October 16, 2014

Oil Prices Continue to Define Geopolitics

Geopolitical Diary
TUESDAY, OCTOBER 14, 2014 - 19:04   
Editor's Note: Oil prices dropped steeply Oct. 14, with crude oil futures falling 4.6 percent to $81.84 per barrel -- the biggest decrease in more than two years. Brent crude dropped by more than $4 a barrel at one stage in the day, dipping below $85 for the first time since 2010. While these are relatively substantial drops, they are just one part of a continuing trend Stratfor has been tracking over the past few months. Factors behind the slump include weak demand, a surfeit of supply and the fact that many large Middle Eastern producers are reluctant to reduce their output.

In light of today's developments, we are republishing the following diary from Oct. 2, which details the reasons behind the falling prices and how the drops could affect oil-dependent countries around the world.

The global oil benchmark, Brent crude, fell Thursday to about $92 per barrel before rebounding to finish the day at around $94 per barrel, the lowest price since mid-2012. The latest sell-off follows one of the sharpest declines in a quarter in recent years, in which the price of oil slid about 16 percent. It may be premature to forecast sustained international oil prices lower than $90 per barrel, but if the price of oil remains close to where it is now, many oil exporting countries will feel the pain after basing their budgets on previous price expectations.

Simply put, the oil market has gotten overstocked. After spending much of the year producing only around 200,000 barrels per day, Libya has seen its production jump up by about 700,000 bpd since mid-June. The United States has continued its relentless expansion of oil production, with the latest Energy Information Agency figures estimating that U.S. production has increased by about 300,000 bpd since the beginning of August, and Iraq has experienced similar gains. Russia, Angola and Nigeria have also seen marked boosts in production. While most of the recent production increases are one-offs, North America could add another 1 million to 1.5 million barrels of production by the end of next year.

What is a Geopolitical Diary? George Friedman Explains.
Despite these noteworthy hikes in oil production, sluggish demand by European and Asian (particularly Chinese) consumers has proved just as important to oil prices. While China's demand will continue to grow, demand in developed countries will remain flat, as it has for a while. These factors only add to the concern that if left unchecked, oil prices per barrel in the $90-$100 range may persist for the foreseeable future.

Lower global oil prices will create challenges for several OPEC producers and others, particularly Russia. While some have suggested that OPEC will lower its production targets, it may not have the ability or the unity to coordinate a large enough drop in production to counter trends elsewhere and bring prices to a level more desirable to it (above $100 per barrel). If oil prices do return to this level in the near future, it likely will have little to do with OPEC's actions.

The Standoff Between Russia and the West

The first and most import consequence of lower oil prices is the effect it will have on the ongoing struggle between Russia and the West. Energy commodities dominate the Russian economy, particularly its exports. Any sustained drop in oil prices would directly impact the country's export revenues, and Russia's GDP would take a significant hit. The Kremlin's 2014 budget was based on oil prices averaging $117 per barrel for most of the year, with the exception of prices of $90 per barrel for the fourth quarter. For 2015, however, the budget has been pegged at $100 per barrel after much debate within the Russian leadership. While Moscow has significant financial reserves and can run a budget deficit if need be, Finance Ministry officials have estimated that lower oil prices could shave off 2 percent of Russia's GDP.

Although Russia has been able to weather the effects of U.S. and EU sanctions thus far for its action in Ukraine, the restrictions have already led some firms, such as Rosneft, to ask for financial assistance from the country's National Wealth Fund. A reduction in oil prices, and in turn lower revenues for Russia's budget, will constrain the Kremlin's ability to support Russian businesses hurt by sanctions the longer they are in place. With less of a financial cushion to soften to consequences of sanctions in the longer term, the Kremlin will have to moderate its position in the ongoing negotiations over the future of Ukraine to meet the demands of Western partners and achieve a reduction in sanctions.

Competition in the Middle East

As the West looks to gain from low oil prices in its struggle with Russia, it is also looking for an opportunity to negotiate with a beleaguered Tehran to come to some sort of a resolution on the Iranian nuclear program. For Europe, Iran and its large natural gas reserves represent one of the most promising long-term sustainable alternatives to Russian natural gas. Tehran is facing sanctioned export volumes, lower profit margins and ongoing expenses because of proxy conflicts in Syria and Iraq, and it can ill afford a sustained downturn in global oil prices. Progress on coming to an agreement with the West may be slow, which will only place more pressure on Tehran to negotiate. 

Saudi Arabia is also set on maintaining its global market share and has an opportunity in the short term to rely on its considerable foreign exchange reserves and low production costs to wait out other global producers. Riyadh's oil output is its most strategic resource, and one that the government is quick to use to its advantage. With summer temperatures beginning to cool and regional consumption starting to taper off, Riyadh can free up larger volumes to export, even at lower prices. The Saudis are also looking to leverage their short-term economic stability over rivals such as Russia, especially as they square off with Iran over the future of the Syrian government.

Saudi Arabia also has the ability to take a considerable number of barrels of oil offline if it wants to. Recently, however, it has offered discounts on its crude oil to secure market share for November, perhaps signaling to other OPEC members that while Riyadh may be willing to take its supply offline, others will have to do the same. But there is no incentive for other countries to reduce their output, since most Gulf producers will still manage to make a profit in the $90-$100 per barrel range; lowering production levels, therefore, would only reduce revenues.

The Americas and Beyond

Outside the Middle East, a decline in oil prices will also affect Venezuela. Officially, Caracas sets its budget at the low target of $60 per barrel of oil, a precedent begun by former President Hugo Chavez. Excess revenue could then be funneled elsewhere to off-budget expenditures to satisfy political patrons. Venezuela is in a dire financial position, needing oil prices perhaps as high as $110 to meet expenditures both on and off the book. Sustained low oil prices would severely hamper Caracas' ability to finance its imports, perhaps forcing government officials to get serious on selling foreign assets, such as Citgo, and gold from its central bank reserves, or offering even more attractive terms on loans for oil deals with the Chinese, though Beijing has recently balked at this. If oil prices stay low for an extended period, Caracas could also be forced to reconsider its deals with Cuba or programs like Petrocaribe.

Meanwhile, for developed massive oil importers -- Japan, China, India and the European Union -- low oil prices will give some respite to significant import bills. On the other hand, prices could also increase short-term strain in Europe, where energy has been the main factor pushing monthly inflation lower. While lower energy costs are good for Europe in the long run, they also raise the threat of deflation and inflame tension between the European Central Bank and Germany. 

Even though prices have likely bottomed out, the recent plunge in the price of oil serves as a reminder of how geopolitically significant energy prices can be. Energy supplies form the backbone of modern industrial economies, and energy resources are critical export commodities for those who possess a lot of them. As long as fossil fuels remain the dominant source of energy -- something that is likely to last at least another few decades -- oil supply and oil prices will remain critical.

Read more: Oil Prices Continue to Define Geopolitics | Stratfor 
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October 14, 2014

Adding up the nickels and dimes

Suhasini Haidar



PTI IN STEP: "The expectations on the personal front between Mr. Modi and Mr. Obama were more than met given their interactions and the particularly poignant visit to Martin Luther King Jr's memorial." Picture shows them at the memorial in Washington.
None of the unfulfilled expectations of Narendra Modi's visit to the U.S. takes away from his substantial achievements in restarting relations that had been in cold storage for months
"I do not think Prime Ministers visits actually produce nickel and dime outcomes," former National Security Advisor Shivshankar Menon said at an event in Washington this week when faced with questions about specific outcomes of Prime Minister Narendra Modi's visit to the United States. "I do not think that's the purpose. The purpose is to push relationship as a whole forward, which was achieved," he added.

Mr. Menon, the key official who has been squiring India-U.S. relations for the past decade — first as Foreign Secretary and then as National Security Advisor — can certainly not be faulted for his conclusions. Mr. Modi has won applause all around for his five-day visit to New York and Washington. Yet as the dust settles on the Prime Minister's travels, it is important that some amount of stocktaking or "nickel and diming" also be done in order to assess the real costs and benefits of the visit, as it represents a major point in Mr. Modi's foreign policy.
Comparing visits

The visit to the U.S. came in unprecedented circumstances. The past year has seen a sudden free fall for India-U.S. relations, symbolised by the extreme reactions to the Devyani Khobragade incident on both sides. Added to that was the awkwardness with which the U.S. handled ties with Mr. Modi, who was a clear front-runner in the elections. The late reachout to him over the visa ban had to be compensated for in a very short period of time after he was elected. As a result, Mr. Modi's U.S. visit cannot be compared with the first visits of previous Indian Prime Ministers. Atal Bihari Vajpayee, for example, had another sort of welcome because of the big thaw he brought in relations between the countries in 2000, as did Manmohan Singh when the nuclear deal was announced some years later or when he visited in 2009 — a year after the Mumbai attacks — as U.S. President Barack Obama's first state guest.

Nor can Mr. Modi's visit to the U.S. be compared to his visits to other countries given the high stakes, the importance of the India-U.S. relationship to his plans for the economy, and the pitch to the massive Indian-American community in the U.S. The visit then must be graded on the expectations raised on both sides. While the expectations on the personal front between Mr. Modi and Mr. Obama were more than met given their interactions and the particularly poignant visit to Martin Luther King Jr's memorial , the specifics or "nickels and dimes" do not add up on several other fronts.

 Mr. Modi's assurances to U.S. businesses already invested in India have gone a long way in securing their interest in the Indian market  In Washington, expectations were clearly enunciated — the administration hoped for support for the U.S.'s coalition against the Islamic State and a rethink on India's decision against the Trade Facilitation Agreement at the World Trade Organization. Even as Mr. Modi flew into New York, Mr. Obama made an impassioned appeal at the United Nations for a global effort to join the 40 nations who had joined the coalition to "degrade and destroy" the IS. The White House said publicly that Mr. Obama would discuss with Mr. Modi "current developments in Afghanistan, Syria and Iraq, where India and the United States can work together with partners towards a positive outcome." Officials said privately that "outcome" didn't have to be anything more than moral support, as the U.S. didn't require logistical support and already had enough ground support from Gulf allies. However, for India, even this would have been a departure from policy. Only in 2001 did the country back a U.S.-led rather than a U.N.-led coalition. Mr. Modi went a step further in rejecting the coalition request, criticising the U.S. for failing to include all countries (pointing to Iran and Syria at the U.N.), and chiding the U.S. over Afghanistan during an interaction at the Council on Foreign Relations, saying it shouldn't "pull out early" as it did in Iraq.

On the economic front, India insisted that no WTO deal could be allowed until a "food security" agreement also went "hand in hand." For Mr. Obama, however, as a beleaguered President, an agreement would have been something he could have touted as a success, not just domestically, but also internationally, ahead of the G-20 summit in Australia in November. It was for this reason that Secretary of State John Kerry, Commerce Secretary Penny Pritzker, and Acting Deputy U.S. Trade representative Wendy Cutler made India's support for the TFA the highlight of their trips to Delhi in the past few months, with Mr. Kerry even saying the government's reversal was "the wrong signal to the world." When Commerce Minister Nirmala Sitharaman said the "WTO deal wasn't dead," many U.S. officials took that to mean a deal could still be hammered out in time for the Washington summit, but were proven wrong.
India's wish list

On the Indian side, the list of expectations was far longer, but perhaps more realistic than the one the U.S. had. This was discernible from the moves the Modi government had made in the run-up to his visit. For example, the government's step to uncap the prices of drugs was criticised by several health NGOs, as it raised the prices of life-saving treatments manyfold. But this failed to elicit any relaxation from the U.S. on market access for Indian companies. The joint statement issued also referred to a "high-level" group that would deal with Intellectual Property Rights issues — a group that has even been criticised by advocacy groups in the U.S. On nuclear issues, U.S. companies GE and Westinghouse remain inflexible on India's supplier liability law, even as the joint statement referred to a dialogue on "all implementation issues." On renewable energy, the government had hoped for big technology partnerships, especially on solar and wind energy, as it had only recently scrapped an anti-dumping law in a move aimed at helping U.S. businesses. Yet all that was announced was the facilitation of loans to the tune of a relatively modest $1 billion from Exim bank. A much-touted education agreement for 'edX' or online education never materialised. On visas, despite Mr. Modi's announcement that U.S. nationals would be granted 10-year visas barring "exceptional circumstances," the U.S. was not forthcoming on the relaxation India had demanded on the H1B visa. Difficulties for IT companies remained unsolved. When asked about this at a briefing for journalists after the visit, a senior Indian government official only said that visas are no longer "linked to reciprocity." Finally, there was no mention of the specific plans for co-production in defence on missiles and naval equipment that had brought a flurry of U.S. officials — from Vice President Joe Biden and Senator John McCain to Defence Secretary Chuck Hagel and Deputy Secretary of State Bill Burns — to India in the past year.

None of the unfulfilled expectations takes away from the substantial achievements of the Prime Minister's visit though, of which the most notable was the restarting of relations that had been in effective cold storage for months. Mr. Modi's command of the Indian diaspora, a powerful and influential constituency in the U.S., was another obvious take away from the visit. And his assurances to U.S. businesses already invested in India have gone a long way in securing and growing their interest in the market here. But if the nickels and dimes of the visit are to add up to establish a much richer partnership between the "world's largest democracies," one must not ignore what was not achieved in the U.S., even as Mr. Modi and Mr. Obama prepare to meet each other again at the G-20 summit.

Student Movements: A Subject of Human Geography

Geopolitical Weekly
Tuesday, October 14, 2014 - 03:00  Stratfor  By Sim Tack

As student protests in Hong Kong continue, memories of the 1989 Tiananmen Square demonstrations naturally spring to mind. Less iconic but no less notable were the Hungarian Revolution of 1956, which began as a student movement; the 2007 Venezuelan protests, which started with a group of students demanding constitutional reform; and the 1929 protests in Paris, which challenged the role of churches in education.

Of course, each student movement is unique; the one underway in Hong Kong concerns Hong Kong affairs, not widespread democratic reform in China proper. And yet all such movements share characteristics that transcend borders, making them an ideal phenomenon through which to study geopolitics.

Student protests lay bare the social and cultural layers that move beneath the surface of geopolitics, much like subsurface currents flow beneath the waves of the oceans. Human geography forms the foundation of society and thus the systems that govern it. Even if we regard the state as the highest level of global policymaking and interaction, these social undercurrents are what move the generations, ideologies and cultural changes that shape the constraints under which states operate.

Patterns Emerge
From ethnic and religious sects to socio-economic divisions, human geography is as important to a state as the physical topography and resources that constitute it. Human geography exists in all states, and as with physical geography, revelatory, even educational, patterns emerge over time.

The way in which the ruled rise up against the rulers is one such pattern. These kinds of movements take a variety of forms, from peaceful demonstrations and strikes to violent insurgencies. Of these, student protests are perhaps the most intriguing because of the unique position in society that students occupy -- they are at the vanguard of a generation that often differs markedly from that of their forebears. It is at this fault line that competing ideologies and changing cultural identities collide.

That they are students means they are intellectually engaged, frequently espousing distinct political beliefs. But to be successful, student movements must galvanize the other areas of civil society. In that regard, they are often a good catalyst for change. Students are already grouped together at universities, often in urban areas, enabling student campaigns to evolve into broader protest movements. Of course, social media has made physical congregation somewhat obsolete, but proximity still simplifies the logistics of political action.

Even under ideal circumstances, student movements can fail, and indeed history is rife with failure. But more often than not, student uprisings tend to be part of longer-term social, cultural or political change. After all, when student protests disappear, students themselves often go on to become part of a more mature generation that retains much of its ideological conviction.

Think, for example, of the May 1968 movement that shook France and several other countries in Europe. Despite failing to achieve many of its goals as it occupied university buildings in Paris, the baby boomer generation later became part of post-graduate society, fomenting far-reaching social and cultural change throughout Europe as the ideas of the New Left continued to bleed into the mainstream.

When a student movement fails to create change, oftentimes it will join or be subsumed by an existing political movement, acting either as a force that advances change or one that that highlights the continuation of ongoing social trends. France's revolution in June 1832 is a prime example. The notion of popular sovereignty had been in place ever since the French Revolution ended the monarchy. The return of the monarchy in 1814, after Napoleon's fall, however, ultimately compelled students to take to the streets in what was essentially an extension of the very same social pressures that had dominated the internal evolution of France for more than three decades. These particular protests in 1832, eternalized in Victor Hugo's Les Miserables, were struck down. But the underlying desires of the masses persisted, culminating in 1848, when the "Year of Revolution" saw the final collapse of the monarchy in France and generated a broader wave of social change throughout Europe.

Student campaigns have by no means been relegated to Europe. The United States witnessed profound student activism during the late 1960s and early 1970s, when the anti-war movement brought about countless protests. At its core was a demographic shift -- the baby boom, which spawned the primary group challenging policy at the time. Of course, these movements did not end the war in Vietnam; they barely convinced Washington to end the draft. But they exemplified the trends of the time, namely, the introduction of a new generation with a distinct ideology.

When student movements emulate broader social unrest, the results can be dramatic. In 1979, the Iranian Revolution radically changed the political identity of the country, facilitated in part by students who stormed the U.S. Embassy in Tehran. The ensuing hostage crisis united many sections of Iranian society in support of the revolution. Ironically, it was this generation of students that put down a later generation of students during the 2009-2010 Green Revolution.

A Society in Motion
Even prior to the current Hong Kong protests, China has had a rich history of student activism influencing society. In fact, the establishment of the People's Republic of China itself had its roots in student movements: Mao Zedong and Zhou Enlai discovered socialism and began to organize politically as student leaders in the early 20th century. In 1919, the May 4th Movement, which grew out of student demonstrations, arguably ushered in what would become the beginning of China's contemporary history when it lashed out against Beijing's response to the Treaty of Versailles.

Students were also at the forefront of the Cultural Revolution in 1966. They helped reinforce the personality cult of Mao as Chinese citizens revolted against capitalism and traditional Chinese culture. It was student repudiation of university leaders accused of opposing the Chinese Communist Party that initiated the actual protests, which in turn started the Cultural Revolution -- something much larger than a student cause, to say the least. 

Considering China's long history -- and the history of student movements -- the current protests in Hong Kong will not be the last time China faces social unrest. As a one-party state with immense geographic, social and economic diversity, China has faced significant calls for reform throughout the years. And the Communist Party will inevitably face more pressure as China changes. For China's is a society in motion: It is creating an urban middle class as its economy matures. Rising urbanization and private consumption have altered the interests and expectations of Chinese citizens, and as expectation rise, so too will pressure on the government to meet those demands.

Along with the emergence of a Chinese urban consumer class, there has been a veritable explosion in the number of students in China as higher education has expanded over the past decade. China is spending more money on higher education to create an educated work force better suited for the economy to which China aspires. But creating more students creates more opportunities for social unrest. The ability of these students to function the way China intends hinges heavily on the performance of the Chinese economy. If economic growth slows, the potential for unrest hastens.

It is difficult to gauge the ultimate effect of the protests in Hong Kong. Still, the student activism there reminds us why these subjects of society are well-suited to protest. Because of their position in the human geography, students will often be at the front of generational changes in their respective societies, even if they are not always the most decisive agents of change.

Editor's Note: Writing in George Friedman's stead this week is Military Analyst Sim Tack

  Read more: Student Movements: A Subject of Human Geography | Stratfor
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October 12, 2014

The significance of lobbying in Indo-US ties

The significance of lobbying in Indo-US ties

By Guest Post Takshashila on October 7, 2014 in blog

by Sanjhana Dore

There are many factors that determine a country's foreign policy. To understand a country's foreign policy, like in the case of the USA, we have to first look local before global. That is, to understand American policy in this case towards India, or other countries, we first have to understand its domestic politics. We have to study their domestic push and pull factors. One of the most important and controversial domestic factors is lobbying.

by Sanjhana Dore There are many factors that determine a country's foreign policy. To understand a country's foreign policy, like in the case of the USA, we have to... 

What is lobbying and what role does it play in Indo-Us ties? There still does not seem to be a single definition that really covers all its elements. Nevertheless, it can simply, be understood as the process through which groups, organization or people directly or indirectly try to sway political decisions through various forms of advocacy directed at policymakers. Essentially, these groups, organization or people are self-interested. Wherein their interest or endorsements are on the bases of it resulting in the best outcome for them; one that might not be favorable to the other parties in concern or the country on the whole. The bitter truth of the matter is, this is how bills, laws or polices are, essentially, passed. Interestingly, the practice is frowned upon in India, as it is classified as an act associated with corruption or bribery and thus is largely unregulated. Contrary to that in the United States, it is a regulated practice and is important, if not central, in determining policy.

Lobbying can be understood through a cricket analogy. For example, the selectors are tasked with picking an additional player for an upcoming tour and there are four players to choose from. Among the four players, one decides to persuade an advisor to the board to endorse him. In the case that he does get selected, the advisor's endorsement of the player might or might not have been solely based on the player's ability. Many might view this negatively because it has by and large over the years been presented as such which has resulted in questioning the morality of the practice on the whole. The practice or method is not principally negative but certain forms of the advocacy involved or employed could be classified, as being unsavoury while others might not be. For example, persuading a company or group to support you by convincing them that you have what it takes or having credentials to back you is as much lobbying as an exchange of favours.

In the last couple of years, there has been a significant rise in the number of groups, organization and people that have been lobbying for the Indian cause in Washington; in an effort to strength Indo-US ties. Leading to many calling the Indian-American Lobby, the "New Kids on the Block". Taking the lead for the, already well-know and well established, Israel or Jewish Lobby, the India lobby is getting results in Washington — and having a profound impact on U.S. policy. This not only has major implication towards Indo-US relations but also in regard to US policy in Asia and its implications for India. The USINPAC or the United States India Political Action Committee is, an example of, a lobbyist group in the US that is responsible for lobbying to secure stronger ties between the two countries. Their latest initiative, a Congressional Briefing on US Liquefies Gas (LNG) Exports to India, is aimed at convincing American lawmakers that India is the ideal import market and strengthening ties in this regard will, potentially, advance energy security, [which has been] a critical US foreign policy goal in the region. This does not, however, take into consideration whether or not the outcome really benefits India or the United States.

The USINPAC is only one of the players in the growing lobby, there are also businesses like those a part of the IT sector both in India and the US that are also very invested in the implications of the domestic rulings. Especially those that pose to have foreign policy implications like that of the US Senate rulings to limit the number of H-1B work visas. This issue has also seen pressure for the Indian government. There is data to show that in the past the Indian government has financed private lobby firms like BGR, about $2.5 million, to peruse their agenda in Washington. In this case it is clear why this is an issue of concern to the Indian government because this Senate ruling, limiting H-1B work visas, could lower India's gross domestic product by up to 0.4 percent in 2015. In this regard, there has been intense lobbying from many organizations, like the US- India Business Council, to reconsider this ruling and the foreign implication it poses in the long term. This is a prime example of the India lobby in action and the fact that it consists of both domestic as well as international players.

Hence, it is fair to make the assumption that lobbying plays a significant role in the shaping of US foreign policy towards India. With its growing presence in Washington, the Indian-American or India lobby has become a force to be reckon with and one that policy advisors will be watching closely in the years to come when trying to determine or understanding Indo-US ties.

Sanjhana Dore is an intern at the Takshashila Institution