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.
ALFREDO ESTRELLA/AFP/Getty Images
Incredibly, territorial disputes between China and its neighbors over uninhabited islands threaten to become a flashpoint threatening peace in East Asia. While tensions have since cooled a bit, the Economist recently warned that "China and Japan are sliding towards war." Last August, large, angry, and violent protests broke out in dozens of Chinese cities against a decision by the Japanese government to buy several of the disputed islands (called Senkaku in Japan and Diaoyu in China) from a Japanese private citizen. Again this month, China sortied aircraft and ships near the islands, and Japan scrambled fighters in response.
Moreover, this is not China's only maritime territorial dispute. In the South China Sea, China, Brunei, Malaysia, the Philippines, and Vietnam pursue conflicting claims among the uninhabited shoals, islets, and atolls comprising Scarborough Shoal and the Paracel and Spratly Islands (including Mishief Reef). This is not a bloodless issue. In 1988, more than 70 Vietnamese sailors died in a naval clash with China near Johnson South Reef. Since then, China and the ASEAN states issued a 2002 joint declaration pledging not to use force to resolve their disputes and to avoid actions that would escalate them. However, no progress has been made toward settling the underlying disagreements, and the declaration was violated almost immediately.
Because of the United States's bilateral defense treaties with Japan and the Philippines, we could be drawn into a conflict we do not seek. Moreover, we have an enormous stake in continued economic growth and prosperity in East Asia, which depends on peace.
What is behind the strong passions surrounding groups of uninhibited rocks whose total land mass is less than five square miles? Fishing rights are at stake -- and a cod war is not unprecedented -- but it would hardly seem worth the risk between states whose annual trade stands at three quarters of a trillion dollars.
Oil and gas wealth is a stronger motivation. No one yet knows the extent of the resources buried beneath the East and South China Seas (in part because their ownership remains in dispute), but if Europe's North Sea serves as a fair precedent, they could be worth trillions of dollars.
Finally, nationalism compounds the problem. Unlike Europe, in East Asia, the wounds of World War II remain unhealed. Diplomatic rows or even riots are periodically caused by disputes over history text books or visits by politicians to shrines for dead military leaders. Hence, the explosive anger last autumn causing protestors to attack Japanese cars and sushi restaurants, although they were owned by fellow Chinese citizens.
How to head off a potentially catastrophic confrontation? Five ideas will help.
First, all states must recognize that no single state can impose a solution, and every state exercises effective veto over exploitation of energy resources. A deep water oil rig can cost up to $600 million, yet can be sunk by a $20 million patrol boat. No commercial oil company, investor, or insurer would risk such a costly and vulnerable piece of equipment in a contested region where hostilities might erupt. Thus, East Asian nations effectively have a choice between continuing to wrangle over natural resources with no production, or reaching an agreement to divide the resources and jointly benefit from them.
Second, all states in the region would do well to bear in mind that despite occasional nationalistic rhetoric, this is an economic question. These barren islands are not like the West Bank or the Balkans, where centuries of human history and intermingled populations complicate the division of land. No country's national heritage is at stake in this question -- only economic benefits that cannot be exploited in the absence of an agreement. Therefore, all governments would do well to tone down their rhetoric about national rights and core interests in discussing the disputed maritime territories. Inflaming nationalist tendencies among citizens will make solving the problem more difficult, not less so.
Third, the disputants should accept that these matters cannot be settled solely by legal arguments or in court. Claims and counterclaims, along with contradictory old maps and sea charts, abound. Asserting that one interpretation of proper title to a territory is "indisputable" is pointless when other nations claim an equally "indisputable" title. Disagreements among nation states -- except in narrowly defined areas in which they offer prior agreement to accept external dispute resolution, e.g. the World Trade Organization -- are political matters and must be resolved by diplomacy and agreement, though perhaps aided by legal tools.
Fourth, in contemplating ways to resolve this matter, the states involved should look to earlier precedents. In the late 1960s and early 1970s, Denmark, Germany, and the Netherlands used a combination of a ruling by the International Court of Justice and subsequent negotiations to resolve conflicting claims to North Sea continental shelf resources. The parties entered the negotiations realizing that no single state could claim the lion's share of the benefits, and that resolving the matter to allow oil exploration to move ahead was in all parties' interests.
Harvard Professor Richard N. Cooper, observes that the neutral zone shared by Kuwait and Saudi Arabia may also serve as a precedent for resolving the East Asia maritime territorial disputes. Without resolving their disputed border, the two countries agreed to share the wealth from oil produced in the zone, which was created in 1922. Today, over 650,000 barrels per day are pumped from the region to both countries' great benefit.
Fifth, the countries of East Asia should begin to heal the wounds of World War II. For example, China, Japan, South Korea, Russia, and the United States could agree on principles to guide their interaction, including, among other things, peaceful resolution of territorial disputes and joint development and management of regional resources (such as fisheries), and follow up with separate annual meetings of foreign, economic, and defense ministers to implement them.
Military conflict over the maritime territorial disputes in the East and South China Seas would be a senseless waste. China may see a tactical advantage in waiting to address these issues as its economic and military power grows, but allowing the disputes to fester risks the outbreak of war and squanders the opportunity to develop potentially rich natural resources. It also prevents nations in the region from working effectively together to solve other pressing problems. The bright prospects for peace and prosperity in East Asia should not be allowed to founder on Mischief Reef.
Energy issues have figured prominently in Governor Romney's campaign. Achieving "North American energy independence" has been a central pillar of the 5-point economic plan that he's been touting -- including at last week's first presidential debate. A bit surprising, then, that in the governor's October 8th foreign policy speech, with its heavy emphasis on the Middle East, energy didn't even merit a mention.
Let's face it. Ensuring the free flow of oil has been the main driver of American strategy in the Middle East for decades. Our nation's economic wellbeing depends on a well-supplied global oil market, and countries in the Middle East account for a significant portion of the world's production. The cartel they dominate, OPEC, today controls between 30 and 40 percent of the international market while possessing the vast majority of the world's proven reserves.
As a result, America and the global economy are incredibly vulnerable to what happens in the region. Every U.S. recession but one since World War II has been preceded by an oil price shock. And in the majority of cases, those shocks have been triggered by events originating in the Middle East. Think the 1973 Arab oil embargo, the 1979 Iranian revolution, or Saddam's 1991 invasion of Kuwait.
But you don't have to go back that far to appreciate the problem we face. Last year's revolution in Libya, along with broader unrest across the Arab world, sent oil prices skyrocketing. Ditto Iran's threats in January to blockade the Straits of Hormuz. And concern about an eventual war with Iran continue to impose a significant risk premium on global prices, a reality Americans confront every day at the gas pump. Even short of tipping the economy back into recession, the effects of this kind of price volatility are highly negative: our trade deficit rises; disposable income and consumer spending decline; and economic growth takes a significant hit.
Concerns about oil prices have often badly distorted U.S. policy toward the Middle East. The most acute example is the effort to pressure Iran to give up its nuclear weapons ambitions. U.S. policymakers have long known that the most effective step we could take against the mullahs is to cut off Iran's oil sales and starve them of the enormous revenues they need to keep their repressive regime afloat. Yet for years, first President Bush and then President Obama fiercely resisted sanctioning the Islamic Republic's petroleum sector. The reason? Because they quite legitimately feared that removing Iranian crude from the market would disrupt global supplies and trigger a devastating price shock. Only in late 2011, with Iran rapidly approaching the nuclear threshold, did Congress finally steamroll the administration by forcing through legislation that targeted Iranian oil.
Even then, implementation of the sanctions was watered down. The administration was given a six-month grace period to assess the possible impact that sanctions would have on the global oil market. And rather than demanding that customers of Iranian oil end their purchases entirely, countries were granted waivers from U.S. sanctions if they only "significantly reduced" their buy -- which in practice required them to cut back between 15 and 20 percent. While the U.S. effort, together with complimentary EU sanctions, have no doubt had a major effect on Iran's economy -- reducing its oil exports by as much as 50 percent -- a full embargo would have been far more impactful and the obvious course of action for Washington to pursue if not for the countervailing concern about oil markets. In the meantime, the Iranian regime continues to pocket perhaps $3 billion per month from the million or so barrels of oil that it still exports daily, all the while pressing ahead with its nuclear program.
America doesn't have a higher national security priority than stopping the world's most dangerous regime from going nuclear. And yet the sad reality is that our dependence on oil has for years, and to our great peril, systematically deterred us from fully deploying the most powerful tool in our arsenal -- all-out sanctions on Iran's petroleum sector -- for resolving the crisis peacefully. Not surprisingly, that underlying logic applies in spades when it comes to any discussion about the possible use of force against Iran, where predictions of oil spiking to an economy-crippling $200 per barrel are commonplace.
The fact that our oil vulnerability has put such severe constraints on our freedom-of-maneuver to address the most pressing national security threat we face is deeply troubling. The big question is whether we can do anything about it. Admittedly, history doesn't offer much reason for optimism. For almost 40 years, successive U.S. presidents have promised to tackle the problem with very little to show for it.
Of course, what's different today is that the United States is experiencing an oil and gas boom that promises to transform our energy landscape in very fundamental ways. Thanks to American ingenuity and technology, U.S. production is poised to increase dramatically over the next decade, after years of steep decline. As Governor Romney has correctly emphasized, through close cooperation with democratic allies in Canada and Mexico, the goal of energy self-sufficiency for North America may well be within reach -- an unthinkable prospect just a few years ago, and one whose benefits in terms of job creation and economic growth could be quite profound.
In addition to the potential economic windfall, however, we also need to be thinking hard about how we can best exploit the coming energy boom to really enhance U.S. national security. That's a much more difficult task. The fact is that because there's a global market for oil, Middle East crises are likely to threaten the U.S. economy with major price spikes no matter how much of our own crude we produce. Just look at Canada and England. While both are oil independent, they remain exposed to the same price volatility that currently afflicts the United States. Their economies will be no more insulated than ours if a war with Iran sends the cost of oil through the roof.
It seems that what really needs to be part of the mix is a viable, bipartisan, market-driven strategy for reducing the monopoly that oil has over our transportation sector. If a sensible way could be found to begin moving some significant portion of U.S. cars and trucks to run on cheaper, domestically produced alternative fuels -- natural gas, methanol, electric -- it would largely eliminate the sword of Damocles that Middle Eastern tyrannies like Iran now hold over the West's economic wellbeing and its strategic decision-making. That would put us on the path toward true energy independence, and restore to the United States a degree of flexibility, leverage, and strength to pursue its interests and values abroad, especially in the Middle East, that we have not known for at least a generation.
All much easier said than done, I know -- especially in an environment where energy issues, like the national budget, have become so politically charged. Nevertheless, hope springs eternal. Perhaps once the upcoming election is over, a new administration will be prepared to look seriously at developing a bipartisan, comprehensive energy strategy that both fully exploits America's new oil and gas bonanza while taking meaningful steps to reduce our vulnerability to extortion by hostile, repressive dictatorships in unstable parts of the world.
If it is, one place that a new president should definitely look to mobilize ideas as well as political support is Securing America's Future Energy (an organization that I'm proud to advise), which has brought together an extraordinary group of American business and military leaders to highlight both the economic as well as national security dangers posed by our dependence on oil, and to recommend possible solutions. Co-chaired by Fred Smith, CEO of FedEx and General P.X. Kelley, former commandant of the Marine Corps, the group includes such luminaries as General Jack Keane, former vice chief of the Army; Admiral Dennis Blair, former director of national intelligence; David Steiner, CEO of Waste Management; Herb Kelleher, founder of Southwest Airlines; and John Lehman, former undersecretary of the Navy. A pretty hard-nosed bunch, to be sure, that has decades of experience operating on the front lines of the global economy and national security, and is convinced that America can and must get after this challenge as soon as possible.
For the country's sake, we should all hope that they're right.
An Oval Office Address to the
Nation (OOAN -- to coin a new acronym) is a "big gun" presidential communication
tool -- perhaps only a special address to a joint session of Congress is bigger.
All administrations keep the OOAN powder dry for an emergency, but few
have husbanded it as carefully as has the Obama administration. This will be
the first Obama OOAN, but he has previously conducted at least three addresses
to a joint session of Congress, not counting the annual State of the Union
With the president's polling numbers falling and domestic and international problems mounting, the time is fairly ripe for Obama to deliver his first OOAN. Fairly ripe, but not fully ripe, because the usual peg for an OOAN is missing: either a) A recent tragedy or b) A recent potentially pivotal development in an ongoing challenge or c) an announcement of an abrupt change of course. (Technically, this last one was not an OOAN because it came not from the Oval but from the Library, so it was a LAN.)
By contrast, President Obama will deliver his OOAN: a) on day 57 of a slow motion crisis, that b) has not just had an on-the-ground pivot (on the contrary, the most recent development, a lightning strike igniting a fire on a recovery vessel seems like an almost Biblical piling-on of trouble), and c) apparently without any dramatic change of course to announce.
I could be wrong about a dramatic policy announcement, of course, but I don't think so because the pre-speech spinning by White House advisors has emphasized how President Obama, simply by virtue of giving his first address, can rhetorically deliver a pivot in the story. He will apparently use the address to reinforce some old talking points ("We have been on the job since Day One") that have not sold well and to refocus attention on old energy proposals that have been stuck in Congress. He will make news simply by giving the speech, but it seems unlikely that the news will be about new policies that will produce a pivot in the Gulf or on the shores.
All of this is domestic policy, of course, so why raise it in a blog devoted to foreign policy? Several reasons:
For our country's sake, I hope tonight's OOAN does represent a pivot point in this crisis. Obama has famously risen to the occasion, especially when the occasion is a "big speech." By rolling out their long-saved big gun, the White House has indicated they think this is the President's biggest speech thus far, so he may once again deliver on his promise.
Alex Wong/Getty Images
What does the ongoing BP oil spill imbroglio in the Gulf have to do with the war in Afghanistan? Probably not much, from the vantage point in the United States. But here in London this week, the two issues are being linked in some ways that should be worrisome for the Obama administration.
Two particular stories have featured in headlines in the major U.K. newspapers this week: BP's plummeting share price from President Obama's rhetorical attacks, and the London visit by Secretary Gates and General Petraeus urging a continued strong U.K. troop commitment to the NATO mission in Afghanistan (followed by Prime Minister David Cameron's surprise visit to Afghanistan today). Separate though they may be, the two stories are combining to produce one narrative in the minds of many British citizens: the Obama administration is attacking a pillar of our economy while urging us to sacrifice even more blood and treasure in Afghanistan.
BP of course bears the most blame for the catastrophic spill, as well as responsibility for stopping it and remedying the damage. And in the first few weeks after the rig exploded, there was little sympathy for BP even here in the United Kingdom. Most U.K. media coverage initially focused on the horrific environmental damage being wrought as well as the Obama Administration's apparent insouciance as the oil continued to gush.
But now that attacking BP (or "British Petroleum" as Obama calls it, even though that has not been the company's name since 1998) has emerged as a core tactic in the Obama Administration's scramble to arrest their own falling political fortunes, they risk doing real damage to relations with a key ally and the largest non-U.S. troop contributor to Afghanistan.
As recently as two months ago, BP was Britain's largest company by market cap, and is a core holding of most British pension funds. In other words, it is not just BP executives or investors in the City who take a hit when BP's share price plummets, but also every average Brit who has any type of stake in a retirement fund. Which is most of the country -- many of whom have also grown weary and skeptical of their nation's military role in Afghanistan.
Last week had already demonstrated one unintended consequences of the administration's intensifying campaign against BP: the vocal attacks that drive the share price down also erode billions of dollars in market value and diminishes the resources BP will have available to pay for the damage, clean-up, and compensation. The White House needs to be mindful of not going too far and triggering a second unintended consequence of further eroding British support for their force posture in Afghanistan. Fortunately at the U.K. end, Prime Minister Cameron, at least up to this point, is trying deftly to strike a balance and not further escalate tensions with the United States either over BP or over Afghanistan.
Pursuing a unified grand strategy is always a hard task, but this situation shows even more acutely the challenges of linking domestic and foreign policy such as the Obama administration's National Security Strategy attempts to do. Last week it was American strategic interests in Asia that got short shrift, as Obama cancelled (again) his Australia/Indonesia trip to focus on the BP spill. This week it is the U.S.-U.K. relationship that is suffering, as a beleaguered White House tries to shore up its domestic political standing at the expense of relations with a key ally.
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As he has been telling us for years, Venezuelan autocrat Hugo Chavez's aspiration is to build "21st-century socialism" for his benighted countrymen. He never has told anyone exactly what that meant, but a decade into his rule, it should surprise no one that his 21st-century socialism bears a strong resemblance to the garden-variety 20th century kind, replete with centralization of power, assaults on private property, and intolerance of dissent. The result should surprise no one either: economic decline and increasing domestic discontent.
It is the stuff of a Latin America novel: a country sitting atop some the world's largest reserves of oil -- earning an estimated $1 trillion over the past decade -- plagued by rolling electrical blackouts, water and food shortages, collapsing public services, and a messianic head of state who is unwilling to take his foot off the accelerator.
Chavez is attempting to blunt the impact of lower oil prices and declining oil production, inadequate investment in critical infrastructure, and inept management by devaluating the currency, confiscating private property, and implementing price controls. It's like putting an arsonist in charge of fire control.
Mario Tama/Getty Images
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.
Scott Nelson/KAUST via Getty Images
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.
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.