There are times when events understandably command our attention and force us to concentrate on solving immediate problems at the expense of addressing their deeper meaning. This is such a time. The attack by Iran (the mullahs deny complicity) on Saudi Arabia’s oil facilities, and the strike at General Motors are two such events.
The massive impact of the attack on the Abqaiq crude processing facility that prepares almost 70% of the kingdom’s crude for export, and on the Khurais field, one of the world’s largest with output of 1.5 million barrels per day, more than 10% of Saudi production, quite naturally concentrated minds on getting Saudi oil production and exports back to pre-attack levels. Which was accomplished much sooner than pictures of the flames leaping from the facilities led us to believe was possible. A sigh of relief when the attack-induced 15% price spike merely took crude oil prices back to levels seen in May.
The immediate supply crisis behind us, now is the time to reflect on the fact that the world oil-supply situation has changed radically and irreversibly. The so-called swing producer can no longer be relied on to make up any supply shortages. Its oil facilities are now in the range of the guns of its enemies — missiles and drones to be more precise. The kingdom’s ability in recent weeks to restore supplies quickly is less significant in the long run than the fact that it is now a less secure source of crude. Unfortunately, many components of the kingdom’s vast petroleum infrastructure are neither defended nor defensible, according to Thomas Marako, director of the Missile Defense Project in Washington, and other security experts interviewed by The Wall Street Journal. The risk of reliance on the Saudis has massively increased.
So has the risk of a conflagration in the Middle East. Trump is working with the Saudis to develop a “proportionate response”, the sort of an eye for an eye, tooth for a tooth retaliation that Tevye, the poor, wise milkman in “Fiddler on the Roof” warned would leave all of us blind and toothless. But the President is under pressure to follow the law of retaliation and let the injured party respond in kind. Mitt Romney, one-time candidate for America’s highest office and now the junior senator from Utah, has emerged from unwanted obscurity to warn, “Direct engagement by the US military … would be a grave mistake. The US has continued arms sales so Saudi Arabia can defend itself.” The arms sales Romney is referring to come to $8.1bn (most to the Saudis, a bit to Jordan and the UAE) and include precision-guided bombs, laser-guided missiles, and advanced F-15 fighter jets.
Many in Washington agree with Romney. So, apparently, does a war-averse Trump, who might be “locked and loaded,” and ready to send military assets to the Saudis, but is relying on tighter sanctions, including sanctions on Iran’s central bank and sovereign wealth fund, which are a major source of funding for the Iranian Revolutionary Guard Corps Quds Forces. Any government ignoring these sanctions would be “risking the integrity of their financial systems” warned Treasury officials.
The President does not want the troop draw-down he is struggling to arrange in Afghanistan to be followed by a major new war with Iran. “Most people thought I would go in within two seconds, but plenty of time….” he said on Friday, adding on Monday at a press conference with Australian prime minister Scott Morrison, lest anyone failed to notice, “I’m showing great restraint.”
Fortunately for America, Saudi oil accounts for only 9% of US imports: its remaining importance stems from the facts that it is of a quality suitable for use in U.S. refineries, and that Saudi fields are capable of rapid increase in production. Fracking technology is turning the US from oil importer to oil exporter. A single shale oil play, the Permian Basin, has 4,000 wells waiting to be fracked, and is capable of meeting all of next year’s global demand growth. Still, frackers are under pressure from low prices, the number of active rigs is down, pipeline capacity remains limited, and fracking is more suited to long-term supply additions than to generating a spurt in production when something like the attack on Abqaiq occurs. In short, frackers’ crude oil is an imperfect substitute for Saudi oil, at least in the short run. But backed by a 727-million barrel Strategic Petroleum Reserve; consistent global over-production; new pipeline capacity from the Permian capable of handling millions of barrels per day, and approval for construction of the Keystone pipeline from Canada, Americans are in a position to worry more about effects of the trade war and how the 2020 elections might affect their economy’s continued ability to grow, than about the Saudis’ travails.
Turn to the strike by some 46,000 workers at more than 30 General Motors plants, the first such “laying down of tools”, as our British friends put it, since 2007, and already the longest such nationwide strike against GM since the 1970s. It is about wages, job security, health care, and the issues that are the usual stuff of bargaining between the United Auto Workers and the car companies. Oddly, it comes at a convenient time for both parties. The union’s top officials are being investigated for money laundering, corruption, in one case for filching workers’ union dues to finance “a lavish lifestyle,” and a host of other crimes: the strike diverts members’ attention from that scandal. On the other side of the picket lines, GM is faced with large inventories of unsold vehicles – 77 days of supply compared with the industry average of 61 — that will be drawn down while its factories are closed. Cox Automotive says the strike will not “hinder sales in the short run.”
Any settlement will have to strike a balance between the workers’ demands for compensation for past concessions and the company’s need to prepare for a harder future. Now that GM is profitable, workers want to make up some ground lost when the company was bailed out by the taxpayers after filing for bankruptcy in 2009. The era of lay-offs, concessions and austerity is, they feel, over, and the time to make up lost ground is here.
GM is looking ahead, rather than to the past, and sees declining demand for vehicles as millennials prefer uber and Lyft to car ownership, and the battle for a share of the lucrative small-truck market intensifies. The company seems to be planning to shut five plants and lay off workers to eliminate $4.5bn in costs. The outcome of the battle will be the model for settlements with other auto-makers, and determine the future of the American auto industry — whether it will have to rely on tariffs to compete with foreign companies, or can succeed unassisted by such barriers to foreign competition.
These twin events did not change the Feds’ view of the economy’s near-term outlook. After all, in 2011-2014, even with oil prices at $100, the economy expanded. And when the GM strike ends, the company will make up for lost output. Jay Powell & Co. held to a long-ago decision to lower interest rates by one-quarter of 1%. No surprise: Trump charged that the Feds’ policymakers have “no sense, no guts, no vision.” The President feels these “boneheads” don’t understand how good it would be for the economy if they would follow other countries’ lead and adopt negative interest rates.
Not to mention what faster growth would mean to a President faced with a decline in voters’ approval of his handling of the economy, the centerpiece of his re-election campaign. It stood at 51% in mid-summer. It now is 46% despite what vice president Mike Pence calls “a booming economy.” A majority, 56%, still rate the economy as good or very good, but that is down from 65% last November. Not good news for The President.