Sen. John McCain on Russia’s airstrikes in Syria

Shades of Churchill in 1938:

Winston Churchill, denouncing the Munich Agreement in the House of Commons, declared:

“We have suffered a total and unmitigated defeat … you will find that in a period of time which may be measured by years, but may be measured by months, Czechoslovakia will be engulfed in the Nazi régime. We are in the presence of a disaster of the first magnitude … we have sustained a defeat without a war, the consequences of which will travel far with us along our road … we have passed an awful milestone in our history, when the whole equilibrium of Europe has been deranged, and that the terrible words have for the time being been pronounced against the Western democracies: “Thou art weighed in the balance and found wanting”. And do not suppose that this is the end. This is only the beginning of the reckoning. This is only the first sip, the first foretaste of a bitter cup which will be proffered to us year by year unless by a supreme recovery of moral health and martial vigour, we arise again and take our stand for freedom as in the olden time.”

On 3 October 1938, Churchill added:

“England has been offered a choice between war and shame. She has chosen shame, and will get war.”

Cold wind blows for crude oil producers

Long-term June 2017 Nymex Light Crude futures (CLM2017) broke support at $60/barrel, offering a target of $54/barrel*.

Nymex WTI Light Crude June 2017 Futures

* Target calculation: 60 – ( 66 – 60 ) = 54

In the short-term, September 2015 futures (CLU15) are testing support at their March low of $50/barrel. Breach is likely, given the long-term down-trend, and would offer a target of $40/barrel*.

Nymex Light Crude September 2015 Futures CLU15

* Target calculation: 50 – ( 60 – 50 ) = 40

Declining prices will hurt the Energy sector in the short/medium-term, but the benefit to the broader economy will outweigh this in the longer term. Lower fuel prices will especially benefit the Transport sector. Highly industrialized exporters like Germany, Japan, China and the broader EU, will also benefit. While oil exporters like Russia, Iran, the Middle East, Nigeria, Angola, Venezuela, and to a lesser extent Norway, face hard times ahead.

Crude breaks support

Nymex light crude (April 2015 contract) broke support at $45/barrel, warning of a decline to $35/barrel*.

Nymex WTI Crude

* Target calculation: 45 – ( 55 – 45 ) = 35

Grantham: Lower oil price is new normal | Macrobusiness

By Houses & Holes
Reproduced with kind permission from

From Jeremy Grantham:


The simplest argument for the oil price decline is for once correct. A wave of new U.S. fracking oil could be seen to be overtaking the modestly growing global oil demand.

It became clear that OPEC, mainly Saudi Arabia, must cut back production if the price were to stay around $100 a barrel, which many, including me, believe is necessary to justify continued heavy spending to find traditional oil.

The Saudis declined to pull back their production and the oil market entered into glut mode, in which storage is full and production continues above demand.

Under glut conditions, oil (and natural gas) is uniquely sensitive to declines toward marginal cost (ignoring sunk costs), which can approach a few dollars a barrel – the cost of just pumping the oil.

Oil demand is notoriously insensitive to price in the short term but cumulatively and substantially sensitive as a few years pass.

The Saudis are obviously expecting that these low prices will turn off U.S. fracking, and I’m sure they are right. Almost no new drilling programs will be initiated at current prices except by the financially desperate and the irrationally impatient, and in three years over 80% of all production from current wells will be gone!

Thus, in a few months (six to nine?) I believe oil supply is likely to drop to a new equilibrium, probably in the $30 to $50 per barrel range.

For the following few years, U.S. fracking costs will determine the global oil balance. At each level, as prices rise more, fracking production will gear up. U.S. fracking is unique in oil industry history in the speed with which it can turn on and off.

In five to eight years, depending on global GDP growth and how quickly prices recover, U.S. fracking production will start to peak out and the full cost of an incremental barrel of traditional oil will become, once again, the main input into price. This is believed to be about $80 today and rising. In five to eight years it is likely to be $100 to $150 in my opinion.

U.S. fracking reserves that are available up to $120 a barrel are probably only equal to about one year of current global demand. This is absolutely not another Saudi Arabia.

Saudi Arabia has probably made the wrong decision for two reasons:

First, unintended consequences: a price decline of this magnitude has generated a real increase in global risk. For example, an oil producing country under extreme financial pressure may make some rash move. Oil company bankruptcy might also destabilize the financial world. Perversely, the Saudis particularly value stability.

Second, the Saudis could probably have absorbed all U.S. fracking increases in output (from today’s four million barrels a day to seven or eight) and never have been worse off than producing half of their current production for twice the current price … not a bad deal.

Only if U.S. fracking reserves are cheaper to produce and much larger than generally thought would the Saudis be right. It is a possibility, but I believe it is not probable.

The arguments that this is a demand-driven bust do not seem to tally with the data, although longer term the lack of cheap oil will be a real threat if we have not pushed ahead with renewables.

Most likely though, beyond 10 years electric cars and alternative energy will begin to eat into potential oil demand, threatening longer-term oil prices.

Exactly right, though in my view the equilibrium price will be more like $50 than $30 for the next half decade.

Don’t miss the full report.

A Solution for Afghanistan’s Opium Crisis? | The Diplomat

Sohrab Rahmaty makes a strong case for changing the strategy to control illicit opium production in Afghanistan:

….In the 1970s, Turkey was a major source of illicit opium for the drug trade. In just four years, and with the help of an American-led initiative, Turkey was able to transform its illegal opium trade into a viable and profitable legal industry. The Turkish government instituted a program that offered to license farmers’ crops for medical purposes, resulting in Turkey becoming a leader in the opiates-based medical field. There is no reason why Afghanistan should not pursue a similar path….

The cost of establishing a legitimate industry would be a fraction of the cost of “containment” of the illicit industry and would also strengthen central government control over outlying regions.

Read more at A Solution for Afghanistan’s Opium Crisis? | The Diplomat.

Crude oil: A zero-sum game?

“The current fall in price does nothing to offset the squeeze on the total economy from rising costs,” Grantham writes. “It merely transfers massive amounts of income from one subgroup (oil producers) to another (oil consumers), in a largely zero-sum game….”[Business Insider]

The above quote from Jeremy Grantham made me do a double-take. His “largely zero-sum game” refers to the global playing field. Oil producers such as the Saudis, Russia, Venezuela, Nigeria and Iran will earn less per barrel, while oil consumers like China and the EU will gain an equivalent amount per barrel. More importantly, oil consumers will receive a substantial boost to their economies. The “zero-sum game” assumes that crude production will remain constant. But consumption is likely to rise significantly as plunging oil prices deliver more savings to consumers, providing a massive stimulus to local economies. That in turn will lead to increased production of crude oil. A win-win for producers and consumers.

The Nymex Light Crude monthly chart shows a breach of long-term support at $75/barrel. Brent crude is in a similar down-trend. Target for the (WTI) decline is $40/barrel*.

Nymex Crude

* Target calculation: 75 – ( 110 – 75 ) = 40

Plunging prices may slow the establishment of new wells, but existing wells are likely to continue pumping as long as the price per barrel of crude is higher than the marginal cost. Marginal costs ignore sunk (or fixed) costs like exploration and establishing a new well. They are merely the variable costs that would be saved — like wages and consumables — if production is halted. Marginal costs are far lower than the producers’ total cost and are not yet threatened.

As for the long-term viability of producers at lower prices, the following chart is worth repeating. Prior to the 2005 “China boom”, the ratio of crude prices to CPI oscillated between 0.1 and 0.2. Over the last few years it has soared to between 0.4 and 0.6. A fall back to 0.2 would harm new, marginal producers (i.e. US fracking) but should not affect core producers. Whether governments reliant on “oil-welfare” — like Russia, Iran and Venezuela — are sustainable is an entirely different matter.

Nymex Crude

Get Ready for Iraq War IV

Retired army officer John A. Nagl writes:

The United States is now at war in Iraq for the third time in my lifetime, and after being in the middle of the first two I’m planning to sit this one out.

The first Iraq war was necessary and conducted well, as wars go; the second was unnecessary and conducted poorly at first, but ended up in a reasonable place given what a fiasco it had been at the start. This third war was entirely preventable, caused by a premature departure of U.S. troops after the second. Although it’s too soon to say how it will turn out, it is not too early to say that unless we get the endgame right, the United States will fight yet another war in Iraq before too long.

Read more at Get Ready for Iraq War IV.

America’s Never-Ending War | Project Syndicate

Brahma Chellaney, Professor of Strategic Studies at the New Delhi-based Center for Policy Research writes:

It is time for the US to recognize that since it launched its war on terror, the scourge has only spread. The Afghanistan-Pakistan belt has remained “ground zero” for transnational terrorism, and once-stable countries like Libya, Iraq, and Syria have emerged as new hubs.

….Making matters worse, Obama plans to use the same tactics to fight the Islamic State that led to its emergence: authorizing the CIA, aided by some of the region’s oil sheikhdoms, to train and arm thousands of Syrian rebels. It is not difficult to see the risks inherent in flooding the Syrian killing fields with even more and better-armed fighters.

The US may have some of the world’s top think tanks and most highly educated minds. But it consistently ignores the lessons of its past blunders – and so repeats them. US-led policies toward the Islamic world have prevented a clash between civilizations only by fueling a clash within a civilization that has fundamentally weakened regional and international security.

An endless war waged on America’s terms against the enemies that it helped to create is unlikely to secure either steady international support or lasting results…..The risk that imperial hubris accelerates, rather than stems, Islamist terror is all too real – yet again.

Read more at America’s Never-Ending War by Brahma Chellaney – Project Syndicate.

China’s Deadly Miscalculation… | RealClearDefense

From Joseph A. Bosco, senior associate at the Center for Strategic and International Studies:

Effective deterrence requires both the will and the capabilities — and the proper communication to the adversary that we are armed with both.

…several U.S. China experts publicly say otherwise, that the U.S. would not and should not intervene. Such talk, taken with other factors, encourages China’s planners to reach the same conclusion. I believe they are wrong, but a major strategic miscalculation is in the making — not because of U.S. capabilities, which are far more than adequate, but because of the perception of the lack of U.S. will.

Without the credible threat of war, the world becomes a dangerous place, with rogue states invading other territories in the belief that a response is unlikely.

As Henry Kissinger says of the Korean War, “We did not expect the attack; China did not expect our response.” Of such miscalculation, devastating wars are made.

It is evident that US foreign policy is based on President Theodore Roosevelt’s maxim: “speak softly, and carry a big stick.” But you must demonstrate that you are prepared to use the stick for it to be an effective deterrent.

Margaret Thatcher (Statecraft: Strategies for a Changing World) put it in a nutshell:

Interventions must be limited in number and overwhelming in their impact.”

Read more at China's Deadly Miscalculation in the Making | RealClearDefense.

What If Everything You Know About Terrorism Is Wrong? | The XX Committee

Great insight into the murky relationship between various government intelligence services and terrorist groups. This goes far beyond provision of weapons and money and includes founding and direction of some terrorist groups which act as covert arms of the intelligence service while providing the sponsoring state with “plausible deniability”.

…One happy by-product of the current American-led war on the Islamic State is that some people are now more willing to state that Iran does in fact possess ties to various terrorist groups, among them AQ and the Islamic State. Yet it’s still a struggle to get many people to see what’s obvious here.

Part of this willful disbelief is due to simple ignorance. Most “terrorism experts,” and virtually all of them possessing academic credentials, have exactly zero personal interaction with operational counterterrorism; therefore they are ignorant of the fact that many intelligence services — and all of them in the Middle East — play a wide range of operational games with terrorist groups, AQ very much included, encompassing everything from placing agents inside terror cells to actually creating terrorist fronts like Tawhid-Salam…..

The appearance of the Islamic State as a major force in Iraq and Syria, with threats of terrorist attacks on the West, has concentrated minds again to a degree. But unwillingness to ask difficult questions persists in many quarters. Despite the fact that we have more than circumstantial evidence that the Islamic State is being manipulated by Syrian intelligence, and Iran’s too, these notions are dismissed out of hand by too many Westerners who study terrorism. Yet if we want to defeat the Islamic State, it would be wise to actually understand it. That Washington, DC, continues its bipartisan blocking of release of the full 9/11 Commission Report, which includes troubling details of Saudi misconduct regarding Al-Qa’ida, is not an encouraging sign.

Read more at What If Everything You Know About Terrorism Is Wrong? | The XX Committee.