All posts by John C. Hulsman

Squandering Bismarck’s Law: US Energy Policy Under Donald Trump

“God protects Fools, Children, and the United States of America.”

                                             –Otto von Bismarck (likely apocryphal)

 Introduction: The Meaning Behind Bismarck’s Law

 The edgy (and very funny) quotation at the head of this article is believed by much of the world. Foreigners have long had an in-joke—probably incorrectly attributed to Otto von Bismarck—about America’s obliviousness to its own fantastic luck. There is a modern technological corollary to Bismarck’s Law of America’s great good fortune. Despite the fact that European elites are broadly as well educated as their American counterparts (I myself went to St. Andrews University in Scotland), why is it that the US monopolises the game-changing innovators of the modern world, creating the people that in turn bring into being whole new cutting-edge industries out of nothing?

America has Alexander Graham Bell, Thomas Edison, Henry Ford, Bill Gates and Steve Jobs to its credit. This is an innovative first team unmatched in modern history. To many outsiders, this is just another sign that America (perhaps unfairly) is smiled upon by the gods.

Frankly, in Bismarck’s supposed quote, there is more than a little envy at work. Yes, America has been blessed by great good fortune, but as my new book, To Dare More Boldly: The Audacious Story of Political Risk, makes clear, far-sighted visionaries have made the most of it. For there are numerous practical reasons for the US’s ‘luck’ in terms of innovation. One of them revolves around a story I have recounted at a number of conferences, that while the American government did little to sponsor the Henry Ford or Steve Jobs, at least they beneficially left them alone.

Think of the practical work of creation, of Steve Jobs and Steve Wozniak tinkering away in Jobs’ garage, perfecting the personal computer. They simply couldn’t have done so in Europe. With its mania for over-regulation, working in a garage would have been forbidden, being considered an ‘unsafe work space.’ Yes, the more we look at America’s luck, the more the story regarding fabled Red Sox slugger Ted Williams comes to mind. Late in his career, Williams had a lucky bounce of the baseball and found himself with an undeserved hit. A rookie said to him, ‘Gee, Mr. Williams, that sure was lucky.’ The dour Hall of Famer replied, ‘The more I practice, kid, the luckier I get.’

Americans’ advantage is that they have been allowed to practice, to tinker at things, to dream and to realise those dreams, with the government (at its best) merely shrouding them in benign neglect. The country’s genius has not been primarily located in the public sphere—I can name many more bad presidents than good ones–but rather in the practical wisdom that if government leaves its people alone, their private, commercial genius will drive everything.

We who practice foreign policy analysis have an in-built bias towards public and governmental—rather than private and commercial—actions. It is what we have grown up studying and assessing, and where we are at our most comfortable. But such a statist interpretation of the world does not begin to fully explain a country such as America, with its genius for non-governmental, commercial solutions.

The shale revolution that occurred during the time of the Obama administration–with it again practicing the blessed innovative principal of benign neglect–is a case in point. Fracking, or hydraulic fracturing—using water and other liquids at high pressures to far more efficiently and cheaply force residual oil and gas to the surface through existing fissures—has utterly transformed the global energy industry.

Suddenly wells and whole fields of gas and oil that had proven uneconomical just years before were made viable across the American West, from Texas to North Dakota. This was a private, commercial engineering initiative that evolved over decades, and all without much (thank God) governmental involvement. Nevertheless, this revolution and its fruits have landed squarely, luckily, in Donald Trump’s lap. So looking at whatever President Trump’s energy strategy might be is entirely beside the point; it is the private, commercial shale revolution that matters for America and the rest of the world.

The Shale Revolution as game changer

 It is almost impossible to overestimate the importance of the shale boom. The numbers tell the tale and they amount to a revolution that has almost incalculable geopolitical and macroeconomic consequences for a world that has largely missed its monumental significance. With the advent of fracking, US oil production has increased 80% over the last decade. The US Department of Energy estimates that in 2018 American production levels will reach 10.3 million barrels per day (bpd), besting the all-time record set in faraway 1970. Of this fully 2 million bpd will be exported. The gas industry is being revolutionised too. By 2015, more than half of all gas produced in the US came from shale.

Nor is the shale boom a flash in the pan. The US Energy Department estimates that America has enough shale gas reserves (coupled with oil and other gas resources) to last for two centuries. Quite amazingly, the International Energy Agency (IEA) forecasts that US oil production is set to top that of energy superpowers Saudi Arabia and Russia in 2018, with more than 80% of global energy supply growth likely to come from the US in the next decade. Staggeringly, by the 2020’s, the IEA expects North America to be self-sufficient in energy.

The Permian Basin in west Texas, accessed through the fracking engineering revolution, is estimated to have as much oil beneath it as Ghawar, the largest field in Saudi Arabia. Further, the oil is far cheaper to extract than are the riches in most countries within OPEC countries. Almost overnight, the United States has risen phoenix-like from energy mendicant to transform itself into one of the global big three (along with Russia and Riyadh), a determiner of the global price of energy.

It would seem Bismarck’s Law holds regarding America’s endless luck. Just a few years ago, everyone thought the US would be perpetually consigned to be an energy importer for the foreseeable future, with all the geo-economic and geopolitical risk that entails. Suddenly, seemingly magically, in a blink of an historical eye, America finds itself one of the major energy producers of the world.

The Saudi’s Rockefeller Gambit fails to kill the Shale Revolution at its birth

 There are two great geo-economic takeaways from the advent of the Shale Revolution. First, the Saudis—until now the world’s primary energy superpower—have definitively failed to kill the Shale Revolution at its birth. Nothing can stop it now. Second, in trying to do so, Saudi Arabia unwittingly made shale the new ceiling for global energy prices for the foreseeable future.

Initially the Saudis attempted to kill shale, playing a version of a very old business game. Their John D. Rockefeller energy strategy—named for the late nineteenth/early twentieth century oil monopolist who would force overall oil production up (taking a temporary loss) and prices temporarily down in service of the greater goal of driving his competitors out of business and thereby boosting his overall market share over time—failed to work. While the price of oil plummeted a dizzying 70% from its June 2014 highs of $120 a barrel to a trough of just over $30 a barrel, shale did not throw in the towel.

 Constant shale productivity gains meant that US output fell only moderately, from a still impressive total at the time of over 9 million bpd. Also, turning shale wells on and off is far less expensive than regarding the fixed-rig wells in Saudi Arabia and the rest of OPEC, making shale for more price sensitive, as wells can be turned on and off like a faucet. In response, the Saudis were forced to suspend their game of energy chicken, instead giving into the inevitable, reversing course, with OPEC (and the help of an equally hard-pressed Russia) now cutting production frantically to limit the financial damage to its members. The September 2016 OPEC deal to cut oil output amounts to nothing less than Saudi Arabia’s surrender to the power of American shale.

The self-inflicted wounds of Riyadh’s Rockefeller strategy have driven the Saudis to economic extremes unthought-of in recent years. In 2015, the Saudi budget deficit amounted to $98 billion, or a whopping 15% of its GDP. While Riyadh has mountainous reserves, it needs the price of oil—the sole motor of its economy—to fetch around $85 a barrel to adequately finance public spending. Despite significant price increases of 35% over the last six months of 2017, this figure is still barely on the horizon today.

While the temporary anti-shale Russian-Saudi alliance, first put in place in September 2016, has proved remarkably durable–with both powers agreeing to keep cuts in place of 1.8m bpd until the end of 2018–it is now clear that nothing will be able to put the shale genie back into the bottle. A year on from the deal, shale production had actually increased by a very healthy 10.8%, year on year. While the Russia-OPEC deal has put a floor on the global energy price of around $50 a barrel, the shale revolution has surely put a ceiling on the global energy price, meaning energy prices will travel in a far narrower band than in the past.

The Saudi Sisyphus and the end of an era

Rather, the young, feckless Crown Prince Mohammed bin Salman (MBS), has blundered, as employing Saudi Arabia’s John D. Rockefeller strategy to permanently drive US shale out of the energy market has led to the exact opposite result. Unwittingly, the Saudis have made the Americans the new global energy swing producer, the permanent ceiling for the global price of oil. For just as prices inevitably rise due to Saudi and Russian cuts, more shale wells come online, stabilising the global energy price. Like the mythological Greek figure of torture, Sisyphus, MBS will roll the boulder of energy price increases up a hill, only to have it perennially tumble down as shale production increases in turn, over and over again.

 This, in its way, is as momentous a shift in global power as the stunning Brexit and Donald Trump political ructions. Whereas Brexit showed Europe to be in absolute decline, and the election of President Trump brings to an abrupt end 70 years of the US as the global ordering power, the Saudi’s meek surrender brings to a close the long age of the OPEC domination of the world’s energy market. The year 2016 truly saw the death of one world order, and the uncertain birth of another.

The boundless geopolitical riches from the shale revolution

 Coupled with the tar sands energy boom in Canada and the liberalisation of Pemex, Mexico’s heretofore state-controlled oil company, North America now stands as close to energy self-sufficiency as it is possible to be in the modern, interdependent world. If properly grasped, this is a geopolitical treasure almost beyond measure. Imagine the decrease in political risk if, instead of having to primarily focus the chaos of the Middle East in terms of securing its energy supplies, the US has to concentrate only on Mexico and Canada.

 The second great geostrategic benefit flows from the first. For the first time in modern history, the US will not have to worry overmuch about the Middle East (and with such tragic results). American imports from OPEC decreased a significant 20% from late 2016 to late 2017, due to the Shale Revolution. At last, a policy of off-shore balancing vis-a-vis that snake pit of a region, the graveyard of presidencies, is possible.

 Third, the shale boom will dramatically turn the US into a net exporter of energy, able to use its exports as a tool of geopolitics. This strategy involves supplying hard-pressed Eastern Europe with more of its energy needs over time (as of April 2018, Moscow accounts for fully one-third of Europe’s gas needs), so they are no longer at the tender mercies of the Russians. This will surely decrease the Kremlin’s sway over Europe as a whole.

It also means it will be possible to entice energy-starved China into buying American shale exports. Over time, this newfound dependence would make it far less likely Beijing emerges as a revolutionary power, as it is unlikely to want to come to blows with a newfound vital energy supplier. It also makes the possibility of a full-blown Sino-Russian alliance, the only power configuration in the near term that can challenge US global dominance, far less likely.

 Conclusion: President Trump and the confounding of Bismarck’s Law

But no amount of luck—even paired with the genius of leaving one’s people alone to be creative–can survive disastrous statesmanship. And the defiantly wrongheaded foreign policy of Donald Trump puts at great risk almost every geostrategic treasure offered up to the US by the shale revolution.

First, in threatening the future of the wildly successful NAFTA accord, the Trump White House endangers not just the significant continental gains made so far, but also imperils the glittering prospects of North American consolidation of near-energy independence in the medium term. For it is highly unlikely either Mexico City or Ottawa will want to formalise consolidating energy ties with a US that has just shown itself to be such a fickle and unreliable economic partner.

Second, the same goes for the White House’s threatened trade war with China. While there is no doubt that Beijing has not played fair in many ways in terms of its trading regime—from habitual intellectual property theft to endowing lavish subsidies on state-owned enterprises. However, by unilaterally threatening up to $150 billion in tariffs (and actually imposing a 25% tariff on Chinese steel and a 15% tariff on aluminium) the Trump administration is not taking the longer-term picture into account.

To put it mildly, Beijing, so ripe to be won over due to its pressing energy needs and the advent of US shale, will not turn to the US for its long-term energy supplies in the midst of a trade war. The geostrategic losses could be incalculable.

Third, by ignoring the Obama administration’s efforts to extricate the US from the cesspool of the Middle East and instead reverting to form in mindlessly supporting Saudi Arabia, President Trump has increased the American footprint in a region when it is both unnecessary (offering the US with little strategic gain) and highly perilous. The US fiddles in the Middle East, while the primary geostrategic arena has decisively shifted to Asia, where most of the world’s future growth will come from, along with much of its political risk. The shale revolution provided the US with an elegant reason to truly pivot away from the Middle East. Yet sadly, and for no gain, this opportunity is being tragically ignored.

There is absolutely no doubt that Bismarck’s law holds: Through a combination of great good luck and the skill of believing in the genius of its people, the United States has been given the Holy Grail that is the Shale Revolution. The tragedy is that all this good fortune is being squandered by a president who remains resolutely determined not to let facts get in the way of his theories.

A version of this was published in the June edition of Aspenia.

Dr. John C. Hulsman is the President and Co-Founder of John C. Hulsman Enterprises (www.john-hulsman.com), a prominent global political risk consulting firm. His most recent work, To Dare More Boldly; The Audacious Story of Political Risk, was just published by Princeton University Press in April 2018 and is now available on Amazon.  

 

 

 

 

 

 

 

Delphic priestesses were the world’s first political risk consultants

In 480 BC, the citizens of Athens were in more trouble than it is possible for our modern minds to fathom. Xerxes, the seemingly omnipotent son of Darius the Great, had some unfinished business left to him by his father. A decade earlier, at the Battle of Marathon in August 490 BC, the miraculous had happened: the underrated Athenian army had seen off Darius and his mighty Persian horde, saving the threatened city-state from certain destruction. Now Xerxes had invaded Greece again, to finish the work his father had started.

Just to make sure that this time Athens did not escape the wrath of the Persian Empire, Xerxes assembled the largest invading force the world had ever seen. While the Greek historian Herodotus—typically exaggerating—put the Persian numbers at 5 million, modern-day historians still place them at an overwhelming 360,000, in addition to a gigantic armada of 750 ships in support of this vast host.

Confronted with almost certain destruction, what did the hard-pressed Athenian leadership do? What was their response to a problem that in terms of both its size and devastating impact seemed utterly insurmountable?

Simple. They requested the services of the world’s first political risk consultant.

The Pythia Invents the Political Risk Industry

 Already, by 480 BC, the Pythia of Delphi amounted to an ancient institution. Now commonly now known as the Oracle of Delphi (when in fact the oracles were the pronouncements the Pythia dispensed), the Pythia were the senior priestesses of the Temple of Apollo, the Greek God of Prophecy.

For over 1,100 years (until 390 AD), the Pythia was viewed as the most authoritative and important soothsayer in Greece. Pilgrims descended from all over the ancient world to the temple on the slope of Mount Parnassus to have their questions about the future answered. Sitting in a small, enclosed chamber at the base of the shrine, the Pythia (there were three priestesses on call at any time) delivered her oracles in a frenzied state, most probably imbibing the hallucinogenic vapours rising from the clefts in the rock of Mount Parnassus, which we now know sits atop the intersection of two tectonic plates.

The Pythia would be sitting in a perforated cauldron astride a tripod. It was reported by pilgrims (as well as the Greek historian Plutarch, who served for a time as high priest at Delphi, assisting the Pythia in her mission) that as she imbibed the vapours arising from the stone her hair would stand on end, her complexion altered, and she would often begin panting, with her voice assuming an otherworldly tone. In classical days, it was asserted that the Pythia spoke in rhyme, in pentameter or hexameter. To put it in modern terms, the Pythia was clearly as high as a kite. But let’s look at the Pythia afresh. For I think that the Temple at Delphi amounts to nothing less than the world’s first political risk consulting firm.

At least since the days when the Athenians consulted the Pythia at the height of the Persian Wars, political and business leaders have looked to outsiders blessed with seemingly magical knowledge to divine both the present and the future. While the tools of divination have changed through the centuries, the pressing need for establishing the rules of the road for managing risk in geopolitics have not. The question for political risk analysis remains the same as it was during the heyday of the Pythia: through superior knowledge (be it spiritual or intellectual in nature), can we reliably do this?

The Pythia’s prognosticating advantages curiously track with the qualities political risk firms look for in their best analysts today. First, in their isolation at Mount Parnassus, the Pythia were not in danger of elite capture (and the curse of analytical groupthink that so often follows) in terms of what they predicated. This is the very curse that doomed so many modern-day analysts to be so very wrong about the Brexit vote (they didn’t bother to look outside the hermetically-sealed elite shell of London) or the startling advent of Donald Trump (they never left the East Coast corridor). Physical, intellectual, and emotional distance, since the days of the ancients until today, has always had great analytical value.

Second, coupled with this distance, the Pythia (and today’s political risk analysts) at the same time had limited but regular contact with the elites of their day who make the arduous trek to visit them. This constant if limited (the Pythia only deigned to speak to pilgrims one day a month) contact meant that those at the Temple of Apollo came over time to understand what it is their elite clients wished to know, and how to provide them with exactly what they lacked; independent, outside, authoritative advice.

Finally, at least in the High Classical Age, the Pythia were chosen from a group of highly educated women, who already knew quite a lot about the world. It is this strange and unique mix of special knowledge, education, distance from the corruptions of power and yet proximity to it, that describes the ideal CV for political risk analysts today, just as it did of the ideal Pythia of yesterday.

The Pythia gave advice to shape future actions, practical counsel that was to be implemented by the questioner. This is exactly what political risk analysts still do today, though we’d use modern jargon and call it ‘policy’ in the public sphere and ‘corporate strategy’ in the business world. But what the Pythia was doing is recognisably the same thing my political risk firm does today.

Actually, it is quite amazing how good a political risk record the priestesses actually had. Between 535 and 615 of the oracles have survived to the present day, and well over half of them are said to be historically correct. In our own age of heightened political risk, I can name a goodly number of modern firms that would kill for that record. There has always been a market to answer basic political risk questions: Can the Persians be stopped, and if so how? Will the UK vote for Brexit? Will Donald Trump become President? Then as now, those with a reputation for getting basic political risk questions right were venerated, just as those who failed were over time were discredited.

Conclusion: The Pythia Masters the Persians

Crucially, over the biggest political risk question Delphi was ever presented with—the invasion of Xerxes—the Pythia came through with flying colours, outlining a policy that would provide the Athenians with a way to practically escape from their impending doom. The Pythia recounted that when Athena—the Greek Goddess of Wisdom and the patron of her namesake city—implored her father Zeus, the King of the Gods, to save Athens, he replied that he would grant them ‘a wall of wood that should be uncaptured, a boon to you and your children.’

Back in Athens, Themistocles, the paramount Greek leader in the fractious democracy, successfully argued that a wall of wood specifically referred to the Athenian navy, and he persuaded the rest of the city’s leaders to adopt a maritime-first strategy against the Persians. This policy—concocted by the Pythia and put into concrete action by the decision-maker Themistocles—led directly to the decisive naval Battle of Salamis, the turning point that brought to an end the Persian risk to Athens’s very survival. To put it mildly, the Pythia had proven to be well worth her political risk fee.

Published in Aeon, May 22, 2018

 Dr. John C. Hulsman is the President and Co-Founder of John C. Hulsman Enterprises (www.john-hulsman.com), a prominent global political risk consulting firm. His most recent work, To Dare More Boldly; The Audacious Story of Political Risk, was just published by Princeton University Press in April 2018 and is now available on Amazon. 

To Dare More Boldly: The Audacious Story of Political Risk (Book Excerpt)

Throughout history, any political risk analyst worth their salt has been able to clearly see one thing above all: the basic power structure of the world. Whether it is Roman historians looking at a unipolar Mediterranean in the Augustan age, or Castlereagh and Metternich gaming out complex European multipolarity following the defeat of Napoleon, this is the starting point for all effective political risk analysis.

In the late Nineteenth Century, one major British statesman — the brilliant, pious, gloomy Lord Salisbury — rightly sensed that while Britain’s power was waning, it still had the ability to set the scene for the coming era. He based his new strategy on the correct structural fact that London remained first amongst equals, even as other great powers such as Germany, the US, and Japan were relatively on the rise. Seeing the world dispassionately as it is in terms of power is the entry point for any successful political risk analysis.

Salisbury’s entire foreign policy rested on the uncomfortable notion that Britain was in the very curious structural position of being in relative decline, but still by a long way the greatest power in the world. However, he saw that the ascension of Japan in Asia, the United States in North America, and Germany in Europe to great power status could not be stopped. Instead, if Britain were to retain its pre-eminent place in the world, these emerging powers would have to be accommodated if possible, and opposed by a British-led alliance if necessary.

 

A few basic but vital truths underscored this shift in British strategy. Salisbury knew that most people would have little understanding of what he was attempting to do. This is a key belief of Salisbury, that for all his conservatism, it is poison in political risk terms to lazily assume that things will always be as they have been up until now. His whole foreign policy was about avoiding this devilish analytical trap.

The second basic precept followed by Salisbury was to avoid wasting time, energy and power worrying what countries were doing in their internal affairs, as outside influences were highly unlikely to change things and would fritter away British power.

In sharp contrast to today’s debilitating western foreign policy views, so dominated (despite all facts to the contrary) by a moralistic Wilsonianism, Salisbury saw the world in starkly realist terms. His job was to secure Britain’s place in the world, no more and no less. All foreign policy ventures would be judged only by this exacting if simple standard.

At this highest level, Salisbury felt that the new world structure called for Britain to function as the global off-shore balancer, staying aloof from the day to day quarrels and shifts in power in the various regions of the world, as British power would only be brought to bear if these regional balances of power fell apart and any one Great Power began to both dominate a region and threaten primary British interests.

Far from being a passive strategy, off-shore balancing calls for a constant assessment of what is going on within regional balances of power, as sudden shifts can result in dangers that must be quickly righted by the ordering power in question.

Off-shore balancing freed Britain up to more narrowly focus on its primary national interest of the time: securing and protecting the colonies and dominions the comprised the British Empire, especially seeing to it that the vital sea routes between Britain and India, via the Suez Canal, were absolutely secured.

As the world’s foremost status quo power, and as the global ordering power, at the core of Salisbury’s overall foreign policy was this fervent desire to avoid war with other rising powers if at all possible, thereby ensuring that these lines of communication throughout the Empire were unhindered, so that British dominance could proceed in a non-dramatic and secure manner.

Maintaining peace meant that as far as possible the United States, Japan, and Germany should be accommodated rather than opposed, as this approach made it far more likely they would emerge over time as status quo powers themselves — prepared to help Britain defend its present global order — rather than as revolutionary powers determined to upend the world that Britain had largely created.

This radically different British policy of accommodating — rather than thwarting — rising powers meant that Salisbury had to directly take on the mind-sets of the majority of foreign policy practitioners of his own time, complacently used to living in a world where they could largely do as they pleased without having to worry over-much about accommodating anyone.

A similar problem has bedeviled American foreign policy at the present moment. Today’s United States finds itself eerily in the same global structural position as was Salisbury’s Britain: it is still far and away the world’s dominant power (and will be so for quite some time) even as it is relatively in decline as other Great Powers, such as China and India, rise from a low base.

As was true in the late Victorian era, the American foreign policy elite of today — as is witnessed every time I attend a Council on Foreign Relations meeting — still can’t get its collective head around this complicated new era. As Anatol Lieven and I pointed out in Ethical Realism, Democratic foreign policy elites may think they can charm the world into doing as they want, and Republican elites may think the world can be bullied into doing as they wish, but the bottom line is that both the dominant Wilsonian and neoconservative strains of thought still think they can pretty much tell the world what to do and it will happen.

They are living in a time warp, still harkening back to the long period — during the Cold War and then the brief unipolar moment — when the United States had far more global power than it presently possesses and could easily afford to pursue a more aggressive, less subtle, strategy. Salisbury ran into precisely the same sort of opposition, as he lived in a hauntingly similar structural world, in terms of global power.

His nimble intellectual success contrasts sharply with the cloddish, dinosaur-like refusal of much of the present American foreign policy elite to simply recognize the world has fundamentally changed, and to act on this precious knowledge. Failure to do so, in political risk terms, poses the gravest threat for the United States today, as its elites fail to adjust to the basic power realities of the new era we presently find ourselves in.

Published in The Long March by Tom Ricks, April 26, 2018

Excerpted, with permission of Princeton University Press, from To Dare More Boldly: The Audacious Story of Political Risk, by Dr. John C. Hulsman. Copyright 2018.