Oil Badly Hurt By Global Warming Fight

By Paolo von Schirach —

WASHINGTON – Well known energy expert Daniel Yergin wrote a thoughtful WSJ op-ed on the horrible headwinds the oil sector is facing on account of the lingering effects of the covid pandemic economic devastations, (The Oil Industry Is Stuck in Virus Alley, December 29, 2020). He describes the pain caused to the energy industry by the sudden collapse of oil demand due to the virtual freezing of international and domestic travel and other key energy intensive economic activities. As hundreds of millions of previously mobile people stayed at home on account of covid, demand for oil-derived fuels collapsed.

The impact of covid

According to Yergin, the open question is how long will it take for the global economy, including business and personal travel, to return to normal now that the covid vaccines distribution started. The oil sector will not recover, he warns, until the world economy will go back to normal, that is only after covid is behind us.

Fine. But is the devastating covid impact the entire oil woes story? Not really. Well before covid struck at the beginning of 2020, the oil industry was already facing other major challenges. After covid is gone these problems will still be there. But none of them were mentioned by Yergin.

There are other problems

Surprisingly, not a word in his article about the mounting threats to the profitability, and indeed continuing viability, of many oil companies represented by chronic crude oversupply, the impact on the industry of more and more global warming public policy countermeasures, and the threat of a more mature, growing electric cars industry.

Sure enough, in the short term the covid pandemic is the most immediate and historically unprecedented challenge facing the oil industry. Still, even assuming a soon to come happy ending to the covid induced global mobility and travel crisis, the oil industry future is not that bright.

Structural oversupply

Way before covid hit us in the early months of 2020, there was structural oil oversupply, largely caused by the unexpected spectacular success of hydraulic fracturing (fracking) in the US. Fracking led to the doubling of oil production in just a few years, this way cutting US oil imports by millions of barrels a day. Since major oil exporters, (Russia and Saudi Arabia in the first place), did not significantly cut their oil production as a way to offset additional supply from the US, the gigantic increase to global supply caused by the unexpected success of American fracking companies created a global oil glut and consequently a crude price collapse.

In ordinary circumstances, assuming stable or growing world demand, the global oil sector would try to find a new equilibrium via a combination of production cuts, bankruptcies of overleveraged high cost producers, mergers and consolidations. And some of this has already happened, with more to come.

In the US, the highly leveraged small and medium frackers that cannot survive with crude prices lower than their production costs (on average about $ 50 per barrel) have gone bankrupt, or sold theirs assets and gone out of business. But, industry consolidation and production cuts notwithstanding, oil prices did not go back to $ 100 per barrel, a level that would guarantee healthy profits for most participants. Please note that all this was pre-covid.

Battered stocks

Investors noticed. Indeed, even in the context of a growing US economy, for many years oil companies underperformed most of the others stocks. In 2019, well before the covid induced additional price collapse, energy companies were dead last in the US S&P 500. Yes, bottom of the bottom –in a heavily oil dependent, booming US economy.

Going forward, even in a back to normal post-covid global economy, oil overproduction and therefore low prices will probably continue, reducing the profit margin outlook for oil companies large and small. Even with covid well behind us, do not expect a much diminished Exxon to make it back to the Dow Jones Industrials index.

Anti-oil public policies

And this is only half the story. Indeed, beyond the supply glut, we have to factor the impact on the oil industry of public policy responses to global warming enacted or about to be enacted by many governments in the developed world.

While it is doubtful that in the near and medium term there will be truly viable energy alternatives to fossil fuels, the now accepted conventional wisdom (right or wrong as it may be) is that as a minimum governments must work with alacrity –starting immediately– to devise ways to reduce fossil fuels consumption. In the near term, we can expect new or higher carbon taxes, higher gasoline taxes, and more mandates for more fuel efficient vehicles. All these public policy measures will make sure that demand for oil-derived products will not grow.

The combined damage of the oil glut and public policy changes is already felt. For instance, in Alberta, Canada, the once thriving oil sands business was in recession pre covid. Countless jobs have been lost. The industry experts realize that this slump, while made much worse by covid, is here to stay. The Alberta Provincial Government is trying to find magic recipes to quickly diversify the oil dependent economy. In the US, thousands of fracking related jobs have been lost, while the economic pain has spread to the vast universe of suppliers and vendors, from pipe makers to those delivering sand used for fracking.

Electric vehicles have arrived

And then we have electric vehicles, EVs, finally becoming viable. Granted, EVs to date represent only a small fraction of total US and global auto production. Even assuming significantly higher numbers due to technological breakthroughs in battery technologies, it will take decades before the world automobile fleets will become mostly electric. All true. But, with sector leader Tesla finally becoming profitable, we probably have reached an inflection point.

For these and other intangible reasons, we have now a new strong anti oil sentiment spreading throughout the world. For example, the government of Denmark recently announced that it wants to phase out dependence on fossil fuels. The Japanese government indicated that it wants 100% electrification of the car sector by 2035, or so. A few months earlier, California declared a ban on the sale of new gasoline powered vehicles by 2035. The big automakers got the message. They have responded to the these new policies with big announcements about investments of billions of dollars in new lines of EVs. They are not betting on a bright future for gasoline powered vehicles.

Not a bright outlook for oil

It is true that we still do not have the proven, scalable technologies that will quickly get us to a new post-oil world. Still, increasing opposition to fossil fuels and more aggressive investments in the development of alternatives to the internal combustion engine are the new trends. Given all this, looking at the world ten or fifteen years from now, there are good reasons to project at best stagnant oil demand.

If this is indeed the case, who wants to invest today in major new oil projects that require huge up front capital outlays, normally justified with the assumption of steady returns over at least a decade? Getting beyond the covid induced oil crisis will be helpful for the battered oil industry. But it will not put an end to the fossil fuel sector’s systemic problems.

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 Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




The End of Oil?

By Paolo von Schirach –

WASHINGTON – The Wall Street Journal reported on December 4th that “Denmark is to end all new oil and gas exploration with immediate effect as part of a plan to phase out fossil fuels by 2050, one of the most drastic moves by a crude-producing nation to curb carbon emissions.” Of course, given the small size of the Danish economy, and Denmark’s modest role as a crude producer, (about 100,000 barrel per day), this news will not move markets.

Symbolically important

Still, this announcement is symbolically very significant. It is yet another signal of a shifting mood. Denmark, a modern, rich, innovative European country, says officially that oil is essentially dead. We know that in terms of public sentiment fossil fuels are somewhat or very unpopular in Europe and beyond. But we are now entering new territory. We are now shifting from “green righteousness” as a posture embraced by those who want to signal some kind of moral superiority to the formulation of workable alternative energy policies. Mostly because of increased global warming concerns, many governments are actively planning –today– for a world in which carbon will play a smaller and smaller role. Granted, we are not quite there yet. But getting there is looking a bit more feasible every day.

Not just posturing

From this perspective this Danish announcement cannot be dismissed as mere green posturing. It is about having turned a corner. Fossil fuels, with all their accompanying emissions contributing to global warming, are the past. Renewable energy is the future. Indeed, increasingly the present.

Of course, easy to argue that while a such a shift away from oil may be realistic for Denmark, it is just a dream for heavily oil dependent America. True. However, while a non-oil, green energy future is still a dream in the US, it is not an impossible dream.

Electric cars have a future

Take electric cars. Until just a few years ago they were the subject of jokes. Today, Tesla –the US leader in this space– has an astronomic market capitalization, (around $ 500 billion), increasing sales, and –guess what– sustained profits. Realistically, if we remove the hype Tesla and electric cars in general are at best work in progress. The batteries that power these vehicles, while now cheaper and lighter, are still too costly. Compared to old-fashioned internal combustion engines, EVs are not very efficient, and comparatively more expensive. To date, Tesla cars are still a luxury or high end product lacking mass appeal.

However, we know that practically all car makers around the world, having looked at Tesla’s rise, have pledged to invest billions of dollars in electric vehicle technologies. Major breakthroughs that will improve battery efficiency this way driving overall production costs down are not guaranteed. But they are entirely possible.

We will still rely on oil

The skeptics are ready to point out that even if there will be fantastic transformative innovations that will make EVs more affordable and therefore appealing to tens of millions of consumers it will take many years before we shall have a large national fleet made out of EVs. We start from an extremely low base. EVs barely made 2% of overall US car sales in 2019.

Which is to say that even assuming a fast conversion rate from gasoline to electricity millions of Americans will continue using cars powered by gasoline burning internal combustion engines for many more years. And this means continuing reliance on oil derived gasoline. Furthermore, oil will still be needed to make jet fuel for civilian as well as military planes, in addition to oil for diesel fuel to power trucks, locomotives and ships. Not to mention oil for plastics, and for other oil derived products we still depend on. All true.

Not a promising future

And yet, I still believe that oil is doomed. Consider this. Oil companies executives must look at very long time horizons when contemplating investment in costly new exploration and production projects. It makes sense to invest billions of dollars in new exploration and production today only if we are reasonably sure that future oil prices will be high enough to repay the initial heavy investments, and then generate pure profits for several years.

Well, if I were an oil corporate manager trying to predict the profitability of the oil sector 20 years from now, I would not be too sanguine about sinking –today– billions of dollars in new exploration. Looking ahead, and especially at the emerging anti-fossil fuel consensus in most developed countries, I would probably conclude that, with many other countries following Denmark’s example, overall demand for oil will shrink, or at least it will not grow. Without buoyant new demand, crude prices will stay low or depressed.

Many energy companies will go bankrupt

The main consequence of this incremental shift away from fossil fuels will be the exit, disappearance or bankruptcy of the weaker players: the high cost producers who could thrive only in a buoyant market with sustained high crude prices.

Looking ahead, I cannot see a bright future for many Canadian companies specialized in extracting heavy crude from oil sands in the Alberta Province. The whole process is not cost-effective, assuming crude below $ 50 per barrel. Likewise, there are too many small and medium producers in the US shale oil business. Many of them could barely stay afloat when oil went below $ 60 per barrel. Now it is at $ 45. Hence a slew of bankruptcies.

Covid impact

Of course, right now the global oil business is hit particularly hard by the fuels consumption freeze caused by the global covid pandemic. Millions of people all over the world drive less, while they practically stopped flying. Going forward, as covid will progressively disappear by the middle of 2021 on account of the forthcoming wide vaccines distribution, for millions of people in America and around the world life will progressively revert to normal. Therefore, we can expect higher oil demand, and higher crude prices in the second half of 2021. All true.

Bleak future ahead for oil

Still, even in a post-covid environment the headwind caused by growing global warming concerns will continue to discourage fossil fuels consumption. At the same time, more and more financial resources will be devoted to investments in alternative forms of energy and energy efficiency.

Trying to imagine the oil industry twenty years from now I see a severely shrunken sectors, with a much smaller number of players. And who will they be? Very simple. The low cost producers who can survive even with historically low oil prices. Think Saudi Arabia, the other smaller Gulf countries, and may be Russia. Most of the other producers will be gone or tottering because they will be unable to survive with low oil prices, given their high extraction costs. The US shale oil boom –arguably the most amazing oil renaissance story of the last twenty years– will be gone.

But even for the survivors prospects will be grim. For sure, Saudi Aramco will be able to extract and sell oil at a profit. But its margins will be much lower, given depressed crude prices. Unless the Saudis manage to create, out of nothing, a non oil economy, the future of the kingdom does not look bright. Oil revenues are used to finance practically everything in Saudi Arabia. A substantially reduced oil revenue stream means an impoverished country. Same story for Russia, a small unimpressive economy whose only strength is energy exports.

Overall, it is hard to say if and when renewable energy will become a genuinely money-making sector (I mean unsubsidized) in the US and other advanced economies. At the moment, renewable energy is still plagued by huge unresolved technical problems –first and foremost the inability to store excess energy to be used when the sun does not shine and wind does not blow.

That said, even without perfect alternatives in place, most advanced societies have decided that they want out of fossil fuels. Denmark’s announcement is an example of the new mood. Expect many more countries to follow suit. My hunch is that there is no coming back. If you have money invested in the conventional energy sector, the time to get out and at least cut your losses was yesterday.

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 Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




Climate Emergency?

By Paolo von Schirach

WASHINGTON – Most sensible people would agree today that climate change due to global warming is a very serious problem. And everybody now knows that at the source of all this we find man-made increased levels of greenhouse gases in the atmosphere. And we also know that all this is happening because we humans keep burning significant –indeed increasing– amounts of high emissions fossil fuels in order to produce the energy we need to power the world economy.

Dealing with the problem?

That said, we also know that public opinion in the West and most elected leaders have come to agree that the most sensible way to stop global warming is to substantially reduce the consumption of fossil fuels, choosing instead zero emissions renewable energy technologies in order to keep the world economy moving.

On the surface this looks like a very good plan. Out with dirty energy, in with clean energy, such as solar and wind. Good plan in principle. But, according to some, not in practice. According to Bjorn Lomborg, Danish author of the recently released book False Alarm, (subtitle: How Climate Change Panic Costs Us Trillions, Hurts the Poor, And Fails To Fix The Planet), all the well meaning clean energy policies enacted or planned share a common defect: they will cost an enormous amount of money and they will not produce the intended effects. They simply will not work.

Wrong approach

How so? Well, because renewable energy technologies, at the current stage of development, are both still very expensive and not very efficient. While costs for solar and wind have come down dramatically in the last decade, these two main sources of clean, emission free, energy are still not cost-effective compared to the dirty fossil fuels. By forcing their large scale adoption now, via mandates, taxes and subsidies, many governments are diverting enormous resources to immature renewable energy technologies in a very inefficient way. We do get more clean energy. But at a very high cost, and not enough of it to make a real change.

Goals will not be met

Besides, and here is the real problem, forced adoption is manifestly not working as intended. While the adoption of renewable energy is definitely growing worldwide, the rate of growth is still too modest, if the goal is to replace fossil fuels before global temperatures climb up even further. In plain language, we have chosen a very expensive medicine that in the end will not be able to cure planet Earth –our intended goal.

And it gets worse. Notwithstanding the solemn pledges made by so many world leaders at the signing of the 2015 Paris Accord, two facts should get our attention. Number one, even if all signatories dutifully fulfilled all their pledges about fossil fuels consumption cuts, this would make practically no difference on world temperatures. Got that? No difference. Number two, at this stage, no country is on track to fulfill the energy consumption pledges they made.

So, argues Lomborg in his book, here the situation becomes almost absurd. Many countries are committed to spend a fortune on something that will produce almost no tangible effect. And we shall fail to meet our targets anyway.

A different approach?

If this is indeed so, may be it would be good to pause for one second and take stock. Please note that Lomborg is not a “climate denier”. In his book he repeatedly states that climate change is real, is man made, is due to fossil fuels consumption and that it will have mostly negative consequences for the planet.

So what is to be done? Lomborg proposes a different, two tracks approach. He argues that instead of spending a fortune on renewables that cost too much, (especially when it comes to the meagre budgets of poor developing countries), and produce little, it would be wiser to invest in adaptation measures aimed at mitigating the impact of climate change.

Mitigation measures

For instance, we know that higher temperatures are causing the increased melting of ice caps on the two Poles of the Earth. Ice turning into water is causing progressively higher sea levels. Overtime, higher sea levels will cause the flooding of many coastal areas around the world. If we do nothing, in a few decades scores of cities (think Miami, New York, Mumbai, Shanghai, Barcelona) will no longer be suitable for humans. We know all this. And this is very serious.

However, remedial actions are possible and reasonably inexpensive, provided we start working now on the necessary countermeasures. Indeed, Lomborg argues, humans have been building dikes to keep the sea away for centuries. Ask the Dutch, whose country is largely at zero elevation and about 30% below sea level. The Dutch have been building protective barriers aimed at preventing flooding for centuries.

Of course, it would be much better if we could prevent higher sea levels. But at the moment we simply lack the technologies to stop higher temperatures and hopefully reverse this global warming trend. Therefore, says Lomborg, let’s mitigate the impact of higher sea levels caused by melting ice. Let’s adapt to this unfortunate development by protecting coastal areas using engineering technologies that are well known and efficient.

More R&D spending will give us new energy sources

That said, Lomborg does not conclude that workable clean energy solutions are impossible. He simply says that what we have developed so far will not do the trick. Nonetheless, he strongly recommends that all advanced societies engage in a truly robust R & D effort aimed at exploring new energy technologies. Eventually we shall come up with something that will be both clean (zero emissions) and super efficient. At that point consumers will not need incentives, or tax breaks to adopt it. The new clean energy technologies will be chosen because they will be better and cheaper.

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 Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




The End of Hong Kong

By Paolo von Schirach

WASHINGTON – Hong Kong as we knew it –an island of economic (and at least to some extent) political freedom living a somewhat precarious, semi-independent existence as a special status appendage to mainland China– is now finished. China just killed it.

For a while, hesitation

A while back, confronted with the defiance of the Hong Kong citizens who were protesting almost daily, desperately clinging to the hope that somehow they would be able to preserve their exceptional autonomous status indefinitely, (or at least for a much longer period of time), the Chinese government hesitated. It allowed loud and at times violent protests that would be simply unimaginable in the mainland.

New course

But now the leaders in Beijing changed course –in a dramatic way. They made what is clearly an irreversible decision regarding ways to put an end to Hong Kong’s open rebellion. A Chinese national security law will be applied to Hong Kong. Along with this momentous decision, comes a simple message. From now on, the recalcitrant trouble makers in Hong Kong will be arrested and punished, harshly. All the others are on notice. Hong Kong will be tamed, with force. And, if this tough Beijing approach to a territory that is supposed to enjoy special autonomies for many more years looks bad in front of world public opinion, so be it.

Chinese pragmatism?

If we step back, the world used to view China’s willingness to accept that Hong Kong, as of 1997 a territory under its sovereignty, would continue to operate according to vastly different (Western) principles of economic and to some extent political freedom (the legacy of British rule) as a sign of reassuring Chinese enlightened pragmatism.

Well, it turns out that China now decided that Hong Kong is too big of a problem, and therefore it must come under full mainland control. The massive demonstrations organized by those who feared that this development might come about –Chinese direct control– somewhat predictably, triggered this very outcome. Henceforth, a national security law from mainland China will be applied to Hong Kong. Therefore, no more Hong Kong special status. Everybody take notice: this is the beginning of the end, in fact the end, of any residual meaningful autonomy and related freedoms inherited by the Hong Kong citizens from British rule that were supposed to be preserved for many more years, based on the handover accords between China and Great Britain.

The end of Hong Kong

Of course, this also means that any hope for Hong Kong’s continuing viability as a vibrant global financial and trade hub, sustained by its special status and related freedoms as a territory that is in essence a free appendage to autocratic China, is now gone.

Make no mistakes. With this open assertion of Chinese power over the territory, Hong Kong is finished –politically and economically. Most fundamentally, this move by Beijing also spells out that China does not have any problems in contravening both the spirit and the letter of the 1984 Sino-British Joint Declaration which explicitly stipulated that Hong Kong would retain its distinctive system and laws for 50 years after the 1997 end of British colonial rule. So, we have to conclude that, according to Beijing, international commitments are binding until they are not, based on its discretion.

How is this possible?

Many observers may argue that there must be some mistake here. This dire scenario cannot be true. Why would China kill Hong Kong, the goose that lays so many golden eggs? Along with the stick of this tough new national security law, surely there must a carrot somewhere. There must be some compromise offer coming from Beijing, some new arrangement that will preserve Hong Kong’s status as a vibrant global trade and financial hub. Hong Kong, the optimists would say, plays a really unique role. It is too valuable to China. As a minimum, it performs a useful role as an open western-style gate linking China’s opaque economy to the free trading world. Why would China destroy this tool?

Hong Kong no longer so important for China

For two reasons. Reason number one. China concluded that tolerating open defiance from some of its subjects is bad for the image of the ruling Communist Party that is supposed to be in control of everything. Yes, there may be some flexibility regarding special situations, (and Hong Kong would be one of them), but only as long as there is complete understanding that on fundamental matters there must be total compliance with the dictates coming from Beijing. Clearly, a large portion of Hong Kong’s citizens do not agree with this understanding. Hence their defiance expressed via protests. And now Beijing tells them and the world that enough is enough. Open defiance will be crushed.

Reason number two, Beijing’s leaders must have concluded that the tremendous growth of the Chinese economy in the last thirty years over time reduced the strategic relevance of Hong Kong as a precious bridge to the West. China obviously concluded that, while this loss is regrettable, it is no longer that significant.

What about the damage to China’s image around the world?

But here is the open question. Will Beijing come to regret this choice? Have the Communist Party leaders in Beijing fully assessed the damage to China’s image and prestige around the world? Don’t they see that international public opinion, already suspicious about China’s behavior, will become even more skeptical about the notion that China has become a responsible global citizen?

In Hong Kong, at this point the people do not need additional evidence to be convinced that they are doomed. Clearly the Hong Kong business elites, as well as the ordinary citizens, see the full implications of the new national security law. And the global companies that have been operating in Hong Kong because of its special status that granted western-style freedoms, and because of its unique role as a regional hub and as the intermediary between global business and mainland China, see this as well. Once it becomes clear to all global investors that going forward Beijing will run the place at every level, and that the local government no longer matters, this will spell the end of Hong Kong’s as a vital economy. Therefore, we can expect to see an exodus. may be not a stampede, but an exodus out of Hong Kong.

People will leave

We know that the British government already offered to those Hong Kong citizens who are so entitled (about 3 million) to relocate to the United Kingdom. Expect many of them to take advantage of the offer. Others will try to follow them, and/or try to go somewhere else: be it Taiwan, Singapore, Australia, Canada, or the US. The smart and wealthy most probably already have contingency plans in place, (second passports, investor visa and property in other countries), that will soon be activated.

The logical consequence of all this is that in a not so distance future Hong Kong will become something like a ghost town. Not literally, of course, but in practice. The vital juices of the former British Colony are kept flowing by the tens of thousands of entrepreneurs who run large and medium local businesses that have prospered because their owners had the confidence of living under a regime of significant personal and economic freedom. If this regime is indeed over, and my sense is that it is over, then Hong Kong as we know it is over.

Miscalculation?

The Chinese government obviously factored all this before declaring that its national security law now will be enforced in the Territory. However, I am not sure that they have fully evaluated the ripple effects, the long term consequences of what they are doing today. As indicated above, I am sure they evaluated the economic pros and cons and concluded that, with a much bigger and much more sophisticated mainland China economy, Hong Kong’s role is no longer that important for China’s growth and welfare. Therefore its loss as a hub for global finance and trade is really not such a big deal. Shanghai can replace it. And that may very well be true. However, and here is Beijing’s miscalculation born out of hubris, in so doing the ruling Chinese Communist Party is also showing the world what China is all about.

The true face of China

Now it comes out in the open that, when dealing with China, there are no nuances, and no special considerations. In this new world, as defined by Beijing, there is rising China’s power. The others have a choice to be either compliant vassals, or opponents. Noisy opponents will be dealt with using whatever means may be available until they accept their role as vassals.

Hong Kong is obviously a special case, with unique features. It has a special history. After 1997 it became legally part of China. Yes, we know that. Yet, precisely because of Hong Kong’s unique history and features, it was pointed out by the optimists outside of China as a good and reassuring example of Chinese wise pragmatism, suggesting that there will always be the possibility of mutually satisfactory agreements with a Chinese government deep down committed to further global progress through a variety of deals with its partners around the world. You know: “Live and let live”. “No matter what, we can find a productive way to get along”.

Well, not so. The deal made with the UK back in 1984, way before the Territory was handed over to China, guaranteed that Hong Kong would enjoy its special status for at least 50 years after China would regain sovereignty over the Colony in 1997. That deal has now been broken. Hong Kong’s protesters will be silenced. Many will go to jail. The lucky ones will escape or learn to be quiet.

Not like us

Sadly, Hong Kong is over. And now the world will look at China with different eyes. This turn of events will not benefit China’s image and prestige at all. Finally the world, in particular the rather absent minded, wishful thinking old democracies, will come to the realization that getting close to China under the assumption that “the Chinese have become more ot less like us” was and is a mistake.

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




True Globalization Must Rest On Shared Values

By Paolo von Schirach –

WASHINGTON – The globalization we know has been driven primarily by the explosion of new cross border business opportunities created by truly disruptive technological innovation. Almost overnight, broadband internet (enabled by a robust global network of fiber optic cables) created a new, zero-cost modality to communicate and share enormous amount of data across the globe.

Moving goods became easy

When it came to transporting physical goods, the standardization of shipping technologies –same containers, same container ships, same container handling facilities used by all trading nations– accompanied by super efficient IT systems for managing and tracking millions of items in real time, made all this possible. Add to the mix huge infrastructure modernization (new rail freight lines, new highways, new airports, new ports) in major new industrial countries like China and we see the contours of the enabling environment for globalization.

Complex international supply chains that in most cases optimized results while reducing costs came to life. Combined with the outsourcing of labor intensive production from the US, Europe and Japan to low labor cost countries, they further contributed to the optimization of production, higher profits for many corporations, and lower prices for millions of Western consumers.

Not just about technology

We know all that. But here is the problem. Globalization should not be only about the successful adoption of new technologies that greatly facilitate cross border economic activities. Globalized business activities should take place within a global environment in which all the players sincerely adhere to the same rules, inspired by the same shared values.

And here is the problem. We do not have a robust rules based global environment in which norms are clearly and genuinely embraced by all participants, and serious penalties are imposed on rules-breakers by an impartial authority.

The World Trade Organization, WTO, may constitute an embryo of such an authority; but it is not the real thing. The WTO does not even come near to having anything close to the investigative and enforcement powers of a national government overseeing domestic commerce norms.

China not playing by the rules

There is no point here in repeating the long litany of complaints against Chinese behavior when it comes to international trade and investments. But it is worth noting that, for whatever reasons, the Western Nations that created the basic architecture of a rules based free trade system, while fully aware of Chinese non-compliance, for decades gave China a pass.

May be it was just wishful-thinking. However, for some reasons, after China entered the WTO, (December 11, 2001), most Western leaders concluded that China had turned a page. The leaders in Beijing were essentially done with the old command economy. They were eager to shed its legacy, while embracing Western style free trade, with all its rules. While China might take its time to fully become “one of us”, many observers had concluded that it was just a matter of time.

It did not happen

Well, now there is a growing consensus that that benign assessment had been not just premature, but flat wrong. Yes, there might have been a time, especially during the 1990s, in which genuine reformists within China had tried to articulate a new agenda aimed at turning the country into something close to a free market economy.

However, the elevation to supreme and now absolute power of President Xi Jingpin in 2012 finally convinced even the most optimistic analysts that this benign transformation within China, which would include its genuine acceptance of the Western rules based system it entered in 2001, is simply not going to happen. On the contrary, the signals from Beijing are that China has the ambition to create a new China-centric world order in which regional powers and others would follow a Chinese inspired and led international trade system. If we take these plans seriously, then we realize that the problem is not that China wants to be a stronger competitor within the existing system. China wants to create a new and improved system fashioned according to Chinese principles and “sell” it to the world as a better alternative to what the West created over time, after the end of WWII.

Be that as it may, and whatever your take on grandiose Chinese mega-projects like Belt and Road, it is clear that most of our benign assumptions regarding a Chinese progressive and indeed, inevitable, “conversion” to free market capitalism were out of place.

What’s next?

This being the case, what’s next? What should come next in the West is a genuine effort, hopefully led by an enlightened American Government, aimed at strengthening ties, at all levels, among all the capitalistic democracies, (The EU, Canada, Japan Australia, New Zealand and South Korea should be on top of this list), and other countries clearly willing to work within a rules based, free market international order.

This should not be about some kind of “Cold War 2.0” with China. But it should be about being inspired by the principle that, at least in general, it is better to do business with countries that share your values.

By refocusing its efforts, at the same time the West would send a powerful yet very simple message to China. The world operates according to principles of fairness, compliance, reciprocity and transparency. If China were genuinely willing to play by these rules, then they are welcome. There would be no issues. But the burden is on Beijing to show, through actual performance over time, its genuine commitment to the rules based system it seemed to have embraced about 20 years ago when it joined the WTO. Until then, the Western approach to trade and investments with China should be inspired by utmost caution and prudence. Assuming that “they are just like us” is a bad starting point. They are not like us.

Western principles

In the Western world the assumption used to be that more widespread prosperity is the outcome of innovation and increased levels of economic activity. In turn, innovation, enterprise and trade are made possible by the existence of political and economic freedoms protected and upheld by freely elected governments via the enforcement of sensible rules aimed at protecting the integrity, fairness and transparency of all economic activities.

I strongly believe that it is about time to forcefully reaffirm these principles, both domestically and in all matters related to international trade and investments. And there is no better way to do so than by establishing win-win international trade agreements with like minded partners, based on fairness, true reciprocity and therefore mutual advantages.

Do business with like minded people

A few years ago (beginning in 2013), there was a great deal of talk of a major US-European Union Free Trade Agreement, known as The Transatlantic Trade and Investment Partnership (T-TIP) that would greatly incentivize economic, trade and investment relations between the two sides of the Atlantic. Here is how the website of USTR (United States Trade Representative) described it:

The Transatlantic Trade and Investment Partnership (T-TIP) is an ambitious, comprehensive, and high-standard trade and investment agreement being negotiated between the United States and the European Union (EU). T-TIP will help unlock opportunity for American families, workers, businesses, farmers and ranchers through increased access to European markets for Made-in-America goods and services. This will help to promote U.S. international competitiveness, jobs and growth.

The U.S. and EU economies are two of the most modern, most developed, and most committed to high standards of consumer protection in the world.  T-TIP aims to bolster that already strong relationship in a way that will help boost economic growth and add to the more than 13 million American and EU jobs already supported by transatlantic trade and investment. T-TIP will be a cutting edge agreement aimed at providing greater compatibility and transparency in trade and investment regulation, while maintaining high levels of health, safety, and environmental protection. T-TIP presents an extraordinary opportunity to strengthen the bond between vital strategic and economic partners. [Bold added]

As you can see, the US Government at the time believed that this agreement would be extremely beneficial for both the US and the European Union. It also affirmed that enhanced economic ties would “strengthen the bond between vital strategic and economic partners.” Negotiations began during the Obama administration, but then it all fizzled after the elections of 2016, because of President Trump’s lack of interest in any new international trade agreements.

It is still possible to negotiate free trade with Europe

Well, assuming a relatively quick end to the current coronavirus global emergency, and a new US administration sincerely interested in both affirming and strengthening a rules based global commerce regime, a good place to start would be an ambitious plan to harmonize the myriad of rules that create de facto impediments to the free flow of goods –and especially services– between the US and the EU. If you consider that the US and the EU together represent the majority of world trade, the impact of a truly liberalized regime for trade and investments between these two giants would be revolutionary, with significant, world wide benefits.

Show the vitality of the Western world and its values

Western Europe and the United States are the two historic pillars of Western Civilization. While some believe that the West is well on its way to inevitable decline, there is no law of physics that establishes this.

An invigorated transatlantic trade and investment regime would act as a powerful tonic. It would open up new opportunities in the US and in Europe. It would strengthen ties among like minded societies. It would spur new joint ventures and mutually advantageous cross pollinations, while opening new avenues for cooperation at multiple levels.

But, more than anything else, a successful agreement that creates real value for all the stakeholders would show that like minded governments, inspired by the same or at least very similar values, can and will cooperate for the benefit of their societies.

Given the enormous amount of technical issues involved, this goal of a Transatlantic Free Trade Area may be very difficult to reach. But it is doable. The benefits, on both sides of the Atlantic, will be immense. And this agreement would be a powerful example of values-driven globalization.

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 Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




Tesla Batteries and Climate Change

By Paolo von Schirach —

WASHINGTON – Notwithstanding solemn pledges issued by many governments, no country that really matters is taking the fight against climate change seriously. Headline grabbing global agreements detailing ambitious emission reduction goals mean almost nothing, as they are purely voluntary, and therefore non verifiable, and certainly not enforceable.

Policy-makers will not act

Do not expect more on this front. The truth is that all policy-makers live under the constraints and pressures of urgent matters that require immediate attention. Catastrophic climate change scenarios regarding what will materialize in our world years or even decades from now do not motivate anybody in a position of responsibility to engage –today– in serious and very costly policy changes.

Innovation will deliver results

That said, there is hope when it comes to drastically reducing dangerous emissions. And hope rests on coming up with cost-effective technological innovation. Man made global warming leading to climate change is largely due to the continuing use of dirty emission producing technologies and industrial processes, most of them developed quite a long time ago. The reason why we keep using them, with only some improvements here and there, is because any currently available alternatives would be far too expensive. However, innovation may change all this. Human ingenuity should not be discounted.

Tesla leading on new battery technologies

Take Tesla, for example. Under Elon Musk, its controversial founder, Tesla dared to think of commercially viable electric vehicles (EVs) many, many years ago, when nobody –literally nobody– in the automotive business believed that this might be possible.

Well, fast forward to today and we see how tiny Tesla has become an EVs sector leader. True, the jury is still out on Tesla’s long term commercial viability. However, a relentless effort to improve its battery technology and therefore reduce cost structure and increase both vehicle performance and company profitability may indicate that this maverick EV company may not just survive but actually lead a boom in EVs production.

We know that the main obstacle on the way to mass produced, affordable electric cars is relatively unsophisticated battery technology. While there has been progress, the batteries used to power most EVs are still expensive, very heavy, and not very efficient compared to the traditional internal combustion engines running on oil derived gasoline.

A game changer

Tesla, however, (and many others innovators around the world working on the same or similar issues), seem to have made very significant progress in improving battery performance on all fronts: life of the battery, cost and weight of the battery, amount of energy stored in the battery, and therefore distance that can be covered with a single charge, and shorter recharging time. Many of these battery technology breakthroughs have just been announced by Tesla, and it remains to be seen how the actual vehicles sold to real customers will perform. Still, assuming that most of what Tesla announced is true or close to becoming true, then we are getting to, or very close to a tipping point when it comes to the mass adoption of electric vehicles.

Cheap, high performance electric vehicles will generate mass markets

It is no secret that so far electric vehicles have had only limited appeal. They are still regarded by most consumers as too expensive. They are fancy gadgets for the rich who can afford to pay extra money for a high-tech car, so that they can brag about being green and cool.

Most budget conscious people considering buying a new car look at the price and then the operating cost of the car (mostly fuel) over the time in which they will use it. For these reasons, an expensive EV coming with the additional problems of limited range, limited numbers of charging stations and a long recharging time does not look appealing.

But a new generation of Tesla vehicles powered by a super efficient, low cost, lower weight, high performance battery that will essentially last for ever, would be a true game changer. It would signal a new era for EVs: from experimentation and tinkering to mass production based on proven superior technology and lower prices.

End of gasoline

When this happens, high performance and cheaper EVs will inevitably displace gasoline powered traditional cars. Assuming that these battery technology breakthroughs will work as expected, we can reasonably conclude that EVs will begin to dominate the global auto industry in just a few years. This will be the beginning of the end for traditional cars. And this will also be the end for many refiners currently producing the rivers of gasoline necessary to power hundreds of millions of traditional cars. Further upstream, the virtual end of gasoline will also mean significantly lower demand for crude oil.

Oil will survive, at least for a while

Of course, we do know that even if it all happens as planned regarding a new generation of batteries, with Tesla and many others inundating the global automotive market with affordable, state of the art, super efficient EVs, it will take years before the world automotive fleet will become totally electric. In the meantime, there will be still demand for gasoline and therefore oil.

The oil industry will survive. Let’s not forget that beyond gasoline oil is also used to make diesel fuel for trucks and other heavy vehicles, and powering ships’ engines, not to mention jet fuel, heating oil, and plastics, and what not. Therefore we can expect that there will still be an oil industry ten or even twenty years from now, (unless other technological disruptions will introduce alternatives to other oil-derived products). However, it will be a smaller, streamlined oil industry; and it will be dominated by the low cost producers, (think Saudi Arabia). In a world market characterized by lower and declining demand for oil, only those who can be and stay profitable with oil at $ 10 per barrel or less will be able to survive.

The end of shale?

This being the case, the future of the recently reborn US oil industry appears very uncertain at best. The economic sustainability of the US shale revolution, itself the fruit of American technological ingenuity, was and is predicated on fairly high oil prices. While the cost of fracking operations has come down significantly in the last few years, fracking is still a fairly expensive activity. It is hard to believe that companies struggling in 2019 to stay alive, let alone do well, with oil at around $ 50 per barrel or less, will be able to survive when crude will go down to $15 or less, on account of soft global demand.

Innovation spill over

Improved battery technologies will also transfer to other applications, such as efficient storage for electricity produced by renewable sources such as wind and solar, something that will most likely increase their appeal and marketability vis-a-vis traditional fossil fuel based electric power generation. Overtime, expect fewer (if any) coal fired power plants, and eventually fewer natural gas power plants that are now necessary given intermittent generation from renewables.

You see where we are going here. We are looking at the real possibility of cascading positive effects, affecting different sectors, all born out of technological innovation spurred by the goal of getting a better battery for Tesla’s EVs. And this is the magic of innovation. It spreads. Tesla was not born out of the need to address a well defined market need. True enough, American drivers were routinely complaining about the high cost of gasoline. But all they wanted was cheaper gas. They had not articulated this complaint into a demand for an alternative to the traditional car powered by an internal combustion engine.

And here is the beauty of innovative minds. Elon Musk launched into an industrial adventure that most analysts dismissed as silly, and therefore destined to failure. But now Tesla, the company he created, despite all its challenges, may be on the verge of deploying another generation of technological innovation that is likely to transform the EV sector, and consequently the entire automotive industry in the US and worldwide.

We need more than new batteries

Back to global warming, it is clear that even radical transformations in the automotive sector leading to sharply lower demand for gasoline and therefore crude oil will not be enough to cause dramatic emissions reductions. More innovation will be needed to radically transform industrial processes, from cement production to petrochemical plants and more, that currently produce harmful emissions.

Green and profitable can go together

However, the Tesla relentless quest for better and more efficient car batteries is a good illustration that it is possible to pursue at the same time profits, a more efficient propulsion technology, and drastically reduced greenhouse emissions. It is not true that trying to be green is a luxury that is simply not practical nor affordable for most industries.

Tesla’s innovation efforts may be driven in part by the desire to produce a perfectly green car. But we should keep in mind that Tesla is a business, not a charity. Ultimately Tesla has to serve its shareholders. They want to see a return on their investments. And this means more cars sold at a profit. By pursuing better batteries that will increase performance while reducing cost, the company is strengthening its competitiveness vis-a-vis conventional vehicles, with the hope that millions of consumers will prefer affordable EVs, not because they are green, but because they are better value for money.

By the same token, assuming that some new industrial technologies will be able to eliminate emissions and increase productivity and profits at the same time, you will have classic win-win propositions in which being green is also good for business.

A long shot, but the only one we have

While this innovation driven approach may be a long shot, this is the only practical way to cut down emissions, stay profitable, and avoid the dire effects of global warming. International agreements that cannot be enforced produce short-lived feel good moments, and not much else. Innovation will be the game changer.

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 Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




US Response to Coronavirus Dictated by Panic, Not Policy

By Paolo von Schirach –

WASHINGTON – Nobody is prescient. No one could have foreseen the timing and the extent of the coronavirus pandemic explosion which originated in China and then from there spread all over the world. However, as I noted elsewhere, the US was especially vulnerable, because it was utterly unprepared to meet any public health emergency.

No systems, no plans

Amazing but true, America had no “pandemic early warning system” in place so that a timely alarm could be sounded, nor did America have any meaningful public health “rapid reaction force” in place that could have been activated after the alarm had been sounded, in order to deploy all the necessary medical equipment and other materials where mostly needed, while ordering and enforcing the necessary contagion prevention measures, (immediate widespread testing, quarantines, social distancing, and lock downs).

True, eventually some of these measures were ordered and implemented here in the US. But, lacking anything even resembling a master plan, all this was done very late, and in a horribly inefficient, fragmented fashion, in a climate of confusion, disorientation and –at times– sheer panic.

Panic led to an extreme response

And the panic created by a disease with no cure and catastrophic predictions about millions of dead Americans, unless we closed everything down, led to the fateful decision to shut the country down, with full knowledge of the incredible damage to the economy that this decision would imply, including a slew of bankruptcies, and tens of millions of suddenly unemployed workers.

Let me make this clear. It did not have to be this way. We closed America down because, at the time, with no deployable countermeasures available and a deadly disease spreading rapidly, there seemed to be no other viable choice, if the main goal was to save American lives.

And, again, there was no other practical choice because the US had no deployable countermeasures, no contagion mitigation systems that could be activated. Here is the sad truth. When coronavirus arrived, America was literally a sitting duck, completely unprepared and therefore defenseless.

Amazingly, this means that America, the world’s leading economic power, leader in medical research and information technology, had not thought that a pandemic could occur here, and therefore had done essentially nothing to prepare for it. As a result, when coronavirus hit, the US had no workable tools to slow down the advancing pandemic, except for quarantines and lockdowns — public health countermeasures first deployed in Europe in the Middle Ages, at a time in which public officials literally had no other remedies.

Taiwan, South Korea and Germany had systems

In contrast, other governments over time had developed pandemic preparedness plans, and they activated them –immediately, as soon as news of the pandemic originating in Wuhan, China spread.

In Taiwan the government had a system in place (created in the aftermath of the SARS pandemic in 2003) that was immediately set into action when the Taipei government realized that something bad was happening in China, back in December 2019.

In South Korea, almost overnight, the government deployed a robust virus containment strategy based on massive testing and subsequent isolation of all positive individuals.

In Germany, a national and regional network of testing facilities sprang into action, almost immediately. As a result, Germany, to date, has by far the lowest number of fatalities per unit of population compared to the rest of Europe.

Because they had robust and tested “damage limitation strategies”, these countries had tools to limit contagion. Their number of fatalities is quite low, despite no cure and no vaccine. Which is to say that, unlike the US, other governments had thought about the possibility of a pandemic and had therefore funded and put in place policies and countermeasures that helped them contain the damage. If they could do this, so could we. The fact that we did not is a huge stain on America, the country that is supposedly ahead of everyone in innovation, science and high tech.

Early warning system would have contained the pandemic

Let me be clear. A US early warning system would not –I repeat, would not– have prevented this virus for which there is no cure from reaching the US and infecting people. However, a sophisticated early warning system, (which includes the ability to learn as early as possible about an unfolding epidemic anywhere in the world, and then quickly track and isolate positive individuals in order to prevent or at least slow down contagion), combined with prepositioned stockpiles of medical emergency material, (masks, protective gear, ventilators, field hospitals easily deployable by the military in high incidence localities), most certainly would have slowed down this pandemic, while reducing its spread and scope. Which is to say that, if America had had a robust pandemic plan in place, we could have avoided shutting down almost the entire economy, while probably saving thousands of lives, even in the absence of a cure or vaccine.

Millions of victims?

As we had none of the rapid reaction tools in place, overtaken by panic, federal and state policy-makers concluded that the only choice before them was between condemning literally millions of Americans to a certain death caused by an advancing coronavirus, or closing down almost the entire US economy in order to slow down contagions, this way preventing a horrible human tragedy. And so, lacking any plausible alternatives, Washington and most of the 50 States decided to literally close down the biggest economic power on Earth.

What is terribly wrong with this scenario is that this “either we kill people, or we kill the economy” choice could have been avoided by having a tried and tested contagion prevention national plan in place that would have worked like a very powerful shock absorber. This is what Taiwan, South Korea and Germany, among others, did –rather successfully.

Of course, as I said above, even if America had been properly organized to react to this pandemic, there would have been some contagion, many deaths, huge economic damage and enormous dislocation resulting in a recession. Hence the need for the US Government to intervene with emergency funds. But, for sure, both the economic dislocation and the emergency interventions would not have been on this scale, (almost three trillion dollars!), because the damage, while still very substantial, would have been far more limited.

Are we going to learn from this disaster?

I really hope we learnt our lessons here; even if at the cost of more than 50,000 lives, and counting; and close to three trillion dollars in emergency aid to corporations and individuals, and counting. I hope that by now our elected leaders have realized that the US cannot afford to have essentially no workable rapid reaction system in place when it comes to low probability but extremely high risk public health occurrences.

Of course, it will cost money to set up and maintain the necessary early warning and rapid reaction infrastructure, trained workforce and chain of command.

But this strategic investment will be only a fraction of the close to three trillion dollars we have already spent so far, not to mention the fact that early detection will give us the ability to save thousands of lives by preventing out of control contagion via timely quarantines and other targeted isolation measures.

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 Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




US Must Have a Plan To Face Future Health Crises

By Paolo von Schirach –

WASHINGTON – Here is the hard truth. America had no plan designed for national health emergencies that could be activated as soon as policy-makers realized the threat of coronavirus. There was almost nothing in place. There was no “early warning system” that would sound the alarm. There was no structure, no prepositioned equipment that could be deployed to crisis points. No well oiled chain of command.

No plan

In a word, there was no comprehensive, tried and tested plan that would integrate public health monitoring, data gathering. There were no models to assess the possible economic impact of public health countermeasures. Furthermore, there were no stockpiles of emergency materials, and no proven and tested logistics system to be activated in order to deliver such material to crisis areas. Sadly, whatever has been done so far, it is all about “make it up as you go”.

It did not have to be this way. By now we know that Taiwan, for instance, reacted promptly and effectively to the very same crisis, because they had a robust plan in place. The plan was generated after the big scare caused by SARS, another respiratory illness that originated from China back in 2003. If Taiwan could create a plan, so could we. There is no excuse for having essentially almost nothing in place.

Rely on what the doctors say

In this catastrophic leadership void, by default, policy-makers sought the counsel and advice of the subject matter experts: i.e. the top national medical authorities. And the medical experts did the best they could on the basis of the extremely limited knowledge they had about this coronavirus.

Confronted with a rapidly expanding global epidemic caused by an unknown pathogen for which there is no treatment or vaccine, the medical authorities, after having minimized the extent of the public health threat, eventually gave what they thought was the best prudent advice.

If the government really wanted to stop this epidemic –they counseled– then it had to order a nationwide, drastic quarantine regime covering as many people as possible. This is only known remedy to stop or slow down contagion. In other words: “Shut down the US economy for…as long as it takes”.

If you want to stop contagion, this is reasonable and prudent public health advice. Except that the medical authorities did not even try to balance the public health advantages of “social distancing” against the colossal economic damage caused by shutting down almost the entire country.

Worst case scenarios fueled panic

At the same time, the same medical authorities, trying to play it safe, gave prognostications about contagion and fatalities based on worst case scenarios. Until not too long ago, they were talking about possibly millions of Americans dead as a result of coronavirus. Imagine that. Millions of Americans would die because of a new disease for which there is no cure.

While we were treated with scary scenarios of millions of dead Americans, the news media wittingly or unwittingly fanned the flames of a growing national panic. The 24/7 news was all about the relentless growth of the pandemic. It was all about semi-desperate doctors and nurses working impossible long shifts in overcrowded hospitals facing a tsunami of severely ill patients, while lacking even basic protective gear for their staff. Not to mention lack of beds and critical equipment, while suppliers struggled to meet unprecedented demand.

Country in chaos

So, the general impression was that America was in chaos. We were confronted with a never-happened-before historic calamity that might kill millions, while we had nothing to fight it, except for quarantines, a physical isolation remedy first deployed by the Republic of Venice during the Plague of 1347.

From the standpoint of policy-makers, if almost certain death for millions is the end game unless we quarantine America, then even the most drastic jobs-killing measures seemed sensible. Thinking about how to save the economy when everybody around you may be positive and soon enough intubated, with tens of thousands ending up dead, seemed stupid.

Catching our breath

Now, a few months into this crisis, we are beginning to catch our breath. National and state authorities, after having thrown trillions of dollars to corporations and individuals in an effort to salvage a shuttered US economy, are at least beginning to look at how we can safely reopen, in increments, our semi-comatose 20 trillion dollar economy. At the same time, based on various accounts, there is reasonable hope that some kind of treatment and, down the line a vaccine, will “soon” become available.

We must have a plan

It did not have to go this way. As the case of Taiwan demonstrates, even without a cure or a vaccine, it could have been possible to plan for such an epidemic, this way minimizing confusion and frictions, and possibly saving many lives.

During the Cold War, when nuclear war was a distinct possibility, US Presidents relied on the ultra-secret SIOP, or Single Integrated Operational Plan. Good or bad as they were, periodically updated SIOPS tried to created a comprehensive scenario that would capture “everything” in case of a possible all out nuclear conflict; so that the Commander in Chief would have the opportunity to see “the whole picture” before making critical decisions most likely leading to unprecedented destruction and millions of lives lost.

On a similar note, after the first oil shock of 1973-74, the US and other oil consumer countries created the International Energy Agency, IEA. The IEA would serve as an information-sharing clearing house linking oil importers and as an energy policy coordination body, in case another major supply disruption would take place at any time in the future.

Furthermore, the US decided to create a massive Strategic Petroleum Reserve, (SPR) essentially a huge stockpile of crude oil that could be released into the US economy in case of a sudden crude oil shortage caused by war or other occurrences. The IEA and the SPR could not prevent another oil supply disruption. But they would mitigate the impact of any supply cuts.

Public health is national security

Well, it’s time for America to develop the public health equivalent of an IEA, SPR, and nuclear war SIOPs. I am not suggesting that the goal here is to gain the capacity to predict, prevent and quickly defeat any possible public health emergency. That is impossible.

However, just as we did with the horrible nuclear war scenarios, or the possibility of devastating oil supply cuts, as a nation, as a minimum we must have reliable early warning systems that will alert policy-makers when something unusual happens anywhere in the world on the public health front. And we should have the “data fusion centers” that will help all the experts and policy-makers, so that they will know what is actually going on in “real time”. With the advantage of timely intelligence, then public officials would be able to properly direct prepositioned equipment to the proper locations, while immediately ordering the appropriate contagion limitation countermeasures.

Balancing public health and economic survival

Furthermore, America needs to have comprehensive plans envisaging different scenarios when it comes to balancing public health countermeasures and the economic impact of such countermeasures. Elected leaders need to be able to see the implications and consequences of difficult decisions.

Elected leaders are the policy-makers in charge

Policy-makers relying on various inputs are the ultimate decision-makers. It makes no sense for elected leaders to say: “We do not know much about this, therefore we shall follow the advice of the medical experts”. Medical experts are not elected policy-makers. Of course, their input is essential. But they are not economists or public administration experts. They see a critical piece of this troublesome reality. But not the whole picture.

Indeed, at what point does the remedy –shutting everything down in order to prevent contagion– becomes worse than the disease in terms of destruction of businesses and employment? Policy-makers should do their best to save lives. But they should be able to assess the danger of killing the national economy against the worthy humanitarian goal of saving lives.

This is why policy-makers need real time data that will help build credible scenarios. All this should be part of a comprehensive, periodically updated plan.

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 Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




Wanted: A Coronavirus Manhattan Project

By Paolo von Schirach –

WASHINGTON – Regarding coronavirus, so far public policy in most Western countries focused on monetary and fiscal interventions. They are aimed at mitigating the disastrous economic impact of the government-mandated freezing of most activities and people to people interactions in order to stop contagion. But it should be clear to all that even vast amounts of money thrown at the US and other major economies will not be enough to stabilize a catastrophic situation caused by the “closing down”, for an indefinite period, of most advanced countries.

The limits of economic stimulus

A giant stimulus package, no matter how big, is at best only temporary relief. By now, we begin to understand that trying to save lives by shutting everything down is causing and will cause catastrophic economic devastation.

With virtually “everything” closed, millions of American workers are suddenly out of a job. Furthermore, in the US thousands of shaky companies, kept alive (before this pandemonium began) by low interest loans, will go bankrupt. Without any income, they are unable to meet their payments obligations to banks and bondholders. And when they go under, sadly they will bring down with them managers, workers and their families, shareholders, creditors, suppliers and more. The oil sector, battered by the global slowdown, is now on life support due to crude at $ 25 per barrel or less, the result of the price war between Saudi Arabia and Russia. And this is just a partial list.

Focus on a cure

So, since we need to keep the drastic people movement restrictions in order to prevent contagion and government-delivered economic relief is not enough, what else can be done?

Well, invest more –much more– where the solution to this crisis will be eventually found: in the laboratories and research facilities where scientists are already busy trying to find a cure and a vaccine for the illness caused by this coronavirus. I am sure that much is being done. But, we simply need to do more. May be much more.

Issuing checks to battered US unemployed workers and credit guarantees to companies in trouble provides important but only temporary relief. Investing the same money, or larger sums, in state of the art research aimed at finding a vaccine and/or cure for this coronavirus is a much smarter policy.

We need a Manhattan Project for coronavirus

We need an “All Hands on Deck” approach to this pandemic. We need a medical equivalent of the Manhattan Project, the secret American effort to develop an atomic bomb during WWII. The Manhattan Project probably looked like a fool’s errand at the time. The task was: invent something new and revolutionary, all on the basis of theories lacking any empirical verification. Some who knew about the secret program viewed it as a fantasy, a waste of time and money.

And yet, it worked!

While the Manhattan Project was about destruction, not saving lives, the use of the bomb secretly developed by the Manhattan Projects scientists against Japan resulted in an immediate ending of the war in the Pacific. This way, millions of lives were saved. The alternative would have been a US landing in Japan and then an enormous military undertaking leading to the conquest of the entire country, inch by inch, through a bloody fight against an enemy that would simply not let go.

A medical call to arms

Simply stated, today we need a “Manhattan Project equivalent”, a historic medical call to arms. As we engage in this massive undertaking, we should be comforted by the fact that, unlike the Manhattan Project scientists who were trying to invent something entirely new, we already have extremely valuable resources in the US and other Western countries.

Indeed, nowadays, we have great scientific talent in America, Europe, and Asia. There are thousands of skilled researchers, state of the art laboratories, sophisticated research tools and futuristic technologies unimaginable only a few years ago.

A clear statement from the top

What we urgently need now is a clear message from the President of the United States and all key policy-makers around the world: finding a cure is the number one priority. Key world leaders need to reassure all the capable scientists who are already working on coronavirus research that they will get all the support they will need.

“This is a global emergency. No red tape or delays. You will get –now– whatever you may need in terms of extra funding, additional staff, new equipment, shared platforms and what not, in order to facilitate and expedite your extremely valuable work”.

A well funded and properly coordinated effort, with easy exchange of findings, data and all relevant information among scientists in different countries, would constitute a modern equivalent of the Manhattan Project. Much of the critical research and experimentation work on the coronavirus is well underway. But policy-makers should elevate this critically important effort to the very top of the national and indeed global agenda, while providing all the assistance that may be required.

We shall prevail

I just cannot believe that with all the existing human and technological resources –if properly funded and coordinated– we shall not be able to find a cure that will beat this virus. Of course, we do not know the timeline. It may take a few months, or may be longer. But this is the way to go. We are way too smart to be confined to a public health policy option that prescribes killing all the Western economies in order to save lives.

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.




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.