Another BRICS summit brings another round of angst in the West over the new world the rising powers seek to build without us. The combined weight of Brazil, Russia, India, China, and South Africa is indeed breathtaking. Each is subcontinental in scope; together they represent nearly every region; their combined GDPs may surpass those of the G7 within two decades; as a group they have contributed more to global growth over the past five years than the West; and between them they boast nearly half the world's population.
Moreover, the BRICS possess complementary advantages: China is a manufacturing superpower; India is the world's largest democracy, with a deeper well of human capital than any other; Russia is a potential "energy superpower," according to the U.S. National Intelligence Council; Brazil dominates a region lacking any great power competitor; and South Africa represents a continent that has grown faster than Asia over the past decade. An alliance among these behemoths could indeed change history in ways that diminish the West.
Except that nearly all of the BRICS covet a special relationship with the United States, have development aspirations that can only be achieved with Western technology and investment, have security concerns they do not want to put at risk through confrontation with Washington, and quietly understand that strategic and economic rivalries within their grouping may be more salient than the ties that bind them together.
There will be several ghosts in the room at the BRICS summit: America, which India, China, and Russia have identified as more important to their interests than other rising powers; Indonesia, whose demographic and economic weight gives it a stronger claim to membership than South Africa; and Mexico, whose dynamic economy is more integrated with the world than Brazil's and wonders who appointed a Portuguese-speaking nation to represent Latin America.
Ironically, it may be the cleavages within the BRICS club that more accurately hint at the future of the global order: tensions between China and Brazil on trade, between China and India on security, and between China and Russia on status. These issues highlight the continuing difficulty Beijing will have in staking its claim to global leadership. Such leadership requires followers, and every BRIC country is reluctant to become one.
As my GMF colleague Dan Kliman puts it: "Talk of a new international order anchored by the BRICS is just that - talk. The two largest emerging powers in BRICS - Brazil and India - desire modifications to the current order; they do not seek to scrap it. Without geopolitical or ideological mortar, the BRICS summit remains less than the sum of its parts."
The BRICS countries may posture, but their strategic interests by and large lie in working more closely with the West rather than forming an alternative block that seeks to overthrow the existing world order. Indeed, the largest of the BRICS tried just such a strategy in another era -- and failed. India's experiment with non-alignment during the Cold War was a recipe for keeping Indians poor and shutting their country out of premier global clubs like the U.N. Security Council. We know how Moscow's quest to mount a Soviet ideological and material challenge to the West ended. And China long ago abandoned its Maoist zeal for world revolution. The country's biggest trading partners today are the European Union and the United States, and its leaders understand that the nature of China's relationship with the United States will be the main external determinant of China's ability to become a truly global power.
Power is diffusing across the international system, and the BRICS grouping is a reflection of that. But we should not let the occasional rising-powers summit lead us to lose sight of the main reality of a more multipolar world -- that in the race for influence in the 21st century, the United States remains in pole position.
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I wrote here a while back when Mexican President Enrique Peña Nieto was elected that we should give him a chance. I said this for several reasons, among them: 1) he and a majority of his party are of a new generation that has turned its back on the old patron-client system that characterizes so much of the developing world, and 2) he knows that to lift the half of the population that still lives in poverty and suffers from massive economic inequality he must increase economic growth, which is possible only if monopolies are smashed and foreign investment welcomed. He's off to a good start, bringing his party with him and building coalitions with the center-right PAN and others.
Three of his administration's actions demonstrate my optimism.
First, like the last PRI president before him, Carlos Salinas, Peña Nieto has shown his resolve and ability to put reform and the public above his cronies by having the head of the national teachers' union arrested on corruption charges (see here and here). No matter that she helped him get elected -- she opposed his reform to strengthen the hand of the state to hire and fire teachers at the expense of the union's overweening power. It is easy to be cynical and say that she was arrested for being a political opponent. Maybe that is exactly what happened. But maybe the president doesn't care who was or was not a supporter of his campaign for the presidency -- corruption is in his sights. In the end, if she is truly corrupt and found guilty, Mexico is better for it no matter what motivated the arrest. With his act he wins respect and not a little fear from the caciques of other sectors who might oppose his reforms and try to take Mexico backwards. We should remember that Mexico is not yet Switzerland or Sweden and is still an evolving democracy. Think Chicago, or Louisiana before Gov. Bobby Jindal.
Second, he is taking on the richest man in the world -- Carlos Slim, who has for decades controlled telecoms in Mexico. Slim controls 80 percent of the country's fixed lines and 70 percent of its mobile phones. The reform the president has put forward (see here and here) would give the government the right to break up monopolies that constitute 50 percent of a market and to make it easier for foreigners to invest.
And finally, the really big prize: reform of the nationalized oil sector. This is the third rail of Mexican politics after Salinas in the late 1980s reformed the communal land system. Peña Nieto leads a party that for decades led with the cry "the oil is ours!" as it nationalized and ran the industry. While the state hasn't run the industry into the ground as Chavez did, it has never lived up to its potential as a key funder of the government and for the last eight years has seen its production capacity drop. The problems stem largely from keeping significant foreign investment and technology out of the industry. The president means to change all that and got a good start at it by getting his party to vote in favor of the reform that now moves to Congress.
While it is unlikely that the leftist parties will support Peña Nieto's reforms -- and certainly not the oil industry reform -- the center-right PAN should and supporters of Mexico, free trade and the free market definitely should. U.S. policy should be to congratulate Peña Nieto and his party and to encourage Mexico to open itself further by these reforms. These are hopeful days for Mexico.
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In the months before the latest round of P5+1 negotiations in Almaty, many analysts had been urging the United States to adopt what became known as a "more for more" approach. That is, offer Iran more relief from sanctions in exchange for more nuclear concessions by Tehran.
It is now evident that Washington instead adopted a "more for less" strategy. More relief from sanctions was indeed offered (according to reports -- the U.S. terms have not been made available for public scrutiny), but in exchange for fewer, not more, concessions by Iran. In particular, the P5+1 has dropped its previous demand that Iran shutter its second enrichment facility at Fordow.
Even discounting the fact that the P5+1 appears to be negotiating with itself -- Iran did not respond to the P5+1's last offer and by all accounts made no formal response to the new offer -- the group's approach to negotiating is flawed. To understand why, one must consider the underlying dynamics of negotiations (for a longer version of this analysis, see this article I co-authored with Prof. Jim Sebenius in the latest issue of International Security).
Success in any negotiation depends on the existence of a "zone of possible agreement" (ZOPA) -- in other words, a range of possible outcomes which both sides judge to be better than not making a deal at all. To use a simple example, if the seller of a house will accept a minimum of $200,000, and a prospective buyer will offer at most $250,000, the ZOPA is between those two figures -- $200,000 to $250,000. The existence of a ZOPA does not guarantee that a deal will be made -- there are still plenty of obstacles to reaching agreement -- but it does mean that a deal is at least possible. If there is no ZOPA, then even the most skilled negotiator will be unable to broker a deal.
In the P5+1 negotiations, analysts have frequently sought to blame the long stalemate between the parties on mistrust, miscommunication, or other tactical matters. But in fact the underlying cause of the talks' failure to produce an outcome has more likely been that no ZOPA was present -- the least Iran would accept was a far more expansive nuclear program than the U.S. and its allies could tolerate, rendering the discussions futile.
Faced with the absence of a ZOPA, there are three ways to create one. First, by exerting pressure that imposes upon the targeted side an additional cost associated with failing to reach an agreement. To return to the home-buying example above, if the seller is moving and has another house under contract for which he requires the proceeds from the sale of his current home, the costs of failing to make a deal rise. This should cause him to reconsider his bottom line, and perhaps accept a less generous offer than he would have previously. While the stakes in a nuclear negotiation are much higher, the principle behind sanctions and other forms of pressure are the same -- they raise the cost of failing to make a deal and incentivize the targeted side to reconsider its negotiating position.
The second way a ZOPA can be created is through incentives or deal sweeteners. Just as home-sellers might offer to help with financing or even to throw in a new car or a vacation to motivate prospective buyers, the P5+1 has offered Iran a range of incentives to motivate it to compromise, from assistance with civil nuclear power to science and technology cooperation. In principle, such incentives improve the value of an agreement and thus pry open a ZOPA that much more.
The P5+1 has tried both of these avenues for creating a ZOPA, though undoubtedly has recently focused far more on pressure than on incentives. These efforts, over the course of many years, have nevertheless foundered, likely because the Iranian regime values a potential nuclear weapons capability -- and the prestige and security that it could bring -- far more than even the oil exports and economic opportunity it has sacrificed to pursue it, and certainly more than Western incentives that Iranian officials have previously characterized as a pittance.
There is, however, a third way to open up a ZOPA in negotiations -- to change one's own bottom line. The temptation to do so will be familiar to anyone who has been involved in a negotiation, during which the impetus to make a deal for its own sake can override previous calculations of one's interests. This appears to have been the P5+1's approach in the Almaty round -- faced with Iranian intransigence, the group decided to accept what it had previously declared unacceptable, namely the Fordow enrichment facility. The existence of this facility had been secret until it was revealed with much fanfare by President Obama, French President Sarkozy, and British Prime Minister Brown in a 2009 press conference, at which they described Fordow as "a direct challenge to the basic compact at the center of the non-proliferation regime."
Sometimes a negotiating party revises his bottom line because of pressures or incentives served up by the other side. Sometimes it is done unilaterally in pursuit of a deal or as a result of reconsidering whether one can really stomach the consequences of failing to reach a deal, which may now be the case with the P5+1.
There are good reasons, however, to avoid unilateral changes in one's bottom line. First and foremost, there were presumably good reasons for staking out that bottom line in the first place. This is certainly true regarding the P5+1's previous insistence that Fordow be dismantled. This facility, more than any other element of Iran's nuclear program, offers Iran a clear path to a nuclear weapons capability, as it is buried deep underground and hardened against aerial attack. Allowing Iran to maintain centrifuge cascades there -- even under IAEA seal -- means that they retain the option to make a nuclear weapon.
Second, negotiations are about perceptions, and continual, incremental shifts in one's bottom line can convey to the party across the table that your "true" bottom line has yet to be reached. In other words, Iran may be excused for thinking that if only they hold out longer against international pressure the demand that they suspend enrichment at Fordow or that they cap enrichment at 20 percent, may fall by the wayside just as the demands for shuttering Fordow, suspending enrichment altogether, and refraining from operating centrifuges have in the past.
Iran may thus misperceive the size and scope of a ZOPA, and may be willing to wait a long time to secure the best possible outcome, having taken eight years to extract the Fordow concession from Washington. In effect, this means undoing whatever progress was achieved through sanctions and incentives in opening a ZOPA by conveying a (hopefully) false impression of the P5+1's own flexibility and bottom line.
Most ominously for the P5+1, it is possible that no ZOPA will ever be opened in the Iran nuclear negotiations because the Iranian regime cannot brook the idea of any compromise with the United States, enmity or "resistance" toward which was a guiding principle of the regime's founding ideology. If this is the case, Tehran will simply pocket the concessions offered by the P5+1, and Fordow will be lent legitimacy just as the October 2009 "TRR deal" lent legitimacy to Iran's low-level uranium enrichment activities. In this case, the U.S. and its allies may find themselves in the unenviable position of advocating a military strike on facilities that they have now declared no longer outside the bounds of international law, but tolerable under the right conditions.
STANISLAV FILIPPOV/AFP/Getty Images
For national security conservatives, last week's State of the Union address was something of a wasteland. On the most pressing challenges facing the nation -- Iranian and North Korean nukes, Syria's meltdown, the war in Afghanistan, Al Qaeda's metastasization, the looming disaster of defense sequestration -- we were treated to a heaping portion of presidential mush, platitudes, and happy talk largely detached from the urgency of the historical moment. The overall effect will surely reinforce a dangerous perception that has increasingly taken root among friend and foe alike: America is waning. The world may be unraveling, but as far as President Obama is concerned, it's really not our problem. U.S. leadership is closed for the season. We're busy nation building at home.
Dismal as it was, there was a section of the president's address that may hold unexpected promise. Though wrapped in a bright green bow of climate change, Obama's discussion of energy could have important national security consequences. Of particular note was his embrace of an energy security trust fund. The proposal is the brainchild of an organization called Securing America's Future Energy (SAFE) and its Energy Security Leadership Council (ESLC) -- the "nonpartisan coalition of CEOs and retired generals and admirals" that the president highlighted in his speech.
In a report issued last December, SAFE and the ESLC called for the establishment of an energy security trust that would be funded by royalties derived from expanded drilling for oil and gas on federal lands. The trust would have one purpose only: supporting R&D on technologies designed to break oil's stranglehold over America's transportation sector, which accounts for about 70 percent of overall U.S. consumption.
Importantly, the underlying motive behind the SAFE/ESLC proposal had nothing to do with climate change and everything to do with national security and the country's economic health. Its authors properly see America's dependence on oil as a major strategic vulnerability. Even taking into account today's revolution in North American energy production, the United States for the foreseeable future will remain mired in a global petroleum market characterized by high and volatile prices, domination by an oftentimes hostile cartel, and the constant threat of disruption by geopolitical events in the world's most unstable regions. While convinced that America's current oil and gas boom must be fully exploited for the huge economic benefits it promises, SAFE and the ESLC also believe it must be leveraged for the long-term objective of breaking our dependence on oil once and for all -- thereby achieving true energy security and a measure of strategic flexibility that U.S. foreign policy has not known for decades.
National security conservatives should be sympathetic to the effort. As I've recounted elsewhere, while the idea of targeting Iranian oil sales as a means of pressuring its nuclear program has been around since at least 2007, the trigger on such sanctions wasn't pulled until 2012. For almost five years, both the Bush and Obama administrations were deterred from taking aggressive action due to fears that removing large quantities of Iranian crude from the market might produce a devastating price shock that would inflict major harm on the global economy.
That's five crucial years that were largely frittered away while Iran was allowed to earn hundreds of billions of dollars in revenue, dramatically enhance its enrichment capacity, and accumulate a stockpile of enriched uranium that with further processing could be used to build a handful of nuclear bombs. Five crucial years during which the pursuit of America's most pressing national security priority -- stopping Iran from acquiring nuclear weapons -- was dangerously constrained by our vulnerability to global oil markets. If that's not an intolerable situation for the world's leading nation to be in, I'm not sure what is. If there's a realistic strategy for doing something to mitigate it, we damn well should get started.
Equally worth noting, however, is the fact that when oil sanctions were finally imposed on Iran last year -- cutting Iranian exports by up to a million barrels per day -- a major disruption to global markets was successfully avoided in no small measure because of corresponding increases in oil production from the United States. As the race to stop Iran's nuclear program intensifies in coming months and further steps to curtail Iranian exports are contemplated -- perhaps removing as much as another 1.5 million barrels per day from the world market -- continued growth in U.S. production will only become more vital.
Now that President Obama has sought to co-opt the ESLC's CEOs, generals, and admirals for his purposes, it's vital to keep in mind the details of what exactly their energy security trust entails. Perhaps most importantly, the ESLC proposed that money for the Trust should come from new drilling in currently inaccessible federal lands and waters -- specifically to include the Pacific, Atlantic and eastern Gulf of Mexico areas of the Outer Continental Shelf (OCS), as well as the Arctic National Wildlife Refuge (ANWR). Moreover, the funds should be drawn from royalties that oil companies already pay as a matter of standard operating procedure when granted drilling rights in areas owned by the federal government. More pointedly, the trust as envisioned by SAFE and ESLC, explicitly ruled out the leveling of any new fees or taxes -- carbon or otherwise -- on oil and gas production. Finally, it's important to note that the money that would be diverted to the trust represents but a small fraction -- much less than 10 percent -- of the total new royalties that would fill federal coffers by opening the designated areas to drilling.
Perhaps not surprisingly, this isn't quite the Obama administration's vision for the Trust -- at least not yet. Most importantly, the administration is proposing that the money should be raised from royalties on existing production rather than from new production in the OCS and ANWR.
While Republicans should see the trust as an idea worth exploring and engage with Obama accordingly, they should hold fast to the ESLC's actual recommendation that explicitly links the trust to the opening of federal areas that were previously off limits. If the president wants to cloak himself in a proposal that "a nonpartisan coalition of CEOs and retired generals and admirals can get behind," Republicans should insist that he at least remain faithful to that proposal's core content.
The weight of the argument certainly favors Republicans. Economically, expanding oil production will serve as a huge boon to a still faltering U.S. economy. Strategically, it can play a vital role in stabilizing nervous global markets, especially in light of the looming showdown over Iran's nuclear weapons program. And politically, the reality is that no deal on an energy security trust is likely to get done unless Republicans get something significant on expanded drilling. Addressing that central pillar in the GOP's energy platform is probably an essential trade-off if Republicans are expected to overcome their deep-seated skepticism and go along with yet more funding for the Democrats' favorite hobby horse of green energy research.
Of course, it was the prospect of a win-win compromise that represented the genius of the SAFE/ESLC proposal in the first place. Republicans get expanded drilling. Democrats get more money for green energy. And in a single package, the sometimes competing goals of economic growth, reducing oil dependence, and lowering carbon emissions could all be addressed in a reasonable way. Something for everyone. That's the basis for broad consensus on a bipartisan energy deal that might actually do the country considerable good. If President Obama turns out to be truly serious about it, Republicans should be prepared to meet him half way.
One final note: For any Washington think tank, having the president of the United States specifically reference your organization in a State of the Union address and endorse one of its policy recommendations is the equivalent of hitting the jackpot. Major kudos to SAFE, an organization that I work with in an advisory capacity. Its success is a great reminder of the extraordinarily important contribution that privately funded non-profit research institutions can make to U.S. policy and the advancement of American interests.
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In a recent remark that has stoked considerable controversy, Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey said that it is. Dempsey underscored the importance of this assertion when he said that it was based on this conclusion -- that the regime is a "rational actor" -- that he felt the current U.S. approach to Iran "is the most prudent path."
To determine whether Gen. Dempsey is right or wrong, it is important to understand what it means for a government to act rationally. It does not necessarily imply that the government sees the world the way we do, or makes the decisions we would make. Simply put, there are two essential criteria for rationality -- first, that decisions are arrived at through a process of logical reasoning; second, that the decisions made are the best ones given the choices available.
Most discussions of whether the Iranian regime is rational focus on the first criterion. Does the regime make its choices by weighing costs and benefits, or through a capricious process guided by whim and claims of divine revelation? The U.S. intelligence community believes that it is the former: for all of the regime's unhinged rhetoric, the regime is calculating in its decisionmaking. The 2007 National Intelligence Estimate on Iran's nuclear program puts it this way: "Tehran's decisions are guided by a cost-benefit approach rather than a rush to a weapon irrespective of the political, economic, and military costs."
However, this conclusion raises a critical question -- what does the Iranian regime see as costly, and what does it see as beneficial?
This leads to the second criterion for rationality: a rational actor makes the best decision given the choices available. But "best" according to whose interests, and whose values? Whether an action is costly or beneficial, and thus whether a decision is best, depends vitally on the answers to these questions. Our own domestic political experience -- witness the Democrat-Republican divide over the national debt -- demonstrates that two rational actors, faced with the same sets of facts and circumstances but holding different interests, philosophies, or values, can reach very different conclusions about what to do.
So for a conclusion that the Iranian regime is rational to be useful in predicting its behavior -- not to mention making and judging our own policy -- we must assess how the regime perceives its interests. Otherwise the "costs" we impose may not be viewed as costly by the regime, and the "benefits" we offer may not be seen as beneficial.
All indications are that the regime values its own survival above all. This likely fuels its drive to obtain a nuclear weapon, which it may see as a guarantee against external foes. To the extent the regime defines its interests parochially rather than as national interests, it may also discount the economic suffering of the Iranian people except to the extent it leads to political turmoil. Thus, to be perceived as truly "costly" by the regime, any sanctions or other measures imposed or threatened by the U.S. and our allies must place at risk the regime's interests, including its prospects for survival. What's more, they must threaten those interests so much that the regime is willing to sacrifice something it apparently values greatly -- a nuclear weapon.
Likewise, any benefit offered by the U.S. and our allies, if it is to affect the regime's calculus, must be seen by the regime as advancing its interests. Many things the U.S. sees as "carrots" -- for example, free trade or normal diplomatic relations -- may in fact be seen as threatening to an authoritarian regime which is leery of the West. Conversely, what the regime would see as beneficial -- for example, assurances that the U.S. would cease its support for human rights or democracy in Iran -- we are unlikely to be willing to offer.
There are two other important points to consider about how the regime decides which option facing it is best. First, we must be aware that there are other costs and benefits at play than simply the ones we generate through sanctions or diplomatic appeals. Individuals in the regime face their own incentives -- for example personal wealth generated in the black markets that sanctions give rise to -- as well as disincentives -- for example the possibility of ending up imprisoned or worse for too vocally bucking the regime's line.
Second, we must also be aware that the regime likely lacks complete information or anything close to it. This is where the assumption that Iran acts rationally runs into the most trouble. Decisions in Iran are made by one man -- Ali Khamenei. By all accounts, he has not traveled outside Iran since becoming Supreme Leader in 1989, is likely insulated by his aides from bad news or criticism, and depends on an increasingly narrow and homogenous power base which may not expose him to alternative opinions. One is unlikely to make a good decision if ill-informed or unaware of all the options. Nor can the regime make accurate judgments about U.S. intentions if we do not clearly communicate our policies or red lines.
There are indeed examples that suggest rational cost-benefit decisionmaking by the Iranian regime, including the one cited in the 2007 NIE -- the regime's apparent decision to suspend its nuclear "weaponization" research in 2003 following the U.S. invasion of Iraq. But other Iranian actions seem untethered from cost-benefit considerations. For example, why would Iran try to blow up a restaurant in Washington in an effort to assassinate the Saudi ambassador, when such an action could spark a war that Iran would surely lose? Or, why would Iran not make a show of cooperation with the IAEA delegation that recently visited Iran, if for no other reason than to delay an Israeli military strike that seems increasingly likely?
More importantly, even if we were to conclude that the Iranian regime is a rational actor, we would not necessarily be able to predict its decisions or behavior. We have a poor understanding of how the regime sees its interests, what it perceives as costly and beneficial, what information is available to its leader, and therefore what it would consider the best decision in a given circumstance. And of course, even otherwise rational actors are prone to the occasional -- and sometimes very consequential -- irrational decision. And in an authoritarian state with an aging and increasingly isolated leader, this risk goes up exponentially.
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Last October, Ambassador Roger Noriega, former Assistant Secretary of State for the Western Hemisphere during the George W. Bush Administration, exposed Hugo Chávez's efforts to aid and abet Iran's illegal nuclear weapons program, including its efforts to obtain strategic minerals such as uranium and to evade international sanctions.
Documentary evidence now suggests that Hugo Chavez's junior partner in Ecuador, Rafael Correa, is apparently forging his own dangerous alliance with the Mahmoud Ahmadinejad regime, raising troubling questions about whether Iran continues to expand its global efforts to obtain uranium and other strategic minerals that are critical to Teheran's rogue nuclear program.
According to sensitive official documents provided to me by knowledgeable sources in Ecuador and other countries and published here for the first time, Iran and Ecuador have concluded a $30 million deal to conduct joint mining projects in Ecuador that appears to lay the groundwork for future extractive activities. The deal, which was apparently finalized in December 2009, "expresses the interest of the President of the Republic [of Ecuador] and the Ministry of Mines and Petroleum to boost closer and mutually beneficial relations with the Islamic Republic of Iran on a variety of fronts, among them mining and geology."
The deal calls for the establishment of a jointly run Chemical-Geotechnical-Metallurgical Research Center in Ecuador [Laboratorio Químico-Geotécnico-Metalurgico] and "to jointly implement a comprehensive study and topographic and cartographic analysis of [Ecuadorean territory]."
What is most concerning about developing Ecuadorean-Iranian ties in the mining sector is that, like Venezuela, Ecuador is known to possess deposits of uranium. In August 2009, Russia and Ecuador signed a nuclear agreement that included joint geological research and development of uranium fields, as well as building nuclear power plants and research reactors. In March 2009, the International Atomic Energy Agency also unveiled plans to help Ecuador explore for uranium and study the possibility of developing nuclear energy for peaceful purposes.
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By John Hannah
Are the Saudis prepared to constrain oil prices to weaken Iran? It's an intriguing possibility that, if implemented, could have major implications for U.S.-led efforts to curb the Islamic Republic's nuclear program.
In no small part because of a weakening dollar, oil prices have risen for most of the past year from a low of close to $30 per barrel to around $82 per barrel last week. But since then, prices have been slowly sliding back, dipping below $77 yesterday. Most media attributed Thursday's decline to a report that U.S. oil inventories had increased higher than expected, and that U.S. consumers continued to reduce energy use in a still sluggish economy. No doubt true. But other factors have been at play as well.
Specifically, the near-record stockpiles of oil that currently exist not only in the United States, but across the developed world, have been made possible by the fact that OPEC has been increasing output at the fastest pace in two years. Earlier this week, Bloomberg reported that the cartel has boosted production more than a million barrels a day since March -- despite the worst global recession since World War II. OPEC's largest producer, the Saudis, have helped lead the way, increasing exports four out of the past six months. Saudi output has increased almost 300,000 barrels per day since earlier this year. Overall OPEC production reached its highest level in 10 months in October.
The Saudis have said that $75 per barrel is an appropriate target price. This week, a Saudi government advisor told the press that, at over $80 per barrel, prices had reached "the high end of our range" and any further rise could prompt the Kingdom to further tap its unused capacity -- which currently stands at approximately 4 million barrels a day.
The Saudis have publicly explained their effort to moderate prices as a function of their desire to protect a fragile global economy. But it's hard not to notice that the Saudi strategy also has the side benefit of pinching Iran. Specifically, while the Saudis in 2009 require an average oil price of about $51 a barrel to cover their budget, Iran needs an average price in excess of $90. If the price holds steady at the Saudi-designated range of $70-$80 for the rest of this year, the Saudi treasury could come in with a slight surplus. The Iranians, by contrast, have reportedly been forced to consider phasing out food and energy subsidies in an attempt to battle their looming fiscal problems.
Of course, reducing subsidies on essential commodities is almost always political dynamite -- especially in a place like Iran, where the economy is already in a shambles, and where millions of Iranians have taken to the streets since the fraudulent June 12 elections to make known their hatred of the current regime. The fact is that the Islamic Republic is desperate for increased cash flow that could be used to buy off as many of its disaffected citizens as possible and cover up its gross economic mismanagement. Saudi determination to limit any price spike -- for whatever reason -- is clearly an impediment.
With daily exports in the range of 2.5 million barrels per day, Iran stands to lose about $900 million annually from every one dollar drop in the price of oil. With excess capacity of 4 million barrels per day, the Saudis are clearly in position to go much farther than they have to date in squeezing Iran if they so choose. An aggressive Saudi effort to depress oil prices well below the current $75 target could prove extremely harmful to Iran's already reeling economy and tumultuous political situation. Almost certainly, such an effort could inflict as much pain on the Iranian regime as many of the sanctions currently being discussed by the United States and its international partners -- and, given Russian and Chinese reluctance to get tough with Iran, would almost certainly be quicker and easier to implement.
Would the Saudis really be prepared to play hardball with Iran in this way? In the past, the answer has usually been no. Taking big risks to offend more powerful neighbors has generally not been the Saudi way. A transparent effort to inflict major damage on the Iranian economy would certainly incur the Islamic Republic's wrath. The Saudis no doubt recall that a similar charge about depressing oil prices led Saddam Hussein to invade Kuwait in 1990. Even if an Iranian military attack is not likely in the cards, the Saudis have good reason to fear the kind of mischief Iran could cause within the Kingdom -- especially among the large, potentially restive Shiite population that is concentrated in its oil-rich Eastern Province.
That said, there's no doubt that Saudi King Abdullah views Iran -- and the near-term prospect of its acquiring nuclear weapons -- as nothing short of an existential threat to the House of Saud and its preeminent position in the Islamic world. There's at least some chance that he may be prepared to consider doing things now that in the past would have been unthinkable in order to prevent his worst nightmare from coming to pass -- especially if he's provided sufficient support, encouragement and guarantees from the United States and our major European allies.
In this regard, the current crisis in Yemen, in which Saudi forces have been drawn into combat on their southern border against Iranian-backed Shiite rebels, has only upped the ante. As with almost everything Iran does, Abdullah no doubt perceives the Islamic Republic's involvement in Yemen as the latest maneuver in a grand strategy whose ultimate target is the Kingdom itself and control of the Islamic holy sites of Mecca and Medina.
The big question is how far the Saudis are willing to go in drawing on their oil power to really do something about it -- something, that is, that actually stands a chance of either 1) compelling the Iranian regime to fundamentally re-calculate its nuclear ambitions, or 2) speeding the regime's unraveling at the hands of its already seething population. Of course, encouraging the Saudis to use oil as a political weapon is not without its downside risks; after all, the United States was on the receiving end of just such a Saudi gambit during the oil embargo that followed the 1973 Arab-Israeli war. But given the enormity of the stakes now at play vis a vis Iran -- both for the Kingdom and for the United States -- it's clearly an option that at least deserves serious consideration. One hopes that it's already the subject of intense consultations between Washington and Riyadh, preferably at the highest levels. Should the United States conclude that the potential benefits outweigh the risks, it will need to muster every instrument at its disposal to steel the Saudi king to take unprecedented measures to face down Iran's unprecedented challenge.
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By Christian Brose
Admittedly, I'm no climate science expert, but I found this piece from Jim Manzi pretty darn persuasive as to why Waxman-Markey -- the American Clean Energy and Security Act -- is a bad bill. It's well worth your time in light of Congress' vote on the bill tomorrow.
By Philip Zelikow
As announced by Igor Sechin on leaving Beijing, it appears that the Chinese government will loan $25 billion to two giant energy companies controlled by the Russian government. In exchange, the Russian government has pledged to supply 15 million tons of oil to China per year for the next 20 years.
This appears, roughly, to be a pledge of about 2.2 billion barrels of oil, over the next 20 years, in exchange for $25 billion now. Depending on how one calculates the cumulative value of present money, this sounds like a deal worth something in the neighborhood of $20 a barrel. And this would lock in at least about 5 percent of all Russian oil exports just for the Chinese market, at such an effective price. I invite others to share information that contradict or elaborate on these apparent estimates.
If the United States had used credit to obtain such a long-term commitment of oil on concessionary terms from a debtor (say, one in the Arab world), some of my academic colleagues would be calling this an illustration of informal empire. For anyone with memories of Chinese history of, say, the 1890s (specifically the history of Russian finance in Manchuria, and the Chinese Eastern Railway), this announcement has to bring a smile -- at least a smile to some folks in China, who know this history very well indeed.
If these numbers are close to being accurate, this deal is a revealing glimpse into the current state of Russia's political economy. Again, though, I invite others to refine these crude, initial guesstimates.
By Philip Zelikow
In a set of suggestions for a global perspective on fiscal policy in the crisis, I offered some suggestions about spending and some suggestions about taxes. On taxes, payroll tax cuts (not a one-off rebate) could be coupled with some kind of carbon tax. I noted that Lawrence Lindsay and Charles Krauthammer had made similar points.
The payroll tax cut gets a quick demand boost by providing a lasting increment in income to folks most likely to spend the extra money. A carbon tax meanwhile reinforces our global credibility on fiscal sustainability (essential for the success of the stimulus). Such a tax could have many other positive macroeconomic effects that could complement an overall spur of aggregate demand: e.g., reduce the long-term current account deficit, dampen reliance on inflation-prone commodities (oil prices are likely to spike again as growth returns), and stimulate R&D on energy productive technologies where U.S. firms may gain a global edge. And then there are the energy and environmental arguments.
The political window for bipartisan policy action has just widened some more. Steve Coll helpfully called attention to an important speech last week by Rex Tillerson, chairman and CEO of ExxonMobil. Tillerson's topic was global energy security. He was not speaking off the cuff. This was a carefully prepared address from the head of one of the largest energy companies in the world. The following passage repays especially close study and is worth quoting in full:
As a businessman it is hard to speak favorably about any new tax. But a carbon tax strikes me as a more direct, a more transparent, and a more effective approach. It avoids the costs and complexity of having to build a new market for securities traders or the necessity of adding a new layer of regulators and administrators to police companies and consumers. And a carbon tax can be more easily implemented. It could be levied under the current tax code without requiring significant new infrastructure or enforcement bureaucracies.
A carbon tax is also the most efficient means of reflecting the cost of carbon in all economic decisions -- from investments made by companies to fuel their requirements to the product choices made by consumers.
In addition, such a tax should be made revenue neutral. In other words, the size of government need not increase due to the imposition of a carbon tax. There should be reductions or changes to other taxes -- such as income or excise taxes -- to offset the impacts of the carbon tax on the economy.
Finally, there is another potential advantage to the direct-tax, market-cost approach. A carbon tax may be better suited for setting a uniform standard to hold all nations accountable. This last point is important! Given the global nature of the challenge, and the fact that the economic growth in developing economies will account for a significant portion of future greenhouse-gas emission increases, policy options must encourage and support global engagement.
This is not the occasion for examining the cap-and-trade issues in detail. But, in short, I think Tillerson is right. The current UN and EU systems for international offsets and globalization of carbon credits are broken, yet such structures are essential to make cap-and-trade work globally. Senator Bob Corker's critiques last year had much merit.
Yet doing nothing is not a good answer either, substantively or politically. Hence I welcome Tillerson's move to open up political space for an approach that may appeal to traditional Republicans and for Democrats willing to join in a bipartisan approach coupled, for stimulus, to a durable cut in payroll taxes.
Shadow Government is a blog about U.S. foreign policy under the Obama administration, written by experienced policy makers from the loyal opposition and curated by Peter D. Feaver and William Inboden.