China is resuscitating the old historic trade route, the silk road, through a widespread infrastructure construction in Southeast and West Asia. It is known as the One Belt and One Road Initiative. “One Belt” refers to the maritime trade route starting from Venice, branching to Kenya, and ending at East China. “One Road” refers to the inland trade route starting from Beijing and reaching western European cities such as Paris.
The magnitude of the project is unprecedented. Combining both maritime and inland trade route, the initiative crosses three continents, totaling over 20,000 miles. According to the State Council of the People’s People’s Republic of China, the initiative is estimated to cost a jaw-dropping $10.6 trillion between year 2016 and 2020. To put the price of this mega project into perspective, the Chinese GDP in 2016 is 10 trillion dollars and the US GDP in 2016 is 18 trillion dollars according to the World Bank.
How is China going to pay for the initiative?
The Chinese GDP grew 6.7% in 2016. Though the economy is robust, the growth rate is lowering after 2007. According to the World Bank, the GDP growth rate in 2007 was 14%, more than twice the growth rate in 2016. Because of rising wages, China has become less and less competitive in manufacturing. International Monetary Fund projects that the GDP growth rate will continue lowering from 2017 and onward.
Without robust economic growth, China has to finance the initiative, borrowing money from international banks, its citizens, and possibly other countries. However, China already carries an unusually large amount of debt. According to the Economist, the Chinese national debt soared from 150% to nearly 260% over the last decade. Considering weakening economic growth and debt, lenders around the world would doubt China’s ability to pay its fair shares back.
So far, the State Council of China announced that the initiative will be financed by China Development Bank, the Bank of China, and countries along the trade route. The funds seem far short from the cost of the initiative.
In February, President Trump signed a repeal of section 1504 of the Dodd-Frank passed in 2010. The section that was repealed required oil, gas, and mining companies to publicly disclose to the SEC any payments they make to governments that are not the US federal government. The initial logic behind the law was that it would promote transparency among the companies and reduce bribery and corruption in foreign nations bearing large resource reserves. The reason the Trump Administration gave for repealing it was that the disclosure process was unnecessary and did not help American companies compete on the foreign landscape.
The possible monetary implications of the regulation were costly. According to the conservative Americans for Tax Reform, companies would have spent from $173 million to $385 million to comply with the regulation. The US was not alone in its requirement for transparency. Many countries in the EU, other European countries, and Canada have similar legislation. Opponents of the repeal point to this fact and also that the loss in transparency could make it harder for citizens to spot corruption and fraud, as Jay Branegan of the Lugar Center think tank argues. At the same time, this could make it easier for companies to hide their shady activities.
The oil, gas, and mine industries all have lots of money and international influence embedded in them. The economic effects of this repeal will not just have ramifications domestically, but all over the world. The House Republican who was the main person behind the bill, Bill Huizenga from Michigan, argued that with the repeal, there would be less costs inflicted on businesses, particularly small businesses, and make them more competitive on the world stage. President Trump also commented on how the repeal could lead to more jobs in the sector, a sector he campaigned hard on and received many votes from - particularly mining.
This legislation was only signed 8 months ago, so the effects of it have yet to be fully felt. It will be interesting to see if American companies really do get more business and compete better against other international companies.
The Organization of Petroleum Exporting Countries (OPEC) gathered in Algeria during the last week of September to discuss strategies to combat falling oil prices. Oil dropped below $30 per barrel earlier this year for the first time in more than a decade, and has remained stuck between $40 and $50 per barrel for the last several months. In light of this, OPEC left the conference announcing an initiative to cut their collective production in an effort to stabilize costs and benefit its member nations.
Traditionally, OPEC has been responsible for controlling the oil market by virtue of its vast supply of natural oil wells. The organization was started by five countries in the 1960’s, and now consists of twelve member nations from the Middle East, North Africa, and South America. The goal of the organization is for all members to coordinate production in order to maintain a steady global supply that sets the commodity’s price at each nation’s profit-maximizing level. Although OPEC has enjoyed great success in the past (most famously during the 1973 Arab embargo of the United States), the organization has struggled to collude in recent years due to a failure to coordinate with Russia (one of the world’s largest producers of petroleum) and an increase in the United States’ domestic supply thanks to new drilling techniques. The last time the organization successfully slashed its production to raise prices was in 2008, when the financial crisis hampered international demand and sent the price of oil below $40 per barrel.
Oil prices surged in the two weeks following the announcement, but have slowly decreased over the last week because of perceived difficulties with OPEC’s proposal. After reaching a three-month-high price of $51.60 on October 19, the price has fallen back below $50 per barrel in the last week. Analysts’ main concerns over the likelihood of the proposal come from Iraq’s announcement that it is seeking to continue increasing production regardless of the organization’s policy, and from Iran’s current hostility toward the organization’s largest producer, Saudi Arabia. Although OPEC announced Russian backing on its decision, the Russian government has contradicted itself over the last two weeks, casting doubt on whether they will actually work with OPEC to taper production.
One of the ironies behind this proposal is that a decision to cut global supply may actually help the U.S. drilling industry that has suffered from the low prices in 2016. According to the Wall Street Journal, domestic oil company struggles have damaged the US economic performance, so while an OPEC agreement may hurt consumers, it could unintentionally help some of the organization’s competitors from higher market prices.
OPEC plans on announcing the specifics of the production shortage on November 30, which will test if it still has the organizational discipline to affect the world’s oil markets.
As his final year in office winds down, President Barack Obama has been making his mark on the world. In recent weeks, the president has made headlines with his historic visit to Cuba, the first by a sitting President in 88 years. Following his return to the United States, he turned his focus towards further progress with Iran, albeit facing some backlash within the federal government.
Under the 2015 nuclear arms agreement between the US and Iran, critical nuclear technology sanctions against Iran were eliminated. However, such measures have done little to help Iran’s long-constricted economy expand and prosper, and the Obama administration is currently considering options to relieve economic sanctions. A key part of this relief package is unprecedented access to U.S. currency, via licenses that would allow foreign financial institutions to conduct trade with the dollar in order to support Iranian business dealings.
It’s critical to note that Iran would still be shut out of the American financial system; the Obama administration’s proposal would only lighten the burden upon Iran when trying to do business with Western nations. Congress finds a problem with this policy, however, since President Obama previously assured its members that, under the nuclear arms deal, Iran would never be granted access to the dollar and financial markets. Several Republican legislators fear that Obama’s attempt to boost Iran’s economic standing would go too far, cutting into the United States’ own economic influence while concurrently putting the global economic system at stake. Two Republicans in particular, Mark Kirk and Mike Pompeo, are propelling forward this viewpoint on behalf of many frustrated colleagues.
“Any administration effort to get foreign financial institutions...to enable Iran’s terror-sponsoring regime to conduct transactions in U.S. dollars...would benefit Iran’s terror financiers while fundamentally undermining the USA PATRIOT ACT 311 finding that Iran’s entire financial sector is a jurisdiction of primary money laundering concern,” argues Kirk of Illinois.
The Republican senator, who is already supporting a new push in Congress to confront Iran’s recent ballistic missile test with increased sanctions, sees a direct relationship between increased financial access and supporting a culture of terrorist ideas and illicit economic activities. Congressman Pompeo of Kansas similarly fears the empowerment of the Islamic Revolutionary Guards Corps (IRGC), Iran’s most powerful security and military organization, which also maintains extreme economic influence via its authority over political decisions (Nader, USIP). “American and international businesses can’t ignore the [IGRC]’s vast control over the Iranian economy and the threat Iranian banks pose to the international financial system,” Pompeo emphasized to The Free Beacon.
The surface-level numbers for Iran’s economy are poor enough: high levels of inflation, a weak currency, skyrocketing youth unemployment rates, and incomplete construction endeavors are all putting the country in a bind. Yet since U.S. sanctions began isolating Iran’s economy, corruption has dominated the nation by way of the IRGC’s immense market influence (for example, filling the shoes of major international companies that fled Iran following the sanctions).
Current President Hassan Rouhani has failed to attract new investors into the country in order to help eliminate widespread market corruption, a shortcoming that is encouraging U.S. lawmakers to push back against President Obama’s economic proposal. The administration sees little issue with granting Iran the same conventional economic freedoms held by most economically involved countries, but many Republican legislators are concerned with expanding economic access to a nation caught in the crossfire.
The world economy is struggling, and investors are now rushing to buy a commodity that has a history of retaining its value during hard times: gold.
Gold is traded through futures. When the markets are bearish, gold is often considered a safe asset, and investors cherish it. The logic behind gold’s stability is related to its ability to function as an alternative currency; it has a high value relative to its weight, and supply is extremely scarce.
It is considered so reliable that at one point in history, the United States backed up every single dollar of currency with the same weight in gold. Although this is has changed, investor attitudes toward the metal have not.
The sense of security that this precious metal emits is once again influencing investor decisions in global markets. With oil now consistently trading below $30/barrel, technology industry stocks falling in value, and emerging markets struggling, the price of gold has skyrocketed during the past month. What seem like peripheral issues are actually directly influencing its value. Gold Futures began February at $1128.00, and have since jumped over 10% up to $1247.80. Year-to-date, Gold has increased in value by 16.75%.
Gold has leveled-out in the past few days, as news leaked that the United Arab Emirates energy minister, Souhail Al Mazroui, said that OPEC is “ready to cooperate” with other oil market players on production cuts. Countries such as Russia have been negotiating with OPEC to try to curb oil production, but talks have thus far failed.
Cutting oil production would lower oversupplies of oil, and help push its price back up. An increase in the value of oil futures might draw investors away from gold; however, yesterday, details of the production curb were announced, and have disappointed many investors. Perhaps gold still has room to climb.
C Adam Pfander
It’s no secret that the stock market is hurting right now—and we can place a lot of the blame on low oil prices. The explanation appears counter-intuitive at first; cheap oil spells cheap energy, which means we all save on gas and heat and anything plastic. That should improve our wealth, not damage it, right? Yes. In fact, the Economist reports that declining oil prices have historically resulted in economic growth. So why are stocks tanking?
The current upheaval in the stock market represents the decoupling of finance from economics. While our economy is gaining strength, some of the world’s largest companies, along with once-prosperous oil-producing nations, are struggling with depressed oil prices. These companies are, most notably, energy manufacturers like Chevron and Exxon Mobil. The nations that are suffering are export based-economies like Russia, Saudi Arabia, and Venezuela - the latter two are members of the Organization of the Petroleum Exporting Countries [OPEC].
The economic well-being of these countries and companies rises and falls with the price of oil. Adding to the uncertainty, many oil-producing nations are politically unstable. Venezuela recently declared an economic state of emergency, and while governments in the Middle East are in a tenuous situation now, conditions will worsen if their main source of income dries up.
What is behind the plummeting oil prices? The market forces of supply and demand. In the past 18 months, oil producing nations have been manufacturing full-tilt. Pair this with the rapid expansion of natural gas production in the United States, and the market is simply flooded with oil. According to the New York Times, approximately one million barrels of oil are produced (supplied) in excess of what is bought (demanded) each day. One million barrels of excess oil act like one million anchors, dragging the price of oil down to historic levels.
The depressed oil market does not alone affect a small group of energy producers and oil-exporting nations. Fossil fuels lie at the heart of the US economy, so trouble in the oil market threatens the US economy as well. Cheaper oil means less energy exploration and extraction, a significant source of fixed capital investment – that is, sales of machines in the economy.
All of this unrest spooks financial markets. If oil companies stop expanding production today, then they could fail to meet their debts in the future, which can cause bankruptcy. Investors grow wary of whether or not they will get their money back from these companies. Should the Middle East erupt into political turmoil due to decreased oil revenues, then emerging market investors also become worried of losing their money. This concern over the future is contagious, and has spread to financial institutions across the globe.
Last month, oil reached a low of $28.35/barrel in mid-January - that is less than a 20-piece bucket of KFC chicken. Recently, the per barrel price has risen to the mid-$30 range largely due to rumors that Russia is negotiating with OPEC to curb oil production. This is not the first time that Russia has attempted to influence OPEC, but previous attempts have failed. Each day that oil prices remain low causes oil based countries, companies, and investors to worry more. This could change if Russia succeeds in its talks with OPEC, but the talks seem like a ‘hail-mary’ in the oil game.