Is it rational to fear resource war with China a decade or two down the road, when it surpasses the size of the U.S. economy, its appetites surge for metals, elements and energy, and its blue-water navy has grown in capability to secure large swaths of distant sea?
Yes, if you embrace the mainstream conviction that the pace of Chinese growth and call on finite resources are incompatible with consumption patterns in the U.S. and Europe. Under this scenario, the West and China are on a collision course: Starting in the next decade, one or the other must either begin to adapt to much-shrunken expectations, invent an entirely new set of fundamental fuels and high-tech building materials, or simply put up their dukes and fight it out.
But what if a new strain of thinking is correct, and we are entering a world not of fossil fuel scarcity, but of a surprising abundance of oil? The spreaders of this new narrative are tallying up production projections in a slew of new and long-known oil patches around the world -- Canada's oil sands; U.S. shale oil and deepwater Gulf of Mexico; deepwater Brazil; the Equatorial Margin of eastern South America; deepwater Angola; offshore Kenya; the Russian Arctic; and elsewhere (such as the Canary Island, pictured above).
They are suggesting by implication that, if all that pans out, the West and China will not be on the path of a smashup; rather, they will be having a much different conversation, which would center on a question of choice:
Until now, the push for clean-tech has been partly driven by a belief that oil is running out -- we had to develop new sources of energy, and fast, or go back to the forest. Now that there was no impending age of darkness, the U.S., China and others would have to decide on its merits -- do they want a cleaner world, one that is not heating up inexorably and sending seawater over the major cities and swallowing up island nations?
The reason they would have to hold such a conversation is that the corollary of this narrative is a wholesale swamping of clean-tech -- oil prices would probably drop so low as to eliminate the competitive economics of virtually any alternative energy source.
Desiree Martin AFP/Getty Images
To understand the Iranian drama requires dual lenses. To the left are the nuclear talks, in which international negotiator Yukiya Amano has announced a potential breakthrough -- Tehran may agree to serious scrutiny of its nuclear research installations. To the right are Western-led sanctions, an attempt to motivate Iran as regards the left lens by slashing its main source of hard cash -- oil export revenue.
We are focused today on that right lens. But to dispense with the left first, Amano, head of the International Atomic Energy Agency, yesterday publicly announced the potential for a new day with Iran (above left, with Iranian nuclear negotiator Said Jalili). IAEA inspectors might for the first time in a half-decade take a look at all the sites, and interview all the players, that they have sought in order to remove the conclusion that Iran is bent on possessing a game-changing nuclear weapon. Later talks could focus on the end-game, which is elimination of Iran's weapons-grade nuclear material.
This announcement instantly unsettled my antennae. In most processes, announcements coincide with the peak achievement. According to that logic, the peak should be an actual binding agreement. That we get it when the peak is simply anticipated makes me suspicious that something less is forthcoming. Amano, himself a past doubter as to Iran's genuineness, says he perceives real movement this time.
Putting that aside, let's skip to the right lens -- the sanctions. As of July 1, they deny Iran access to the international banking and insurance system, without which it is very, very difficult to conduct a large-scale oil business. This blog has been skeptical that the sanctions will work -- the history of Iraq and South Africa, for example, shows that stubborn nations can work around apparently crippling sanctions. Iran specialists say the evidence is that Tehran is either anticipating or already feeling the pain, hence its presence and attitude at the talks. We are watching.
In an angle missed by everyone else as far as I can tell, the Financial Times' Javier Blas, James Blitz and Geoff Dyer report on Western sanctions tinkering. This is an attempt to address a serious flaw in the sanctions strategy that, if left untended, could seriously boomerang on the international community.
[Update: at Eurasia Group, David Gordon reminds me that their own Greg Priddy and Cliff Kupchan pointed out this problem, and its solution, a week ago at the New York Times a week ago. It is a must-read.]
The flaw involves tanker insurance, which no tanker will go without and risk the potential of billions of dollars in liability should there be an accidental spill or other incident. The tinkering is to waive the sanctions to allow insurance for certain volumes essentially to four countries -- China, India, Japan and South Korea. These are the biggest customers for Iran's 2.2 million barrels a day of oil exports. The last three have agreed to cut back their purchases, but still intend to buy some, which the West actually has encouraged. But the worry is that they won't buy any at all if there is no tanker insurance, or that rogue insurers could step in and offer so much insurance that the sanctions could become meaningless.
You see, in a perfect sanctions world, the punishment is bad for the victim, and does not inconvenience anyone else. However, should too much Iranian oil vanish from the global market, prices could surge, which would be very inconvenient, say, to President Barack Obama, currently a candidate for re-election, not to mention the struggling economies of Europe.
So the idea is to exchange this insurance tinkering -- they are calling it a shipping waiver -- for an Iranian "pledge" not to develop nuclear weapons. The trick is to do this in a way that does not appear weak, since pledges are not enforceable. To check this logic, I queried Daniel Byman, a Middle East analyst and professor at Georgetown University. Byman:
A pledge would be viewed with a lot of suspicion; [it would be] better than nothing, but most would doubt. And Obama could not publicly embrace this politically.
Yet Byman also thinks the story is credible. "Europeans are far more amenable to this than the U.S.," he told me. "It depends what the [Iranian] guarantees are in practice."According to the FT, the U.S. is together with Europe in the shipping waiver idea, the strategy being to lock in the cuts to Iranian exports, and no more. Here is what Citibank's Ed Morse told me about the report:
The shipping waiver is a bone. It enables the original sanctions to go into effect globally but enables those governments who limited the amount of oil being imported to have insurance coverage for that amount of oil. It reduces the impact of the unintended consequences of ancillary sanctions on insurance and makes for smoother relations with allies.
What troubles me is the attempt to be clever. When you try to be perfect in real life, you can end up with some imperfect results. Take our economic history of the last decade.
Hamed Jafarnejad AFP/GettyImages
Florida's anti-Castro activists, along with both presidential candidates, can relax for the time being -- the latest attempt to strike oil in Cuba has failed. If Spain's Repsol had found what it expected underneath the Northbelt Thrust north of Havana, it could have seriously complicated politics in pivotal Florida, which decided the 2000 presidential race. Yet, Cuban oil politics may still be coming to Florida.
Few places in the U.S. are so tethered to the politics of another country as is Florida. Hundreds of thousands of Floridians -- Cuban-Americans -- continue to seethe at the Castro family's survival after a half-decade in power (waving above, President Raul Castro) and they expect their politicians to seethe with them. On the national scale, it is difficult to win Florida's 29 electoral votes if the Cuban-Americans are against you.
Hence the politics of Cuban oil. Estimates are that the Northbelt Thrust contains 6 billion barrels of oil. Repsol tried and failed to find commercial volumes in 2004, but was sure that the industry's vaunted new technology would succeed this second time. If its intuition was right, Repsol would have validated Cuba's aim of becoming the world's next petro-state. That oil would have buttressed the Castro edifice with a big new source of export dollars.
Because of U.S. sanctions, no U.S. technology was used in the drilling. Yet, some quarters predictably would have accused President Obama of allowing the hated Castros to get rich. Both he and presumptive GOP nominee Mitt Romney would have had to find a way to make the anti-Castro folks feel better. What neither would want to say is, "Get a life. It's called the free-enterprise system."
Because of this charged atmosphere, Repsol itself -- which has serious operations in the U.S. as well -- has been forced to lay extremely low, not talking at all publicly about its Cuban operations.
Alas, a few days ago, Repsol said the well was dry.
Yet no one can relax entirely - Malaysia's Petronas is in line to drill next in Cuba's waters, and the results seem likely well before November. Hence, Obama and Romney must keep watching Cuba.
Juan Barreto AFP/Getty Images
As travelers to the world's frontiers know, it is not in the airport on the way into a country when the main fleecing usually begins, but on the journey out. You are at your most vulnerable -- laden with gear, trinkets and, if you are a businessman, country commitments such as infrastructure. You are usually in a rush.
Such is the case with Pakistani treatment of NATO aims to revive the use of Pakistani roads for the final 18 months of its deployment in Afghanistan. The Pakistani route has been closed since a NATO air strike last November killed two dozen Pakistani soldiers, and no one would apologize. But now NATO needs the roads to repatriate ground vehicles, aircraft and heavy equipment.
The negotiations to reopen the route, leading up to the current NATO summit in Chicago, has gone something like this: Let's see what you have. Ummh hmmh. We were charging you a $250-a-vehicle tax, but this is much more stuff -- very burdensome to our roads. Very burdensome. What would you say to $5,250 a truck? Twice that if it's a double-semi? Mmmm. And of course you will repair any damage to the roads.
President Obama and the U.S. military are offended. At the demanded rate, the total bill could come to hundreds of millions of dollars. U.S. negotiators have offered less, though neither they nor the Pakistanis have disclosed how much less.
The backdrop is that NATO is getting it from all sides. In 2011, the U.S. paid Pakistan about $17 million a month in taxes on trucks that carried about 40 percent of NATO cargo into Afghanistan. When things turned bad, the U.S. turned to what it calls the Northern Distribution Network, or NDN, a 3,000-mile network of roads starting in Europe, passing through the former Soviet Union, and terminating in Uzbekistan, from which cargo crosses over the Friendship Bridge into Afghanistan. NDN is three times the length of the Pakistani route, which starts in Karachi, and it consequently costs more -- six times more. NATO has been paying $104 million a month to transport its stuff across the NDN to Afghanistan, according to the Associated Press. Who gets this money? The countries along the way, plus the truckers.
But where do such situations end up? You know yourself -- you clench your teeth, reach into your wallet and pay. That is the price of adventures in frontier lands.
Banaras Khan AFP/Getty Images
The geopolitics of picking winners: Scorn is routinely heaped on the George W. Bush Administration for allegedly being in the pocket of Big Oil: Vice President Dick Cheney dined regularly with his old buddy Lee Raymond of ExxonMobil, Steve Coll writes in his new book on the company, and otherwise handed over the henhouse to the foxes. But this is not strictly true: Bush also put the government decidedly behind the development of technologies that could upend Big Oil -- battery-powered electric cars, and especially hydrogen fuel-cell vehicles. Positioning new technologies to challenge the economics of incumbents is always a tricky business, and so it has been with these non-fossil fuel approaches to locomotion. But Bush (pictured above at a hydrogen fuel cell event in 2003) decided to pour hundreds of millions of dollars into them anyway.
The laissez faire puritans don't like it, but governments around the world these days are in the business of choosing what industries and companies will win the day. The Brazilians like sugar ethanol and Petrobras, the South Koreans favor Samsung and their other national champions, and the Chinese hand-select for the entire economy. The common denominator in these examples is that a business decision is made by government, and generally maintained through successive national leaderships. Not in the United States, which has zigged and zagged according to the whims of who is in the White House or Congress. When critics of whatever stripe tell you that a given administration "has no policy" on (take your pick: Russia, energy, the Middle East), that is generally what they mean -- the White House has diverged from a prior policy that the critic embraces.
So it has been with the effort to upend how Americans transport themselves from place to place -- the Obama Administration's tastes have been the opposite of its predecessor's: From the beginning, it favored battery-driven electric cars, and shunted hydrogen fuel-cell vehicles to the back-burner. In fact, these are sister approaches -- both use electricity to move a car. Only, batteries store electricity produced elsewhere, while fuel cells produce their own from fuel (in this case hydrogen) stored on board. I have heard some disappointment from the fuel cell crowd -- it makes no sense, they say, to spend hundreds of millions of research dollars on hydrogen fuel cells, then overturn the process over policy. If your intuition tells you that batteries are a better bet, throw money that way too, but keep them going on parallel tracks. All of the above, as Obama describes it, ought to include fuel cells.
As I write this week at Slate, this line of thinking appears to have been heard in the Administration, which seems to have warmed up toward hydrogen fuel-cell vehicles. But to the degree that this change in attitude is carried through, it will have a steep climb. Fuel cells have the advantage of no range anxiety -- they can go 150-250 miles on a hydrogen fill-up, then refuel in a matter of three to five minutes. Only, while Germany is building hydrogen refueling stations like gangbusters, there are almost none in the United States. (There need to be about 11,000 at about $1.5 million each, according to General Motors.) The conventional thinking -- which I do not totally accept -- is that they may have to be stand-alone stations, because incumbent oil companies have no incentive to add hydrogen to their gas pumps when they themselves do not produce this fuel. From my side, I think that will probably be the case in the beginning, when the market is being formed; but once it gets going -- if it gets going -- entrepreneurs will step in and incentivize incumbent station-owners to add hydrogen tanks.
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Georgia without Misha
By Sam Patten
The writer was a political adviser to Saakashvili's United National Movement in the 2008 Georgian parliamentary elections, and more recently counseled Georgian opposition leaders Irakli Alasania and Bidzina Ivanishvili.
Outgoing Georgian President Mikheil "Misha" Saakashvili is a captivating figure, anyone who has met him would agree. Watchers of Georgia -- a nation that gets attention for its hosting of oil and gas pipelines, its willingness to challenge Russia, and its status as the closest thing to a democracy in the region -- might also concur that his larger-than-life personality overshadows his government's record of reform. That is why, at next week's Chicago NATO summit as well as elsewhere on stops throughout the United States, Saakashvili (pictured above, right, with New York developer Donald Trump) will be under pressure to avoid impromptu remarks.
But in Georgia, in Russia, the United States and elsewhere, it is Misha's infectiousness, positive or negative, that continues to define the discussion about the Caucasian country. Having worked both for and against him, I have come to believe that Misha's greatest gift for Georgia may be yet to come. If he steps back and allows his authoritarian system to relax, history and his own people will view him differently. He ought to step out of the picture, and watch his country evolve without him.
Several months ago, I was guiding a tour of international journalists through Georgia and providing my unvarnished view of local politics over dinner. I noticed one reporter looking at me knowingly, with a smile, which I returned with a quizzical look. "You're still in love with Misha, aren't you?" he suggested. The comment struck me as unnerving, especially as I was then representing the opposition and had just taken the crew to meet Saakashvili's billionaire opponent, Bidzina Ivanishvili. What haunted me throughout my most recent assignment in Georgia, is that there was an element of truth to the accusation. As $4 billion of foreign assistance in the wake of Russia's 2008 invasion of Georgia made perhaps more clear, in the West there is an enduring attachment to Misha despite his many flaws. Once the central figure in branding a modern Georgia, though, should Saakashvili cling to power in the next year, his legacy is sure to be measured only in diminishing returns.
Seiran Baroyan AFP/Getty Images
Sports car companies, fashion designers, Silicon Valley startups -- these are the natural stuff of celebrity businesses. But battery-makers? Not so much -- unless you are A123 Systems, in which case, with your MIT superstars, you have scaled the high-tech world, and ended up in the rarefied air. But such company is transitory -- high-flyers come and go (Mark Zuckerberg: take note). For Boston-based A123, which went IPO a little over two years ago at a share price of $13.50, this week made a filing with the Securities and Exchange Commission that it may not survive, and sold today as low as a humbling 87 cents a share. (pictured above, better days: At the White House in 2007, actor Rob Lowe climbs into a car fitted with an A123 battery.)
A123's straits are notable for what they say about the global advanced battery business. If scientists somewhere in the world -- China, Japan, South Korea, the United States are all in this technological contest -- can create a big leap in battery capability, they could overturn energy and geopolitical presumptions. Companies and countries relying on the income stream of fossil fuels would be at once undermined. New companies and industries would rise to importance, and geopolitical influence could shift away from the Middle East.
But, quite apart from the issue of whose technology can or should prevail, the industry consensus is grim: Almost all current advanced battery and electrified-car companies are suffering the downside of being first-movers. They are far early into the market, which is fine for those with deep pockets -- after all, this is a normal part of the new product cycle (think cell phones and flat-screen TVs). But most start-ups do not have that luxury. Apart from Asian companies that make consumer batteries such as the AA, and the Toyota Prius, battery and car company products are too expensive, generally not consumer-ready, and have met slow sales.
A123 was started in 2001 by MIT professor Yet-Ming Chiang and Bart Riley, both of them coming from American Superconductor, which Chiang co-founded. For those paying attention, the company became synonymous with the notion of a new battery-driven age. Starting in 2006, it began to rack up joint venture contracts with companies including General Electric, Chrysler and Shanghai Automotive. In 2009, it was awarded a $249 million matching grant by the U.S. Department of Energy as part of the Obama Administration's effort to jump-start a U.S. battery-making industry.
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Last month, the Financial Times reported that Goldman Sachs-backed Cobalt International Energy had partnered up with a local Angolan company as it sought rights to drill a world-class offshore oilfield. The company to which Cobalt offered the equity stake was partly owned by three senior Angolan officials, the FT wrote. Three months ago, Houston-based Cobalt went on to declare a discovery in a well called Cameia-1. Now, U.S. authorities are investigating Cobalt. [Update: Cobalt responds below.]
Angola has received much attention on the issue of payoffs in recent months. Global Witness, the U.K.-based investigative firm, has issued a report about $550 million in "social payments" provided to the state-owned oil company Sonangal by Cobalt, BP and a private Angolan-Hong Kong joint venture.
But this is just the way the oil business works on the frontier, as I write today at The New Republic. In December 2010, for example, Halliburton paid $35 million to Nigeria to settle a bribery case involving a big liquefied natural gas project that had drawn in former Vice President Dick Cheney. And not just the oil business - what makes the subject topical right now is a New York Times allegation of extensive bribery by Wal-Mart in Mexico.
I started looking at the phenomenon while based on the Caspian Sea in the 1990s. At the time, oil executives' faces would go uncomfortably pale when you mentioned a certain known go-between for bribes to senior Azerbaijan officials. In Kazakhstan, feet would shuffle and voices get rattled at the mention of James Giffen, the New York lawyer who later was charged with serving as a conduit of foreign oil payoffs to President Nursultan Nazarbayev. Two years ago, Giffen was acquitted in federal court in New York -- he did not contest the facts of the bribery accusations, but said he was innocent because the whole time he was serving his homeland, slipping inside dope to American intelligence agencies.
Things have changed. I talked to Joseph Covington, a Washington lawyer who in the 1980s headed the foreign bribery section at the U.S. Justice Department. He suggested that, unlike just a few years ago, American businessmen are no longer terrified of the Foreign Corrupt Practices Act, which outlaws bribery of foreign officials to obtain business. In the Caspian days, businessmen would fess up to bribery and pay for an extensive internal clean-up to avoid prosecution. That still is usually the case, but after Giffen showed that with the money and the gumption one can beat the FCPA, we are seeing more cases of executives electing to fight.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.