In recent weeks, many analysts have expressed considerable surprise as oil prices have hit $80 per barrel and prices at American gas pumps have fallen. This “surprise” seems to have crept up on us, but evidence of shifting market demand and energy production has been available for some time. Over the past three years, high oil prices have generated increased interest in oil and gas in remote locations such the Arctic and East Africa. In addition, breakthroughs in oil and gas technology have also driven the development of unconventional oil and gas resources in regions of the world that were previously considered too high-cost, too high-risk or too far away from established markets for profitable energy production. Further, as a result of climate change melting Arctic ice, new oil fields and delivery routes have opened up, while technological advancements in resource extraction are opening vast new regions for resource exploration in countries like Mozambique and Tanzania, which lack even the most the most basic infrastructure and need high energy prices to justify their development.

Despite possible environmental and infrastructure challenges, a number of countries and regions are motivated to pursue increased resource development and extraction for a variety of non-energy related reasons. For example, the political leadership of Greenland views the development of energy and mineral resources as an opportunity to gain independence from Denmark. For its part, Canada sees the development of its northern territories as a way to bolster its claims to national sovereignty over its “internal waters,” a view contested by both Washington and Moscow. In the case of Russia, development of the Yamal Peninsula and its offshore Arctic waters has been a major priority for President Vladimir Putin, who believes the policy will catapult Russia into the vanguard of future global oil and gas producers and, as a result, will make Russia a market player in the Far East as well as Europe.

Unfortunately, while these emerging energy producers are coming on line, the market for energy has been shrinking—at least for the near-term. Since June 2014 (when oil was at $115 per barrel), oil prices have been in a free fall, with demand dropping across Europe, Japan, India, China, Brazil and much of the emerging world market. The drop in demand is the result of a number of factors, including:

• Slowing global economic growth;
• Rising global oil production (especially in North America);
• Unexpected resumption of oil production in Libya, Nigeria, South Sudan and Iraq;
• Increasing energy efficiency, a response to three years of oil prices in excess of $110 per barrel, which, in turn, had an impact and continues to impact long-term global demand;
• A decision by Saudi Arabia in August 2014 to cut oil production by 400 thousand barrels per day, an attempt to defend its market share in the face of falling global oil prices;
• Record oil output from Russia;
• Surging natural gas liquids and hydrocarbon gas liquids production outside the OPEC quota system;
• Natural gas eating away oil’s market share as a refining fuel and as a feedstock in petrochemicals;
• The decision by Japan to restart some of its nuclear reactors, reducing forward demand for fuel oil in the power sector;
• Dumping of oil onto the marketplace by hedge fund managers who had gone long on oil prices (by some estimates as much as two million barrels per day) in anticipation of further price rises – the hedge funds had no alternative but to liquidate their positions when the market turned against them.

In August, Saudi Arabia tried and failed to stop the slide in oil prices. Now supported by the United Arab Emirates and Kuwait, the Saudis have decided to send a message to the world market that it will do whatever is necessary to maintain its market share, even accepting a near-term loss in revenue over the next two years. The Saudi goal is to slow or halt unconventional oil production, which is undermining their market share and profits. The short-term decline in oil prices also serves Saudi Arabia’s agenda by hurting their adversaries (Iran and Iraq) and squeezing Russia’s ability to fund the Assad regime in Syria.

However, the Saudis and their allies may be overlooking the complex economics of unconventional oil production in North America. For example, while drilling new wells in some unconventional basins may not be profitable at $80 per barrel, many existing wells have largely been amortized by current tax policies making them economic at prices in some basins such as the Permian at prices as low as $40 to $50 per barrel. The most important factor is that the production profile of many unconventional wells is very different. For example in the Bakkan wells flow very strongly but then crash often initially only recovering four percent of the oil in place while the Permian wells tend to plateau but ultimate recovery is much higher.

While various pundits have opined on this question, the truth of the matter is that no analyst really knows the full range of production costs across the unconventional crude oil production continuum since this information is highly proprietary. Nonetheless, with oil prices for West Texas Intermediate (WTI) at $81 per barrel and Brent at $83 per barrel and with Wall Street in turmoil and Europe poised on the brink of a new recession, the specter of a major price decline similar to that of 2008 cannot be ruled out. While prices could overshoot on the downside, I believe that prices will fall to $60 to $70 per barrel, before stabilizing at a level still far above the $38 per barrel we saw in 2008.

The precipitous drop in oil prices could not have come at a worse time for U.S. oil producers, who have been advocating for the United States to lift the long-time ban on crude oil exports (in place since 1975).  According to the Brookings Energy Security Initiative’s research on the issue, if the ban were to be lifted immediately, the United States could be exporting 1.7 million to 2.5 million barrels per day (mmbd) by 2015. With the market in such a weak position and demand falling, adding as much as 2.5 mmbd to the world market would significantly drive down both crude oil and petroleum product prices (gasoline and home heating fuel). While beneficial to consumers in the near term, the effect on crude prices will only add to the current market turmoil and a further downward spiral in crude prices. Furthermore, with many unconventional oil wells also producing natural gas, to the extent that oil prices fall below $60 per barrel, some natural gas production could also be affected.

Keep in mind, however, that the further crude prices fall in the near term, the faster they may rebound, as low prices become the engine that leads to a resumption of demand and world economic growth. The fall in oil prices will have various effects on different countries, though the magnitude is often overstated. For example, any further fall in oil prices could have serious deleterious effects on the Russian economy. As a major oil export economy (with oil accounting for 14.5 percent of Russia’s gross domestic product), Russia’s budget for 2014 is predicated on an average price of $97 per barrel. Therefore a price slide to $80 per barrel or below would pose a major economic setback for that country. The fact that prices have averaged at $110 per barrel for the year-to-date however allows Russia some cushion in the event of a short term price drop – as do Russia’s large financial reserves. However, any prolonged drop in oil prices will pose serious challenges to the Russian economy.

Countries that produce at a high cost with large populations, subsidized consumer prices and various political constraints, such as Iran (sanctions), Indonesia (falling energy exports), Iraq (political turmoil), Nigeria (political instability and falling exports) and Venezuela (a collapsed economy in need of high export prices) will be thrown into turmoil. Fearful of low prices, Venezuela recently attempted and failed to call an emergency meeting of OPEC to discuss the situation. Given the already fragile nature of many of these regimes, the prospect of serious social upheaval cannot be ruled out. On the other hand, large oil importing countries such as China, India, Brazil, Japan and South Korea stand to benefit from falling oil prices.

It is against this backdrop that OPEC will meet in late November. The oil price slide and efforts to reverse it will be priority one on the ministers’ agenda. While the Saudis may be willing to cut production if all the other OPEC members also agree to substantial cuts, the prospects for an agreement are slim to none, given their individual internal political realities and revenue needs.

As a long-term observer of the oil market, I have seen this game played out in various manifestations over the last 40 years. We are clearly in for a wild ride; buckle your seat belts. 

Midway through Hong Kong’s second public consultation on the method of electing the next chief executive (CE), both pro-democracy “pan-democrat” legislators and the Hong Kong government and Chinese Central government are still holding their cards close. Following the current public consultation, members of Hong Kong’s Legislative Council (LegCo) will cast an historic vote on political reform. Hong Kong’s mini-constitution, the Basic Law, states that “the ultimate aim is the selection of the CE by universal suffrage upon nomination by a broadly representative nominating committee in accordance with democratic procedures” (Basic Law Art. 45). Pan-democrat LegCo members currently plan to vote against the eventual resolution on political reform, given their dissatisfaction with the reform process to date. Observers predict that passage of a resolution will happen only if the Hong Kong and Central governments can swing a few pan-democrats over to their side in the final hour.

The problem is a prickly one: Is it possible to design an electoral system that is sufficiently open and democratic in the eyes of the Hong Kong people and, at the same time, that guarantees to the Central Government that the elected leader of this special administrative region accepts the supremacy of the Chinese Communist Party? Even as politicians on each side reiterate the near “impossibility” of changing their positions (see e.g., RTHK Backchat discussion with Justice Secretary Rimsky Yuen at 4:25), thought-leaders from Hong Kong’s universities are inventing creative proposals with the potential to break the deadlock.

The Ground Rules

A 2004 decision of the Standing Committee of the National People’s Congress (NPCSC), China’s national legislature, interpreted the Basic Law to require a “Five-Step Process” in order to amend the selection method for the CE. Hong Kong is now between Steps 2 and 3.

• Step 1: The current CE must submit a report to the NPCSC on the need to amend the electoral system. That submission took place on July 15, 2014 after a five-month initial public consultation process. The CE’s report faced heavy criticism in Hong Kong for not accurately reflecting public opinion.
• Step 2: The NPCSC must issue a decision affirming the need for the amendment. The NPCSC announced that decision on August 31, 2014. It endorsed a system by which citizens may directly vote for the CE but imposed restrictive conditions on the nomination procedure of eligible candidates. The decision triggered 79 days of protest and civil disobedience – what activists and the media have referred to as the “Umbrella Movement.”
• Step 3: The Hong Kong government must introduce the political reform bill in LegCo, and two-thirds of legislators must endorse it. The vote in LegCo is scheduled to take place during the first half of 2015, although a precise date has not been set. The purpose of the second-round public consultation is to forge consensus behind political reform within the parameters set out in the August 31 NPCSC decision.
• Steps 4 and 5: In the event that LegCo endorses the bill, the CE must provide his consent and report the amendment to the NPCSC for its final approval.

If the bill does not receive two-thirds endorsement of LegCo (or if it does, but the NPCSC does not approve) then political reform would fail. Hong Kong would be left with the status quo, and Hong Kong people would lose the opportunity to vote for their chief executive for at least the next seven years.

Limited Room for Negotiation

The terms set out by the August 31 NPCSC decision limit the range of possible political reform options. For that reason, one of the core demands of the Umbrella Movement was to scrap the decision and re-start the Five-Step Process; that didn’t happen, however. In January 2015, the Hong Kong government issued a public consultation document framing the discussion in the lead up to the vote in LegCo. The consultation document hews closely to the NPCSC decision:

• The Nominating Committee (NC) will resemble the previous committee that elected the CE with the same number of members (1,200) belonging to the same limited number of subsectors (38). The Wall Street Journal recently described that committee as “a hodgepodge of special interests.” During the consultation, citizens may discuss adding new subsectors to make the committee more inclusive and representative (such as adding new subsectors to represent the interests of women or young voters), but restructuring will necessarily mean disrupting and eliminating the positions of existing subsectors or committee members. Therefore, the consultation document suggests these changes are unlikely to be achieved (Consultation Document, Chapter 3, Sec. 3.08 p. 10).
• The NC will nominate two to three candidates, and each candidate will require endorsement from at least half of the NC membership. (Given the difficulty of restructuring the subsectors or their electoral bases, these terms would effectively exclude any pan-democrats from nomination.) In order to make this more palatable, the consultation document proposes that citizens discuss a two-stage nomination process. In the first stage, a quorum of 100-150 committee members would “recommend” individuals for nomination. The committee would then elect the nominees from this recommended group (Consultation Document, Chapter 4, Sec. 4.09 p. 14). In theory, the meetings when recommendation and nomination votes take place could be staggered in order to allow campaigning and public debate. The idea is that NC members would take public opinion into consideration before casting their second vote.
• On the voting arrangements, citizens may discuss a “first-past-the-post” arrangement with either a single-round, two-round, or instant runoff vote systems (Consultation Document, Chapter 5, Sec. 5.06 p. 17-19).

Both sides in this negotiation have fired shots across the bow. At the launch of the second public consultation on January 7, Chief Secretary Carrie Lam remarked, “there is no room for any concessions or promises to be made in order to win over support from the pan-democratic members.” For their part, the pan-democrats vowed to boycott the public consultation and veto a resolution that conforms to these terms. They argue that the proposed method of electing the chief executive does not improve upon the status quo.

Most pan-democrat legislators are directly elected from geographical constituencies, and public opinion could provide legitimate grounds for shifting their position. According to polling by the Hong Kong University Public Opinion Programme last month, a plurality of respondents view the Hong Kong government’s proposal as neither a step forward nor a step backward for democracy. If the government were to commit to making the electoral system more democratic in the next CE election in 2022, a clear majority of respondents would then support the government’s plan.

Inventing Options and Finding Common Ground

The two-stage nomination mechanism in the government’s proposal is an acknowledgement that the NC ought to be responsive to public opinion. But without additional tinkering, this procedure does not materially change the incentives of NC members. What if the public had the power to reject the slate of candidates nominated by the committee?

Since the first public consultation, a few academics, including Simon Young at Hong Kong University (HKU), have considered at least two ways this could happen. An “active” approach would allow Hong Kong voters to cast blank votes and require a minimum percentage of affirmative votes for the winning candidate. A “passive” approach would require a minimum voter turnout rate for a valid election. NC members might then have to take public opinion into account.

Early last month, Albert Chen, also a professor at HKU and a legal advisor of the NPCSC, began to advocate publicly for a proposal that employs a ballot with a none-of-these-candidates option (see RTHK Jan. 13 edition of The Pulse). Under his proposal, if a majority of people vote for “none-of-these-candidates,” the slate of candidates put forward by the NC will be voided. When the public votes down the candidates, the NC could revert back to an election committee and choose a provisional CE. Alternatively, the Chief Secretary could assume CE duties during a six-month interim period prior to a new election (drawing upon Basic Law Art. 53). Chen argues that his proposal would give the Hong Kong people—not pan-democrat politicians—decision-making power to accept the new NC and its slate of candidates or to revert back to the status quo.

More recently, Johannes Chan, HKU professor and human rights advocate, floated a competing proposal that would provide voters with the option for negative voting. A 20 percent “no” vote for an otherwise leading candidate would trigger a re-vote. Between the first and second elections, the candidates would have additional time to campaign. If after the second election, still 20 percent of voters oppose the leading candidate, the candidate would be disqualified, and the NC would nominate new candidates. Given Hong Kong’s governance problems and increasing public polarization, the 20 percent veto ensures that no CE will be saddled with a substantial block of Hong Kong society affirmatively opposed to him or her from day one.

Albert Chen’s proposal received a tepid if supportive response in pro-Beijing quarters. Jasper Tsang, the Speaker of LegCo and member of the largest pro-establishment political party, and Rita Fan, a member of the NPCSC, affirmed their view that the none-of-these-candidates mechanism does not violate the Basic Law. While the government’s consultation document does not expressly mention the none-of-these-candidates concept, Hong Kong’s Justice Secretary indicated that the proposal should be considered. Starry Lee, another leader of the biggest pro-establishment party in LegCo, countered that technical difficulties and limited time for discussion would pose obstacles to the none-of-these-candidates ballot proposal.

Pan-democrats so far have tended to rebuff government overtures to engage on the topic. A few legislators, such as the Civic Party’s Ronny Tong, have been willing to engage (with Albert Chen on the Jan. 13 edition of The Pulse) but have reservations about what happens after a voided election, and feel that the threshold for public veto is too high. Law Chi-kwong, a founding member of Hong Kong’s Democratic Party and also a member of the HKU faculty, suggested that the winning candidate ought to receive an absolute majority of votes with blank votes counted. (E.g., when one candidate receives 45 percent, another receives 35 percent, and none-of-these-candidates receives 20 percent, that would lead to a void election.) However, other scholars associated with the Democratic Party have distanced themselves from the blank vote debate and Law’s statements.

The Merits of Blank Voting

The debate over blank and negative voting in Hong Kong unfolds in a global context where none-of-these-candidates has become an increasingly common political choice. Several democracies have institutionalized the practice. Proponents cite instrumental rationales, such as improved accountability and transparency. However, these benefits are not necessarily guaranteed. More broadly, people recognize the inherent value of the “no” vote as a form of political expression.

In the U.S. state of Nevada, for example, a none-of-these-candidates option has appeared on the ballot for all statewide and national elections since 1975. During the 2012 presidential cycle, the Secretary of State of Nevada argued that removing a none-of-these-candidates option would harm Nevada voters by taking away a “legitimate and meaningful ballot choice.” There is precedent for none-of-these-candidates winning a plurality of votes in a congressional primary; in that case, Republican Walden Earnhart finished behind the none-of-these-candidates option but still “won” the primary and got the nomination. More typically, the ballot option plays a “spoiler role.” In the 1998 Senate race, for example, 8,125 votes for none-of-these-candidates dwarfed the 395-vote margin between Harry Reid and John Ensign. This allowed Reid, the incumbent, to be re-elected.

It is hard to find examples where none-of-these-candidates has won a majority of the popular vote. Hong Kong’s pan-democrats may be right to question whether this possibility would meaningfully affect the calculus of the NC. Colombia is one of the few jurisdictions where blank votes can have institutional consequences. The right of citizens to cast a blank vote was established by the Colombian Constitution in 1991, and later codified in political reform statutes in 2003 and 2009. Similar to Albert Chen’s proposal in Hong Kong, if the number of blank votes equals a majority of the total number of votes cast, the election must be repeated. The original candidates cannot participate in the second election.

The Colombian experience suggests that the blank vote is more consequential in races with fewer candidates. Colombian voters have never nullified a slate of candidates at the national-level, where the field is crowded. In the city of Bello, however, the blank vote won the mayoral election in 2011. In that case, the electoral authority disqualified the one opposition candidate. This led to a one-man race and united all opposition forces around the blank vote in order to reject the establishment Conservative Party candidate. In the second round election, the replacement Conservative Party candidate (Carlos Alirio Muñoz López) won 59 percent of the vote. In the end, his party benefited with a resounding popular mandate. By this logic, the blank vote could matter in the two- to three-candidate race contemplated for Hong Kong.

Empirical evidence also suggests that local conditions in Hong Kong could support a relatively high turnout for none-of-these-candidates. Based on data from Spain and Italy, Chiara Superti at Harvard finds that blank voting is a sophisticated political choice, more likely to take place in municipalities with highly educated and politically engaged electorates. Hong Kong would qualify.

Beyond candidate selection, voting is a highly expressive act. A citizen’s vote is an expression of identity as well as a channel for protest. Echoing this view, the Supreme Court of India recently held that the country’s constitutional guarantees of freedom of speech and expression confer on Indian citizens a right to reject all candidates and to exercise their right to affirmatively vote for none-of-these-candidates in secrecy. As a people who define themselves by “core values,” including freedom of expression, this resonates with Hongkongers. More fundamentally, the ballot serves a powerful safety-valve function. At the time universal suffrage was introduced in England and France, the vote was presented as a way to channel political turmoil into more moderate political expression—and this, too, resonates in Hong Kong today.

Views expressed in the article are the author's personal views.