The Art in the Forest

I woke up Monday morning to find a bit of a debate on my Twitter feed over assessments of my ability (or lack thereof) to pontificate on trends in the energy sector. Specifically, Art Berman — @aeberman12 — noted:

“I told Peter last time we met that I believed he should stick to what he knew–demographics & geopolitics. His view of shale plays & US energy independence/dominance is that of most oil analysts with no experience in O&G business–partly right & dangerously wrong.”

Let me start by saying that while those sound like fightin’ words, Twitter has a way of making us all sound like hot-headed jerks. I’ve met Art a handful of times and I know he is one ultra-polite cat. Art was just pointing out in under 280 characters that he’s a specialist in his field and I am… not.

He’s correct about that, but he is not correct about the rest. I am not a demographics expert, and I’d argue geopolitics is too multi-tentacled of a beast for anyone to truly command.

I also don’t know more about the Chinese DF-26D ballistic missile than the folks in the U.S. Navy who worry about it striking an American carrier, so I’m an avid reader of Aviation Week. Nor do I know the minutiae of demographic trends, so I follow Vikram Mansharamani. Nor can I keep up with the wild insanity of European security policy, so I rely upon the insights of Francois Heisbourg and Ivo Daalder. Nor do have the time, inclination and focus to follow the ins and outs of Chinese finance, so I keep tabs on what Michael Pettis is doing. Rose Gottemoeller for nuclear policy. Liam Denning for global energy markets. Borzou Daragahi for the Middle East. Milo Hamilton for rice. Max Roser for delightfully unexpected data visualizations. Jake Bramante for great backpacking analysis.

I’m not a specialist in any of these things. I mean, come on, I’m from Iowa. How sophisticated do you think I can be?

All these folks I follow are the true experts. The specialists who know all the details and relationships of their respective niches. I think of them as tree people.

I’m more of a forest guy.

Since Art started this little journey, I’ll use him as an example.

Art’s specialty is petroleum economics, in particular he analyzes the relationship among a firm’s finances, its reserves, its production rates, and ultimately its profitability. The bread and butter of his consulting business is to help folks identify which firms will and will not prove financially viable over various time horizons. (Apologies to Art if I didn’t get that quite right. After all, I’m not a specialist.)

If you are interested in the U.S. shale industry from an investment or profitability standpoint, and for some reason you have not spoken to Art, you are doing yourself a disservice. He’s clearly the headliner for his business niche.

But Art is probably not who you would go to discuss the newest technologies in the shale sector, and why would you? He’s not a specialist in that very specific subfield. For that the University of Texas’ Bureau of Economic Geology (BEG) is a better match. I watch what both are doing.

I follow Art both for a reality check on how much the shale sector can grow with current models, as well as to understand what sort of firms might be able to enter the shale patch to displace players less stable. Its about figuring out the future corporate makeup of the shale patch. Without Art I would have never known to even look at the shale sliver of bond markets.

Conversely, I follow the BEG to get an idea of what new techniques might work at what price points in what petroleum basins so that I can grope towards an understanding of what the operational geometry of the shale patch might look like in three to five years. Without the BEG I wouldn’t have even heard of multilateral drilling until it became widespread and could have never projected forward.

I don’t pretend to know more about the specialties of Art or the BEG because I do not, and I never will. But I use the work of both as well as Vikram and Ivo and Rose and Borzou and Milo and many, many others to game out the bigger picture over many sectors on multiple continents over a (much) longer time horizon.

I look at the world. It is a very big forest. It requires me being as well-rounded as possible. I’m certainly not the smartest person on topics oil when in a room of oil operators, but I bet I know more about agriculture. And when I’m in a room of farmers I bet I know more about manufacturing. It isn’t about being the smartest person in the room on any given topic. It’s about being able to draw connections among all topics.

Energy informs electricity informs manufacturing informs trade informs China informs finance informs real estate informs civic development informs educational patterns informs technological advance informs geographic advantage. Not exactly the circle of life, but such interconnections form the context of what I do. I’m a sort of advanced generalist. A professional novice.

So, with that in the proverbial back pocket, let’s talk about shale today.

The biggest point of friction between Art and myself is over output horizons.

I’ve pretty consistently been among the more optimistic forecasters of future shale output, while Art has pretty consistently been among the more pessimistic. We’ve both been wrong. Shale has always done better than the forecasts.

Take a look at this screen grab. This is all data from the U.S. Department of Energy’s Energy Information Agency–EIA is by far the best piece of the U.S. government infrastructure for collecting and understanding the details of any energy question. The dotted lines are the EIA’s annual estimates for what shale output will be in the future. In the legend you can see what year EIA made each estimate.

The solid line at the top is actual output.

Notice that the EIA has never gotten it right. They’ve always under guessed. That’s because they cannot factor in technology that has not yet been invented. There is oil in shale formations, but the EIA–and I daresay, Art–didn’t know how to get it out of the ground. Toss in the profit motive, and BAM! People found a way. Shale boom.

The problem is predicting the impact of new technology. Whenever something comes out that no one has seen before, it is no simple task to predict what it will do once it is applied en masse. As recently as five years ago there were hundreds of producers in the shale space. Each was developing new techs. Even if 90% of those innovations proved unworkable, the rest eventually caught on and transformed what was possible. Things like micro seismic, multilateral drilling, better data and water management are not simply being continually refined and improved but combined into best-practices systems that have steadily–meteorically–increased American oil output to generate that thick line.

That unpredictability is step 1.

Step 2: Enter Art.

Art is absolutely correct: Many of these small companies have not been profitable. Many hemorrhage money. Yet that hasn’t mattered because international instability has funneled ridonkulous volumes of scared, stupid money into the United States. That money seeks investment products that have a hard asset and a revenue stream. A net loss is not considered overly problematic since if the money stayed at home the fear is it would all be lost. Shale bonds, as imperfect as they are, fit the bill. Add in the general swollen nature of the American financial community in the aftermath of the subprime crisis and the availability of financing hasn’t often been a limiting factor. Art doesn’t have to be wrong for the overall sector to grow.

Where I get interested is that the very financial weakness of these barely-profitable or unprofitable firms provides openings for stronger firms.

Enter the super majors. For the first decade of the shale revolution, the supers barely touched the sector at all. Their concern — like Art’s — is profitability. They saw an experimental industry with razor-thin to nonexistent profit margins and they stayed away.

But all those new techs are now combining into a best practices suite, and whenever a piece of the oil patch is determined not by chutzpah and innovation and financial…creativity but instead by brute force and iron-clad internal finance and technical acumen, bet on the supers every time. The supers are now sweeping into the shale patch and buying up financially-stressed independent operators by the dozen.

In a young industry ingenuity is everything. In a mature industry scale is more important. The independents have ingenuity. Ingenuity has made shale ever more efficient, dropping overall production costs from in excess of $100 a barrel to something under $40. But the industry is now maturing, and the supers have scale. The torch is passing.

ExxonMobil has rather boldly opined that some of their newer, larger production schemes for the Permian Basin will be have costs as low as $15 a barrel.

As that’s a figure cheaper than oil production costs in Saudi Arabia, that sort of claim grabs my attention even though we know that the Exxon plan is not an apples-for-apples comparison. Exxon didn’t note whether the $15 figure includes exploration or tax or transport costs or is limited to production and lifting expenses. Much more importantly, the supers operate in a starkly different manner than the smaller mom & pop firms that have dominated the shale sector until now:

In part the supers have the advantage of scale (internally-sourced finance, better data crunching, the best engineers in the world, etc.). A bigger piece of it, however, is the supers won’t drill a well they don’t think will be profitable. Most smaller players — in part because they are experimenting — will drill every possible spot on their leases. That’s what happens when cash-flow is king. The supers think on a longer time horizon and so tend to only drill the really good spots. That generates more output per unit of input, even if it leaves a bunch of crude in the ground. It might generate less production, but it is better optimized. Profitability looks better. (I can hear Art nodding approvingly.)

This evolution in players probably means that the pace of output increases will slow but considering 2018 output gains were the largest single-year gains ever, that really isn’t saying all that much.

Which brings us to point three. Even assuming the pace of increase in 2019 is half that of 2018, the United States still becomes a net crude exporter at the end of this calendar year. Yes, that’s a notable milestone, but it in no way signals the end of the shale story. Even assuming future annual increases are only one-third that of what they were in 2018, the American oil patch will add a new Saudi Arabia of output within a decade.

Now there are a hundred shades of subtlety within that statement, and a thousand events that will unfold before that happens, so I’d not get too enthusiastic with the chick-counting. But most of the things that will go wrong will happen well beyond America’s borders, and there is little to nothing in Art’s world that will change the petroleum switch-over from somewhat financially-stressed small firms to the more stable super majors. This is cooked in.

It is indeed time to start noodling over what it means when the world’s largest supplier of internationally-available crude comes from a country that no longer has much interest in global stability.

That’s my new forest. The trees in this scary forest are not reserves and debt tables and drill bits, but Japanese missile ranges and Swiss insurance brokers and Saudi assassination manuals.

Time to meet some new specialists.

The Decivilization of Venezuela

Of late, Venezuela has had a wretched time of things.

As a rule I attempt to be judgement-free when it comes to evaluating governing systems. For the most part, governments—like economies and cultures—are products of geography. Germany’s proximity to so many competitors makes it focus on organization and quality. America’s territorial insulation and richness enables it to get by with a much smaller, more laissez faire system. China’s regional splits force it to gyrate between central clampdowns and peripheral spin-outs. I try not to criticize or play favorites, and keep my personal preferences to myself.

But then there’s Venezuela.

Venezuela is a country of geopolitical advantages in a region where those are hard to come by. It has oil and agricultural wealth, an educated populace, a commanding position on world trade routes, and easy access to the world’s largest consumer market. It is far from the most advantaged country, but Venezuela had what it needed to thrive…until a reckless, selfish cult took that wealth for itself.

The Venezuelan system isn’t socialist at all. It hasn’t been for a long time. When a socialist government takes over a productive asset, it runs that asset with an eye towards furthering some government goal. Perhaps not competently, but keeping seized assets operational so they can provide this or that input is sort of the point. For at least the past decade when the Venezuelan government has taken over something—say a farm—they instead loot it like a flock of locusts and simply leave it to lie fallow.

This isn’t socialism, or even mismanagement—this is kleptocracy. (Yes yes yes there’s an argument to be made that most socialism-flavored governments concentrate so much decision-making into government hands that such cronyism is a constant danger, but that’s a debate for another time.) Suffice to say, since roughly the middle of the Chavez era in the late 2000s, the only thing socialist about the Venezuelan system has been the propaganda.

Under the misgovernment of President Nicolas Maduro, Venezuela has suffered one of the worst economic depressions in human history—so far we’re at an estimated 50% contraction in GDP and seven-digit annualized inflation growth.

The crisis can be seen, and felt, most acutely in terms of food prices. A Venezuelan earning the official minimum wage would need five months of savings to purchase a single can of olive oil. Private grocery stores struggle with supply issues thanks in large part to corruption in government-controlled supply chains. “Non-essential” items like condoms, diapers, and medicines are all but inaccessible. Venezuelan fuel is now sold just across the border in Colombia to Venezuelans by corrupt government officials who keep the cash.

Venezuela used to have a modern healthcare system, but now basic supplies are so scarce that intensive care units have shut down. Doctors have emigrated. Over 70% of the hospitals that are still open don’t have running water and frequently lose power. An estimated 3.4 million, or 10% of the population, have fled the country, mostly to Colombia and Peru.

Those who stay have begun the process of dying from malnutrition and preventable diseases. The average Venezuelan lost 24 pounds in calendar year 2017. The pace of decline is accelerating. At the time of this writing, the bulk of the capital of Caracas has not had power for a week. No power means no running water means no refineries means no gasoline means no food distribution.

Summed up, Venezuela in 2019 is teetering on the edge of a complete decivilizational event.

Decivilizational. It’s a big word with bigger implications. But first we need to unpack what we’re going to unpack: civilization itself.

Everything we know about human civilization is based on the simple idea of organization. Once a government lays down some basic ground rules like “don’t kill your neighbor” people start doing what people do: raising families, growing food, hammering out widgets. People start trading, so that the farmer doesn’t also have to make flour. This specialization makes us more productive in our chosen fields—be it farming or milling or blacksmithing. This society gets richer and expands. More land, more people, more specialization, more interaction, more internal trade, greater economies of scale.

Eventually we become so specialized and our technology has advanced so much that we become totally incompetent at tasks which used to be essential. Try producing your own electricity or enough food to live on while keeping up your full-time job. What makes it all possible is the idea of continuity: the idea that the safety and security we enjoy today will still be here tomorrow and we can put our lives in the hands of these systems. After all, if you were pretty sure the government was going to collapse tomorrow, you’d probably worry less about whatever work-related minutiae your manager insists is so important and instead focus your time on learning how to grow and can vegetables.

What the Americans have done in the post-World War II era is to vastly expand continuity via the global Order. Instead of specialization and interaction being limited to the internal affairs of individual nations, the Americans imposed security on the global system. Think of Europe, a place where dozens of ethnicities have fought wars with one another for millennia. Yet with the exception of some hiccups in the Western Balkans there hasn’t been a shot fired in anger between armies since May 1945. That’s flat-out unprecedented. Labor hyper-specialization is now the norm, and trade has become so complex entire economic sub-sectors (independent logistics providers, trade negotiators, contract mediation, and warehouse planning consultancies), now exist to facilite it. The civilizational process is reaching for its ultimate, optimal peak.

But “optimal” is not the same thing as “natural.” The Americans deliberately forced the Order into existence to fight the Cold War. The Americans have a deep continuity and large economies of scale without the Order, but the global system is wholly artificial. Making matters worse, the Order does not and cannot maintain itself. Someone must pay the bill to keep it going, and the American right, the American left, and the American center have lost interest and are all arguing for a more constrained American role in the wider world. No one else has the spare economic heft or the large market or the globe-spanning naval capacity to force an Order. Break the global continuity and everything that makes our world work quickly cracks apart.

There are a number of ways down, but they all share something in common: reduced interaction means reduced access means reduced income means fewer economies of scale means less labor specialization means reduced interaction. Shortages force people to look after their own needs directly. The value-added advantages of continuity and labor specialization whither. Everyone becomes less efficient. Less productive. And that means less of everything: not just electronics but electricity, not just automobiles but gasoline, not just fertilizer but food. And it compounds. Electricity shortages gut manufacturing. Food shortages gut the population. Fewer people means less chance of keeping anything that requires specialized labor working. Say, things like the electrical grid or food production.

Whether the country in question is high-tech export-led manufacturer (Germany, South Korea, China), a mid-tech supply chain link (Thailand, Poland, Turkey), a resource exporter (Kuwait, Russia, Morocco), or a major agricultural supplier (Brazil, South Africa, Kazakhstan) the differences are one of scale rather than kind. Lack of continuity means disruption of what we think of as civilization to exist.

Just how vulnerable is everyone? Think of it this way:

While “only” about one-fifth of global foodstuffs are traded internationally, the vast majority of global foodstuffs are produced with industrialized inputs like fertilizers and pesticides. Those inputs on average more than triple yields. Those inputs are largely petroleum-derived and four-fifths of the world’s oil is traded internationally. Unless you live in a country lucky enough to produce enough oil for its own needs and have the ability to process it into agricultural inputs and have the climate and land necessary to grow your own food, all it takes is one small tweak to the physical security of trade routes in the general vicinity of places like the Former Soviet Union or the Persian Gulf to shift you from living in a world of plenty to a world of want.

What would you do—what wouldn’t you do—to get a full belly? To feed your children?

That is what decivilizational means: a cascade of reinforcing breakdowns that do not simply damage, but destroy, the bedrock of what makes the modern world work. And that’s just one example in one sector.

What is going on in Venezuela is horrible by any measure, and in a world of Order Venezuela is the very definition of outlier. But a world of Order is not the natural state of things. Pay attention: Some shade of what the Venezuelans are going through is what many of us will need to deal with. Soon, the only thing that will truly make Venezuela stand apart is that its pain is self-inflicted.

Brexit: The End of the Beginning

The United Kingdom stands at the precipice of its greatest change since the collapse of empire. It will be just as painful.

This week Britain got a new parliamentary grouping – the Independent Group – that might in time form the kernel of a new political party. It started with a breakaway of seven opposition Labor MPs, and on Feb 20 picked up an eighth defector as well as three MPs who ditched the ruling Conservatives.

The environment shaping the splintering, unsurprisingly, is Brexit.

Let’s start with the Conservatives. Prime Minister Theresa May arguably has the worst job on the planet right now. May believes the 2016 referendum in favor of the United Kingdom leaving the European Union obliges her to lead the United Kingdom to leave the European Union. We can debate whether referendums truly are the will of the people (I’d argue that since referendums ask explicit questions they are purer gauges of the popular will than elections), but the point is that May’s interpretation of the results are that hell-or-high-water the UK will leave.

It was always going to be messy. There was never going to be a divorce deal with the European Union. EU policy dictates that in any big issue each individual EU member must approve of the final text. The Irish want to maintain restriction-free access to Northern Ireland. The Spanish want a path to recovering Gibraltar. The Dutch want the British as close to the common market as possible, but not if it means they have to follow rules the British do not. The French want to gut the British geopolitically. The Germans seek to maintain market access but deny London any rule-making influence.

There simply is no iteration of any deal that can satisfy all these divergent interests, much less in the short two-year timeframe the Brexit negotiations allowed. Getting a comprehensive trade deal with Canada took the EU a decade. Even if there were a path forward that would please all of Europe, any such deal couldn’t get through the British Parliament. In losing those three MPs, May has lost her majority – which was already razor thin and only in existence at all with the help of a minor Northern Irish party which has some pretty uncompromising views on issues Irish.

No, there is zero way forward here that is anything other than a hard crash out. I’ve held this position from the beginning, but now the United Kingdom cannot get anything done that requires a parliamentary majority.

Those of you on the political left, don’t get cocky. British Labor’s mess is just as bad with the added problem of not being in power. Between 2016 and 2018 the Labor Party came back from the bleeding edge of dissolution under the leadership of Jeremy Corbyn by tacking to the hard left and bringing in a lot of youthful energy.

The problem is that young Brits tend to be exceedingly pro-Europe while Corbyn is anti-…. pretty much everything, with Europe near the top of his list. When you’re not in power it is easier to paper over such differences, but with many in the Labor Party agitating for a second referendum to undo the first one and with Brexit the issue of the moment, it is getting harder to hold the party together. The seven Labor MPs who founded the Independent Group did so expressly because they want the UK to remain in the EU and felt their leader was on the wrong side of the issue.

I see a few things here:

First, the United Kingdom’s party structure is in freefall. Neither the Conservatives nor Labor are unified on the issue of the day and so MPs are breaking off in an attempt to form new poles of power. Something similar is occurring in the United States, but features of the British system enable the shift to occur much more quickly.

The United States distributes power among local, regional and national levels, while the presidency is elected independent of Congress. In such a system the level of direct/local democracy is higher, but on the big issues change tends to come more slowly because a party breakdown doesn’t immediately or necessarily change the national government. (This design quirk is part of why any American administration always seems so tone deaf while Congress seems so feckless.) The biggest shock to the American system, the end of the Cold War, is only now – three decades later – working its way through the political framework. And it has taken that combined with things like digitization, the ongoing Baby Boomer mass retirement, and the rise of China to force a long-overdue political reshuffling.

In contrast in British national elections the various elected representatives meet in Parliament and select the national leader from among their own number. If the ruling party cracks, it can no longer command a majority in Parliament. A vote of no confidence can bring the government down in a day, force new elections in a month, and voila! New parties, new government, new policies.

Second, in the United Kingdom the next few weeks to months will be utter political paralysis. May has lost her majority so even if the European Union could stomach a Brexit deal more favorable to the UK, May can no longer get any deal approved. Only five weeks remain until Brexit occurs. With the reality of a hard Brexit belatedly sinking in, Parliament should be incredibly busy with a mass of enabling legislation that would help smooth the process within the United Kingdom in preparation for what happens after nearly a half-century of laws and regulation are invalidated in a day. No such luck. This is going to make the transition much more difficult than it needed to be and it was already going to be very difficult.

Third, if anyone wants to take advantage of the United Kingdom, now is the time. Upon leaving the EU the Brits will lose access to half of their trade portfolio and there is zero vision within the country’s political and cultural structures as to how to move forward.

Politically, the Brits cannot chart a route forward. May undoubtedly is not in it for the long haul, and Brexit challengers within the Conservative Party are, how shall I put this, not exactly carved out of honesty, thoughtfulness or creativity.

On the other side, Labor is led by a man who makes Donald Trump look honest, thoughtful and inclusive. The defectors who formed the Independent Group had some choice words for their former leader that included things like bigot and Stalinist. Considering how fast a single election in the United Kingdom can change policy paired with the epic possibilities for rapid change that Brexit provides, the election of Jeremy Corbyn would be a disaster that would take the United Kingdom a generation to recover from.

For Brits reading this, please take to heart that this criticism of Corbyn’s character and policy preferences comes from a citizen of the United States, a country with a well-documented and respected track record in recent decades of selecting the absolute worst candidate from among a wide range of suitable options. I know a damp squib who is chuffed at his own chunder when I see one.

The country most likely to seek advantage over the Brits is a country that has done it before: the United States. In World War II the Americans nailed the Brits to a borderline-usurious deal known as Lend-Lease in which the Brits received some shoddy, outdated ships in exchange for almost every bit of the British Empire in the Western Hemisphere. That deal subjugated the United Kingdom to American strategic preferences for the next two generations.

Post-Brexit Britain will be its most geopolitically desperate since those dark days when it stood alone against the Nazis, and the American administration is already in the process of rewiring all its foreign relations. Any deal negotiated in the post-Brexit chaos will be at least as disadvantageous as Lend-Lease and will – at a minimum – result in most of the British financial sector decamping to New York City.

Finally, a few words about what the Brits are leaving. The drama of Brexit has enabled the Europeans to shift attention from all those issues that were already past the point of no return in 2016: immigration, refugees, the Ukraine War, Russian aggression, the Syrian War, overloaded pensions, demographic collapse, sovereign debt, Greek insolvency, Italian banking, the failure of the German political center, the deliberate destruction of liberal democracy in Poland and Hungary, the end of productive relations with Turkey, etc.

Not only have none of these issues gone away, all have gotten worse. Many are fully capable of killing the European project independently. All of them combined simply make the end of the EU an issue of a betting pool for the date. With the Brexit “process” about completed, all European eyes will refocus back upon these unsolvable issues. For Europe, the year 2019 will suck as much as it will for the Brits. The EU was always going to end, so the Brits getting out before the collapse and getting a head start on whatever is next will a decade from now broadly be remembered as the right call.

But it didn’t have to be nearly this hard.

Fire in Venezuela, Part III of, um, II

Read Part I and Part II

Geopolitics has two speeds.

The first is glacial. The sort of huge, multi-generational trends that I spend most of my time studying and charting don’t shift easily or quickly. Whether the issue is pushing an army over a mountain range, or attempting to encourage a country full of people to have more children, or finding a substitute for gasoline, change – or at least change that is big – comes slow.

This is part of the power of geopolitics: if the rules change only rarely, it is fairly straightforward to draw trends deep into the future.

Of course, there is that other speed. The forces of geography may be unstoppable and inevitable, but that does not necessarily make their destined results imminent. Political forces don’t simply resist them doggedly, but often pathologically. For a solid example, consider the Cold War: the Soviet economy was never much more than an organized mess, yet from the time Soviet leadership realized it was all hopeless in the early 1970s, it still took another two decades for it all to go to pot. Only a fool would assert the Soviets did nothing of relevance during that time.

Yet leaders resist forces geopolitical at their risk. Pressure builds until the inevitable release. The greater the delay, the greater the pressure, the greater the subsequent explosion. In such moments truly epic forces are unleashed all at once: the Berlin Wall’s fall, the Asian Financial Crisis, the September 11 attacks, the release of Avengers: Endgame.

At such moments, the speed accelerates to lightning and people in my line of work have a heyday. It’s professional vindication, personal validation, and a helluva lot of excitement all at once. We all look for these moments.

Last week I saw something in Venezuela that I knew had to happen eventually. After two decades of mismanagement well past the merely criminal, it appeared the socialist government of Venezuela had finally collapsed under its own incompetence. Forces geopolitical, I thought, had finally gotten their revenge.

Part I and Part II of this series were, to be blunt, my wallowing in the moment.

Aaaaand I jumped the gun.

Please take this newsletter for what it is: part mea culpa, part explanation, and part a look forward at what it means that Venezuelan strongman-president Nicholas Maduro is not quite done making history.

First and most obviously, Maduro is still large and in charge. Initial reports that he had fled the country or slipped in the shower and fell on some bullets were wildly untrue. The Venezuelan military – the only faction in Venezuela that really matters as concerns Maduro’s survivability – remains more-or-less unified and in support of their boss.

Nor has the Venezuelan opposition made meaningful progress. Consolidation around self-declared interim president Juan Guaido appears no more coherent than any of the other failed opposition efforts to close ranks. The only item of substance that has changed from the past 20 years of Chavez-Maduro rule is that nearly every country in the Western Hemisphere has now called for Maduro to step down. There is zero indication that any of these countries, however, is willing to do much more than mouth the words. A military invasion is firmly off the table (and with the Venezuelan capital of Caracas not being a coastal city, any such effort would be, in a word, complicated).

Second, there is one power that is doing a bit more than voice its concerns. Since that power is the United States, best to pay attention. On Jan 28 the Americans levied blanket sanctions on the Venezuelan state oil firm, PDVSA. While the United States will still allow Venezuela to sell crude to American entities, Washington will not allow any cash from the sales to flow back to Caracas. In addition, the Americans froze the assets of Citgo – a PDVSA subsidiary in the United States that’s primarily a refiner.

Formally, about 32% of Venezuela’s crude oil exports end up in the United States, but this vastly understates how dependent Venezuela is upon the American market for a pair of reasons that can only be the normal state of operation in a country as broken as Venezuela has become.

Of the seven-tenths of Venezuela’s oil exports that do not flow to the United States, the majority – technically –goes to China and Russia. However, Venezuela gets no cash from these “sales.” Instead, the oil is accepted as payment-in-kind to whittle down the billions of dollars of loans those two countries have extended to Venezuela over the years. Nearly all this crude oil is then sold on to the American market where the Chinese and Russian intermediaries are paid in cash.

Bottom line 1: the direct sales to the United States are Venezuela’s primary source of income. Without them, Venezuela’s humanitarian/economic/political catastrophe – a mess that has already resulted in widespread famine – will become truly apocalyptic.

Bottom line 2: It is unclear if the new U.S. sanctions will touch these flows as well. If they do, the Chinese and Russians will be left holding gobs of crude they – and nearly anyone else on the planet – lack the capacity to refine. With no one able to take Venezuelan crude in appreciable volumes, PDVSA will have no choice but to shut down nearly all operations and experience a massive skilled labor bleed. That would add – at minimum – two years to any theoretical future recovery.

Third, this now has reverberations throughout North America.

Most American oil production is now shale crude, a specific sort of crude oil that has extraordinarily low concentrations of contaminants such as sulfur or mercury and has the consistency of nail polish remover. That makes it almost hilariously easy to refine into finished products.

Or that’s how it should work anyway.

Starting in the late 1970s the American oil industry believed that the global stream of crude oil was becoming heavier and more sour, so they invested bajillions of dollars in upgrading the entire network so the Americans could import crap crude no one else wanted (big discount!) and refine it into top-of-the-line products for sale at home and abroad (big margins on the upgrade and arbitrage).

One of those crappy crude grades U.S. refiners sought out was Venezuelan crude which is as heavy and sour as U.S. shale crude is light and sweet. Buy low, sell high. Life was good.

Recent events have made life less good.

American shale crude is now being produced so cheaply – on average full-cycle costs are now below $40 a barrel – it is crowding out America’s domestic low-quality crude production. The American crude stream is becoming increasingly light and sweet to the point American refineries cannot easily process it. New refineries are being built and older ones expanded and/or dumbed down, but that’s an expensive and time-consuming process and refiners needed to be sure this whole shale thing would last before really buying in. Despite being on the very cusp of technical oil independence, of late the United States energy complex has become more dependent upon imported crude in order to gain access the specific heavy/light/sour/sweet mix that works best for the refining complex while the excess shale crude is exported.

The three imported grades that figure most prominently are collapsing.

The first is Mexican. While the mainstay of U.S. refiners for decades, the general collapse of oil production in Mexico has all but eliminated Mexican crude oil from the American diet. There was hope with the energy reforms of the outgoing administration that this would be reversed, but freshman Mexican President Andrés Manuel López Obrador has made it clear those reforms will at best be slow walked. Don’t expect any fresh flows of Mexican crude in the U.S. market until at least 2030.

The second crude grade U.S. refineries like comes from the Canadian province of Alberta. Dealing with Albertan tar sands is sloppy, expensive work – requiring a cost point in excess of $70 to break even. Today U.S. crude is selling for $55.

It gets worse for the Albertans. Alberta is landlocked and has wildly insufficient transport options to get its crude into the U.S. market. Between that and a general political paralysis in Ottawa on energy issues that (almost) makes Washington look functional, Albertan crudes are now regularly selling at a $30 or higher discount to American crudes. The Albertan provincial government recently ordered reduced output in an attempt to level out price problems. (The political reverberations of this in Canada will be extreme, but that’s a newsletter for another day.)

The final crude grade U.S. refineries prefer is, of course, Venezuelan crude. Based on how the Trump administration handles the new sanctions regime, Venezuelan crude may vanish from the American market completely.

In the short term this is not looking very good as it will force U.S. refiners far abroad to search for crap crude. The Middle East is probably the only region that can provide the volumes the U.S. needs. Ironically, on specs alone, Iranian and Russian crude might actually look pretty good.

In the longer term this is not looking very good for everyone outside of the United States. Events in Venezuela (and Canada and Mexico) are forcing U.S. refineries to change their slow-walk shifts from preferring crap crude to preferring shale crude into more of a panicked sprint. Once completed – give it two to four years – the United States, beyond simply having no interest in protecting oil flows out of the Persian Gulf, will have no interest in protecting oil flows from anywhere.

The United States maintains the only global navy and it has been the American commitment of that navy to global commerce and security that enables a global oil market to exist at all. No one with possible exceptions of France and Japan will have the military capability to reach the Persian Gulf in force at all. The ultimate result will be oil shocks of the sort the world hasn’t experienced since World War II… except in the United States which will be a sequestered market.

Fire in Venezuela, Part II of II

It is always dangerous writing about unfolding events. With that in mind, Part I is just about where we are now. Part II is about the future.

Assuming for the moment that Nicholas Maduro has indeed fallen from power and his regime is crumbling, everything that happens in the next few weeks are details. Venezuela’s constitutional system of government has been suspended to shattered since at least the mid-2000s, and any new government will literally be making things up as it goes along. Even if the new government is truly representative of the popular will and makes no mistakes whatsoever, Venezuela’s mid-term future is for chaos and degradation. The damage of the Chavez/Maduro years has simply been too deep-rooted and catastrophic for this story to unfold any other way.

Four main problems:

First, food. Venezuela used to be a significant food exporter, but a combination of outright theft, corruption, supply chain breakdown and state expropriation of private assets that resulted in those assets lying fallow, has reduced the country to importing roughly three-quarters of its foodstuffs. As other economic sectors decayed the ability of anyone to afford what food is available has shriveled and starvation set in.

In the best-case scenario with perfect management, political unity and deep international assistance, bringing Venezuela back to food-neutral will take three years. Venezuela is in the tropics, and when tropical lands lie follow they tend to go riotous pretty quickly. Add in the infamous low fertility of tropical soils and the Venezuelans will need to reform all the supply chains for fertilizers and pesticides and such just to get things started. That all takes time. And money.

In the meantime, the 30-million(ish) people who remain in Venezuela will either continue to starve or live on handouts. Either way, the political system will remain fragile and so very, very desperate for years to come.

Second is oil – both a problem in its own right and perhaps a partial solution to the money issue. The money part is obvious – oil brings in income that could be used to regenerate Venezuela’s agricultural sector. But neither is this quick or easy.

Venezuelan crude is some of the most expensive to produce in the world, and fetches some of the lowest prices. It is high in sulfur and thicker than toothpaste. Only highly-specialized technicians can coax it out of the ground, and many Venezuelan crudes require specialized equipment just to get it to port. There are also very few countries that can process it. Add in economic chaos and a whiff of political desperation and there will not be a long line of companies wanting to pour large volumes of cash into the country in the near-term. Adding as little as a million barrels per day of new output is likely at least a five-year project. Venezuela currently produces only about 1.6 million bpd, down from 3.4 million bpd when Chavez took power.

(Side topic: When the Saudi government saw Chavez angling for power, they did everything they could to encourage him, hoping his economic populism would wreck the country’s oil output. They picked the right horse.)

Making matters worse, technically – legally – Venezuela owes any new production to Chinese and Russian entities who have provided the Chavez and Maduro governments with billions of dollars of loans. Loans that were to be repaid with crude oil.

Third, Venezuela in the best of times is a very shooty place. The political culture of the country has always been shaped by extreme economic inequality, which has generated crime and violence rates as bad as Colombia’s while Colombia was in a cocaine-fueled civil war. The oil largess succeeded in pacifying large parts of the population, in essence buying off the poor with absolutely massive subsidies on energy products and food.

It isn’t so much that any economic rectification effort must abandon those subsidies, but instead that the country cannot afford them now. Expect broadscale unrest to be the norm for years.

And that’s hardly the worst of it. Chavez’s first attempted rise to power took the form of a coup. After becoming president more conventionally, he later survived a coup. It all made him a bit nervous. In order to establish a force that would be loyal to him personally, he flat out bribed a few tens of thousands of neighborhood thugs to be his unofficial militia and equipped them with Russian-provided AK47s. They are now unmoored and unpaid – but not unarmed. Expect them to take whatever they damn well please.

Finally, Venezuela had no real release valves. If Maduro is truly gone, there is no one left to blame except whatever poor bastard tries to pick up the pieces and lead the country to a better future. There is no food-exporting country next-door that Venezuelans could theoretically migrate to. (Brazil produces food, but the trackless Amazon is between Venezuela and Brazil’s agricultural lands). The only country Venezuela shares a land border with that folks can walk to is Colombia, and the Colombians have already taken in over two million Venezuelan refugees.

(Another side topic: Most Latin American countries have enacted restrictions on Venezuela migration to prevent swarms from coming. Colombia has not. During the Colombian Civil War the Venezuelans accepted droves of Colombian refugees. The Colombians feel it is their duty to return the favor. Despite all the bad blood between recent governments on both sides, along with the general descent into nationalistic-populism around the world, it is nice to see the two powers not being complete jerks to one another.)

Whether Venezuelan refugees being largely stuck in-country is good or horrid of course depends upon what you think of people who are refugees due to internal political mismanagement, but the bottom line is that there is nowhere for Venezuelans to go.

And there won’t be for years.

Fire in Venezuela, Part I of II

To read Part II, click here

So…there might have just been a military coup in Venezuela.

Not hard to see the justification. The economic policies of the now-deceased Hugo Chavez largely destroyed what used to be the breadbasket of the northern half of South America as one as the most sophisticated energy firms of the developing world: PDVSA. Under Chavez’s successor, current(?) President Nicholas Maduro, the degradation has accelerated. Foreign airlines no longer serve the market and most foreign contractors across all sectors have left due to non-payment, and the destruction of the country’s economic cores combined with a level of graft that would even make Russian oligarchs blush (briefly) has become so entrenched the country is in the early stages of a civilizationally-crushing famine. Something like one-sixth of the population has already fled and at least two-thirds of those who remain are malnourished. The Maduro government has largely abrogated the country’s constitution, run sham elections and largely kept the country’s opposition parties out of the halls of power.

Put simply, the place is ready to blow. And it just might be blowing.

Last week a shadow assembly of opposition groups labelled Maduro a usurper. U.S. Vice President Mike Pence on Feb 22 formally recognized that assertion.

On Jan 21* there was a definite coup attempt by the National Guard. It was stopped and the government arrested the leadership.

On Jan 23 opposition leader – Juan Guiado – unilaterally declared himself the interim Venezuelan president. Shortly thereafter, U.S. President Donald Trump formally recognized Guiado’s claim to power.

Perhaps most importantly, while the military isn’t saying anything, riot police are guarding – not dispersing – anti-government protestors. Where the military comes down on this will ultimately prove whether this is a true change, or just the start of another massacre.

I cannot overstate how something like this has been a long time coming. Between Chavez and Maduro the Venezuelan system – politically, economically, and culturally – has degraded from being one of Latin America’s most successful and vibrant to among its most dysfunctional. But a coup today hardly means the country is through the worst.

Far from it, this is where things get very, very bad.

*I wrote this in three minutes flat, so I got the date wrong and listed as Feb 21 originally.

American Evolutions, Part 3 of 3: Beyond Democrats and Republicans

See Part 1: From Sears to Google and Part 2: From Order to Disorder… in America.

So here’s where I get a bit nervous. One of the great truths in geopolitics between 1950 and 2015 is that American domestic politics barely mattered at all. Support for the global Order was strongly bipartisan and it was considered treasonous for any politician to seek foreign support against a domestic opponent. Republicans may have not cared for JFK, but they certainly didn’t try to reach out to the Soviets during the Cuban Missile Crisis to undermine him. Democrats might demonize Nixon, but they never considered collaboration with the North Vietnamese to score political points at home. (Jane Fonda doesn’t count.) Even in periods of America’s most intense infighting, the strategy was the same: the Soviets were the bad guys, and global leadership via the Order was the way to fight them.

As such I get to dive into the political guts of every country in the world with regularity, but I don’t have to dissect the internal politics of my home country. That’s awesome! Americans are really touchy about their ideologies; the bipartisan nature of American Cold War foreign policy enabled geopolitical strategists like me to take a pass on all things political.

Well, so much for that.

With American foreign policy in a state of collapse right along with America’s party structures, I now need to apply the tools I use daily on the United Kingdom and Germany and Russia and Brazil and China and Vietnam and India and Iran to the United States.

Everybody buckle up.

Take a look at this matrix. It breaks out the various voting blocks in the United States on ideology as well as old-style party affiliation. The closer to the top, the more you feel the government should stay out of your personal life. The closer to the right, the more you believe the government has no business in your economic life. If you hug the left, you feel the government must take an active role in managing the economy. If you’re near the bottom, you want the government to not simply respect but actively protect traditional societal norms. If you’re near a corner, you have hybrid views. For example, if you find yourself at the intersection of economic and social conservatism (the bottom right), you believe the government has no role in helping poor people get food, and the stress of poverty will actually do them spiritual good. If you’re completely opposite where economic and social liberalism meet (the top left) you look forward to the day that we all sing kumbaya dressed in government issued gunny-sacks paid for by the confiscation of the assets of anyone who owns their own home.

Factions are color-coded by political affiliation: blue for Democrats, red for Republicans, green for swing voters.

While you’re digesting that, a couple caveats followed by a simple observation:

Caveat #1: These are broad, poorly-defined groups because that’s how coalitions (and graphic making) work.

Caveat #2: Predicting the tactical shifts in American politics is tricky. Americans tend to be a bit moody. What follows is less a hard forecast and instead a probable outcome based on what we know today. It’s an example of the sort of work that’s consuming bigger and bigger slices of my time.

The observation: There are a lot of American factions in the bottom-left quadrant. Folks who are socially conservative on cultural issues, but also feel the government should play a role in ironing out economic inequalities – or at least personally give them more stuff.

That concentration is where Donald Trump is focusing his attention. The oval is the cluster of factions Trump is fashioning into a new coalition. Those bottom three categories (populists, evangelicals and pro-lifers) are his core. But that trio is not far off from the ideological mix that tends to drive unions, Catholics and Hispanics. I’m not asserting here that Trump has these groups in the bag. That’d be hilarious. I’m simply noting the ideologies of Trump’s core groups are not all that far off from these other groups, and that voting patterns among these factions in the 2016 election indicated a sharp break with what we thought we knew about who votes blue versus red.

Most union members, for example, are conservative on social issues and most of Trump’s core is left-of-center on economic issues. All tend to be somewhat distrustful of globalism. Despite all the rhetoric on all sides, the Hispanic vote isn’t locked into the Democratic coalition. Most voting Hispanics are social conservatives who are broadly against large-scale immigration unless it deals with family reunification issues. If Trump’s core coalition could find a way to massage the race issue, there’s a distinct and mind-bending possibility that not only could the – let’s call them Trumplicans – capture a large chunk of the Hispanic vote, but a sizable piece of the ideologically-similar African-American vote as well. That would easily give the Trumplican coalition an outright majority of American voters.

Noticeably absent from the Trumplican coalition are a pair of factions core to the traditional Republican identity: fiscal conservatives and the business community. Both are dismissed by Trump’s core as either irrelevant or an enemy, and both hold – at best – a very weak hand in the Trump administration at present. Their core ideological issue is that math matters – let’s call them Mathocrats – and they strongly favor a right-leaning tax policy that minimizes the role of government. Since the Trumplicans are somewhat left on economics, particularly when it comes to government spending, this pair of formerly Republican factions are likely to from the nucleus of opposition to the Trumplicans.

So who are the Mathocrats’ potential allies? Greens, Socialists and youth voters are probably out of the question as rebelling against basic mathematics is sorta their thing. That leaves a trio of more economically moderate groups near the top-center of the ideological matrix: pro-Choice voters, single women and gays. Women and gays are concerned with political rights, something that modern business thinks is broadly peachy. Women and gays want to protect their own property and financial assets – you haven’t seen a hissy fit until you tell a 35-year-old gay man that his partner can’t be listed on a lending agreement. (I sure know I threw one.) Such economic concerns are near and dear to the hearts of both fiscal conservatives and the business community. The only tension in such an alliance is getting over inertial expectations – and since issues of race are not in play, a Mathocrat coalition would have a far easier time of putting the past to bed than a Trumplican coalition.

Now think about this in terms of foreign policy.

Under the Order, the all-or-nothing nature of the Cold War dictated that foreign policy had to be bipartisan. It was not overly shaped by either party, nor did it much vary from administration to administration regardless. But now there is no unifying threat or need or theme. Each new party can have a foreign policy that makes sense to its constituents as things evolve. American foreign policy is likely to oscillate not only between administrations, but within them.

That is likely to be far more erratic than it sounds. Think of what has happened in the past two years. The Americans have abandoned many of their alliances and geopolitical agreements and yet taken minimal hits – NAFTA, NATO, the WTO, deals with Cuba and Iran and Turkey and both Koreas. It is all falling apart, yet the U.S. economy is growing quickly. Instead of being abuzz with talk of the world burning these past two weeks, Americans instead obsessed about how a would-be Supreme Court justice acted in high school. Foreign policy – at best – demands third-tier attention in the American mind, and typically then only when it is mated to a domestic issue they care more about.

But look who is missing from both potential coalitions: national security voters. Folks who care about national security are the ultimate agnostics. They don’t care about social mores or the culture war or tax rates or development policy or the balance of power between the federal center and the states. So long as the military is capable and politically protected, they’re good. American isolation from the world will make American foreign policy a part-time issue. America’s likely future political parties will make American foreign policy inconsistent. And with America’s military supporters being the ultimate swing voters, American foreign policy will be intensely kinetic.

Yes, the Americans are taking a break from the world and that is problematic, but it is nothing compared to what is coming. In about a decade, instead of living in a world where the Americans are the most powerful force for global stability, they are likely to be the most powerful force for global instability.

American Evolutions, Part 2 of 3: From Order to Disorder… In America

See Part 1: From Sears to Google and Part 3: Beyond Democrats and Republicans.

The American political system is in breakdown.

It isn’t a bad thing. It is perfectly normal. Healthy even. Let’s lay it out:

The United States has a first-past-the-post electoral structure based on single-member districts. When you go to the polls, you are being asked to vote for the specific person who will represent the specific geographic area in which you live. In most cases the winner will be the sole representative for said area in whatever representative body is in play. To win that specific seat, the would-be representative does not need a majority of votes, but “only” needs to get one more vote than whoever comes in second.

Applied across a large population and territory, such a system forces a two-party political structure. A party that attempts to cater to a narrow slice of the electorate would never be able to get more than a few percent of the vote, and therefore never gain a majority for any meaningful amount of time. The diversity of the American political and economic base further weakens would-be small parties: voters that make their living on the coal production of Illinois have different interests from those who work in the medical centers of Boston, the data centers of the arid West, the whiskey producers of Kentucky, the aeronautical center of Seattle, the chemicals producers of the Texas shore, the agricultural plains of the Midwest, and the techies of Silicon Valley, just to name a few.

So the question becomes, how do you become a big party that appeals to a lot of voters?

The solution is to put up a big-tent. To form a coalition of different factions that collectively appeal to more people. The trick is to form a coalition wide enough to attract lots of votes, but narrow enough so the factions under your tent don’t fight.

Between 1940 and 2015 the Democrats were pretty good at the first bit. Their coalition combined minorities, unions, Greens, socialists, youth and pro-choice voters. Collectively such groups make an easy majority of the American electorate. But there are many issues that spawn internal conflict. For example, “minorities” includes African-American, Hispanics, gays, and single women – all have radically different concerns, many of which conflict. When the Democrats play the culture war card, their entire coalition tends to implode: the economic concerns of African-Americans differ from the immigration concerns of Hispanics differ from the political concerns of gays differ from the reproductive rights issues of single women.

The Republicans, in contrast, have proven better at the second part of the electoral math: building a cohesive alliance. The Republican coalition comprises evangelical Christians, pro-life voters, national security and fiscal conservatives, business owners, and populists. With the notable exception of the populists, these factions’ core issues do not conflict, and since the populists in many ways define themselves as the anti-Democrats it has proven fairly easy for the rest of the Republican alliance to count upon the populists as a vote bank, without giving them much influence over the Republican electoral platform.

It all went to hell in 2016.

The implosion of the Democratic alliance has been most spectacular. An alliance of white, young, urban liberals and card-carrying socialists who make up (at most) one-fifth of the Democratic voting base threw a social media rebellion. They collectively seized control of the media during the primary process and made a bid to dislodge the Democrats’ mainstream candidate (aka Hillary Clinton) with one of their own (aka Bernie Sanders). As damaging as the fight was for Democratic unity, it was only one piece of the puzzle. African-Americans experienced a sharp breach with the Democratic National Committee over police brutality issues. Jill Stein successfully courted many Green voters to her splinter party.

And of course the Democratic strategic platform has some perennial problems that led to periodic vote collapses. Democrats see themselves as the voice of youth and immigrants. Unfortunately for the Democrats, the most liberal of the youth are too young to vote and as Americans age they become more conservative. Similarly, undocumented immigrants are the most pro-Democrat, but since undocumented immigrants are not citizens they cannot vote. Additionally, second- and third- generation Hispanics are very conservative economically and politically. In essence, the Democrats’ strategy mobilizes non-voters in the current election, who then go on to be the conservative voters of the next election. Perhaps not the best plan.

The Republicans are in a similar state of disarray. There were many things that went wrong for the Republicans in the campaign: campaign finance reform muted the business community, Hillary Clinton was actually somewhat attractive to national security voters, no one running seemed to care about government budget deficits, Trump was kind of a dick, etc.

But it all comes down to the role of the populists. Populists on the right are a mixed bag of folks that in general are very unhappy with some state of affairs. Their issues shift and manifest differently, but ultimately it can be summed up that they believe someone is screwing them and/or the country and they want it to stop. NOW! That typically makes them prickly on issues cherished on the Left – race, changing cultural norms, immigration, government intervention in their economic lives. But it also makes them prickly on issues traditionally owned by the Right – big business, banking, a government that does too little. The rise of social media didn’t simply allow the Bernie Sanders crowd to make an over-sized splash in the political pool, it also enabled the populists of the right to seize control of the Republican primary system and put their man on the ticket.

Trump’s rise to prominence was only possible because of the populist rise, and the populists broadly distrust not just the Left, but other portions of the Republican alliance. The populists’ reliable outrage combined with Trump’s trademark political-wind-detection and volatile personality has largely ejected the fiscal, national security and business factions from the Republican coalition – not to mention the Trump White House. All that is left are the populists and the narrow-issue categories of pro-lifers and Evangelicals.

Trump has figured out that the American political landscape is now so fractured – Democrats, Republicans and centrists all – that this narrow base is sufficient to sustain him in a first-past-the-post system in the short term. While many find Trump’s tweeting and shouting and rambling press conferences shocking and offensive and bewildering, he is not speaking to the “many.” He is speaking to this base, and so long as he keeps speaking to them they will stick with him to Armageddon.

This is obviously not sustainable in the long run, but that doesn’t mean it is not normal. The coalitions that make up the two American parties are not carved in stone. A quick read of American political history indicates this is the fifth time the two parties have broken down. Each time they reform with a different mix of factions. Keep in mind that before these seismic, party-smashing upheavals went down last time in the 1930s and 1940s, the African-Americans were Republicans while business leaders were Democrats. Times change. The parties change with them. But such change hardly happens overnight. Historically speaking, these political interregnums last about a decade. We are barely in year three.

Combine this with other things going on in geopolitical space. The entire basis of America’s Cold War strategy was to induce cooperation among a broad, global alliance of countries to hem in, beat back and in time strangle the life out of the Soviet Union. The Americans did this not simply by providing physical security for their allies, but indirectly subsidizing them with a network of global trade expressly designed to maximize the allies’ advantage to the determent of American economic interests. Faced with such an existential threat, American foreign policy during the Cold War was thoroughly bipartisan. Both parties supported the creation and maintenance of the global Order.

It all worked great and the Americans were able to win the conflict without a war. In the nuclear age that was no small achievement.

But it also means the entirety of what makes the modern world work – global supply chains for shipping, manufactures, finance, agriculture, energy and other raw materials – is an unintended side effect of a security strategy that achieved its goal back in 1989. And since the Americans are the only country capable of maintaining the military and economic structures the global system needs to survive – and because the Americans do not necessarily need those structures themselves – the whole thing is falling into Disorder.

American foreign policy today is mismatched by any possible definition. The global Order has run its course and the Americans have no replacement, leading to strategic drift.

That’s before the breakdown of the bipartisan consensus of American foreign policy.

That’s before the breakdown of both American political parties prevented the Americans from even having a conversation about how they might theoretically move on beyond the Order.

That’s before the rise of the American populists of the Trump coalition accelerated the abandonment of the old Order.

That’s before the factions most interested in the minutiae of foreign affairs – the business and national security conservatives – found themselves both without a party and ejected from being able to influence the White House.

A decade with the Americans out of the picture is ample time for the world to go completely to shit. Much of my work these past few years has been about just that devolution: what a world without America looks like.

But the Americans’ internal political discombobulation will end in time. Their parties will reform. They will have a foreign policy again. In fact, at least one of those parties may already be taking form – raising some possibilities both for the future of American politics and America’s place in the world.

American Evolutions, Part 1 of 3: From Sears to Google

See Part 2: From Order to Disorder… in America and Part 3: Beyond Democrats and Republicans.

Today’s story begins with the once-behemoth that is the American retail firm, Sears. In the last week of September Sears’ stock dipped below $1 a share, reducing the company’s market value below $100 million. Sears may still linger on a bit, but when a big firm falls into penny-stock territory, its outright liquidation is a foregone conclusion.

Sears (originally Sears, Roebuck and Company) is the iconic store of the American modernization experience. As a relative latecomer to the world stage, Americans got in on the industrial revolution significantly after most Western European nations. The vast majority of Americans lived on farms until late in the 19th century. Urban Americans had access to manufactured goods, but in rural regions most people made their own clothes and tools – or tapped the expertise of craftsmen in local towns. Most of these in-town purchases were managed via general stores where managers, knowing farmers had no alternatives, gouged on pricing, credit terms and selection.

Enter Sears.

Sears sourced manufactured goods from American cities (and abroad) and built a distribution network deep into every nook and cranny of the American territories. Starting with luxury goods in 1886 and rapidly moving into everyday products, by turn-of-the-century Sears’ 500+ page mail order catalogues had become ubiquitous not just in cities, but in farmhouses. It was Walmart and Amazon all in one. Sears completely overhauled what Americans considered to be centuries-old economic norms and pushed cheap, high quality manufactured goods into every single home. Sears quickly became America’s largest firm and largest employer. Quite unwittingly, Sears started the United States on the long path to urbanization, the industrial age, and the destruction of the local retail store.

(Incidentally, when the British Empire brought its manufactures to German lands, the economic dislocation helped start a German civil war. So anytime you think Americans can’t handle transformative economic stress, please try to keep it in perspective.)

Sears’ near-death today is part of a similar economic transformation. Just as Sears was a physical manifestation of the Industrial Revolution, Sears’ end is part of the Digital Revolution. Gathering, processing and distributing information has been the bugaboo of corporate systems as long as there have been firms with a reach further than they could see. The steamship and telegraph obviously helped, but managing anything big first and foremost requires an information system.

The Digital Revolution thus far has reduced the cost of storing information to nearly zero. In the early 1980s storing a gigabyte of data cost roughly $500,000 and I think that’s without accounting for inflation (economists and techies don’t always have the best relationships when it comes to data comparisons). Today storing that same volume of data costs roughly three cents. Information transfer costs follow a similar path (part of why all publicly available email clients are available at no-cost).

With information now being in effect free, the biggest restraint on industrial expansion became… humans. Someone still needs to analyze and distribute the data, and then check up on the results. Humans in the data chain have become the general store managers of our time, gatekeepers to the consumer that escalate prices. Enter algorithms, designed from day1 to remove humans from the data management equation. With the elimination of those pesky human barriers, the Digital Revolution reached out into the real world of sales and distribution and killed the job-destroying monster that preceded it. That’s remade how we design, order, manufacture, transport and warehouse goods. It allows us to instantly transmit architectural plans, military orders, payroll, and cat videos as well as get two-day (or less) deliveries for free.

The problem with algorithms is twofold. First, we have yet to figure out how to program in value judgements and ethics. Second, anything that introduces a hiccup into the information flow – say, fact-checking – increases the cost to something above zero. Just as Sears’ systematically cut out costs, algorithms and the human decision-makers who design and manage them see the human element as a block on progress. Something to be ruthlessly excised.

That has set up Silicon Valley for the mother of all government smack-downs.

Let’s divide the American political spectrum into four rough blocks: the center-left, center-right, populist-right, and populist-left – and then look at how their view of Silicon Valley has radically shifted during the past three years.

America’s center-left originally adored Silicon Valley because they were corporate titans with social agendas that matched the center-left’s general political views – particularly when it came to social policies on issues such as education, gay rights, and multiculturalism. The center-left – epitomized by politicians such as Chuck Schumer and Diane Feinstein – saw Silicon Valley as remaking corporate America from within.

But as information transmission became free, this happy marriage collapsed. Silicon Valley resisted anything that might infringe upon information flow, including flows that harmed issues the center-left valued. For example, Russian attempts to spawn race riots or shift the direction of a presidential campaign, or the ISIS live-streaming of executions, or disinformation campaigns blaming train derailments on Hilary Clinton after she lost the election. Consequently, the center-left hasn’t simply dropped its support for the Valley, it now sees the valley as a threat to democracy itself. The Valley’s chronic misogyny in the age of MeToo doesn’t help the Valley’s case with the center-left either.

America’s center-right – represented in Washington by folks such as Paul Ryan and Mitch McConnel – similarly were wedded to Silicon Valley’s aura. In the Valley the center-right saw a heavenly manifestation of what could be achieved with American know-how and new technology and a spirit of entrepreneurship in a low-regulatory environment.

This happy marriage has also ended. At first it was about politics: Valley CEOs started to get a bit too public with their enthusiasm for left-leaning issues, and charges erupted that some in the Valley were censoring right-leaning political viewpoints on platforms they controlled. But the center-right’s concerns soon deepened to something much more fundamental: much of the Valley committed to never working for the American government – most notably the intelligence community and the Defense Department. But Valley services remained fully available for sale so their work could benefit other government’s programs.

The idea that the political liberalism of Silicon Valley is better served by allying with Xi Jinping’s dissident eradication systems or Vladimir Putin’s systematic repression than the U.S. military requires mental contortions the center-right considers unfathomable. The center-right now doesn’t merely question the Valley’s ideology or even its patriotism, but its sanity. The most pro-business part of the American political spectrum is now firmly anti­-Silicon Valley. Concerns about cybersecurity and the regulations those concerns will likely spawn is only the icing on the cake.

But as much credence as there is to the points of America’s centrist politicians, the concerns of the American populists are actually more valid.

The populist right started out furious with Silicon Valley. Whether the politician is Ted Cruz or Donald Trump, the Main Street verses Wall Street discourse is not only a powerful one, it is broadly accurate. The current manifestation of Silicon Valley is fundamentally designed to remove as much human labor from the economy as possible. It – statistically – is the greatest job-destroying machine in American history.

The populist left is, if anything, even more angry at the Valley. Algorithms and robots don’t pay taxes, but their profitable outputs still accrue. This concentrates the income of what used to benefit human laborers to the operators and designers back in San Jose. Politicians like Bernie Sanders and Elizabeth Warren are fundamentally correct when they assert this is a leading reason for America’s deepening economic inequality.

All four factions are correct. All four factions are edging towards policies that would revoke the Valley’s unlimited license via some sort of constraining regulation.

Tesla is probably in the greatest danger. Technically, Tesla is a car firm, but its valuation and finance-raising systems mirror Silicon Valley rather than Detroit. That gives it access to ridonkulous amounts of cash – something necessary to pioneer fundamentally new technologies – but lands it with the metrics of a conventional automotive firm. Therein lies the rub.

When it comes to evolving ethics in a dynamic regulatory environment, most investors go with what they know. They know Tesla is a badly-run company that has yet to figure out how to move metal around its own factory floor. They know Tesla has almost never met a production goal. They know Tesla cannot break into the mass market (the cheapest available Model3 is at fifty grand, with the subsidy). They know Tesla’s technology and materials science is insufficient to its goals. They know Tesla faces stiff, rising competition from more experienced market players.

They know Tesla is led by a CEO whose social media strategies mirror a broadly-disliked president. They know Tesla’s CEO has bet the firm’s future on a political ideology that provides subsidies that will not last. They know Tesla’s CEO sees no problem cross-subsidizing the firms of family members. And they know Tesla’s CEO has settled with the SEC on charges of stock manipulation which cost the firm that has never made a profit $20 million. There is no shortage of preexisting business norms and regulations that could bring Tesla down. Should the investment community ever believe Washington is coming for Silicon Valley, they will ditch the weak players first. It doesn’t get weaker than Tesla – ergo why the short-selling of Tesla is already so intense.

Facebook comes in second, and not simply for the role they’ve played in Russiagate. The firms’ unfettered and enthusiastic raping and selling of customer data has not simply shown no ethical constraints, but we now know Facebook actively markets its user data to scammers. Not via the web – dark or otherwise – but by sending sales reps to scammers’ convention and closing deals in person. The public trust has been lost. The question in my mind isn’t will Facebook be eclipsed and displaced by a rival, but will there be prison time for some of its executives?

Twitter may have a brighter future. Unlike Facebook, TeamTwitter admitted the role it played in Russiagate fairly early on and has taken steps to roll back the damage. Such public admissions combined with a sense of genuine regret – or at least a reasonable digital facsimile of regret – stand in stark contrast to Facebook whose grudging, plodding steps have the feel of a six-year-old who thinks moving a single pair of underwear to the hamper has cleaned up his room and thus should be allowed to go back outside to play. Are Twitter’s actions and contrition deep and fast enough? That’s a political question, but I give points for effort.

One likely path forward in regulation is the modification of Section 230 of the Communications Decency Act. To make a very long and technical legal explanation short, Section 230 stipulates information technology platforms are not publishers, and so are not responsible for any content they pass along. Without 230 we’d not have an Internet economy since all our infotech platforms would be liable for the accuracy of everything in every webpage, blog post, pop-up ad and email.

To date, there have only been three carveouts: copyright infringement, child pornography and sex trafficking. Silicon Valley fought those carveouts tooth and nail, asserting first-amendment rights issues, but mostly being concerned about costs. The hilarity of deliberate inaccuracies currently punctuating American political information systems – Russiagate being the prime example – are pushing many political factions to consider a fourth carveout for foreign election interference. And while with some very skilled coding an algorithm can be taught to look for prostitutes, I’m guessing that determining whether an ad that slams or celebrates Hillary Clinton or Donald Trump is accurate will require the sort of judgement call only a human can make. And humans don’t work for free.

Amazon probably faces less pressure, and probably has more time. Yes, AmazonPrime and related subsidiaries are a very visible part and parcel of the whole job-destroying ethos that motivates Silicon Valley. But three issues pop up:

First, the damage to American retail is largely done. A stiff roll-back at this point would probably be counterproductive. And this is hardly the first American retail revolution: general stores to Sears to Walmart to Amazon. At each step the process is more capital intensive but less labor intensive with slimmer margins. Where do you draw the line? Do you draw a line? (A change to how Amazon is taxed, however, is an excellent idea).

Second, Amazon would operate in the red if not for a single unit that has nothing to do with getting a hairdryer to you: Amazon Web Services. AWS is the data management portion of Amazon which is wrapped up in nearly every dataflow for every business in the country. It is well-run, faces competition, and has next to nothing to do with the retail arm. Splitting the two so that the wildly-profitable AWS cannot cross-subsidize the barely profitable (and until recently, unprofitable) Amazon Retail makes a wildly great deal of sense for all players. It would certainly preserve the value-added portion of Amazon that generates lots of new sources of economic activity rather than gutting old sources.

Third, Amazon is everywhere. I don’t say this to imply U.S. government entities cannot bring it down, but instead that Amazon’s retail activities are in every American county, complete with dozens of distribution centers and tax relationships. Should the regulatory floodgates open the result will be a thick, self-ambulatory tangle of regulations at the city, country, state and national level. It will be a rancid mess that Amazon leadership will be able to exploit to buy time and – most importantly – to shape in a way to mitigate end-impacts upon the firm.

Of the big boy digital firms, that leaves Google, whose recent actions put it into a category all its own:

Recent defections from Google’s development teams have exposed the firm’s work on a project they call Dragonfly, a search engine product for the Chinese market. Allegedly, Dragonfly tags certain search terms the Chinese government chooses that it thinks might indicate dissident behavior such as “how do I get a Canadian visa?” or “what happened in Tiananmen Square in 1989?” or “what is Falun Gong?” It then packages the request with other search data on the person in question, complete with IP and physical addresses and phone numbers and forwards the information on to the Chinese state. It’s a degree of privacy violation and government monitoring of civilians that would have disgusted Orwell.

If – and I emphasize the word “if” because I do not have a Dragonfly-style program covering Google HQ – Dragonfly is real, Google is in serious trouble. Collaborating with a dictatorship that is sliding into a cult of personality so complete Hitler would have salivated over the program violates every ethical and political norm of every political faction in the United States. Anything that puts Elizabeth Warren and Ted Cruz on the same side during Senate hearings should get everyone’s attention. And Google’s executives’ refusals to confirm or deny Dragonfly’s existence while under oath before Congress tends to shift my thinking that this is less bureaucratic bungling and more greed so all-consuming it constitutes treasonous behavior. It is exactly the sort of massive corporate miscalculation that has triggered catastrophic government crackdowns on major American firms in the past. The breakups of Standard Oil and Bell come to mind.

And it would happen under President Donald Trump. Make no mistake. Trump is no longer part of the party of the businessperson. Things in America have changed in politics too…

Trade Talk, Part 2 of 2: For Whom the Trump Toll

On Oct 1 the American, Canadian and Mexican governments announced their mutual agreement to a revised treaty text for the North American Free Trade Agreement. As it was at formation, NAFTA remains the most valuable trade block in the world. Donald Trump insists the new deal will be called “the United States – Mexico – Canada Agreement” or USMCA. As something very close to that acronym has already been taken by an organization that excels in high-kinetic situations and getting American citizens abroad out of trouble, I’m still going to call the trade deal “NAFTA.”

Trump got a rough start. He came in with zero experience and a cabinet that was, in a word, messy. Organizationally he spent his first two years dealing with (causing?) personality and organizational conflicts, and during the past year he has fired nearly everyone in his cabinet with expertise.

But in the background this entire time, Trump’s trade team has continued hacking away at rewriting the United States’ entire trade position. During the decades of the global Order, the United States was all about granting the world deference on economic and trade issues so the Americans could gain the allegiance of most of the world on security issues. That’s how the Americans built and maintained their alliance against the Soviets. That Order is now collapsing, and that necessitates a different approach to both security and trade.

Meaningful adjustments to how the Americans treat the world are, generally, broad-scale disasters for most countries. The ability to trade security deference for economic dynamism in a world of global security was a great exchange for most. Under Trump the two issues are now divorced. You want a security deal with the Americans? You need to offer them something security-related. You want a trade deal with the Americans? You need to offer them something trade-related. No more cross-swaps unless you are willing to be embarrassingly deferential. At first everyone resisted. In part because they had a great deal going in – with the Cold War long gone they hadn’t needed to give the Americans much – in part because no one wanted worse terms.

But since the Americans control global finance and the global currency and global trade flows and the global ocean and global energy and the world’s largest market, the White House holds all the cards. Once it became clear Trump’s position wasn’t rhetoric, everyone knew they’d have to find a way to make a deal.

South Korea – fearing the need to stand alone against North Korea and China and Japan – went first, largely giving in to Trump on economic issues in the hope that when the time comes the Americans will be there on security issues. It is unclear if that will work for Seoul, but it was very clear the Koreans didn’t have a choice.

Next came Mexico, a country whose entire meaningful trade portfolio – and its recent rise from mass poverty – is wrapped up in NAFTA. A country whose seen its position in the U.S. market slashed by China. A country who knows it cannot attach itself to any other market.

Trump’s trade team used its agreement with Mexico to force Canada’s hand. And just like that, America’s economic position in the world is guaranteed. NAFTA alone accounts for roughly one-third of America’s entire global trade position. With that secure, the Americans can now get down to some serious bullying with everyone else.

Next up is Japan. Now sandwiched between a South Korea who already has a deal and a slightly redesigned NAFTA, the only markets that really matter to Tokyo are already locked into Trump’s new system. Trump wants a bilateral or nothing at all. And so this week Japan relented and opened negotiations. I doubt they’ll take long to conclude.

Even easier to negotiate will be a pending bilateral with the United Kingdom. In 2019 the Brits will be leaving the European Union without a deal. The pending hard Brexit will trigger a depression in the United Kingdom, forcing London to accept whatever trade terms the Trump administration sets.

Of America’s largest trading partners that only leaves two on the outside.

The first is Germany. There will be no deal here. There are two obstacles. First, Germany is within the European Union, and EU trade deals are negotiated and administered by bureaucrats in Brussels the Germans do not fully control. Those eurocrats tend to be pretty huffy about how special the EU is and – by design – do not factor in geopolitical issues. Even easy deals typically take a decade to negotiate and it is my opinion the EU doesn’t have that much runway left.

Second is the issue of France. If Paris and Berlin were to combine forces to pressure the EU secretariat to cut a quick deal with Trump, it might happen. But the French and German economies are structured differently and interact with the Americans differently. In absolute terms the French export less than one-third as much to the United States as Germany, to say nothing for the thin French industrial position within the United States itself. That leaves the eurocrats to do what they do best – and that doesn’t include a quick deal.

Hong Kong, China

That just leaves China, a country that is loosely tied for first place in the American trade volumes pecking order with the Canadians and Mexicans. With every country that gives in to Donald Trump, the maneuvering room of those on the outside shrinks. With Korea and Mexico and Canada and Japan and the United Kingdom locked in, already representing 40% of all US trade, China has everything moving against it. We’re now beyond the simple issues of the Americans controlling the global system but not needing it, or the Chinese needing the global system but being unable to maintain it, or the Chinese needing the American market far more than the reverse is true. We’ve even moved past the unavoidable fact that the two people most responsible for Trump’s foreign economic and security policies – Trade Representative Robert Lighthizer and National Security Advisor John Bolton, respectively – have taking China down a few dozen pegs as their top goal.

The new bit of info is that America’s entire trade policy is now designed to break China. The Americans wrote into the new NAFTA treaty that if a signatory signs a trade deal with any non-market-based economy (read: China) then the Americans will up and leave. Expect such language to be appended to every deal the Trump administration writes. For all the talk of China stepping into America’s free-trade shoes (which I always found rather silly) everyone now knows exactly the cost of picking what the Americans feel to be the wrong side.

We might even know the date. As part of their efforts to box in Iran, the Americans are prepping secondary sanctions against any entity that continues importing Iranian crude after November 4. Nearly all international trade is not settled directly, but indirectly via the dollar. For example, if Vietnam sells shoes to South Africa, South Africa pays rand to an intermediary which converts them to dollars, and then converts the dollars into dong which are paid to Vietnam (because no one in Vietnam has or wants rand, and no one in South Africa has or wants dong).

Since the U.S. dollar is the intermediary that makes it all work, Washington holds the option of saying “no,” especially if those transactions are routed either through U.S. banks or banks that value their business with U.S. institutions… like the Federal Reserve. Apply that to all transactions of a given entity and the effect is a complete shut-out from not just the American market, but all global trade.

As present, China is the only country that hasn’t at least hinted at cooperation with the United States’ anti-Iranian efforts. That raises the tantalizing, terrifying possibility of a trade-cum-security-cum-finance throwdown between the Chinese and Americans as soon as November 5 that is less the Chinese bringing a knife to a gun fight and more the Chinese bringing a knife to an artillery exchange.

For those thinking that Trump is a spent force because he’s about to face a mid-term wipe out, think again. Even in the event of a Democratic wave that turns the Congress blue, nothing changes. The U.S. Constitution clearly grants the presidency preeminence and autonomy in foreign affairs. When domestic politics hobbled Bill Clinton, George W Bush and Barack Obama, all three put more of their hours into international politics. At its fundamentals, trade policy is part and parcel of such foreign affairs issues. Congress might be required to stamp approval on new deals, but Congress plays no role if the executive wants to scrap old deals. Trump can even choose to cease executive workings for preexisting deals he might legally need Congressional approval to scrap. (You can thank George W Bush and Barack Obama for setting that particular precedent – they are the ones who decided to not enforce laws they disagreed with.)

The fact is that the United States has leverage to spare in every sphere of global significance, and Trump is racking up some significant successes in converting that leverage into real – if fairly minor thus far – changes. Whether or not you care for the Cold War Order or trade deals like NAFTA or more direct action against traditional trouble states, change is less in the wind than barreling down the tracks towards us all. And with each of the old-style allies that finds itself lined up in the new Trump-style system, the speed of onrushing change will only increase.

Now if we only knew something about the destination.