Capture the rent!

A former Shell exec has been making news with a prediction of $5/gallon gasoline in 2012.  I don’t know if he is right about 2012, but I am sure he is right about $5. This is inevitable, given the finite resource and (we hope) economic growth over the next few years (not to mention inflation).

The question is this:  who will capture the “rent”?  Rent is the excess return over the cost of production, distribution, refining and normal profit (which in some parts of the world is more like $5/barrel, at a time when oil is selling on the world market at over $90/barrel).  As things stand today, most of the rent goes to non-U.S. oil producers abroad, where production costs are lower than in the now declining oil fields in the U.S.

At current prices, the U.S. is sending something more than $400 billion/year abroad to pay for oil imports, much of it ending up in the pockets of people we would not want to enrich if we thought about it:  Iran and Russia foremost, Venezuela secondmost.  Even if we don’t import oil directly from them, U.S. demand contributes to the market conditions that enable them to sell into the world market at $90/barrel a product that costs them far less.  Money and oil are fungible:  any significant decline in U.S. demand would affect the price worldwide and reduce the flow of rents to oil producers worldwide.

Enriching antagonists is not the only problem.  Protecting the sea lanes through which oil is transported is costly.  As things stand today, the costs are charged to the U.S. taxpayer in general, not to oil users. Colleagues estimate these costs are $10-20/barrel of U.S. consumption. I’d like to see those costs paid by those who use more of the oil, not by those of us who use less (I am writing in a 68 degree room, with two sweaters on).

The obvious way to do this is with an oil import fee.  That, however, turns out to be neither wise nor possible.  Not wise because it would protect U.S. producers and encourage domestic production.  Wouldn’t it be smarter, the price being equal, to use someone else’s first?  Not possible because the United States, in its wisdom, long ago “bound” the tariff on imported oil.  This means we agreed not to increase the tariff, which is very low.  If we impose an oil import fee, we would have to compensate others in the form of sharply reduced tariffs (and increased imports) for doing so.  If we refused, the World Trade Organization’s rules would allow others to retaliate by raising their tariffs.  Not a good way to go for a country in need of massively increasing its exports.

The better way is to charge fees on all oil use, or if you prefer for environmental reasons on all carbon use.  This would “capture the rent” to pay for the associated security, environmental and other costs (including road infrastructure) associated with the use of oil.

One argument against comes from the left:  poor people spend more of their incomes on oil and energy generally than rich people, so an oil or carbon tax is regressive.  This can be fixed, in part, by using some of the income from the tax to provide benefits to people with lower incomes.

Another argument against comes from the right:  we wouldn’t want to do anything to discourage exploration and production of oil.  I don’t see why not:  conserving a finite resource for future use sounds the right way to go to me.  But in any event much of the money we send abroad to pay for oil is ending up not in oil exploration and production but rather in Dubai real estate and other worthy causes.

Why is this subject not discussed more often?  Well, it is:  Tom Friedman raises it regularly in the New York Times, but there is absolutely no resonance in the body politic.  Gasoline taxes aren’t the third rail of American politics, they are the train.  No one wants to get hit by it.

Barack Obama is too smart not to know all that I have written above, but to my knowledge he has not breathed a word about gasoline taxes since becoming President.  I can only hope that in a second term he would break the spell and capture the rent, but I don’t know where he’ll find a Congress willing to go along.  Maybe a lame duck in 2014?

If he needs inspiration, he might turn to Iran’s President Ahmedinejad, who despite strong opposition is cutting oil subsidies sharply and allowing domestic product prices to rise (by a factor of 4) while compensating with payments to lower-income Iranians.  Of course he can do that because the increased prices put money directly into the Iranian government’s pocket, which is what oil taxes would do for the U.S. government. Is Ahmedinejad more courageous than Obama?

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The Iraqi nationalist Maliki is back

While the Wall Street Journal has awkwardly divided its interview with Iraqi Prime Minister Maliki into two pieces, one concerned with oil issues and one concerned with the departure of U.S. troops, together they make interesting reading.  We seem to be back to the pre-election, Iraqi nationalist, Maliki (as opposed to the far more sectarian one we saw during the campaign and immediately thereafter).

Maliki and me

On the one hand, the renewed Prime Minister insists all American troops will leave by the end of 2011 (except for a rather large defense cooperation group at the U.S. embassy, presumably with a contingent of contractors), as provided for in the Status of Forces Agreement (SOFA).  On the other, he is at pains to make clear that international oil companies are welcome in Iraq, no matter what coalition partner (and Iranian ally) Moqtada al Sadr says, and that Iraq is making plans for major expansion of oil exports and diversification of export routes.  In other words, this is an Iraq that can stand up to both Iran and the United States and pursue its own interests effectively.

What is far less clear is how Maliki intends to proceed on Iraq’s more pressing internal problems, especially the dispute with Kurdistan over its boundaries.  There is an indication in the part of the interview on the U.S. troop presence that Maliki thinks he can continue to slow roll the Kurdish insistence on the constitutionally mandated referendum.  But how will he handle the withdrawal of the U.S. troops, who play a vital buffer role between the Iraqi Army and the Kurdish peshmerga?  Substantially increased oil revenue would likely lubricate the situation–the Kurds have shown a good deal of willingness to delay so long as their 17 per cent of the revenue flows and grows.

If this Iraqi nationalist Maliki is back to stay, Washington should be content.  So far at least, the Sadrists have been kept out of the security ministries, Allawi’s Sunni allies got a good slice of the government (and may get more), and the Kurds are in but unable to call the shots.  Maliki is a clever operator and may well be able to continue to govern relatively unimpeded, finding the support he needs from different configurations of his unwieldy grand coalition, depending on the issue.  This is the high wire act Maliki’s staff told me last June he could perform better than anyone else, not leaning too far towards the Americans or too far towards the Iranians.  It’s a good spectator sport for those who like their politics both subtle and risky.

No I wasn't scolding him, just asking if he would take one more question. He did.
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Does God cause Nigerian violence?

The press will portray yesterday’s violence in the Nigerian town of Jos, following on Christmas eve bombings,  as inter-religious, between Christians and Muslims. And some of the main battle lines are certainly drawn along that divide.

But the driving factors lie far from religion: political status, property rights and power distribution are the underlying causes.  As my former US Institute of Peace colleague David Smock puts it:

The principal sources of this conflict are competition for resources and political power rather than theological differences.

The most important of the underlying issues seems to arise from the distinction between “indigenous” people and “settlers.”  As Chris Kwaja and Darren Kew explain:

This distinction becomes a major legal problem because Nigerian law allows local governments to determine their own qualifications for residency, and local administrators across the country typically make this determination based on ethnic heritage and historic control of the land.

Consequently, many Nigerians are considered “residents” of local governments in ethnic homelands from where their grandparents or great-grandparents may have migrated and where they themselves may never have even visited. These same Nigerians may be denied residency in the very neighborhoods where they were born. Without certificates of residency, individuals face a host of problems in voting, gaining political office, accessing certain types of employment or public services, and even buying land.

The largely Muslim Hausa have generally been regarded as non-indigenous “settlers” in Plateau State, of which Jos is the capital, no matter how long they have lived there.  But in Jos North, where the Hausa control the local government, they treat non-Hausa as settlers.

These are problems considerably more mundane, and in a sense soluble, than at least some theocratic issues. While there are Nigerians committed to resolving them, resources have been lacking, and the justifiably admired Imam and Pastor need support (the video clip about them

here is only 10 minutes, despite what the label says).  Unless the underlying issues are dealt with, Nigeria’s fault lines, which are not limited to Plateau State or Christian/Muslim tensions, will widen, with catastrophic consequences in a country that supplies about 2.3 million barrels of oil per day to the world market (including 8% of U.S. imports) and has the largest population in Africa (over 152 million).

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Christmas presents from Muslim friends

There is something cooking–maybe something good–involving Turkey, Pakistan and Afghanistan.  The Muslim Santa Claus yesterday delivered Karzai welcoming the idea of the Taliban opening an office in Turkey and Turkey announcing a military exercise involving Pakistan and Afghanistan scheduled for April.  These were outcomes of the fifth AfTuPak (my coinage, I think) meeting since 2007, when Turkey’s hyperactive non-secular government (I hesitate to call it Islamist because of the implications to non-Turkish ears, even if that too would be accurate) undertook to help improve relations between Kabul and Islamabad.

This comes on top of revival (admittedly for the umpteenth time) of the TAPI pipeline proposal involving Turkmenistan, Afghanistan, Pakistan and India, a proposal still far from realization but a clear sign of rapprochement among the countries involved.

Somewhere in the bowels of the State Department someone may be grumbling about all this, calling it a pipedream, as American diplomats (and intel analysts) tend to do about anything not conceived in Washington.  But surely Clinton, Gates and Obama understand that this kind of effort among Afghanistan and its neighbors can have positive repercussions.  If it works, someone can discover that it all really was invented in DC (maybe even Holbrooke’s last legacy).  Anything that gives Afghanistan and its neighbors, most especially Pakistan, a common stake in peace has got to be rated a plus.

David Petraeus is sounding a lot happier about Pakistan’s cooperation these days.  Some of this will just be salving old wounds, but maybe, just maybe, there was something more going on while we were all enjoying the holiday yesterday.

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The world is slowing down again

The world is slowing down again, after the sprint from Thanksgiving.  This time I’m sure it’s not just me:  no cars on the way downtown today, even though there were traffic jams on the Beltway.  I hope it helps the economy.

Here is my quick assessment of where things stand as we head into Christmas/New Year:

  • Sudan:  independence referendum is on track for January 9-15.  People (read “people in the know, more or less, whom I’ve talked to”) seem confident the North will accept the results.  Still no agreement on Abyei, which could be lost to the South, or on the many post-referendum issues (oil, citizenship, debt, border demarcation, etc.), which will be negotiated in the six-month transition period.
  • Iraq:  Maliki met the 30-day deadline by presenting his ministers to parliament Tuesday, with some temporary placeholders in important national security slots.  No one but me seems happy with the motley crew, but now let’s see if they can govern effectively.
  • Afghanistan:  President Karzai objects to the September parliamentary election results, which returned fewer of his favorites than he would like, but has agreed that parliament will meet January 20.  We’ll see.  The Obama Administration strategy review was little more than a sham–we’re in this war until 2014, when VP Biden says we’re out come hell or high water.
  • Palestine/Israel: no more hang up on the settlement freeze, which Washington abandoned.  Both parties are pursuing their “Best Alternative To a Negotiated Agreement”:  Israel is building, Palestine has received a spate of recognitions.
  • Koreas:  After indulging in an artillery barrage against a South Korean island, North Korea has turned down the volume, but there is no real progress on the issues.
  • Iran:  Ahmedinejad fired his foreign minister and brought in the MIT-educated atomic energy chief, who knows his stuff.  Sanctions are biting and the regime is abolishing subsidies to cope.  Americans and Europeans hope rising gasoline prices will generate popular pressure on the regime.  Little sign of that so far.  Next P5+1 meeting in late January.
  • Lebanon: bracing for the Special Tribunal verdict (still!), with Tehran backing Hizbollah in denouncing the whole process.
  • Egypt: voted in unfree and unfair elections that won’t even do much good for President Mubarak.
  • Balkans:  Kosovo elections marred by ballot stuffing, causing reruns in some municipalities January 9.  A Swiss opponent of Kosovo independence accused Prime Minister Thaci of heinous crimes.  Montenegrin PM Djukanovic resigned, Croatia arrested its own former PM, Bosnia is having trouble forming a government.  Mladic of course still at large.
  • Burma:  Aung San Suu Kyi still moving cautiously.  I guess when you’ve been under house arrest that long a bit of caution is in order.

The earth was spinning pretty fast for President Obama until today.  He got a big new stimulus package (in the guise of tax cuts), repeal of Don’t Ask Don’t Tell (if you don’t know what that is, don’t ask and I won’t tell), ratification of New START (that’s when you have too many nuclear weapons and need an agreement with Russia to allow you to get rid of some while giving in to upgrading others), food safety regulation, and health benefits as well as compensation for the 9/11 rescue and cleanup crews.  Former New York City Mayor Giuliani, probably frightened they would hand the $4.2 billion bill to him, was notably off in Paris promoting an Iranian group that has made its way onto the U.S. government list of terrorist organizations.

The president lost two battles:  a few of the rich get to keep a lot of money even though the government needs it more than they do, and kids brought illegally to the U.S. through no fault of their own don’t get to stay just because they want to go to college or serve in the armed forces.  I guess you can tell whose side I’m on.

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Vanden Heuvel beats Boot but war will continue

I find it hard to imagine that any objective person reading Katrina vanden Heuvel on the costs of the Afghanistan war and Max Boot on the need to give General Petraeus a chance today would come out in favor of continuing the war for four more years, at great cost in money and lives. Boot’s Iraq analogy is stretched to the breaking point, as Nir Rosen made clear in spades yesterday. Vanden Heuvel’s enumeration of the opportunity costs is daunting.

This does not mean that vanden Heuvel is going to win the argument.  Beyond Vice President Biden’s promise to be out of Afghanistan by 2014 “come hell or high water,” I detect no push in the Administration for accelerating withdrawal.  As vanden Heuvel herself notes, the current time line enables the President to appease both hawks (with the continuing commitment) and doves (with the promised drawdown).  Removing the Afghanistan war as a partisan issue, and a divisive one among Democrats, during the 2012 presidential campaign no doubt counts as a big plus for the Administration.

Vanden Heuvel goes wildly off track in appealing to John Kerry to put the wooden stake in the heart of the Afghanistan war, as Senator William Fulbright to the Vietnam war.  Kerry has nowhere near the prestige of Fulbright; if anything, a move against the war by Kerry would be seen as one more dovish maneuver by the anti-Vietnam war protester (don’t get the wrong impression:  I was one too).  To get the U.S. to accelerate the withdrawal from Afghanistan would require a clarion call from a Republican hawk.  Little chance of that.

Instead what we need to do is make the most of what military gains Petraeus manages over the next four years by increasing the civilian effort, establishing in at least some parts of the country enough legitimate Afghan governing authority to block reentry of Al Qaeda into communities as we withdraw, and continuing the effort to reintegrate individual Taliban and to negotiate an overall political reconciliation.

There is unlikely to be victory in Afghanistan, but there needn’t be defeat either.

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