Ten Reasons Why Oil Under $30 Per Barrel Is A Major Problem

Gail E. Tverberg

A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back. What is wrong with this story? A lot of things, as I see it:

Oil producers can’t really produce oil for $30 per barrel

A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.

Figure 1. Global breakeven prices (considering only technical extraction costs) versus production. Source: Alliance Bernstein, October 2014

2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.

Oil can only be extracted within a broader system. Companies need to pay taxes. These can be very high. Including these costs hashistorically brought total costs for many OPEC countries to over $100 per barrel.

Independent oil companies in non-OPEC countries also have costs other than technical extraction costs, including taxes and dividends to stockholders. Also, if companies are to avoid borrowing a huge amount of money, they need to have higher prices than simply the technical extraction costs. If they need to borrow, interest costs need to be considered as well.

3. When oil prices drop very low, producers generally don’t stop producing.

There are built-in delays in the oil production system. It takes several years to put a new oil extraction project in place. If companies have been working on a project, they generally won’t stop just because prices happen to be low. One reason for continuing on a project is the existence of debt that must be repaid with interest, whether or not the project continues.

Also, once an oil well is drilled, it can continue to produce for several years. Ongoing costs after the initial drilling are generally very low. These previously drilled wells will generally be kept operating, regardless of the current selling price for oil. In theory, these wells can be stopped and restarted, but the costs involved tend to deter this action.

Oil exporters will continue to drill new wells because their governments badly need tax revenue from oil sales to fund government programs. These countries tend to have low extraction costs; nearly the entire difference between the market price of oil and the price required to operate the oil company ends up being paid in taxes. Thus, there is an incentive to raise production to help generate additional tax revenue, if prices drop. This is the issue for Saudi Arabia and many other OPEC nations.

Very often, oil companies will purchase derivative contracts that protect themselves from the impact of a drop in market prices for a specified time period (typically a year or two). These companies will tend to ignore price drops for as long as these contracts are in place.

There is also the issue of employee retention. In a sense, a company’s greatest assets are its employees. Once these employees are lost, it will be hard to hire and retrain new employees. So employees are kept on as long as possible.

The US keeps raising its biofuel mandate, regardless of the price of oil. No one stops to realize that in the current over-supplied situation, the mandate adds to low price pressures.

One brake on the system should be the financial pain induced by low oil prices, but this braking effect doesn’t necessarily happen quickly. Oil exporters often have sovereign wealth funds that they can tap to offset low tax revenue. Because of the availability of these funds, some exporters can continue to finance governmental services for two or more years, even with very low oil prices.

Defaults on loans to oil companies should also act as a brake on the system. We know that during the Great Recession, regulators allowed commercial real estate loans to be extended, even when property valuations fell, thus keeping the problem hidden. There is a temptation for regulators to allow similar leniency regarding oil company loans. If this happens, the “braking effect” on the system is reduced, allowing the default problem to grow until it becomes very large and can no longer be hidden.

4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

People often think that going from a low price to a high price is the opposite of going from a high price to a low price, in terms of the effect on the economy. This is not really the case.

4a. When oil prices rise from a low price to a high price, this generally means that production has been inadequate with only the production that could be obtained at the prior lower price. The price must rise to a higher level in order to encourage additional production.

The reason that the cost of oil production tends to rise is because the cheapest-to-extract oil is removed first. Oil producers must thus keep adding production that is ever-more expensive for one reason or another: harder to reach location, more advanced technology, or needing additional steps that require additional human labor and more physical resources. Growing efficiencies can somewhat offset this trend, but the overall trend in the cost of oil production has been sharply upward since about 1999.

The rising price of oil has an adverse impact on affordability. The usual pattern is that after a rise in the price of oil, economies of oil importing nations go into recession. This happens because workers’ wages do not rise at the same time as oil prices. As a result, workers find that they cannot buy as many discretionary items and must cut back. These cutbacks in purchases create problems for businesses, because businesses generally have high fixed costs including mortgages and other debt payments. If these businesses are to continue to operate, they are forced to cut costs in one way or another. Cost reduction occurs in many ways, including reducing wages for workers, layoffs, automation, and outsourcing of manufacturing to cheaper locations.

For both employers and employees, the impact of these rapid changes often feels like a rug has been pulled out from under foot. It is very unpleasant and disconcerting.

4b. When prices fall, the situation that occurs is not the opposite of 4a. Employers find that thanks to lower oil prices, their costs are a little lower. Very often, they will try to keep some of these savings as higher profits. Governments may choose to raise tax rates on oil products when oil prices fall, because consumers will be less sensitive to such a change than otherwise would be the case. Businesses have no motivation to give up cost-saving techniques they have adopted, such as automation or outsourcing to a cheaper location.

Few businesses will construct new factories with the expectation that low oil prices will be available for a long time, because they realize that low prices are only temporary. They know that if oil prices don’t go back up in a fairly short period of time (months or a few years), the quantity oil available is likely to drop precipitously. If sufficient oil is to be available in the future, oil prices will need to be high enough to cover the true cost of production. Thus, current low prices are at most a temporary benefit–something like the eye of a hurricane.

Since the impact of low prices is only temporary, businesses will want to adopt only changes that can take place quickly and can be easily reversed. A restaurant or bar might add more waiters and waitresses. A car sales business might add a few more salesmen because car sales might be better. A factory making cars might schedule more shifts of workers, so as to keep the number of cars produced very high. Airlines might add more flights, if they can do so without purchasing additional planes.

Because of these issues, the jobs that are added to the economy are likely to be mostly in the service sector. The shift toward outsourcing to lower-cost countries and automation can be expected to continue. Citizens will get some benefit from the lower oil prices, but not as much as if governments and businesses weren’t first in line to get their share of the savings. The benefit to citizens will be much less than if all of the people who were laid off in the last recession got their jobs back.

5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production.

Instead, recent oil prices represent an attempt by the market to find a balance between supply and demand. Since supply doesn’t come down quickly in response to lower prices, and demand doesn’t rise quickly in response to lower prices, prices can drop very low–far below the cost of production.

As noted in Section 4, high oil prices tend to be recessionary. The primary way of offsetting recessionary forces is by directly or indirectly adding debt at low interest rates. With this increased debt, more homes and factories can be built, and more cars can be purchased. The economy can be forced to act in a more “normal” manner because the low interest rates and the additional debt in some sense counteract the adverse impact of high oil prices.

Figure 2. World oil supply and prices based on EIA data.

Oil prices dropped very low in 2008, as a result of the recessionary influences that take place when oil prices are high. It was only with the benefit of considerable debt-based stimulation that oil prices were gradually pumped back up to the $100+ per barrel level. This stimulation included US deficit spending, Quantitative Easing (QE) starting in December 2008, and a considerable increase in debt by the Chinese.

Commodity prices tend to be very volatile because we use such large quantities of them and because storage is quite limited. Supply and demand have to balance almost exactly, or prices spike higher or lower. We are now back to an “out of balance” situation, similar to where we were in late 2008. Our options for fixing the situation are more limited this time. Interest rates are already very low, and governments generally feel that they have as much debt as they can safely handle.

6. One contributing factor to today’s low oil prices is a drop-off in the stimulus efforts of 2008.

As noted in Section 4, high oil prices tend to be recessionary. As noted in Section 5, this recessionary impact can, at least to some extent, be offset stimulus in the form of increased debt and lower interest rates. Unfortunately, this stimulus has tended to have adverse consequences. It encouraged overbuilding of both homes and factories in China. It encouraged a speculative rise in asset prices. It encouraged investments in enterprises of questionable profitability, including many investments in oil from US shale formations.

In response to these problems, the amount of stimulus is being reduced. The US discontinued its QE program and cut back its deficit spending. It even began raising interest rates in December 2015. China is also cutting back on the quantity of new debt it is adding.

Unfortunately, without the high level of past stimulus, it is difficult for the world economy to grow rapidly enough to keep the prices of all commodities, including oil, high. This is a major contributing factor to current low prices.

7. The danger with very low oil prices is that we will lose the energy products upon which our economy depends.

There are a number of different ways that oil production can be lost if low oil prices continue for an extended period.

In oil exporting countries, there can be revolutions and political unrest leading to a loss of oil production.

In almost any country, there can be a sharp reduction in production because oil companies cannot obtain debt financing to pay for more services. In some cases, companies may go bankrupt, and the new owners may choose not to extract oil at low prices.

There can also be systemwide financial problems that indirectly lead to much lower oil production. For example, if banks cannot be depended upon for payroll services, or to guarantee payment for international shipments, such problems would affect all oil companies, not just ones in financial difficulty.

Oil is not unique in its problems. Coal and natural gas are also experiencing low prices. They could experience disruptions indirectly because of continued low prices.

8. The economy cannot get along without an adequate supply of oil and other fossil fuel products.

We often read articles in the press that seem to suggest that the economy could get along without fossil fuels. For example, the impression is given that renewables are “just around the corner,” and their existence will eliminate the need for fossil fuels. Unfortunately, at this point in time, we are nowhere being able to get along without fossil fuels.

Food is grown and transported using oil products. Roads are made and maintained using oil and other energy products. Oil is our single largest energy product.

Experience over a very long period shows a close tie between energy use and GDP growth (Figure 3). Nearly all technology is made using fossil fuel products, so even energy growth ascribed to technology improvements could be considered to be available to a significant extent because of fossil fuels.

Figure 3. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends from 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by the author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

While renewables are being added, they still represent only a tiny share of the world’s energy consumption.

Figure 4. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Thus, we are nowhere near a point where the world economy could continue to function without an adequate supply of oil, coal and natural gas.

9. Many people believe that oil prices will bounce back up again, and everything will be fine. This seems unlikely.

The growing cost of oil extraction that we have been encountering in the last 15 years represents one form of diminishing returns. Once the cost of making energy products becomes high, an economy is permanently handicapped. Prices higher than those maintained in the 2011-2014 period are really needed if extraction is to continue and grow. Unfortunately, such high prices tend to be recessionary. As a result, high prices tend to push demand down. When demand falls too low, prices tend to fall very low.

There are several ways to improve demand for commodities, and thus raise prices again. These include (a) increasing wages of non-elite workers (b) increasing the proportion of the population with jobs, and (c) increasing the amount of debt. None of these are moving in the “right” direction.

Joseph Tainter in The Collapse of Complex Societies points out that once diminishing returns set in, the response is more “complexity” to solve these problems. Government programs become more important, and taxes are often higher. Education of elite workers becomes more important. Businesses become larger. This increased complexity leads to more of the output of the economy being funneled to sectors of the economy other than the wages of non-elite workers. Because there are so many of these non-elite workers, their lack of buying power adversely affects demand for goods that use commodities, such as homes, cars, and motorcycles.1

Another force tending to hold down demand is a smaller proportion of the population in the labor force. There are many factors contributing to this: Young people are in school longer. The bulge of workers born after World War II is now reaching retirement age. Lagging wages make it increasingly difficult for young parents to afford childcare so that both can work.

As noted in Section 5, debt growth is no longer rising as rapidly as in the past. In fact, we are seeing the beginning of interest rate increases.

When we add to these problems the slowdown in growth in the Chinese economy and the new oil that Iran will be adding to the world oil supply, it is hard to see how the oil imbalance will be fixed in any reasonable time period. Instead, the imbalance seems likely to remain at a high level, or even get worse. With limited storage available, prices will tend to continue to fall.

10. The rapid run up in US oil production after 2008 has been a significant contributor to the mismatch between oil supply and demand that has taken place since mid-2014.

Without US production, world oil production (broadly defined, including biofuels and natural gas liquids) is close to flat.

Figure 5. Total liquids oil production for the world as a whole and for the world excluding the US, based on EIA International Petroleum Monthly data.
Figure 5. Total liquids oil production for the world as a whole and for the world excluding the US, based on EIA International Petroleum Monthly data.

Viewed separately, US oil production has risen very rapidly. Total production rose by about six million barrels per day between 2008 and 2015.

Figure 6. US Liquids production, based on EIA data (International Petroleum Monthly, through June 2015; supplemented by December Monthly Energy Review for most recent data).

US oil supply was able to rise very rapidly partly because QE led to the availability of debt at very low interest rates. In addition, investors found yields on debt so low that they purchased almost any equity investment that appeared to have a chance of long-term value. The combination of these factors, plus the belief that oil prices would always increase because extraction costs tend to rise over time, funneled large amounts of investment funds into the liquid fuels sector.

As a result, US oil production (broadly defined), increased rapidly, increasing nearly 1.0 million barrels per day in 2012, 1.2 million barrels per day in 2013, 1.7 million barrels per day in 2014. The final numbers are not in, but it looks like US oil production will still increase by another 700,000 barrels a day in 2015. The 700,000 extra barrels of oil added by the US in 2015 is likely greater than the amount added by either Saudi Arabia or Iraq.

World oil consumption does not increase rapidly when oil prices are high. World oil consumption increased by 871,000 barrels a day in 2012, 1,397,000 barrels a day in 2013, and 843,000 barrels a day in 2014, according to BP. Thus, in 2014, the US by itself added approximately twice as much oil production as the increase in world oil demand. This mismatch likely contributed to collapsing oil prices in 2014.

Given the apparent role of the US in creating the mismatch between oil supply and demand, it shouldn’t be too surprising that Saudi Arabia is unwilling to try to fix the problem.

Conclusion

Things aren’t working out the way we had hoped. We can’t seem to get oil supply and demand in balance. If prices are high, oil companies can extract a lot of oil, but consumers can’t afford the products that use it, such as homes and cars; if oil prices are low, oil companies try to continue to extract oil, but soon develop financial problems.

Complicating the problem is the economy’s continued need for stimulus in order to keep the prices of oil and other commodities high enough to encourage production. Stimulus seems to takes the form of ever-rising debt at ever-lower interest rates. Such a program isn’t sustainable, partly because it leads to mal-investment and partly because it leads to a debt bubble that is subject to collapse.

Stimulus seems to be needed because of today’s high extraction cost for oil. If the cost of extraction were still very low, this stimulus wouldn’t be needed because products made using oil would be more affordable.

Decision makers thought that peak oil could be fixed simply by producing more oil and more oil substitutes. It is becoming increasingly clear that the problem is more complicated than this. We need to find a way to make the whole system operate correctly. We need to produce exactly the correct amount of oil that buyers can afford. Prices need to be high enough for oil producers, but not too high for purchasers of goods using oil. The amount of debt should not spiral out of control. There doesn’t seem to be a way to produce the desired outcome, now that oil extraction costs are high.

Rigidities built into the oil price-supply system (as described in Sections 3 and 4) tend to hide problems, letting them grow bigger and bigger. This is why we could suddenly find ourselves with a major financial problem that few have anticipated.

Unfortunately, what we are facing now is a predicament, rather than a problem. There is quite likely no good solution. This is a worry.

Note:

[1] For example, more dividend and interest payments are paid, tending to benefit the financial industry and the elite classes. More of the output of the economy goes to workers in supervisory positions or having advanced education. Other workers–those with more “ordinary” responsibilities–find their wages falling behind the general rise in the cost of living. As a result, they find it increasingly difficult to buy cars, homes, motorcycles, and other goods that use commodities.

The 21st Century: An Era Of Fraud

Paul Craig Roberts

In the last years of the 20th century fraud entered US foreign policy in a new way. On false pretenses Washington dismantled Yugoslavia and Serbia in order to advance an undeclared agenda. In the 21st century this fraud multiplied many times. Afghanistan, Iraq, Somalia, and Libya were destroyed, and Iran and Syria would also have been destroyed if the President of Russia had not prevented it. Washington is also behind the current destruction of Yemen, and Washington has enabled and financed the Israeli destruction of Palestine. Additionally, Washington operated militarily within Pakistan without declaring war, murdering many women, children, and village elders under the guise of “combating terrorism.” Washington’s war crimes rival those of any country in history.

I have documented these crimes in my columns and books (Clarity Press).

Anyone who still believes in the purity of Washington’s foreign policy is a lost soul.

Russia and China now have a strategic alliance that is too strong for Washington. Russia and China will prevent Washington from further encroachments on their security and national interests. Those countries important to Russia and China will be protected by the alliance. As the world wakes up and sees the evil that the West represents, more countries will seek the protection of Russia and China.

America is also failing on the economic front. My columns and my book, The Failure of Laissez Faire Capitalism, which has been published in English, Chinese, Korean, Czech, and German, have shown how Washington has stood aside, indeed cheering it on, while the short-term profit interests of management, shareholders, and Wall Street eviscerated the American economy, sending manufacturing jobs, business know-how, and technology, along with professional tradeable skill jobs, to China, India, and other countries, leaving America with such a hollowed out economy that the median family income has been falling for years. Today 50% of 25 year-old Americans are living with their parents or grandparents because they cannot find employment sufficient to sustain an independent existance. http://www.zerohedge.com/news/2015-10-27/why-are-half-all-25-year-olds-still-living-their-parents-federal-reserve-answers This brutal fact is covered up by the presstitute US media, a source of fantasy stories of America’s economic recovery.

The facts of our existence are so different from what is reported that I am astonished. As a former professor of economics, Wall Street Journal editor and Assistant Secretary of the Treasury for Economic Policy, I am astonished at the corruption that rules in the financial sector, the Treasury, the financial regulatory agencies, and the Federal Reserve. In my day, there would have been indictments and prison sentences of bankers and high government officials.

In America today there are no free financial markets. All the markets are rigged by the Federal Reserve and the Treasury. The regulatory agencies, controlled by those the agencies are supposed to regulate, turn a blind eye, and even if they did not, they are helpless to enforce any law, because private interests are more powerful than the law.

Even the government’s statistical agencies have been corrupted. Inflation measures have been concocted in order to understate inflation. This lie not only saves Washington from paying Social Security cost-of-living adjustments and frees the money for more wars, but also by understating inflation, the government can create real GDP growth by counting inflation as real growth, just as the government creates 5% unemployment by not counting any discouraged workers who have looked for jobs until they can no longer afford the cost of looking and give up. The official unemployment rate is 5%, but no one can find a job. How can the unemployment rate be 5% when half of 25-year olds are living with relatives because they cannot afford an independent existence? As John Williams (shadowfacts) reports, the unemployment rate that includes those Americans who have given up looking for a job because there are no jobs to be found is 23%.

The Federal Reserve, a tool of a small handful of banks, has succeeded in creating the illusion of an economic recovery since June, 2009, by printing trillions of dollars that found their way not into the economy but into the prices of financial assets. Artificially booming stock and bond markets are the presstitute financial media’s “proof” of a booming economy.

The handful of learned people that America has left, and it is only a small handful, understand that there has been no recovery from the previous recession and that a new downturn is upon us. John Williams has pointed out that US industrial production, when properly adjusted for inflation, has never recovered its 2008 level, much less its 2000 peak, and has again turned down.

The American consumer is exhausted, overwhelmed by debt and lack of income growth. The entire economic policy of America is focused on saving a handful of NY banks, not on saving the American economy.

Economists and other Wall Street shills will dismiss the decline in industrial production as America is now a service economy. Economists pretend that these are high-tech services of the New Economy, but in fact waitresses, bartenders, part time retail clerks, and ambulatory health care services have replaced manufacturing and engineering jobs at a fraction of the pay, thus collapsing effective aggregate demand in the US. On occasions when neoliberal economists recognize problems, they blame them on China.

It is unclear that the US economy can be revived. To revive the US economy would require the re-regulation of the financial system and the recall of the jobs and US GDP that offshoring gave to foreign countries. It would require, as Michael Hudson demonstrates in his new book, Killing the Host, a revolution in tax policy that would prevent the financial sector from extracting economic surplus and capitalizing it in debt obligations paying interest to the financial sector.

The US government, controlled as it is by corrupt economic interests, would never permit policies that impinged on executive bonuses and Wall Street profits. Today US capitalism makes its money by selling out the American economy and the people dependent upon it.

In “freedom and democracy” America, the government and the economy serve interests totally removed from the interests of the American people. The sellout of the American people is protected by a huge canopy of propaganda provided by free market economists and financial presstitutes paid to lie for their living.

When America fails, so will Washington’s vassal states in Europe, Canada, Australia, and Japan. Unless Washington destroys the world in nuclear war, the world will be remade, and the corrupt and dissolute West will be an insignificant part of the new world.

Russian government prepares cuts as poverty surges

Andrea Peters

Russian political leaders began the new year by announcing major cutbacks in government expenditures in response to an escalating budget crisis. Oil, the mainstay of the Russian economy, is now trading at less than $30 a barrel, down from highs less than two years ago of over $100 a barrel. Russian energy giant Gazprom just announced a 2015 third quarter loss of 2 billion rubles ($26.1 million), compared to a 105.7 billion profit a year prior.

Speaking on Friday at a meeting of government officials, Russian Prime Minister Dmitry Medvedev warned, “The dramatic movement of oil prices is creating serious risks for the fulfillment of the budget.” He called for bringing budgetary outlays “in line with expected incomes,” privatizing state enterprises, and reducing “the size of the state apparatus,” in other words, laying off government employees.

Medvedev’s remarks were underscored by parliamentary leader Sergei Narishkin in comments to the Russian news agency TASS. “Economic realities point to the fact that a correction has to be carried out,” Narishkin opined.

Last week, the government ordered all Russian ministries to submit plans for a 10 percent reduction in their expenses. Finance Minister Anton Siluanov warned that without such steps, one of the country’s major reserve funds, which currently has a balance of $59 billion, would soon be empty.

The new cuts come on top of last year’s 10 percent across-the-board reduction. According to the Kremlin’s English-language press, RT, health care, education, social security, pensions, culture, tourism and sports are all being targeted. Even these measures may not be adequate to stem the budgetary crisis, as the proposed cuts are based on estimates that assume the price of oil to be $40 a barrel, more than $10 above the price at which the commodity is currently trading.

News of the cuts emerged alongside a report by pollster VTsIOM finding that the number of poor families in Russia, as measured by those reporting difficulty paying for food and clothing, grew from 22 percent to 39 percent in 2015. This statistic is much higher than the official poverty rate (with a cutoff of $112 per person per month), which increased last year by another two million people to around 14 percent of the population. The sharp decline in Russian living standards, which were hammered by last year’s recession, when the economy contracted by 3.7 percent and real wages fell by nine percent, is expected to continue into 2016.

On Monday, the country’s currency fell further, reaching a new low of 79 rubles to the dollar. It has lost more than half its value since 2014, driving up the cost of imported consumer items, in particular food and medicine. Industry has not benefited from the relative cheapness of the ruble, as non-oil exports and production failed to grow in 2015.

In addition to axing spending, the government is targeting the pension system. In December, Russian President Vladimir Putin indicated that preparations were underway to raise the retirement age, citing the fact that the country’s lifespan had risen to 71. This year, payments to retirees will be raised in the first part of the year by just four percent, well below the rate of inflation and three times lower than in 2015, resulting in a cut in their real value.

Former Finance Minister Alexei Kudrin, a right-wing advocate of austerity who is rumored to be preparing to return to the Kremlin, criticized even this modest adjustment. He claimed that if Russia wanted to be a “social state,” i.e., one that provides even a modicum of social programs and welfare services—the country would need a growth rate of at least five percent a year.

Rising costs for food, medicine and utilities, along with pension arrears, are driving Russia’s elderly population into destitution. The average monthly retirement income for 2016 is projected to be just 13,132 rubles, or $166, about $50 more than the official poverty line for a single person. It will be lower, however, for pensioners who continue to work, as their retirement payments are not indexed to inflation at all. In the Siberian city of Novosibirsk, pensioners who went to the post office in January to collect their monthly check were notified that due to “underfunding” and “cash flow” problems, they would not be able to collect their payments.

Households that had previously benefited from social programs providing a modicum of support for families with children now confront a double crisis of falling wages and reduced welfare benefits. Sergei Smirnov, a leading social scientist with the Russian Academy of Sciences, explained to Gazeta.ru, “If you have one head of household who works and his wage is falling by 10 percent, and you have a stay-at-home mother with two children, and her sole means of support is social welfare, then under conditions in which there is no indexing [to inflation], that family will lose somewhere around a quarter of its income.” He added, “Twenty five percent, that is perceptible. That is serious grounds for social discontent.”

Wage arrears are also becoming widespread. As of December 2015, according to official statistics, there were 3.89 billion rubles in unpaid wages nationwide, а number that has been steadily growing since June 2012. The government recently announced a small increase in fines for employers who fail to pay their workers, a measure denounced by the head of Russia’s Federation of Independent Trade Unions because, according to him, the present sanctions were already working and increasing them would “destroy jobs.”

While Russia’s official unemployment rate, which stands at 5.8 percent, is relatively low, the Ministry of Labor recently released data indicating that 631,000 workers are in immediate danger of losing their jobs. Over 60,000 enterprises employing 18 percent of the working population have declared their intention to let go staff. There are, in addition, over 280,000 so-called idle workers, those who either agreed to take an unpaid vacation or work fewer hours, an increase of 74 percent compared to last year.

In an expression of the immense pressure building on Russian households, indebtedness and late payment on consumer debt have grown dramatically. In Sverdlovsk Oblast, a province in the Ural Mountains, past due balances increased last year by over 42 percent. Today, the average borrower in the region spends 45 percent of his monthly income financing his consumer debt. In Novosibirsk Oblast, bank debt exploded to 440 billion rubles in 2015, a 63 percent increase. Similar scenarios can be found across Russia, according to a recent article in Nezavisimaya Gazeta.

As living standards buckle under the weight of the economic crisis, public opinion surveys register growing anxiety and disillusionment. Just 25 percent of Russians believe that if they lose their job, they will be able to find another decent form of employment. And one out of every three Russians now has two or more relatives who have recently been laid off, reports VTsIOM. A new study by the Russian Environmental Policy Center found a growing mood of protest in the population, particularly among the least well-off and those outside of the country’s largest urban centers. In mid-November, Russian truck drivers began demonstrations against a newly imposed federal highway taxintended to finance road repair and line the coffers of the Kremlin oligarch whose company owns the toll systemthat is destroying their earnings.

China confirms economic slowdown as IMF cuts global growth forecast

Nick Beams

The Chinese economy has experienced its slowest growth since the aftermath of the Tiananmen Square massacre a quarter of a century ago, with the economy recording an expansion of 6.9 percent last year, compared to 7.3 percent in 2014. Growth in the fourth quarter of 2015 was even lower, at 6.8 percent.

Significantly, steel and electricity, two key components of Chinese heavy industry, recorded full-year contractions in output volumes. Steel production was down by 2.3 percent, while power generation fell by 0.2 percent. Coal production was down for the second year in a row.

Growth in industry and construction grew by what was described as “a paltry” 0.9 percent for the full year amid a four-year decline in the prices of industrial products. Fixed asset investment, which includes infrastructure and factory construction, grew by 10 percent, the lowest rate of increase since 2000. Infrastructure investment fell in December after earlier rising as a result of a government fiscal stimulus.

The slowdown in Chinese growth was announced even as the International Monetary Fund released a report cutting its forecasts for global growth for this year and 2017. The IMF included a warning that unless “key transitions in the world economy are successfully navigated, global growth could be derailed.”

The IMF forecast global growth of 3.4 percent in 2016, compared to a forecast of 3.6 percent it made in October, and 3.6 percent for 2017, down from 3.8 percent in October. The US economy was predicted to grow by 2.6 percent in 2016 and 2017, down from 2.8 percent, with euro zone growth forecast to come in at 1.7 percent, compared to the previous forecast of 1.8 percent.

Among the major risks to the global economy, the IMF cited: a sharper-than-expected slowdown in China; a further increase in the value of the US dollar, impacting corporate debt held in emerging market economies; “a sudden bout of global risk aversion,” that is, a financial crisis that could be triggered by a number of events; and an “escalation of ongoing geopolitical tensions which could affect confidence.”

Rather than being situated on some long-term or even medium-term horizon, such risks are an ever-present reality of the present global economic environment.

The IMF also warned that commodity markets posed a two-sided danger. Further falls in commodity prices, which are down to their lowest levels since the financial crisis of 2008-2009, would “worsen the outlook for already fragile commodity producers.” Brazil and Russia are already in recession, and the malaise could spread further.

Lower commodity prices could also impact high-yield debt—so-called “junk bonds”—issued by energy-related companies and “threaten a broader tightening of credit conditions.”

These warnings are underscored by the continuing fall in the price of oil. It has dropped to as low as $28 per barrel and could well go lower, with some analysts predicting $20 or even $16.

On Tuesday, the International Energy Agency warned that the global oil market “could drown in oversupply” as Iranian oil came back onto the market as a result of the lifting of sanctions. It said there would be an enormous strain “on the ability of the oil system to absorb the glut.”

While oil demand increased in 2015, the rate of growth has slowed as a result of recessionary trends in the global economy. With oil prices having fallen by 75 percent over the last 18 months, one of the biggest impacts of a continuing fall will be in corporate bond markets, where debts incurred when oil was $100 per barrel are no longer viable.

These trends will be further affected by the China slowdown, which, together with concerns over how far and how fast the Chinese currency, the renminbi (also known as the yuan), may fall, is one of the sources of continuing turbulence on global stock markets.

While there was general relief that the Chinese growth figures were not as bad as they might have been, sections of the financial press pointed to areas of growing concern. In an editorial on Tuesday, the Financial Times said “some optimism was justified,” given that the growth rate was within “touching distance” of the official target of around 7 percent. It also cited data showing that consumer spending was accounting for a greater share of Chinese growth, as China moved to decrease its dependence on manufacturing and heavy industry.

“Such progress,” the newspaper wrote, “… does not disguise either the pain inherent in the transition or the deep faultlines that threaten to fracture China’s dynamism. Chief among these is the uncomfortable fact that China is buying much of its growth through a ballooning issuance of corporate and household debt.”

The Financial Times cited figures from the Bank for International Settlements showing that China has the highest private debt levels in the world, and that the cost of servicing this debt has risen from 12 percent of GDP in 2009 to 20 percent today.

“The danger now is that the contraction in industrial profits, the debt service burdens, and a flagging property market could together depress household income growth—jeopardising the consumer spending that forms the most robust stratum in the economy,” the editorial continued.

What is referred to as the “pain of transition” involves the destruction of whole swathes of industry and the loss of millions of jobs, raising before the regime its greatest fear—an upsurge in the struggles of the working class. There are already signs of such a movement.

There was a monthly record of 400 protests by Chinese workers in December, a result of growing unrest in the working class flowing from the increased financial turbulence associated with the devaluation of the renminbi, the stock market crash which began last August, and the ongoing slowdown in the economy.

The lower growth figures are also reflected in continuing job cuts in the major economies, with a series of companies in Europe cutting jobs across the board, including in electricity generation, airlines, steel and finance.

In the US, Johnson and Johnson announced Tuesday that it would cut 3,000 jobs in its medical device operations as part of a plan to slash $1 billion in costs.

There are warnings that US manufacturing is heading for a recession if it is not already in one. A survey published by the Federal Reserve earlier this month said that most of US manufacturing, with the exception of cars and aerospace, had been weakening over the course of the past eight months. According to the National Association of Manufacturers, manufacturing production, which was growing at a rate of 4.5 percent a year ago, has slowed to a rate of just 0.9 percent.

Just as in China, these worsening economic conditions and the continuing attacks on wages, jobs and social conditions are leading to greater resistance in the working class. The deep opposition to the contract imposed by the UAW bureaucracy in the US auto industry has been followed by the “sick out” protests of Detroit teachers over deplorable conditions in the city’s public schools and outrage over the lead poisoning of the water supply to the nearby city of Flint, a result of budget cuts.

This resistance is being fuelled by deepening social inequality, of which further evidence emerged this week with the publication of a report by the aid agency Oxfam. The study showed that that just 62 people held as much wealth as the bottom half of the world’s population.

As the report noted: “Far from trickling down, income and wealth are instead being sucked upwards at an alarming rate.”

Growing fears in ruling circles of an eruption of class and social conflict have already been voiced by the European Union’s Institute for Security Studies. In a report published in 2014, it pointed to “the conflict between unequal socioeconomic classes in global society,” noting that the tensions between the world of the poor and world of the rich “would increase, with corresponding consequences.” Those tensions have only increased since the report was written and there are signs that the consequences are emerging more clearly into the open.

“Staggering” violence in Iraq: The legacy of US war and occupation

Bill Van Auken

Describing current levels of killing and mayhem in Iraq as “staggering” and “obscene,” two United Nations agencies released a report Tuesday that recorded at least 55,047 civilian casualties between January 1, 2014 and October 31, 2015. The total included at least 18,802 civilians killed and another 36,245 wounded.

The report added that over roughly the same period, a total of 3,206,736 civilians, including over 1 million school-age children, have been driven from their homes by the violence.

The UN’s High Commissioner for Human Rights Zeid Raad Al Hussein said the report failed to reflect the full human toll inflicted by the conflict in Iraq. The numbers reported killed or wounded, particularly in areas under ISIS control, undoubtedly fell well short of the real level of carnage. Moreover, many more had “died from lack of access to basic food, water or medical care,” he said.

The high commissioner added that the report “starkly illustrates what Iraqi refugees are attempting to escape when they flee to Europe and other regions. This is the horror they face in their homelands.”

The period dealt with in the report begins with the month the Islamic State of Iraq and Syria (ISIS) seized the cities of Ramadi and Fallujah in the predominantly Sunni Anbar Province, subsequently overrunning fully one-third of Iraq’s territory. It stops short of the upsurge in violence over the past few months, including US-backed military campaigns to retake Ramadi as well as Banji and Sinjar, which undoubtedly saw a further spike in casualties.

The report deals at length with atrocities carried out by ISIS as well as attacks on civilians by Iraqi government security forces, along with Shia and Kurdish militias.

It is decidedly muted, however, about Washington’s responsibility, not only for civilian casualties from thousands of airstrikes, but more fundamentally in terms of the historic destruction wrought by the illegal US invasion of 2003 and the more than eight years of military occupation that followed.

As the report was issued, US Defense Secretary Ashton Carter told reporters in Paris that the Pentagon is preparing to substantially escalate the US military presence in Iraq. “I expect the number of trainers to increase, and also the variety of the training they’re giving,” he said.

A US military spokesman in Baghdad on Wednesday said the number of new “trainers” would be “not thousands, hundreds.” They would be in addition to the 3,670 US troops the Pentagon says are now deployed in Iraq.

Much of the UN report deals with the grisly violence unleashed by ISIS against the Iraqi population, targeting in particular both current and former employees of the Iraqi government and security forces, as well as Shia Muslims and members of religious minorities, together with Sunni Muslims perceived as too “moderate.”

The report recounts a series of ISIS atrocities, including mass killings “in gruesome public spectacles, including by shooting, beheading, bulldozing, burning alive and throwing people off the top of buildings.” It documents sexual violence and enslavement of women and children by ISIS, including 3,500 from the Yazidi community, which was early on invoked by the Obama administration as a pretext for US intervention, but has since been largely forgotten by the US government and media.

It also cites “unlawful killings and abductions perpetrated by pro-Government forces” as well as their persecution of civilians forced by the fighting to flee their homes, particularly form predominantly Sunni areas. It reports that “some have experienced arbitrary arrest in raids by security forces and others have been forcibly expelled.”

In addition to Iraqi security forces, the report points to the abuse of civilians by both Shia militias and the Peshmerga, the forces of the Kurdistan Regional Government.

A report released Wednesday by Amnesty International further documents the systematic destruction of Sunni Arab homes by the Kurdish forces in northern Iraq, saying that their actions may constitute war crimes.

Backed by US airstrikes, the Kurdish forces have taken over areas in Nineveh, Kirkuk and Diyala provinces that were previously ethnically mixed. In an apparent attempt to incorporate these areas into Iraqi Kurdistan, the Kurdish forces have launched what amounts to a campaign of ethnic cleansing.

The UN report includes accounts of large numbers of civilian casualties inflicted by airstrikes, while failing to attribute them to any party in the conflict and stating that its investigators have been unable to confirm the totals. The US military is responsible for the majority of airstrikes carried out in Iraq. While acknowledging, as of a week ago, dropping some 29,000 bombs and missiles on the country and claiming to have killed more than 6,400 ISIS fighters over the past three months alone, the Pentagon has, incredibly, acknowledged only 15 civilians killed.

The UN report tells a different story. Among last year’s airstrikes listed in the report, some of the bloodiest include:

May 22-23—“... airstrikes hit al-Najjar, al-Rifai and Sahaa areas in western Mosul in Ninewa, allegedly killing 30 civilians and wounding 62 others, including women and children.”

June 3—“... an explosion due to an airstrike in Kirkuk’s Hawija district allegedly killed several ISIL fighters and civilians... A member of the Kirkuk Provincial Council was quoted by multiple local sources as stating that around 150 individuals, including women and children, were allegedly killed and wounded in the blast.”

June 8—“... local sources reported that an airstrike in Mosul, Ninewa, caused 33 civilian casualties. The report alleged that several residential neighbourhoods in al-Zuhour district were hit, killing 20 civilians, including seven children and nine women, and wounding 13 others, mostly women.”

June 11—“... an airstrike reportedly hit an ISIL target near a market in Hawija, Kirkuk. According to a source, 10 civilians were killed and wounded in the incident. Other reports mentioned more than 60 civilians killed and over 80 wounded.”

July 1—“17 civilians, including four children and six women, were reportedly killed in an airstrike conducted in the al-Rifaie area of western Mosul, Ninewa. Eleven other civilians were reportedly wounded.”

July 31—“... up to 40 civilians may have been killed and over 30 wounded when three houses allegedly sheltering IDPs was hit by an airstrike in Rutba, west of Ramadi, Anbar. Official sources confirmed the incident and the number of casualties, which included 18 women and 11 children (under 14 years old).”

August 13—“... a maternity and children’s hospital in Nassaf village, south Fallujah, was hit by airstrikes reportedly carried out by ISF warplanes pursuing ISIL fighters. Sources confirmed the airstrikes destroyed the hospital and killed at least 22 individuals (including six women and eight children) and wounded 52 (including eight women and 17children).”

September 3—“... an airstrike hit a bridge in Jazeera al-Khaldiya, around 20 kilometres east of Ramadi, Anbar, killing 46 civilians and wounding 20... On the same day, another airstrike reportedly hit a residential area in eastern Ramadi, killing 28 civilians.”

These murderous airstrikes are only the tip of the iceberg in terms of the responsibility of US imperialism for the slaughter outlined in the UN report. The current situation is the direct product of over 25 years of US war against Iraq and of Washington’s interventions elsewhere in the region.

From the first Gulf War of 1991 through the 2003 invasion and subsequent military occupation of Iraq, US imperialism carried out the systematic destruction of what had been one of the most advanced healthcare and social infrastructures in the Arab world. The second war claimed the lives of over 1 million Iraqis, turning another 5 million into refugees, while the divide-and-rule strategy pursued by the Pentagon stoked a sectarian civil war by deliberately manipulating tensions between Iraq’s Shia and Sunni populations.

ISIS itself is the direct product of US interventions in the region, emerging first under the US occupation and then growing in strength thanks to the wars for regime-change launched first in Libya and then in Syria, in which it and similar Salafist jihadi militias received weapons and funding from the CIA and Washington’s closest regional allies, including Turkey, Saudi Arabia and Qatar.

While the UN report asserts the necessity of holding accountable those responsible for “war crimes and crimes against humanity” in Iraq, it fails to indict the principal criminals, who comprise the leading figures in the last two US administrations, from Bush and Obama on down.

The political significance of the global economic turmoil

Nick Beams

The continuing sell-off on global markets, which has sent stocks down by as much as 20 percent from their highs in 2015, is not simply an expression of mounting economic contradictions, significant as they are. It points to the emergence of a profound crisis in the very framework of capitalist rule over the past quarter-century.

Yesterday saw the Dow fall by as much as 566 points at one point, finishing up 246 down for the day, following a slide in markets from East Asia to Europe, with the British stock market plunging to the levels of 2003.

The fall on Wall Street continued the trend in which American markets have experienced their worst opening for any year in history. It was fuelled by the continuing fall in oil prices, which dipped below $27, having fallen 30 percent over the past year and 75 percent from the level of more than $100 per barrel in 2014. The oil price slide signifies that the so-called super cycle in commodity prices, which began in 2003 with the rapid industrialisation of China, has come crashing down in a concentrated expression of the recessionary forces now ripping through the global economy.

Yesterday was dubbed “Black Wednesday” for so-called emerging market economies, which provided a significant boost for the world economy after the 2008 financial crisis, as currencies fell sharply and concerns mounted over their financial stability in the face of growing problems in repaying their dollar-denominated debts.

The quantitative easing policies pursued by the Fed and other major central banks, which pumped trillions of dollars into the global financial system, led to an explosion of borrowing by corporations in emerging markets, which more than quadrupled their debt from $4 trillion in 2004 to over $18 trillion by 2014. Now this money is heading for the exits.

According to the Institute for International Finance, emerging markets saw a $735 billion capital outflow last year, most of it coming from China, a shift characterised by the organisation’s chief economist as an “unprecedented event.” Other estimates put the outflow even higher, with one economist telling the World Economic Forum being held in Davos, Switzerland that the capital flight from China had reached $1 trillion since mid-2015.

But the emerging market tailspin is only one of the most prominent symptoms of the deepening crisis of the global financial system. On the eve of the Davos meeting, William White, former chief economist of the Bank for International Settlements and now chairman of the Organisation for Economic Cooperation and Development’s review committee, warned that the global financial system was unstable and faced an avalanche of bankruptcies.

“The situation is worse than it was in 2007,” he said. “Our macroeconomic ammunition to fight downturns is essentially all used up.” Debts had continued to build up over the past eight years and it would become obvious in the next recession that many of them would never be repaid.

European banks already had $1 trillion of non-performing loans and were heavily exposed to emerging markets. “Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem too,” he said.

These views were reflected in comments by Zhu Min, the deputy director of the International Monetary Fund, to a panel at the Davos meeting. He warned that investors and wealth funds had been clustered together and asset markets had been dangerously correlated, meaning that any problems in one area would rapidly spread to the financial system as a whole.

“The key issue is that liquidity could drop dramatically… If everybody is moving together, we don’t have any liquidity at all,” he said, pointing to a situation where investors all try to sell at the same time and there are no buyers, leading to a market collapse.

Former IMF Chief Economist and now Harvard Professor Kenneth Rogoff told a television panel discussion at Davos that fear in the markets was being driven by the realisation that Chinese authorities were not “magicians,” and with interest rates close to zero or below in Europe and Japan, quantitative easing was now largely exhausted. “What’s driving this is that the central banks are not coming to the rescue,” he said. Companies were holding back investment because of deep anxieties and the events of the past year had dispelled the myth that China was a “perpetual growth machine.”

Underlying the growing financial crisis is not merely the fall in oil and commodity prices and slowing global growth, but something even more profound--the disintegration of the economic and political structures through which global capitalism has developed over the past quarter-century, since the dissolution of the Soviet Union in 1991.

Wrongly identifying the Soviet Union and the Stalinist bureaucracy that ruled it with socialism, bourgeois governments, political pundits, journalists and academics proclaimed this event as the final and irrevocable triumph of capitalism and the “free market,” and the birth of a “new world order.”

Now there is a growing sense that it has proven to be very short-lived. This mood was reflected in an article published Wednesday by one of the chief boosters of the “new world order” myth, New York Times columnist Thomas Friedman, under the title “What If?”

Pointing to growing economic and political turbulence, he wrote that it was “hard not to look around and wonder whether the recent turmoil in international markets isn’t just the product of tremors, but rather of seismic shifts in the foundational pillars of the global system, with highly unpredictable consequences. What if a bunch of eras are ending all at once?”

The causes of this disquiet are becoming ever more apparent. On the economic front, the boost to global profits by the transformation of China into the cheap-labour platform of world capitalism, and the opening up of new areas of the world to capitalist plunder made possible by the liquidation of the Soviet Union, has come to an end.

The European Union, which expanded after 1991, is in an advanced state of disintegration, with the emergence of deepening conflicts between its members. While these differences have been sparked by the refugee crisis, the imposition of austerity by Germany and the deepening contradictions of the single currency, they reflect, at bottom, the impossibility of harmoniously unifying the countries of Europe on a capitalist basis.

The end of the USSR was hailed as the onset of a “unipolar moment” in which the US could finally realise the ambitions of its ruling class for total world domination. The past quarter-century, beginning with the first Gulf war 25 years ago this month, has seen one war after another, with the ever clearer danger of a Third World War. The mad delusions of the American ruling elites that a single nation, even one as powerful as the US, could rule the world have turned into a global nightmare, with US imperialism confronting opponents on every front.

These and other processes have led to an acute crisis of confidence that is now feeding back into and interacting with the worsening situation in the financial markets and the world economy more broadly.

But the most significant factor in the new geo-economic and political environment is the mounting wave of social opposition, deeply rooted in the consciousness of billions of people, to the present order.

Over the past quarter-century, the essential relations of capitalism as a system of war, social inequality and repression in which governments function, as Marx explained, as nothing other than the executive committee of the capitalist ruling classes, have come ever more clearly into view.

There is not a single capitalist government around the world that is regarded as having any genuine political legitimacy. And nowhere is this crisis of bourgeois rule more concentrated than in the centre of world capitalism, the United States.

As Friedman pondered, “what if” the 2016 US presidential election “ends up being between a socialist (Democrat Bernie Sanders) and a borderline fascist (Republican Donald Trump),” under conditions where the government has no answers to the economic and social crisis?

As the World Socialist Web Site has explained, Sanders is in no way a socialist, but rather a thoroughly bourgeois politician who stands four-square in support of American imperialism. But the fact that he is regarded as a socialist opponent of Wall Street by millions of people and receives support on that basis is of crucial importance, reflecting deep-going changes in social and political consciousness. Those shifts are already finding expression not only in the United States, but globally. They will accelerate in the coming period as the breakdown of the world capitalist economy and the political structures within which it has operated continues to intensify.

At present, political consciousness takes the form of ever-deepening discontent and the feeling that the present order is intolerable. The crucial task is the transformation of this mass discontent into a conscious political struggle for the program of international socialism.

Forecast 2016: Another Year at the Crossroads for Pakistan

Sushant Sareen

Much like in all the previous 67 years of its existence, Pakistan finds itself on the crossroads even in the 68th year. The good things that happened in 2015 on the economic, security, diplomatic and political fronts are fragile and not irreversible. In 2016, Pakistan will have to consolidate the gains made in 2015. If it does not, matters could go downhill pretty quickly. It is in this sense that Pakistan is at a crossroads once again; and whether it will be able to sustain the momentum of 2015 and stay on the bumpy road to reform; or whether it will change course and take yet another wrong turn; or even slip back down the path it traversed in 2015, will decide how 2016 will end.

OverviewOver the course of 2015, the real ruling establishment – the Pakistan military – opened up just too many fronts. Apart from continuing operations in North Waziristan against the ‘bad’ – Tehrik-e-Taliban Pakistan (TTP) – terrorists, the army also got very deeply involved in anti-terror and anti-crime operations in Karachi; anti-insurgency operations in Balochistan; anti-corruption drive in Sindh and within its own ranks; and anti-terror operations (albeit intelligence-based) in Punjab and Khyber Pakhtunkhwa. The army was called upon to supervise elections, provide security backup to the China-Pakistan Economic Corridor (CPEC) project, and become judge, jury and executioner in the military courts that were set up.

Its role in forging the foreign policy on India, Afghanistan, and the US became more hands-on and intrusive. The army chief was also the chief diplomat, and apart from hobnobbing with both the Afghans and the Americans, he was also trying to assuage the Saudis who were unhappy over Pakistan's refusal to participate in Riyadh's war against Yemen. In 2015, even as the army was encroaching in virtually every sphere of government activity and arrogating to itself the veto on every critical national decision, it continued to form and control the policy on India, not only sabotaging peace initiatives taken by Pakistani Prime Minister Nawaz Sharif but also deciding on matters of conflict and cooperation with India – whether on the Line of Control (LoC), or on issues related to trade, transit or terrorism.

It will not be easy for the military to maintain momentum of the myriad fronts it has opened; and even less so because, with every new front it opens, its list of adversaries and those who would like to see it falter if not fail, grows. This becomes even more critical given the sheer lack of capacity and capability in the civilian dispensation, which will find it difficult to benefit from the inevitable slack that will come as a consequence of the Pakistan army spreading itself so thin.

Political

The ruling Pakistan Muslim League-Nawaz (PML-N) will find itself firmly ensconced in 2016. The challenge that could have come its way from the Pakistan Tehreek-e-Insaf (PTI) was has been quite snuffed out over 2015. While the PTI will not roll over and play dead, the sort of pressure it was able to build on the government (with the hidden hand of the military propping it up), is unlikely in 2016.

Most issues on which the PTI agitated – e.g. election fraud – have more or less been settled and are unlikely to get any traction in 2016. However, the PTI is trying to latch on to new issues, most potent being the clamour over the CPEC. But this is a double-edged sword because while the PTI might be able to rouse public opinion in provinces like Khyber Pakhtunkhwa and Balochistan on the Punjab-centred CPEC, it is unlikely to go down well with the electorate in the province that is the controlling authority of Pakistan – Punjab. Without stirring Punjab up, the PTI will be unable to shake the PML-N. But, if the PTI can build up a solid movement against the PML-N on the CPEC issue, it can bring Nawaz Sharif under pressure.

Whether this will be enough to destabilise the PML-N government is another matter. Unless the PML-N government commits some very egregious mistake because of its proclivity for high-handedness, any challenge the PTI mounts will not cause too much trouble.

As for other political challengers, there are none on the horizon. The Pakistan Peoples Party (PPP) is practically on its deathbed and has completely lost the political plot. It is unlikely that the PPP’s fortunes will be resurrected by Bilawal Bhutto Zardari because none of his slogans – most of them taken from a different era of his grandfather and mother – strike no resonance with the public, and will not, in 2016. Religious parties could begin agitating against the government on the issue of the crackdown on terrorism and extremism, but if the army supports the government, or as is more likely, leads the drive against extremism, then there will not be much these parties will be able to achieve.

The danger, however, is that the army could just as easily use the religious parties to keep the government under pressure. After all, the military-mullah alliance has worked well for both the military and the mullahs. Of course, the mullahs will have to dance to the tune of the military and shed some of their pretensions of being autonomous in charting their political course.

Civil-military RelationsCivil-military relations will be the biggest political driver in 2016. Again, nothing new here. But 2016 is the year of transition in the military. Gen Raheel Sharif is to retire in November. There is already talk of whether or not he will get an extension. This will be a difficult decision for Nawaz Sharif to make – does he stick with the devil he knows or take his chances with the devil he does not? Gen Sharif has managed to assert himself and insert the military into the decision making processes of the government like it hadn’t happened since the end of former Pakistan Prime Minister Benazir Bhutto’s first government. But he has also let the civilian facade continue. His successor may not.

There is also a chance that the next General may have different ideas on controlling terrorism and extremism. On the other hand, Nawaz Sharif might decide to go for a new army chief because the next man would take at least a year before he comes into his own, long enough for the former to try and change the power balance. It is another matter that these sorts of calculations have a record of going terribly wrong, and no one knows this better than Nawaz Sharif who has had an uneasy relationship with every single army chief.

EconomyOn the economic front, 2016 is unlikely to see any major take-off. Cut through the window dressing of national accounts by the Chartered Accountant finance minister, and there isn’t very much to celebrate. The only bright spot, if at all it can be called that given all the controversies surrounding it and the fuzzy economics underlying it, is the CPEC. Apart from the investment coming under the CPEC, there is hardly any other green field investment in Pakistan. The macro-economic indicators, in spite of all the fudging, still do not look very good. Savings remain very low; investment has not quite picked up; revenue collection remains anaemic; public debt is spiralling; growth numbers are not anything to write home about; and the external sector remains fragile.

In 2016, it is unlikely if the Pakistan economy will be the toast of town. But if there are no major external shocks – destabilisation in West Asia, disruption of the remittances, oil shocks etc. – the economy will meander along.

Security2016 will be a crucial year on the terrorism front. The first few weeks do not seem to bear out the bombastic declaration by Gen Sharif that this will be the year in which terrorism will be defeated in Pakistan. A lot will depend on how the situation pans out in Afghanistan; and the portents are not good. Apart from the fact that Pakistan has continued to back its proxies among the Taliban, there are new players emerging due to the fragmentation in the Taliban ranks.

Despite Pakistan's efforts to get the Taliban faction supported by it into the driving seat in Afghanistan, it looks as though even Pakistan's own Afghan proxies might try to assert their autonomy from their patrons. If this happens, then the security situation, not just in Afghanistan but also in Pakistan, will go into a tailspin. The vast, ungoverned spaces straddling the border between the two countries will become the playground for all sorts of terrorist groups. The entry of the Islamic State (IS) into the AfPak region is also going to change the contours of terrorism.

The traction the IS is gaining among a new set of terrorists as well as the its attraction to some of the breakaway factions of the Taliban will remain a source of concern; and worse, destabilisation in both Afghanistan and Pakistan. Any uptick in terrorist violence will not just further damage the investment climate but also could risk the CPEC on which Pakistan appears to be basing its entire economic future.

Relations with IndiaRelations with India will go through the familiar cycle of engagement followed by estrangement. Despite all the euphoria generated by the December 2015 thaw – the meetings between the NSAs of both countries, followed by the visit of the Indian External Affairs minister to Islamabad where she announced the ‘comprehensive bilateral dialogue’, and topped by the flying visit of Indian Prime Minister Narendra Modi to Lahore – among the incorrigible optimists, there isn’t anything on the ground to suggest that Pakistan has made a paradigm shift in its India policy. The Pathankot attack is one indication that nothing has changed insofar as use of terrorism as an instrument of state policy is concerned, or, for that matter, the ability of the powers that be in Pakistan to sabotage any engagement process between New Delhi and Islamabad.

Chances are that both sides will start the process of engagement. Pakistan will make a show of moving against the Jaish-e-Mohammad terrorist organisation. But once the attack moves out of the front pages, it will be business as usual.

Therefore, by all accounts, the familiar trajectory of India-Pakistan engagement will be repeated. The best that can be hoped for is that violence along the LoC will be kept under control. For how long, is anybody’s guess. There is high probability of terrorist violence inside Kashmir. Some of this will be Pakistan-driven but some will be driven by the international jihadist narrative. But all of it will tend to be linked with Pakistan (which too will be tempted to dabble in the affairs of Kashmir), which in turn will lead to tensions between the two countries. There is also a high probability of another big terror attack within a few months, especially if the Indo-Pak engagement gathers some pace.

The AIIB: Regional and Global Responses

Madhura Balasubramaniam

The Asian Infrastructure Investment Bank (AIIB) was formally inaugurated on 16 January 2016. The AIIB is a multilateral development bank envisaged to "promote interconnectivity and economic integration" in Asia. Headquartered in Beijing, China, the Bank has 57 Prospective Founding Members. In June 2015, the startup capital of $50 billion was increased to $100 billion. The Bank has aroused different reactions from each part of the world. The articles tends to analyse these responses at the regional and global levels.

The foreign policy and economic concerns that underlie the establishment of the AIIB include the need to bridge the infrastructure investment gap of $8 trillion in the East Asian region. The AIIB, with its initial capital of $100 billion to be invested in energy, transportation, rural and urban development and logistics becomes significant in light of the investment gap.  Other major reasons for China to promote the Bank include the under-representation of non-western economies in existing global financial institutions, and the need to channel surplus Chinese capital into overseas investment.

Beijing argues that because 75 per cent of the seats and shares in the AIIB are reserved for Asian countries, the imbalance in representation of non-western economies in the existing international financial system will get addressed. This is an attempt to attend to a broader Chinese foreign policy agenda of playing a more proactive role in global institutions. Finally, infrastructure investment via the AIIB is to serve as a vehicle to drain surplus capital - estimated at $137 billion in the second quarter of 2015 - as well as to address concerns of regarding the capacity of construction material.

Regional Responses

The AIIB has received mixed reactions in major Asian countries. The Philippines has decided to hold off its decision to participate in the AIIB citing the non-binding nature of the Articles of Agreement (AOA). Japan is not participating in the AIIB to avoid a potential negative impact on Tokyo-Washington relations. Vietnam and India, on the other hand, have decided to participate in the AIIB citing their infrastructure demands. The regional response to the AIIB is significant. The Philippines, Vietnam, India and Japan each have territorial disputes with China. It is possible that negotiating opportunities might present themselves as these countries balance their territorial disputes with their growing economic relations with Beijing.

The AIIB is also a new platform for Taiwan to advance its bid for international recognition. Taiwan submitted its bid to join the AIIB and it was rejected on grounds of nomenclature. This is in tune with Beijing’s policy of strictly opposing any representation of Taiwan as an independent state. The rejection of Taiwan on grounds of nomenclature, as opposed to compromises in other international organisations such as the ADB or WTO, is a clear indication that Beijing’s political concerns trump the economic agenda in the establishment of the AIIB. This raises concerns that the AIIB will serve as tool for China to pursue its geopolitical ambitions, particularly in the light of regional territorial disputes. It would, therefore, be significant to observe the AIIB’s response to Taiwan’s bid for ordinary membership in 2016.

Global Responses: EU and the USThe EU's response to the AIIB reflects the willingness of member-states such as UK, Germany and France to engage more closely with Beijing as well as to encourage China to assume a more significant role in multilateral institutions. As members, they do have a potential role to shape the Bank from within. However, the divergence in stances taken by EU members regarding membership bids reflect the need for a coordinated response.

The US had refused to join the AIIB and is also said to have lobbied against the bank, leading to an increasingly isolated position as key US allies joined the Bank. The establishment of the AIIB is viewed as an erosion of US’ influence in the region.

Washington's concerns about the AIIB presenting a challenge to the existing financial institutions, and on whether or not it would meet standards of governance and environmental safeguards, were addressed during Chinese President Xi Jinping's US visit in November 2015. In a joint statement released by the White House, the US acknowledged China's contributions to the financial infrastructure in Asia and beyond, reflecting a nuanced change in Washington's position in an attempt to perhaps mitigate some of the political costs it incurred due to non-participation as well as attempts to dissuade its regional and European allies from joining the Bank.

The establishment of the AIIB highlights China’s attempt to shape the international financial architecture in a manner that is economically beneficial to the region and also serves to portray China as a responsible stakeholder in the international system. Simultaneously, the regional and global responses reflect the complexity involved in each country’s decision-making process on participate in the AIIB; and the decisions are informed by both economic and political considerations vis-à-vis their respective bilateral relations with China.