money has flowed into Russia than out. According to data from the Bank for International Settlements, foreign owned banks have lent the country at least $260 billion. That is nearly double the value of its estimated assets in the West. As a consequence, Russia’s bilateral trade has risen to more than $100 billion annually. Almost a third of Europe’s gas, coal and oil imports come from Russia, and there has been a huge upsurge in direct investment by foreign firms.

Rhetoric used by the international community implied that there would be consequences if the referendum went ahead while the peninsula was still occupied by Russian troops. No doubt, Mr Putin will have considered the penalty a price worth paying. The question now, though, is what will happen next. Washington insists the screw will be tightened if the situation were to escalate in Ukraine – a distinct possibility that could happen fairly swiftly since the aim of the Crimean separatists is to secede from Ukraine within a month. They also aspire to adopt the rouble and by joining the Russian time-zone.

Whilst a military response to Russian aggression has already been ruled out by Western leaders, meaningful sanctions are not really much of an option, either. A full-blown trade-war would inflict serious damage on both sides. However, capital flows between Russia and the West are already in a parlous state in anticipation of lesser action, including assets freezes and travel restrictions already imposed. In order to defend the rouble, Russians are withdrawing billions from Western banks and selling off US Treasury Bonds. Mr Putin also raised interest rates to 7 per cent; a move that will discourage capital outflights from Russia to the West, a rate of interest that will be far more attractive for Russians to invest at home. The West seems certain to reciprocate by dumping Russian assets.

Yet, this all comes at a particularly delicate time for the world economy. Emerging markets, including China, have rapidly slowed down; the Eurozone is expecting a period of deflation to start anytime soon; and, America’s economy has started to inflict severe withdrawal symptoms to many countries around the world following its tapering of quantitative easing. The global economy may be just one sharp shock away from lurching into another recession.

A standoff with Russia over Crimea’s breakaway is the last thing the world needs. Economic considerations cannot surpass the higher purpose of defending international law, and as such must be secondary to it. Nonetheless, the interplay between politics and economics is what is making this situation so dangerous and destabilising. All concerned should be aware of just how very much more disruptive this crisis could yet become.

Standard