OPEC+ decision to cut oil production will impact gas prices

Earlier this month, the 23-member oil-cartel known as OPEC+ (Organization of the Petroleum Exporting Countries), of which Russia is a member and led by Saudi Arabia, announced it would slash production by 2 million barrels per day.  The production cut is equal to 2% of the world’s daily oil production.  The cut was seen as a slap in the face to President Biden.  The move by OPEC+ drew angry criticism from Washington and the White House accused the Kingdom of taking sides with Russia.

In response the Biden Administration said it plans to re-evaluate the U.S.’s eight-decade old alliance with Saudi Arabia. It is hard to forget that during the Presidential campaign in 2020, the president’s money quote was he promised to make Saudi Arabia a “pariah” state.  He said there is “very little social redeeming value in the present government in Saudi Arabia.” He has criticized the Crown Prince for his role in the killing of Washington Post journalist and political opponent Jamal Khashoggi.  All this while courting Iran, an arch enemy of Saudi Arabia, in the hopes of striking a nuclear deal that would give Tehran billions of dollars to threaten the security of Gulf States.

Still for months the leader of the free world lobbied Saudi Arabia to help ease energy prices by pumping more oil into the market.  These pleas fell on deaf ears. The Administration urged the Saudis to wait for the next meeting of OPEC+ on Dec. 4 before making a decision on production cuts.  The Administration wants to hold down gas prices to advance the Democrats’ chances in the midterm congressional elections. Now the administration has announced it will sell 15 million more barrels of petroleum from the nation’s strategic reserve, aiming to ease gas prices.  The White House said it was prepared for more sales of the $400 million barrels in the strategic petroleum reserve if there are further disruptions in the world markets.

Not only that but the White House is starting to relax some of the sanctions on the authoritarian government in Venezuela which sits atop some of the world’s largest oil reserves to allow Chevron to resume pumping oil and exporting oil to the U.S.  There is an ominous sound of barrel scraping here.

Congressmen from both parties called for retribution against the cartel as well.  Some called for taking direct action against Saudi Arabia such as denying it access to military hardware and passing legislation allowing OPEC+ members to be sued under antitrust laws.

The Saudi’s rejected the accusation that it was getting in bed with Russia. They stated that the decision to cut output was driven purely by economic considerations and in response to future uncertainty about demand for oil.   OPEC+ was doing what it usually does.  They want to regulate the flow of crude oil to world markets in an effort to control prices. That is what the cartel is all about, full stop.. They are seeking to protect their national economic interests as has always been the case. The Saudi’s need money to provide for a decarbonized future and to fund its on-off war in Yemen.

The irony here is that according to the U.S. Energy Information Administration in September 2019, the U.S.  became a net exporter of crude oil and petroleum products for the first time since 1973.  In 2022, the U.S. will again be a net oil importer.  The Administration’s policy has been to ween the American economy off fossil fuels in favor of clean energy.  Quite apart from bans on fracking, bans on drilling, the President’s first act in 2021 was to scrap the cross-border permit for Canada’s XL pipeline which was projected to carry 900,000 barrels of crude oil a day into the U.S.

Events like the coronavirus and the tragic war in Ukraine should have revealed the dangers of being dependent on unreliable regimes and geopolitical adversaries.  These choices have left the U.S. in  an untenable, vulnerable place.

The Fed Fighting Inflation

Prices at the gas pump and in the grocery store are climbing at the fastest pace since 1981.  As inflation spreads throughout the economy, it is proving painful for working families.

The Federal Reserve has raised interest rates three times so far this year and has signaled it plans to keep doing so in coming months.  The country is in the eye of the storm; the price spiral is nowhere close to over.

The Fed is passing off these interest rate increases, in bits and bobs as the British say, as a coherent strategy organized around a defining theme: to fight inflation and put the beast back in its cage without tipping the economy into a recession.

The American public has been told with monotony by various media outlets that the central bank has a laser-like focus on cooling the economy and limiting demand for goods and services, noting that the Fed has not hiked interest rates by 0.75 percentage points in one go since 1994.

The media was so transfixed with this figure that if you had a frequent flyer mile for every time it was mentioned you would have enough miles to circumvent the globe by now.

What is absent from this reporting is that the funds rate is now in the 1.5 to 1.75 percent range.  The Fed plans on the rate reaching a relatively modest 3.4 percent by year’s end.

Meanwhile, inflation hit 8.6 percent in May, the fastest rise in 40 years, with more pain to come.  Interest rates are still way below the rate of inflation.  It is crucial that the Fed take the cost of borrowing well above the inflation rate for price pressures to cool.

The reasons behind the current inflation are not hard to fathom, from the global pandemic to supply chain issues and the war in Ukraine.  The expansionary monetary and fiscal policies of 2020 and 2021 surely put a fire under the economy, driving up consumer demand and putting upward pressure on prices.

While it might not quite be true that, as Milton Friedman memorably put it, “inflation is always and everywhere a monetary phenomenon,” it is still a large part of the explanation.  Skip over blaming Putin.  To believe that is to think in political cliché.  Inflation was high before the Russian invasion of Ukraine.

By any normal reckoning, the Fed and others steering the economic ship remained conspicuously in the wrong for a long time when it came to dealing with the rise in prices.  By to-ing and fro-ing and insisting that inflation was transitory last year and hoping it just went away as though it didn’t exist, inflation got out of hand.

For the U.S. to defeat inflation, it will take real leadership.  To put it crassly, the Fed needs leadership like that provided by its former Chair Paul Volcker, the consummate public servant, a rarity on par with Halley’s comet.

As Volker understood it, inflation can be defeated, but it takes a willingness to make tough choices and the minerals to face down critics.  He did everything except kick extra points to deal with runaway inflation, explaining to the public the tough road ahead, the sacrifices to be made and the fact that there was no alternative.

For example, when inflation reached 15 percent in 1980, Volcker understood the need to go for inflation’s jugular and ratchet up interest rates above the rate of inflation.  He raised interest rates to over 20 percent to crush raging inflation.

That gives a foretaste of what the U.S. will experience in the coming years if the Fed does not move more aggressively and quickly to combat inflation.

While predicting the future is beyond difficult, if the Federal Reserve is to get inflation under control, it has a long way to go when it comes to raising interest rates.

Prime Minister Trudeau went too far in dealing with Canada’s ‘Freedom Convoy’

The “Freedom Convoy” of trucks that converged in Ottawa on Jan. 28 began in response to the Canadian government’s requirement that Canadian truck drivers crossing the U.S. border be fully vaccinated to avoid testing and quarantine requirements upon their return. Then it evolved into a protest against all public health measures aimed at fighting the COVID-19 pandemic.

Organizers said they would not end their protest until all pandemic-related public health measures were dropped.

After three weeks of protests, Prime Minister Justin Trudeau invoked the Emergency Act to deal with the blockades. It was the first time the law had ever been used, and it was invoked even though there were plenty of other laws on the books to deal with peaceful protests. It was a classic example of using a machete when a scalpel would have worked just fine.

The Act gave the Canadian government broad powers to restore order, ranging from placing significant limits on peaceful assembly, to prohibiting travel, to requiring financial institutions to turn over personal financial information to the Canadian Security Intelligence Service and freezing the bank accounts of protestors and anyone who helped them.

The Act also gave the government broad authority over businesses, such as dragooning private tow truck companies to provide services against their will. Insurance companies were required to revoke insurance on any vehicles used in blockades.

The Emergency Act is only supposed to be invoked in a genuine crisis, such as in wartime. The War Measures Act, its predecessor, was last invoked under the current prime minister’s father, Pierre Trudeau, in response to the 1970 October Crisis, when a group of militant separatists who wanted to create an independent socialist Quebec engaged in numerous bombings and kidnapped and murdered a cabinet minister.

There is a very real difference between invoking a law against violent terrorists using it to combat a largely peaceful protest by Canadian citizens tired of COVID-19 restrictions and lockdowns.

Riot gear-clad Ottawa police, with provincial and federal help, towed dozens of vehicles that were blocking Ottawa’s downtown streets, retaking control of the area around Parliament buildings, and using pepper spray and stun grenades to remove demonstrators. Ottawa’s streets are now back to normal; there is only snow and silence in the country’s capital.

All this could have been done under existing law. As Alberta Premier Jason Kenney put it, “We have all the legal tools and operational resources required to maintain order.” Put simply, the prime minister could have restored and maintained public order without marginalizing substantial segments of the population.

Trudeau, born and bred elite, first described the truckers as a fringe minority who held “unacceptable” racist and misogynist views. He refused to meet the protesters or negotiate with them, and he was not interested in hearing about the mandates’ impact on their lives. Many of these truckers had spent the last two years keeping the supply chain running.

Instead of finding ways to defuse the situation, Mr. Trudeau issued the emergency order, which he called a “last resort.” After a conservative member of Parliament and descendant of Holocaust survivors asked him tough questions about his handling of the truckers’ protest, Trudeau denounced conservatives who “stand with people who wave swastikas and confederate flags.” These comments came from someone who spent his youth wearing blackface.

The role of government is to maintain public order while respecting civil liberties, including the right to peaceful assembly. Many protests are disruptive and often unlawful, so it is reasonable to impose limits on the right to assemble.

But a real leader and statesperson would have gone to the protesters and said: “I’m here. What do you want to say?” Seeking out and meeting with protesters and pursuing dialogue is a far more strategic way to restore the rule of law than imposing martial law.

The return of the Taliban. What went wrong in Afghanistan?

Writing about recent events is always hazardous. It can be difficult to establish precisely what has happened and why. There is also a lack of clarity about the relative significance of events.

Americans don’t yet know where the collapse of Afghanistan ranks in the list of American military and foreign policy disasters such as the debacle in Iraq, the fall of Saigon, the failed “Bay of Pigs” invasion in Cuba, and the 1979 Iran hostage crisis.

But three points are surely certain, first, the shambolic exit from Afghanistan is a major setback that will undermine U.S. credibility for years to come. As Henry Kissinger said, “To be an enemy of the US is dangerous, to be a friend is fatal”.

Second, Afghanistan fell because America forgot the lessons of history. It does not understand the world beyond its borders, which is very different than the U.S.

Finally, given how the atrocious implementation of the pullout. of U.S. troops from Afghanistan was, Joe Biden will have to wait a bit before he receives his Nobel Peace Prize. Another black eye for the U.S.

There will be lots of talk in the coming days about the harsh lessons to be learned from America’s retreat from Afghanistan. In April, Biden announced the U.S. would withdraw our military from the country without conditions on the 20th anniversary of the 9/11 attacks. What an awful historical irony that the Taliban will once again be in control on Sept. 11.

Looking back, there are some indisputable facts about what went wrong in Afghanistan, and responsibility is certainly divisible by more than one president.

On Oct. 7, 2001, the first of these presidents, George W. Bush, launched Operation Enduring Freedom—the invasion of Afghanistan. The operation sought to bring the architects of 9/11 to justice and reduce the threat of terrorism. Then the Afghan mission, which often lacked strategic clarity, morphed from counter insurgency to counter-narcotics and then into capacity building to remake Afghanistan as an award-winning liberal democracy.

The result is a painful lesson of what can happen when immense military might is put in the hands of politicians and their minions who lack the understanding to employ it properly. Equally culpable are politicized American military leaders who consistently lied about the strength of the Afghan security forces.

The result is that the Taliban, a UN-designated terrorist group, defeated the world’s greatest military power. Another self-inflicted blow to America’s reputation that will complicate Biden administration goals to check China’s rise by building coalitions in the Asia Pacific.

According to the Costs of War project at Brown University, the U.S. has spent more than $2 trillion in Afghanistan since 9/11. That’s $300 million per day for two decades.

And the human costs are even greater. There have been 2,448 service members killed and over 21,000 American soldiers injured in action, along with 3,846 contractors killed. That pales beside the estimated 66,000 Afghan national military and police and over 47,000 Afghan civilians who were killed.

And because the U.S. borrowed most of the money to pay for the war, generations of Americans will be burdened by the cost of paying for it. The Costs of War researchers estimate that by 2050, interest payments alone on the Afghan war debt could reach $6.5 trillion. That amounts to $20,000 for each and every U.S. citizen.

You do not need to support a continued presence in that arid, stone-age country to recognize that things have gone badly. The execution of the U.S. withdrawal has been disastrous, deadly, and humiliating, handing power back to the Taliban in a matter of days. The dramatic unravelling of the situation in Afghanistan puts President Biden’s reputation for foreign policy expertise at risk.

It is worth bearing in mind what former Bush and Obama Defense Secretary Robert Gates wrote in his memoirs: Biden has “been wrong on nearly every major foreign policy and national security issue over the past four decades”.

But not to worry, this is not your father’s Taliban. They are smarter and tougher.

Leadership lessons from ‘Twelve O’Clock High’

The two best examples of crisis leadership for contemporary students of management and leadership are World War I and World War II. The former a gold mine of information illustrating virtually every conceivable way of doing things wrong and World II a nice balance between doing thing wrong and doing things right.

World War II was actually three separate wars that took place at the same time: United States versus Japan in the Pacific, the United States and the United Kingdom (UK) versus Germany in Western and Southern Europe, and the Soviet Union versus Germany in Eastern Europe.

Germany and Japan started World War II having great successes by doing things right. Then they lost their way and ended up doing everything wrong.

In contrast, the Allies (US, UK, and the Soviet Union) started off doing many things wrong, mainly out of ignorance and false illusions, including the misuse of air power.  But they managed to get their respective acts together and wound up doing most things right.  They won the war, and in so doing, reshaped the world.

Running a business has a great many parallels with running a war.  To succeed in either, you must set realistic goals, identify and deploy the relevant resources necessary for achieving these goals, and then skillfully implement the options you select.  After that you have to roll with the punches that inevitably whack you from unexpected events and adjust your strategy with dispatch.

Two fine Hollywood movies made in the late 1940s effectively dramatize “war situations” that are also common in business.

“Command Decision” is one of the movies with themes that translate to business.  It deals with strategic decision making at the command level.  The other is “Twelve O’ Clock High,” which is about a manager taking over a failing bomber group and whipping it into shape through a program of stern discipline.

It is the harrowing story of the first B-17 bombers in England in World War II and the terrible losses they took before long-range fighters were available to escort them on combat missions over Europe. The movie was adopted from a popular novel that was, in turn, based on a real event that affected the Eighth Air Force in England during 1942 and 1943.

The new leader immediately incurs the hatred of aircrews when he comes down hard on the lack of discipline.  He deals harshly with slackers, segregating the worst misfits into a crew known as “The Leper Colony”. He openly criticizes mistakes, insists on a high level of professionalism and is a straight talker who appreciates straight talk in return.

Resentful of the new management style, all the pilots ask to be transferred out of the unit.  But the new commander sticks to his principles. As the bomber group develops combat effectiveness and the group’s performance improves, and the loss of life decreases, the pilots change their minds and support the new commander and his leadership style.

This story dramatizes steps the leader took to restore the morale of people who had come to regard themselves as “hard-luck failures” who had accumulated the highest loss rate and the worst bombing effectiveness record and motivated them to become a winning team.

The film highlights timeless leadership lessons such as creating a strategy; setting clear expectations; creating performance standards; giving clear directions; putting the right people in the right jobs; communicating the “why”; restoring accountability, and pushing, pushing, and pushing until the job is done.

Whether commanding a bomber group or managing employees towards making their numbers, these leadership qualities are essential and universal, especially in situations of extreme emergency and crisis.

Leadership lessons learned from the 1948 movie ‘Command Decision’

COVID-19 has turned the world upside down, and it is clear that things will not return to the status quo ante anytime soon. The pandemic has provided a test for societies and for their leaders.

One dimension of leadership always in short supply is the ability to tell people the truth, even if the message is unwelcome, such as that things will get worse before they get better.

In the current climate of fear and uncertainty, the United States needs leaders who can make strategic decisions independent of politics and do the right thing.  This dimension of leadership is captured in the excellent 1948 movie about strategic bombing in World War II, “Command Decision.”

The film deals with strategy, leadership, corporate politics, and is probably the most sophisticated American war film ever made.  It dramatizes a fundamental strategic conflict between two Army Air Force generals. Both are West Point graduates who committed themselves early on to Billy Mitchell’s schtick of air power as a “war-winner in its own right.”

The younger general commands the Eighth Air Force’s strategic bombing units in England during 1943. He’s learned that the Luftwaffe has begun production of a wiz-bang new jet fighter at three plants deep inside Germany. He believes these factories must be bombed into oblivion as soon as possible, no matter what the cost in bomber and air -crew losses, to prevent the jet fighter program from creating a defensive shield over Germany that will make strategic bombing impossible and threaten the planned 1944 invasion of France.

But his older and more politically savvy boss is convinced that the ultimate success of strategic bombing depends on the size of the bomber force Washington allocates to the Eighth Air Force. This will be determined by how effective they are at producing acceptable bombing results without high loss rates,  which rules out the go-for-broke raids the younger general wants to mount against the three jet fighter factories.

The younger general insists that they must take advantage of a period of clear weather to complete the destruction of the factories if strategic bombing of Germany is to have any future.  The older general believes the future of strategic bombing depends on the Eighth Air Force getting enough bombers.  This will be determined at an allocation meeting in Washington, where heavy bomber losses certainly won’t help their case.

In other words, the younger general fights the Germans in Europe while the older general has to fight the US Navy, which wants bombers for the Pacific theater, and Army ground forces which wants to recycle bomber pilots now in training as company commanders.

These dramatic debates between the two generals are breathtaking; two dedicated pros with very different perspectives about the strategic issue at hand pour out their arguments, hopes, fears, and differing career expectations.

The movie’s sympathies lie with the younger general and show that he was right.  At the time the movie was made, there was widespread public acceptance of Air Force propaganda that its Strategic Bombing concept had been successful.  It turned out in retrospect, that the pre-war strategic bombing advocates grossly underestimated the resources needed for this concept to succeed, so the older general was actually right.

The problem the two generals confront is similar to the Covid-19 crisis.  You can impose a protracted lockdown and harm the economy to the point where recovery will take decades, or forego lockdowns and get the economy moving, but with a significant increase in illness and death.

Few people like to hear bad news, but telling the public what it needs to hear and facing problems is an important test of leadership.  The role of a leader is to do the right thing in addressing a wicked problem that may have no clear solution – only an array of possible approaches, each with deleterious consequences.