A standard take on how energy affects world politics is Tom Friedman's "First Law of Petropolitics" -- the belief that high energy prices cause energy exporters to act in more belligerent ways. What if the opposite is the case, however?
The Atlantic's Charles Mann has a long, winding cover story on the growth of non-traditional hydrocarbon energy reserves -- shale gas, methane hydrate, and so forth -- and what that could mean for world politics. The good parts version:
Shortfalls in oil revenues thus kick away the sole, unsteady support of the state—a cataclysmic event, especially if it happens suddenly. “Think of Saudi Arabia,” says Daron Acemoglu, the MIT economist and a co-author of Why Nations Fail. “How will the royal family contain both the mullahs and the unemployed youth without a slush fund?” And there is nowhere else to turn, because oil has withered all other industry, Dutch-disease-style. Similar questions could be asked of other petro-states in Africa, the Arab world, and central Asia. A methane-hydrate boom could lead to a southwest-to-northeast arc of instability stretching from Venezuela to Nigeria to Saudi Arabia to Kazakhstan to Siberia. It seems fair to say that if autocrats in these places were toppled, most Americans would not mourn. But it seems equally fair to say that they would not necessarily be enthusiastic about their replacements.
Augmenting the instability would be methane hydrate itself, much of which is inconveniently located in areas of disputed sovereignty. “Whenever you find something under the water, you get into struggles over who it belongs to,” says Terry Karl, a Stanford political scientist and the author of the classic The Paradox of Plenty: Oil Booms and Petro-States. Think of the Falkland Islands in the South Atlantic, she says, over which Britain and Argentina went to war 30 years ago and over which they are threatening to fight again. “One of the real reasons that they are such an issue is the belief that either oil or natural gas is offshore.” Methane-hydrate deposits run like crystalline bands through maritime flash points: the Arctic, and waters off West Africa and Southeast Asia.
In a working paper, Michael Ross and a colleague, Erik Voeten of Georgetown University, argue that the regular global flow of petroleum, the biggest commodity in world trade, is also a powerful stabilizing force. Nations dislike depending on international oil, but they play nice and obey the rules because they don’t want to be cut off. By contrast, countries with plenty of energy reserves feel free to throw their weight around. They are “less likely than other states to sign major treaties or join intergovernmental organizations; and they often defy global norms—on human rights, the expropriation of foreign companies, and the financing of foreign terrorism or rebellions.” The implication is sobering: an energy-independent planet would be a world of fractious, autonomous actors, none beholden to the others, with even less cooperation than exists today.
Voeten's post at the Monkey Cage goes further.
The fact that China and the U.S. both currently rely on oil imports may be an important stabilizing force as it creates a shared interest in stable global oil markets and thus in ensuring that the Oceans are navigable, the Middle East is relatively stable, and that rules and norms whose violations could trigger instability are obeyed. Energy independence has long been thought to free U.S. foreign policy from undesirable constraints. But would the world be more stable if the U.S. had fewer constraints on how it exercises its foreign policy?
As if on cue, the Financial Times' Richard McGregor and Ed Crooks report that the Obama administration is starting to think about how to use the country's new energy bounty in
Although the energy department is the decision maker, the issue is being debated at senior levels in the White House which sees energy exports as giving the US new geopolitical leverage.
In a little-noticed speech in New York in late April, Tom Donilon, the White House national security adviser, said the new energy bounty allowed the US “a stronger hand in pursuing and implementing our international security goals”.
Mr Donilon said increased US and global gas production could break the link between the gas and more expensive oil prices and “weaken control by traditional dominant natural gas suppliers”.
The White House is also promoting gas as an alternative fuel to oil and coal as a way to reduce greenhouse emissions.
All of this has Walter Russell Mead a bit giddy, but let's go back to Mann and Voeten's point. Assuming that the extrapolations pan out -- and it's worth remembering that five years ago those projections looked very different -- will declining energy prices trigger an arc of instability?
Color me a bit skeptical. First, energy is hardly the only resource that imbricates the great powers with the rest of the global economy. The global value chain does that on its own quite nicely, thank you very much, and a glance at the new Trade in Value Added data makes that clear.
Second, if Donilon's speech was any indication of what new energy reserves would mean for U.S. foreign policy, I'd say retrenchment was not in the cards:
[R]educed energy imports do not mean the United States can or should disengage from the Middle East or the world. Global energy markets are part of a deeply interdependent world economy. The United States continues to have an enduring interest in stable supplies of energy and the free flow of commerce everywhere.
We have a set of enduring national security interests in the Middle East, including our unshakeable commitment to Israel’s security; our global nonproliferation objectives, including our commitment to prevent Iran from acquiring a nuclear weapon; our ongoing national interest in fighting terrorism that threatens our personnel, interests and our homeland; our strong national interest in pursuit of Middle East peace; our historic stabilizing role in protecting regional allies and partners and deterring aggression; and our interest in ensuring the democratic transitions in Yemen, North Africa and ultimately in Syria succeed.
Furthermore, as the FT article suggests, the United States sees the change in natural gas as a way to expand exports into Latin America. This doesn't sound like a county that wants to retreat into autarky.
Third, there is one way in which reduced exports might make life easier for Middle Eastern governments -- in the short term. That region has the highest level of energy intensity in the world, in no small part because gas and oil are cheap and subsidized. Declining demand from elsewhere allows these governments to continue to provide cheap energy at home. From both a climate change perspective and an economic reform perspective, this ain't good news. But it does augment political stability.
Finally, this is a slow-motion change in the global energy picture. North America has moved the furthest down the road on this revolution -- Japan, China and Europe are just starting. So energy exporters have a fair degree of warning about what's coming. This doesn't mean that they'll use the lead time properly. Still, one of the reasons for building up sovereign wealth funds and the like is to insure against the time when the energy fairy disappears.
What do you think?
I've been reading a raft of books recently arguing that authoritarian capitalism is a more sustainable model than us in the West appreciate. According to this meme, entities like sovereign wealth funds, state-owned enterprises, and national oil companies will be carving up ever-greater slices of the global economy.
Whenever I read these arguments, the question that gnaws at me is how these authoritarian capitalist institutions will operate in other authoritarian capitalist countries. See, this kind of argument presumes a harmony of interests that doesn't necessarily exist between authoritarian states. It also presumes a standard of competency and efficiency - or, at least, efficient corruption -- that makes these firms and institutions able to compete with private sector firms.
For see what I'm talking about, see this Washington Times story by Kelly Hearn on China's growing frustration with Venezuela:
China has poured billions of dollars into Venezuela’s oil sector to expand its claim over the country’s massive oil reserves.
But Beijing is getting relatively little for its investments, and Chinese officials are increasingly frustrated with Venezuelan President Hugo Chavez, according to energy analysts and former managers of the state oil company, Petroleum of Venezuela, or PDVSA as it’s known by its Spanish acronym....
In 2010, CNPC signed a deal to help Venezuela develop a major Orinoco oil field known as Junin 4, which includes the construction of a facility to convert heavy oil to a lighter crude that could be shipped to a refinery in Guangdong, China.
“Although the contract was signed in December 2010, not one barrel of oil has yet been produced, much less upgraded,” said Gustavo Coronel, a former PDVSA board member.
“So far, nothing much seems to be happening, except for the arrival of a large group of Chinese staff to the CNPC’s Caracas office,” he added, referring to the Venezuelan capital, Caracas.
“Apart from money, there seems to be little that China can offer Venezuela in the oil industry,” he said, adding that a “culture gap will make working with China very difficult for Venezuelan oil people, who were mostly trained in the U.S.”....
The Chinese also seem to be increasingly wary.
Internal PDVSA documents released by a Venezuelan congressman show that the Chinese balked at a $110 billion loan request by Mr. Chavez in 2010, after PDVSA officials failed to account fully for where the money would go.
Venezuela is not the only place that Chinese foreign direct investment in energy is running into bottlenecks and roadblocks. There was Myanmar last year:
fter five years of cozy cooperation with Burma’s ruling generals, China Power Investment Corp. got a shock in September when it sent a senior executive to Naypyidaw, this destitute Southeast Asian nation’s showcase capital, a Pharaonic sprawl of empty eight-lane highways and cavernous government buildings.
Armed with a slick PowerPoint presentation and promises of $20 billion in investment, Li Guanghua pitched “an excellent opportunity,” a mammoth, Chinese-funded hydropower project in Burma’s far north.
Then came the questions: What about the risk of earthquakes, ecological damage and all the people whose homes would be flooded? Is it true that most of the electricity would go to China?
Two weeks later, Burma, also known as Myanmar, scrapped the cornerstone of the project. President Thein Sein, a former general who took office in March, announced that he had to “respect the people’s will” and halt the $3.6 billion dam project at Myitsone, the biggest of seven planned by China Power Investment, or CPI.
As the world’s biggest consumer of energy, China has hunted far and wide in recent years for sources of power — and of profit — for state-owned corporate behemoths such as CPI. The result is a web of deals with often-repressive regimes, from oil-rich African autocracies such as Sudan and Angola to river-rich Burma.
But coziness with despots can also backfire.
Amid a dramatic, though still fitful, opening in Burma after decades of harsh repression, public anger has swamped China’s hydropower plan. The deluge threatens not only hundreds of millions of dollars already spent but also China’s intimate ties to what had been a reliably authoritarian partner, its only East Asian ally other than North Korea.
Beijing still has big interests in Burma, including a multibillion-dollar oil and natural gas pipeline that is under construction. But a partnership forged with scant heed to public opinion has been badly jolted by a barrage of no-longer-taboo questions.
These are just isolated cases -- I have no doubt that China has a boatload of successful FDI projects in energy. What's telling, however, is that regardless of whether the host regime is democratizing or reverting to autocracy, the political economy of these investments is far from problem-free.
One must sympathize with the Chinese firms here. China's domestic politicsal economy of investment aren't this messy. Oh, wait...
Germany's move—marking a contrast with the U.S. and other countries that have largely stuck to plans to continue pursuing nuclear power—is a U-turn from a contentious plan that Ms. Merkel engineered just last fall that would have extended the lifetimes of some of Germany's reactors into the 2030s, more than a decade longer than previously scheduled. Ms. Merkel's latest move is effectively a return to an agreement to phase out nuclear power approved in 2002 by a center-left Social Democrat-Green coalition....
In few countries is nuclear energy the hot-button issue it is in Germany, where polls show some 70% of the populace opposes it, the legacy of a broad-based antinuclear movement that harks back to the 1986 Chernobyl accident. Since the Fukushima accident, antinuclear protests have taken place across the country.
Ms. Merkel's change in course, though, hasn't produced the desired political effect. Conservative allies have been frustrated by her turn away from a cherished policy victory, and nuclear opponents have seen the move as opportunistic. Those perceptions contributed to several stinging regional election losses for the Christian Democratic Union this spring, and have led to a surge in clout for the opposition Green Party.
And now the NYT:
For Mrs. Merkel, the embrace of clean energy represents a transformation based on the politics of the ballot box. Just last year, her center-right coalition forced through an unpopular plan to extend the life of nuclear power plants, with the last to close in 2036. That action inflamed public opinion but the Fukushima disaster politicized it. The nuclear crisis is widely believed to have caused Mrs. Merkel’s party to lose control of the German state of Baden-Württemberg for the first time in 58 years, in a March election that became a referendum on energy policy.
By Monday, Mrs. Merkel said the country must “not let go the chance” to end its dependence on nuclear power.
And, finally, Reuters:
The German chancellor has, in nine months, gone from touting nuclear plants as a safe "bridge" to renewable energy and extending their lifespan to pushing a nuclear exit strategy that rivals the ambitions of the Social Democrats and Greens.
Merkel had her atomic epiphany after the Fukushima disaster in Japan in March, announcing a moratorium on nuclear power and launching an urgent overhaul of German energy policy, resulting in the exit strategy announced on Monday.
Her change of heart, however genuine as it may be, coincides with a string of disastrous election results for her Christian Democrats (CDU) and their Free Democrat (FDP) allies that have been partly blamed on her unpopular pro-nuclear policy so far.
With the FDP losing popularity almost as fast as the Greens gain it, and the Greens unseating the CDU in their heartland of Baden-Wuerttemberg in March as well as outpolling them for the first time in Germany in Bremen this month, Merkel has upgraded the nuclear moratorium to a rush for the exit.
Watching Merkel's performance during the myriad euro crises of the past two years, I'm beginning o detect a decision-making algorithm at work. Let's call it The Merkel Algorithm. It consists of the following steps:
1) A problem festers;
2) Dither and do nothing;
3) Public opinion polls drop;
4) Let things fester some more;
5) Lose an electioon somewhere;
6) Announce new policy that reverses prior position
7) Lose even more political support.
Merkel appears to have brilliantly executed this strategy on both the eurozone and nuclear power. In all seriousness, what I don't understand is the long periods of dithering and festering. I get that politicians will sometimes be wrong-footed on policy shocks. Merkel, however, really does seem to wait until the worst, most cravenly political moment to do something. Why?
Your humble blogger hereby calls on all Germany-watchers to offer either an explanation or a more nuanced take on the Merkel Algorithm -- because your humble blogger is good and truly flummoxed.
Today is Patriots Day in Massachusetts, which means it's a school holiday, which means I'm at home with the Official Blog Children. Because I don't have much time to blog in-depth about much, I'd like to address a shallow topic this AM -- Donald Trump.
The current frontrunner for the 2012 GOP presidential nomination has made a few comments hinting at how he would approach foreign economic policy. Let's take a look, shall we?
From the Wall Street Journal:
As for foreign policy, Mr. Trump said he is "only interested in Libya if we take the oil," and that if he were President, "I would not leave Iraq and let Iran take over the oil." He remains sharply critical of the Chinese, asserting that as President, "I would tell China that you're either going to shape up, or I'm going to tax you at 25% for all the products you send into this country."
"I'm all for free trade, but it's got to be fair trade," he said. "China has taken advantage of this country for a long time." Regarding the $300 billion he said China stands to make from trade with the U.S. this year, Mr. Trump said, "What's protectionism? ...I want to be protected if that's the case." As for pending trade deals with Colombia, Korea and other countries, he said he would only sign them if they were the right deals for the U.S. "If it's a bad deal, I wouldn't sign it," he said.
Here's a fun little project for the commenters: predict what would happen to the global political economy if, in fact, President Trump seized all of Iraq's oil reserves and slapped a 25% tariff on Chinese exports. Hint: I don't think it ends well.
As for the trade deals, given that almost all of Panamanian and Colimbian exports come into the United States duty-free, I'm dying to hear how the Donald is going to improve upon them.
The stuff from the WSJ is boilerplate economic populism mixed with a healthy dollop of ignorance about the global economy -- but then there's this exchange with CNN's Candy Crowley:
Donald Trump says that the "right messenger" could tell OPEC to lower crude oil prices, insisting that prices "will go down if you say it properly."....
Asked on by CNN host Candy Crowley what his idea would be to get OPEC to lower crude oil prices, Trump said: "It's the messenger."
"I can send two executives into a room. They can say the same things; one guy comes home with the bacon and the other guy doesn't," Trump said. "I've seen it a thousand times. ... We don't have the right messenger. [President Barack] Obama is not the right messenger. We are not a respected nation anymore and the world is laughing at us."
Well, I agree with Trump that the world is laughing at someone.
The statement that the U.S. is "not a respected nation anymore" is flatly false. As for whether the "right messenger" can convince OPEC to lower crude oil prices, methinks that Trump is vastly exaggerating the ability of any messenger to tell countries to act against their economic and political self-interest (not to mention OPEC's influence over oil prices). Well, that or he's been watching this scene way too many times.
According to Politico's Maggie Haberman and Ben Smith:
More than anything else, according to those who’ve spoken to [Trump], he doesn’t want to be seen as the butt of this particular joke.
“He gets mad that people aren’t taking him seriously,“ said one Republican who’s spoken with him.
So, just for the record , this is me trying to take Donald Trump's policy pronouncements seriously. That said, I'd like to thank the Donald for providing such easy blog fodder on a holiday!
In a lot of ways, Saudi Arabia has had a lousy six weeks. Revolutions, protests and general unrest have spread across the region from far-away Tunisia to way-too-close-for-comfort Bahrain and Yemen. You're starting to see mainstream meda reports suggesting that the Kingdom's influence is waning compared to Iran. The region is clearly spooked enough to spend an extra $36 billion to forestall a massive turnout for the planned "Day of Rage" on March 11. If that doesn't work, the king might have to fall back on The Onion's suggested strategy.
With all of this going on, however, I find this report by the Financial Times' David Blair, Jack Farchy and Javier Blas to be veeeeerrrrryyy interesting:
Saudi Arabia is in “active talks” with European oil companies to meet the production shortfall left by Libya, the clearest indication to date that the leader of the Opec oil cartel is about to boost supplies to stop further rises in the oil price, which surged to near $120 a barrel on Thursday.
Riyadh is asking “what quantity and what quality of oil they [the European refiners] want,” a senior Saudi oil official said on condition of anonymity....
Paolo Scaroni, Eni chief executive, on Wednesday made the most pessimistic public assessment to date of the impact of the Libyan crisis on the country’s oil output, saying the country was producing only 400,000 b/d, compared with 1.6m b/d before the violence erupted.
“The real phenomenon is there are 1.2m barrels less on the market,” Mr Scaroni told reporters in Rome, adding that the loss of Libyan production was “not a huge thing, but it is something and there is also a sense of general uncertainty in the region which can be the trigger for speculation”.
The shortfall means the world market is enduring its biggest oil crisis since hurricane Katrina in 2005 knocked out most US oil production in Gulf of Mexico.
Traders believe that Saudi Arabia has the capacity to increase production and also the oil of the right quality to meet the shortfall. The kingdom produces so-called Arab Extra Light and Arab Super Light, which through blending could be made to resemble the high-quality, light, sweet oil produced by Libya.
The Saudi move comes as oil prices reached levels that many economists believe will dramatically slow the global economy and potentially trigger a double-dip recession. Oil prices hit an all-time high of nearly $150 a barrel in mid-2008.
Here's my question: why are the Saudis being so cooperative at this point? There might be sound strategic reasons -- preventing a double-dip recession, assuaging longstanding allies, etc. It could be that the Saudi leadershipis feeling secure enough to plan for long-term price stability.
Still, based on the recent reportage, I'm a little surprised that the Saudis aren't exploiting the current uncertainty to ensure the security of the current regime going forward. If I was a Saudi prince right now, I'd be
blowing my fortune during a 72-hour blowout in Vegas involving Salma Hayek, Christina Hendricks, and all the shrimp I could eat making it very clear to my buyers just how important stability is in my neck of the woods.
As an energy consumer, I'm grateful for the current Saudi behavior. As someone who studies the global political economy, I'm surprised and puzzled by this same behavior.
Am I missing anything?
Jad Mouawad and Andrew Revkin report in the New York Times on just the most darling Saudi proposal for how to help solve the global warming problem:
Saudi Arabia is trying to enlist other oil-producing countries to support a provocative idea: if wealthy countries reduce their oil consumption to combat global warming, they should pay compensation to oil producers....
The chief Saudi negotiator, Mohammad al-Sabban, described the position as a “make or break” provision for the Saudis, as nations stake out their stance before the global climate summit scheduled for the end of the year.
“Assisting us as oil-exporting countries in achieving economic diversification is very crucial for us through foreign direct investments, technology transfer, insurance and funding,” Mr. Sabban said in an e-mail message....
A recent study by the International Energy Agency, which advises industrialized nations, found that the cumulative revenue of the Organization of the Petroleum Exporting Countries would drop by 16 percent from 2008 to 2030 if the world agreed to slash emissions, as opposed to the projection if there were no treaty.
But with oil projected to average $100 a barrel, the energy agency estimated that OPEC members would still earn $23 trillion over that period.
If Saudi Arabia was serious about diversifying its economy, it would open up its spigots and let the price of oil fall to the point where there were market incentives for economic diversification. Somehow, I don't see that happening.
So, this isn't really going to go anywhere -- but what I do find particularly amusing is that if one thought about compensating dirty energy producers for the costs of climate change mitigation, then oil producers would be close to the back of the line. Coal-producing economies -- like China and the United States -- would be justified in demanding much greater levels of compensation, since coal is a much dirtier energy source. Oil would be in front of natural gas producers, and that's about it.
Readers are encouraged to proffer their own proposals in the comments that would seem more outlandish than the Saudi one. Creativity counts!!
Houston-based Citgo Petroleum Corp., the U.S. fuels and refining unit of Venezuelan state oil company PDVSA, plans to suspend its program to provide discounted heating oil to poor U.S. communities, according to Citizens Energy, a nonprofit which helps Citgo distribute the heating oil.
Citizens Energy chairman Joseph Kennedy said in a statement Monday that Citgo was calling off its heating oil aid programs in the United States due to "falling oil prices and the world economic crisis."
From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets. In the short run, falling oil prices are leading to welcome relief at the pump for American families ahead of the holidays, with gasoline down from its summer record of just over $4 to an average of $1.66 a gallon, and still falling. But the project delays are likely to reduce future energy supplies — and analysts believe they may set the stage for another surge in oil prices once the global economy recovers.So, let me see if I have this right:
[L]et’s imagine—as The National Interest asked me to do—that the summer of 2008 turns out to be the all-time peak of oil prices, and that the end of the oil era is imminent. The first instinct is to assume that in this world—a world in which oil would be a minor commodity, irrelevant to both geopolitics and the global economy—America would be much better off. Oil-exporting autocracies would fade into obscurity, and the Middle East would revert to barren sand-strewn lands. This imagined future, after all, is what drives politicians from George W. Bush to Barack Obama to say that ending dependence on foreign oil will liberate America. But would this really be the case? It may be that the assumptions we hold are grounded in a misunderstanding of the global order. Perhaps instead, without oil dominating their economies, the Middle East oil states would be far less dependent on the United States for trade, for security and for dollars. Perhaps the dollar would no longer be the world’s reserve currency, which would severely hinder America’s ability to fund its current-account deficit—and its military superiority. And then, perhaps, the security guarantee the United States provides to the Middle East—and by extension the entire oil-dependent world—would be null and void. In short, a world that doesn’t need oil may also be a world that doesn’t need the United States. But when prices of oil are skyrocketing, people aren’t thinking about the possible long-term implications of energy independence, only the short-term gains.Go read the whole thing. Feedback is very much welcomed -- this was, by definition, a speculative essay. And props to Justine Rosenthal, who was smart enough to push me to write this back when oil was over $140 a barrel.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.