THE QUARTZ FORECAST

2016 will bring a world of worry in Saudi Arabia, and not much calm elsewhere, either

Obsession
Energy Shocks
Obsession
Energy Shocks

Over the last couple of years, chaos and unpredictability have become the new normal. We are rocked by upheaval in Syria and Iraq, continued Russian needling in Ukraine, corruption-fueled political topsy-turvy in Brazil, China’s economic makeover, and havoc in the oil and stock markets.

Yet this year could top all of that, if only because some of the turmoil will intersect, creating the chance for even greater mayhem. The moving parts include the plunge in the price of oil and other commodities, the flood of migrants into Europe, economic turbulence in Russia, and the brutality of ISIL and its global tentacles.

Of all the stormy trends, Saudi Arabia worries us the most. It’s in a bout of political brinksmanship with Iran, it’s fighting in Yemen, and it’s at risk of internal attack by ISIL. On the economic side, the blowback from low oil prices is forcing it to tighten its belt and contemplate the unthinkable—floating an IPO for part of Aramco, the sacrosanct state oil company. We don’t believe the Saudis will actually do so—even if they’d love the cash, the Saudi psyche is simply unequipped to be as transparent as would be required to sell equity anywhere on a Western bourse. But the very fact it’s being discussed demonstrates Saudi’s straits—and if the Saudis are in trouble, imagine the rest of OPEC.

Almost any one of these points of friction could spiral into a larger public problem for the royal family. And any serious upheaval in Saudi Arabia could be catastrophic for regional stability and the global economy. And that’s why several of our six big forecasts for 2016—based as always on Quartz’s 15 common-sense rules for understanding geopolitical trends (find the first 14 here and the 15th here)—are tied to oil.

Here we go:

1. Iran will add 1 million barrels of oil a day to the market

An Iranian oil worker rides his bicycle at the Tehran oil refinery, south of the capital Tehran, Iran. Across a Mideast fueled by oil production, low global prices have some countries running on empty and scrambling to cover shortfalls, even as more regional crude is on tap to enter the market.
Getting ready for the flood. (AP/Vahid Salemi)

For almost four years, the US and Iran have done a kabuki dance toward a quasi-thaw that could allow them at least to get their thorniest issue off the table: Tehran’s nuclear program. On Jan. 16 they finished—international inspectors completed a six-month verification of Iran’s compliance with the mandates of a nuclear accord, and Iran received the start of more than $100 billion in its frozen cash, plus the right to resume unhampered export of its oil.

The consensus view outside Iran is that it will manage to put an added 500,000 barrels a day onto the market, maybe 600,000, and that even that will take the bulk of the year and perhaps 18 months. But all along, Iran has said that it plans to sell an added 1 million barrels a day. This is a matter of cash and market share, of course, but it also brings to mind two of our 15 rules for understanding geopolitics—the Mountain and Injustice rules. The former explains the behavior of countries that view themselves as rightful geopolitical players, and behave that way; the second normally describes the often event-turning actions of people who believe they have been massively wronged, but also can refer to entire countries that feel the same way.

Iran obsessively views itself as a rightful Mountain, perhaps the most legitimate in the Middle East, with an uninterrupted national history that goes back 2,500 years and includes an impressive roster of poets, writers and philosophers. That it has been subjected to years of humiliating Saudi dominance in the oil market, not to mention the iniquities meted out by the Great Satan America, is certainly, in the Iranian view, a terrible injustice that now can finally be rectified.

The Iranians have been long preparing for this day—the ink wasn’t dry on last year’s accord before they began to meet its terms. We take Iran at its word—if it says it will export another 1 million barrels a day, that’s what it intends.

In the same vein, we expect no honeymoon with Tehran: On Jan. 12, just days before the nuclear deal was to be implemented, Tehran captured 10 American sailors who mistakenly wandered into Iranian waters, and treated them like prisoners of war; and on Jan. 15, shortly after Tehran released four Americans in an exchange with the United States, a pro-Iranian militia kidnapped three more US citizens in Baghdad (US officials say they do not believe that Iran itself ordered the abduction). Iran’s February parliamentary elections meanwhile look likely to heavily favor hardliners, who have disqualified most reformers from even running. Look for a very difficult year of tension between Iran, the Saudis, and the United States.

2. Expect another year of low oil prices

Gas prices are displayed at a petrol station in Le Chesney, France, Tuesday, Dec. 29, 2015. Petrol prices are expected to keep falling as the major oil producing countries fight for market share by increasing production. The diesel in France drops less than 1euro a liter, the lowest level in since 2009.
Gas in Le Chesney. (AP/Michel Euler)

Iran’s impending oil export boom is a main reason why the glut of crude oil will persist through the year. There’s also a serious possibility of a global recession (outside the US). China, the voracious maw of commodity demand over the last decade, could, according to some forecasters, have flat GDP growth in 2016, along with only tepid growth in oil demand. Hence, oil prices may rise toward the end of 2016, but will likely not break out of a $25-to-$45-a-barrel band.

In September, we made a wager with oil correspondents at other publications on the price of Brent crude on Dec. 31, 2016 (we won the bet for 2015); we selected $65 a barrel, which was the low guess. Obviously, such a guess now seems very high, yet as long as the price isn’t more than $65 at the end of the year, we win.

But now that the trend is clearer, we think year-end prices won’t be materially higher than their current level, at around $30 a barrel. Another force telling us this will be the case: We expect Saudi Arabia to keep its spigot wide open, producing about 10 million barrels of oil a day, even if US drillers cry uncle (see below). Saudi Arabia will do so to spite Iran, its sworn enemy, which will be hurt more than the Saudis by low prices, because Iran’s cash reserves are smaller.

So what does “materially” mean? That we could have safely bet $20 lower than our $65-a-barrel forecast for year-end 2016.

3. Putin will drop Assad

FILE - In this file photo taken on Tuesday, Oct. 20, 2015, Russian President Vladimir Putin, center, shakes hand with Syrian President Bashar Assad as Russian Foreign Minister Sergey Lavrov, right, looks on in the Kremlin in Moscow, Russia. When Russian Foreign Minister Sergey Lavrov said his country is ready to aid Syrian rebels fighting Islamic State militants on the ground, rebel commanders scoffed at the notion, pointing out that Russian aircraft were pounding rebel bases in central and northern Syria on daily basis.
October in Moscow. (AP/Alexei Druzhinin)

In June 2014, when Saudi Arabia foresaw an unexpected tidal wave of US shale oil swamping the global market, it sensed an existential threat: If expensive-to-produce US oil were permitted to simply waltz into the markets and steal share, it could shake the Kingdom’s delicately balanced rule, along with its regional influence, all of it leveraged on oil income.

So, as it did during the mid-1980s during a similar threat, Saudi Arabia decided to flood the markets itself and apply what’s been known since Rockefeller as a “good sweating”—low prices to force out less well-heeled competitors. With some $750 billion in cash, the Saudis said they were prepared for up to five years of battle, and the rest of the global petro-economy—namely their fellow OPEC members and Russia—had no choice but to go along.

The Saudis said the fighting would be over relatively quickly, and they could get back to counting their dollars. Since then, oil is down about 77% from its June 2014 peak of $115.71 a barrel, with no relief in sight. Saudi Arabia is very publicly battening down the hatches, raising fuel prices by 50%, speaking of imposing taxes for the first time, and even of selling shares in Aramco, the crown jewel and milking cow for the royal family and the entire country (we don’t believe they will float Aramco, but that is grist for another story).

Russian leader Vladimir Putin, meanwhile, is maintaining his calm visage. Don’t believe appearances, however—with a Kremlin failure to take the oil catastrophe with adequate gravity, as the Saudis have, the wheels threaten to come off the Russian economy. Russians with their eyes open are warning that the country could run through its cash reserves this year, and trigger an inflationary spiral that could crater the ruble and ruin ordinary Russians, in the same way that the much-maligned previous president Boris Yeltsin did (twice) in the 1990s.

Here is where we invoke the rules. So far, Putin has managed by relying on the Muddle Along Rule, which describes the tendency of countries to cope regardless of the mayhem around them; despite plentiful forecasts to the contrary, countries only rarely collapse entirely.

But while Muddling Along might be just fine for a country like, say, Afghanistan or even Greece, Russia doesn’t see itself in such company. In fact, the entire Ukraine crisis is explainable by Russia’s (and Putin’s) self-identity as a regional power deserving and demanding of global respect (a Mountain). Putin doesn’t want to merely Muddle Along; he would like to be remembered some time after he dies for having restored Russian greatness—a latter-day Vladimir the Great, if you will.

Which brings us to the Precipice Rule, which states that people such as Putin will do much shouting, threatening, and even invading, but generally speaking stop short of sending the whole enterprise trundling over a cliff. And that’s where Russia is now. There’s a time for shouting and settling scores, and there is a time for making a deal. We think the latter time has arrived.

What sort of deal would Putin go for? We know what he would like (which we get to below), but for starters he would offer to get the West’s feet out of the fire of Syria by removing Assad, who depends largely on Russian support to stay in power. (In an interview published Jan. 12, Putin suggested a willingness to give Assad sanctuary.) Putin would do so by rummaging around in the Alawite community (the same Islamic grouping from which Assad comes) for someone sufficiently trusted by the intelligence services to be loyal and hold things together.

We believe that Saudi Arabia will go along with such an arrangement because it would mean getting rid of the hated Assad. As for Iran, it won’t like the deal and may have to be steamrollered. The US will accept as long as an election is scheduled for sometime down the road, say within 18 months.

In exchange, Putin would demand a Western hands-off policy in Ukraine, leaving it uninvited into either the EU or NATO. He would also want a permanent, undisputed place in the firmament in Syria; and, of course, the lifting of all economic sanctions. Thus, when oil prices go back up, as they eventually must, Russia would be positioned to immediately translate that into economic resurgence and a happier domestic populace. And Russia would keep its self-respect, having gotten everything and given up nothing geopolitically.

The West, given its unimpressive record at negotiation with Putin, could give him just this deal. We won’t venture to forecast the level of Western skill at the poker table. But a better arrangement for the West would grant Putin his continued influence in Syria, alongside the US, while telling him to clear out of eastern Ukraine. The West’s leverage to cut such an arrangement is Putin’s economic desperation—this is his chance to get sanctions lifted. As a bonus, he’d get to keep Crimea.

4. Electric and autonomous cars will reach an inflection point

The Chevrolet Bolt EV debuts at the North American International Auto Show in Detroit, Monday, Jan. 11, 2016.
The Bolt: first mover. (AP/Paul Sancya)

The world’s major carmakers are under pressure: In order to meet government rules in the important US market, they must approximately double the average fuel economy of their fleets by 2025 at a time of an American love affair with trucks and SUVs.

The Staying in Power rule can be tweaked for business purposes, and we consult it in this case to plumb what the carmakers will do in order to survive: We conclude that they will add electric SUVs and trucks to their fleets with prodigious autonomous driving functionality.

Even before the year began, 2016 was already poised to launch the new age of electrics: Chevy and Tesla had announced that they would unveil mainstream electric cars that will travel 200 miles on a charge and cost in the range of $30,000 and $35,000 after government subsidies. On Jan. 6, Chevy unveiled its all-electric Bolt, which will be available for sale by the end of the year; in March, Tesla is to reveal its Model III, which it says will be for sale at the end of 2017.

Tesla has already shown the way to the electric SUV future with its Model X, which began deliveries in 2015. At roughly $80,000, the X—even though it technically hits the market at its sweet spot—is too expensive to go mainstream. The challenge for all the carmakers will be to halve the price. They will—the Stay in Power rule demands it.

5. Obama will close Guantanamo

Protesters wearing orange jumpsuits depicting Guantanamo Bay detainees, hold a sign that reads "Not One Step Back Close Guantanamo" participate in a rally outside of the White House in Washington Monday, Jan. 11, 2016, calling for a close of the detention center at the U.S. base at Guantanamo Bay, Cuba.
Protesting the camp, January 2016. (AP/Carolyn Kaster)

When the US attacked Afghanistan in the wake of 9/11, it swept up some 780 men and incarcerated them in Guantanamo Bay, Cuba. In the subsequent months, leaders of al Qaeda were captured; they, too, were sent to the detention center. The facility was stigmatized, however, after revelations of torture of prisoners, and their incarceration largely without charges or trial.

The closing of Guantanamo is the last of the major 2008 campaign promises left unmet by US president Barack Obama. We forecast that he will close the center this year.

The problem with closing Guantanamo is finding places to put the prisoners, such as 27 men designated for indefinite detention without charges. Congress has banned their imprisonment on US soil, and as long as the US won’t take any, not many other countries are willing to do so themselves. In fact, 34 of the 93 remaining prisoners have already been cleared for release but remain at the center because of fear that they could return to the fight against the US.

Yet Obama treats the Guantanamo question with the fervor of a True Believer, a rule that explains the behavior of individuals whose impulses can verge on religious-like conviction. One of his first acts on taking office was to issue an executive order to close the center. And on Jan. 10, one of his aides said he’s preparing a plan to submit to Congress to do just that, a prerequisite demanded by leading senators and congressmen.

It is clear that Guantanamo is not a trivial detail to Obama, but in his view central to his legacy. We conclude he will want to leave office having this self-identified task done.

6. Trump will beat Republican rivals, but lose to Clinton

In this Oct. 29, 2015 file photo, Republican presidential candidate Donald Trump in Sparks, Nev. One year before Election Day 2016, Republicans are consumed by uncertainty and infighting while Democrats are coalescing behind Hillary Rodham Clinton. But there's a long way to go.
The nominee. (AP/Lance Iversen)

For the last several months, US political pundits—538’s Nate Silver, the New Yorker’s Ryan Lizza, etc.—have said to ignore early polls showing Donald Trump leading the pack of Republican candidates for US president, and more or less forecast that he will not be the party’s nominee. They said that early polls simply are not reliable and that, like early leaders in every modern US election cycle, Trump, too, will fade when voters start to pay attention and headed for the polls. The Financial Times forecast (paywall) that Texas senator Ted Cruz will get the nomination instead.

It all reminds me of a lesson from David Briscoe, my AP bureau chief during the Philippines revolution: While rumor, supposition, and robust voices will claim all sorts of complex things, Briscoe said, the reality more often than not is the simple thing you see on the surface. He was telling me to ignore the rumors and look at the facts.

And what are the facts in the case of the US election? That Trump has led—by a good distance—in virtually every national and many state-level polls for several months. The latest national poll, by the Wall Street Journal and NBC, have Trump leading Cruz, his nearest rival, 33% to 20%. A Des Moines Register/Bloomberg poll has Cruz leading Trump by three percentage points in Iowa, where the Feb. 1 caucus will mark the first major step in whittling the field. But other polls have Trump ahead in Iowa, and he has a big lead in all the major polls in the next state to vote, New Hampshire on Feb. 9.

Therefore, following the informal rule of accepting the story that’s right there in front of our faces, we forecast that Trump will win the Republican nomination. He will face Democrat Hillary Clinton, who also has led in national and most state polls consistently. Clinton will beat Trump by a landslide, based on the Precipice Rule, which, as we described above, explains that states and their people will sometimes walk right up to edge of disaster, but generally speaking refrain from going over.

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