US Oil and Gas Sector Hit Hard By Virus, Price War

By Paolo von Schirach –

WASHINGTON – Sadly, coronavirus is here in America. All the restrictions announced and feared on most economic activities have created huge disruptions and panic. The entire travel, entertainment and restaurant industries are comatose. Airlines bookings literally collapsed. And now, with most economic activities frozen, there is widespread fear that this may be just the beginning of a massive health and economic crisis –with no timeline.

Even worse for the oil sector

Well, if things are looking ugly for the broader US economy, they are simply disastrous for the US fossil fuel industry, oil in particular. The global economic slowdown began in January when China literally closed down half of its economy. The consequent drop in oil demand from China depressed already low oil prices.

Very low oil prices mean that many low margin small and medium sized US oil companies will go bankrupt. And this is because their extracting costs are far higher than in Saudi Arabia or Russia. Many of them could barely stay alive with oil at $ 50 per barrel. But when crude prices went down from $ 60 to $ 30 the picture looked bleak. And now, with the new development of a price war between Russia and Saudi Arabia, expect oil (now at around $ 25) to go down to $ 20 per barrel, or even lower. What started as a crisis for the US energy sector in January, just turned into a nightmare.

The incredible impact of the US energy renaissance

Taking a broad view, there is no question that the US energy boom triggered by the 10 year old domestic “fracking revolution” is one of the brightest spots in the US economy. Thanks to fracking, in the space of almost nothing, America, assumed to have only small and rapidly declining reserves in both oil and gas, came back with a gigantic roar; all thanks to its ability to exploit vast amounts of oil and gas until recently deemed to be unrecoverable, due to the prohibitive cost of extraction.

Well, thanks to the revolutionary fracking technologies, unrecoverable oil and gas became recoverable. In just a few years, a large number of small and medium energy companies (Exxon Mobil and Chevron, among others came later) made the US into the world’s largest natural gas producer, and now the biggest oil producer. It is hard to overestimate the positive impact of all this.

New jobs and energy security

Just think about it. Nowadays, we have billions of dollars invested at home, in this dynamic domestic energy sector, instead of being sent out to buy OPEC oil. We also accomplished the creation of “Hemispheric Energy Security”.

To be clear, America is not totally energy independent. However, if you combine this staggering increase in domestic energy production with Canadian and Mexican imports, you realize that nowadays most of the energy Americans use every day originates from the Western Hemisphere. This is a huge net plus in terms of improved US energy security and therefore national security.

Problem: high cost

The big fly in the ointment in all this was and is that shale oil extraction is a high cost, low margin business. And this is a big problem. Indeed, mostly on account of a mature, abundantly supplied global energy market, crude prices are now historically low, while many if not most US players in this shale oil sector are over leveraged, while they do not make much money by selling oil at such low prices.

In fact, some do not make any money at all. Given relatively high operating costs, low oil prices and large debt burdens, the sheer survival of many American small and medium energy companies was highly questionable before the crisis of 2020 began. For these reasons, the energy sector was not very attractive to average investors. Indeed, even in the context of a very robust stock market in 2019, oil stocks were the worst performers.

Energy companies must be profitable

Yes, it is great to celebrate this astonishing American energy renaissance. However, this is a capitalistic economy. Eventually, you have to be profitable to stay in business. Of course, cost cutting and consolidation were happening in this rather fragmented industry, well before this most recent oil price collapse. And the sector proved to be much, much more resilient than what many critics had argued. Initially thought to be viable only with oil at $ 60 per barrel or above, many companies can still make money with oil at $ 50 or $ 40. However, some cannot.

The impact of the crisis in China

And then January 2020 came along, with the explosion of the coronavirus epidemic in China. This led to the freezing of the Chinese economy, and the consequent collapse of (already low) oil prices due to drastic demand cuts by its biggest customer. This was bad news for all oil producers and exporters; but really horrible news for the shale oil sector in the US that depends on relatively high crude prices (at least $ 50 per barrel on average) to stay profitable.

Saudi Russia price war

Well, if this were not bad enough, on the heels of the China problem came an unexpected price war between the two main world exporters: Saudi Arabia and Russia. They would not continue their cooperation based on agreed upon production cuts aimed at supporting global oil prices. In fact, with no deal, they decided to turn all the taps on, this way flooding an already over supplied oil market, with a consequent additional price drop.

Well, if oil at $ 40 per barrel was very bad news for many US shale oil producers, you can imagine the impact of oil at $ 25 per barrel, or lower. This is an unmitigated disaster, in the context of a suddenly deteriorated US and world economy.

If this oil price slump lasts much longer, you can expect many bankruptcies, and tens of thousands of American oil workers out of a job, with negative cascading effects on the hundreds of suppliers and vendors that depend heavily on vibrant energy companies buying pipes, drilling equipment, valves, pumps, and what not. Expect collapsed demand for all these oil services, parts and components companies. And, as a sad consequence of all this, expect additional misery and negative ripple effects on so many local economies that had done very well on account of the money brought in by the oil business.

Price war cannot last much longer

The only hope in all this is that this price war cannot last very long because it is unsustainable for both Saudi Arabia and Russia. Indeed, while both countries’ oil industries can still make money even at these extraordinarily low oil prices, both governments cannot afford this.

Russia based its spending plans on oil at $ 50 per barrel. Saudi Arabia needs oil at $ 80 to finance its rather ambitious economic diversification agenda. Here is the thing. Revenue generated by foreign oil sales is almost all these two countries got. Russia may be somewhat better placed, but is not in a great position.

US shale sector will take time to recover

Yes, for a while at least, both countries can dip into their dollar reserves to finance the cash shortfall caused by drastically reduced oil revenues. But not indefinitely. In all this, the US shale oil sector is getting hit pretty hard, because its operating costs are much higher than current oil prices.

No way that companies that need oil to be at $ 40 per barrel just to stay alive can keep going much longer with crude hovering around $ 20. In the end, the US shale sector will survive. But only after undergoing painful bankruptcies and consolidations after which only the fittest will make it.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




The Coronavirus Recession and Elections

By Paolo von Schirach –

WASHINGTON – After a rather bad start, President Donald Trump is now doing a much better job in his efforts to convince America that his administration is doing all what is necessary to contain the coronavirus epidemic, while reducing its adverse impact on the US economy.

Economic measures

Some economic measures aimed at alleviating the damage and the stress to companies and workers seem appropriate. However, you can bet anything that the initial testing fiasco will be pointed out by Joe Biden and all Democrats between now and November as clear evidence of Trump’s incompetence at a time of a great national crisis.

As things will probably get worse, with more economic damage caused by the disruptions to normal activities inevitably following the coronavirus containment measures, (flights canceled, sports events, conventions and shows canceled, schools closed and more), can Trump blame the inevitable US economic recession on an uncontrollable epidemic? Will he be able to argue –convincingly– that he did all the right things, at the right time against this emergency? Will worried, if not panicky, Americans believe him?

Trump will get low grades

I doubt on Trump getting good grades on his coronavirus crisis handling. Of course the severity of the judgement will really depend on how long this epidemic will linger. Still, if we go into the November elections as the US economy is still caught in a downdraft, while the US health system is overwhelmed, or worse paralyzed by too many sick patients arriving at the same time, this is really bad news for President Trump. No matter what, at elections time, blaming the incumbent for whatever is going wrong in America is the knee-jerk reaction.

On the other hand, if the worst will soon be over, and the public will see the proverbial light at the end of the tunnel, then Trump may have a better chance at getting re-elected. But it will not be easy.

Not a popular President

Indeed, let’s not forget that this is not a popular President. Even while the economy was doing very well, with GDP growth at 2.5% or above, and with the lowest unemployment rate in half a century, Trump’s favorables never –I repeat never– went above 50%.

Of course, we know that this President has a large and fiercely loyal core group of strong supporters. They are and will be with him –no matter what. But, as important as these supporters are, they are not the majority of America’s voters, not even close.

Return to normalcy

If Joe Biden, (assuming here that eventually he will get the Democratic Party nomination), will be able to portray himself as the “Uniter“, the seasoned leader who can bring opposing factions together, he may get the nod not just from the Democrats but also from the millions of independents who are now seeking normalcy and a steady hand in Washington.

From this perspective, being part of the much maligned “Washington Establishment” will be a good thing for Biden. He will be able to say that he knows how to work productively with all lawmakers, irrespective of party, as well as many diverse constituencies in order to “get things done” for the American people.

In 2016 Americans opted for an outsider

In 2016 being part of the “Washington Establishment” was a bad stain. Trump emerged from literally nowhere largely on the basis of his starkly different resume. Indeed, he was not a professional politician.

And this is what millions of Americans, disappointed in the performance of the deeply entrenched political class, really liked back then. In Trump they saw the new champion who would upset the Washington self-dealing racket, (“Drain the swamp”), let fresh air in, and make the US Government finally work for the forgotten little guy.

Well, Trump’s got elected on the basis of his promises to do things very differently. But he assembled a mixed record in the execution of his unorthodox agenda. And his relatively low favorables indicate that most Americans, having tried the non politician in 2016, would seriously consider more traditional offerings in 2020.

Low favorables before this crisis

This mood shift back to the center became palpable after Biden regained his Democratic front runner status in the wake of the South Carolina Democratic Party Primary, held before the explosion of the coronavirus pandemic. And Biden’s rise has become irresistible as the country is in a panic. Overall, I believe that this health crisis is helping Biden, not Trump.

Again, remember that Trump’s leadership credentials were already questioned by many before coronavirus hit the US. The messy way things have been handled until recently did not contribute to change the critics’ minds.

The miracle would be to be able to present Trump’s coronavirus response as a Churchillian moment of heroic valor in front of an unprecedented adversity confronting America. I am sure that lots of communications specialists are already working on how to shape this story in order to provide a positive narrative. But somehow I do not believe that it is going to work.

Either way, Trump is in trouble

So, here is the thing. If this coronavirus emergency continues, and possibly gets worse between now and November, then Trump is in real trouble. If it goes away very soon, and America gets back to work, without too much damage to the economy, he is still in trouble on account of his low favorables.

Joe Biden’s moment?

America’s mood changed. No more wrecking balls, please. Many voters now seem to crave consensus builders who can deliver incremental reforms, hopefully with with some measure of bipartisan support.

Gaffe prone, a bit shop worn Joe Biden may not be the ideal champion, but as of now he is the man (almost) the entire Democratic Party is betting on. And, come November, millions of independents will probably agree.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




The Economic Damage Of Coronavirus

By Paolo von Schirach

WASHINGTON – The spreading coronavirus epidemic has already created an enormous challenge for the global economy. This epidemic is caused by an unknown new virus for which human beings have no immunity. For this reason, while this illness is very similar to a seasonal flu, its mortality rate is significantly higher. Hence the global scare.

Widespread restrictions

To date, there are no medical remedies for this new illness. Lacking other remedies, the countermeasures, beginning in China, (where it all started), have focused on lockdowns, quarantines and interruption of travel to and from the regions and countries affected. The goal is to slow down the spreading of the disease. Still, while this may be a sensible prevention policy from a public health standpoint, the economic impact has been devastating. Large parts of the Chinese economy have essentially been frozen by all these restrictions.

Frozen economy in China

Think about it. Lockdown affecting tens of millions of workers means that factories and offices are closed, workers do not work, goods are not produced, orders are not filled. Restaurants and hotels are empty, airlines cannot fly.

This prolonged work stoppage will amount to catastrophic economic losses for China, whose economy –let us keep in mind– was already rather anemic prior to this crisis, in some measure due to the negative impact of the tariffs war with the US.

Economic contagion

And this is not just affecting China. The reality of globalization means that we already have widespread economic contagion, even in countries only mildly affected (so far) by this new disease. Indeed, while relatively unscathed by the epidemic, the US is already suffering economically.

And this why. All US multinationals, and other smaller companies, depend on complex (and, it turns out, very vulnerable) supply chains centered in Asia. As the Chinese economy freezes, many US companies do not get their products delivered, and/or do not get critical parts and components for products assembled in the US. This is costly, and it negatively affected production schedules.

Sectors already affected

Beyond that, certain sectors of the US economy, such as leisure and business travel, hotels and airlines are already affected in a major way due to all the travel restrictions imposed by the authorities.

Furthermore, we can expect that the US oil industry will suffer devastating losses. With industrial production down in Asia, global oil demand collapsed and so did benchmark oil prices. The large and expanding (thanks to shale drilling) US oil industry supports dozens of medium sized companies and tens of thousands of high paying jobs. Many of these jobs are now in jeopardy. If the oil prices slump continues, expect major losses and bankruptcies in the US oil patch.

Additional contagion

The fact that new points of contagion have exploded in South Korea, Japan, Italy and Iran worries markets even more. These developments lead all experts to conclude that the coronavirus epidemic is now out of China, and it cannot be contained. Therefore, we should expect more countermeasures in the shape of travel restrictions and lockdown, and consequently additional harm to the global economy. Hence the financial markets panic and the deep losses experienced by Wall Street (the worst since 2008) in the last few days.

The road ahead

If we could have the reassurance that these extreme “Coronavirus Containment Measures”, while severe, were only temporary, then the world economy could adjust, absorb this hit, and get ready to restart soonest.

But the problem is that we do not know how long this epidemic will last. And this allows for the worst scenarios to proliferate. After the 2008 financial crisis exploded, the panic was caused by lack of knowledge regarding the extent of the financial shortfalls. How big were the losses for the banking sector? How many mortgage companies would go under? Who would be capable of surviving? The market panic was largely due to lack of reliable data.

However, the massive liquidity injection by the US Fed into the US economy, combined with massive rate cuts, helped to reassure the markets; and they gradually re-established confidence in the system. After those beneficial interventions, climbing back to normality was certainly painful; but everybody agreed that it was doable.

How long will this last?

In this coronavirus case, there is no clear end game. The health experts have no reassuring answers for this medical emergency. Lacking a cure, keeping infected individuals and areas isolated and blocking altogether travel and events where large numbers of people congregate seems a sensible way to slow down or contain the spread of this virus. The problem is that these prevention measures cause enormous economic losses, as the recent developments in China, South Korea, Japan and Italy clearly indicate.

More contagion, more restrictions

Should the epidemic spread from Italy to the rest of Europe in major way, and from Europe to other parts of the world, assuming similar restrictive policies adopted by additional countries, the economic damage caused by widespread freezing of production and world commerce would be incalculable.

For instance, in Iran, a severely under resourced country, the epidemic most probably cannot be contained. Will the virus travel from there to Central Asia, the Middle East and Africa? Scary scenario; but not impossible.

Without
some good news, such as new data showing a global contagion slowdown and/or the
announcement of a cure or vaccine that could be quickly administered, it is
difficult to see how markets can stabilize and go back to normal.

Last but not least, should the epidemic spread to the US in a major way, (it is already here), all bets are off. If America stops, the world stops.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




The EU Will Not Create Its Own Armed Forces

By Paolo von Schirach

WASHINGTON – French president Emmanuel Macron said it right. In his speech at the Munich Security Conference he argued that “We need a European strategy that renews us and turn us into a strategic political power.” Indeed, there is no reason why Europe should not be a world power.

The EU has a lot of assets

The European Union has a significant size, a large population, (512 million), and the second largest economy in the world, ($ 18 trillion), just a bit behind he US, if we add the GDP of all its member states.

Long gone are the dark days of the beginning of the Cold War, when a destroyed Europe had to rely on American protection, delivered via NATO, to guarantee its own security, vis-a-vis a menacing Russia.

The dark days of the Cold war are over

In 1949, the year NATO was created, Germany was a vanquished and semi-destroyed country. It had lost its eastern provinces, (to Poland), and the Soviet Zone of Occupation had morphed into a separate, and hostile, Communist State under Soviet control. The rest of Europe was also heavily damaged by WWII and fairly poor. Europe needed the security protection that could be provided only by a strong and confident America.

70 years later, we have a completely different scenario. First of all, the Soviet threat vanished with the implosion of the Soviet Union at the end of 1991. Germany was reunified, and is now the fourth largest world economic power. The rest of Europe has also grown significantly.

There is no European core

So, what’s preventing an economically strong EU from playing a much bigger role on the world stage? Very simple. the European Union has no political core, no clear identity. It is not a federal state with an established identity and a clearly defined national interest for whose protection armed forces have been created and sophisticated diplomacy is used on a daily basis.

The European Union is an unprecedented experiment linking sovereign states that have agreed to surrender some sovereignty to supranational, EU institutions that operate according to rules defined by a complex web of intra-European treaties.

Hard to say what the “European Union” really is. It is certainly much more than a Free Trade Area. But, for sure, it is not a state. Nor is there any agreed upon road map, plan, agreement or anything else that binds members states to create a European Federation at any time.

Macron’s suggestions will go nowhere

This should be enough for anybody to conclude that Macron’s exhortations, while justified in principle, will go absolutely nowhere. Lacking the glue of shared identity and shared destiny, complex associations agreements among sovereign states are just not enough to create a new, major power that will play a significant role on the world scene.

Size, population, GDP and overall development are important prerequisites, of course. And Europe arguably has all of them. But Europe is not a state. There is no democratically elected, centralized, federal European government representing the European people, with the clear and undisputed mandate to define the national interest, while allocating the necessary economic resources to create the armed forces, (along with the command structure), necessary to protect it.

Talk but no actions

Therefore, expect some talk about Macron’s idea of a more assertive Europe. But not much more than that. Sure enough, Macron’s concerns will be addressed in some measure by creating ad hoc committees gathering EU policy-makers, elder statesmen, and military leaders. These committees can and will meet, discuss, propose, and what not. But there is no way that this Europe, as currently configured, will be able to create a sizable EU defense budget, and then field modern, credible armed forces operating under a European Command.

While diminished, NATO is still there

So, is Europe defenseless? Not really.

Europe can still rely, or at least most Europeans hope this, on good old, US-led, NATO. Yes, after all these years, NATO is still there. While most American troops are gone, there are still thousands of U.S. soldiers in Europe, and there is still an impressive infrastructure of old and tested joint NATO commands, regular NATO meetings, NATO military exercises, and an established practice of discussing most Western security issues within the framework of the Alliance.

Of course, the major problem is that NATO, today just like 70 years ago, is mostly a US unilateral security guarantee to Europe. Everybody knows this. Today many question the continuing need for this old Alliance, decades after the end of the Soviet threat that justified its creation. But the truth is that inertia dominates.

NATO is there, so let us keep it, even though there are good reasons to questions its purpose and viability, considering the much reduced defense budgets (and therefore military capabilities) of all its European members.

European defense without NATO

What Macron proposes for the EU is something like a Europe-only NATO, without the US and Canada. Again, nothing wrong with that. A relatively prosperous Europe could and should finally be autonomous and self-sufficient on fundamental security issues.

There is no Europe

Except that there is no Europe, if by “Europe” we mean a strong state, with a legitimate European Government in charge of fundamental issues, including defense and foreign affairs.

Indeed, it is hard to believe that this European Union, with its unelected leaders running armies of bureaucrats, can have the authority and the credibility to raise expensive armies and organize defense strategies under a unified EU Command.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




Can Tesla Make It?

By Paolo von Schirach –

WASHINGTON – Tesla’s recent massive stock price rise has no rational explanation. Believe it or not, electric vehicles (EVs) manufacturer Tesla now is worth more than the combined value of General Motors, Ford and Fiat Chrysler. It is worth almost the same as Volkswagen and BMW combined. And yet the company produced only 500,000 cars last year, and has yet to be consistently profitable for at least a year. How is this possible? Clearly many of those who buy and hold Tesla’s stock are part of something akin to a cult, rather than savvy, rational investors. And yet, Tesla is no cult or joke. Far from it.

There is something there

There is definitely something “there”, there. But the something is not what most normal people are looking for: that is a well-structured manufacturing company that has a credible business plan that demonstrates when and how this car maker will become consistently profitable, this way rewarding its investors.

With Tesla, the usual parameters do not apply. And yet, at some point the company will have to become profitable. Yes, of course; but it is not clear when this will happen. Thus far, Tesla’s faithful investors are willing to believe that this will happen “soon”. Even though they do not know when, they are willing to believe this. So, is this EVs manufacturer a hallucination, a dream, or –worse– a hoax?

The fact is that nobody knows for sure what Tesla is.

Musk broke all the rules

That said, what we do know for sure is that Elon Musk, Tesla’s co-founder and CEO, successfully broke all the rules, and single handedly upended the entire automotive industry. And this is most welcome.

All analysts would agree that, before Tesla, electric vehicles were a dream, at best a concept, something we could think about, but whose time had not come yet.

Making EVs a reality

Well, Elon Musk made the EV dream a reality. Starting from scratch, his company designed and made appealing, interesting electric vehicles that people actually wanted to buy. Sure enough, he smartly took advantage of politically motivated subsidies in the form of federal and state tax brakes that increased the appeal of EVs. That was a big help, especially at the beginning.

Still, it is a fact that Tesla over time managed to design and produce models that are becoming cheaper, more efficient, with increased mileage per battery charge. In other words, thanks to Tesla, EVs are much closer to becoming truly competitive vis-a-vis even the most efficient, traditional internal combustion engine vehicles.

The battle is still on

I realize that the epochal battle for market dominance has not been won yet. Especially at a time of very low oil prices, and consequently cheap gasoline, the challenge to make EVs that are more cost-effective than traditional gasoline powered cars is huge. But it seems that Tesla is constantly working on refining its products. Can they make better, cheaper, more efficient batteries? Can they further reduce production costs? I have no idea. And I truly believe that nobody really knows for sure.

Musk is a genuine innovator

But I would like to bet on Elon Musk’s abilities. Whatever you can say about his bluster, braggadocio, exaggerations, wild predictions and what not, this successful South African immigrant is an extremely welcome addition to an uninspiring American industrial scene made out of unimaginative leaders who in most cases are at best capable of tweaking and fine tuning old stuff.

Think about it. The internal combustion engine is a more than 100 years old invention. It is most disappointing that no truly radical innovation has been produced by the major brands that have been designing and producing cars for decades.

It took Elon Musk –an immigrant and a complete outsider, with zero prior experience in the automotive sector– to shake up the entire industry. For that alone Musk deserves a great deal of credit.

Tesla opened a new chapter

Tesla opened a new chapter. It creatively linked renewable energy, automotive technology, sophisticated electronics, and more into a new way to think about personal transportation. Whatever your opinion about Tesla’s viability as a profit-making company, we should all welcome bold innovation.

Of course, being bold and daring does not always mean being right. Eventually the numbers will have to validate the new formula. However, for the time being, most Tesla investors are willing to suspend judgement. They are willing to believe the seemingly impossible, if not outright absurd. And, in the end, they may be proven wrong.

But, whatever Tesla’s future, I still believe that Elon Musk is a genuine trail blazer. With zero assurances of success, he dared to go where no one else would. That by itself is a great achievement, and (I hope) a powerful source of inspiration for all the would-be innovators in the United States.

Same old, same old does not do it anymore.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




Millions Can Hardly Get By In Full Employment America

By Paolo von Schirach –

WASHINGTON – Especially if compared to barely alive, anemic Europe, America’s GDP and employment growth rates look absolutely sensational. As always, even if there is little or no justification, the incumbent president (Donald Trump in this case) takes all the credit, witness his recent Davos speech.

Millions US workers make very little

However, if we look under the hood, the picture is far, far less attractive. In a recent Letter to the Editor, The Wall Street Journal, (January 23, 2020), Martha Ross, an economist who works at the prestigious Brookings Institution, a major Washington, DC think tank, pointed out that “53 million Americans –44% of workers aged 18-64– earn low wages, with median earnings of $ 10.22”. Got that? 44% of US workers make a little more than $ 10 an hour. And, Martha Ross adds, these are not just kids starting out in life using low wage jobs as entry points into the labor force. These are ordinary adults, folks trying to make a living.

Insignificant wages growth

Sure enough, it is a good thing to note real, inflation adjusted, wage growth. However, as Martha Ross points out in her letter, this growth means that for non supervisory retail workers the bump amounts to an increase from an average of $ 16.28 an hour to $ 16.81. Not exactly a sensational jump.

Here is the thing. A single adult, with no children or other dependents, may be able to get by with such meagre earnings. But a family cannot. As Ross concludes: “Despite a recent uptick in wages and a low unemployment rate, tens of millions of Americans earn barely enough to live on”.

Indeed. And this is a national tragedy; even though not talked about much because the overall picture looks rosy. The US economy is growing at more than 2% a year, the stock market jumps from record to record, there is hardly any inflation, and the unemployment rate is at 3.5%, a historic low.

Low wages tied to bad education

So, why is it that in the midst of a booming economy millions of Americans are paid so little? One of the reason must be that millions of Americans can compete only for low paying jobs because they have no marketable skills since they received a truly bad or mediocre education. Sadly, our American public schools system is a disaster. This has been proven time and again through countless domestic and international academic tests.

Sure enough, America can be proud of being home to many excellent private schools and most of the top ranked private universities. However, these prestigious institutions are accessible only to the wealthy and the super gifted who may receive merit scholarships. For sure, these young people, once they graduate, will have access to good or excellent jobs that will launch them into great careers.

All the others, however, the millions who could enroll only in mediocre to bad high schools, combined with all those who did not manage to finish school and obtain a high school degree, get only the scraps. Hence the sharp socio-economic divide and the sad, in fact dramatic, statistics cited by Martha Ross in her letter to the WSJ.

Two tier America

So, here is the thing. For all practical purposes, we have two separate countries here in America. In the upper tier, young people receive a good or excellent education. Armed with that, they can aspire to highly rewarding careers.

In the lower tier we find instead the unlucky ones who were stuck in inner cities and did not have access to a good or even decent education. In fact, many of them, even those who received a high school diploma, received almost no real education. And the unlucky ones in this lower tier tend to be mostly minorities and poor.

Which is to say that in our America, the country that used to be admired across the world as an “open access to all society” and for its “upward mobility”, nowadays “birth is destiny”, just like in Europe in the Middle Ages.

Indeed in today’s America, if you were born poor, in a bad neighborhood, your chances of getting the education you need to climb the socio-economic ladder are close to zero. Therefore, even in a growing economy with full employment, millions can only get dead-end jobs that pay a bit more than $ 10 an hour.

This is a national disgrace.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




Free Markets, Anybody?

By Paolo von Schirach –

WASHINGTON – Let’s be honest. The free markets that we learn about in school do not exist. They never did and never will. What we have instead are very imperfect approximations. What we have, at least in some parts of the Western world, is a declared intention to have a level playing field in which different corporations try their best to offer products and services, without enjoying any special advantages. For this purpose, governments established, (among others), antitrust authorities tasked with the goal of preserving free markets and fair competition.

Gaming the system

But this is an effort, a goal, an aspiration. In reality, most big corporate players do their very best to game the system in their favor. The dark secret of all true blue free market capitalists is that they all aspire to have and keep an impregnable rent position, whereby they will continue to dominate their market sector, hopefully for ever.

In pursuit of this anti-free market goal, US companies and trade associations spend larger and larger amounts of money on Washington, DC-based lobbyists whose only mission is to obtain, via legislation or specially designed regulations, set-asides, tax breaks, quotas, restrictions on imports, and whatever else may make it easier for their clients to protect their market positions and fend off competitors.

A semi-market

Therefore, what we have in America is a semi-market. In many ways there is competition, access and opportunity for new comers to come in and do their best to offer their products and services. But this system is quite imperfect.

And, again, the thriving, in fact almost monstrous, lobbying industry in Washington, DC illustrates how everybody, from dairy farmers to sugar growers, from the auto industry to the film industry, is trying to get special favors from Congress, the Executive Branch and all sorts of regulators, or prevent their competitors from getting them.

Europe pushing champions

That said, it seems that in Europe they are about to take this game up one level. Afraid of losing not just a few battles but the actual war on innovation and competitiveness, the Brussels-based European Union technocratic elites are now dreaming of creating EU Champions in leading tech sectors, (batteries for electric vehicles, telephony, artificial intelligence, robotics, you name it). This will be done by creating partnerships between the private sectors, national governments and EU institutions.

Well, this is a lot more than just lobbying. This is about openly subsidized new conglomerates created for the specific purpose or carving pieces of markets now occupied by American and increasingly Chinese tech giants.

Airbus worked

There is, of course, an illustrious (and remarkably successful) precedent to all this. And this is the Airbus consortium created back in 1970 by the Europeans to compete against America in the critical sector of passenger jets, and more. At the time, US companies dominated world markets. Europe had nothing.

If the intent was to carve a space for European companies, the notion of different companies in different European countries (France, Germany, Britain and Spain), enjoying varying degrees of state aid, being capable of designing, manufacturing, and selling state of the art jetliners for the global market seemed truly preposterous.

Indeed, many skeptics predicted that this Airbus consortium would turn out to be a gigantic waste of time and money. To begin with, the business model seemed most improbable, since it rested on the willingness and ability of various corporate entities located in different countries, with distinct agendas and corporate cultures, to successfully cooperate in a major effort aimed at designing, producing, and selling state of the art jetliners.

Success

Well, surprise! it worked. In fact it worked extremely well. Nowadays, Airbus is the undisputed number one or number two (depending on the year) manufacturer of jetliners. However, Airbus, especially in its early years, managed to survive because, beyond its now undisputed ability to make good airplanes, it enjoyed various subsidies. Could Airbus have survived without them, especially in the difficult early years? May be not.

Of course, Boeing, the US aerospace conglomerate that suffered the most on account of this new, well heeled competitor, cried foul. How can a US private sector company compete against a European conglomerate that benefits from various states aid, while its customers (the airlines) could obtain extremely generous finance terms for purchasing Airbus products?

The Airbus reply was that Boeing enjoys its own subsidies. It gets a lot of business from the US Defense Department. With those profits it can finance its civilian airliners sector.

However, even though there is some truth in the argument that Boeing is not a pure private sector company fighting against many competitors, it is absolutely clear that Airbus could not have been conceived without the massive state subsidies that gave the company the staying power (especially in its early years) it needed in order to consolidate its fragile market positions.

More subsidized consortia in the EU?

So, is the EU idea now to repeat the Airbus formula, extending it to different critical industrial sectors? Can this be done? Will it work? Well, it seems that this is the only idea that might work in Europe. The European private sector, (assuming we can talk about a EU-wide private sector), is just not capable of doing important, ground-breaking things on its own. And this reality has critical implications. Europe is already falling way behind in tech innovation. If nothing happens, the competitiveness war will be lost very soon. Europe will be an industrial backwater.

China, the emerging world economic power, does not have any problems pushing its own national champions, be they state owned enterprises, or nominally private enterprises, (think Huawei), that clearly enjoy special status as favored companies. Clearly China is not a market economy.

Free markets are an abstraction

Alright. The above tells us that truly free markets, with open and unfettered competition, are an abstraction. In varying degrees, everybody is exhibiting rent-seeking behavior. Everybody is trying to game the system via carve-outs, set-asides, protectionism, ad hoc regulations, and other non-tariff barriers in order to keep the competition out, or at least in a disadvantaged position.

More lobbyists in Washington, DC

Comparatively speaking, the US seems a bit better. However, do not expect the armies of Washington, DC lobbyists to disappear any time soon. If anything, they are becoming bigger, more sophisticated, and more expensive. And this is a worrisome trend. We preach free markets. Some politicians may actually believe in them. But corporations currently enjoying a dominant position are not really committed to this idea.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




Self-Driving Electric Cars Coming Soon

By Paolo von Schirach –

WASHINGTON – Imagine this: affordable, driverless electric cars, EVs. This would be the true game changer for urban transportation and urban living. I say “would be” because this revolution, prophesized and announced many times, has not quite arrived. We know that there has been significant technological progress in these areas in the last few years; but not enough to make this vision into a reality. Still, I am hopeful that some day we shall see it.

When the revolution comes

If and when these affordable, autonomous EVs will hit the road, the impact of this radical technological revolution will be immense. I am not just talking about the environmental gains deriving from zero emissions electric engines, and therefore the overall reduction of greenhouse gases and significant air quality improvements in all large urban areas.

The real game changer will be that most people will no longer want to own a car, because hiring one will be very easy, and very cheap. Hence a true revolution in the way most of us will deal with all personal mobility needs, especially in large urban areas.

Changes in the way we think of mobility and cars

Even today, relying only on established, gasoline powered cars driven by humans who need to be paid for their driving, the availability of app-connected transportation services like Uber and Lyft convinced many city dwellers that calling a vehicle via smart phone whenever needed is easier and probably cheaper than owning and driving your own car.

How so? Uber of course is not free. However, for many users who rely on Uber or equivalent services any app-connected car service is more cost-effective than going through the trouble of buying and keeping a car.

It is true that you have to pay for each Uber ride, while you pay only a little (the cost of gasoline) each time you drive your own car. Still, you have to consider all the costs connected with owning a vehicle. You have to factor the substantial cost of the initial purchase, plus the cost of registration, insurance, parking, fuel, ordinary (oil changes) and extraordinary maintenance, (new tires, new brakes, new transmissions). Then add odds and ends like the cost of parking tickets, (some people collect many of those), the cost and aggravation caused by possible car accidents, and then the aggravation of the daily stress of driving on congested roads, and all of a sudden the Uber option, while it has a price, seems more cost-effective, at least for some.

Driverless, electric Uber

Well, if relying on smart phone connected car services as opposed to owning a car is the emerging trend today, imagine the appeal of this car hire option in a not so distant future in which your Uber or equivalent vehicle will have an electric engine and no driver. These radical innovations obviously will mean very low operating costs for the service provider, hence much lower fees charged to users, and guaranteed, fast 24 hour service.

The rides will be cheaper because there will be no payments to a human doing the driving. Besides, the driverless car will stay on the road day and night. It does not get sick and it does not need to take a break. And the cost of the electric charges will be much lower than gasoline.

The future of personal mobility

So, here is tomorrow’s scenario. Think of driverless EVs that will be on the road almost 24/7, (taking a break only for the time necessary to recharge the car’s battery). Since these vehicles will cost much less to operate, the companies providing the service will be able to pass on to the consumers significant savings.

And this will mean that almost anybody will be able to afford rides, probably several rides a day. At the same the service providers will be able to guarantee that there will be plenty of vehicles constantly on the road available to quickly meet demand for rides. And this means almost no wait time for your ride.

No more need for private cars

In this new scenario, for the vast majority of urban dwellers, owning a private vehicle will become unnecessary, because all mobility needs will be easily and inexpensively met by driverless EVs. If this is so, let’s think about the significant ripple effects of this radical reorientation of consumers’ preferences.

Fewer cars

As a result of all this, there will be a complete restructuring of the automobile industry. Only EVs will be manufactured, of course; but fewer of them, because it will no longer be one vehicle per individual driver. One vehicle on the road 24/7 will serve many customers during the day. This will mean far fewer cars on the road. And probably improved road safety, because driverless vehicles will not get distracted, they will not cause accidents. They will not be under the influence of alcohol. They will not be tired and sleepy.

Empty parking garages

Furthermore, far fewer cars constantly in circulation will mean plenty of redundant parking spaces. In most large cities enormous parking garages have been built for commuters. They are filled every day by tens of thousands of cars parked there by commuters. In the future commuters will be able to rely on services provided by driverless cars, therefore all these parking lots and garages will sit empty. This will create an opportunity for re-purposing a great deal of valuable urban real estate.

A better future

So, here the picture. No more private automobiles on the roads, or at least far, far fewer of them. And this means that the substantial capital devoted by millions of individuals to purchasing a vehicles will be used for other goals. Besides, given far fewer cars on the road, there will be no more road congestion, and no more street noise caused by the internal combustion engines and related air pollution. And, finally, no more stressed out drivers/workers who have to fight the traffic twice a day, every day, commuting to and from their work places. All in all, with the driverless EV doing the driving, this will translate into a much more enjoyable, more relaxing urban life experience for millions of people across the globe.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC




Raising The Temperature In The Middle East

By Paolo von Schirach –

WASHINGTON – After the unexpected airstrike that killed IRGC General Qassem Soleimani, right outside the Baghdad airport, analysts began speculating what Trump’s end game may be. In other words, is this just an ill-conceived, spur of the moment decision? Or is this targeted assassination of the master mind of all the Iran-led irregular forces operating with impunity in the Middle East part of a carefully orchestrated US “plan”?

Recalculations about America’s will are in order

I have no idea. However, I would say that this brazen attack that eliminated the most significant and most revered leader of Iran’s international mischief will probably cause some rethinking on the part of those who have come to believe that America is a hesitant giant, essentially impotent when targeted by non state actors.

Well, not so impotent, it turns out. I would speculate that Soleimani was killed in some measure because he got used to traveling from Iranian fiefdom to Iranian fiefdom, (Lebanon, Syria, Iraq, Yemen), without too much concern about his own safety. In other words, being at the head of a victorious and unchallenged unconventional military force, made Soleimani arrogant. It made him believe that he was invincible, that he could safely move around almost anywhere in the region.

Here is the thing. Going forward, the accepted narrative of a rather passive and impotent America, incapable of reacting to stealthy attacks that do not leave clear footprints, no longer applies. Not just Iran, but all America’s enemies should take all this into account.

Making things worse in the Middle East?

Sure enough, this sensational killing caused all sorts of speculations regarding possible reverberations on the volatile Middle East, already torn by conflicts and insurrections. Trump has been accused by Joe Biden, would be Democratic nominee for the presidency, of having thrown a stick of dynamite into a powder keg, or something like that.

Sure, this American action raises the temperature in the region. But the most feared consequence of a major Middle East crisis, sky rocketing oil prices, will not happen. As Holman W. Jenkins noted in a recent piece in The Wall Street Journal, the unrelated American fracking revolution, by substantially increasing US oil production, completely transformed global oil markets.

There is plenty of oil

In other words, today the world should not be overly concerned with any disruption of the flow of oil passing through the Strait of Hormuz. The difference between 10 0r 15 years ago and today is that America –until not long ago a major oil importer– is now the largest oil producer in the world. Yes, the US produces more oil than Saudi Arabia or Russia. While America still imports oil, it buys most of it from Canada, not from the Persian Gulf.

This fantastic increase of America’s oil production has had and will have significant geopolitical consequences. A very big one is to have down graded the strategic importance of the Middle East as an oil producing region, and therefore the possible negative impact of Iranian actions targeting Middle Eastern oil facilities on the world economy.

Nothing happened after Iran attack Saudi oil facilities

If you recall, a few months ago, the Iranians launched a surprise attack against major Saudi oil installations, knocking down with one shot about 50% of Saudi Arabia’s oil output. Well, what happened? Not much. Yes, oil prices went up, for a few days. But then, when the analysts were reassured that there was plenty of extra supply in global energy markets, oil prices went down again.

I am not suggesting that the Middle East has become irrelevant, far from it. What I am suggesting is that Iranian threats and possible attacks against oil are not as dangerous as they used to be in an era of tight supplies and enormous needs for imported oil on the part of the United States.

Iran is not the winning champion

Yes, after the stinging loss of Soleimani, its revered military leader, we should be prepared for something really nasty coming out of Iran. But let us not forget that Iran is not Stalin’s Soviet Union, or Nazi Germany at the height of its power.

Iran is an impoverished police state, stricken by US economic sanctions. It is a country in which an increasingly recalcitarting population, notwithstanding the obvious threats of imprisonment, torture or death, still engage in spontaneous protests against the high cost of food and other basic necessities. While we should not underestimate its resourcefulness, today’s Iran is not exactly an unbeatable champion.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC




Cyber War Happening Now – We Are Not Ready

By Paolo von Schirach –

WASHINGTON – We are at war. Aggression which one day can take devastating dimensions is targeting America on a daily basis. I am talking about cyber warfare. Unfortunately, it is very hard to label cyber war as “war”, simply because it is vastly different from the “conventional war” we are used to study, discuss and prepare for.

Intellectual obstacles

Sadly, our ability to think intelligently and proactively about this potentially fatal form of aggression is seriously hampered by our old-fashioned categories. Much to our disadvantage, when it comes to warfare, we are still prisoners of largely obsolete concepts, scenarios, international law definitions, strategies and tactics that do not allow us to fully comprehend the extent of unconventional warfare, in particular cyber war.

The UN Charter allows self-defense

All students of international law know that Article 51 of the UN Charter clearly affirms the right of self-defense that can be exercised by any UN Member, irrespective of any action that may or may not be taken by the UN Security Council to deal with that specific breach to international peace. It sounds right. Self-defense is an inherent right of all sovereign nations. Except that Article 51 specifies that self-defense is justified “if an armed attack occurs”.

Armed attacks

And here –in this narrow and quite frankly obsolete definition– is our problem. This classic definition indicates that an illegitimate war of aggression has occurred if and when there is an “armed attack”. And we know what that is. This is Pearl Harbour. This is Nazi Germany moving into Poland on September 1, 1939. We picture armies shooting their way across internationally recognized, sovereign boundaries. We know a war of aggression when we see one.

Deliberate obfuscation in semi-conventional conflicts

But today we are confronted with a vastly different universe when it comes to warfare. Even when we are dealing with quasi-conventional conflicts, in recent years the lines have been deliberately blurred by bad actors who do their best to muddy the waters, with the goal of denying responsibility for their actions.

Indeed, Crimea was taken over in 2014 not by the Russian Army but by “Green Men” whose uniforms did not have any insignia. Likewise, officially no Russian forces are taking part in the bloody conflict in the Donbas region in eastern Ukraine. The Iranians have proxy forces in Iraq and Syria, trained and armed by them. But they are not technically part of the Iranian Army. And we could go on and on.

When there is no armed attack

While it is not that complicated to see through these disguises in semi-conventional conflicts, when it comes to cyber operations, cyber attacks, and cyber terror, we are in uncharted waters. To start with, it is often hard to determine that there was an attack, let alone who the attacker is. Whatever they are, these actions are not “armed attacks” as defined by Article 51 of the UN Charter, and as most practitioners think about acts of aggression.

We do not recognize cyber war as war

And here is our main problem. Our weakness as a society, and I suspect this includes key policy-makers, is that we have a psychological resistance in recognizing that cyber attacks are pure “acts of war”, simply because they do not look like the conventional aggressive military operations we are used to.

Furthermore, since cyber war is relatively new, we still do not have the intellectual and technical tools to fully comprehend the extent of this threat, and how devastating large scale cyber attacks could be. Are we talking about a few cyber probes here and there? Are we talking about discreet actions of cyber theft or cyber espionage? We know about all of them. But is this really war? Yes, it is.

Prepare for the worst scenario

And it will get worse. Count on it. There will be new, stealthy and deadly tools. It would be foolish, if not criminally negligent, not to think about all this and try to prepare for the absolute worst. I mean well coordinated cyber attacks that could cripple our country, (for instance, attacks that would completely and permanently disable our national power grid), without a single shot being fired by enemy forces.

Our problem

And here is our problem. Right now we are at the very beginning of a very dangerous new era in which cyber tools are used as weapons. To date, aggressive cyber capabilities are probably still relatively modest. But they will inevitably grow, along with the growth of cyber science and the numerous new applications that will be created. And the temptation to do bad things is very strong. Hostile forces can always hope to hide behind anonymity.

We sort of know all this. But in a rather nebulous way. Most of all, there is no real sense of urgency, most likely because these acts of aggression take place in this intangible cyber space, whose dimensions and relevance are generally unknown to most of us and that would include policy-makers who do not have the sophisticated technical background that would allow them to immediately grasp the dimensions of this ominous threat.

The challenge

So, here is our challenge. How do we mobilize all relevant policy and scientific resources against a war we are already involved in that does not look at all like the wars we are used to? How do we mobilize and sustain national efforts aimed at countering invisible cyber attacks that may soon be replaced by much bigger, perhaps fatal attacks?