[Text / Andrei Konoplyanik, translated by Yang Jiayuan, Observer.com]
In my opinion, all the current problems in the energy sector of the European continent are related to the end of the "long century" of US domination of the world economy.
"Europe's energy problems are based on the end of America's 'long century'", screenshot from the website of the Russian Council on Foreign and Defense Policy
Arrigit's "Long Century"
Giovanni Arrigi identified four systematic cycles of global capital accumulation in his classic book The Long 20th Century: the Genoa cycle from the 15th to the early 17th century, the Dutch cycle from the late 16th century to the end of the 18th century, the British cycle from the second half of the 18th century to the beginning of the 20th century, and the American cycle in the late 19th century and continuing into the current phase of financial expansion (Arrigi's book was published in 1994 after 15 years of writing). At the turn of the century, the British cycle came to an end amid the global turmoil of World War I and the American cycle (see chart 1).
Exhibit 1: The path towards liberalization of global trade, based on Financial Times data
At the beginning of the American accumulation cycle, I think one event is quite important: at the end of November 1910, the six major American bankers held a secret meeting on Jekyll Island. This meeting led to the creation of the Federal Reserve System of the United States in December 1913, which largely formed the core of what Arrigi called America's "long century."
The two rises of the United States in the 20th century can be seen as the basis of its accumulation cycle, the "long century." These two rises were based on the two world wars and their postwar recovery periods, and it is worth noting here that both wars took place in Europe and Asia, not on the territory of the United States. To a large extent, the United States provided materiel and technology (on the basis of expanding its own production) for these two wars and post-war reconstruction outside its territory. On the other hand, the dollarization of the world economy has deepened under the operation of the Federal Reserve. It can be said that the "long century" of the United States is based on the "destruction-reconstruction" of the world beyond its borders, and the cycle repeats itself.
The growth of American dominance after World War II depended heavily on the growth of globalization – the development of uniform rules of the game and standards for the protection of trade and investment. On the one hand, this reduces the risk of international trade and investment; On the other hand, these rules are formed mainly by promoting the bilateral agreement system. The United States will inevitably participate in this, as the strong player in the bilateral side, to set rules that suit its own interests.
The first agreement for the avoidance of double taxation was concluded in the 2020s, an agreement for the protection of investments was signed in 1959, and by 2010, nearly 3,000 such agreements had been reached. These agreements are largely based on the U.S. model, which applies its model to various corresponding multilateral agreements that protect the interests of capital-exporting countries. And the root of all this - in the entire "long 20th century", the territory of the United States has never experienced a world war or a local war with devastating consequences. In other words, the so-called globalization was largely established under the American model.
However, it seems to me that the financial crisis of 2008-2009 marked the end of the US cycle. In addition to the three traditional centers of the world economy, new and powerful competitors have emerged in many areas of the world market - the BRICS countries, mainly China and India, but also the countries of Southeast Asia. At that time, these countries expanded their competitive advantage by reducing labor costs and producing low-value-added products on the world market, and made niche breakthroughs in some industries.
The current rules of the game no longer maintain U.S. dominance and give the U.S. a competitive advantage in the phase of world economic recovery and growth, but instead allow America's young and enterprising competitors to grow to an equal footing. There are only two strategies to meet this challenge: either run faster than your competitors, or "pour glass into your opponents' shoes" so they can't run.
There has been a clear logical shift in the United States: from globalization to regionalization to protectionism. Sanctions and embargoes are two extreme tools of protectionism, and today they are a common means for the United States to compete. This means that the United States has rejected the basic norms of international law, the basis of the globalization process.
In other words, the United States needs to pursue yet another "break-and-rebuild" cycle of the world beyond its territory (passing a new Lend-Lease Act and implementing a new Marshall Plan) in order to stimulate its own economic growth and maintain its lost global dominance. At the same time, the European Union, as a military and political ally of the United States, has always followed the United States, although most of the time the United States' actions in the economic field are actually aimed at Europe itself, which has gradually become the weakest link in the global economic competition.
Three main competitors of the United States
For the United States, there are three competitors that must be hit: Russia, Europe and China. To defend its losing position in the global economy, the United States is now pursuing long-term, purposeful strategic economic action against these three adversaries. Moreover, the actions of the United States on the "European front" are aimed at all three opponents at once.
Russia: By involving Russia in a military conflict with Ukraine and causing Russia to devote resources to it, the United States creates an additional economic burden on Russia, thereby delaying possible technological breakthroughs in Russia's non-military industry and slowing Russia's advancement to the world in these areas. By directly enacting sanctions against Russia and the EU's anti-Russian sanctions agenda, the United States has created obstacles for Russia's energy supply to Europe, aiming to supply its more expensive liquefied natural gas to Europe, making it impossible for Europe to buy cheaper (at European cut-off prices) and more environmentally friendly and cleaner Russian pipeline gas than American gas. As a result, U.S. LNG opens up a profitable European market.
U.S. LIQUEFIED NATURAL GAS CARRIER, PICTURED FROM THE U.S. Department of Energy website
Europe: The intra-EU energy market is based on the expectations of exchange participants (i.e. energy traders and resellers on virtual trading platforms), and the restriction of Russian energy supplies to the EU increases energy prices, as the EU is expected to face a shortage of external energy supplies (from a price point of view, there is no and will not be a better alternative to Russian energy). This is drastically reducing the profitability of Europe's energy-hungry industries, especially energy-intensive ones, which are on the verge of being shut down, whereas in established European countries, most of their manufactured goods are exported to the world (and they are competing with U.S. products). This means that these European manufacturers will either withdraw from the world market (if they shut down and declare bankruptcy) or lose competitiveness due to the sharp soaring costs of the energy sector.
And that's just one level, as European companies face an existential crisis and are beginning to move from Europe to places where business conditions and operating conditions are similar, but energy prices are relatively low. This is even more surprising for the United States. After European companies closed their local factories and moved production lines to the United States, the skilled labor for manufacturing also flowed to the United States. The above series of domino effects will have a very positive impact on the United States, providing impetus for its economic growth. As a result, the EU has been eliminated as a competitor to the United States in the global economy. There are no emotions in front of business.
China: Europe is China's most important export market. As the EU deliberately rejects cheaper Russian energy in favor of more expensive alternatives (mainly U.S. LNG liquefied natural gas), European demand for Chinese products will decrease, and China, one of the main competitors of the United States, may face a slowdown in growth.
In this competition, Europe, the friendliest to the United States, has become a vulnerable side, a victim of the "America First" strategy of successive US presidents.
USA: Keep Europe away from Russia
In order for the United States to rise again (and halt its own decline), it needs to wage a new "world war" outside its own borders, while creating a gap between Europe and Russia to prevent them from concentrating their resources. An effective solution to this problem is the conflict between Ukraine and Russia that Zbigniew Brzezinski planned (or designed) in his 1997 book The Great Chessboard.
For example, George Friedman, founder of the Stratford Corporation (often referred to as the "shadow CIA"), a private intelligence agency, made clear his argument that the United States needed to break up Europe from Russia. At a meeting of the Chicago Council on Global Affairs on February 4, 2015, he said (and I fully agree with him): "The ultimate goal of the United States is to establish an intersea federation, a concept proposed by Piłsudski to create a territorial alliance between the Baltic and Black Seas." The primary goal of the United States is to prevent German capital and technology from being linked to an unparalleled combination of Russian natural resources and labor ... The United States has worked for a century for this ... To defeat such a combination, the trump card of the United States is to draw a dividing line between the Baltic and Black Seas ... Together, Russia and Germany would be the only force that could pose a significant threat to the United States. ”
Background: Piłsudski's idea of a federation of the seas later led to the Three Seas Initiative. The initiative was launched by the United States in 2014 and formalized as an international initiative in 2016. Initially, only two countries (Poland and Croatia) joined, followed by 12 Eastern European countries. The initiative envisages the formation of a vertical infrastructure corridor in the eastern part of the EU, in particular a vertical north-south gas transmission corridor connecting LNG terminals in the north (Baltic) and south (Aegean, Marmara and Adriatic), and the delivery of US LNG full of "liberals" to Eastern European countries from the north and south to replace the "undemocratic" Russian pipeline gas full of dirty "dictators".
Russia sends natural gas westward through underground gas storage facilities in western Ukraine, while the United States cuts into a north-south longitudinal gas corridor in this east-west gas transit channel, and after gasification, US LNG will have the opportunity to send natural gas further westward and into the European Union through the existing natural gas transmission system originally built for Russian gas. This can be achieved by taking advantage of the "mandatory third-party access" and "use-and-forget" clauses in EU (Third Energy Scheme) legislation.
Romanian President Klaus Johannes speaks at the Three Seas Initiative Forum in Bucharest in September 2018, pictured from the Associated Press
In fact, these plans have already been put into practice. On 26 August, the construction of the Polish-Slovak gas pipeline connected to the Slovak gas transmission system was completed, which became a continuation of the Ukrainian transit corridor near the Vike Kapshani dispatch point. US LNG must enter underground gas storage facilities in western Ukraine (which have been operating as bonded warehouses since 2017), on the one hand, in order to eliminate discontinuities in the supply of natural gas, on the other hand this will have the opportunity to influence the price situation on the trading floor of Baumgato (Central European Gas Hub), which is an important pricing center in Central and Eastern Europe and a distribution center for Russian gas flowing along the Ukrainian gas corridor (part of the gas leaves Baumgarten to the south, passing through Austria, Reach Italy, partly westward, through the Czech Republic, to Germany and France).
Limit
In the course of America's strategic efforts to maintain its global dominance, all the rules of the game that have been established in the post-Yalta world system and configuration are gradually being abandoned. Globalization continues to deepen until new powers enter the world stage and begin to crowd out or make further economic expansion of the United States difficult.
One of the most obvious examples is the price cap on Russian energy, in which I see a deeper connotation – not only about the acceptability of "price caps", not just about whether it can ensure the production, supply or profitability of Russian energy resources, but in fact returning to the cost-plus pricing system.
The US intended to impose price caps (and it was the US that initiated the discussion), followed by the European Union and the G7, with the aim of departing from the basic norms of international law and destroying the post-Yalta world order on which they were based. In my view, the proposal to cap prices [on oil, gas or any other natural resource] means giving up the sovereignty of the state over its natural resources.
Let me explain why. The main initiator of the price limit proposal is the current US Treasury Secretary Janet Yellen. She is a very famous economist. She has taught at Harvard University, the London School of Economics, and the Haas School of Business at UCLA. From 2010 to 2018, she served as First Deputy Governor of the Federal Reserve for four years, and then as Chair of the Federal Reserve for another four years. She is also an Honorary Fellow of the British Academy. In other words, she has not only received a good economic education and academic practice, but also has rich experience in economic activities.
On June 21, 2016, Janet Yellen, then chairman of the US Federal Reserve Board, conducted a monetary policy report, pictured from the US Federal Reserve website
On April 21, she first proposed a price cap at a dinner of G7 economic leaders in Washington. I can't say she made this suggestion out of ignorance or stupidity: her resume is too beautiful, so it's impossible. She has a prominent reputation in her professional field, and she should (and cannot) not be unaware of the financial consequences of her proposal.
Therefore, I conclude that the proposal has a purpose. I think there's a lot behind this proposal, and it's by no means just trying to find out the "cut-off price" (production and delivery costs) of Russian oil/gas for Europe or other markets in order to impose a price cap at that level.
The decision to introduce a price cap (so far, Western countries have not found a concrete solution, but the decision itself is important enough) means to me a departure from the basic norms of international law. The principle that States should have inalienable (permanent) sovereignty over their natural resources was emphasized in United Nations General Assembly resolution 1803 of 16 December 1962, which was later cited in many other international documents.
Three-tier pricing mechanism
A little digression about the pricing theory of non-renewable natural resources. There are three pricing criteria for non-renewable natural resources (see Chart 2). The first two futures contracts are based on the physical energy market, which are also investment prices. A lower investment price guarantees self-financing, covering all the seller's mining and transportation costs (basic investment costs, operating costs, debt financing costs), plus an acceptable rate of return after considering all risks. At this price, the so-called Ricardian rent can be obtained. Ricardo rents were extended from land to "products of scarcity"), that is, the difference between the costs of production land in different natural conditions.
Figure 2: Range of changes in "cut-off price" (prices acceptable to both producers and consumers), graphed by the authors of this article
Higher investment prices are linked to the value of energy alternatives. This is why there is so-called indexation of oil/petroleum products in the terms of gas contracts, which means that the price of natural gas is linked to energy alternatives - oil (in Asia) and petroleum products (in Europe). This was the idea that the Dutch came up with in 1962 (the so-called Groningen principle for long-term gas export contracts), before which the International Oil Cartel applied this principle in the post-war reconstruction of Western Europe in the fifties and sixties based on the Marshall Plan. They were actively promoting mechanization in Europe and replacing West German coal with fuel oil (mainly Middle Eastern oil from oil cartels) in the power sector in Western Europe.
Therefore, by pricing at the price of energy alternatives, you can get not only the so-called Ricardian rent, but also the hotlin rent.
The third price is the transaction price, which refers to the one-time and/or futures transaction price of deliverable and non-deliverable contracts. It is based on the anticipation of price movements on exchanges by resellers – traders or speculators because they are unwilling to take investment risks. Because it is based on the expectations of non-investment players, this price may go higher or lower. Among them, prices can be raised to a level higher than Ricardo rents and hotlin rents. That is, this price generates additional price rent not only for the seller (businessmen and speculators who do not bear the investment risk), but also for the producer (who bears the investment risk).
In 1962, when the United Nations General Assembly adopted Resolution 1803, when the oil market had only two investment prices and spot trading was not yet a developed market, it took almost a decade for spot trading to be actively developed, and it took another twenty years for the energy exchange to maturely be established. Therefore, if we take as a principle the sovereignty of States over their natural resources, the difference between the maximum price (then the investment price, now if it exceeds the maximum investment price, the highest transaction price) and the cost, that is, the natural resource income, belongs to the people of the host country, that is, to the country that owns the energy resource.
Therefore, behind the G7 proposal is the purposeful proposal of the United States, that is, to give a third country, a consumer country that does not have sufficient natural resources of its own, the right to dispose of the natural resources of the sovereign state at will. Today they are targeting Russia, because Russia has huge natural reserves of non-renewable energy, which is the material basis of the current and future global energy industry. Tomorrow, their target could be China, which owns and controls equally important natural resources such as green metals and rare earths, which are important components of future global energy development.
This is the long-term special operation of the United States: to maintain its shrinking niche in the world economy at the expense of Russia, the EU and China.
[This article was originally published on the website of the Russian Council on Foreign and Defense Policy on October 10]
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