Author Archives: Ricardo Fagundes Leães

About Ricardo Fagundes Leães

Internacionalista, Pesquisador da FEE. International Affairs Researcher at the FEE.

Spanish labor reform: sure losses, uncertain benefits

In February 2012, in Spain, the proposal of labor reform headed by the government of Mariano Rajoy, of the Popular Party (PP), was converted into law. Truthfully, this undertaking is located in a larger context of labor market flexibilization movements, such as in Mexico, Chile, Argentina and, especially, in Brazil, which means that it cannot be considered a unique case. More than five years after its ratification, an evaluation of its results is required, so that parallels can be drawn with the process in progress in our country.

In short, the reform aimed at facilitating dismissals and hiring on a partial or temporary basis. Accordingly, the legal obligations of the companies that cut off their employees were reduced and the processes for the admission of new employees were simplified. The official justification was that, in a context of crisis, these changes would allow the external flexibility of firms (i.e. layoffs) to become internal flexibility (i.e. wage reductions), which would soften their negative effects and enable a faster recovery.

At first glance, the available data seem to indicate an ambiguous picture: concomitant increase in job creation and precariousness in labor relations. In fact, by the end of 2016, compared to the last quarter of 2011, the number of employed persons increased 350,000 and that of salaried employees was augmented by 250,000. Thus, the unemployment rate fell from a level of 24.8% to 18.5%, which was welcomed by enthusiasts of the legislation updates. On the other hand, the hiring of temporary employees and part-time workers has advanced, making the average annual salary, currently 800 euros, lower than the one in 2011.

It is up to the analysts to see if it is possible to attribute a direct causal relationship between the reform and the generation of jobs. That being said, despite the positive data on job creation, it should be noted that the analysis of the period when the reform was taking place shows a dubious scenario: although the unemployment rate has actually fallen since 2011, one should note that its level rose until mid 2014 — a trajectory that was only reversed with the resumption of economic growth in that year, that is, the quarters immediately after the reform point to an opposite picture to that imagined by its supporters. As the correlation between economic growth and job creation is well-proven in the specialized literature, it remains uncertain, albeit plausible, that the decline in the unemployment rate was actually caused by the labor reform

Figure 1

Number of employed persons in Spain — 1st trim./09-4th trim./15

SOURCE: Encuesta de Población Activa/Instituto Nacional de Estadística (2016).

Thus, a careful analysis of the data available indicates that the direct relationship between the flexibilization of labor laws and the creation of jobs is not conspicuous. In the Spanish case, at least, the link between the two elements only took place after the occurrence of an opposite phenomenon, indicating that the effect of job creation may be due to a third factor, independent of the reform — which casts doubts about whether a similar result would not have occurred even without these changes. This finding is especially relevant for Brazil, as the effects of the labor reform recently approved by Michel Temer will be observed in the coming months.

On the other hand, the negative externalities allowed for by the change in legislation seem to be inextricably linked to the reform itself: precariousness of work, increase in partial and intermittent contracts and immediate wage reduction were the stated aims of those who proposed the law. In fact, part-time jobs grew by 1.8 pp per year between 2011 and 2016, standing at 15.3%, while the rate of involuntary temporary contracts increased by 5.2 pp, reaching 60.5%. Finally, the reform also provided an increase in the number of “false self-employed workers”, employees who are forced by their companies to work on their own account. In relation to the total number of self-employed workers, this group represented 62.9% in 2011 and rose to 67.1% in 2016, confirming the trend of worsening the employment protection conditions.

In addition to warning about the need to reduce labor costs in order to turn external flexibility into internal flexibility, reformers also argued that this process would favor Spanish companies in terms of international competitiveness, as lowering these costs would allegedly increase their profits. On this point, it should be noted that these benefits will only occur if the world economy recovers, so that importers will increase their demand for Spanish products.

In these circumstances, it must be said that, for Spanish workers, the benefits of the labor reform seem ambiguous at best, since job creation is not necessarily linked to the change in legislation. In contrast, the losses are crystal clear, once these shifts have spawned precariousness in labor relations and wage contractions.

The trade agreement between Mercosur and the European Union: insurmountable obstacles?

The prospect of a free-trade agreement between the Common Market of the South (Mercosur) and the European Union (EU) has been on the agenda of politicians, businessmen and researchers for many years. In fact, the attempt to formalize a free-trade agreement (FTA) between Mercosur and the EU dates back to 1995, when the Framework Agreement on Interregional Cooperation (FAIC) was signed. Since then, despite repeated remarks of mutual interest on the conclusion of the agreement, the parties have not reached an understanding on the issue yet, so there are still doubts about the concrete possibilities for its implementation. Recently, with the election of Mauricio Macri in Argentina, Michel Temer’s inauguration in Brazil and the suspension of Venezuela in Mercosur, it has been speculated that the agreement might be closer to its conclusion. In our view, however, despite these events, several obstacles to a positive outcome for those in favor of the treaty remain.

In general terms, the main obstacles to the viability of the free-trade project between Mercosur and the EU are threefold: (a) there is a significant fear by European agricultural producers that the agreement entails insurmountable damage, for they see the competition with South American producers as a risk to their very existence on the market; (b) as a result of this fact, some South Americans have misgivings about a positive outcome, even if they support the agreement, believing that the Europeans will not give up their agricultural protectionism; (c) finally, in South America, there are political groups that express a general opposition to the signing of an FTA with the European Union, since they consider that it represents a capitulation of national interests to those of the Europeans, making it impossible for South American countries to implement an autonomous regional development strategy.

Contrary to what is often suggested by media analysts and pundits, the biggest obstacle to the conclusion of the agreement between Mercosur and the EU has always been the resistance of European farmers, who are fearful of South American competition. Ever since the very start of the negotiations, agricultural sectors in Europe have expressed concern that this treaty would prevent them from competing in the food market. In fact, these producers already receive protection and subsidies within the European Union, through the Common Agricultural Policy (CAP), one of the most important policies of the EU.

The CAP was established in 1962, and its main goals are to ensure the regular supply of foodstuffs, maintaining a balance between the city and the countryside, valuing natural resources, preserving the environment and granting farmers an income in accordance with their productivity. By doing that, the CAP aims to consolidate a single large common market within which agricultural products can move freely, but with preference for products produced in the European Union. While the CAP is intended to increase agricultural productivity, safeguard regular supplies to consumers and ensure the stabilization of reasonable prices, its central objective is to protect European farmers from international competition so as to prevent rural exodus.

The importance of the agricultural sector to the European Union is clear when the data provided by the European Union Statistics Office (Eurostat) are analyzed. In 2016, for example, there were 8.73 million individuals employed in agricultural activities in the rural area, which represented 3.99% of all employees.1 In absolute terms, Romania (19.37%), Poland (18.94%), Italy (9.45%), Spain (8.71%) and France (8.32%) were the most important countries. In terms of total employment, Romania (20.73%), Greece (11.74%), Poland (10.41%), Lithuania (7.68%) and Latvia (7.60%) were the largest ones.

As regards the labor force in the agricultural sector, it is important to highlight the fact that most of these people are allocated in the form of family farming. Fifteen out of the twenty-nine countries in the bloc employ more than 80% of the labor force in this modality, and in only four of them the family farming sector corresponds to less than 60% of the total. This way, we can see the importance of this segment, which could become quite vulnerable without the existing protection in the EU. It is for this reason, therefore, that the European Union’s public policy makers give centrality to the CAP in order to avoid negative economic and social impacts which would most likely weaken the European agricultural sector.

As the primary sector in South America is much more competitive than in Europe, it is in the best interest of the Mercosur countries to liberalize the European Union’s agricultural market, given the vast possibilities this process might entail in terms of exports to this region. Consequently, this is precisely the point that represents the biggest obstacle to the adoption of a free-trade agreement between the two blocs, since European agricultural producers are strongly pushing for the maintenance of the current barriers. These, in turn, are justified because they are seen as essential for the survival of the CAP, which was so painstakingly built. In addition, the European Union is still feeling the significant effects of the 2008 economic and financial crisis, which has led to double-digit unemployment rates in several countries. In these circumstances, there is a strong fear that the disruption of the agricultural sector will have a negative impact in terms of job losses and income if agricultural markets are opened up.

Due to the EU’s stance, skepticism among members of Mercosur about the viability of the agreement has increased. Regarding that, we should note that Paraguay and Uruguay — because of the representativeness of their agricultural sectors — have always been more favorable to the implementation of the agreement, while Brazil and Argentina, although having never renounced the project, have become hesitant about the benefits of the negotiations. In general, especially in media outlets, South American resistance is associated with the rise of progressive governments in the region, especially those of Luís Inácio Lula da Silva and Dilma Rousseff in Brazil and those of Néstor and Cristina Kirchner in Argentina.2 This ideological characterization, however, does not truthfully represent the negotiations, although bearing some resemblance to reality.

Regarding Brazil, for example, some signs of discredit could already be noted during Fernando Henrique Cardoso’s (FHC’s) second term, when, in 2001, in a speech at the French National Assembly, he stated that he hoped for a trade association between Mercosur and the European Union, but pondered the risks that protectionist aspirations could supplant the spirit of free trade. In fact, FHC’s remark had a strong symbolic component, since France had already made explicit its opposition to the agreement. In the French perspective, the FTA would be extremely damaging to its farmers and jeopardize the very meaning of the CAP, a position not welcomed by the Brazilian government. Despite the occasional differences, FHC’s stance was kept during Lula’s administration, which also emphasized the benefits of free trade and pointed to European protectionism as the main obstacle to the progress of the negotiations.

Dilma’s administration expressed willingness to resume the negotiations on the agreement, which had been interrupted between 2004 and 2010. However, although some conferences to discuss the viability of the process had been held, resistance to the openness to the European agricultural sector remained, which hindered a broad understanding on the subject. Despite this, there has always been some reluctance among some groups of the Workers’ Party (PT) to the treaty, interpreted as a gesture of subservience to the large European capitalist groups, which would preclude an autonomous development project. It should be observed, however, that these sectors have always been outnumbered within the Brazilian government, which has never abandoned the rhetoric of defending free trade and the benefit of an FTA with the European Union, provided that the Europeans agree to liberalize their agricultural market.

As for Argentina during the Kirchners’ administrations, a different situation is seen. Rather than welcome the supposed benefits of free trade, the Argentinians were suspicious of the benefits of the agreement for assuming that it would block their attempts at reindustrialization and jeopardize the survival of their remaining industrial groups, such as auto parts, chemicals, electrical equipment and capital goods. Thus, in addition to demanding a longer term for the implementation of the agreement, the Argentinians demanded the inclusion of an ample list of industrial sectors that would not be part of it, which was considered unacceptable by the European representatives. Because of this posture, Cristina Kirchner’s position in Argentina was considered a major obstacle for the parties to arrive at an understanding, so her departure and Macri’s inauguration were seen as a trigger for the agreement.

In fact, the political transition in Argentina is a favorable element to the progress of the negotiations between Mercosur and the European Union, since the list of restrictions of the Argentinian government no longer constitutes an obstacle for the treaty to be signed. However, as already stated above, the biggest obstacle for the talks to move forward is the European agricultural protectionism, which will hardly cease to be an impediment. Although some analysts prefer to hold the Kirchners’ governments accountable for hampering the process, a more thorough look reveals that negotiations have been stalled since the late 1990s, years before the emergence of a wave of progressive governments in South America.

1The data series used were Total Employment — All Categories, which includes total employment under the categories of the Nomenclature of Economic Activities (NACE) and Total Agriculture Forest and Fishing Employment, which refers to the total number of employees in agriculture, forestry and fishery. Both series include individuals between 15 and 64 years of age.

2The Venezuela of Hugo Chávez and Nicolás Maduro will not be analyzed in this article because the country only joined Mercosur in 2012 and was suspended in 2016, so it does not represent an obstacle to the negotiations with the European Union.

Editorial

China’s economic rise has dominated the agenda of analysts and researchers for many decades. In fact, throughout this period, the country has experienced spectacular growth rates, which has boosted its foreign trade and direct investments extraordinarily. More recently, although its rates have declined, as compared to the ones of the previous cycle, China keeps moving at the fastest pace among bigger economies, apart from India, prompting further analysis of its challenges and strategies.

Since China started promoting a diplomatic and economic opening in the 1970s, it has undergone several transformations in terms of trade and investment. At first, while receiving investments from the U.S., Japan, and Western Europe to diversify its industrial park, its exports were predominantly primary — mainly oil. Over the years, however, the Chinese have become the world’s leading exporters, selling manufactured goods, whose aggregate value has not stopped growing. At the same time, their need for primary products has made them the largest importer of commodities, such as iron ore, soybeans and crude oil. This fact is shown in trade relations with Brazil and more specifically with the State of Rio Grande do Sul, whose partnership with China is based on the sale of commodities and the purchase of manufactured goods.

In this issue of Panorama Internacional, therefore, we will address some matters that pervade the dilemmas of China’s ascension and its relations with Brazil and Rio Grande do Sul. To do so, we selected articles that cover some recent political changes in China and the Chinese agriculture, technological innovation policies and foreign policy. However, we do not intend to exhaust the debate on the subjects chosen for this issue, and we also recognize the relevance of other topics that had to be left out of the discussion. Nonetheless, we do believe that this issue can contribute to the controversies over China’s rise, enlightening matters that, in general, delimit Beijing’s strategic behavior.

In Tarson Núñes’s article, we notice that, given the hegemony of the Chinese Communist Party in the country’s politics, it is necessary to look at the state to understand the dynamics of the Chinese economy. Hence, we can see an attempt by the Chinese government to adapt to the new international scenario, after the crisis of 2008, in order to harmonize the socioeconomic issues with the conjuncture. Thus, in its official resolutions, the Chinese government has already stressed its commitment to promote the transition from an export-led growth model to one with an emphasis on the domestic market to provide for the well-being of its new middle class. For this aim, the need for improvements in labor relations and environmental issues — abandoning the strategy to push for growth at any cost — is asserted, as well as the ambition to technologically qualify the country and increase the productivity of the economy.

Next, in Sérgio Leusin Jr.’s analysis, we find out that agriculture is another area in which China has been undergoing major transformations. Indeed, although the country has become a major importer of food, its agricultural sector is still large, especially when it comes to rice, tobacco, wheat, corn and soybeans. However, since rural flight remains a persistent social phenomenon, the government has been seeking ways to raise agricultural productivity in an ecologically sustainable way, to curb the flow of population towards urban centers. In addition, Leusin Jr. points out that government subsidies are a crucial element of the Chinese agriculture, once the government purchases a portion of the production and sets minimum prices, causing distortions in the global food trade, which has already been reported to the WTO by the United States.

After that, in Iván Tartaruga’s text, the incentives for technological development in China are scrutinized, a topic which has drawn the attention of scholars in recent years. In fact, especially since 2008, investment in research and development has skyrocketed, leaving China only behind the U.S. in this regard. Tartaruga argues that, despite all this, the amount invested does not in itself guarantee a greater generation of innovation, and precisely for that reason, the Chinese have been seeking to connect these policies with their country’s socioeconomic needs in three ways: (a) by fostering inclusive innovation, targeting low income population; (b) by organizing innovation pools in some provinces; (c) by prioritizing “clean” or “green” technologies. Yet, Tartaruga cautions that the lack of a competitive business environment conducive to innovation can hamper the Chinese advance in this area.

Finally, Robson Valdez’s study addresses the political and economic relations between China and Brazil and between China and the State of Rio Grande do Sul. In his view, our country and our state are at a crossroads, once our relationship with China is apparently no longer based on mutual benefits that would contribute to our development. Besides the aforementioned trade asymmetry, as a result of the fact that primary products constitute the core of our exports to China, another issue is that the Chinese are eager to acquire some key sectors of our economy. Instead of promoting Brazil’s advancement, Chinese investments appear to be serving Beijing’s interests exclusively, in a context in which both Brazil’s and Rio Grande do Sul’s governments have set fiscal stability as top priority. Thus, in order to overcome short-term obstacles, they are giving up mechanisms and instruments that could be used to promote economic growth and implement long-term public policies, thereby compromising national sovereignty.

This issue’s interviewee is Carlos Aguiar de Medeiros, PhD in Economics from the State University of Campinas (Unicamp) and Associate Professor at the Economics Institute of the Federal University of Rio de Janeiro (UFRJ). Medeiros’s research focuses on development, unemployment, technology, growth, industrialization, the state, markets, monetary standards, balance of payments and international projection.

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The presidential elections in the U.S. and their multiple meanings

The American presidential elections, which took place in November 2016, represent the most awaited political event of the year by experts, media professionals and the general public. This is true not only because the contest between Hillary R. Clinton and Donald J. Trump spawned several controversies throughout the campaign, but also for the fact that the presidential election cycle in the United States brings to the spotlight disputes between programs whose reach is global, due to the military, economic, demographic and territorial power of the United States.

This issue of Panorama Internacional discusses some of the main structural and conjunctural aspects regarding the United States and its presidential elections. Topics such as the functional distribution of income, the monetary policy, the political and electoral system and the strategic reorientation of the American foreign policy have been analyzed so that the reader can familiarize himself/herself with issues that indicate which paths will be taken by the country in the years to come. Naturally, it is not our aim to exhaust the debate over these issues, but to provide means for the comprehension of trends regarding politics, economics and international relations.

After reading this issue, we hope the reader will be aware of the most important dilemmas that the United States is facing today regarding its strategic goals, its economy and its political system. We understand that the country has been going through structural changes in the past decades, which puts it in a situation of intense political polarization and acute social conflicts. In 2016, this situation was translated into a distinct electoral campaign — compared to previous ones — as candidates such as Donald J. Trump and Bernie Sanders, who were not related to the political establishment, had unexpected results in the primaries.

It is our understanding that the surprises during the primaries reflect a change that has been taking place for decades: the functional distribution of income. In Alessandro Miebach and Augusto P. de Bem’s article, we can see that, since the 1980s, social inequalities have not only ceased their descendant trajectory, but they have also started a process of systematic growth, which is reflected by the Gini coefficient.

At first, the association between the increase of social inequalities and the advance of non-traditional candidacies may seem blurry and many political analyses do not consider this aspect, but we firmly believe that these facts are inseparable. That is due to the fact that there is a growing feeling among many social layers in the U.S. that the American political system is ruined, for it only serves the wealthier. In this context, the frustration falls into two completely opposite perspectives: on the one hand, there are those who favor structural reforms, raising taxes for the rich, strengthening public services and ending corporate campaign financing; on the other hand, there are those who defend tougher legislation to tackle criminality, stricter immigration laws and the repeal of measures that were created to protect social, ethnic and gender minorities.

Next, André Scherer presents his article about the recent and possible future behavior of the Federal Reserve (Fed), responsible for moderating long-term interest rates in the U.S. As already shown by Miebach and de Bem, the financialization of the capitalist system has spawned structural changes in market economies, creating a scenario in which all the decisions by the Fed have worldwide repercussions. In that sense, the author argues that, even though the expansionary monetary policy that characterized the post-crisis period is no longer in effect, the expectations of a sudden rise in interest rates have not been confirmed. Although there has been a 0.25 percentage point increase at the end of 2015, some predicted three other rises for this year, which has proven wrong, and there are those who say that interest rates will remain untouched until the end of 2016. According to Scherer, this frustration is mostly due to the realization that the recovery of the American economy has been slow, and that the creation of jobs in the past months does not seem to show a surge in industrial investment.

After the analysis of economic topics, Augusto N. de Oliveira dissects the electoral system in the U.S., clarifying how presidents are selected in the country and explaining their prerogatives and duties. In his article, Oliveira shows how much the political and electoral process has changed in America since the first presidential election took place in 1788. Generally speaking, it is possible to highlight two parallel phenomena: insofar as the president has started taking over responsibilities which were not assigned by the Constitution, the electoral process has changed too, with the establishment of political parties and shifts in the Electoral College. Nowadays, however, the system has been heavily criticized, for states are entitled to determine the congressional districts, and they sometimes do that in order to benefit a particular party. Moreover, many states are also creating rules to restrict voting by minorities.

At last, Bruno M. Jubran evaluates the American foreign policy, assessing its geopolitical reorientation during Obama’s term. In mid-2011, while the last American troops were being withdrawn from Iraq, Obama announced the ‘Pivot to Asia’: after decades considering the Middle East its strategic priority, the United States would henceforth focus its international agenda on the Asia-Pacific region. That goal, released in an article signed by Hillary R. Clinton, indicated that the U.S. would expand its activities in that region by military, political and economic means, trying to attract these countries even more to its sphere of influence. Outspokenly, the government recognized that its foreign policy would be based upon containing China’s rise, in order to reassure America’s dominance in the 21th century.

The interviewee of the current issue is Cristina S. Pecequilo, PhD in Political Science from the University of São Paulo (USP), Associate Professor of International Relations at the Federal University of São Paulo (Unifesp) and at the Graduate Program in International Relations San Tiago Dantas, Associate Researcher at the Brazilian Center of Strategy and International Relations (Nerint), of the Federal University of Rio Grande do Sul (UFRGS), and at a joint Study Group between Unifesp and the Federal University of ABC (UFABC). Pecequilo develops research on American foreign policy, among other topics.

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The multifaceted nature of oil dynamics

After a ten-year upward cycle, oil prices fell sharply since July 2014, in a move that turned the previous cycle upside down. Even though the commodity’s value has recovered a small portion of these losses in the past months, the speed of the fall is still noteworthy, mostly because it was not anticipated by leading analysts and specialized agencies. Soon after that, it was suggested that the price had fallen due to the slowdown of the global economy (especially China), which caused a decrease in oil demand in a context where the oil supply was growing (Figure 1). However, these assumptions, although empirically true, do not take full account of the situation, which presents itself more multifaceted, with roots that go beyond the relation between supply and demand.

 grafico-1

When one reads about the oil price dynamics, it often happens that only the amount demanded by consumers and the one offered by producers, as well as the level of its global stocks, are considered. In this sense, every time there is an imbalance in one of the factors in question, there would be a change in prices in order to restore market balance. It so happens, nonetheless, that historically the oil price trajectory is not fully consistent with the behavior of its demand, at least in terms of its amplitude. Therefore, we must go beyond textbook explanations in order to try and understand this process, for oil is viewed as a national security asset by most countries, giving it a leading position in the global economy. Thus, in our understanding, the geopolitical dispute over the property and exploration of oil reserves is paramount to any evaluation of the subject.[1]

The main factor of oil market transformations in the last years is directly related to the increase in exploration of unconventional resources, which made possible the recovery of the oil and gas industry in the United States (Figure 2) — which had been declining for decades — and the boost of oil exploration in Canada (Figure 3). With the “Shale Revolution” and the growth of oil sands, the United States was able to cut back its oil imports, notably the oil produced by members of the Organization of the Petroleum Exporting Countries (OPEC). That is an extraordinary situation because it reverses a pattern of growing energy dependency in the United States, which had been putting the world’s most important economy in a position of relative subjection to the OPEC. So, insofar as China’s demand for energy resources increased, there was an escalating fear that there would be an oil shortage in the U.S. eventually, and that feeling naturally pushed prices and speculations upward.

 grafico-2

 grafico-3

The viability of unconventional resources was only a reality after years of high oil prices, given its high break-even[2], as well as a set of technological innovations (fracking[3], 3D geological mapping and horizontal drilling). Throughout this period, however, there were growing fears that the world was approaching the “peak oil”, once the oil consumption of emerging countries kept expanding, in a background where most oil reserves were already declining. In a context of financialization of commodities, such fears made oil prices skyrocket, since this resource seemed close to extinction. Nevertheless, in a clear paradox, it was precisely this background — theoretically inauspicious — that made possible the oil and natural gas production in new regions in North America, contradicting analysts’ and policymakers’ forecasts[4].

Among the most important consequences of the rise of unconventional resources, we should highlight, first of all, the resurgence of the U.S. oil industry, which grew by 74,42% in terms of total volume between 2008 and 2014. Moreover, in that same period, there was a 36.71% reduction in oil imports in the United States. Thirdly, there has been a significant change when it comes to energy imports by the U.S.: in 2008, OPEC countries accounted for 55.35% of that total, while Canada was responsible for 19.99% of that amount. In 2014, however, the two were virtually the same, since OPEC’s slice represented 40.82% of that total, versus 39.32% of Canada. Lastly, in these years, the boost of Canadian oil production (roughly 1 million barrels/day) coincided with the increase in Canadian oil purchases by the United States (Figure 4).

 grafico-4

In light of the above, it appears that the recent drop in oil prices has succeeded the sharp reduction in U.S. energy dependency. It is much more than an oil surplus in international markets and a decline in consumption; it is a major transformation, as the most important global power (the main consumer and importer of oil) seems on the verge of easing a problem that, up until now, was worsening. Given the importance of oil, both economically and militarily, it is not difficult to understand why the decreased need of energy imports from OPEC is a relief for the U.S. government and consumers. Certainly, in an already favorable context, the cooling of world demand may also have contributed to the decrease in price, but it does not explain, by itself, the phenomenon as a whole.

For the United States, energy security is not only about the supply of energy resources at its disposal, but the guarantee that the energy flow to its allies is not interrupted. In that sense, it is clear that the “Shale Revolution” has brought two major consequences that can alter the European energy market. First, the reduction in U.S. imports of natural gas (mainly from countries such as Algeria and Nigeria) makes it possible for European countries to purchase energy from those economies. Due to the fact that the region is highly dependent on Russian energy imports, the emergence of new suppliers may reduce its vulnerabilities by curtailing Russia’s bargaining power. In addition, due to the recent abundance, the natural gas market is saturated in the United States, so that the U.S. government has authorized energy exports to Europe, which could also diversify its options.

When oil prices began to plunge, it was suggested that the movement represented a Saudi maneuver to harm Iran and Russia, its political and energy rivals, and to derail the production of unconventional resources, mostly in the United Sates. This perspective gained ground because, as oil prices plummeted, Saudi Arabia not only did not cut its production, but increased it slightly at first, and then stabilized it in subsequent months. Given the importance of the swing producer[5], it seemed only natural to speculate about Riyadh’s real intentions, although no official statement in that direction has been released. Notwithstanding, as much as this explanation is internally consistent, it is necessary to note some aspects that show how complex and multifaceted the subject is in order to understand that Saudi Arabia may not gather the means to control the oil market that way.

When put in perspective, Saudi energy policy has consistently kept a pattern of caution and fear about sudden changes regarding oil. In the 60s and 70s, for example, the country acted carefully as its neighbors demanded an oil embargo on Israel’s supporters. In the 80s, when oil prices were low, OPEC members pushed Saudi Arabia to cut its production, as it did, but had their expectations dashed, once those cuts were offset by increases in regions outside OPEC, keeping prices low and diminishing Saudi’s market share. Moreover, at the beginning of this century, when high prices benefited Iran and Russia, there was no effort in Saudi Arabia to increase its production and plunge prices. As a matter of fact, Saudi energy policy has been much more reactive then active, and more cautious than bold.

Saudi Arabia has indeed already declared its interest that oil price be maintained at modest levels, a position that sets it apart from other major oil producers. Nevertheless, even if Riyadh is taking advantage of this beneficial circumstance, it would be an extrapolation to state that there is intentionality behind this process. Saudi Arabia is the only state that has vast proven yet untapped oil reserves, but the fall in oil prices was not preceded by a Saudi announcement that showed willingness to expand its production significantly. It was not the expansion of production which anticipated the collapse in prices, but quite the opposite: only after the oil prices began to drop, Saudis increased mildly their own production. More than a plot, it is a strategy that seeks to not repeat past mistakes and to transfer costs to its rivals. From the point of view of the Saudis, if production cuts are necessary to stabilize prices, they should occur elsewhere.

In the current situation, unconventional resources seem to have mitigated energy vulnerabilities in the U.S. and Europe, and apparently have debilitated the political sway of major producers, such as Saudi Arabia and Russia. However, it remains unclear how long this is going to last. Due to its high break-even, the unconventional resources industry is going through a hard time, as shown by investment cuts and underproduction. Despite these problems, so far, most shale companies did not go bankrupt, even if the smaller ones are in a dire situation, which shows that their resilience may be greater than expected. Still, the persistence of low prices may reverse last years’ expansion. In that scenario, U.S. energy dependency would once again be an issue, and that would reposition the geopolitics of oil in favor of Saudi Arabia.

[1]  With the increasing financialization of natural resources, the economic and geopolitical movements tend to be amplified, which can affect prices in both volatility and trend.

[2]  The break-even is the point at with the income from sale of a product or service equals the invested costs.

[3]  Fracking, a slang term for hydraulic fracturing, is the process of creating fractures in rocks and rock formations by injecting specialized fluids (a mixture of water, sand and chemicals) into cracks to force them to open further.

[4]  In A mudança na tendência do preço das commodities nos anos 2000: aspectos estruturais (2013), however, Serrano points to an opposite relation: when oil demand started to grow, OPEC did not raise its production to the same level, and the “new production” that came eventually was actually from regions whose production costs were higher, thus establishing a new break-even for this activity.

[5]  Swing producer is a supplier of a close oligopolistic group of suppliers of any commodity that controls its global deposits and possesses large spare production capacity.