Predictions for 2015

It is challenging to make prognostications that are specific and testable, or, in the thinking of Karl Popper’s brand of empiricism, falsifiable. Many predictions are formulated such that they could be argued, post facto, to be true regardless of what actually happens.

I’ll try to avoid making those. At the same time, prognoses about complex phenomena like global economics and war are often, by their nature, vague and open to interpretation, and they consist of many parts. They are replete with statements about things that aren’t necessarily discrete or quantifiable. At best, they can be viewed as compositions, as systems of many interdependent propositions and variables which must be accepted or dismissed holistically. This is the insight of Thomas Kuhn, who found the Popperian view of how science evolves, through the testing of individual hypotheses, to be naive. He popularised the use of the word “paradigm”, a superset of a hypothesis. It may be that the apparent truth or falsehood of my predictions will depend on whether you buy into certain paradigms.

Without further ado:

1. The price of crude oil will rebound to US $80/bbl or more.

It’s not in the interest of any oil-producing nation to perpetuate the current freefall, which has led, at the time of this writing, to oil trading in the $50-$60/bbl range .

I’m not an industry analyst, but my impression is that the current slide is caused by a combination of:

  • Reduced short-term global demand.
  • Saudi Arabia breaking ranks with its OPEC cohorts and refusing to restrict output.
  • Optimism about the increasing production of the American domestic energy sector (leading to expectations of higher supplies).

I don’t think Saudi Arabia going rogue is going to last. Saudi Arabia can weather low prices better than many rival oil autocracies, but ultimately, these states have common interests. Someone will probably make a deal with the Kingdom to encourage them to return to cartel discipline. The Russian economy suffers particularly heavily from a fall in oil, as its state budget depends almost entirely on high oil price targets, and it exports almost nothing apart from energy and raw materials. It’s possible that Russia, despite not being an OPEC member state, will offer some carrots to get the Saudis to cut output.

As for the optimism about American domestic energy supplies, there’s definitely an underlying reality: undeniably, output has increased profoundly in the last few years, to the extent that it may be one of the most significant structural changes of the early 21st century. But I would wager that some of the correspondent market movements can be attributed to irrational exuberance and speculative trading, too; once the sizzling party cools down and the fast rave music gives way to slower ballads, cracks will emerge, in the form of concerns about sustainability of yields (at certain EROEIs) and environmental impact of this boom. I don’t believe that short-term advances in hydraulic fracturing of shale change the big picture, which is that the EROEI of global hydrocarbon energy supplies is falling.

I hope that the current trend in increasing energy capture efficiency (and therefore EROEI) of photovoltaic cells and wind turbines, as well as ongoing research into hydrogen fuel cells, thorium reactors, and other alternative sources, will continue undistracted by short-term fossil fuel supply bumps. I’m not holding my breath for capital markets to get smart enough to emphasise long-term prospectus over short-term speculative opportunities, though. I’ve always thought that energy and environmental issues are key examples of market failure, alongside healthcare.

2. Russia will continue to be mildly depressed.

Most of Russia’s present economic malaise and inflation (50% devaluation of the rouble) probably owes itself more to the crash in crude oil prices than to any effect of Western sanctions, in the same way that Russia’s stabilisation in the 2000s owes itself to the rise in crude oil prices rather than Putin’s much-touted economic policies.

So, I think any recovery is likely to be linked to the oil. As I expect the gains in crude to be modest (to ~$80/bbl or so, rather than $100+), I don’t expect Russia to see a dramatic reversal in its current fortunes.

3. The Ukraine conflict will stagnate, unresolved.

There is neither political commitment nor opportunity for either the West or Russia to, as outside influences, drive the Ukraine conflict to any endgame. The only actor that has an incentive to take decisive action and definitively consolidate Ukraine is the Kiev government, but it does not have the military capability or finances to do that.

What I expect is that the current status quo will coalesce into a kind of uneasy détente, not wholly unlike the aftermath of the Georgian-Russian conflict of 2008, where South Ossetia and Abkhazia became nominally independent and de facto Russian-controlled–and, at the very least, ungovernable for Georgia. This kind of situation has a tendency to ossify over time, unless some dramatic transpiration suddenly reanimates active conflict.

That is to say, the Russian-adhering Eastern Ukraine will continue to be a semi-ungovernable patchwork for the central government. Professional ‘rebels’ from the likes of the Donetsk People’s Republic will continue to carve out careers for themselves, and be variously, depending on what’s going on, nudged by half-hearted Ukranian army offensives, officially disavowed by Russia, or unofficially utilised by Russia as a tool to coerce Ukraine and the West (with the implicit threat of whipping up pro-Russian nationalist agitation among such groups). More generally, Eastern Ukraine will continue to run nominally as part of Ukranian territory, but with its fronds tending increasingly toward the Russian sun in terms of economic and political linkage.

This situation will, over time, reach some sort of equilibrium where nobody really “wins”, while everybody claims to have won and trades accusations of banditry. The world will forget about Ukraine and move on; Russian economic relations with the West will slowly and subtly renormalise, particularly with Europe, though the remnants of sanctions will continue to be used by the US to pressure Russia, while the instability of the East–with the implied influence that Russia has over it–will be used by Russia as leverage against the West. Both the US and Russia win in having an outside enemy to refer to, particularly the Putin regime, which will point to US sanctions as easy blame for ongoing internal malaise it cannot fix.

4. US-Iran relations will improve and the US will ease sanctions against Iran.

While some recent improvements in US-Iran relations can probably be attributed to the ascendance of more moderate post-Ahmadinejad forces, the more significant incentive for collaboration involves the common enemy of ISIS. It is likely that there will be some quiet, underplayed horse-trading and compromise regarding Iran’s nuclear programme in the service of this awkward alliance.

5. The ISIS-driven partition of Iraq will solidify.

With increasing US commitment to airstrikes against ISIS, which is also perceived as a regional threat by nearly all incumbent regimes, it seems likely that ISIS military gains will be arrested. On the other hand, another US ground war to decisively drive ISIS out of the territories they currently occupy does not seem politically possible.

This will probably lead to a hardening of existing boundaries between ISIS-controlled and non-ISIS-controlled Iraq. Small flare-ups will occur between ISIS and local governments who have more enthusiasm for driving them out decisively than the US does, such as the battle-hardened Peshmerga of Iraqi Kurdistan, though they will not succeed in doing so for lack of supplies and firepower. Other locals will probably come to an accommodation with ISIS, though this is something neither side will publicise because doing so is a losing proposition PR-wise (failure to defeat ISIS on one side, failure to comprehensively consolidate an Islamic caliphate on the other side).

6. The Syrian Civil War will continue without resolution or settlement.

This war will continue and inflict even more destruction upon an already destroyed and war-weary country.

In all likelihood, however, it will come to be increasingly simplified down to a pro vs. anti-ISIS conflict, especially since the American view is that any enemy of hard-line Islamists is its friend. Depending on the overall military successes of ISIS in Iraq and Syria, this may even lead to a delicate, understated thawing or rapprochement with the Assad regime, though neither side will publicise this fact because it’s a lose-lose PR proposition.

7. Chinese (PRC) growth will continue to plateau.

As China undergoes industrialisation without a clear next step beyond its specialisation in manufacturing, its GDP growth will continue to plateau. Combined with a possible pop in its overheated urban real estate market, this may lead to a mild recession.

8. China will become an increasingly attractive IT outsourcing destination over India.

As a result of its growth and increasing (though very unequally distributed) affluence, India has become too expensive for many Western firms’ tastes, and they will increasingly look to China to fill the gap, particularly in low-skill business process outsourcing and backoffice functions. But this in itself is unlikely to be China’s ticket out of a looming existential crisis of macroeconomic purpose.

9. The West African Ebola epidemic will peak and fade from public view.

The West African Ebola epidemic is currently projected to peak in April or May of 2015 by the WHO. After that, it will probably fade from public view entirely, punctuated by the occasional incident of an infected individual making it across Western borders.

10. Pope Francis will face political challenges from conservative hardliners.

It is unlikely that Pope Francis’ spate of rapid and theologically radical liberal reforms will be allowed to continue forever by the conservatives within the Vatican inner circles and conservative bishops elsewhere. Such conflicts have already flared up, and thus far, the Pontiff has prevailed.

Canon law has no procedure to impeach or recall a pope. I don’t think his job is in danger. His influence over certain conservative constituencies and their local directors will probably be reduced in increasingly conspicuous acts of defiance, though.

11. The global appreciation of the US Dollar will end.

The increased dollar demand is most likely due to:

  • The Federal Reserve is nearing the end of its most recent period of Quantitative Easing (QE), which is expected to pull back money supply.
  • The high performance of the S&P 500 spectrum of the US stock market.
  • Exuberance about American energy supplies and perceived domestic recovery in jobs and real estate.
  • Increased demand for hard reserve currency in places with high inflation, such as Russia and many of the former Soviet republics (whose currencies’ fate is, in many instances, closely linked to the rouble).

I think this exuberant climate will cool by the end of 2015Q2 and that former-USSR inflation will stabilise in tandem with rebounding oil prices. The stock market is thought to be in need of a correction phase. These things will send the dollar back down to historical norms.