1) The rise of populism: The combination of the middle-class economic squeeze and Islamic extremism at home risks fueling the populist politics of xenophobia and anger surging across Europe and the United States. This could continue to weaken establishment politicians and empower those on the far left and far right, making both American and European foreign policies more unpredictable and diverting leaders from engagement abroad in favor of damage-control domestically. It could encourage greater insularity that would allow regional crises to fester.
2) A foreign policy reset for the United States: A major terrorist attack on the United States, along the lines of 9/11, could scramble the presidential race and force the Obama administration to reverse its current round of retrenchment to attack the danger abroad. This could transform the dynamic of international politics after seven years in which U.S. President Barack Obama has appeared content to lead from behind, or not to lead at all. Should Donald Trump or another outsider candidate prevail in the race for the Republican nomination, it will be partly a result of widespread anger and fear over the Obama administration's perceived inability to keep America safe. Whether a Democrat or a Republican wins the contest in Nov. 2016, U.S. foreign policy is likely to return to its traditionally more hawkish, expeditionary orientation.
3) The breakdown of transnational institutions: A series of Paris-style attacks across Europe could fracture the European Union, as individual countries close their borders and pursue different national approaches to the threat of Islamic extremism at home and abroad. The Syrian refugee crisis has already placed enormous strains on European unity. If jihadists motivated by the successes of the Islamic State group abroad succeed in terrorizing the major capitals of Europe in a systematic way, existing trans-national institutions may simply buckle. The EU would likely remain as a shell institution, but decades of integration could finally be reversed.
4) The slowdown of developing economies: Global inequality could spread as the developed world resumes its traditional position as the driver of economic growth (although industrialized economies will not be immune from turbulence, with British Chancellor George Osborne warning of a “cocktail of risks” spilling over from abroad). Emerging economies that have powered the past 15 years of worldwide economic growth are slowing down or even contracting. The narrative of the past decade has been one of a “great convergence,” as poor nations from the global south narrowed the economic gap with the industrialized West through rapid economic growth. After years in which conventional wisdom assumed the future belonged to the BRICS (Brazil, Russia, India, China, and South Africa), the balance of economic power is now being redressed. This is a function of dynamic technological change, collapsing commodity prices and the end of easy money that led emerging powers to rack up debts, rising labor costs in China and its slowdown into the middle-income trap, and America's normalization of monetary policy following the Federal Reserve's decision to raise interest rates for the first time since 2006. Emerging markets that binged on debt and commodity riches during the boom now face a reckoning as the U.S. dollar strengthens and weak Chinese demand hollows out their primary export market.
5) Volatile oil markets: Changing energy dynamics will continue to tip the balance between net energy exporters and importers, placing intense pressure on the former. India and the United States are among the lead beneficiaries, although cheap oil and desperate efforts by the Organization of Petroleum Exporting Countries to protect market share risk undercutting U.S. shale producers, even as America returns to the global market by liberalizing oil exports. Top energy exporters like Saudi Arabia, Iran, and Russia, as well as commodity superpowers like Brazil, are the losers, not only in terms of profit but from the risk of rising unrest among disaffected constituencies at home as the money runs out. China is in the middle — as an energy importer it benefits from low prices, but its slowdown is causing widespread harm to its trading partners in Latin America, Africa, the Middle East, diminishing its leverage abroad even as it places pressure on China's big state-owned oil producers at home.
6) A reckless Moscow: Russia's decline will make Vladimir Putin more dangerous, not less. The Russian president is a gambler and a risk-taker; these propensities may grow, not diminish, even as his foreign adventures do not bear fruit for Russian interests. Domestic pressure on Putin will mount as the economy contracts, the plummeting oil price requires severe cuts to government programs (including military spending), and Moscow secures no quick victories in either Ukraine or Syria. Should Putin be ousted through elite factionalism, his successor is likely to be no more liberal and to be equally anti-Western in orientation.
7) A face-off with Beijing: China's growth slowdown, potentially to below 5 percent, could increase President Xi Jinping's propensity to fan the flames of nationalism and assert China's interests more forcefully abroad. Indeed, one senior Chinese official opened the new year with a warning that the U.S.-led order “is like an adult in children's clothes,” and that an America whose “great contributions to human progress and economic growth” now “lie in the past” should get out of the way so China can work to construct a new order. A crisis over Taiwan, the Senkaku Islands, or maritime disputes in the South China Sea could help restore the Chinese Communist Party's legitimacy should it come under challenge from socioeconomic discontent. But this is also a risky proposition for China as the United States is likely to stand firm, and a loss of face abroad (much less a loss through conflict) could do untold damage to the Party's continued rule. Whether China's “Go west” strategy of infrastructure exports through the One Belt, One Road initiative spurs reform at home or only postpones the necessary transition away from heavy industry remains a wild card.
8) A Balkanized Internet: Fueled by China's demand for cyber-sovereignty and the failure or fragility of democratic institutions in Eurasia and the Middle East, the Balkanization of the Internet could gather pace, signaling the close of an era that promised a truly worldwide web of free information flows. China has more internet users than any country, so the online norms it advocates have potency. Beijing's illiberal alliance with Moscow in favor of state control over its virtual territory, echoing state control over its geographic domain, could find additional support from conservative undemocratic regimes in the Middle East, including Iran and Saudi Arabia, as well as from strongmen in democracies like Turkey who seek to tilt the political playing field in their favor. Pressures on the liberal order in cyberspace increase the stakes for transatlantic leadership on this issue, and for new alliances to protect the open internet with democracies like India.
9) More trouble from North Korea: Jealous of the great powers' focus on Islamic State terrorists in the Middle East and their deal-making on Syria, North Korea's Kim Jong-un will seek to rattle the cage through provocative missile or nuclear tests, like the hydrogen bomb explosion his regime allegedly conducted on Jan. 6. North Korea recently failed in an attempt to test a submarine-fired ballistic missile; as 2015 closed Pyongyang was warning the United States of “unimaginable consequences” if it failed to agree to a peace treaty. Although strategists and journalists more recently have focused on other potential military contingencies in Asia, U.S. military officers continue to see the Korean theater as the most likely venue for regional conflict, with pressure growing on Pyongyang as Beijing distances itself from Kim's antics and the economic gap between North Korea and its more prosperous neighbors grows ever wider.
10) Wider war in the Middle East: As U.S. leadership in the Middle East remains inadequate, the risk of heightened regional conflict increases. This reality inverts President Obama's belief that regional powers should settle regional disputes; the evidence over the past few years suggests that localized wars intensify, in the absence of robust U.S. engagement and coalition-building. The risk of conflict between Turkey and Russia could intensify over Syria, building on a centuries-long history in which their imperial predecessors sparred for influence from the Balkans to the Caucasus. Iran's behavior could also become more destabilizing as hardliners seek to offset charges of appeasement over the nuclear deal struck with the great powers in 2015 by stepping up support for Shia insurgents in Yemen, Iraq, and Syria, intensifying hostilities with Saudi Arabia and Turkey in particular. A Saudi-Iran cold war threatens to turn hot in the wake of Iranian hard-liners' storming of Riyadh's embassy in Tehran and a Saudi-led bloc of Sunni governments' severing of diplomatic relations with Iran at the start of the year.
Despite this grim prognosis, 2016 holds the potential for upside surprises. Perhaps the most important would be a positive outcome of the American presidential election that delivers national renewal after a poisonous political season and a recommitment to foreign policy leadership, reassuring anxious allies and creating a firmer foundation for global prosperity. Happy new year.
An earlier version of this essay appeared in the Nikkei Asian Review .
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Petroleumworld News 01/18/2016
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