Part VIII: Keystone and the Method to Trump’s Madness

Trump is turning the government his own personal shade of orange and it may take decades to get the dye out.

President Donald Trump formally signed off on the Keystone XL pipeline on March 24.

While there will undoubtedly be ongoing legal and environmental wrangling (that’s just the nature of pipeline politics these days), the presidential waiver was the final formal step of the approval process. Construction will begin in short order, with completion likely in about two years.

Three things come to mind:

1) The economics of Canadian crude in a world of U.S. shale is questionable, but at least now they aren’t so ridiculous.

U.S. shale is very low in contaminants. In a normal system it would sell for a massive premium, but the speed at which shale crude has come on-line has overwhelmed not just American infrastructure, but global energy trends. From-scratch, shale wells can now begin production in less time than OPEC states take to bring pre-existing spare production back online. The result is that despite its sky-high quality, U.S. shale actually sells for a slight discount to international norms.

Canadian oil sands is more traditional from a pricing point of view. It is thick and gooey and packed with sulfur; it’s one of the lowest quality crudes in the world and as such sells at a steep discount. It also gets sold almost exclusively into the U.S. Midwest, the same area that is awash with U.S. shale crude. The result is that Canadian crudes typically sell at a $10 a barrel discount to U.S. shale at least, and more than that to global norms.

The real problem (for Canadian crude) is production costs. U.S. shale oil full-cycle costs are now below $40 a barrel. Canadian heavy is about double that… and that’s before you consider that Canadian heavy often needs to be railed because there isn’t sufficient pipe transport capacity. The transport difference alone adds $5-10 a barrel more to Canadian heavy’s cost. Keystone XL will reduce that shipping cost to the $2-3 range, in theory making Canadian heavy more competitive over the long term. The production cost differential is still wide enough to likely dissuade any new volumes of Canadian heavy coming online anytime soon, but at least the economics of production will be a bit less out of whack vis-à-vis shale.

2) U.S. industry needs to formally adjust for new crude mixes.

Ten years ago everyone knew that crudes like Canadian heavy were the future, and so everyone retooled their refineries to run on heavy, sour crudes. Then shale popped up and wrecked everyone’s well-laid and expensively-funded plans. Now in some ways U.S. refiners faces the best and worst of all worlds. Best in that the two major input streams — Canadian heavy and shale — can be purchased at discounts to the global norm. Worst in that the two crude streams are about as far apart as concerns quality as is possible and so cannot be run in the same facility.

The solution is blending facilities that mix the two along with a few other inputs to make something a bit more regularized, preferably with enough flexibility that refineries can custom-order a blend that matches their technical requirements as well as the market needs of the day. The problem isn’t just tank farms and dedicated pipelines, but those “other inputs” that help the blend remain blended. Otherwise the mixed crude tends to separate like salad dressing. Spoiler alert: Keystone XL guarantees that such blending facilities are going to be a big growth industry for the next decade.

3) Trump is not a normal president, and he’s becoming less so by the day.

That Trump moved quickly on Keystone XL doesn’t surprise me. What surprises me is that the announcement today came without Trump’s Elon-Musk-style leadup and fanfare. While many media like to lampoon him as, well, eminently lampoonable, the fact is that he is a shifting target who shows no sign of establishing a normal order of business. In the meantime, he is forcing the government to work the way he wants them to.

My contacts in the refining world have already detected a 180-degree shift in the way the Environmental Protection Agency operates. Under Obama, EPA inspectors would drop in unannounced and demand to see everything. Now they are giving weeks of notice for information requests and volunteering that even these looser reporting deadlines are more like squishy guidelines…and that’s before Trump’s 30%+ funding cut to the Agency kicks in.

The State Department has had minimal contact with its own Secretary, Rex Tillerson, who has emphasized personal diplomacy over institutional diplomacy. Both styles have pluses and minuses, but the Trump team is very clearly laying the groundwork for a broad-scale elimination of many of the levers of government power. People criticize Trump for seeming to still be floundering after two months on the job, but I see the greatest civil deconstruction in the history of the Republic. At the speed Trump is moving, it would take a generation of effort to rebuild the bureaucracy should future presidents attempt to turn back the clock. Trump may well have the greatest impact of any president on the structure of government since the New Deal.

And Trump’s efforts are hardly limited to the executive; Congress is firmly in his sights. After some rough back-and-forth with the Republican caucus on the Obamacare replace/repeal, Trump threw up his hands last night and directed Congress to vote up or down on the bill as it stands. His message to conservative and moderate Republicans opposing the reform bill in its current form is a stark one: you campaigned on repealing Obamacare, but now you’re all bitching about the details. So either do it and let’s move on to other things, or break your pledge and reap the whirlwind from your constituents. It’s a stark reminder that Trump isn’t just not really a Republican, but that he ran against the Republican Party.

Trump is merging the Obama’s strategy of direct executive orders that can only be challenged via multi-year lawsuits with the Reagan strategy of building and abandoning Congressional alliances issue-by-issue with a Clintonesque predilection for going direct to the people in order to force everyone’s hands. Yet Trump is governing without a support infrastructure, so he’s both difficult to influence or to hold to account.

It is far too soon to say that Trump will be successful, but considering the enervated nature of the U.S. parties, betting against the new president would be most unwise. Love him or hate him, President Trump doesn’t just have his own style, he is going to rule.

Part VII: Ms Merkel Goes to Washington

How Merkel and Trump get along (or don’t get along) will determine the world’s path for at least the next three decades.

Here it comes.

German Chancellor Angela Merkel will meet with U.S. President Donald Trump tomorrow (March 15). These are the leaders of the two branches of the free world, and how they get along (or don’t get along) will determine the world’s path for at least the next three decades. I’m not hopeful. Two weeks ago the Trump administration issued its new trade guidance, which calls for nothing less than the unravelling of the global trade order.

The key institution is the World Trade Organization, a grouping formed by the United States expressly to manage global trade, most notably by adjudicating trade disputes. The WTO isn’t just some gathering like the G20, but instead a Senate-ratified treaty at the heart of U.S. economic law. In Trump’s new policy outline, which at a few hundred pages is by far the most detailed anything I’ve seen out of the Trump White House so far, Trump asserts that U.S. citizens are subject to U.S. law, not WTO rulings. When the two clash, U.S. law takes precedence. More than the travel ban or the Dakota Access Pipeline or Russians having conversations with the Attorney General, it is the implementation of this decision that will determine how our world will (d)evolve in the months and years to come. The WTO — indeed, the entire trade order — cannot function without the world’s largest market being open, and without the world’s largest navy making imports and exports of everything from iPods to Toyotas to French cheese to Kuwaiti oil safe for everyone.

I warned in the Accidental Superpower that it didn’t really matter to the United States how things unraveled, but that for everyone else “it truly matters whether the American shift from Bretton Woods occurs slowly over a decade of neglect or deliberately in a single [moment] of panicked fury” after the Americans have a really bad hair day. We are very clearly seeing the latter—no Trump jokes intended.

There are few countries with more to lose than Germany, and Merkel must be preparing for her summit with palpable dread.

Germany is not a normal country. Its territories are cobbled-together statelets that historically have had stronger local and regional, rather than national, identities. But whenever those statelets do start to act as one, their sheer heft tends to scare the bejeezus out of everyone else. A fractured Germany is one that falls prey to its neighbors; a unified Germany is one that its neighbors feel forced to tear down. Most of German (which is to say, European) history has obsessed with how to manage the German Question, and the answer has always been either grueling war or equally grueling occupation.

Except when the Americans were in control, that is. The whole point of the Bretton Woods system of free trade was to unify the world’s once-warring countries under a single rubric in order to contain, beat back, and destroy the Soviet Union. In this order Germany was no longer isolated target, but instead an integrated bulwark. With Germany and France and Spain and Italy and Britain and Sweden and Turkey and more all on the same side, the Germans could for the first and only time in their history expand economically without risk of invasion (except from the Soviets, of course). The time since the Bretton Woods era kicked off has not “simply” been the greatest period of peace and prosperity in human history, but it has been the only period of peace and prosperity in German history.

I say this without hyperbole: without Americans underwriting Bretton Woods, there is no free trade. No free trade, no EU and NATO. No EU and NATO, and suddenly Germany is once again exposed to the broad-spectrum competition that is Europe — a competition that Germany is by default the most powerful player, but equally by default cannot possibly win.

Merkel faces the impossible task of somehow convincing Trump that everything that he knows and believes spells disaster for Germany, Europe, and the global system. And that somehow that makes it bad for the everyday Americans, US strategic goals, and Trump himself as well. And to do so without triggering something worse. After all, it isn’t like it is Trump’s goal to deliberately and explicitly tear Germany down. He just doesn’t care.

I do not envy her that conversation.

The timing for Merkel couldn’t be worse. The entire European fabric is shredding, even before the Americans set sail in the other direction.

  • The United Kingdom is leaving the EU, giving fact to the fear that the EU is not Europe’s inevitable future. As London has already launched free-trade talks with the Americans, Canadians, Turks, Indians, Australians, Kiwis and the European Free Trade Association, there is a building horror that the Brits might not be destroyed by Brexit, and should that happen, then what is stopping other rich members from leaving?
  • Relations within the EU have turned acrimonious. A Polish internal spat is throwing a veritable troop of monkeys (and their wrenches) into EU workings, with Warsaw threatening to upset the entire EU order. At issue is the EU’s decision to override a Polish objection to a change of the EU president (the sitting Polish government is angry that the EU’s titular head is a former Polish prime minister from their domestic political opponents). The last time something like this happened, it was Margaret Thatcher using her anger at EU budgeting to stall all things EU for the better part of a decade.
  • The Dutch government — by far the most effective party at patching together EU unity in trying times — is likely not just to fall in elections this Wednesday, but might actually get replaced by the strongly Euro-skeptic party of Geert Wilders, a man who makes Donald Trump look positively calm and inclusive. Similar firebrands have already taken power in Hungary and Poland, seem posed to assert command in Italy, and that doesn’t even broach the topic of Marine Le Pen’s likely first round victory in France’s upcoming presidential elections.
  • Turkey is on the warpath, both figuratively and literally. First, figuratively: A big topic in current European politics is to prevent Turkish politicians from holding political rallies across Europe (typically with anti-European themes). It has gotten so bad that the Dutch government denied the Turkish foreign minister the ability to land his plane last week. As such, the notoriously prickly Turkish government is screaming it will cancel or subvert every single deal the Europeans have made with the Turks in the past decade—President Erdogan has even accused the Dutch of behaving like “Nazi remnants”. Now for the literally: Anti-ISIS efforts in Syria and Iraq are coming to a head outside of ISIS’ capital of Raqqa, Syria and its largest city of Mosul, Iraq. In both cases the U.S. and Europeans have become deeply involved in alliances that involve Kurds, something that so infuriates the Turks that it cannot help but impact Western-Turkish relations more broadly — and Turkey controls how many Syrian refugees can swarm up from Europe’s southeast.
  • Russia is reinforcing its positions not just in the Ukraine border region, but in Ukraine itself. A serious military effort may well be imminent. Putin sees a government in Washington that is testing the NATO alliance even more than he does, and Putin likes what he sees. Others have noticed. In late February the Swedes formally abandoned their post-Cold War optimism, reinstituting the draft.

And while normally I prefer to leave aside personality issues, they are depressingly relevant here. Merkel has a (well-earned) reputation for being methodical, slow to commit, pensive and in general reserved. Trump has an (equally well-earned) reputation for being the exact opposite. If ever there was a time that personal styles would be needed to help make impossible talks possible, it would be now. Instead, we have the opposite.

About the only thing Merkel (and Europe, and the world writ large) have going for them is the slim reed of hope that Trump’s anti-trade policies might not be finalized. Leaks out of the White House point to a “civil war” within the core Trump team between nationalist/isolationist/anti-trade personalities like Steve Bannon and Peter Navarro and more nuanced pro-business personalities such as Gary Cohn of the National Economic Council.

But the emphasis is definitely on the “slim”. The complete absence of strategists such as National Security Advisor HR McMaster or Defense Secretary James Mattis from the conversation, much less the broader debate, is crushingly telling. The United States is the least integrated major economy into the global system. For Washington the creation of the trade order was a strategic gambit with understood economic costs meant to underpin the Cold War alliance, not a plan perceived to generate economic gains. If Trump’s military advisors don’t see themselves as having a role in this trade debate, then that slim reed of hope is just the proverbial last flash before light vanishes from the sky.

Eyes on an Obscure Russian Minority

In The Accidental Superpower I noted that while the Chechens will always be a thorn in Russia’s side, that a different Muslim ethnic group — the Tatars — are the ever-present dagger to Russia’s heart.

Unlike the Chechens who are a semi-cloistered mountain people nestled in the Caucasus and so rarely leave their homeland, the Tatars are modern and cosmopolitan. They sit at the merger of the Oga and Volga rivers — the pair of navigable waterways elevate Russia to something more than just a wide-ranging country endowed with resources. As Accidental readers know, navigable waterways are the bedrock of economic success. They enable a people to establish internal trade, build their own capital, and move up the value-added scale organically.

Both the Oga and Volga are Russian rivers, but their junction is at the Tatars’ homeland. The Tatars also happen to live atop most of the major infrastructure that connects Russia to Siberia. Should the Russians ever lose control of the Tatars, they cease being a regional power, much less a global one.

In the past couple of years, Tatarstan has been simmering. Economic breakdowns, Kremlin confiscations of the regional oil company (Tatneft), and more recently a banking crisis. It’s been on my list to write about, but last night my former employer, Stratfor, beat me to the punch. Strat and I differ on many things of course, but they’re a great one-stop-shop for international news, analysis and intelligence that is so obviously lacking in national global media these days.

I’m happy to say that Stratfor was lost without me when I left back in 2012, but I’m even happier to say that they seem to have found their way in the years since — and are once again churning out some great work. This article, IMO, is emblematic of that.

Russia’s Eyes Focus on Tatarstan by Stratfor