Don’t Burst our Bubble: Geopolitical Consequences of a Chinese Financial Crisis

The world has two superpowers once again: the People’s Republic of China, the rising power, and the United States of America, the empire in decline. Not quite. These descriptions may represent an increasingly popular sentiment but they remain far from certitudes. What if the path of the rising power was to meet a sudden obstruction? Despite an ascension of historic proportions, the Chinese growth story today stands at risk with the possibility of a catastrophic financial crisis looming. While this is a controversial point, particularly given the dubious nature of predicting financial crises, there are enough apparent distress signs to consider the possible consequences. 

Generating headlines and headaches today is the bursting of the “Chinese stock market bubble.” In the last year, the Shanghai Stock Exchange gained 150% only to fall by nearly 40% in July and August. While China boosters have rushed to point out the stock market’s insulation from the larger financial system and Beijing’s readiness to intervene to stabilize them, this fails to recognize several more significant financial risks. Credit Suisse analyst Andrew Garthwaite references China’s triple bubble in housing, credit and investment. The housing risk is well documented: construction continues to outpace sales in what is described as a dual economy. In primary Chinese cities like Shanghai, exorbitant demand has fueled speculative pricing. Yet in peripheral cities, there is an abundance of supply leading to high vacancy rates, most notoriously in “ghost cities” like Ordos. Corporations are over-levered with debt estimated at 125% of GDP. Municipal debt is also unsustainably high at 40% of GDP and is dependent on property sales and shadow banking - the multi-trillion dollar, unregulated financial boogeyman - for funds. Finally, investment remains the poison to cure China’s thirst. Investment has fueled much of its storied rise and a $1.1 trillion investment plan in January was used to drive this year’s shining 7% growth rate. However, state sponsored investment comes with further debt accumulation and severely diminishing returns. While there have been reform efforts by Chinese leadership towards more market and consumption led growth, their commitment and pain tolerance will certainly be tested during the impending economic slowdown. 

If any of Garthwaite’s “bubbles” were to burst, it could freeze credit in the financial system, cause a massive loss in wealth and bring the broader economy to a halt. Not to worry, some argue, as implicitly guaranteeing much of the existing debt, including the banking sector, municipalities, shadow-banking system and state owned enterprises, is the Chinese government. But while Beijing has previously proven capable of plugging holes to steer the ship to safety, in the midst of a tempest all bets are off. Nonetheless, many insist that the state’s power to intervene with trillions of dollars and forcibly dictate market behavior is sufficient to stave off financial peril. I have two responses. First, assuming the government can keep the financial system afloat and move in earnest towards liberalizing reforms, virtually identical political risks, admittedly less dramatic, remain under the anticipated lower-growth regime. Second, the outstanding debt presents potentially systemic risk and represents liabilities an order of magnitude greater than the government’s mobilizable assets. Thus, there is more than just Western dogma behind the conviction that, as in the physical world, in the economy, natural forces always dwarf the designs of men. While the timetable may be delayed, in statist China, all steps taken by the government to prevent financial ruin other than structural reforms will only create more moral hazard and moral hazard will only heighten risks of a greater crash. As former Treasury Secretary and China-ist Hank Paulson wrote in reference to a Chinese credit crisis, “It's not a question of if, but when.” Brace yourselves: we may be in for a hard landing in China and the geopolitical ramifications would be staggering.

Dependent States

While the entire global economy will suffer from a large-scale Chinese financial crisis, the tumult will be felt first and hardest by states most dependent on China’s economy. In its rise, China has developed supreme economic importance to several regional and resource rich states. According to the World Trade Organization, China is the lead trading partner to Angola, Sudan, Yemen and Cambodia. Beyond their trade with China, these countries have another essential common factor: they are all Least Developed Countries (LDCs). In fact, among the states to which China is the principal export or import partner, nearly a third are on the UN’s list of LDCs. This excludes the likes of Democratic Republic of Congo and Equatorial Guinea, which have highly publicized economic ties to China but unpublished trade statistics. Aside from being generally poor, LDCs are also often decentralized, highly corrupt and prone to conflict. And political power, particularly among the resource-rich rentier states, is almost always held narrowly at the top. To borrow language from Nassim Taleb, these states are fragile. This point was made particularly clear to me on recent visits to Myanmar and Cambodia - two countries with tragic histories of political violence and uncertain political futures - where both the jade market in Mandalay and the booming real estate market in Phnom Penh were all dominated by Chinese businessmen. Their suitcases full of cash superficially fuel economic growth but in actuality line the pockets of a cabal of kleptocrats.

To consider the geopolitical consequences of a Chinese financial crisis on these dependent and underdeveloped states, consider the extreme but analogous case of Latin America during the Great Depression. During the early 20th century, America was an industrializing nation en route to global pre-eminence and had unmatched influence in Latin American states. The region was underdeveloped, had tremendous economic and political inequality and was highly dependent on commodity exports to the U.S. and Europe. During the Great Depression, it was likely the hardest hit region in the world. There were precipitous falls in exports and foreign investment and by Depression’s end, fifteen out of twenty Latin American countries had defaulted on their debt. Of course, the suffering spilled over into politics as well. Numerous states, including Argentina, Brazil, Chile and Peru experienced military coups. In the case of Brazil, the fall in coffee prices, which was paramount to the state’s revenue generation, brought the 1930’s military dictatorship of Getulio Vargas. Vargas’ reign began the state’s efforts to diversify into  industrial production and ultimately became the model for import substitution. To say nothing of its economic efficacy, Brazilian import substitution was an obvious political condemnation of American political and economic dependency.

In the event of a Chinese financial crisis today, dependent LDCs will also face political and economic ruin. To see how shocking that could be, consider a special case: North Korea. While North Korea may be the state closest to autarky, the regime’s dependence on China is unquestioned. Dating back to the Chinese military rescue during the Korean War, North Korea has been existentially reliant on China. Today, China represents 60% of the country’s trade, providing the majority of its food – often in direct aid of the military - and 90% of its energy. However, Beijing’s feelings towards North Korea are reportedly divided, with the Hermit Kingdom falling out of favor with some after its first nuclear test in 2006. If belts tightened in China due to massive credit and economic constraints, the squeeze would certainly be felt in North Korea as well. Unfortunately for its neighbors, the DPRK’s typical means of blowing off political steam is by blowing up rockets. Long-term however, in a regime tightly controlled by a small group of the elite, it wouldn’t take much dissatisfaction for the regime to fall. A few key defections could bring down the entire enigmatic house of cards. The geopolitical consequences of such a regime change are worthy of much more than lip service, but certainly such a transition, generally assumed to reunification with South Korea, would be profound.

The threat to regimes are posed today to the LDCs and the myriad other states (if only I were bold enough to say Russia), to which China is benefactor. Most of these are rentier states with iron-fists keeping it all together. When the money dries up, some may find the resources to weather the storm and keep their elite clients and soldiers happy. Others may not. These regimes at their core are unstable; a loss of financing or an economic downturn could easily sway the allegiances of an avaricious political elite, prompting a wave of systematic policy or regime changes. 

Pivot states

Beyond dependent states of either the US or China, lie pivot states - nonaligned states in a position to benefit from the successes of either. Their allegiances are variable, falling along a spectrum of degrees of influence between the two poles. Unlike during the Cold War, when overt security threats between the two superpowers put a premium on loyalty, today’s spectrum is relatively fluid. In the event of a large-scale Chinese financial crisis, we may see an across-the-board movement of these states towards American embrace. While there are various present benefits to alignment with China, it remains the growth stock in a pivot state’s portfolio. A shock to the perceptions of its growth potential would justify a large shift in America’s favor.

To make this a bit more concrete, consider the founding members of the topical Asian Infrastructure Investment Bank (AIIB). The China-led financial institution includes 57 member states from five continents - North American representation being noticeably absent. Interestingly, of these 57 states, 25 have, or are in negotiations to sign, free trade agreements with the United States. These overlapping states, many of which are involved in the ongoing Trans Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP), can be convincingly labeled pivot states, juggling American and Chinese ties. David Dollar, Senior Fellow at the Brookings Institution, has pointed out the complementarity in Asia of the AIIB and TPP, analogizing them as the hardware and software, respectively, of economic integration. The AIIB would provide funds for infrastructure development across Asia and the TPP would provide markets and trade regulations. However, in the face of massive credit constraints in China, this picture looks quite different. Chinese financing of future infrastructure projects may take a hit and its power as an essential economic partner will diminish. Asian pivot states will be further pushed towards American patronage and western markets for growth. States like South Korea, Vietnam and Malaysia will be encouraged to complete the TPP and gain greater access to U.S. consumers. Similar movements would be seen in Europe and Latin America which have been edging closer towards China despite or, perhaps more appropriately, because of their historic relationships with the U.S.

Big Picture

At the end of the day, what does a large-scale financial crisis mean for China and geopolitics? As I’ve already proposed, it would most fundamentally mean a strengthening of American power. Many have argued that long-term we are moving, to borrow Ian Bremmer’s term, towards a G-Zero world with an absence of global leadership. Though this is a useful paradigm, it lacks necessary nuance. Chiefly, an economically integrated world necessitates a global leader. International commerce, for example, will always have a primary reserve currency and benchmark for trade and financial standards. If choosing a global leader was a multiple-choice question, America may no longer be the obvious choice but by process of elimination, it remains. And, given a Chinese financial crisis, it will maintain this status as sole superpower for the foreseeable future.

What of China’s trajectory? Following massive financial crises, consider the FDIC after the Great Depression and Dodd-Frank after the 2008 Financial Crisis, there is always a policy push to correct for the past system’s shortcomings. It is important to consider what policy changes in China would follow from such a financial crisis. Would the scalpel only correct financial regulation or larger issues of governance too?  The abrupt bursting of asset bubbles is often described in terms of widespread and dramatic losses in confidence, i.e. panics. Unlike in western systems, in China’s heavy-handed, state capitalist model, no logical barrier separates a loss of confidence in the financial system from a loss of confidence in the state. Internationally, China would certainly lose credibility. The question remains whether China is destined to be a global counterweight or just a regional heavyweight. Faith in its global prospects would surely sour. However, more damning are the potential domestic ramifications. With enough time for it all to stew, just as in its dependent states, a large enough financial crisis, with vast economic repercussions could threaten the regime. Consider the possibility of unrest throughout peripheral China due to reeling municipalities, a countrywide recession due to a broken financial system and a massive loss of wealth among the country’s elite due to a collapsed housing market and underwater enterprises. In such an environment, the wheels of a repressive government, held together ostensibly by a growth imperative, may come off. Predicting the demise of the Communist Party in China is fairly extreme and more than likely a financial crisis or economic slowdown, regardless of their magnitudes, would be disruptive not destructive. But regime change is a risk. Many pundits would argue that China’s present economic and state structures are not sustainable. At a talk several years ago with Fareed Zakaria, when it was still provocative to debate Chinese versus Indian growth prospects, he offered that there is near certainty of what Indian government will look like in ten year. Yet in ten years in China, only God knows. Stay tuned: with the future of international power hanging in the balance, a Chinese financial crisis will only add to the mystery.

- Josh Poretz, A'15

Ian Bremmer credits The Fletcher School for its growing political risk focus

Ian Bremmer, President at Eurasia Group, discussed the birth of political risk as an industry and the difficult nature of entering such a cross-disciplinary profession in a recent blog post.

 State of Politics: Rising Risk and the Birth of an Industry

State of Politics: Rising Risk and the Birth of an Industry

 

There is no set course of training for people to enter the political risk field…I got my Ph.D. in political science from one of the top universities in the country, and not once did I take a course that taught me how political science applies to the business world. That’s a huge oversight, and it’s a principal reason I started Eurasia Group. But people are starting to catch up to the times. Public policy schools are leading the charge by offering courses in political risk. The Fletcher School at Tufts is already hard at work fashioning a curriculum specifically geared to the field, and I think they’re making great progress.

The student-led Fletcher Political Risk Group seeks to harness The Fletcher School’s diverse IR curriculum to prepare the next generation of political risk professionals. Through our cornerstone event, The Fletcher Conference on Managing Political Risk, we connect practitioners and academics to discuss contemporary geopolitical issues, along with the skills and strategies needed to address them. We invite you to explore our site to see highlights from last year’s conference and stay tuned as we gear up for next year’s event in March 2016.

2015 Keynote Address

The 2015 Fletcher Conference on Managing Political Risk featured an engaging keynote address by Nassim Nicholas Taleb.  Check out his perspective on the world of risks and fragility.  

How do size and stability correlate?  What makes an economic system fragile? Anti-fragile?

Why do we always "miss" the warning signs? Who should we trust define them and look out for them?

Keynote address by Nassim Nicholas Taleb

Nadim Shehadi, moderator

Let's start with the notion of fat tails. A fat tail is a situation in which a small number of observations create the largest effect. When you have a lot of data, and the event is explained by the smallest number of observations. In finance, almost everything is fat tails. A small number of companies represent most of the sales; in pharmaceuticals, a small number of drugs represent almost all the sales. The law of large numbers: the outlier determines outcomes. In wealth, if you sample the top 1% of wealthy people you get half the wealth. In violence – a few conflicts (e.g. World Wars I and II) represent most of the deaths in combat: that is a super fat tail.

So why is the world becoming more and more characterized by fat tails? Because of globalization. More “winner takes all” effects. You have fewer crises, but when they happen they are more consequential. And the mean is not visible by conventional methods. 

Now, moral hazard. Banks like to make money. Under fat tails, large numbers operate slowly. Let's say you get a bonus for each year you make money. Then in 1982, banks lost more money than they did in their history. Then in 2007-2008, $4.7 trillion were lost. Then bankers wrote letters about how the odds were so low that the event was as much of a surprise to them as it was to you. Any situation in which you see the upside without the downside, you are inviting risks. People will tell you something is very safe, when in fact it is dangerous. Visible profits, and invisible losses. People are getting bonuses on things that are extremely high risk. And then the system collapses.

If you have skin in the game at all times, this does not happen. Modernity: a situation in which people get benefits from the action, but the adverse effects do not touch them. You hide risks to improve your year end job assessment. Bear Stearns never lost money – until they lost money.

Hedge fund managers are forced to eat their own cooking. When the fund loses money, the hedge fund manager loses his own money: he has skin in the game. You have fools of randomness, and crooks of randomness. Driving on a highway, you could go against traffic and kill 30 people – why does that not happen more often? Because types of people who would do this kill themselves along with others, so they filter themselves out of the system. Entrepreneurs, who make mistakes, are effectively dead if there is a filtering system. Suicide bombers kill themselves – so we can't talk about them as a real threat to the system. So there is a filtering mechanism. People don't survive high risk. If they have skin in the game, traders don't like high risk.

Let's now talk about fragility. The past does not predict the future. The black swan idea is not to predict – it is to describe this phenomena, and how to build systems that can resist black swan events. We define fragility as something that does not like disorder. What is disorder? Imagine driving a car 50 times into a wall at 1 mph, and then once at 50 mph: which would hurt you more. So there is an acceleration of fragility. The goal is to be anti-fragile.

There are two types of portfolios: 1) if there is bad news you lose money, 2) if there is bad news you win money. One doesn't like disorder, one likes disorder. One is fragile, one is anti-fragile. Size (such as size of debt, size of a corporation) makes you more fragile to disorder.

 

Questions & Answers:

  •  Do the people of ISIS returning home pose a risk?
    • This is not a risk. Debt is a risk. ISIS makes the newspapers and people talk about it but the real risks are not ISIS – the real risk is ebola, because it can spread. And the next ebola will be worse. So when people ask me to talk about risk, an epidemic is the biggest risk.
  •  Can you discuss some examples in the world that are fragile, examples of the fat tail?
    • The Soviet Union did not collapse because of the regime but because of the size. Similarly, a lot of people don't fully understand the history of Italy, before unification. There was constant, low grade turmoil. After unification, there were infrequent but deep problems. The risks facing us today, are the real things that can harm us and spread uncontrollably.
  •  Should we still think about risks on a country level? How do we think about transnational risks?
    • Cybersecurity – banks spend 5% of their money on it. Netflix engineers failures every day. They pay an army of agents to try to destroy their system, to discover their vulnerabilities. Things that experience constant stress are more stable. In cybersecurity, there are a lot of risks, but we're doing so much to protect against it that we don't need to worry much. But eventually the cost of controlling these risks might explode.
  •  What is your blind spot?
    • If I knew my blind spots, they wouldn't be blind spots. I'm developing something that is improving stress testing. The good thing about fragility theory is you can touch a lot of things. I want to make narrow improvements, little by little, not try to save the world.
  •  Is statistics useless or are there some redeeming qualities?
    • Any science becomes applied mathematics and if it's not applied mathematics yet, it is not a science. Stats is used mechanistically. Statisticians need to make risk an application of probability theory. A lot of the people doing this come from the insurance industry.
  •  How does bad data effect your work?
    • When you have a lot of variables, but not much data per variable, you are more likely to have spurious correlations. And when you have a lot of data, you are likely to find a stock figure that correlates with your blood pressure – that's spurious. More data is not always good.
    • Another problem is that if I want to write a paper, I test, test, test something until it fits my expectations – and I won't reveal to you how many times I have tried. If there is someone doing this for a living, for money, then I don't trust them.
  •  This is a great system you're developing but can it be misused?
    • The problem is in the math and in the ethics.
  •  If we stop using statistics, how can we make decisions? Don't we have to make assumptions?
    • Have skin in the game. Only use statistics for decisions if the stats are reliable. Joseph Stiglitz is blocking evolution – he made a prediction about Fannie Mae not collapsing, and it collapsed – and yet he's still lecturing us on what to do next. 

The Shifting Geopolitics of Oil & Gas: Risks and Opportunities

The final panel of the 2015 Fletcher Conference on Managing Political Risk honed the discussion on a specific, and notoriously volatile, industry.  See how our panelists explain the madness of the Oil & Gas sector, as well as describe what methods of astute and patient political risk are most apt to effectively evaluate such variance.  

Do you agree on their predictions for the year end price of oil?

The Shifting Geopolitics of Oil & Gas: Risks & Opportunities

The IEA reports that global oil consumption will rise from 90 million barrels per day in 2013 to 104 million barrels per day in 2040, and estimates that $900 billion of investment annually will be necessary to meet that growth. Amidst this increasing global demand for energy, driven in large part by the developing world, the American shale revolution and technological advancements in the extraction and storage of liquefied natural gas has altered the international energy market and resulted in dropping gas prices. Meanwhile, tensions over Ukraine and related economic sanctions against Russia have pushed the energy giant to increase ties with China, and an increasingly unstable Middle East poses questions for global energy security. The patterns of energy supply and demand that have long defined the global economy are in flux. What is the future of the global energy landscape? This panel will address the risks and opportunities that investors face as a result of these economic and geopolitical shifts.

Moderated by Professor Barbara (Bobbi) Kates-Garnick

 

Sarah Emerson, President of Energy Security Analysis, Inc (ESAI)

  • There is no easy way to forecast the future but companies need a view for the future
  • ESAI Energy takes a multidimensional view towards forecasting by looking at all variables that effect petroleum like economic growth, access to capital, policies, industrial policy etc.
  • Two types of risks in projecting data fall into two categories: 1) policy change risk  and 2) geopolitical risk: are there things going on that will lead to conflict and regime change.
    • Policy change risk: How do you deal with those two uncertainties especially when you cannot see change coming?  Other times policies are announced but not implemented.
    • Geopolitical risk can be determined by rigorous analysis by experts in the field: Measuring the fragility index of a country, and how components contribute to the fragility, can help in anticipate how supply and demand might change.
  • For example, in spring of 2014 Saudi Arabia did not want to cut oil prices. Study of Saudi Arabia would indicate that Shale posed a threat, and Saudi Arabia would want to defend market.
  • Therefore, monitoring trends can be extremely valuable since companies don’t need perfect forecast, but a threshold.
  • Large oil and gas private businesses are more adept at dealing with “Black Swan” situations.

 

Paulina Mirenkova, IHS CERA Associate Director, Russia and Caspian Energy

  • Sanctions imposed on Russia by United States and European Union and drop in oil prices has had dramatic effect on Russia.
  • Sanctions were imposed first in response to annexation of Crimea and later expanded with the evolution of the Ukraine conflict
  • Features of sanctions: targeted specific companies and individuals. At the same time these sanctions were deliberately left ambiguous, resulting in in business confusion.
  • These sanctions will have long-term impact, but immediate impact has been the cutting Russia out of international credit market and devaluing of ruble.
  • Long-term impact on oil production comes from prohibition on technology transfers to Russian companies (particularly in Artic and Shale production)
  • Russian Companies must cut investment programs and foreign companies are reluctant to invest in Russia.
  • Oil price drop has not has as much as an impact in Russia as the sanctions.
    • Oil price drop stems from the oversupply in market from U.S. oil. However, demand and consumption expected to rise. Relative high cost production must come online to meet demand. IHS CERA expects that the rebalancing will occur and after 2021 prices will come up to approx. $99/barrel
  • There is great attention being paid to Russian oil and Gas sector. Putin is not the only decision maker in Russia and therefore must listen to Russian power apparatus (Silovikis) must keep balance with them. Putin is very popular in Russia, but economic woes may prove to be a challenge.

 

Kevin Book Managing Director, Research, at ClearView Energy Partners, LLC

  • Clearview’s clients are primarily Financial investors (institutional assets) and strategic planers at large oil and industrial companies
  • Both those client groups care about long-term expectations and they take a wide range of reports in order to diversify information for risk management.
  • Oil company portfolios are constrained by geology.
  • Oil company managers are engineers,  investment bankers, and others are diplomats. 
  • Companies can apply quant analysis or just pick a low oil price number to assess internal rate of return and break even prices.
  • If you do have realistic expectation on break-even price, next thing to manage risk is good relations with host country.
  • Expansion of shale has introduced US as a risky market as well.
  • Top 5 questions from clients:
    • 1) Iran deal. +/- 1.5million barrels a day depending on deal
    • 2) Russian sanctions, long-term impact on supply.
    • 3) Crude oil export policy in US
    • 4) questions regarding trains carrying crude from unconventional regions
    • 5) Climate change unknowns, including management of methane as byproduct of oil production.
  • Companies can use two strategies to minimize risk: by diversify risk in geographies, and syndicating risk sharing with other partners.

 

Discussion

  • Did OPEC make a mistake with decision 6 months ago by failing to protect the price of oil?
    • OPEC is 12 states and therefore not uniform as a body. There is a discrepancy between wealthy countries and production-dependent countries in the organizations. Therefore  countries like Saudi Arabia and Kuwait could stomach the oil price decline while countries like Venezuela would hurt more.
  •  How do sanctions affect domestic policyholders in mid and long term in Russia?
    • aulina: There is a lot of emphasis on import substitution and preparing for tough times. However, this may not sustainable long term. Putin’s popularity dependent on oil revenues but there is also a nationalistic element emerging and people are prepared to suffer for Russia.
  •  What is impact of low oil prices on renewable energy? What will it mean to have a Republican Congress?
    • Kevin: The need for fuel diversification as well as the desire for lower carbon footprint boosted Ethanol production in 2007. This, however, was prior to increase of oil production in the US and therefore ethanol may not have enjoyed the same status today. That mandate is likely to enjoy continued support from Republican politicians.
    • Sarah: Gasoline demands will probably decline in the future, especially in the fleet fuel economy in the next 10 years. Diesel may decline but not as sharply.
      • The ethanol mandate had set the percentage mix of ethanol in gasoline consumption assuming an increase in the demand for gas consumption.  In reality that projected demand was never reached and we may witness some negotiations to reduce the ethanol content requirement.
      • While renewables are on a rise in the World we will have to eliminate coal first and foremost due to the carbon content. Alternate energy sources like coal to liquids or gas to liquids are not affordable at current prices in comparison to oil. Therefore, it will require governments to mandate the use of those fuels in the energy mix. However, in the low oil price environment it will be difficult to see dramatic changes.
    • Paulina: The use LNG for trucking in China has been widespread. LNG has displaced dielsel since dielsel prices were tied to oil prices. The gap between oil and gas has been decreasing due to low oil prices but the Chinese government has introduced taxes on oil to maintain that price differential.
  •  Would a Global climate pact in 2015 have any effect in the near future?
    • Kevin: There is an increased you can’t extract a certain amount of carbon without exceeding threshold of safe emissions. Therefore, a climate chance pact can impact such projects currently in place that have decades of operational life.
      • here are currently disparate national plans Intended Nationally Determined Contribution (INDCs) but those targets are different from commitments. Therefore harmonization of those differences may be needed and may take a longer time.
    • Sarah: A comprehensive global climate change treaty will be very difficult to achieve because environment is local. Therefore we should generate national efforts instead to tackle local issues.
  •  Will the Artic be a source of tension or basis of cooperation for energy exploration?
    • Kevin: Artic will not be a source of cooperation. There are a lot of environmental risks associated with the Arctic and the technical expertise is there yet. U.S. not well positioned to take advantage of Artic.
    • Paulina: For Russia, Artic is a major priority for next 20 years and Russia will be aggressive in its claims and explorations in the Arctic.  The lack of access to capital markets and technology will slow Russia down, so Russia will turn to other sources for capital like China or other partners.
  •  What is your best Oil forecast for the next 12 months?
    • Kevin: End of year price could be between $52-$62 unless an OPEC production cut happens.
    • Sarah: Prices should probably be lower based on supply and demand currently. The price will probably stick around $50’s with some volatility, perhaps down to $40’s in the event of disruptive events.  In 2016 price could be in $60’s and probably to $70 in 2017: 70’s. Return to $100 is far down the road.
    • Paulina: HIS CERA projects similar forecasts. Expect a lot of volatility, U.S. is now a swing producer and continues to increase production that will only level off this year. In 2015 prices will remain in low $50s. Prices will be volatile for next few years. Saudi Arabia allowed for volatility by not adjusting output, but in the long term they will need to balance oil prices. U.S. has too many disjointed producers and will not be take that role.