Brian the revolutionary

It is easy to see Monty Python's Life of Brian (1979) as a satire on religion. The signs are there. The biblical setting. Talk of messiah. Blasphemy. Crucifixion. But as commentary on religion, it is not especially profound. Following false prophets, splitting among ludicrous divisions of creed (shoe versus gourd), seeing meaning in garble. These are its messages. Yet it is far deeper as a satire of the revolutionary. What endures is not Brian the prophet but Brian the revolutionary.

The parody of the revolutionary reverberates throughout. Brian hates the occupying Romans “as much as anybody,” but joins the People's Front of Judea as much to fight the Romans as for Judith. From all the in-fighting, Stan/Loretta does not even know the name of his group. “The only people we hate more than the Romans are the fucking Judean People's Front,” says Reg, the group's leader. When Brian suggests to his group and the “Campaign for Free Galilee” that “we should be united against the common enemy,” the unison answer is “The Judean People's Front?!”

Not all revolutionaries have the same task. Reg, the “glorious leader and founder of the P.F.J.,” will be coordinating the kidnapping of Pilate's wife, but “will not be taking part in any terrorist action, as he has a bad back.” Aren't you coming with us, asks Brian. “Solidarity, brother” is Reg's response. “Oh, yes. Solidarity, Reg.” A fanatic's vocabulary is full of symbols to stifle debate and dissent.

There is opportunism in revolution. The People's Front of Judea is secular. After listening to Jesus, Francis notes that, “Well, blessed is just about everyone with a vested interest in the status quo, as far as I can tell, Reg.” To which Reg replies, “Yeah. Well, what Jesus blatantly fails to appreciate is that it's the meek who are the problem.” But as Brian becomes the savior-designate, his revolutionary brothers coalesce around him. He becomes their leader. “Morning, Saviour,” is how Reg greets Brian.

Martyrdom gets some air too. The supremely useless “Judean People's Front Crack suicide squad” kills itself; “That showed 'em, huh” says its leader. Then come the People's Front of Judea to offer “sincere fraternal and sisterly greetings to you, Brian, on this, the occasion of your martyrdom.” Brian replies “You sanctimonious bastards!”

More than anything Life of Brian shows the ambivalence of the revolutionary. This is partly revolution for revolution's sake. When Stan wants to become Loretta to have babies, Judith and Francis stand up for Stan's right to have babies. “What's the point?” says Reg. Francis replies, “It is symbolic of our struggle against oppression.” “Symbolic of his struggle against reality,” says Reg.

The revolutionary cause is unclear. Reg complains of the Romans, “They've bled us white, the bastards. They've taken everything we had, and not just from us, from our fathers, and from our fathers' fathers... And what have they ever given us in return?!” Many answers. Frustrated, Reg tries to put an end to all this, “All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, a fresh water system, and public health, what have the Romans ever done for us?”

Life of Brian caricatures rebellion and anti-imperialism better than it does religion. It is a satire of the 1960s and 1970s and its message carries through. It is a glimpse of that peculiar beast, the revolutionary, and what carries him forward. It is a satire of the first order.

America in Numbers: Sex

Do not ask why but I just received and started reading my copy of the Statistical Abstract of the United States (2009), a 1,000-page tome with over 1,300 tables on every aspect of these united states. Before I scare you, or enrage you, or perhaps even bore you with teen pregnancy, abortion, infant mortality, unemployment, poverty, murder, and the like, I thought it best to grab your attention with an easy one: sex. Here you go, then, a brief summary of sex in the US.

The survey in the book looks at males and females 15 to 44 years old in 2002. Of the total, 90% have had sex with a partner of the opposite sex. The rate among teenagers (15-19 years) is lower obviously, but still around 61.6% for males and 62.2% for females. As you move towards older groups, the rate of people who have had sex increases, but there is still a 9% of both males and females with no sexual contact by age 24, and there is also a 1%-2% with no sex by the time they reach 35.

The median number of sexual partners is 5.4 for men and 3.3 for women, which is not surprising (as a fact as well as a result of bragging by men or understating by women). The distribution of sexual partners is skewed: only 12.8% of men report having had sex with only one woman versus 22.5% of females; similarly, 22.5% of males report having had 15 or more sexual partners, including 2.5% of teenage males and 1.9% of teenage females (high school and freshman year must have been crazy). By contrast, only 9.2% of females report having had more than 15 partners. In the middle range (2-14 partners), males and females are similar; they differ mainly on the extremes.

From a racial point of view, the median number of partners for blacks is reported at 8.3, versus 5.2 for non-Hispanic whites and 4.5 for those with Hispanic or Latino origin. For females, the mean is similar for whiles and blacks (3.6 versus 4.1) but much lower for Hispanics (1.7). Blacks are also reported to have a lower proportion of just one sexual partner (5.8%) and higher proportion of 15 and above (33.8% versus 22.3% for non-Hispanic whites). For females, 34.6% of Hispanics or Latinos report just one partner versus 21% of non-Hispanic whites and 12.4% of blacks. On the other extreme, 10.2% of non-Hispanic white women report 15 or more partners versus 8.8% of blacks and 4.6% of Hispanics.

In terms of same-sex contact, the rate for females is 11.2% versus 6% for males, which I think will satisfy a perennial male fantasy. The data on same-sex contact is more sparse but it is also worth noting that 3.4% of males currently married reported having had some same-sex experience; the number for married females was 7.2%.

The final statistic is sexual activity in the last twelve months: about 14.8% of males and 13.9% of females reported no sexual activity the past year. About 62.2% of males and 66.8% of females reported sex with only one person of the opposite sex, while 1% of males and 3.1% of females reported sexual contact with both the same and the opposite sex in the last twelve months. When it comes to teenagers, the spread is bigger with 0.9% of males reporting sex with both male and female in the last twelve months, a number that was 5.8% for females.

References: US Census Bureau, Statistical Abstract of the US 2009, Tables 92-93

From crisis to crisis

Crisis begets crisis. In the 1970s, high oil prices helped create stagflation, and the cure for stagflation – the Fed raising interest rates – sent Latin America into default. Then with widening US current account and budget deficits, the Plaza Accord helped to devalue the dollar, but the near-term result –monetary easing in other countries – created a stock market bubble in Japan, whose burst triggered an economic crisis.

Now is no different. From the Asian financial crisis, developing countries learned it is better to hoard reserves in good times than to beg the IMF in bad ones. And to deal with the prickled dotcom bubble, the Fed let money loose, and while it celebrated the “great moderation” of low inflation, a housing bubble grew, one snubbed by the Fed since asset bubbles, it claimed, were not for the monetarist to deflate.

There were other problems too: high oil prices transferred wealth from those who had it to those that were not sure what to do with it; China thought it easier to lend money to Americans to buy Chinese goods than to help its own people to buy them; there were American wars and tax cuts to finance as savings were low and household debt up; and Wall Street went into a another collective daydream thinking that if you package assets broadly enough and sell them widely enough, risk will go away. What could go wrong?

It is actually a wonder that this crisis took so long to come. For the past four years it has been “imminent.” The US current account has been unsustainable and the dollar has been about to collapse; housing prices have been about to fall all over the OECD; high oil and commodity prices have been about to create inflation; and the “twin engine” global economy running on US and China has been about to “run out of steam” unless aided by sickly Europe and Japan.

Much as Wall Street is to blame, this was an economic crisis before it was a financial crisis. Now it is a political crisis. How a crisis is solved is as important as solving it. The short-term task is to restore confidence in banking, restore demand, and manage the inevitable downward adjustment of housing prices. And there are absurdities to prevent such as writing trillions in bilaterally traded credit default swaps that appear nowhere in balance sheets, or packaging assets and liabilities in a way that no one understands what is the underlying risk or value.

The longer term challenge, however, is to find a way to arrest the crisis beforehand. For years, the world knew it was on an unsustainable economic path. Save a meagre revaluation of the Yuan, little was done to change course. That reveals a great deal about the growing gap between the reality of the global economy and the adequacy of the institutions to manage it. Without those institutions this crisis will soon beget another.

George Orwell, Restating the obvious

George Orwell, Essays. Everyman’s Library, 2002. 1,369 pages. $35

I knew George Orwell the way most people know him: through 1984 and Animal Farm, and from some of his better known essays, “Shooting an Elephant,” “Politics and the English Language,” “Why I write” and a few others. This collection reveals another Orwell, adding much depth to the man, while also showing certain sides of him which most of us are less familiar with.

What struck first me in this book was how widely read Orwell was. We usually think of him as a master writer, and he comes across as a having thought deeply about language. But his grasp of the literary work of the nineteenth and twentieth centuries is much greater than I imagined. Not only is he familiar with the major authors, but also with “lesser” works: “good bad books” as he calls them (“the kind of book that has no literary pretentions but which remains readable when more serious productions have perished.”). When told by a publisher that he will re-issue “minor and partly-forgotten novels,” Orwell admits that, “I rather envy the person whose job it will be to scout round the three-penny boxes, hunting down copies of his boyhood favorites.” Even for better known writers, he likes to think of them holistically, often focusing on their lesser known works. Tolstoy, for instance, appears more for a pamphlet he wrote against Shakespeare than for any work. And rarely will Orwell write about an author without putting one piece of work in the context of the author’s total work, good and bad, widely known and obscure.

Originality was Orwell’s chief rhetorical devise. In fact, it is remarkable that there is so little repetition in a book of over 1,300 pages. The essays were written over a twenty-year period (1928-1950), and yet barely a handful can be thought of as repetitive and most manage to surprise even if after you have read much of his work. Think about this sentence: “If one were obliged to write a history of the world, would it be better to record the true facts, so far as one could discover them, or would it be better simply to make the whole thing up? The answer is not so self-evident as it appears.” What rests at the center of his originality is a comfort with contradiction. This passage from “Shooting an Elephant” about his feelings while serving with the imperial police in Burma is most telling: “With one part of my mind I thought of the British Raj as an unbreakable tyranny, as something clamped down, in saecula saeculorum, upon the will of prostrate peoples; with another part I thought that the greatest joy in the world would be to drive a bayonet into a Buddhist priest’s guts.”

The contradiction was firstly personal: his experience in Burma and later in the Spanish Civil War taught him internal conflict and ambiguity, and that attitude guided his work. “If there are certain pages of Mr. Bertrand Russell’s book, Power,” he wrote, “which seem rather empty, that is merely to say that we have now sunk to a depth at which the restatement of the obvious is the first duty of intelligent men.” The restatement of the obvious became a main preoccupation and, with time, the signature of his writing. In an essay on Rudyard Kipling, he blames T.S. Eliot for not explaining Kipling’s appeal despite having so many detractors. Orwell immediately concedes that “It is no use pretending that Kipling’s view of life, as a whole, can be accepted or even forgiven by any civilised person.” Then, Orwell can more easily consider Kipling’s literary work and appeal.

What allowed him to do that was a belief that art can be aesthetically tasteful even if politically wrong. In a twenty-page essay on Jonathan Swift, he spends the first fifteen condemning Swift’s pessimistic view of human nature; then, he admits that “curiously enough he [Swift] is one of the writers I admire with least reserve, and Gulliver’s Travels, in particular, is a book which it seems to impossible for me to grow tired of.” His most detailed treatment of that subject comes in reviewing Salvador Dali’s autobiography: “It is a book that stinks. If it were possible for a book to give a physical stink off its pages, this one would – a thought that might please Dali, who before wooing his future wife for the first time rubbed himself all over with an ointment made of goat’s dung boiled up in fish glue. But against this has to be set the fact that Dali is a draughtsman of very exceptional gifts.” And then more plainly, “If you say that Dali, though a brilliant draughtsman, is a dirty little scoundrel, you are looked upon as a savage.” That balance, honesty, and aesthetic separation from politics marked his literary analysis.

Politically, Orwell’s chief target was totalitarianism: “Every line of serious work that I have written since 1936 has been written, directly or indirectly, against totalitarianism and for democratic socialism, as I understand it.” In a roundabout way his opposition to totalitarianism comes from his desire for truth and fairness. His “starting point is always a feeling of partisanship, a sense of injustice. When I sit down to write a book, I do not say to myself, ‘I am going to produce a work of art’. I write it because there is some lie that I want to expose, some fact to which I want to draw attention, and my initial concern is to get a hearing.”

What connected that passion for the truth with distaste for totalitarianism was the Spanish Civil War and Orwell’s need to convey the truth as he saw it on the ground and to de-romanticize the contemporary admiration for the Soviet Union. What horrified him about totalitarianism is its ability to manufacture the truth: “From the totalitarian point of view history is something to be created rather than learned. A totalitarian state is in effect a theocracy, and its ruling caste, in order to keep its position, has to be thought of as infallible. But since, in practice, no one is infallible, it is frequently necessary to rearrange past events in order to show that this or that mistake was not made, or that this or that imaginary triumph actually happened.” It is against this fear that 1984 was written.

His answer was socialism. What attracted him to socialism was equality. He had grown and lived much of his life at subsistence or even poverty, and he spoke ill of his time at St Cyprian’s, a school for wealthy kids, which promoted a contradictory moral code: “On the one side were low-church Bible Christianity, sex Puritanism, insistence on hard work, respect for academic distinction, disapproval of self-indulgence: on the other, contempt for ‘braininess’ and worship of games, contempt for foreigners and the working class, an almost neurotic dread of poverty and, above all, the assumption that money and privilege are the things that matter, but that it is better to inherit them than to have to work for them. Broadly, you were bidden to be at once a Christian and a social success, which is impossible.” It is not hard to read some admiration for the shortages produced by the war, nor would he mind wartime rationing in peacetime.

Despite his obsession with socialism, Orwell was not a particularly deep economic thinker. Obviously he writes about economics but from a political or social standpoint. I cannot think of another writer that is more aware of how much things cost and how the prices of little things change with time, at least not one who is not an economist. But Orwell does not consider the economic system as a mechanism that works on supply and demand, or on incentives, nor does he conceive of economic liberty either as a subset of liberty more generally or as a means to political liberty. He read F.A. Hayek’s “Road to Serfdom” which linked socialism to totalitarianism, but Orwell was hardly able to see capitalism as anything more than exploitation: “Hayek’s able defence of capitalism, for instance, is wasted labour, since hardly anyone wishes for the return of old-style capitalism. Faced with the choice between serfdom and economic insecurity the masses everywhere would probably choose outright serfdom, at least if it were called by some other name.”

Of course, Orwell was conscious that socialism was not easy to achieve, and he was even more aware how problematic revolutions can be, a view that has must owe something to his reading of Gustave Flaubert’s Salammbô and Arthur Koestler’s novels: “Revolutions always go wrong – that is the main theme” writes Orwell in a section that contrasts Koestler’s Gladiators with Salammbô. Later in the same essay, he notes that “Revolution, Koestler seems to say, is a corrupting process … it is not merely that ‘power corrupts’: so also do the ways of attaining power.” This essay comes shortly after Orwell completed Animal Farm, and the thematic linkage between the two is unmistakable.

World War II confronted Orwell with a tough choice: he would have preferred a socialist war, and it was clear that neither side if victorious would implement Orwell’s agenda. His position was much a reaction to the thinking of the day, and especially of the intellectuals in England. He summarily dismissed pacifism, as a doctrine which “can only appeal to people in very sheltered positions,” and he sympathized with Kipling’s view that it was “making mock of uniforms that guard you while you sleep.” He grew increasingly patriotic though he had dreaded and opposed the war before it started. His patriotism, in the end, was more than just a preference for truth and fairness – it reflected his own upbringing and instructs. “Most of the English middle class,” he writes, “are trained for war from the cradle onwards, not technically but morally.” He saw in a dream ”that the long drilling patriotism which the middle classes go through had done its work, and that once England was in a serious jam it would be impossible for me to sabotage.”

In a review of a book by Malcolm Muggeridge you see even better that Orwell’s patriotism was emotional more than rational: “I know very well what underlies these closing chapters. It is the emotion of the middle-class man, brought up in the military tradition, who finds in the moment of crisis that he is a patriot after all. It is all very well to be ‘advanced’ and ‘enlightened,’ to snigger at Colonel Blimp and proclaim your emancipation from all traditional loyalties, but a time comes when the sand of the desert is sodden red and what have I done for three, England, my England? As I was brought up in this tradition myself I can recognize it under strange disguises, and also sympathize with it, for even at its stupidest and most sentimental it is a comelier thing than the shallow self-righteousness of the leftwing intelligentsia.”

It is that courage in writing, the willingness to confront and admit personal contradictions, the honesty in admitting when passion overrules reason that we treasure and miss in Orwell, and the chief reason that this collection of essays will be forever my companion.

First, say what’s on your mind

A friend was sitting at the school cafeteria, looking aimlessly at her iMac, waiting for inspiration to come. She wrote a few words, took a sip of coffee, and then erased them. By the time I sat next to her, her coffee cup was half empty, and the screen was fully so. It was writer’s block at its worst: an email that needs to be sent quickly or not at all (and an email where the writer puts too much thought into details that the reader won’t notice or care about anyway).

“What are you trying to say?” I asked. “Well, I met this man yesterday. We had a good chat but I didn’t have my business card on me. I want to email him and tell him it was nice to meet him and to give him my contact info.” Why not write that, I asked. She paused. She was skeptical. I explained, “Just write: ‘It was nice to meet you yesterday. I didn’t have my business cards on me, so I am writing to send you my contact info’.” She thought for a second. It made sense. She was relieved.

This wasn’t the first time I had offered such advice. In fact, most times I volunteer to help friends with their writer’s block, it is the same story: I ask them what they want to say, and then all I do is write it down while they dictate. It is surprising how grateful they are for such service. It is probably because there is something about writing that scares people into inaction – they freeze at the daunting task of putting their thoughts, simple as they may be, onto paper. The supposition is that writing must be formal and so the usual rules (“just say what you want to say”) shouldn’t apply – or at least that is how most people approach writing.

II

There are three kinds of writing: there is bad writing, made up of convoluted sentences and unintelligible ideas; there is good writing, which conveys a point pithily and clearly; and there is great writing, which moves, excites, entertains or even inspires. Bad writing is value-subtracting, as economists would say – the sentence adds to less than its parts. Good writing is value-neutral. Great writing is value adding – the sentence is more than the sum of its parts as words come together to create new images or emotions or a rhythm that adds to the story or argument.

Bad writing is often the result of people aiming for great writing instead of good writing. Hence the hesitation when starting to write - it has to “sound good.” In reality, bad writing is good writing trying to be great and failing. The rules for good writing are best summarized by George Orwell: write simply, succinctly, and get your point across (he had six rules, but in his spirit, I distilled them into three). My own advice would be “say what’s on your mind; then go back and edit ruthlessly.”

Not all bad writing has such noble roots, of course. A more common reason for bad writing is laziness, the unwillingness to re-read and edit one’s work. This is bad writing as a self-fulfilling prophecy. The logic is simple: I am a bad writer so there is no reason to spend much time trying to improve my writing which will be bad anyway – and indeed unedited or careless writing is inevitably bad writing. This “writing defeatism” feeds on the illusion that good writing comes to good writers effortlessly, a literary deus ex machina, if you will – which is far from the truth, as any self-respecting writer will admit.

An even bigger source of bad writing is bad thinking. Although the author blames writer’s block, it is really the ideas that are poor, not the writing aptitude. Many people make up their minds or refine arguments as they write (I do much of that myself), but it is rare for good writing to save a bad or uninteresting idea. The challenge is how to create a logical and coherent argument, link propositions with facts, and establish hypotheses that can be tested against evidence. The problem of writing is very often the problem of thinking.

III

Aristotle tells us that rhetoric should combine ethos, pathos and logos. Ethos means consistency. If you are a crook campaigning against corruption, your rhetoric is hollow and your speech unpersuasive. Logicians will say that ad hominem arguments are bad – the rebuttal should not be addressed to the speaker’s credibility but to the argument’s logic and evidence. They are right, but as any lawyer will attest, this rarely happens – we care about whether the politician who preaches freedom is autocratic, whether the broker of peace is a murderer, the self-professed philanthropist miserly. Who speaks matters as much as what is said – or at least the character of the speaker makes a difference for the argument.

Pathos is emotion, the ability to excite or energize a crowd. Listen to Neville Chamberlain declare war on Germany in 1939 and you will see what the absence of pathos means: “This morning the British Ambassador in Berlin handed the German Government a final note stating that, unless we heard from them by 11 o'clock that they were prepared at once to withdraw their troops from Poland, a state of war would exist between us. I have to tell you now that no such undertaking has been received, and that consequently this country is at war with Germany.”

Contrast that with Roosevelt’s “Day of Infamy” speech: “Hostilities exist. There is no blinking at the fact that our people, our territory, and our interests are in grave danger. With confidence in our armed forces -- with the unbounded determination of our people -- we will gain the inevitable triumph -- so help us God. I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, December seventh, a state of war has existed between the United States and the Japanese Empire.” Granted, Chamberlain and Roosevelt were declaring very different wars and Churchill’s more memorable phrases came at times more threatening to Britain than the fall of 1939. But a country yawning its way into a war will never win.

Logos is logic, the ability to take the reader from the common and acceptable to the unfamiliar and provocative through steps that even the skeptic can follow. I learned the most about logos from two teachers. The first was a historian I did not particularly like and whose class I eventually dropped. Yet he taught me a valuable lesson. He was challenging the conventional wisdom that Napoleon spearheaded nationalism in Europe. I remember him listing his various counter-points (whose details, needless to say, I no longer recall). But then, with a characteristic scorn that befitted a man of his age, education and intellect (and I say this with affection), he concluded: “All you need for good analysis is a solid grasp of fact and a great deal of common sense.” What a thought! Good analysis, apparently, is for everyone – who will admit that common sense and understanding facts are beyond them?

The second teacher was an economist. He pushed us to think about robustness in a way only an economist could – “what if you change this assumption, or this number, what happens to the result?” He would always ask us to examine the weakest link in our thought; what was essential and what not for our argument. Did it all depend on one fact which, if proven wrong, would destroy the whole point? More fundamentally, however, he liked to deflate false authority: “How does he know?” he would say when confronted with a simple and confident answer to a very complex question. Or, more amusingly: “if he’s so smart, why isn’t he rich?” If anything, he taught me that tension, ambiguity, and uncertainty are the basis for logical thought. Honest minds are conflicted minds.

IV

My academic training is in international relations and economics, yet it is my study of statistics which guides my thinking on logic and argument. What distinguishes statisticians from other logical creatures is that they quantify questions such as, “how much evidence do we need to reach a conclusion” or “how sure are we of the conclusion we just reached.” There is a five-step process I learned in an introductory statistics class that I apply: state the hypothesis; articulate the methodology in testing the hypothesis; specify a threshold that your evidence will need to reach in order for you to accept the hypothesis; check the data; reach a conclusion.

I often puzzle friends by telling them I think of a problem as a multivariate regression. A multivariate regression has six elements (pardon the bullet-point exposition again, but that what mathematical thinking is about): the first is the dependent variable, or more simply, the observations which vary from subject to subject (salary, for example). Then come the independent variables which might explain the variation (intelligence, education, experience, etc.). Then, we look at four questions: is the relationship between variables significant (does your salary in fact depend on whether you are more intelligent, educated or experienced); is the relationship positive or negative (do you make more or less with each level of education, more experience, etc.); is it weak or strong (how much more, how much less); and how much of the variation in salary can you explain through changes in the other variables?

True, I do not spell out each problem as a multivariate regression, but I still wonder whether the variation I observe can be explained by the causes I have identified in my hypothesis: what I can explain and what not; what evidence supports and what contradicts my hypothesis; what should my conclusion be in light of the data I have uncovered. Obvious questions, but fundamental too.

V

The ancient Persians had a custom which is relayed to us by Herodotus; “If an important decision is to be made, they [Persians] discuss the question when they are drunk, and the following day the master of the house where the discussion was held submits their decision for reconsideration when they are sober. If they still approve it, it is adopted; if not, it is abandoned. Conversely, any decision they make when they are sober, is reconsidered afterwards when they are drunk.”

Deflating an idea through drunkenness can be a cleansing exercise. A good idea should withstand the perspective and ridicule that comes with alcohol. As JM Keynes put it, “It is astonishing what foolish things one can temporarily believe if one thinks too long alone.” (Those who have seen A Beautiful Mind or Pi will recognize how perspective can lead to breakthroughs.) Logos is about thinking while sober; pathos is looking at an idea while drunk (ethos, by contrast, is avoiding public speaking when too drunk, jeopardizing credibility once and forever). This is not exactly Aristotle’s trio, but he would recognize the duality of argument in soberness and drunkenness, reason and emotion.

I want to end with some advice I got from another professor, who led me to think about how to balance impulse with reason and to have the courage to pursue new ideas. It was a graduate-level class on public finance which, as an eager second-year student, I was taking. We had read a paper arguing that the Magna Carta could be understood by using economic theory. Its method and approach had intrigued me. I wanted to do something similar for my term paper, using economics to analyze the signing of the Treaty of Westphalia. My teacher was obviously uneasy about the choice. He thought it too risky. But then, he wrote this in an email: “Hey, this is only a term paper. One can be a little adventurous.”

It was quite a radical thought, especially for a college sophomore with an ambivalent attitude towards term papers. (I followed his advice but the research yielded nothing.) He was the first teacher to ever tell me to have the courage to “go for it” and see what happens. And that’s the advice that comes to mind whenever I stare at a blank computer screen - just write.

A Buck for Chuck

In my darker and more cynical moments, I imagine making a campaign contribution to Chuck Schumer, the democratic senator from New York. The amount I would give him would cover the cost of an economics course in a local school because a man obsessed with legislating on economic policy should not be illiterate in economics.

My first encounter with Mr. Schumer was a few years back when he wrote an op-ed in the New York Times challenging comparative advantage (January 6, 2004). According to Mr. Schumer, the theory is outdated because David Ricardo, the theory’s exponent, had assumed factors of production to be immobile. As Mr. Schumer wrote, “Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today's case, to a relatively few countries with abundant cheap labor.”

Comparative advantage leaves much to be desired. It does not explain, for example, what causes countries to differ in their productivities, hence taking as a given a variable that should be explained. And developing countries often specialize in the production of primary goods, thus losing out on the dynamic gains from trade. But Ricardo’s central insight remains: a country benefits from trade even if it is less productive than its trade partners. Factor mobility does not invalidate that point. In fact, trade in goods acts similarly as trade in factors of production. And anyway, factors of production are nowhere nearly as mobile as Mr. Schumer claims.

Now Mr. Schumer is back again. For years he has been musing, along with Senator Graham, about imposing a 27.5% tariff on Chinese goods if China does not revalue its currency. This campaign has been abandoned in favor of implementing trade measures against countries that manipulate their currencies. Mr. Schumer claims the plan is not directed at China (in an article co-authored with three other senators): “our bipartisan legislation is not to punish any one country but to encourage all countries to follow international rules.” But China is the bill’s more immediate and likely target.

Mr. Schumer is an economic looney toon, not to be taken really seriously. But his legislation has drawn support from both Senators Barack Obama and Hillary Clinton, two democratic frontrunners for the presidency. And the legislation is seen as responding to growing anxiety in the United States about free trade. If nothing else, it reveals just how fragile free trade remains to politicians who are keen to exploit voter anxiety (although actual legislation, thankfully, often lags behind).

The most obvious drawback with this legislation is that determining exchange rate manipulation is extremely difficult. Anyone working with exchange rates will admit that predicting exchange rate movements is nearly impossible; economic theories are no better than guessing in being able to forecast exchange rates. Hence, judging what a “fair” value for a currency should be is nearly impossible.

It is equally unclear how much exchange rate movements affect trade flows. According to economic theory, an appreciating currency makes imports cheaper and exports more expensive. If the Chinese Yuan were to appreciate, China’s imports would increase and its exports would shrink. Reality is different, however. The obvious statistic to cite is from the Yuan itself: since allowed to “float,” it has gone from 8.28 ¥/$ to 7.59 ¥/$, but China’s trade surplus with the United States has grown from $162bn in 2004 to $233bn in 2006.

The same is true about the US trade deficit with the Euro area, where the dollar has depreciated more dramatically. After 2003, when the $/€ rate was in parity, the US bilateral trade deficit in goods went from $78bn to $93bn in 2006, despite a drop of nearly a third in $/€ rate. (The deficit stabilized somewhat in 2006). Prices respond slowly and imperfectly to exchange rate changes, making deficits less correlated with exchange rates. An appreciating Yuan, in other words, would bring uncertain changes to the US-China bilateral trade deficit. (Those interested to read more on this issue can look at the IMF’s World Economic Outlook, April 2006, p. 114-115).

Nor is China alone is to blame for the US trade deficit. In 2006, the bilateral US deficit with China was $233 billion, while the overall trade deficit was $838 billion - China accounted for just a quarter of the total. More importantly, US trade with Asia has remained constant over time, with 25% of US exports going to Asia and 36% of US imports coming from Asia in the past five years. The trade with China reflects a shift in production processes – trade that used to be with other Asian countries is now channeled through China.

The truth is that America’s trade deficit reflects underlying economic realities, especially low savings and high spending in the United States, and high savings and low spending in China. The flow of money from China to the United States would be expected to persist as long as these economic fundamentals remained.

The question is whether legislation is the optimum way to address these imbalances. (A more fundamental question is whether imbalances need to be addressed in the first place, but I will stay away from that question for now.) The senators note that, “A little pressure can go a long way to encouraging the right policies.” This is surely naïve: legislation is much more likely to encourage either reciprocal retaliation or, at the very least, a stubborn Chinese reaction.

It is really discouraging to see how much economic debates are detached from economic reality, though this is to be expected, more so in an election period. Trade raises important policy questions, but dealing with them is made no easier by politicians who ignore basic tenets of economic theory and fact. These misconceptions are numerous and above I have just touched on a few. More to come in later posts.

Temporary relocation

For a few months, I will be writing for my school’s blog http://blogs.sais-jhu.edu/saisgeist/

Who will stand up for the market?

You have to sympathize with Neelie Kroes, the European Commissioner on competition. For years now she has been screaming loudly that the internal market on gas and electricity, supposedly liberalized and supposedly competitive, is dysfunctional, and that this is no small part because big European utilities are acting anti-competitively. A week ago, her Directorate released a comprehensive inquiry into the gas and power sector in Europe.

The report is enough to make any free marketer cringe. Big companies (“incumbents” as the Commission calls them) are stifling competition. They are able to do that because they have national governments on their side. Either socialist by inclination, or socialist because energy is a “strategic” sector not to be trusted on markets, or socialist because energy insecurity warrants new powers to be granted to government, states are engaged in an alliance with businesses at the expense of the consumer, who is sold the idea, unconvincing at best and ludicrous at worst, that it is really his interests that are being defended.

To be fair, there are certain problems that are fundamentally intractable. Long-term contracts, for example, are often necessary to finance big projects like cross-border pipelines, but they erect barriers to entry and “freeze” market conditions for years as well as adding illiquidity to a market since gas committed to one place cannot flow to another. Infrastructure is supposed to operate on open-access principles (capacity allocated by bidding rather than who owns an asset), but being guaranteed access to a pipeline is often needed before a company can sign deals abroad or commit the money to build expensive projects.

There are other problems too, problems that lie at the core of “Europe.” What is the appropriate level for regulation: at the state or at the European level? How should Europe balance a general commitment to the market (which the EC is meant to defend) with a commitment to democracy (which means states ought to make their own rules)?

What Europe faces, therefore, either than powerful incumbents, is an incomplete consensus on how to deregulate energy, made harder by the fact that each European country has its own view on how to do things and is willing to defend its sovereign right to act differently. Yet it is disheartened to think how all this is playing out. If the European Commission cannot succeed in infusing competition, what are we to think of its powers as the defender of the EU’s laws, and what are we to think of its commitment to the free market?

As I think of this, I am torn between two visions of Europe: one is a persistent, and to me indefensible, tendency to glorify cooperation and uniformity; the other is a Europe that helps member states do the things they are supposed to do by making the politics a bit easier. I have always liked Europe for the latter and criticized it for the former. What the European Commission is doing today on energy I approve and believe in; but it is not succeeding yet, and that makes me sad, both for what this means today and what it spells for the future.

Oil producers and the dollar

The Financial Times reported on Monday that, “Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.” Although this move has obvious implications for the value of the dollar, there is little doubt that we will soon hear from analysts how vulnerable the American economy remains to unstable regimes that can impose huge costs on the United States if they choose to do so; and the argument will soon convert either into a case for energy independence or a case against China who, it is assumed, holds equal leverage over the United States because it holds so much of American debt.

I thought it best to avoid both of these arguments and just append the relevant graph from the Quarterly Review of the Bank for International Settlements (look at the graph in the far right). The point that should stick out is that while the dollar holdings of oil producers have come down, they have done so from very high levels, and the dollar remains, by far, the most sought after currency for oil producers. While this does not negate the obvious implications for the dollar (which will fall as relative demand for it declines), it should put the discussion in context before jumping onto any grand geopolitical conclusions.

Thanksgiving

One dog?

From Al-Jazeera.Net: “Beijing families were first restricted to one child, and now the Chinese authorities have set the limit on pets too with its one dog policy. China's capital will institute a "one dog" policy for each household in nine areas, the official Xinhua News Agency reported on Wednesday." (link)

Lessons from OPEC

The latest news suggests that OPEC has agreed to cut its quota by 1 mbd, bringing its target output down from 28 mbd to 27 mbd (in August, OPEC produced 30.04 mbd, which included 2 mbd from Iraq, which is excluded from quotas). But reaching consensus was not easy: first came production cuts from Nigeria and Venezuela totaling about 200 kbd. Saudi Arabia protested the move to voluntary cuts, though its own production was coming down too. It took a while before others agreed to reduce quotas as well.

From this picture emerge two interesting points. The first is about OPEC’s cohesion, which fluctuates wildly, though the organization usually comes together more easily when tasked to defend rapidly falling prices (rather than, say, cut production to hike prices). This should serve as a reminder to those who have hasten to notice an “axis of oil” emerging to threaten Western interests. Even OPEC, the most concrete manifestation of the axis, finds it hard reach consensus on oil production. It is hard to see how so varied a group can hold together any other meaningful political alliance for a considerable period of time.

The second point is about asymmetrical power. The common assumption these days is that oil producers have all the power. But the drop in oil prices has seriously jeopardized their fiscal plans. Granted, they have too much money in the bank for anyone to claim that these regimes are in trouble—a $60/bbl world is still great for them. But given how resilient economies have proven to high oil prices, it is not unreasonable to state the oil exporting countries have more to lose from low oil prices than importing countries from high ones.

These are important lesson amidst our energy hysteria.

Sarkozy on Turkey

From Nicolas Sarkozy, in the Wall Street Journal:

“The decision to accept each new applicant should be taken in light of the EU's internal objectives, its institutional limitations and the level of popular support. Such decisions should not be based upon foreign policy goals or a desire to encourage neighbors to reform.

So who is European and who is not? Clearly, some non-member countries are part of the European continent and have the right to full EU membership. This group includes Switzerland, Norway and -- eventually -- the Balkans. Then there are other countries whose right to join the Union is debatable or who, although neighbors, are clearly non-European.

For this latter group in the Euro-Asian and Mediterranean areas we should avoid presenting them with overly stark choices: Full membership or nothing at all. Our first step should be to establish preferential partnerships so we can work together while still observing our different interests and values.
…
Of all the countries with which the EU should have preferential relations there is Turkey, our neighbor and friend, sharing many of our security concerns and many of our values. These are good reasons for strengthening our ties with Turkey, without going so far as offering full membership.”

The Russian reassertion

A very interesting graph from today’s Wall Street Journal:

The ritual

From Gideon Rachman in the Financial Times: “The rituals of the ‘clash of civilisations’ are by now well established. Somebody somewhere in the west ‘insults Islam’ – Salman Rushdie writes a book; a Danish paper publishes a cartoon; the Pope makes a speech – and the demonstrators take to the streets. What better way to prove that Islam is a religion of peace than to burn the Pope in effigy?”

Advice to an oil company

From the Oil & Gas Journal (18 Sept 06): “Here, then, are two suggestions, for BP or any oil company hoping to address image problems. First, believe in the contributions oil and gas make to human welfare, and brag about them. Nothing sways public opinion more effectively than unabashed commitment. Second, with health, safety, and environment, accept no mistakes, no compromises, and no excuses. Ever.”

Alternatives, and alternatives

This excerpt from this week’s Oil & Gas Journal rather well the dangers inherent in policy that believes alternative energy is superior merely because it is alternative:

When alternatives to hydrocarbon energy are promoted simply for being alternatives, questions should arise about their effects on consumers, about their costs to taxpayers, about their own environmental consequences, and about how much energy they really can provide. This doesn’t mean resisting nonhydrocarbon energy, the development of which now is crucial to supply later. It means simply that nonhydrocarbon energy will fare best in the long run if decisions about it are made within a framework of market-based principles, oriented to consumer and taxpayer interests and designed to keep expectations realistic.

Difficult bargains

On Tuesday, Alaska Governor Frank Murkowski suffered a humiliating electoral defeat, coming third in the Republican primary and securing only 19% of the vote. The reasons for his defeat vary—the Wall Street Journal believes “incumbent arrogance” is the problem—but negotiations for the building of a gas pipeline from Alaska through Canada and into the United States has to rank high among his constituency’s grievances.

The idea of a natural gas pipeline linking Alaska to the Lower 48 has been floating for years, and Gov. Murkowski has been an ardent supporter. As governor, he negotiated with the oil companies involved—ExxonMobil, BP, and ConocoPhillips—about the terms under which the pipeline would be built. At issue was the tax rate that would apply to earnings from the oil companies’ operations in Alaska as well as tax breaks on investment that were meant to make the capital expenditures for the pipeline more attractive.

After the governor came to an agreement with the oil companies, however, the Alaskan legislature voted into law a bill that varied from the governor’s initial agreement. The version that became law last week imposed a higher tax rate on net revenues, and also increased that rate as oil prices went higher. Needless to say that the oil companies and the governor were not pleased, and it remains to be seen how this different law will affect the building of the pipeline.

What this story underlines, more broadly, is the difficulty of striking a bargain between state and company when it comes to oil and gas. Venezuela and Bolivia, for example, are accused daily of bullying oil companies and of being inhospitable to foreign investment. It is easy to assume that such issues are the purview of “dysfunctional” polities in the developed world. But Gov. Murkowski’s failure in the Republican primary ought to remind us that finding a proper way to split revenues between the people and the oil companies is always an arduous task.

Oil companies in the wilderness

A New York Times editorial on the lessons of Prudhoe Bay writes that, “the BP fiasco also reminds us why we should not put the fate of America’s wilderness in the hands of the oil companies.” It is interesting, then, to read that the fiasco has prompted a different reaction on who live in the “wilderness.” Alaska governor Frank Murkowski called on lawmakers to support his proposal for the construction of a gas pipeline that will bring gas from Alaska to the Lower-48 through Canada as a way of diversifying the Alaskan economy.

True, a gas pipeline poses less of an environmental threat than an oil pipeline, and true too that there is still political infighting before the proposal gets approved by Alaskan legislators. But it is interesting to see how different the lessons are on those who live in the “wilderness” and earn their living (plus a check from oil royalties) through the oil business.

References:
“Lessons from Prudhoe Bay,” New York Times, 9 Aug 06 (link)

A conspiracy in Prudhoe Bay?

Greg Palast never ceases to amaze me; this is his take on BP shutting production at Prudhoe Bay: “Why shut the pipe now? The timing of a sudden inspection and fix of a decade-long problem has a suspicious smell. A precipitous shutdown in mid-summer, in the middle of Middle East war(s), is guaranteed to raise prices and reap monster profits for BP. The price of crude jumped $2.22 a barrel on the shutdown news to over $76. How lucky for BP which sells four million barrels of oil a day.” (link)

Begin with the main error: BP does not sell 4 million barrels a day; it sells 4 million barrels of oil equivalent. Oil production, according to the company’s annual report, was closer to 2.5 mbd in 2005 with the rest being natural gas. (It is actually amusing to see him get this wrong given that he writes, in his bio, that he is “an energy economist.”)

Do the (big picture) math: 2.5 mbd x $2.2 rise in prices comes to $5.5 million a day. What about the loss? From the 400 kbd shut-in, BP is entitled to about a quarter (even less—92,000—by some estimates). So the loss is 92 kbd x $76 is about $7 million a day (even if you discount the oil price, given that Alaskan oil is heavy, the difference is still large). The monetary loss is larger than the gain (puting aside all other issues to reputation, etc.). This is hardly “monster profits.”

If you want to make more accusations, Mr. Palast, at least begin with getting your facts straight.

Are refiners to blame?

That domestic refining shares the blame for high gasoline prices has been a political accusation for a while now; in April 2006, for example, Senator Charles Schumer (D-NY) accused refiners of keeping plants off-line as they switched to summer fuel blends to keep prices high. Now the attack has come alive again, prompted by a report by Jeff Donn of the Associated Press (link), which claims that gas prices are high because of market power in the refining sector.

The arguments made in the report merit close attention, even though, after close examination, they lose much of their potency. But before turning to the report, here is a graph to get the argument going: it plots the price of gasoline based on where the money goes—crude oil, refineries, distribution & marketing and taxes. Two trends are clear: first is that an ever smaller percentage goes to taxes (since most taxes are unit taxes that do not increase with prices) and second, that more and more money goes to crude oil. Refining and marketing, on the contrary, have retained an almost constant share (a volatile one too) of the final price of gasoline.

What does this say about the AP report? Mr. Donn writes that, “Crude oil [accounts] for just under half the price of gasoline.” Although he writes this to explain the industry position that high crude oil prices lead to high gasoline prices, implicit is the idea that this is not too much (I am reading between the lines here). After all, Mr. Donn writes that, “A big chunk of gas prices -- almost a fifth -- pays refiners who make gasoline from oil,” suggesting that he thinks these numbers important.

The first issue is that how much of the overall gasoline price goes to crude oil is irrelevant; what is important is how much of the change in gas prices can be attributed to changes in the price of crude (in econometrics lingo, how much of the variance in one variable can be explained by variance in other). In a study I did for gasoline prices and crude oil between January 2000 and January 2006, that number was 0.91, meaning that 91% of the change in gasoline prices can be explained by changes in crude oil prices (time series models usually yield very high results anyway, though I did use a control trend variable).

The other interesting number is that the coefficient is 0.80 implying that a 1% change in crude oil prices leads to a 0.8% in gas prices (I used logs; also, I did not test, as the AP did, whether whether prices rise and fall by the same proportions, although I will get to that). These numbers may seem high, but they are consistent both with a look at a graph plotting the two variables (the two really high gas values were September and October 2005 following Hurricanes Katrina and Rita), as well as with other studies (look at the Cato study in the references).

The AP report then goes on to look at refining margins: the difference between input costs (crude oil) and output prices (gasoline and distillate). Below is a graph with that spread, with data taken from the BP Statistical Review of World Energy 2006; one thing to note is that margins have gone up for all three major refining centers, not just the United States (the spike in the US in 2005 is, again, due to Katrina and Rita). If market power alone explained refining margins, there should be a dissimilar pattern in margins (unless we assume that those two centers also have concentrated market power); we would also expect a more consistent upward trend in prices since industry consolidation (in refining) has dated to the early 1980s (after the repeal of the Emergency Petroleum Allocation Act in 1981).

But are there other reasons to expect margins to increase? The AP reports writes, “In a competitive market, when raw material gets more expensive, margins typically shrink, economists say.” This is not necessarily true when demand for the final good is inelastic (as gasoline is). What is more, refineries are capital-intensive industries that exhibit considerable returns to scale. No refinery has been built in the United States since 1976, but overall capacity has increased all the same from 15.2 mbd in 1975 to 17.3 mbd. This has been achieved through capacity expansions at existing refineries and through efficiency gains (for example, by adding catalytic hydrocracking processes that increase the amount of gasoline or diesel that can be extracted from a barrel of oil).

A second reason is that oil coming into the United States is heavier and sourer. The average API gravity of crude oil inputs into US refineries has decreased from 32.64 API in Jan. 1985 to 30.25 in Aug. 2005, and the sulfur content has increased from 0.88 in Jan. 1985 to 1.40 in Aug. 2005. In simple terms, this means that refining is harder because refineries need to make premium content from lower quality inputs. As refining gets harder, it is reasonable to see higher margins, particularly for refiners that can process lower quality crudes. Also, in tight markets, the premium between high and low quality oil increases further given that refiners bid up the price of higher quality crudes much faster than low quality crudes.

Two more points to make: the first is that refining is a separate business, related but not identical to oil. Oil prices reflect the scarcity of oil, and similarly, gasoline prices reflect the scarcity of refining capacity. In 1983, utilization rates were 72% in the United States; in 2004 they were 90.3% in 2005. The scarcer a service becomes, the more valuable it is; no collusion is necessary.

The second is that quality differentials are having a major impact because they limit intra-US trade (the so-called “boutique fuels”). At some point there were 17 different gasoline standards nationwide, although this is set to decrease due to the Energy Policy Act of 2005. But different standards mean that having a surplus in one state and a shortage in another will not necessarily lead to trade. Add to that Congress’ effort to phase out MTBE and replace it with ethanol rather quickly, and this too has created constrains in the refinery market.

What about the idea that prices change asymmetrically: “The Associated Press analysis looked at weekly federal pricing data since September 1999. It found that a gallon of retail gas rose an average of 6 cents for a 10-cent rise in oil, but dropped only 4 cents for a 10-cent decline in oil -- suggesting that gas temporarily resisted downward shifts more strongly than oil.” This is important, but the report offers various reasons that are very persuasive (price stickiness or retailers trying to maximize profits), even though they are dismissed by the author. (Another issue is to examine whether this discrepancy disappears when we use lagged variables—essentially a lower crude oil prices will have an effect after some time given that a refinery still purchased past oil at a higher price and is more inclined to charge more for it.)

In the end, market concentration is surely a concern, although this trend has more to do with the regulatory problems (and adverse economics) involved in building refineries than in any specific design for collusion. It is frustrating to think that an American living in Wyoming will pay more to drive to work because China is buying more oil, or because Kuwait has struggled for ten years to pass a law that will boost foreign investment in its oil sector, or because nearly all of the oil revenues in Mexico go to the government leaving little for re-investment. But it is no less true.

*

Despite my overall criticism, I am glad that the AP did this study. This has been a popular issue for quite some time and the evidence to examine it has been absent from public debate. It is depressing to hear so many politicians discuss this topic without spending some time to study it methodically; it is even more depressing to think that when I did my own study (for a class), all it really took me was some knowledge of statistics and five-six hours on a Thursday afternoon.

References:
Unless otherwise indicated, data comes from the Energy Information Administration; Nick Snow, “Schumer seeks probe of refining capacity utilization,” Oil & Gas Journal Online, 19 April 06; Peter Van Doren and Jerry Taylor, “Economic Amnesia: The Case against Oil Price Controls and Windfall Profit Taxes,” Cato Institute Policy Analysis (12 Jan 06); Franz B. Ehrhardt, “Refining and price,” Oxford Energy Forum, August 2005; Bob Williams, “Refiners’ future survival hinges on adapting to changing feedstocks, product specs,” Oil & Gas Journal, 11 Aug 2003; “Margins soar,” Petroleum Economist, September 2004; “Attention to refining,” Oil & Gas Journal, 26 Sept, 2005; “Big profits, big decisions,” Petroleum Economist, September 2005; David Nakamura, “Refining industry to sustain strong margins through 2004,” Oil & Gas Journal, 15 Mar, 2004; “Devising a winning strategy,” Petroleum Economist, September 2005

The virtues of populism

Last Thursday, union workers picketed facilities belonging to the Colombian state oil company, Ecopetrol. Their grievance was a government plan to sell off 20% of the company (not to privatize it fully, repeats the government) in order to raise capital and allow it to explore further in the country. The workers doubt the government’s sincerity and see the in plan the seeds of privatization. So they protested.

So often when I read of Hugo Chavez’s latest shenanigans, I get sad to think how bad populism can be for a country. But now I read this news from Colombia (news that has replicas around the world) and I am reminded of just how hard it is to take on the street. No wonder Chavez (and Morales, and others) just decide to ride the wave of populism rather than try to counter it.

When the good oil company gets hit

There is irony in the news that BP has stopped operations from Prudhoe Bay due to corrosion in the pipeline system that comes from the field: in an industry with few friends, BP has been an exception, led by the statesman-like CEO Lord John Browne and having a commitment to alternative energy that has earned it many friends in and out of the oil business.

It is ironic, then, to see a company that has developed such a positive image be hit by a wave of misfortune: first came a fire in a Texas refinery in March 2005 that killed 15 and injured 170; then were oil spills in Alaska that culminated in the current shutdown; and in June, regulators charged BP with trying to manipulate the propane market in the United States.

All this comes amidst an internal fight in the company which brought Lord Browne to butt heads with company chairman Sir Peter Sutherland about whether Browne would be forced to retire when he turned 60. A compromise followed by which Browne would step down in the end of the calendar year that he turned 60 (2008), about 10 months after his birthday.

Investigations that will follow may weigh more heavily on BP’s responsibility for the oil spill and the accusation on market manipulation. (BP accepted responsibly for the fire at the refinery.) This will show whether BP has had more than just misfortune.

Even more ironic, however, is that ExxonMobil—a company which a far greater reputation for efficiency in the industry (which includes environmental protection at operations)—is still bedeviled by outsiders, at a time when the same people (I include myself here) hail a company such as BP for its corporate responsibility. I guess there are worse things that being ruthlessly efficient.

Rebelling from afar

From the Wall Street Journal on Fidel Castro: “Of course it may be no coincidence that most of the admiration all these years has been from afar. The idea of "Fidel" allows his leftish admirers from the comforts of free, mostly capitalist societies to imagine that someone out there is struggling to build a better, more egalitarian way of life -- without any of them having to live amid the daily Cuban reality of grinding poverty and political intimidation.”

This reminds me: one of teachers on the Middle East always likes to point out how the radicals on the Palestinian issue were (and are) so often those far removed from the West Bank and Gaza. It is much easier, it seems, to be adamant and uncompromising from Baghdad or Cairo … just as it easier to earn revolutionary praise from those who are unaffected by your cruelty.

References:
“Romancing Fidel,” Wall Street Journal, 5 Aug 06

Oil costs what we pay for it

(This is a post I made to an online discussion poll conducted by the Financial Times (link). The question was: Can the world live with oil at $80 per barrel?)

It is almost pointless to ask “Can the world live with oil at $80 per barrel?” For the past few years, the world has lived with very high oil prices and has actually fared quite well, at least at the macro-level. True, economic growth may be starting to slow in some places, but this is often attributable to factors unrelated to oil. Today’s oil crisis is hardly a replica of the 1970s when economists had to coin a new term—stagflation—to describe the peculiarity of the predicament that had befallen upon us.

The reason that the world has coped with high prices is that the price hike is demand driven. Just like any other product, the price of oil is driven both by fundamentals (what it costs to produce it and how scarce it is) and by the market’s willingness to pay for it. Usually prices settle in between these extremes, even in a market where politics tamper with prices all the time. This means that prices are at $75/bbl because firms and individuals think that buying oil at that price is better than not buying oil at all. Ultimately all prices reflect their marginal product and so oil prices will keep rising until the cost of a barrel exceeds its utility for firms and individuals.

The risk that we face today is twofold: first, fuel inflexibility may be forcing buyers to pay for oil a higher price than they can afford. But, thankfully, this is only a short-run issue, and given the economy’s resilience in dealing with higher prices, a longer-term adjustment may not be too painful. The second risk is an asymmetrical ability to pay for oil: given that oil prices are set at the margin, a problem exists if the marginal buyer can set prices that are too high for other consumers. Many fear that China is playing that role today given its ability to grow despite higher oil prices. But this risk, however, is less acute when an overall slowdown in demand will help bring prices down.

In other words, it’s not whether the world can live with an $80 barrel oil; rather, the price of oil will mostly reflect what the world can live with.

The other Hugo

There is no end to the trouble that Hugo Chavez seems to be causing around the world. His most recent extravaganza was a world tour that included buying arms from Russia, a few handshakes with Mahmoud Ahmadinejad of Iran, and a feeble attempt to shore up revolutionary credentials by visiting an erstwhile American enemy, Vietnam.

But whatever the bombastic rhetoric, there is a pragmatic side to Hugo Chavez, as is evident by two pieces of news from Caracas. The first is that Venezuela and Colombia have begun constructing a gas pipeline that will link Colombia to the remote Venezuelan region of Zulia (link); for seven years, Colombia will export gas to Venezuela, which will return the favor once it develops its own gas fields. The second is that Venezuela has almost reached an agreement with Trinidad and Tobago to develop jointly cross-border fields that hold approximately 10 tcf in gas reserves. Technical details are the only remaining issues to be worked out by the countries.

Not meaning to overstate the significance of the news, but remember that both Colombia and Trinidad & Tobago are American allies, and that Venezuelan relations with Colombia have been inimical for years. That there is a pragmatic side to Chavez may not mean much, but at least in a world that lives with constant insecurity, to see a country such as Venezuela deepen energy ties with neighbors that hardly share Chavez’ enthusiasm for Bolivar is heartening.

References:
Curtis Williams, “Venezuela, Trinidad to jointly develop fields,” Oil & Gas Journal Online, 25 Jul 06

Strip poker joke

This is from Reuters: “It started as an April Fool's joke but an Irish bookmaker's proposal to hold the world's biggest strip poker contest will become reality next month. Paddy Power floated the idea as a joke but it generated so much interest -- and hundreds of requests to take part -- that the Dublin-based company decided to organize a contest.” (link)

Oil profits, again

ExxonMobil, British Petroleum, Royal Dutch Shell, and ConocoPhillips released their earning reports for the second quarter of 2006. Here are their results (operating income): Exxon: $10.3bn, BP: $6.1bn, Shell: $6.3bn, COP: $5.2bn. Needless to say that this news will spark anew a debate about corporate profits and the money made by the oil industry; but an equally interesting number is how much these companies invested: Exxon invested $4.9bn in the second quarter, BP $3.7bn, Shell $6.7bn, and Conoco $3.6bn.

It is not just that oil companies are investing so much of what they make in new and existing projects (although part of their problem is that there are fewer and fewer good projects to invest in), but these numbers should remind us that big oil makes big money in part because the investments needed to bring oil and gas to market are huge. Few industries require so much investment to maintain growth, and whenever there is talk of “excess” profits, it is worth remembering that the money is not a windfall that came from the sky but rather the result of large investments made in (usually) inhospitable environments and often in conjunction with governments that have no hesitation to change contract terms years into the life of a project.

The gains of war

The Levant continues to erupt in flames and the discussion has narrowed on the humanitarian tragedy that has accompanied Israel’s attacks on Lebanon, as well as the idea that Israel is resorting to disproportionate violence to achieve its aims. Here is one great quote on the occasion from an op-ed that Fouad Ajami wrote for the Wall Street Journal; Ajami writes of Hassan Nasrallah, Hezbollah’s leader: “There was something to Nasrallah’s conduct that recalled the performance of Gamal Abdel Nasser in the Six Day War of 1967. That leader, it should be recalled, closed the Straits of Tiran to Israeli shipping, asked for the evacuation of U.N. forces from the Sinai Peninsula -- clear acts of war -- but never expected the onset of war. He had only wanted the gains of war.”

References:
Fouad Ajami, “Hostage to Hezbollah,” Wall Street Journal, 21 July 2006

The exaggerating conspirator

An op-ed in today’s New York Times explores the meaning and limits of academic freedom; the piece was prompted by a lecturer at the University of Wisconsin at Madison who “acknowledged on a radio talk show that he has shared with students his strong conviction that the destruction of the World Trade Center was an inside job perpetrated by the American government.”

A thought comes to mind is how the exposure to conspiracy theories can be rejuvenating. I always remember that my first traces of pro-Americanism emerged after excessive exposure to anti-Americanism. Reading conspiracy theories made me crave for evidence and argument and a desire to move beyond speculation and innuendo and subject political analysis to rigorous argument and analysis.

Whenever I engage in an argument about American policy, I always turn to the same starting point—is it possible that all the conspiracy theories on America are true? It is through excessive exposure to the ridiculous aspects of anti-Americanism that one can begin to acquire a more nuanced—and maybe favorable—view of the United States.

References:
Stanley Fish, “Conspiracy Theories 101,” New York Times, 23 July 06 (link)

The Stingy NOC?

That National Oil Companies (NOCs) pay a premium to gain access to reserves abroad is accepted almost as a given, especially by those who are alarmed by the expansion of Chinese oil companies in foreign lands. But here is a graph from Wood Mackenzie, printed in last week’s Oil & Gas Journal, that tells a very different story: it plots the implied price of oil in upstream acquisitions over time. True, this is an incomplete image of the argument, which includes the accusation that NOCs pay a premium to gain access to reserves (while this plot only looks at acquisitions). All the same, it is very interesting to see that NOCs have paid less than their International Oil Companies (IOCs) counterparts in recent acquisitions.

Tale of two launches

A UN resolution on North Korea is expected to push the country back to six country talks; “I think ultimately North Korea will have no choice but to return to the talks and pursue denuclearization of the Korean peninsula,” said US Secretary of State Condoleezza Rice. The resolution calls on North Korea to stop its ballistic missile program and on member states to prevent exports and imports that could assist Pyongyang in pursuing its WMD program.

Last week, the Financial Times ran this cover in its US edition: on the far right of the page it had news on North Korea launching a missile; and in the middle there was a photo from the launch of the Discovery. My point is not moral relativism—I do not think the two actions equivalent. But I am wondering why is it that when a country such as America (or China) launches a missile in space, there is considerable pride in the act, but when North Korea launches its missiles, we ignore pride as motivator for its actions.

North Korea is a wretched place, there is no doubt; and Kim Jong-Il is desperate for attention that his country’s accomplishments do not deserve. Not giving in to blackmail is a fine and principled position for the world’s countries to take; but without offering more of an alternative world for Pyongyang, I hardly see what would make North Korea turn. Threaten to isolate the world’s most reclusive state; or threaten to attack a country that feels the Korean War is still being waged and whose paranoia is unmatched in today’s world?

Forgive my skepticism.

Basayev in verse

This week marked the death of Shamil Basayev, a Chechen rebel leader most notoriously famous for the siege of a school in Beslan in September 2004 which claimed the lives of over 300 people, most of them children. There is an excerpt from an old Economist article which I thought fitting for the occasion (from December 2004):

But the worst blows of all, as so often the case,
Were the blows meted out by our own human race.
And of these there were few that could ever compare
With the slaughter that opened the Russian school year.
Three hundred children, perhaps many more,
When the classrooms were stormed were found dead on the floor.
Chechen guerrillas were plainly to blame,
But many thought Russia shared some of the shame
For badly mishandling the siege of a school
And repressing the Chechens who wanted home rule.

Qatar and the G8 summit

As the world’s leaders gather in St. Petersburg to discuss, among other things, energy security, my mind keeps going to a land far away: Qatar. Yes, I know Qatar is not part of the G8; and yes, discussions on the Middle East will focus on more explosive topics such as violence in the Levant or Iran’s nuclear program. And yet there is a reason to think of Qatar as the world grapples with the theme of energy security. Qatar’s recent history reveals a lot about how our energy world could be made more secure and stable.

Begin not with Qatar, but with the concept of energy security itself. At its core, energy insecurity is a political problem, emerging largely from the ambitions of producers who wish to extract political concessions through their energy resources. Think of “safe” energy producers: the United States, the United Kingdom, Norway, Australia, etc. Their common denominator is that they do not use their energy reserves as a tool of policy, at least not in any significant way. Contrast that with Iran, Saudi Arabia, Venezuela, or Russia, whom we would associate, quite correctly, with fiddling with their energy sources to achieve a variety of political objectives.

What distinguishes these two groups of producers? At first glance the question seems absurd—does one need to list the differences between the US and Saudi Arabia, or between Norway and Iran. But stay with me. For “safe” producers, oil or gas is not a policy tool because it is not a distinguishing feature of their place in the world. The US, the UK, Norway, Australia would still know what their role in the world would be even if they had no drop of oil. Granted, it helps that these countries discovered energy reserves late; but this is another reason they hardly think of how to make use of their energy sources to get a voice in the world.

What about our other group? What would Venezuela be without oil? Kuwait? Is it a coincidence that the Soviet Union, a superpower, never cut off gas supplies to Europe during the cold war, but that Russia used gas to achieve political objectives a multiplicity of times, most recently against Ukraine in January 2006? Or, is it a coincidence that Saudi Arabia has been a largely reliable producer (facilitated both by huge reserves and by finding a niche in being a swing producer) while at the same time being comfortable in knowing that it will remain the custodian of the two Holy Cities of Mecca and Medina?

A country will use what it can to find a place in the world, and oil is an ideal candidate for countries that feel they have little else with which to attract the world’s attention. This brings me back to Qatar. In 1996, Qatar founded Al-Jazeera, a pan-Arab TV station that has revolutionized how the news gets reported in the Arab world and which accords Qatar a great deal of soft power in the region. Qatar is also host to CENTCOM, the American military command in the Middle East, a privilege which gives it influence and protection. Slowly but steadily, Qatar has built a niche for itself, founded on energy but not entirely dependent on it. Meanwhile, the risks associated with doing energy business in Qatar are rather low, meager when compared to other energy-rich countries in the world.

Qatar’s lesson for energy security is that a country which feels secure about its position in the world is much less likely to fiddle with energy to try to get the world’s attention. And that is as good a starting point for energy security as one can hope for.

A cynical European

Two different stories caught my eye in yesterday’s Financial Times: the first is that CNE, the Spanish energy regulator, is poised to do what it can to frustrate a bid by the German company E.On to buy Endesa, a power utility in Spain. CNE, the FT reports, will require that E.On sell off part of Endesa’s nuclear and coal plants, thereby changing the nature of the company to be bought and stripping E.On of assets that produced 60% of Endesa’s output last year.

(It should be noted that Gas Natural, another Spanish company, has already made a bid for Endesa, albeit for less money and some stock. Endesa’s board has considered both bids as unsatisfactory, not valuing Endesa for what it is worth. Gas Natural would also be required to sell some of Endesa’s assets, though they would go to another Spanish firm, Iberdrola).

The second news item concerned the amount of structural funds allocated to European countries for the period 2007-2013. The total amount would be €308bn for the seven years with Poland to get about €59.7bn, followed by Spain (€31.5bn), Italy (€25.7bn), the Czech Republic (€23.7bn), Germany (€23.5bn), Hungary (€22.5bn), Portugal (€19.2bn), and so on and so on.

These two stories, I find, revel a lot about the current state of affairs in the European Union. Yes, there is continental idealism; and yes, the bonds that connect Europeans today far exceed any that have connected them in the past. But deep-seated nationalism and resistance to foreign exchange remains, even among European friends. And for many people and businesses, the most tangible effect of the European political project is to be found in subsidies or funds extended from Brussels. What would happen if and when the funds run dry? How much political allegiance will they have bought? Judging from recent reactions on cross-European merger activity, my bet is: not enough.

Coping with high oil prices

The most surprising feature of the current oil crisis is that it does not really feel like a crisis. Oil and gas prices may be high and many people are struggling to cope with rising energy bills, but at a macro level, the world’s largest economies have grown consistently in the past two years. Hardly is our fear realized—that high energy costs will force an economic downturn, much less a recession. What explains this disconnect between expectation and reality?

To examine this question, take three mechanisms through which oil prices affect economic performance (there are more, but let’s focus on three): a reduction in income caused by the need to spend more money on energy leads to reduced demand for goods and services and this, in turn, forces an economic slowdown; an increase in inflation generated by higher prices that firms charge to cover energy costs leads to a reduction in real income; and worsening performance by firms, reflecting mainly higher costs and/or reduced overall demand by shrinking real income.

Begin with the first mechanism: US households spend more money on energy today—that much is obvious. But as Figure 1 shows, the amount spent on energy as a percentage of personal consumption is not very high, certainly not as high as it was in the late 1970s or early 1980s, when over 9% of personal consumption went to fuel oil, coal, electricity and gas. In 2005, energy expenditures as a share of consumption were 5.8%, up a full percentage point since 2003, but still below peak levels. Granted the data is not unambiguous—for example, current consumption is linked to high debt levels—but there is a clear sign that today’s high energy prices are not putting a strain on the economy that is comparable to that felt in the late 1970s.

What about inflation? Over the past fifteen years (1990-2005), there has been an observable decline in inflation, driven by a variety of factors unrelated to oil. As Figure 2 illustrates, the link between higher oil prices and inflation is all but clear (here is shown the Consumer Price Index excluding energy prices to gauge the effect of energy prices on other goods): in 1999-2001 there seem to be a rise in oil prices that is followed by an increase in inflation; after 2002, however, oil prices go higher, as inflation goes down; and by 2003, oil prices skyrocket, with only a minimal effect on inflation. Here, again, there are various exogenous factors to consider—mainly better macroeconomic management and the influx of goods from China, which have kept prices low. But this does not negate the underlying fact—that higher oil prices have not generated inflation, at least not to the level expected (and feared) by observers.

This reality produces the following question: could it be that firms are taking the hit? It is possible that firms would try to absorb energy costs in order to maintain demand for their goods. If this were true, we would expect firms that need a lot of energy to suffer more than firms that need less energy for their outputs. There is some evidence for this hypothesis, though the verdict is ultimately mixed: as Figure 3 shows, utilities and transportation—two energy intensive industries, had mixed results in 2004 with the former turning a profit while the latter suffering losses. From the rest (excluding Agriculture and Mining), there appears some trend, albeit weak, linking higher energy intensity and lower profits. At the same time, the numbers involved (energy costs at around 5-10% of total intermediate costs, and generally high profits) for most industries suggest that we cannot rely on this explanation—that firms are taking the hit—for understanding why oil prices are not having a large effect on the economy.

Perhaps the clearest view on this question comes from a more basic statistic: how much do firms spend on energy? Figure 4 shows gross output in the United States for the years 2000-2004 (gross output is labor and capital expenses, which make up GDP, as well as firm expenditures on energy, materials and services). The left axis plots gross output while the right axis shows total energy costs. What is impressive is that energy costs make up such a small portion of total costs (or total output). Even with high prices in 2004, energy costs make up about $450bn or 4.5% of total input costs. More than anything else, this should underscore why large changes in energy expenditures are not placing as high a strain on the economy, even though the fact that prices have risen more orderly than in the past may help explain why the adjustment has been less painful.

*

Granted, economic performance is but one aspect of the current energy crisis; it may not even be the most important. Granted too, that these numbers rest on a macro-level analysis and may conceal many problems, not least that of that families trying to pay their energy bills. Granted also that there are many international dimensions (even imbalances) to consider that may be salvaging economies from recession. But there is still some truth in here—that economies can grow in spite of high energy prices should make us rethink energy security and the calamities we tend to associate with rising oil costs. It may also give us some reassurance about our ability to make the transition from hydrocarbons to other energy sources as painless as possible. And that is good news for the long term.

References:
Figure 1 data come from the Economic Report of the President (February 2006); Figure 2 data come from FRED—the Federal Reserve Economic Data; Figure 3 and 4 data come from the US Department of Commerce, Bureau of Economic Analysis, while the WTI spot prices for figure 3 are from the Energy Information Administration. All numbers / years are latest available.

Steps to energy security

(This is a letter that the Washington Post published on July 8. Link to the letter and to the original story)

Sebastian Mallaby ["What 'Energy Security' Really Means," op-ed, July 3] provides a sensible contrast to the hype that often accompanies energy discussions. Yet he errs on two counts. The first is in describing China's energy security strategy solely as "buying stakes in foreign oil fields." China is not driven by a false sense of security (at least not fully). Chinese oil companies are involved in exploration and production, helping to bring oil to market. Given that lagging investment is one reason oil prices are so high, this is not an unreasonable policy.

The second error is to assume that producers and consumers have identical interests. At one level, this surely exists: Producers and consumers have a common interest in energy markets. But producers tend to want political benefits from their energy, while consumers prefer access to energy with few strings attached. This divergence produces tensions; for Russia and Iran, for Venezuela and Bolivia, oil and gas will never be just commodities. Energy security can build on common bonds, but there are inherent limits to a purely commercial approach to energy.

NIKOS TSAFOS
Washington

How vulnerable to oil prices? Part 3

Two more thoughts on this mini series. The first is a closer look at two energy intensive industries: transportation and utilities. There are a few interesting points to be made here; the first is that supply costs (which include other materials and services, but not labor and capital) rose on average by 12% between 2000-2004, even though energy prices rose by 23%, indicating that high energy prices were not driving supply costs at the same pace. Most industries were also able to pass on costs to consumers (costs increased by 12%, prices by 10%). In three industries, they were not: pipelines, warehousing and utilities. The former two happen to have high elasticities, meaning that their business output fluctuates along with prices preventing them from passing on costs to customers. Utilities managed to pass on enough costs (19% rise in prices, 28% rise in costs), while maintaining a healthy profit increase (at least in 2004: 7%).

The second thought comes from this graph, which plots gross output based on its various components: capital, labor, energy, materials, and services. The line shows expenditures on energy as an intermediate input (used to generate a good or service); although spending on energy has increased (from $350bn in 2000 to 430bn in 2004), it still forms a tiny fraction of overall output: no more than 2% of gross output, or 5% of costs (energy, materials and services). And so, despite the increase in prices, energy costs remain a small expenditure for firms.

*

My parting thought on this series is that the main mechanisms through which high energy prices would force an economic slowdown seem not to operate. Granted, much of the current growth, in the US and elsewhere, is fed by macroeconomic conditions whose longevity may be questionable (especially debt spending in the US). At the same time, energy seems to form just a part of that equation, and not a big one either. Whether energy costs do not matter or are guised by booming economies who are bound to come crushing down remains to be seen. But there needs to be much more attention on this great puzzle, why are we not more vulnerable to high oil prices?

How vulnerable to oil prices? Part 2

My post on the observation that high oil prices have not forced a slowdown in economic growth was based a macro view of the world (“How vulnerable to oil prices,” 27 June 06). A micro analysis supports the overall thesis that energy costs are less important than they used to be, and it also reveals trends which are consistent with theory and common sense. To conduct a micro analysis, I asked the question: how are households and industries affected by high oil prices?

PERSONAL CONSUMPTION

Personal consumption is what non-government entities spend every year (the difference between income and consumption is savings / investment). The question to ask in terms of oil prices is this: how much consumption goes to energy-related expenses? The graph below plots this: the blue line calculates total spending on gasoline oil, fuel oil and coal, and electricity and gas. Then, the red line plots what percentage of total consumption these expenditures make up.

As expected, although energy-related expenditures have increased since 1960, they form a smaller share of total consumption; and even though this trend is reversing, the 2005 figure (for first half of 2005) is still lower than either pre-1973 levels and considerably less than the energy crisis years in the 1970s. What this graph shows is that despite high energy prices, the amount that the US spends on energy as a percentage of its total spending is still small, though increasing.

INDUSTRIAL EFFECTS

A second important question in examining GDP growth and high energy prices is to look at how different industries are affected by higher oil prices. The hypothesis here is straightforward: industries that rely more on energy should be hardest-hit and we should expect those industries to experience a greater slowdown when compared to less energy intensive industries. The figure below examines that data for this hypothesis.

On the x-axis is a measure of energy intensity measured as follows: money spent on energy inputs over value added. This is a crude measure of energy intensity, but it is a good proxy, and we can expect that industries with higher values rely more on energy for their well-being. The y-axis plots annual growth in value added for 2004. Our hypothesis would say that we would expect a downward sloping line: the more energy intensive, the less industries grew.

This is what the data show: I have circled utilities and transport, both energy intensive and both confirming the hypothesis. I have also circled mining and farms; the former grew despite energy intensity because it includes oil companies which make more money with higher prices, while the latter grew in large part as a recovery from slow (and negative) growth in the past few years. The rest of the industries reveal a similar pattern: more energy intensity equaling less growth.

*

What is interesting, then, is that even though there is a link between energy intensity and growth, the effect is not large enough to force either a recession or even a slowdown. There are sufficient industries that are not very energy intensive that continue to grow irrespective of high energy prices, thus ensuring that there is no overall slowdown. At the same time, this may be changing, as a greater share of personal consumption is devoted to energy—if prices remain high, the share of consumption devoted to energy may stabilize, and we will probably need to see a further increase in prices to detect a more sizeable effect on economic growth.

How vulnerable to oil prices?

The most surprising feature of the current oil crisis is that it does not really feel like a crisis. Oil prices may be high and many people are struggling to cope with rising energy bills, but at a macro level, the world’s largest economies have registered solid growth in the past two years. That the global economy continues to grow despite high energy prices contradicts our assumption that higher energy prices ought to slow down growth, if not force a recession. Yet this reality has not provoked a corresponding change to our attitude towards energy prices. Hardly do we revisit the most basic, and pervasive, of our images about energy, and hardly do we question whether the commonly presumed link between oil prices and economic growth is true. A serious study of our ability to cope with high oil prices requires a prior examination of whether oil prices affect economic growth.

ROBUST GROWTH

Figure 1 shows real GDP growth in 2004 and 2005 for the world’s twenty largest economies (corresponding to 80% of world GDP and 77% of energy use; methodology at end of article). Without an exception, all grew in both years. This is remarkable: Brent spot oil prices in 2003 were $30.62, in 2004 $39.57, and in 2005 $54.52. Despite this rapid increase in oil prices, many economies have shown significant gains; and the most sluggish among them (chiefly Germany, France, and Italy) face problems that go much beyond high oil prices.

What explains this counterintuitive fact—that countries grow despite high oil prices? One hypothesis is that energy intensity, the amount of energy required to produce a unit of GDP, has decreased gradually thus allowing countries to grow with less energy. Although this is indeed the case, a survey of the years 2004 and 2005 shows how difficult it is to establish a positive link between energy intensity and economic growth (figure 2). Theory would suggest that this relationship should be reflected in a downward slope—the more energy intensive an economy, the less it grew. This is not the case; in fact, there is little correlation, at least for these twenty economies in these two years.

At the same time, growth slowed somewhat in 2005. Figure 3 plots economic growth in pairs for the years 2003, 2004 and 2005: the x-axis gives the first year, and the y-axis gives the second (e.g. the green triangles show economic growth for 2003 in the x-axis and for 2004 in the y-axis). The 45-degree line shows parity—any data point on that line had similar economic growth for two successive years; data over the line experienced higher growth in the second year of the pair, and data under the line registered a slowdown in growth. In 2002-2003, growth varied considerably; in 2003-2004, however, most of the countries showed increased growth, even though oil prices were much higher. In 2004-2005, about half of the countries were experiencing equal growth as in 2004, and the rest registered a slowdown, albeit a small one.

THE DEMAND-DRIVEN CRISIS

What to make of these numbers? One hypothesis about the resilience of economies to high oil prices traces the reason to energy intensity. In a way, energy matters less today since countries need less energy to produce wealth; therefore, they can grow, even as energy prices soar. Even though there is no correlation between energy intensity and economic growth, a shift has taken place and the level of energy intensity is so low that countries can grow almost independent of it.

Taking this idea one step further is the notion that the link between high oil prices and economic growth was never strong to begin with. This idea has several proponents who have sought and failed to find definitive empirical linkages between oil price movements and changes in growth in the United States. (See Robert Barksy and Lutz Kilian, “Oil and the Macroeconomy Since the 1970s,” Journal of Economic Perspectives, Fall 2004.)

Perhaps what distinguishes today’s energy environment is that the rise in oil prices, while dramatic, has been orderly, much smoother than either the 1973 or 1979 oil shocks. This time, the rise has been demand-driven, primarily as marginal demand has outpaced marginal supply, owing largely to lagging investment, although abetted by fears about disruptions, geopolitical or natural. Today’s prices have they have risen to high levels because consumers have been willing to pay for expensive oil. Not so in the past, when prices rose because of shortages or explicit changes in posted prices.

Figure 4 illustrates this point, even though it does so crudely. On the x-axis is plotted real GDP growth in 2005 and the y-axis plots the difference in 2005 and 2004 growth rates (1% means that the GDP growth rate in 2005 was 1% higher than in 2004). This figure looks anew at figure 3, essentially asking the question: which countries can afford to pay high prices and are less likely to be affected by them? The answer is the countries that are growing faster, even though the proof is intuitively derived from the graph rather than proven mathematically.

Given that today’s markets are also much more responsive to supply and demand dynamics than they were in the 1970s, variations in demand lead producers to adjust prices much more rapidly than in the past. This indicates that high prices will remain as long as there is demand and that if a recession were to follow, demand for oil would come down along with its price. This may appear intuitive, but it is quite the opposite from the assumption that oil prices cause recessions rather than respond to underlying macroeconomic conditions. Alarming as the rise in prices has been over the past few years, we are still far away from understanding precisely how higher oil prices affect economic growth.

Methodology

Annual GDP growth estimated from figures in the country database of the Economist Intelligence Unit (EIU). Energy intensity calculated as: energy consumption in million tons of oil equivalent (using numbers from the BP Statistical Review of World Energy 2006) divided by the GDP (PPP) of that year.

Think through before attacking

Following news that North Korea is planning to test-fire a Taepodong ICBM, there appears to be some momentum building in favor of striking North Korea’s missile while still in the launching pad. This reminds me of the furor created a few months ago about using military strikes against Iran’s nuclear program. Surprisingly lacking in those advocating such actions is a willingness to examine seriously what comes next—after destroying North Korea’s missile or Iran’s nuclear installations, then what?

For the most part, advocates either take the best-case response and accept it as the most likely; or they conceive of the military action as an act in itself, which will recast the political environment in which negotiations will take place, presumably such change being for the better. For a country that has invaded two others after being attacked on September 11, Americans have surprising faith in the torpor and inertia which with countries will react if attacked by America.

The most sensible commentary I have read in a long time comes in a column by David Ignatius: he turns to Henry Kissinger for advice: “I asked Kissinger this week what lessons he would draw for the new U.S. engagement with Iran from his own diplomatic experience. Kissinger said he didn't want to give public advice to Rice, but he said that as a general proposition, the United States should seek to find common security interests with Iran -- stressing that a strong and prosperous Iran doesn't threaten the United States so long as the Iranians refrain from reckless and destabilizing actions.”

And this, in a nutshell, is the prime drawback of a foreign policy that makes democracy promotion its ultimate target and chief benchmark: such a policy often refuses to examine countries based on what they do—and the compatibility with American interests; treating a country by what it is, rather than what it does, is a poor basis for any relationship.

References:
Charles L. "Jack" Pritchard, “No, Don’t Blow It Up,” Washington Post, 23 Jun 06 (link); Ashton B. Carter and William J. Perry, “If Necessary, Strike and Destroy,” Washington Post, 23 Jun 06 (link); David Ignatius, “Talk Boldly With Iran,” Washington Post, 23 Jun 06 (link)

World Powers survey

Recently released is a survey by the Bertelsmann Stiftung on popular attitudes on world powers (link). The survey polled samples in the United States, the United Kingdom, France, Russia, China, Japan, Brazil, India, and Germany; the purpose was “to investigate public perceptions of the qualities, resources and objectives of world powers.” The report makes for interesting read—hidden between the lines are valuable insights into world politics and popular attitudes. Here are a few of my observations:

- In the question, “what qualities must a country possess to be considered a world power?” only 21% responded military power, in itself an interesting find. Striking is that the highest percentages came in China (36%) and America (33%), followed by Russia (29%), France (28%) and the UK (24%)—all five members of the Security Council. From the aspiring members of the Council, military power was not highly regarded: Germany (7%), Brazil (11%), and Japan (16%), with no number given in India.

- In the question, “Which of the following countries or organizations are world powers today?” America had a commanding lead with 81%, which means that 19% did not regard America as a world power, a curious read of the current distribution of power in the world (oddly, America’s country-response was also 81%). Next was China with 45%, though its neighbors were unwilling to accord it world power status—only 26% of Russians, 31% of Japanese and 34% of Indians responded that China is a world power. The European Union got a feeble 32% driven by high rates in Germany (75%), France (49%), and the UK (53%).

- In the question, “Which of the following countries or organizations will be world powers in the year 2020?” America and China were nearly equals—57% for the United States, 55% for China. What is very interesting is that the percentage for the European Union dropped—from 32% who regard it as a world power now to 30% who think it will remain so in the future. Although the European numbers were pretty equal, there was a drop in the collective responses—signaling both a general pessimism about Europe’s futures and also a gap between how Europe sees itself and its future and how the rest of the world does.

- In the question, “What are the main objectives that a world power should pursue?” the issue that topped the list was poverty reduction (44%) followed closely by combating international terrorism (35%), environmental conservation (33%) and democracy and human rights (32%). Curious that of the top four only one is essentially an international act—combating terrorism; the other three are essentially policies entrusted (and best done) by states, yet there seems to be some consensus that leadership in these issues is important.

- In the question, “In the future, what country or organization should play a more important international role in maintaining peace and stability in the world?” America tops the list with 51%, followed by the United Nations (38%), China (36%), and the European Union (33%). Large remains the gap between European and world perceptions of the EU’s contribution; curious too is the French ambivalence—48% for America, 45% for the United Nations, and 51% for the European Union. Interesting too is that China is warmly regarded only in China (71%), followed by Germany and the UK with 50%.

- In the last question, “What is the best framework for ensuring peace and stability?” striking is the overall ambivalence in answers. Large percentages (60-80%) think the world is better off lead by the United Nations or a system of balance of regional powers; unipolarity is highly regarded in Russia and India, while 35% of Japanese have no view on the issue, an excessively high percentage.

Very big oil

The Financial Times just published its list of the world’s 500 largest corporations by market capitalization. Thirty-seven oil and gas companies made it onto the list with a total market capitalization of $2.5 trillion, which amounts to 11.2% of the total for the world’s largest 500 (Banking was the top sector with 80 companies, and 3.9 trillion market capitalization). In the top fifty were eight oil and gas companies:

1- ExxonMobil ($371 bn)
5- British Petroleum ($233 bn)
7- Royal Dutch Shell ($211 bn)
10- Gazprom ($196 bn)
17- Total ($162 bn)
27- Chevron ($129 bn)
34- ENI ($113 bn)
48- Petrobras ($91 bn)

Notable is that only two companies are American--Exxon Mobil and Chevron (the next American oil and gas company is ConocoPhillips, which ranked 53rd). Notable too is the presence of Gazprom, which last year ranked 58th and jumped up to 10th place this year; a great increase in ranking was in store for Petrobras too, which increased from 113th last year to 48th now.

Needless to say that this list includes only publicly traded companies; in the oil and gas sector, these are miniscule compared to the giant National Oil Companies of the Middle East, whose reserves alone would boost them beyond any company in this list.

OPEC enlargement

News has come out that OPEC is considering inviting Angola and Sudan to join its ranks. Expectedly, this has worried markets and politicians who fear anything OPEC and who believe that the cartel will be made more powerful if the two African countries join along.

But the fears are a bit exaggerated: the two producers do not add much to the cartel: in 2005, OPEC produced around 34 mbd, Angola around 1.25 mbd, and Sudan 0.36 mbd (world production was around 84 mbd). A second reason to feel less worried is that OPEC is hardly a successful cartel, especially in tight markets. To defend prices, OPEC members must bind together, but cohesion is low when prices are high. For a year now, OPEC has disbanded its quotas. In tight markets, whether Sudan and Angola are members of OPEC will not make a big difference.

It is even not clear that Angola and Sudan will want to join. Free-riding on the cartel’s actions is preferable to making production cuts oneself; this is what Mexico, Norway and Russia have done in the past. Wanting foreign investment to develop natural resources, Angola and Sudan would scare off the oil majors, fearing that their return on investment would be subject to OPEC quotas. This is no guarantee that they will not join; governments make energy policy by taking into account much more than the dollar return of their actions.

What if Angola and Sudan joined OPEC? The cartel has always split between price hawks and price moderates. Countries with low reserves take a near-term view of markets and tend to want high prices; countries with high reserves usually try to defend oil’s competitiveness and tend to advocate moderation. Sudan has medium reserves with a Reserve to Production (R/E) ratio of 57 (meaning it will run out of oil in 57 years if it maintains current production); Angola’s R/P ratio is 24 (by way of comparison: Saudi Arabia has 67, Iran 88, Iraq, Kuwait and the UAE over 100).

Reserves alone will not govern price policy; Sudan is fighting a war in Darfur, it has signed a fragile peace treaty with the South, and has major internal problems, leading it to be likely a price hawk. Angola has similar problems, trying to rebuild its infrastructure which was destroyed during years of civil war, and to alleviate its high level of poverty.

Although this may mean that both countries may favor high prices, their interest in developing resources (and their dependence on foreigners to do so) may moderate their willingness to join OPEC. But in the current markets, OPEC is not really a force to fear.

Jailed for a kiss

According to the BBC, 10,000 people marched in Jakarta, Indonesia to support a bill before parliament that would, among other things, ban public kissing and erotic dancing. The BBC reports that: "The bill would make organising erotic dancing punishable by up to 10 years in prison and public kissing on the mouth punishable by five years or a fine." (link)

The Year of Energy that was

(This is an article I wrote for the SAIS Observer, my school's monthly newspaper; it summarizes nicely some of the ideas and events that have marked the year.)

This was the year of energy at SAIS: a year full of energy drama during which our sense of insecurity only increased. As SAIS began its year, oil cost $60/barrel; at year’s end, prices were over $72. In these nine months, SAIS grappled with the energy world—its limits and its implications, its present and future, its promise and its perils. The world was moving fast, and so was SAIS’ attempt to make sense of it all.

Our year began with Nick Butler, Vice President of Strategy and Policy Development for British Petroleum. This inaugural event in September laid the foundation for the year of energy. Mr. Butler made the case for energy - why it matters for students in international affairs. Implicit in his vision was the need to take an interdisciplinary approach to understanding energy, and the need to study the energy component of political issues as well.

In November, as Mahmoud Ahmadinejad called for Israel to be “wiped off the map,” Fatih Birol, chief economist at the International Energy Agency (IEA), presented the World Energy Outlook 2005 at SAIS. Focusing on the Middle East and North Africa, his concern was that insufficient investment could dramatically affect future prices. As Dr. Birol spoke, only Saudi Arabia had any spare production capacity—markets were tight, and incremental demand was outpacing incremental supply. Dr. Birol’s speech was meant to alert us to a looming shortfall - to highlight the topic with the hope to change it too.

As SAIS went to exams, out came SAISphere, our annual magazine. Energy was the theme, and our faculty probed the various issues that make up our energy world. SAIS students were pleased to read the profiles of SAIS alums and to see that many energy analysts come from SAIS. The publication reminded us why this is a great place to study energy - to probe interdisciplinary topics, to converse intelligently about derivatives as well as internal politics, to understand the energy side of China’s rise, as well as how regulation affects the price at the pump.

As we prepared to return from winter break in January, Gazprom – the fourth largest publicly traded company in the world and half-owned by the Russian government - cut off gas to Ukraine, an unkind new year’s gift from the country on whose energy we will become increasingly more dependent in the future. In the same month, George W. Bush declared that America is “addicted to oil,” refocusing the country’s dialogue on energy.

March was a busy month. The number of attacks against oil targets in Iraq reached 300 since the war began, extremists tried to blow up the Abqaiq facility in Saudi Arabia, the internal situation in Nigeria deteriorated, and America signed a nuclear deal with India. Meanwhile, SAIS hosted Claude Mandil, executive director of the International Energy Agency. His cautioned that energy use is unsustainable. At the same time, most solutions are unrealistic: there is no silver bullet and no single energy source will make the arduous transition painless. Gains will be made, but on the margin; serious tradeoffs are involved, between domestic and international politics, between the current generation and the next.

Over Spring Break, twenty-one students traveled to Houston for a first-hand look at the industry and to meet with its leaders. As they returned, the energy year was reaching its peak: a gala dinner with Pulitzer-Prize winner Daniel Yergin, one of the foremost authorities on oil. His vision was somber, commenting that we need to rethink energy security. The whole supply chain should be our focal point, not just foreign threats; we need a better way to integrate India and China, not just fear their ascent; and we need to remember that markets are part of the solution, not of the problem.

Ever looming this year has been the specter of a nuclear Iran. It is fitting then that the this year’s graduation speaker will be Nobel Prize winner Mohamed El-Baradei, director general of the International Atomic Energy Agency (IAEA), fresh off his return from Tehran. As the world commemorates the 20th anniversary of the Chernobyl accident, nuclear power is in the headlines, as are the fears of nuclear proliferation. Next year’s IEA World Energy Outlook will be devoted to the topic, showing the atom’s role in our energy future.

On the anniversary of Chernobyl, here is what the scientific journal Nature opined:

“The true lesson of Chernobyl … is not that nuclear power is unsafe, but that it is unsafe in the hands of a corrupt, unaccountable, irresponsible political system that fails to take reasonable measures to protect its citizens. The future of nuclear energy does not hinge primarily on the development of a safer reactor or a more geologically reliable waste repository, but on the ability of states to build public trust in their ability to safely implement and manage the technology.”

Therein lies the message of the year of energy: geology and technology impose physical limits; but everything else is for us to make. Our edge as students comes from our education here at SAIS - our ability to think deeply and widely, to probe within and connect between issues. The past nine months have made us think creatively about energy, and they have prompted us to engage with the world beyond. A good cause this is, and a year well spent.

Adventurism in the Andes

(This is a letter that the Christian Science Monitor published on May 8. Link to the letter and to the original story)

Your May 4 editorial, “Adventurism in the Andes,” captures the perils which accompany the momentum toward nationalization in resource-rich countries. Most distressing, however, is the thought that the trend is hard to reverse. Kuwait has been discussing Project Kuwait, a bill to invite foreign investment, for a decade now, to no avail. Iran has struggled to find a formula to bring back foreign investors, a task made harder by the country's isolation. Even Mexico's debate is colored by the country's nationalization of the oil industry in 1938.

As we follow the likes of Hugo Chávez and Evo Morales, it is worth recalling not only that they are harming their own hydrocarbon industries, but that the popular expectations on which their policies feed are likely to be with us many years after their own stint in power is over. A pity to think how much harm can be done in so little time - harm that will prove very hard to reverse.

Nikos Tsafos
Washington

Cheney at Vilnius

Vice President Dick Cheney delivered a sharp rebuke to Russia while in Vilnius, Lithuania; “No legitimate interest is served when oil and gas become tools of intimidation or blackmail, either by supply manipulation or attempts to monopolize transportation,” the vice president said. The Russians found the speech “incomprehensible.”

Put aside that America, once again, mocks the European desire for solidarity and pan-European unity; that America is standing up to Russia’s energy “blackmail” more forcefully than Europe is a painful reminder that the mutterings about a coherent European policy on energy remain a joke.

A few months ago, I speculated that America might be called to fill the vacuum and insecurity in Eastern Europe that Western Europe seemed unable or unwilling to attend to (“Energy cold war,” 13 Feb 06). Cheney’s speech can be understood neatly in that light. Ironic that during the 1980s, as the Soviet Union was building an infrastructure to supply natural gas to Europe, America resisted the encroachment because the Soviet Union would gain undue leverage over Europe. America proved wrong then, the Soviet Union played no energy politics. But today that reality haunts America and Europe: Europe for the sense of insecurity it entails, America for the fear that Europe is too dependent on Russia to play tough. Worse still is the fear that a transatlantic divergence over Russia may emerge; with gas flowing from Russia to Europe, is there still a common Western front towards Russia?

Wither the state?

For the prophesiers of withering state power comes this simple photograph of the Bolivian army guarding a refinery operated by Brazilian oil company Petrobras (photo from Reuters). Our shifting focus has made us forget the debates we were having until recently—that the state is gone, that corporations are on the rise, and that the people and their institutions were slaves to international capital and companies. This image should remind us otherwise—that the state has the guns and that the legitimacy to use them is unmatched by any group of corporate executives, however rich and influential.

Killing Moussaoui?

The Wall Street Journal opines today: “Then there are the ‘mitigating factors’ that led the jury to reject death. According to news reports, three of the 12 jurors agreed that Moussaoui, of Moroccan ethnicity, ‘was subject to racism as a child’ in his native France. Nine jurors agreed that ‘Moussaoui's father had a violent temper and physically and emotionally abused his family.’ America is at war with a relentless enemy, which observes no rules of war and wantonly murders innocent civilians. Fretting over whether enemy agents had dysfunctional childhoods is no way to win that war.”

I find the Journal to be wrong on this one. Reasonable people may disagree on whether a criminal’s childhood should have any bearing on the decision meted out by a jury. But to think that killing Moussaoui, rather than sentencing him to life imprisonment, is a more appropriate way to fight the war on terror is a different story altogether. The “relentless enemy” that America is fighting will not be deterred by the death penalty; nor, I suspect, will it be emboldened by thinking that America is too “feeble” to kill a terrorist after trial. In the grand scheme of things, whether Moussaoui was executed soon or died in jail later will not make a huge difference in this war.

References:
“Moussaoui loses,” Wall Street Journal, 4 May 06

Distracted students

The Christian Science Monitor reports that professors increasingly want their classrooms to be unwired—computers in the classroom, they believe, distract students who spend time checking email or chatting with friends online. Don Herzog, a law professor at University of Michigan, experimentally banned computers in the classroom for a day; the result was a dream discussion with students, he said.

Forgive my incredulity but a boring class is a boring class. It cannot be salvaged by banning computers. The student who is interested will remain interested, whether notes are taken in a computer, on paper, or not at all. And the student who has lost interest in the class will find ways to avoid paying attention: look around at the cute classmates that occupy the room, peek outside the window and anticipate the moment of freedom that is to come, scribble odd cartoons in the book’s margins, or, in the old-fashioned way, daydream away from whatever the professor is sharing that day. At least catching up on email or doing internet shopping is time better spent than the traditional class-avoidance schemes that students resort to as a way to cope with boring classes.

References:
Maia Ridberg, “Professors want their classes 'unwired',” Christian Science Monitor, 4 May 06 (link)

Bolivia nationalizes gas industry

There is much to say about Bolivia’s decision to nationalize its natural gas industry (link). That big oil and gas companies are regarded as predators and abusive of the national interest is an idea that has resonance even in America, even if the reaction is for more political oversight, not nationalization. Bolivia’s story reminds us that hydrocarbons are both a symbol of sovereignty and an instrument for its exercise: political legitimacy comes from targeting foreign companies, credibility from a successful attack.

The more subtle message, however, is that a large group of people, under appropriate leadership, can delude itself so easily into thinking nationalization is a good idea. Witness Kuwait and Iran, two countries which nationalized their oil industries decades ago, struggle to find terms to re-invite foreign capital. Mexico, too, suffers from the same problem: the political impossibility of allowing foreign ownership is contrasted sharply with the attention and expertise that the oil wells require so desperately.

Evo Morales may celebrate a political victory today. He rejoices, no doubt, that he joins his friends from Caracas and Havana to form a regional alternative to American hegemony (link). His shortsightedness in signing a trade deal with his two neighbors is just that—shortsighted. But the energy decision he sealed today will linger on, and it will be long before any politician will be able to pick up the pieces and revitalize a gas industry that is certain to make less gas and deliver less money to those who Morales pretends to defend.

The oil CEO

This is from James K. Glassman at the American Enterprise Institute; it captures nicely the downside of the high-pitched rhetoric in Washington (the same dilemma applies to foreign producers who are both demonized and expected to invest money to expand their supply of oil): “Imagine you're the CEO of an oil company today, listening to Specter talk about a windfall profits tax, the President go on about "addiction" or Frist about "price gouging." Your main job as CEO is to allocate capital, to decide where to put your shareholder's money for the long term. Are you encouraged to make "strong re-investment [of] cash flows" in this environment? I doubt it. Maybe the best idea is to stash the cash in Treasury bills or buy a retail chain or give the money back to investors.” (link)

Is the IEA the solution?

In the search for creative ideas to our energy crisis, Jim Hoagland argues that the International Energy Agency needs expanding: “The IEA, founded in 1974 as a counter to OPEC, has been allowed to languish since then and has a professional staff of only about 150. But it has the potential to become the effective advocate and coordinator for oil-importing countries that U.S. officials foresaw at its outset. Western leaders urgently need not only to calm their publics about energy supplies but also to begin a long-term program to reduce their vulnerabilities to foreign upheaval and blackmail. Bush and Merkel should put revitalization and redirection of the IEA at the top of their talks, which should cover a lot more than the price of gas.” (link)

Put aside for now that the IEA already covers more than the price of gas; and put aside too that supply cushions (which is what the IEA does) make more sense for oil and gasoline than for any other commodity—coal and nuclear is not usually traded in international markets, and natural gas is hard to store for strategic reserves. Still, what are the merits of strengthening the IEA as an instrument in the West’s energy strategies?

International institutions work best when there is sufficient common ground for cooperation and when the problem is essentially one of coordination. It is not clear that this description fits the energy situation today. Western countries have different preoccupations and concerns—witness the European reaction to the Ukraine crisis. No common approach was forged not because the institutions for doing so were lacking (though they were), but because countries who felt vulnerable to Russian gas did not want to go too far in alienating their Russian suppliers. No institution can bridge such a gap.

The call for institutional creativity and energy diplomacy reflects a conceptual shortfall in consumer countries. Energy pervades all issues, we are told; but there is little systematic attempt to place energy within a broader foreign policy framework. Energy is a tool for policy, a catalyst for relations between producers and consumers; but energy diplomacy often treats energy problems as energy issues, rather than reflections of broader political trends. Does Russian’s gas diplomacy reflect energy policy or is it rooted in Vladimir Putin’s perceptions of the role Russia should have in the world? I trust the latter.

This brings me back to the IEA. Crisis management and research are two things that the IEA does best because an energy institution can best deal with energy issues. Energy diplomacy is political and hence best left to states that can judge the relative goals and tradeoffs of their policies. This is the reason I am pessimistic about the promise of the IEA and why I doubt it is the proper instrument for policy action.

Fighting for oil?

“Why does America fight?” asks John B. Judis of The New Republic. Simple answer: “Oil.” The bookends to his article should highlight his thinking:

“It’s not fashionable to say this, but the Iraq war was about oil. Not entirely, but certainly more than it was about weapons of mass destruction or a link to Al Qaeda. The 1991 war with Iraq was also about oil, and if the United States goes to war in the future with Iran or with China, it will likely be about oil.
…
The United States could follow a different strategy, combining drastic conservation at home with an attempt to work a new international oil agreement that would prevent competition over supplies giving rise to war. Call it green internationalism. But don't expect the Bush administration to undertake either of these steps. And don't, unfortunately, expect a cautious Democratic administration to do so either.”

Put aside the pretentiousness of the article: “it’s not fashionable to say this, but the Iraq war was about oil,” writes Judis, as if offering going out on the limb or a profound truth that is obvious and elusive to us lesser readers. Put aside still the ridiculousness of “green internationalism,” an idea that is vague as it is non-useful. The problem is that Judis explains world through the lens of oil, rather than placing oil within the context of politics.

America’s beef with China, he writes, will be about oil. So is the dispute with Iran; and the nuclear deal with India. But taking oil as the cause for conflict is misguided: why do we think America will fight with China over oil, but not with Japan or Western Europe? This a ridiculous question, you may think, but it goes to show that oil alone is the not the cause of conflict. Would America feel as threatened by Iran if it were ruled by different people? The oil would still be there, but would America fight? Regimes matter and it is more useful to ask under what conditions and against whom a country would fight over oil.

What about the objectives of war? In the worst case, Judis writes, America “can seek privileged access to the world oil supplies and prevent other countries from gaining similar access.” Interesting point, but where is the link to war? And what is privileged access? America’s military posture in the Middle East increased when American corporations, and hence American profits, were expelled from the Middle East. The fear was the Soviet Union and later Iraq. For America, “similar access” has been rather different than taking over or controlling states, much as Judis thinks about the Iraq war.

The idea that America fights for oil is not wrong; just incomplete. And so it deserves a deeper understanding that Judis has given us in this article.

Gasoline politics

From the Wall Street Journal:

“A decent portion of the latest run-up in gas prices -- and the entire cause of recent spot shortages -- is the direct result of the energy bill Congress passed last summer. That self-serving legislation handed Congress's friends in the ethanol lobby a mandate that forces drivers to use 7.5 billion gallons annually of that oxygenate by 2012.

At the same time, Congress refused to provide liability protection to the makers of MTBE, a rival oxygenate getting hit with lawsuits. So MTBE makers are leaving the market in a rush, while overstretched ethanol producers (despite their promises) are in no way equipped to compensate for the loss of MTBE in the fuel supply. Ethanol is also difficult to ship and store outside of the Midwest, which is causing supply headaches and spot gas shortages along the East Coast and Texas.

These columns warned Republicans this would happen. As recently as last year, ethanol was selling for $1.45 a gallon. By December it had reached $2 and is now going for $2.77. So refiners are now having to buy both oil and ethanol at sky-high prices. In short, the only market manipulation has been by politicians.”

References:
“Denny Pelosi,” Wall Street Journal, 25 Apr 06

Gas Flaring

From the World Bank: “The Global Gas Flaring Reduction partnership estimates that over 150 billion cubic meters of natural gas are being flared and vented annually.  That is the equivalent of the combined annual gas consumption of Germany and France. The public-private partnership of governments, state-owned companies and major international oil companies, which is chaired by Bank, estimates that CO2 emissions from flaring are about 13% of committed emission reductions by developed countries under the Kyoto Protocol for the period 2008-2012.” (link)

Think small on energy

The obsession with alternative energy has morphed into an obsession with alternative reality. There is no managed transition to cleaner fuels, just a desire to get there; whatever fuels we use today—oil, gas, coal, nuclear—are all bad. America needs secure energy, we are told, but no plan is good enough—no new LNG terminals, no drilling in ANWR, no nuclear power plants. The universe of renewable and affordable energy is there for us to grasp, if only the government would pass the right laws, laboratories researched the right technologies, OPEC could be broken apart, America could stop importing so much oil, and oil companies ceased to be so greedy.

This narrative is becoming increasingly convincing, particularly among Democrats, though populism against “Big Oil” is party-blind. New Jersey’s two senators, Frank Lautenberg and Robert Menendez, want the president to bring action against OPEC members who belong to the World Trade Organization for inhibiting commerce. The Federal Trade Commission, the same senators say, should “hold the big oil companies accountable for their actions against US consumers.” Senator Charles Schumer (D-NY) wants the FTC to investigate whether refineries are creating an artificial shortage to make profits. And Senator Maria Cantwell (D-WA), along with fifteen other senators, says America needs “a tough law that prevents profiteering in the oil and gas industry.”
There is truth, no doubt, in these concerns—to be in the WTO and maintain quotas in crude oil exports is duplicitous. What is disconcerting, however, is the growing inability to have a realistic discussion about energy. False myths pervade the debate, as does an unrealistic faith about how to escape America’s energy predicament. Energy independence seems to be the consensus, but there is no blueprint to achieve it. And even if energy independence were possible, it would still be a bad idea, serving only to blur productive discussion on energy policy.

At its core, energy independence is a form of energy isolationism. Get things right in America, it whispers, and all will be good. But follow the dreamers’ logic and theirs is a dead-end. Strike out oil and gas, replace it renewable energy, and the Middle East is still a place where America will have interests; it will still need to maintain stability; will it let China or India take the lead; could it risk the global recession that would ensue if a regional war were to break out? American foreign policy in the region has taken forms, mostly unrelated to the precise number of oil barrels consumed. Its foreign policy ends are reflected in its perception of its role in the world; its foreign policy means mirror its faith in the tools of statecraft: diplomacy, coercion, war.

America’s power projection in the Middle East may have been imperfect—September 11 showed that much—but at least it recognized that policy was subject to immutable laws, to inescapable trade-offs. Deplorable as many find the bargain that America made with Saudi Arabia, its premise was that the American economy and way of life would be threatened if Saudi Arabia fell either to the communists or to religious extremists. There was a cost and a benefit, even if the magnitude of both can only be revealed in hindsight.

It is these tradeoffs that contemporary discussions try to avoid. Saudi Arabia and Kuwait need to invest more, they are told; but then the president pledges not to consume their oil. China is blamed for its guzzling demand, yet when it tries to expand the supply of oil by going to places Westerners avoid, it is blamed still for supporting unsavory regimes. Congress mandates ethanol use and then refuses liability protection for MTBE; when the predicted shortfall in gas increases prices, refineries and oil companies are targeted for blame.

Energy policy in this country has suffered from big ideas. A step in the right direction is rejected because it is not a leap; the dream is for all problems to be solved at once or not at all. There is no nuance, no subtlety, no priority. Energy geopolitics is nasty and difficult to deal with as it is. Wishing this wasn’t so makes it no less nasty and slightly more difficult. Stop obsessing about the energy of the future, and let us manage the energy of today. Let’s just do it a little bit better.

References:
Anne Applebaum, “Tilting at Windmills,” Washington Post, 19 Apr 06 (link); Nick Snow, “Democrats press Bush to act as energy prices increase,” Oil & Gas Journal Online, 19 Apr 06; “The Gasoline Follies,” Wall Street Journal, 28 Mar 06

Impossible energy

Anne Applebaum writes in the Washington Post: “The problem plaguing new energy developments is no longer NIMBYism, the ‘Not-In-My-Back-Yard’ movement. The problem now, as one wind-power executive puts it, is BANANAism: ‘Build Absolutely Nothing Anywhere Near Anything.’ … There's a lot of earnest, even bipartisan talk nowadays about the need for clean, emissions-free energy. But are we really ready, politically, to build any new energy sources at all?”

I find this to be the most accurate assessment of the energy predicament that many Western states in general, and America in particular, face. Opposition to nuclear power is high; oil is perceived to be the devil incarnate, and so are the countries that either produce it or consume it. LNG is regarded as dangerous for security, pipelines dangerous politically (especially in Europe).

Exciting as it may be to believe that a renewable energy source is just around the corner, hoping will not make it so. We need to learn to live better with the energy sources that we have, not with the ones we wished we had.

References:
Anne Applebaum, “Tilting at Windmills,” Washington Post, 19 Apr 06 (link)

Katrina in photos

Columbia University announced today this year’s Pulitzer Prize winners. For Breaking News Photography, the Board recognized the Dallas Morning News Staff for their coverage of New Orleans after Katrina hit. It is a chilling collection, and I recommend you go through the twenty or so photos that were given the award (link).

Why Iraq?

Bob Herbert writes in The New York Times: “We were attacked by Osama bin Laden and Al Qaeda. What are we doing in Iraq? … That fear, and the patriotism felt by so many millions of Americans, have been systematically exploited by the administration. The invasion of Iraq was not about terror. It was about oil and schoolboy fantasies of empire and whatever weird oedipal dynamics were at work in the Bush family.”

Herbert is wrong on two counts, I think. The first is that Iraq had nothing to do with September 11. True, there was no direct connection, despite what Dick Cheney asserted time and again, between the September 11 terrorists and Saddam Hussein’s regime. The linkage between Iraq and Al-Qaeda may take years to probe fully, but in the strictest sense, September 11 was not made possible because of Iraq.

The more basic question, however, is whether September 11 was a political or a criminal act. If the answer is criminal, then going after Osama bin Laden would be the primary objective—to capture him and debilitate his terror network. If it were political, then two possibilities arose: the first would attribute this political act to the resentment that many Arabs and Muslims felt towards American foreign policy in the Middle East. Or, the act could be blamed on the political condition of many Arab regimes which have crushed dissent for so long and which maintain an airtight political space within.

It is in these terms that the invasion of Iraq ought to be understood. Criminal as the act may have been, eliminating bin Laden would have offered only temporary comfort. The underlying dynamics in the region were unfavorable to America. It is here that oil factors in: the explanation that September 11 was the product of Arab and Muslim hostility due to American foreign policy could not be accepted in full because an American retreat from the Middle East was not an option. A reorientation was necessary, and Iraq offered the easiest and most valuable target for such a reorientation, offering both the prospect for change and also offering the opportunity to withdraw American troops from Saudi Arabia.

It this logic that brought America to Iraq, and it is not unreasonable. Think what you will about the Iraq War. But when Bush’s critics resort to the most simple-minded explanations for the Iraq War, they are committing an error as basic as that which they accuse their opponents of committing: they are reducing a complex political event into its most reductionist components. And I have to confess that between the Bush motivations for the Iraq War and the accusation that America went in just for oil and “schoolboy fantasies,” I find the Bush view much more sophisticated.

References:
Bob Herbert, “The Fear Factor,” The New York Times, 17 Apr 06

Is freedom universal?

“I want you to understand this principle, and it's an important debate and it's worth debating here in this school [SAIS], as to whether or not freedom is universal, whether or not it's a universal right of all men and women. It's an interesting part of the international dialogue today.”

George W. Bush, speech @ Johns Hopkins SAIS, 10 April 2006

I doubt I will take the president’s advice. Freedom is universal, I have no doubt. But I find the question profoundly uninteresting, if not futile. It offers no answers: so what if freedom is universal? All people long to be free—the president is right. But it is unclear what this means for policy; not only because freedom is one desire among many, but because the idea that freedom is universal is a particularly bad starting point for foreign policy.

For a foreign policy centering on democracy promotion, the universality of freedom appears a solid basis. But this misreads the link between democracy and freedom: freedom is not the cornerstone of Western democracies, restraint is. Democracies exist not because of freedom, but as a way to safeguard it. Elections are meant to diffuse power, rather than just allow voters to choose their leaders. Democracy translates the desire for freedom by creating a space in which it is exercised—and this is done mainly through limiting everyone’s freedom.

The difference is not semantic. It raises the question of whether the desire for freedom can create a political order. Freedom is necessary but not sufficient in this view: the ability and willingness to compromise is more important. This is explains the disillusionment that often accompanies the first attempt to democracy—people think they will be free, but they rarely are. Their freedom depends not on their ability to vote (as many think), but on the success of the political system that will emerge from that voting to diffuse power. Their freedom depends on the inability of everyone else to have too much freedom.

Even more important is the misplaced emphasis on freedom for foreign policy: “I think elections are the beginning of the process, not the end,” the president said in that same speech. Elections work better when they express a variety of interests that already exist rather than when they try to produce that variety out of thin air.

The more important critique, however, is that the acceptance of state legitimacy, the cornerstone of realist thinking and the anathema to its critics, is fundamental to relations between states. When a state does not accept another’s legitimacy, there is no basis for cooperation. American policy often falters because it depends on regimes whose legitimacy America challenges; unwilling to punish or overthrow them, American policy is unable either to extract cooperation or to coerce it. Think of Syria or Iran: what agenda can America pursue with these countries when they know that nothing other than regime change will satisfy America—why comply?

It is against this contradiction that America has to conduct its foreign policy. The belief in freedom is noble—but it distorts both the promotion of democracy, which is better achieved when there is a basis upon which society can turn democratic, and it also hinders the advancing of many other fundamental American interests—say Syria allowing jihadis into Iraq, or Iran negotiating seriously over its nuclear program. That’s a high price to pay for not much in return.

George W. Bush

President Bush spoke at school today; it was a festive event, with the requisite weekend-long preparations that included security sweeps, a gradual transformation of school space to accommodate the president and a combination of enthusiasm and chatter than should accompany the president’s visit. The event wasn’t remarkable except for the fact that the president was speaking and this, in itself, accords the event a certain gravitas (link to transcript & video).

One thing that stood out and that I liked in the president was his willingness to discuss the long-term issues confronting this country. His wants to talk about Social Security, even though the political merits for doing so are thin; he wants to discuss immigration, even if the debate is overly emerged; and he wants to warn on the dangers on isolationism and protectionism, even though free trade has fewer and fewer friends.

I know you can find all sorts of arguments against the president and his policies—but there is something admirable for someone to be able to transcend politics (perhaps some would say too much so) and speak his mind, even if the articulation is not always the most eloquent. These are debates worth having and the president should keep speaking up.

(Photo from the White House website)

The Zimbabwe black hole

Two reports on Zimbabwe reveal the extent of misery in the country: “Life in Zimbabwe is shorter than anywhere else in the world, with neither men nor women expected to live until 40, a new UN report says. Zimbabwe’s women have an average life expectancy of 34 years and men on average do not live past 37, it said. The World Health Organisation report said women’s life expectancy had fallen by two years in the last 12 months.” (link)

And another: “The country woke on Saturday to news of an overnight price rise that left bread 60% more expensive than the previous day. The southern African country’s official statistics agency announced that the annual inflation rate - already the highest in the world - was heading towards 1000%. Zimbabwe's main state media tucked the bad news in the middle of bulletins dominated by what critics call ‘useless speeches’ by officials from the government of Robert Mugabe, the president. But the new 913.6% inflation rate still announced itself loudly on the streets of Harare where survival remains a challenge even to citizens well practiced in the art.” (link)

Death for oil?

From BBC News: “Chinese police have vowed to clamp down on pipeline oil theft, even threatening to impose the death penalty. According to police oil theft cost the industry more than 1bn yuan ($124.6m, £71.8m) and led to 2,877 arrests. Many cases were so serious they had "wrecked" production facilities, senior police officials told reporters. ‘Criminal punishments will be meted out, including the death penalty,’ said Ma Weiya, vice director of the police social security management department.” (link)

Does the word excessive come to mind?

A nuclear gaffe

This is from All Headline News: “Officials at a German nuclear power station have admitted a grave error; officials have gone on the record saying they have lost the keys to top security areas within their own plant.” (link)

The endangered convert

Richard Cohen has a nice piece in the Washington Post on Abdul Rahman, the Afghan who converted to Christianity and was threatened to be executed as a result: “The groupthink of the Muslim world is frightening. I know there are exceptions -- many exceptions. But still it seems that a man could be killed for his religious beliefs and no one would say anything in protest. It is also frightening to confront how differently we in the West think about such matters and why the word ‘culture’ is not always a mask for bigotry, but an honest statement of how things are. It is sometimes a bridge too far -- the leap that cannot be made. I can embrace an Afghan for his children, his work, even his piety -- all he shares with much of humanity. But when he insists that a convert must die, I am stunned into disbelief: Is this my fellow man?”

Whenever I reflect on radicalism, I am always reminded of the words of Malcolm Kerr, wrote after the Six-Day War: Arab politics “had ceased to be fun. In the good old days most Arabs refused to take themselves seriously and this made it easier to take a relaxed view of the few who possessed intimations of some immortal mission.” The region has become far more serious since. Too serious indeed.

References:
Richard Cohen, “Unfathomable Zealotry,” Washington Post, 28 Mar 06 (link)

Divorced while asleep

From Al-Jazeera: “A Muslim couple in India have been told by local Islamic leaders that they must separate after the husband ‘divorced’ his wife in his sleep. The Press Trust of India said in a report published on Monday that Sohela Ansari had told friends that her husband Aftab had uttered the word ‘talaq,’ or divorce, three times in his sleep. When local Islamic leaders heard about the incident, they said Aftab's words constituted a divorce under an Islamic procedure known as ‘triple talaq’.” (link)

Senator Schumer in China

In April 2005, Senators Charles Schumer (D-NY) and Lindsey Graham (R-SC) proposed legislation to impose a 27.5% tariff on all Chinese goods if, within two years, China had not taken immediate and concrete steps to let its currency float. They withdrew it under pressure from the administration but promised to bring it to the floor some time in the future.

Given that this legislation has been brewing for some time now, it is encouraging to see Senators Schumer and Lindsey finally make it to China (first trip for either). Mr. Schumer said: “I was very frank with the vice premier. I said when I came here I thought the Chinese policy was sort of mercantilist, aimed at accumulating wealth. And now I see that there is an added dimension.” Mr. Graham: “The challenges this country faces are greater than I realized.”

For one, it is good that a “fact-finding” trip takes place a few years after both have been demonizing China for its mercantilism. The New York Times writes, “Maybe the chance to talk face-to-face with Chinese on their home turf is what it took to make Mr. Graham and Mr. Schumer realize that just as trade is a two-way street, so too are sanctions.”

Maybe. But what is more likely is that the two Senators appreciated the complexity of the issue at hand. Americans may focus inadvertently on a rising China, but the Chinese see a massive challenge ahead: how to bring prosperity to the poor hinterland; how to preserve the stability of the communist party and the legitimacy of rule; and how to build institutions that can cope with the explosive growth that China has experienced.

For Senators wanting to make foreign policy, it should not take them a trip to China to realize this elementary fact. But if that’s what it takes, too bad they didn’t go earlier.

References:
Jason Dean, “A Senate Test of Protectionism,” Wall Street Journal, 25 Mar 06; “Mr. Schumer Goes to China,” New York Times, 27 Mar 06

Sensible anti-Americanism?

Jim Hoagland in the Washington Post: “In radical Islamic propaganda, the United States has graduated from being a mere Great Satan out to undermine Iran's ayatollahs to being depicted as a global monster responsible for virtually every crime and failing since the dawn of modern history. Meet the new Jews: the Americans.”

I sympathize with Hoagland’s observation that America is increasingly seen that way around the world; and I agree with him that this is a skewed and incomplete portrait of America. But I fear that America’s dialogue with the world is skewed by this distorted image: America’s supporters often dismiss their opposition because it assigns to America unreasonable ills. As a result, they overlook whatever legitimate complains others make about America foreign policy.

This is natural: when anger and reason mix (as they do in the discourse over America), anger is usually louder and more likely to provoke a defensive reaction. Polarization edges out policy disagreements—there is an underlying current of anti-Americanism that reflects the world’s anxiety about the buildup of American power, out of proportion both with what the rest of the world is doing and with the reasonable threats to American security; there is worry that America has the ambition to change the world but not the stamina to do so; and there is concern that America involves itself with insufficient attention to detail and locality, and when it finds things too complex, it either resorts to force or backs away.

The point is that there is a reasonable anti-Americanism out there; the perils of the “grand monster” depiction lie not in their inaccuracy but in their tendency to distort or overwhelm the accurate.

References:
Jim Hoagland, “America, the global target,” Washington Post, 26 Mar 06

The intelligent Google user

“Are search engines making today’s students dumber?” asks Edward Tenner in the New York Times. The article is more anecdote than argument, but here is part of the thesis: “In the February newsletter of the American Historical Association, the reference librarian Lynn D. Lampert notes the prevalence of ‘ill-conceived (or often nonexistent) student research practices.’ As another university librarian, Pamela Martin, observed, ‘Google’s simplicity and impressive search prowess trick students into thinking they are good all-around searchers, and when they fail in library searches, they are ashamed as well as confused.’

Having spent a lot of time using both Google and Library searches (and having helped others master their skills in them) I think there are two impediments in searches: either people are not familiar with a program and hence don’t know how to do advance searches, are too timid to toss away a bad search or cannot recognize where along the way their search turned bad; or, the alternative, is that people do not understand how their search results do not match their desired outcome. The former can be overcome with practice, the latter hardly so.

References:
Edward Tenner, “Searching for Dummies,” New York Times, 26 Mar 06 (link)

War for oil, again

I came across this updated version of the argument that America went into Iraq for oil. This is from Greg Palast, an investigative journalist:

“And what did the USA want Iraq to do with Iraq’s oil? The answer will surprise many of you: and it is uglier, more twisted, devilish and devious than anything imagined by the most conspiracy-addicted blogger. The answer can be found in a 323-page plan for Iraq's oil secretly drafted by the State Department. Our team got a hold of a copy; how, doesn't matter. The key thing is what’s inside this thick Bush diktat: a directive to Iraqis to maintain a state oil company that will ‘enhance its relationship with OPEC.’

Enhance its relationship with OPEC??? How strange: the government of the United States ordering Iraq to support the very OPEC oil cartel which is strangling our nation with outrageously high prices for crude.” Specifically, the system ordered up by the Bush cabal would keep a lid on Iraq's oil production -- limiting Iraq's oil pumping to the tight quota set by Saudi Arabia and the OPEC cartel. There you have it. Yes, Bush went in for the oil -- not to get more of Iraq's oil, but to prevent Iraq producing too much of it.” (link)

Let’s put aside that a 323-page report has been summarized into “enhance its relationship with OPEC.” This article is a shorter version of a video that Greg Palast did for BBC’s Newsnight (link). The video covers more material and offers more nuance than this simplified story. For example, Palast writes that “‘It's about oil,’ Robert Ebel told me.” In fact, Ebel says that people think it’s about oil and that he disagrees. He says the invasion is about getting rid of Saddam Hussein and that the day after is about oil. Not quite the same thing as Palast’s snippet quote.)

I have a general aversion to such arguments. Asking whether America invaded Iraq for its oil is, simply put, the wrong question. Would Iraq have the same strategic importance without oil? No. Did America try to get Iraq’s oil? Well, international oil companies have been having trouble to get to the Middle East for years—the imposition of privatization after an invasion would be unstable and doomed to fail. It also doesn’t explain why other countries, where oil interests are equally powerful and would have profited more than they did under oil-for-food, did not support the war. Would America like it if Iraq’s oil industry approximated Western standards rather than copycat Kuwait’s, Saudi Arabia’s or Iran’s? Yes and there are signs that America’s originally supported group held such ideas (my mind is on Ahmed Chalabi; link).

A casual reading of the region’s oil politics reveals one disturbing truth: the advance of democracy is usually an inhibitor for energy interests, primarily because populist elements in legislatures (acute in Kuwait and Iran) block efforts to bring in international oil companies. The advance of democracy and the advance of “Big Oil” interests have hardly run in parallel. Finally, one suspects that America could have found a cheaper way to Iraq’s oil—oil-for-food maybe?

“War for oil” is a slogan, not an argument.

Political aversion

Sandra Day O’Connor and Roy Romer write in today’s Washington Post: “Fierce global competition prompted President Bush to use the State of the Union address to call for better math and science education, where there's evidence that many schools are falling short. We should be equally troubled by another shortcoming in American schools: Most young people today simply do not have an adequate understanding of how our government and political system work, and they are thus not well prepared to participate as citizens.”

There is something to be said about this. For me, however, the link is different: my occasional aversion to politics comes not from my failing to understand how government works, but from understanding it all too well.

References:
Sandra Day O’Connor and Roy Romer, “Not By Math Alone,” Washington Post, 25 Mar 06 (link)

Inside Saddam’s Iraq

The Pentagon Joint Forces Command released yesterday the report of the Iraqi Perspective Project, meant to illuminate how Saddam Hussein viewed Operation Iraqi Freedom (full text). Foreign Affairs has put on its website an article that is based on that report and that will appear in the May / June 2006 issue (link). It’s an extraordinary look into Saddam Hussein’s Iraq, one that is rightly captured in the Foreign Affairs title: “Saddam’s Delusions.”

Chirac’s walkout

Jacques Chirac staged a brief walkout from a summit meant to forge a common EU policy on energy after a French businessman spoke in English …

Tells you a lot about what common means in Europe these days. (link)

The American mindset?

I went to a presentation yesterday on the “Minorities of Greece.” The event series allows young aspiring policymakers to give presentations and get feedback from experts. The content of the presentation was interesting but immaterial to the point I want to make, though it suffices to say that the presenter was critical of Greece’s overall handling of minorities (the focus on the Chams who used to live in Greece but are now in Albania), with comments on the duplicity of not criticizing an EU member, potential destabilization in the Balkans and so on.

At the end of the talk, one of those providing feedback said something to the following effect (I paraphrase): “You touched on some big points but you buried them. You could have talked about how this links to the Iraq war and the effort to bring democracy and federalism as a way for minorities to live together; how it affects the accession of Turkey into the EU and the duplicity about the Armenians; how democratic values are endangered at their place of birth; and how if Greece gave compensation it would remove this potential de-stabilizer in the region; and so on.”

I was amused; and scared. Amused because here is one person who has no idea about anything on the topic trying to frame it in four or five different ways that are inapplicable, irrelevant, or both; scared because he is the kind of person making decisions.

Communicating the Iraq war

David Ignatius writes in the Washington Post: “Ask senior military commanders what they think about Bush and they will tell you they love his toughness -- but wish the White House could communicate its Iraq strategy better. Bush has tried. … But it's not working, and the president owes it to the troops, above all, to figure out a better way to communicate.”

The overall column is very interesting and I suggest reading it. I agree with Ignatius and would like add two problems I see with the Iraq communication strategy: first, it seems like the words are the same, and so is the tone. I haven’t looked into it, but I suspect you can find an overall correlation between current speeches and past ones (WMD rationale and all that notwithstanding) without much change over time.

The other defect is the spin. The inability to look at the broader picture and the anger towards those who disagree is particularly depressing. I think there is something to be said about the fact that the media tend to report one thing and others who come from Iraq (including so I have spoken to) say another. But this is a far cry from just lambasting the media for their coverage.

References:
David Ignatius, “Communication Breakdown,” Washington Post, 24 Mar 06 (link)

The civil war in Iraq

Charles Krauthammer writes in today’s Washington Post that the debate over whether Iraq is having a civil war is meaningless since Iraq has been in a civil war for a long time: “those who have decided that because of ‘civil war’ it [a solution] cannot be done have been unreasonably panicked by something that has been with us all along.”

The best comment on the Iraqi civil war came from a Middle East who said (I paraphrase): “the big change is now Sunnis know two can kill. They used to think that if the Americans left, they could declare victory. They are no longer so sure.” It may be odd to hope for a balance of power (or maybe call it a balance of terror) to provide stability. In that sense, Iraq is making progress, not because there is civil war but because the cost-free support for the insurgency and one-sided belief that if the Americans left all would be good seems to be dissipating.

References:
Charles Krauthammer, “Of Course It’s a Civil War,” Washington Post, 24 Mar 06 (link)

The Israel Lobby

John Mearsheimer (U Chicago) and Stephen Walt (Harvard KSG) just released a study on the influence of the “Israel Lobby” on American foreign policy, with the premise that the Lobby steers America to a consistent and excessive pro-Israel position. The study has caused a thunder around here, and people are already posting rebuttals to it. I was very skeptical when I first heard about it, but then again I am familiar with Mearsheimer’s academic work and he is no dupe. So I read the study.

There are several interesting points, though the authors often stretch their points, especially when they try to settle historical facts that are still much disputed, though this is understandable since their argument is to show that America’s support for Israel does not spring from as clear a set of characteristics as one would think.

But there are two points the authors bring up that deserve more discussion: first, is the level of American support for Israel justified by the national interest? Given that Israel’s survival is no longer at stake, should America support Israel the way it does? And second, does America’s support for Israel distort American policies; particularly does it make it more confrontational towards Iran and Syria (the authors also have a section on Iraq)?

I don’t know the answer to these questions, but I know that there is something to discuss there. This study is bound to be controversial, but that’s no reason to avoid the issue.

Adonis and the Arab condition

This interview, published on MEMRI, features the Syrian Poet Adonis (text / video). It is short and worth watching; here are some excerpts:

If I look at the Arabs, with all their resources and great capacities, and I compare what they have achieved over the past century with what others have achieved in that period, I would have to say that we Arabs are in a phase of extinction, in the sense that we have no creative presence in the world.
…
That is our real intellectual crisis. We are facing a new world with ideas that no longer exist, and in a context that is obsolete. We must sever ourselves completely from that context, on all levels, and think of a new Arab identity, a new culture, and a new Arab society.
…
The Muslims today - forgive me for saying this - with their accepted interpretation [of the religious text] are the first to destroy Islam, whereas those who criticize the Muslims - the non-believers, the infidels, as they call them - are the ones who perceive in Islam the vitality that could adapt it to life. These infidels serve Islam better than the believers.

Gas deal between Russia and China

Russia and China have agreed on a deal for Russia to provide natural gas to China. All the same, “Alexei Miller, head of Russia's gas monopoly Gazprom, told reporters that the timeframe and the scale of the deal had been agreed with China's oil and gas company, CNPC, but he said the financial details were yet to be negotiated” (link). There have been many deals that were agreed upon but never materialized. Meanwhile, I recall this wonderful essay by Selig Harrison, who will provide great insight to anyone interested in the geopolitics of gas in NE Asia (link).

The father and the war

There is a remarkable op-ed in today’s Washington Post, written by a father whose son spent two tours in Iraq (and just returned from the second). This is the link to the story.

The French barricades

John Thornhill, editor of the European edition of the Financial Times, has an excellent piece in today’s paper on the recent student riots in France; it’s a great article that should be read in whole, but it will suffice to quote two parts from it:

“Whereas the revolutionaries of ’68 wanted to change the world, those of today want to keep it much the same. Whereas the ’68 generation wanted to challenge their parents’ complacency, those of today want to enjoy the same privileges: secure jobs, short working weeks, early retirement and an enviably high standard of living
…
Instead, he [Dominique de Villepin] should argue that the students are on the wrong side of the barricades. Rather than condemning his half-hearted reform, they should support him in being far more radical – and egalitarian – and extending flexible labour contracts to everyone in the workforce. That really would shake the students’ parents out of their complacency – and be far more in the spirit of ’68.”

References:
John Thornhill, “French students on wrong side of barricades,” Financial Times, 18 Mar 06

Afghani oil & gas

This is from a Financial Times article: “Afghanistan’s untapped oil and natural gas reserves may be significantly larger than previously thought, according to the results of a survey by the US Geological Survey (USGS) and the Afghan Ministry of Mining and Industry released in Washington on Tuesday.” The estimated reserves are about 1.5bn barrels of oil and 15.6tr cubic feet of natural gas.

Anyone ready for the conspiracy theory version of the article: “that’s why America is occupying Afghanistan!”

References:
Alexander Kliment, “Afghanistan’s untapped oil and gas underestimated,” Financial Times, 15 Mar 06

BTC security

This is an interesting article from Defense News on the security of the BTC pipeline (link). Particularly interesting is the last quote from David Cooper, a defense consultant: “Pipelines are nearly possible to protect. But horseback patrols and ground sensors? They need high-resolution earth observation at a minimum … Even with the best of technology, you’ve got to have an entire organizational approach coordinated along the whole thing to secure it.”

Chavez’s bad and ugly

Hugo Chavez is just too much to keep up with. Now he has changed Venezuela’s flag to add an eight star in honor of his ideological hero, Simon Bolivar, while also changing the horse on the country’s coat of arms to face left instead of right (link). A more serious issue is that Venezuela recently signed a mining deal with Iran, and there are concerns that Venezuela may be supplying uranium for Iran’s nuclear program (link).

Men who are too attractive

This is from Al-Jazeera: “Bangladeshi workers banned from Malaysia because local women find them too attractive are apparently now being smuggled in as students” (link).

The circular logic on India

Robert Kagan writes in the Washington Post about the nuclear deal with India: “Were Congress somehow to reject the administration's deal in some effort to maintain a consistent principle on nonproliferation, it would have no effect on Iran's decisions. But that futile gesture would have a devastating effect on U.S. relations with India. In our less-than-ideal world, where, we are often told, America needs good friends and allies, that would be a terrible bargain.”

Isn’t that logic great: why should America sign a nuclear deal with India? Because now that America made a deal, it would look bad to reject it …

References:
Robert Kagan, “India is not a precedent,” Washington Post, 12 Mar 06 (link)

The US-UAE Free Trade Area

This is from Al Jazeera: “The United States and United Arab Emirates have postponed free trade talks, the US Trade Representative's office said on Friday, a day after a Dubai state-owned company said it would give up US port management operations to calm a political furor” (link). The Los Angeles Times reports on the same story: “The United States will resume talks in March on a free-trade pact with the United Arab Emirates despite an uproar over the Bush administration’s approval of a deal to allow a UAE company to operate terminals at six U.S. ports, a U.S. trade official said” (link).

It is needless to say that both reports come from an original Reuters story which resembles the latter more than the former (link). Either way, this is probably the first fallout from the Dubai Ports deal—after all, it was that political charge which created the need for a period to “cool off.” It may turn that the Dubai ports deal will help push the deal forward if only because Capitol Hill will be wary about rejecting a second economics deal with the UAE in such a short period. On the other hand, FTA have been an essential element in America’s Middle East diplomacy—one which, by the way, is helping contain the power of Saudi Arabia. It would be a pity if such a narrow minded definition of the national interests (i.e. not having Arabs running US ports) would undermine other diplomatic initiatives which are far more conducive to the national interest.

A letter on Larry Summers

This is a letter to the editor which appears in the Financial Times:

Sir, I feel compelled to write a reaction to David Allen's letter on the Larry Summers affair (“Leader must behave as decent person,” March 4). What struck me is the comment: “I have no personal experience of the man; but I have, as have many others, heard numerous accounts of his arrogance and bullying - accounts frequent enough to make me feel comfortable with their reliability.” Now, I do not wish to express any personal opinion on Larry Summers' performance as Harvard's president. Rather, I wish to object to publishing such a second-hand personal attack without any basis of evidence.

I think one can best judge a person's true character by how he/she treats what you might call "nobodies" - people so far below them on the power scale that there is no personal gain to be had from being nice to them. I have never forgotten how Larry Summers treated me when I was such a nobody.

In the early 1980s, I was an undergraduate at the Massachusetts Institute of Technology. I was a terrible student (ie, I was an engineering major with little interest in the subject and rarely saw the inside of a classroom). After my junior year, I was determined to stay in Boston for the summer to continue more "interesting" activities. I went looking at job postings and found that an economics professor named Larry Summers was looking for someone to do computer programming. There, at least, was something I could do - even a terrible engineering major knows more about computer programming than an economics major - so I applied for and got the job.

Now, the point of the story is this: after a few months, the blockbuster news broke that the famous Larry Summers had been stolen away from MIT by Harvard. My first thought was, of course, "Oh no, now I'm out of a job." But very soon, I got a phone call that went roughly like this: "Mike, this is Larry Summers. I've decided to go to Harvard. But don't worry. I've found someone else at MIT who will hire you."

Now this is what has always impressed me. Why, in the midst of all the pressure he must have been under at that time, would he have bothered to take the time to find a new job for an undergraduate research assistant?

Michael Keane,
Professor of Economics,
Yale University,
New Haven, CT 06520, US

Barroso's idea

I thought this was a wonderful photograph of Jose Barroso launching the EU’s Green Paper on Energy Security.

Solana on the EU’s energy security

Javier Solana, the EU high representative for foreign policy, argues in the Financial Times for more dialogue with producer countries; he writes that, “most producers and all consumers have a shared interest in maintaining a stable, transparent framework in which the pricing mechanism can function as freely as possible. This means no unilateral measures and no ‘politicisation’ of energy exports to punish foes or reward friends. What we need is an orderly combination of markets, law and consensual negotiations.”

I have written elsewhere about why I think this overall approach is wrong (“Russia & energy security,” 25 Jan 06): “The more fundamental issue for energy security is whether it is possible to reconcile two competing visions of energy: producers wanting to form political partnerships and exert influence using their natural wealth, and consumers wanting access to that wealth with as few strings attached as possible.”

Mr. Solana recognizes that the EU needs to make its own market much more competitive. But the main  premise of energy security should be to recognize not the promise of markets alone, but their fundamental limitation in dealing with an essentially political issue.

References:
Javier Solana, “Why Europe must act collectively on energy,” Financial Times, 8 Mar 06

Rationing abundance?

Iran is the world’s fourth and OPEC’s second largest crude oil producer. Its conventional oil and natural gas reserves are both the second largest behind Saudi Arabia and Russia respectively. Yet Iran imports natural gas because it has not invested enough money to make gas production profitable. And today, Iran’s parliament passed a law to ration petrol (Iran has a small refining base and it imports gasoline -- link).

How sad…

Exxon’s aggressive strategy

ExxonMobil has just announced an aggressive strategy; its press release said that, “the company expects to start up more than 20 new global projects in the next three years to produce even more energy to fuel vehicles, light and heat homes, and power businesses around the world” (link). Its new chief executive suggested that “upstream projects, from the Caspian Sea to the deepwater Gulf of Mexico, could over time bring on the equivalent of 2.5 million barrels of new oil a day” (link).

This is interesting for two reasons. First it underlines the link between prices and investment—in a market which is so often presumed to be riddled with imperfections, there are certain sound dynamics at work and ExxonMobil’s plan reveals that. The second is that the presumption among industry experts is that the reason oil companies make so much money is that there are few good investment opportunities out there. Call it the end of easy oil. And also call it inaccessible oil, either for geology, geography or politics. The success of ExxonMobil’s strategy will be a good test case for this hypothesis.

Nuclear power in Turkey?

This is an interesting story: Turkey’s energy minister, Hilmi Guler, has said that, “the rise in oil prices and the need for multiple sources of energy make our need for nuclear energy an utmost priority” (link). According to the minister, Turkey is considering building up to five atomic energy plants, the first of which would open in 2012. Currently, Turkey imports 90% of its natural gas from Iran and Russia, making the case for diversification rather strong. But while the economic logic for this move is sound, one has to wonder if Turkish leaders are looking at Tehran as much as they are at the energy numbers.

No gas deal before the elections in Ukraine

Ukrainian Prime Minister Yuriy Yekhanurov has said that an agreement with Russia about natural gas supplies will come after the March 26 election (link). This is the agreement that is supposed to settled long-term the dispute over volumes and prices which turned awry in December / January and which was resolved for the first half of 2006.

This postponement is hardly surprising since both sides have an interesting in waiting. Russia can maintain the fear in the mind of Ukrainian voters that its supplies are in jeopardy if it gets too close to the West; also, signing a deal now would accord the Yushchenko government a victory that Moscow would hardly wish to give. Ukraine is probably betting that a victory for the current administration would improve its negotiating position since it would show that Russia’s crass tactics did not pay off and produced a backlash.

Kuwait discovers gas and more oil

The Kuwaiti oil minister has announced that Kuwait has discovered a field with natural gas and oil reserves (link). The estimates put the reserves at 35 tcf (with about 60 to 70 % recoverable) and the oil reserves 10 to 13 billion barrels. This is important both in that Kuwait does not produce natural gas and also because it underlines the potential to find oil and gas even in areas that are as well explored as Kuwait.

Ready for China?

Sebastian Mallaby has an excellent article in the Washington Post on the growing tendency to use China as a scapegoat for the economic ills which are afflicting this country. I am reminded of this article by David Lampton in the winter issue of The National Interest which made the sensible observation that while America has tried to integrate China into the web of rules that make up globalization, it will become increasingly necessary for America to make its own adjustments to the new world that China’s rise is creating.

In meeting this adjustment, the furor is Washington does not bode well, especially given how hysterical Americans have become while China is still extremely poor on a per-capita basis (by which I mean: imagine how much more it can grow). Optimists like to point out that America went through the same phase with Japan in the 1980s. But I draw little comfort from that fact—the anger towards Japan subsided because the cold war ended (producing an excessive euphoria) and Japan went into a decade-long recession.

I am afraid the China-bashing is gaining its own momentum and this cannot be good for anyone.

References:
Sebastian Mallaby, “Trade And the China Card,” Washington Post, 6 Mar 06 (link); David M. Lampton, “Paradigm Lost,” The National Interest, Winter 2005/06 (link)

Do oil imports matter?

I have put together this graph which shows the significance of import dependence. It plots the price of oil and US imports as a percentage of total consumption. The graph illustrates that there is no relationship between increased import dependence and prices. In fact, the correlation is negative (-0.59), indicating an inverse relationship whereby lower prices presumably boost demand and hence imports. In that sense, the underlying problem (high prices) and the articulated concern (import dependence) are unrelated.

A near miss in Abqaiq?

Gal Luft, executive director of the Institute for the Analysis of Global Security (link), wrote an op-ed in today’s Washington Post on the attack against the Abqaiq oil facility in Saudi Arabia. He says: “Had the terrorists succeeded in penetrating the guarded facility and detonating their bombs inside, they might have turned the complex into an inferno, releasing toxic chemicals that could have killed and sickened thousands of locals and expatriates, including many Americans, who work and live nearby” (1).

Dr. Luft is both right and wrong. It is true that success would have caused more damage than failure, but it is not true that this was a “near miss.” According to Saudi security adviser Nawaf Obaid, the car which penetrated the outer perimeter of the facility but was still stopped a mile away from the closest facility. Not exactly a near miss.

In a way, the emotional effect of terrorism has caused our imagination of what terrorists can do to outpace the terrorists’ own capabilities. This is a guerilla battle which is not asymmetrical; the success of terrorism depends, in large part, on the indefensibility of a country. But in a war on oil facilities, big guns, expensive radar systems, fast vehicles, trained military personnel, etc. counts. And it seems that the militants are no match for the Saudi security forces yet.

Another important point is the reaction to the attacks. When the militants first brought terrorism to Saudi Arabia (in May 2003), they were condemned because people thought they had gone too far (2). In reaction to this attack, the religious leader of Saudi Arabia issued a religious decree (fatwa) condemning the attacks, making the point that the attackers were threatening the collective wealth of the nation and were also provoking instability in the country that could excuse foreign intervention. This is not exactly the rhetoric that the militants depend upon to win, especially in a county such as Saudi Arabia where everyone’s wealth depends on oil. (The fatwa was read to me in Arabic and I have not found an English translation or link).

Does this mean that we should not fear such attacks? No. In all probability some attacks will take place, though the result will probably be less apocalyptic than is usually assumed. The key is to have appropriate reactions to such attacks. The problem, as Dr. Luft himself acknowledges, is that there is little spare capacity in world markets. But this is changing. Reports by OPEC (link) and even the IEA (link) predict that the call on OPEC (how much OPEC needs to product to balance supply and demand) will most likely remain constant over 2006. This means that increase in world oil markets will be met by non-OPEC supply, and OPEC supply expansion will increase spare capacity (link).

These are, of course, projections. But they underline two important themes: as long as spare capacity is the problem, the solution lies in more spare capacity, not unreasonable calls to reduce dependence for oil. In part this is happening, though the data is not 100% reassuring. The other point is about China—its overseas activities are contributing to a growth in supply which will alleviate pressures on the world oil market and contribute to everyone’s security. America may not like what China is doing, but it cannot demonize the world oil market while, at the same time, condemning China which is aggressive in trying to correct it.

References:
(1) Gal Luft, “An Energy Pearl Harbor?” Washington Post, 5 Mar 06 (link); (2) Crisis Group, “Can Saudi Arabia Reform Itself?” Middle East Report No 28, 14 July 2004;