The Power and the Money

Is the U.S. serious about fighting organized crime in Mexico?

I recently met with a high-level PAN official from the Calderón administration. The official said some things which were very interesting. (I cannot identify the official.) First, the Calderónistas do not see much (if any) substantive policy space between them and the new Peña administration. This is in line with the common feeling that the outgoing PAN president supported the PRI candidate over the candidate of his own party.

Second, the official (do note that I am not even using a pronoun) admitted that Mexican officials do not care how many illegal narcotics cross the border heading north. They do, however, care when the people who earn profits from that traffic suborn justice and bribe officials in Mexico, and they really care when they use violence. That said, they believe that much (in fact, the official intimated it was most) of the violence comes from fighting over the rights to sell drugs within Mexico. This was said in surprisingly blunt terms, but it was not surprising: the administration openly suggested that legalization might be a good idea as early as 2010.

Finally, the official said that they had great cooperation from the United States on everything except ... stopping money from flowing back to Mexico. On that, neither the Bush nor Obama administrations wanted to do much. There was no appetite on the low end to search southbound vehicles for cash in trunks, and there was no appetite on the high end for ... well, click this link and then this one.

The second link will take you the first stories about HSBC’s laundering of narcotics profits going from the U.S. to Mexico. What happened? Well, the United States eventually reached a $1.92 billion settlement against the bank. $1.92 billion! That’s a lot of money! HSBC profits fell 17%!

Only ... well ... the Mexican ex-official was not satisfied. Consider. HSBC earnings went from $16.2 billion to ... $13.5 billion. The CEO’s take home pay declined ... from $8 million to $7.4 million. The number of employees who earned bonuses above £1 million went from 192 ... to 204. 

It is true that the fine wiped out any HSBC profits from moving illicit earnings. The problem is twofold. First, you have let people move blood money, an action that actually carries criminal penalties, but you imposed no criminal penalties! It is easy to agree with Senator Warren (D-Massachusetts) that this is an outrage.

But there is another problem. There is, right now, if you are a bank moving illicit funds, there is a low chance of getting caught. So if the idea is to disincentivize money-laundering, you need to do a lot more than just wipe out the potential profits. You need to wipe-out the risk-adjusted potential profits.

And that the United States did not do.

Which brings us back to the title of this post. Are we? Really?

Not Happy To Be Right

It looks like I’ve won another bet with John Quiggin. February 2013 has come and gone, and Hafez Assad remains in power in Damascus.

If you’re interested in my analysis of the Syrian conflict — and, really, why would you be? — here’s what I wrote two months ago. Basically nothing has changed since then. Assad is still going to lose, it’s still going to take a long time, and a lot of people are going to be killed, maimed, impoverished or otherwise immiserated first.

For the record, here’s what I wrote back in August 2011: “Assad will still be in Syria, and still the leader of an internationally recognized (though very diplomatically isolated) government. It’s possible that he might be assassinated by then, but I don’t think it likely. I don’t see a blue-on-blue coup taking him out now, and I don’t think he’s anywhere close to cutting and running. Foreign military intervention is (for reasons I’ve discussed) unlikely... the regime may well have lost control of large swathes of the country. Syria will probably be increasingly violent, impoverished, and immiserated. And Assad may well be — in effect — just a powerful warlord in a country that has a number of warlords. But he’ll still be there, and will still be at least nominally the head of state. More’s the pity.”

I’ve been arguing with myself as to whether I want to re-up the bet for yet another six months. I’ve won twice now; why not go for the trifecta? Well ... in my opinion, those first two wagers (Assad will last a year beyond August 2011; Assad will last another six months beyond August 2012) were sucker bets. That first bet was something like 10-1 in my favor. I could have lost, but the odds were quite firmly on my side. The next six months... eh, the odds are still on my side. But not by as much. It’s still a good bet, but it’s no longer in the candy-from-a-baby category.

But that’s not why I’m hesitant about betting again. 2-1 is still good odds, after all. But I’m getting a little weary of betting on the loathsome dictator who is plunging his country into blood and horror. “Oh hey, another week, looks like I’m going to take some more of John Quiggin’s money” is fun. “Another week, another thousand people mangled or dead in the Syrian meat grinder” is not. Wagering on the outcome is starting to seem tasteless.

That bet grew out of a debate in August 2013 about dictators. John Quiggin thinks that dictatorship is an institution in decline, and that the number of dictators around the world is likely to decrease; I think that it’s an institution that’s in reasonably good health, and that the number of dictators around the world is likely to remain more or less stable. It’s only 18 months since we started watching this, so it’s certainly too early to declare a trend. But... in that time, the number of dictators has not changed significantly. One dictator (Meles Zenawi of Ethiopia) died of natural causes and has not yet been replaced. Zenawi was an old-fashioned charismatic revolutionary. His replacement as President is a mild-mannered figurehead, with a junta of revolutionary veterans really running things from behind the scenes. Those sorts of arrangements don’t tend to be long-term stable, so let’s see how this evolves over the next little while. Ethiopia’s an interesting place, and I could imagine a range of outcomes, from “heading for liberal democracy! hurrah!” to “more dictatorship” to chaos.

Meanwhile, though, Presidents Bongo of Gabon and Gnassingbe of Togo — two authoritarian African leaders who inherited the positions from their fathers — have both been growing steadily more dictatorial. Bongo, in particular, seems to be evolving into a classic old-fashioned African kleptocrat. I put both these guys on my “borderline” list back in August 2011. Today I’d move Bongo, at least, into the full-fledged dictator category today.

So, no net change. It’s still early days, but I have to say there’s more evidence for a “dictatorship is doing fine, thanks” hypothesis than the “dictatorship is inevitably doomed” position.

Finally, let’s note that Syria is proving a useful cautionary tale for dictators around the world. You want to tacitly tolerate those street protests, people? See where that leads! You want to end up like Syria? Guys like Lukashenka of Belarus and Nazarbayev of Kazakhstan — both of whom were visibly jumpy about the fall of Qaddafi back in August 2011, and clearly concerned that the Arab Spring might be heading their way — have visibly calmed down since then. State-controlled media in authoritarian countries around the world have been quick to depict the Syrian conflict as a plucky Assad attempting to hold the breach against terrorism, civil war, foreign intervention and chaos. At this point the Syrian conflict has turned into a small but real net positive for dictators around the world, and will continue so for a while no matter how it turns out.

Singapore is not serious ...

... about raising fertility.

Over at Demography Matters, my friend and occasional co-blogger Randy McDonald brings our attention to the Singaporean government’s preoccupation with below-replacement fertility. They seem quite worried about it, to the point of calling for ever-greater immigration designed to keep up the population at 5.3 million.

The thing is, “seem” is the operative word. Judging from actions, the Singaporean government does not care that its native-born population is going to fall. And it is probably right not to care! But I find it mildly vexing that it makes so much noise while doing so little.

You can find the current natalist policies on page 72 of this population white paper. The highlights:

• 75% of the cost of fertility treatments;
• $4,800 (U.S., at an exchange rate of 80¢ per Singaporean dollar) for the first and second child, rising to $6,400 for the third and beyond;
• A deucedly vague “affordable” rental scheme for people with enough money to buy an condominium but are waiting to move in;
• $480 a month for day care;
• A tax rebate of $4,000 for the first child (doubling to $8,000 for the second and $16,000 for later ones ... but not refundable);
• A cumulative tax deduction for working mothers of 15% of earned income for the first child, 20% for the second, and 25% for the third.

So what does this all come to? Well, the median income in Singapore is $28,800 per year. For a couple with two children, you get a one-time gift of $9,600. Then you get $5,760 for day care ... which drops in half when the child is no longer an infant. (And does not get you much unless day care is much cheaper than in the United States. Unlicensed housefront operations in Queens Licensed home operations in Upper Manhattan cost more than about $480 a month.) Our hypothetical two-income couple has an income tax liability of $2,232 (calculated using this chart from the Singaporean tax authorities) which unless I am greatly misunderstanding means that the value of the subsidy is effectively capped.

Total annual payments for a first child in a two-income family, with both earning the median: a one-time first-year gift of $12,792, followed by $5,112 per year until the child enters school. Life-changing, this is not. And worse yet, if you needed fertility treatments, which most older couples do, you needed to think about the cost. (Israel does it differently.)

This is not serious.

What would be serious? Ah. Well. In 2011, the Singaporean government ran a surplus of $21.3 billion. There were 42,600 births in the country. A fertility rate high enough to replace the population (in fact, a bare tad higher) would imply roughly 70,000 births. $21.3 billion ÷ 70,000 ≈ $300,000 per child.

OK, then: offer $300,000 per child. Tweak as desired. That would be serious policy. Of course, I am not saying that paying a $300,000 child bonus would be good policy.

But it would be affordable. And it would live up to Singapore’s reputation for social engineering! So before they give up and say it cannot be done, they really should at least try. Or stop complaining.

What is interesting about the Colombian coal industry?

In an effort at crowdsourcing, I am asking the question: What do you want to know about the Colombian coal industry? What do you want to know about coal in general? What do you want to know about mining in Colombia in general?

There is a case in the works; possibly a paper. I will be in-country in May. Before I start, I would very much like to know what people consider to be the big interesting questions.

Worthless Canadian initiative: the Senate of Canada

In the past week, the Senate of Canada — the upper house of the Canadian parliament, the chamber where politicians appointed by the Governor-General on the advice of the Prime Minister lend their sober second thoughts to legislation put forward by the House of Commons — has been getting quite a lot of bad press. Two senators appointed by Conservative Prime Minister Stephen Harper have been singled out for apparently abusing the Senate’s housing allowance, claiming that since they live somewhere far from Ottawa they need a special subsidy: Mike Duffy, of Prince Edward Island, hasn’t been seen by his claimed neighbours, while Patrick Brazeau of Québec faces criminal charges of domestic violence and sexual assault on top of housing expense fraud and any number of other tawdry claims ranging from non-payment of child support to stupid fights on Twitter.

In the above picture I took last summer of Parliament Hill’s Centre Block, the east wing housing the Senate is located on the right side of the picture. The House of Commons, the elected lower house, is on the left. Unpopular as the House’s MPs (Members of Parliament) may be, at least they have the legitimacy that comes from being elected. The Senate is a non-elected body, an upper house on the model of Britain’s House of Lords that was charged from the beginning with counterbalancing excesses of popular democracy with a regionally-balanced representation of people who are supposed to be seasoned politicians. To wit, after Wikipedia:

Under the constitution, each province or territory is entitled to a specific number of Senate seats. The constitution divides Canada into four areas, each with an equal number of senators: 24 for Ontario, 24 for Quebec, 24 for the Maritime provinces (10 each for Nova Scotia and New Brunswick, and four for Prince Edward Island), and 24 for the western provinces (six each for Manitoba, British Columbia, Saskatchewan, and Alberta). Newfoundland and Labrador, which became a province in 1949, is not assigned to any division, and is represented by six senators, while the three territories (the Northwest Territories, the Yukon, and Nunavut) are allocated one senator each.

Senators remain in office indefinitely, until they retire of their own free will or until they are unable to exercise their duties. They are appointed by the Governor-General, on the recommendation of the Prime Minister, who — whether Liberal or Conservative — has taken care to stock the Senate with politicians of their party. The social-democratic New Democratic Party (NDP), now the official opposition, has no Senators at all. This, as John Ivison noted in the right-of-center National Post, may be a significant problem for the NDP if as seems likely it may end up winning an election and forming a government.

The Senate has no legitimacy. Might it be reformed? No. The Conservative Party has promised, not least because of its roots in western Canada where a Triple-E Senate has been very popular. A senate that was Equal (each province having the same number of senators), Elected (being elected by each province’s electorate), and Effective (the body having greater control over what legislation was passed) is what Harper et al would like. A writer in the Halifax Chronicle-Herald has pointed out that reform has been very slow to come, even with the Conservatives’ majority government.

Just last week, Prime Minister Stephen Harper announced he will refer proposed legislation for Senate reform to the Supreme Court of Canada. Introduced in 2011, the legislation has been moving at a snail’s pace through the House of Commons, with the government and opposition parties blaming each other for the delays.

Harper’s request to the Supreme Court could take as long as two years, meaning any meaningful changes would be unlikely to be implemented before the next federal election.

The Conservatives have proposed limiting Senate appointments to nine-year terms and has encouraged provinces and territories to hold elections to fill vacant Senate seats. A handful of existing senators have been elected for Senate vacancies in their home provinces, then subsequently appointed by the federal government.

[. . .]

It’s six years since Harper pledged Senate reform. Implementing change in a timely manner has proven more challenging than the prime minister may have hoped.

In actual fact, anything more than slow change is impossible, since central and eastern Canada largely opposes this, as Atlantic Canada and Québec see their shares of the Canadian population drop (and Ontario sees its share stagnates) while western Canada grows. To engage in constitutional reform in Canada, one needs to get the support of seven provincial governments together holding a majority of the Canadian population. (Good luck with with getting the provincial governments of Québec, the four Atlantic Canadian provinces, and even Ontario to agree with a measure that would weaken their position nationally.) Anyway, how democratic could the Senate be when there are almost a hundred times as many people living in the most populous Canadian province (Ontario, my province of current residence) as in the least (Prince Edward Island, my province of birth)? As this article in Ottawa’s Hill Times points out, it’s only in Alberta that a majority of Canadians want the Senate to be an elected body anyway.

Alas, the official NDP policy of abolishing the Senate is unlikely; as Ivison and I note above, how to cross the threshold is another question entirely. I agree with the opinion of Kelly McParland from the National Post, but again, getting the necessary majority to abolish the Senate is going to be impossible.

[C]ommon sense suggests it’s better to just close the place than try to turn it into some deeper-thinking wing of Parliament. Liberals, for decades, used the Senate as a rest home for hacks, money-raisers, loyalists, out-of-work MPs and the occasional feel-good appointee. Brian Mulroney took a similar approach, while Stephen Harper started his first mandate by ignoring it, and more recently has tried to stuff it with appointees pledged to support his troubled plans to reform it.

The impracticality of reform was demonstrated by Harper’s reported plan to block an improved Senate from overruling the House of Commons. There are many reasons that reforming the Senate is a bad idea, but the danger that it could become a rival for power is one of the most compelling. Two houses battling for position could only add to Ottawa’s dysfunctionality. But why reform something that is only going to remain powerless?

In an ideal world, prime ministers would indeed put great thought and effort into establishing a highly skilled, intellectually impressive, thoughtful and engaged Senate. But it’s not an ideal world. The NDP supports abolition, so if Thomas Mulcair were to become prime minister — which seems the most likely alternative once Canadians grow tired of the Tories — he’d most likely treat the institution with the same contempt displayed by the Tories. A Liberal revival, should it happen, would most likely see an effort to offset the Tory majority with an equal number of third-string Liberals.

The Senate of Canada is the appendix of the Canadian variant on the Westminister model of parliamentary democracy. Unlike the human appendix, alas, the Senate can’t be removed.

Worthwhile Canadian initiative

If all goes as planned, we will soon have a post about the Canadian senate, to complement our other posts on Senates in the United States, the big Latin trio of Argentina, Brazil and Mexico, the Philippine Republic, and the Plurinational State of Bolivia. Until then, however, we leave you with this fascinating video of the Canadian lower house in action, debating the great issues of today.

Hat tip: Leticia Arroyo.

Observatorio argentino 18: The state of YPF

How is Argentina’s nationalization of the YPF oil company panning out?

In short, the nationalization has so far had the salubrious (and rather ironic) effect of getting the Fernández administration to roll back some of the more counterproductive bits of Argentine energy policy, but its confused quasi-Bolivarian foreign policy is now coming back to bite the government via the ruling against Chevron. Fortunately for Argentina (and also ironically) an imperialist foreign court in the Netherlands seems to have tossed the country a lifeline.

Start with Argentine energy policy. YPF’s stock price jumped on November 29 ... because the Argentine government agreed to allow companies to sell natural gas from new developments at $7.50 per MMBTU, more than three times the previous controlled price. YPF shares then rose throughout December as it became clear that Argentina was going to raise the export price of oil from $42 to $70.

In one sense, then, YPF is doing well because the Argentine government has stopped doing some ... er ... counterproductive things. This validates a hypothesis I ventured about the expropriation in a case I wrote about it: nationalization gave the Fernández administration cover to lift some unaffordable subsidies. 

What about attracting capital into the oil industry? In August, YPF laid out an ambitious $37.2 billion investment plan. Most of the cash is supposed to come from the company’s own earnings. (Those earning would not have materialized without the decision to raise oil and gas prices.) But it also calls for $4.5 billion from international partners and $6.7 billion in bond issues.

And that is where it gets sticky. YPF’s chosen partner, Chevron, keeps getting bogged down in legal trouble. In part, that is due to the YPF nationalization. On November 20, YPF’s former owner, Repsol, sued Chevron in Spain. Repsol asked the Spanish court to issue a cease-and-desist order under Spain’s “disloyal competition law.” (“Disloyal competition” sounds weird in English; a better translation would be “unfair business practices” or “antitrust.”) On December 4, Repsol hit Chevron with a second lawsuit in New York.

These lawsuits were not enough to stop Chevron. It isn’t that Repsol has no case. It is that the case is uncertain; moreover, Chevron might not be liable at all unless Argentina refuses to pay some future arbitration judgment against it, and such a judgment is unlikely before 2017 or 2018.  Chevron is taking a legal risk in jumping into the Vaca Muerta oil shale, but it is a reasonable one. (For what it is worth, “reasonable” does not mean “If I were the head of Chevron, I would take the risk.” I would not.)

Chevron’s real problem is the lawsuit Ecuador launched against Chevron in Argentina. That one seems to have brought Chevron’s plans in Argentina to a halt. YPF is now on a roadshow in the UAE looking for partners. YPF has also received a pledge of $1.5 billion from Bridas Holdings. (Here is another description of the deal.) Bridas is half-owned by the Bulgheroni family of Argentina, and half-owned by CNOOC. Repsol, of course, has announced that it plans to sue Bridas.

There is something odd in the Chevron travails. The courts in Argentina are not fully independent, but as Setty has pointed out, the Fernández administration has had some trouble lately getting them to rule its way. (This Economist article gives more details.) In addition, Fernández herself is probably torn between needing Chevron’s money and wanting to support her Ecuadorean ally. What you smell is confusion.

My guess is that the Argentine supreme court will use the recent decision by the Permanent Court of Arbitration in the Hague (PCA) to overturn the lower court ruling and unfreeze Chevron’s assets. The PCA ruled that it had jurisdiction over the case and had previously ordered Ecuador to halt foreign enforcement actions until it made its final decision; it now holds Ecuador responsible for any damages imposed on Chevron by foreign courts. The ruling provides a basis for the supreme court to throw out the case. At that point, the action will shift to the courts in Spain.

That case, unlike the one in Buenos Aires, is a black box from where I sit. It will be fun to watch.

Some unsolicited political advice

“Dog whistle” is a useful political metaphor, but it is still just a metaphor. A human being cannot teach him or herself to hear a high-pitched noise. On the other hand, people can learn to hear political dog whistles that are not aimed at them.

Which means that a point likely comes in the life of every political movement when dog whistles lose their ability to send secret messages. At that point, the savvy pol will denounce the dog whistle, while finding another means to nod-and-wink at said constituency.

I would therefore submit that inviting Ted Nugent to the SOTU is not a useful dog whistle. The implication is that Republican politicians would stand to gain from denouncing it while giving off other Second Amendment-related signals.

That is all.

Drone wars

There has been a lot of recent controversy about America’s drone policy. That controversy is deserved. There seems to be something odd about the use of weapons of war outside a war zone. What are the rules? Where does it end?

When I think about it, there do seem to be clear rules and we know exactly where it ends. Only they are not the rules that the Administration has written down and they are not rules that any administration could openly admit to.

Basically, the United States will use drones in any of the areas where we would use any kind of military force to advance our interests outside of war. E.g., countries (or subareas of countries) that satisfy two conditions:

1. They are outside the reach of a legitimate, democratic and effective government;
2. The open use of American force would not embarrass a government we like or damage other American interests.

E.g., the U.S. will use drones to kill people in the world’s ungoverned spaces, just like it will use the Marines or the Army or any other element of national military force. But we will not use them to kill people in Canada and we will not use them in Colombia, albeit for different reasons.

These unwritten rules, I think, are why liberals massively support the use of drones to kill Al-Qaeda members in Yemen. I was surprised to discover that self-selected viewers of the Ed Show are okay with this policy. The support is there despite the risk to foreign civilians and even when the alleged terrorists are American.

The legality is strange (in essence, even American citizens in ungoverned spaces have no rights) but not, I do not think, new.

In practical terms, the difference between drones and F-16s or cruise missiles is one of cost. They can linger for more time than most manned vehicles and with no risk of losing the pilot. And they are more accurate than cruise missiles. That makes them easier to use. But it is not like the U.S. refrained from firing cruise missiles at Afghanistan or Sudan. Or, for that matter, sending helicopters full of Naval special forces into Pakistan.

None of this is to say that there is nothing new under the sun. Surveillance technology is different: ultra-high resolution photographs and bird or bug-sized flying spybots are in fact new things that need new rules. But those truly new things have not yet entered the public debate.

Drones as they currently exist are a matter of a change in scale but not a change in kind. The fundamental issues are no different and the unwritten rules are no different. If we are honest with ourselves, we know the rules and we know the limits. We just cannot say them ... and perhaps do not wish to admit them. After all, they amount to a declaration of sovereignty over much of the planet, within which the Constitution does not apply.

But once you realize that the limits are there, the lack of debate makes sense.

The flowback from fracking, European edition

Gavin Wright is one of the best economic historians of the United States. In a seminal article, he advanced two findings. First, early American industrial success was due to access to cheap abundant natural resources. Second, there was nothing special about America’s geological endowment that caused it to enjoy cheaper and more abundant natural resources. Rather, Americans were particularly innovative in figuring out ways to turn their geological endowments into usable economic resources. In a 1995 paper with Paul David, the authors cheekily called American resource abundance “socially constructed.”

American industrial dominance faded as the technologies developed in the United States spread to other places. (Lower transportation costs helped: cheap Australian iron could power Japanese industrial exports, for example.) Over time, some countries also developed the ability to indigenously develop new natural resources (an article by Wright and Jesse Czelusta mentions various South American nations, in addition to Australia, Canada and Norway) but it really was not until the second half of the 20th century.

History is repeating itself. The technologies allowing for the development of shale gas and tight oil have originated in the United States. (There has got to be a paper in why.) But there is nothing particularly special about America’s geology. There is likely a lot of shale gas in Europe, among other places.

The question is how fast can the technologies invented in the United States be deployed overseas? The Economist points out that even if you can get past the political barriers, it will still likely take a decade for exploration and development. I am not so sure that it has to take that long, but there is a very serious obstacle to developing European shale ... the flowback.

Basically, when you dig a shale well it produces a lot of wastewater: the flowback (e.g., the fluid that you pumped down there to fracture the rock) and other water liberated during the drilling. That water is nasty stuff, regardless of what you pumped down there in the first place. It contains heavy metals, icky long-chain hydrocarbons, and is slightly radioactive. (The link goes to a USGS report.) In most U.S. plays, you get about 600,000 gallons of flowback and other water in the first ten days. You then get another 200 to 1,000 gallons per thousand cubic feet (MCF) of natural gas. (An EPA study is here.)

So what do you do with the toxic and salty and mildly radioactive flowback? Well, in the United States we pump it into Class II disposal wells: lightly regulated abandoned old wells, mostly owned and run by small mom-and-pop operations. (And I do mean lightly regulated. Click the link and be horrified.) We truck the stuff thousands of miles (in an exercise with some of my students, we estimated a minimum flowback disposal cost of 25¢ per MCF) or recycle it for use in other fracks. Chesapeake, for example, reuses about 6% of its water and aims to up that to 20% in some plays. But that will still leave 80% of the sludgy briny glowing water to be dumped somewhere.

And most of Europe does not have a century of oil and gas drilling behind it. The U.S. has literally hundreds of thousands of Class II wells lying around. Britain and Poland do not. So where are they going to dump the wastewater?

I would go so far as to call this a dealbreaker for most European countries (Ukraine excepted) save for one caveat: there is a huge opportunity for companies that can invent ways to better reuse the flowback. The DOE has already put some (rather small) monies towards this purpose. But this is a place where the case for subsidies is weak. There are huge incentives for anyone who can figure out a way to substantially cut the amount of flowback from fracking to make a lot of money.

In fact, some have started. So get moving! Europe awaits.

Why we fight

 This story comes from Business Insider, a serious website. In it, they say that a drill sergeant asked his recruits to provide him with a written explanation of why they joined the Army.

Well done, soldier! (And intel, too! Word.)

By the way, here is the original Reddit thread. If you have ever been in basic training of any sort with any service, you gotta read it. Heck, even if you haven’t. Especially this subthread. (I am still laughing.) Note that Looney82 is in fact the drill sergeant in question.

The Alaskan way in Venezuela?

 The great state of Alaska has a fairly unique way of handling hydrocarbon revenues. According to Article 9, Section 15 of the constitution of Alaska, “at least 25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments.” In 1980, the legislature set the actual pay-in requirement at 50% of the above revenues.

The Alaska Permanent Fund Corporation (APFC) then invests the proceeds. For reference, in 2012 the Fund received $915 million from the state, up $28 million from 2011. (APFC annual reports can be found here.) The APFC is more-or-less free to do what it wants; it is fairly conservative but not as much as some other sovereign wealth funds.

Roughly 53% of the investment income earned by the APFC is then paid out in dividends (calculated here) to citizens of Alaska, i.e., any U.S. citizen resident for at least six months. (Alaskan law previously favored longstanding residents, but the U.S. Supreme Court threw that out in 1982.) Dividends are based on a five-year rolling average, so it is unlikely that a crash (like, say, 2008) would axe dividends although. That said, it is possible. Last year the APFC transferred over $605 million; in 2011 it transferred $801 million. (The link will take you to the web page of the organization that distributes the dividends, called the Permanent Fund Dividend Division; that is different from the APFC.) Historical data on dividends can be found here.  

You got it: every man, woman, and child in the State of Alaska gets a check ($1,174 in 2011) cut to them by the state government from the proceeds derived from the state’s titular ownership of all subsoil resources. Which is why, obviously, Alaskans hate socialism. 

Could this system work in Venezuela? Pedro Rodríguez, José Morales, and Francisco Monaldi suggest that the answer is yes. Oil has been a net benefit to Venezuela, but the country has clearly wasted most of the income; giving cash to citizens could solve that issue. Still, there are a couple of rubs. They address all of them in their paper, but not in sufficient detail:

1. How much is needed to keep the Venezuelan state running? Alaska set up the Permanent Fund fairly close to the beginning of the oil boom. Venezuela, on the other hand, will be doing so after a decade of high oil rents and almost a century of oil dependence. The authors are probably correct to argue that a new government could shut down most of the “misiones” without too much trouble. The authors are certainly correct to argue that the country would be better off getting rid of its idiotic fuel subsidies. It is less clear to me, however, that starving the rest of the bureaucracy would be wise, regardless of how bloated it may be. Venezuela right now suffers from too little governance in some very big fields (police, courts, schools and infrastructure, just for a start) and fixing the mess left over from President Chávez and his feckless Punto Fijo predecessors could easily require more money, not less;
2. How do you deal with disincentive effects? The amounts that would be distributed under the Venezuelan plan are a much larger share of income for the median (let alone poor) Venezuelan than for the median Alaskan. Alaska in 2011 had a median income of $67,825 per household, against an average APF check of ($1,174 × 2.65 people per household) $3,111. Call it 5% of per capita income. In Venezuela, though, similar numbers would have in 2008 represented “31% of per capita income for those at the bottom 25% of the income distribution, 15% for the next quartile and 8% and 3% for the top two quartiles respectively” at official exchange rates. Unofficial exchange rates could as much as triple those figures;
3. The volatility problem follows. Alaskans just have 5% of their income tied to swings in oil prices plus financial markets. (To be frank, the Alaskans have not solved that problem despite using the mechanisms proposed by the authors to do so.) In Venezuela, it will be much higher; 
4. How do you get past the unpopularity of the plan? The Venezuelan opposition proposed such a thing in 2006. The authors have evidence that a lot depends on how the proposal is phrased, but those results do not take into account the inevitable opposition campaign;
5. If you solve problems (1) and (2) by allocating only a relatively small percentage of the oil money, what exactly is it that you have solved? I am honestly unclear. Is it the management of the hydrocarbon sector? Well, lots of countries have more-or-less solved at problem in various ways: Brazil and Algeria come to mind. Is it to weaken political machines? OK, but populists could still play with payouts, no? Is it to insure that benefits flow to the poorest? I am with them on that one, but it might be hard to sell.

In short, the authors make a compelling case, but I think the devil really is in the details. I would like to see a more detailed proposal.

From space, everyone can see you flare

Bakken oil development requires a lot of use of trucks and railroads. A typical horizontal well in North Dakota requires 1,100 inbound truck trips. Then you gotta move the stuff out. It is possible to build gathering facilities, of course, but trucks remain viable for short hauls. Over longer distances, railroads can be competitive. In short, you can have fast oil development without making much investment in specialized infrastructure.

The above is not true for natural gas. For natural gas, pipelines are the only game in town. You build gathering pipelines and processing plants or you don’t produce. No one will build a gathering infrastructure, of course, until they have some idea of how much gas it will carry.

Tight oil wells in the Bakken also produce associated natural gas. The problem, of course, is that you cannot know how much associated gas will be produced from a group of wells until oil production starts. So you need to start oil production before a gas infrastructure is in place.

Of course, if you have wells producing oil, you still need to do something with the associated gas. You could just vent it, but methane is nasty stuff on both the local and global level. So you set it on fire. That gives you CO2 –fine locally, but bad globally, albeit less bad than just venting methane.

In short, there is a chicken-and-egg problem: in an oil play, you need to waste a lot of natural gas before anyone will build the infrastructure needed to use it. In Texas, there is a lot of new drilling, but it is in places that have been drilled before and where a gas infrastructure exists. Texan oil producers, therefore, flare only 0.5% of their associated gas. (It is, however, getting bad in the Eagle Ford.)

In North Dakota, they flare 32% of the gas. That is why it suddenly looks from space as if a major new megalopolis has sprouted in North Dakota.

How big a problem is this? In economic terms, not that much. Losses from Bakken flaring came to $196 million in 2011, or 1.4% of the value of production.(In Texas the economic losses are even less, although you can also see the flaring in that arc running along the south of Texas below the San Antonio-Austin double plex.)

The CO2 problem is more serious, but as you can see below, the Financial Times estimates that Bakken oil is no worse than oil imported from Saudi Arabia:

In short, the flaring problem looks more dramatic than it is, in both economic and environmental terms. That is not a brief for doing nothing, either by private industry or government regulation ... there is money being left around on the table and this is a source of CO2 that is easy to fix. It is a brief for stating that compared to the Canadian tar sands there is nothing to see here. Well, there is ... but only from space. From Washington, not so much.

Randy McDonald reviews a science fiction novel

I was pleasantly surprised by John J. Lumpkin’s first novel, Through Struggle, The Stars. I’m normally wary of the sub-genre of military science fiction. Many of the more recent titles that I’ve seen appear on bookshelves aren’t very good books at all, titles written by their generally right-wing American authors who were much less interested in the art of writing than they were in creating crude nationalist propaganda. The need for a jihad against Muslims, the amusing fatal decadence inherent in the French (or, more broadly, Europeans), the underhanded cunning of the Chinese, the need for the simpler and more martial mores of the past to replace an immoral liberalism — all these tacks have featured too prominently in too many milSF books I’ve picked up for me to feel comfortable with the genre. To the author’s credit, he did a very good job of avoiding this pitfalls of milSF.

Through Struggle, The Stars is set in the starfaring future of 2139, decades after the development and deployment of technologies capable of creating stable wormholes between points in space light-years apart and antimatter-fueled starships capable of transporting wormhole terminuses to distant planetary systems made interstellar travel possible, and after a devastating asteroid impact on Earth gave every countrry capable of mounting interstellar colonization efforts the incentive to do so. Colonies from dozens of different powers are scattered among the nearby stars, different countries’ colonies clustering in different areas. China and Japan, apparently the dominant powers on Earth, are also prominent players beyond the Solar System. Of late, these countries have begun to drift towards war. In this dynamic, unsteady environment, newly commissioned American cadet Neil Mercer joins the United States Space Force and catches himself up in the various maneuverings of the United States as it and its leadership bring the United States and its allies into the Sino-Japanese conflict.

To my relief, no one is propagandizing for any country in this novel. Each of the actual and potential combatants have their good sides, but each also has their own flaws. Lumpkin has written a novel where China is probably the biggest power in the world, but it isn’t an obviously evil or threatening polity. Military fiction novels where the parties in a conflict are complex are inherently more interesting than ones where contrived conflict is created between Good Guys and the Evil Ones, if only because it makes it possible to sympathize with characters on all side that aren’t sockpuppets. Lumpkin deserves to be praised for his even-handedness.

Some of my fellow reviewers have pointed out that the world of 2139 is a world where not much seems to have changed since the early 21st century, politically and otherwise. China is an oligarchy with an expansive sphere of influence on Earth; Britain is an independent American ally outside of an integrated Europe where France seems to be a major player; countries in the global South like Brazil, India, and Mexico seem to be present only in passing, although Iran does make an interesting appearance. Culturally, too, the world of 2139 seems almost too recognizable and contemporary, a certain Hispanicization of the United States aside. These likely anachronisms did stand out to me, although they didn’t prevent my enjoyment of the novel.

I also liked the attention that Lumpkin gave to his material universe. Different worlds are not perfectly Earth-like, the colonization of distant exoplanets is a costly venture that isn’t universally successful, and attention has been given to the import of the location of different stars in different places. The planetography of some of the worlds visited is paid attention, and the nature of life on sai; he even gives multiiple explanations for Fermi’s paradox. (One of these explanations lies at the root of the Sino-Japanese conflict and the United States’ involvement in sai.)

The novel is definitely a good first novel, and a worthy one. I’d give it 3.5 stars out of 5. The novel’s website points to it being the first novel in a projected series, The Human Reach. I look forward to seeing followups, and to seeing this and other novels on the series on bookshelves. Well done.

I bought my copy of Through Struggle, The Stars from Smashwords for $US 2.99, but the novel is also available from Amazon and other online retailers.

Another review of a science fiction novel

Carlos Yu here.

Through Struggle, the Stars
A Human Reach Novel
By John J. Lumpkin
Copyright 2011 John J. Lumpkin
Smashwords Edition

The important things out of the way first: Through Struggle, the Stars is a solid, readable first novel. I would read this novel’s sequel, and I would consider reading an unrelated novel by this author. It’s well-paced and has moments of genuine dramatic tension, a B in a world without grade inflation.

Through Struggle, the Stars is military science fiction without being military pulp science fiction. It’s not a dumb adventure novel of the kind where your IQ points are used for target practice by the writer, and it doesn’t read like someone else’s fetish porn. Quite frankly, this is probably why it hasn’t found a publisher yet. The story is jingo-neutral, or close to it.

Lumpkin has put some thought into each of his set pieces and how they fit into the overall plot of the book. The space combat is realistic in that ships radiate energy like real physical objects, they move with very low accelerations, and they are very vulnerable to hypervelocity impacts. Lasers in space and as a form of artillery have important roles. Lumpkin abides by the constraints of his imaginary wormhole technology, and he uses the local stellar neighborhood as his playground. It’s not totally rigorous, but he’s put in some work.

There is a nagging problem with inconsistency in the setting, however. I’m not sure whether this would be picked up by the general science fiction reader, should such a person exist, but it jarred me. Simply put, the timescales are off. A social setting that would not be a bad extrapolation of today’s demographics in 2050 is given a date of 2139. Future institutions are immediately recognizable. Technological progress outside of the space applications sector has moved very, very slowly —there are no flashy advances in automation or genetic engineering, for example. Despite Japan  becoming a major power once again through its first mover advantage in space technology, economic convergence between the richer nations and the poorer nations has stopped. At the same time, interstellar colonies on previously barely habitable worlds somehow have reached populations in the millions and have been settled for decades, and there is significant commerce. Many nations have colonies.

This mismatch in timescales is a shame, because each part of Lumpkin’s universe feels realistic enough. If anything, his setting feels a little too contemporary — a scene involving a Mercedes and a brawl in a casino parking lot comes to mind.

The politics of colonization motivate the background of the plot — true terra nullius, there are no aliens so far in this setting. There is a worldwide belief in the necessity of developing colonies off-Earth to maintain cultural and biological survival due to the horrible effects of a near-future asteroid impact. This belief has merged with a resurgent nationalism. Policymakers also believe that wars between superpowers can escalate incrementally, perhaps because of the excellent defensive countermeasures in this setting, but I wonder if Lumpkin has in the back of his mind what happens when the conditions for deterrence through mutually assured destruction no longer apply.

The characterization in Through Struggle, the Stars was, for want of a better word, adequate. The soldiers are more fully realized than the intelligence agents. I didn’t believe in the motivations of the two principal Chinese agents, but it wasn’t because of “characterization through ethnic stereotype,” and they are presented as outliers. People die, and I am pretty sure that Lumpkin has read Tobias Wolff’s short story, “Bullet in the Brain.” (Go read it. It’s short.)

Through Struggle, the Stars is an emotionally cool book. It lacks some of the quirky outsider energy of classic science fiction, but it also lacks the same undercurrents of dogmatism and score-settling. This book is not about saving the world with a single grand gesture, or flipping the table over to reveal the rot underneath; it’s about conflicted people in the military and the intelligence services at a particular point in geopolitical history. I enjoyed how the Big Secret turned out not to have very much effect, although it is conceptually important.

I’m more than happy to answer any questions.

A review of a science fiction novel

A friend of mine, James Nicoll, asked me and a few other mutual amigos to review a self-published science fiction novel: Through Struggle, The Stars, by John Lumpkin. Somewhat reluctantly, I downloaded and read it. To my surprise, I enjoyed the read while remaining unconvinced by the scenario. I will also put up my friends reviews (all written separately). Here (with one change) is mine:

Through Struggle, The Stars is much better than a self-published novel has any right to be. It’s a tale of a war in the year 2140 between China and Japan, told through the eyes of a new officer in the United States Space Force. The USSF — which has inexplicably adopted naval ranks and conventions despite the name — exists to defend both the terrestrial United States and its interstellar colonies. The setting is hard science fiction, in the sense that the only gimme is a system of wormholes to allow interstellar travel. No aliens; space vessels rotate for gravity; and while they use fusion engines that we have no idea how to build the accelerations involved are tiny. The politics aren’t self-evidently silly and the populations of the colony worlds are sensibly low. In fact, it reads like the kind of novel that I tried to write as a teenager, only well-crafted.

From the tone of the above paragraph, I’m sure that you can guess that my overall review is going to be negative. Since the book has a lot of positive qualities, let me start with them. First and foremost, I kept reading! I am not the sort of person who finishes every book he starts. In fact, I finish only a small minority of them. Most of my reading is work-related nonfiction and thus mostly skimmed. As for novels, I’m a high-friction reader: the moment I have to work to maintain my attention, my reading speed drops quickly — and it takes very little to get me to quit. This novel I did not quit. That is an extremely good thing. 

Second, I very much liked how the majority of the American characters had Spanish last names. Finally, somebody who thinks about demographics! I also liked that they threw in Spanish catch-phrases, but just as that: catch phrases. That is exactly how Spanish survives after several generations. We learn (from a Senate vote) that the United States has at least 52 states by 2140 and the author opens the possibility that Cuba might be one of them. Normally, that would get my “silly future cliché” alert up, but the allusion is simply that one enlisted USSF person has Havana for a home town. That would be possible today. While I do not believe that Cuba will ever become part of the United States it is supremely easy to believe that the country will continue to have a “special relationship” with the mainland, up to and including free migration. So the throwaway line didn’t desuspend my disbelief — after all, add Puerto Rico and the District of Columbia and you’ve got 52 right there.

The characters were believable, if somewhat clichéd. Actually, “clichéd” isn’t the right word. They were believable enough for me to care about them (and therefore keep reading) but they weren’t distinct enough for me to really remember any details. The one exception was a Chinese gangster-turned-intelligence-agent, and he stuck with me because I didn’t really ever believe in him. He wasn’t a cliché by any means; he just seemed too much like an agent of the plot, a character created by “The Narrative” rather than a real person who naturally found himself involved with the other people in the book. (The phrase in quotes is a reference to Scalzi’s Redshirts.)

The politics were well-handled … but lacking. First, the portrayal of China as a quasi-democracy felt wrong. Such regimes first appeared in Latin America in the late-nineteenth century; they quickly collapsed (via coups or civil wars) or turned into full-on dictatorships. That pattern continued through the 20th century with a third wrinkle: several of the quasi-democracies turned quickly into real democracies. Mexico’s second dictatorship-in-drag collapsed in the 1990s; even in Turkey today, the “deep state” seems to be on its last legs. It strained my belief to think that China would be ruled by a century-old corrupt oligarchy 130 years from now. (A newly-minted corrupt oligarchy would be a different story.)

Second, the politics of the war were given disappointingly short shrift. It is indisputable that major inter-state war has gone into serious decline since 1945. It strikes me as very plausible that it could see a comeback. The novel provides a necessary condition: powerful directed-energy weapons make it at least plausible that politicians would believe that they could control the ladder of escalation. (The prevalence of robotic and precision weapons had a similar effect.) Logically, therefore, the war began as a limited conflict fought at sea and in space; one can imagine future audiences cheering on such a contest.

The problem is that there was something very pro forma about the backdrop. There is an interesting question about whether industrialized interstate war (limited or not) is possible in a modern democratic environment. Can modern democratic politicians capitalize on violence? Would modern audiences countenance unleashing death in their names for anything less than national survival? These questions are unaddressed. When the author reveals the reason the American president maneuvered the U.S. into the war, it comes as an anticlimax. (It depends on the FTL McGuffin.) There were some references to U.S. domestic opposition, but mostly in the context of “ethnic Chinese” congressmen objecting to a war with the madre patria. (Which is, I have to say, a silly idea — in a world where China has been rich for a century, there will be no discernable Chinese-American community have been little net immigration from China for at least as long. The descendents of past and current immigrants will have long since assimilated; second-generation outmarriage among Chinese-Americans currently tops 50%.) There is a subplot involving a Taiwanese independence movement that strained credibility. In short, the politics never became unbelievable — but they were underexplored.

Which brings me to the killer problem: the book read like it took place in 2012, 2030 on the outside. It was simply unbelievable as a depiction of life in 2140. The ground combat scenes, for example, read like they happened last week. (The main characters were a little too composed during the fighting, but that’s a different issue.) Sure, there were exoskeletons and lasers from space, but that felt like window-dressing. Nothing about microdrones, intelligent robotic “pack animals,” self-guided ammunition ... the tactics of ground combat were basically unchanged.

The same problem afflicted the rest of the book. There were passing mentions of self-driving vehicles, advanced drones, machine translation, advanced 3-D printing, computer interfaces implanted in people’s eyeballs and “the best genes that money could buy,” but none of that had any appreciable effect on the course of the action or the social background in which the characters operated. The author failed completely at giving the impression that the book took place in the future. Now, it is possible that the author is correct that by 2140 automation will advance, sensor technology improve, cyborgization continue, 3-D printing mature and gene modification become common among the rich ... yet with daily life remaining about the same as in 2012. (Along with military organizations, ground combat and democratic politics.) That is possible! And hell, as a small-c conservative, I would very much like it to be true. But it’s a tall order, and a writer who wants to keep my disbelief suspended needs to make the case. The author of this book does not even try.

As a coda, I had three other quibbles. First, while the space combat scenes seemed well thought through, I did have to wonder what all those people on board the ships were actually doing. Even if our 22nd-century space navies decide to keep human commanders in the loop rather than entrusting it all to the AI’s, one would think that the ships would operate with tiny stripped-down crews and lots of maintenance robots. If that’s wrong, I want to know why.

Second, the dynamics of space colonization didn’t make much sense, at least not on the surface. There wasn’t much commerce, so the motivation seemed to be non-economic. The few colonies we saw were not rich places, so there was some indication that the author realized the problem, but it wasn’t explicit. Nothing caused me to recoil, but I couldn’t shake the feeling that something didn’t make sense about the scenario.

Lastly, there were a few dumb throwaways. A reference to helium-3 mining on the Moon. Ugh. A reference to asteroid mining. Slightly more plausible for a few rare elements, but double-ugh as something needed to power Earth industry. And then there was a major lacuna for a book about geopolitics: a bit about coastal protections for major cities was the only reference to global warming.

In short, the book succeeded as a yarn. But it failed as science fiction. Props for the Spanish last names, thinking through the dynamics of orbital combat, and avoiding (most) clichés. But minus for essentially writing “2012 in Space!” rather than something about the year 2140.

I would read other works by the author; he shows a lot of promise. I’m not sure that I would read other works set in the same universe, though. None of my objections require him to rewrite his background — just explore it in greater depth. The end result, however, won’t look much like the “2012 in Space” that we saw. Maybe Charlie Stross would let him bounce ideas around?

Comments welcome on any and all of the topics raised above.

Syria in 2013

So we haven’t written much about the war in Syria. Long-time readers of this blog may recall that back in the spring and summer of 2011, we were posting something about the Libyan conflict every couple of weeks or so. Why the relative silence?

Well, a couple of reasons. One, the Syrian conflict is complicated. Libya was a relatively straightforward military struggle, with clearly defined, mostly contiguous areas of rebel and government control. There were fronts and supply lines and any number of classic set-piece battles. You could look at a map and instantly have some notion of what was going on. Syria, not so much.

Two, there was a painful dearth of decent analysis on Libya. I called the date of Qaddafi’s downfall (late August) several months before it actually happened, and I did it using amateur methodology that any bright high school senior could have come up with. What’s striking is not that I got it right but that nobody else did, at least in the public sphere. (In retrospect, it looks to us that the Obama administration and the Pentagon had the same date in mind.) Syria, on the other hand, does not lack for informed commenters; you can begin at Josh Landis’ Syria blog, which is something of a clearinghouse, and then just start clicking through links. There’s enough good stuff out there that I don’t really think I’d be adding much of value.

That said, here are a few throwaway observations.

• Assad loses. The correlation of forces has begun to tilt against him; as with Qaddafi, he’s trying to climb a slope that is only getting steeper. The Russians are backing away (and never provided significant material aid), his army has shrunk down to an Alawite core with unreliable auxiliaries, he’s running out of money, yadda yadda.
• It’s probably going to take a while. Back in August 2011, John Quiggin bet me that Assad wouldn’t last a year; I won that bet. We extended it for another six months, to the end of February 2013. I expect to win that bet too. The regime still has real sources of strength — it controls the capital, has almost all the heavy weaponry, can still access cash and weapons via Iran, the Sunni merchant class hasn’t bolted yet. I don’t dare pick a date, but I think it’s still months and months away. Meanwhile, I’m sorry to say that a lot more people will die, and even more will be impoverished or immiserated. (To understand the dynamics, you could do worse than to read Che Guevara’s book.) 
• It’s not going to destabilize the region. Jordan’s stable in part because its neighbors are so screwed; Jordanians who might be inclined to rock the boat have only to look at Iraq and Syria to reconsider. Israel will be fine, at least until a new Syrian regime gets properly settled in. Iraq’s problems are driven by internal politics, not stuff happening in Syria. The one partial, limited exception is Turkey, where Assad’s clever stroke of liberating his Kurds is having some knock-ons. I can’t however really consider it “destabilizing.” The Turkish state is not at risk and the status quo in Turkey is very unlikely to change. (In fact, there are signs that the fallout from the Syrian civil war may be having a constructive effect.)
• In fact, a surprising thing about Syria is how little impact it’s had on regional and world politics so far.
• Boots-on-the-ground foreign military intervention remains extremely unlikely. No-fly zones or a Libya-style bombing campaign are conceivable but very unlikely any time soon. (There is evidence that Assad considered the use of chemical weapons, which would have prompted intervention, but the operational benefits from doing so were iffy at best and the strategic consequences all negative. This is unlikely to change.) 
• There’s not going to be an Alawite fortress state in the west. (Or at least, not for long.)
• What follows won’t be pretty. The Islamist Menace (UNDER THE BED AND ALWAYS EVIL) is one of the more tiresome tropes of modern U.S. politics. That said, some pretty unsavory types are coming to the fore. The longer the fighting goes on, the worse this is going to get. Post-Assad Syria will be a fissiparous place and probably pretty violent, and the many interests of outside parties aren’t going to make matters any better. When some sort of stability finally does emerge there’s no reason to think that it will be dominated by bien-pensant liberal democrats.

All of these seem pretty obvious, but I emphasize again that I’m not a Syria expert — this is that same “bright high school senior” level of analysis. If I turn out to be right about most or all of this stuff, I’m actually going to be rather annoyed with our foreign policy commentariat.

Natural gas prices will rise and tight oil will not peak for decades

I tend to avoid blogging about the stuff that I teach about in my class. That is probably a mistake.

A recent presentation by J. David Hughes about shale gas and tight oil has gotten some recent attention. It makes two conclusions. First, the price of shale gas is going to go up. Second, the tight oil boom is a chimera.

The conclusion that the price of shale gas is going to rise is true. It is also not news. (Why was it treated as such?) For example, I made a presentation on October 4th, 2012, to the Business and Environment Initiative at HBS on fracking and shale gas. In that presentation, I pointed out three things:

1. If you assume land costs of $5000 per acre and opex of $1.50 per MMBTU, then the “point forward costs” (i.e., marginal costs including land acquisition) of shale gas are $8.31 in the Fayetteville shale and $8.75 in Haynesville;
2. ARC Financial estimates that $22 billion per quarter in capex is needed to maintain production, up from current expenditures of $12bn;
3. Shale gas drilling has gone off a cliff (rigs in operation have crashed from a little over 1500 at the beginning of 2008 to only 500) ... and given the well-known hyperbolic decline rates of shale wells that meant production would soon decline unless prices recovered. (I reference those hyperbolic declines in this January 2012 post on Argentina.)

In short, Hughes is correct (his back-of-the-envelop calculation of the needed capex is actually only half that calculated by ARC) but his conclusion is not news and should not be treated as such. There are industry professionals who claim that well costs will fall and that land costs are not sustainable, so the marginal cost data should not be taken as data from on high. (Chesapeake has said that its magic spot for the Marcellus shale is around $5.) That said, few believe that natural gas prices will remain below $4 per MMBTU for much longer ... but “much longer” probably means more than a year. I do not expect U.S. prices to suddenly jump.

What about tight oil? Well, we already know that the marginal cost of tight oil is at least $60. When you add in the realization spread (the difference between the companies’ realized revenue per barrel and some benchmark price, usually Brent) you get a marginal cost of at least $90.

Hughes goes on to argue that the Bakken will peak in 2017 and then decline, but that rests on some dicey assumptions. First, that the 2010 EIA estimate of 9,767 potential wells remaining is correct. It is probably not: it assumes spacing of 2 wells per square mile, when four is already occuring and eight is already feasible. Second, it includes only discovered reserves. Finally, it assumes that oil prices will not rise further. The first two are relatively improbable.

Moreover, the Bakken is only one of many plays in the United States. It will start to decline relatively soon, if not by 2017 ... but other plays are expected to increase. The EIA really does know what it is doing when it makes its projections.

In short, it is true that the Citigroup analysis seems breathlessly out to lunch and it is true that tight oil plays require high prices. But we are not facing peak-tight-oil anytime within the United States. And while natural gas prices are fated to rise, the rise is not immediate.

Chicago is not Ciudad Juárez and never will be

The answer to this question is no.

To be brutally frank, even raising the comparison destroys the author’s credibility. I understand the point that she is trying to raise. Comparing the two cities utterly obscures it.

And the United Nations makes Ghana give Argentina its warship back

There is something amusingly science-fictional about the title of this post, like something that John Brunner would have written satirically in the 1960s.

The International Tribunal on the Law of the Sea (ITLOS) is an international court (loosely-associated with the United Nations) that rules on disputes related to the Law of the Sea Treaty. It consists of 21 judges elected by the governments of the states party to the Law of the Sea Convention. They serve nine-years terms; decisions are made by majority. Since it was created in 1996, the Tribunal has only seen 20 cases.

And today it released its decision in case #20! “Ghana shall forthwith and unconditionally release the frigate ARA Libertad, shall ensure that the frigate ARA Libertad, its commander and crew are able to leave the 22 port of Tema and the maritime areas under the jurisdiction of Ghana, and shall ensure that the frigate ARA Libertad is resupplied to that end.” It also ordered each party to pay its own costs associated with keeping the ship in berth to date.

Ghana argued that the ITLOS did not have jurisdiction because:

1. The ARA Libertad was in Ghanaian territorial waters (p. 4 at the above link);
2. Argentina had waived immunity under U.S. and U.K. law (p. 5);
3. Domestic appeals in Ghana are continuing (p. 6).

ITLOS declared (in paragraphs 94-100 at the link to the decision):

1. A warship is an expression of the sovereignty of the State whose flag it flies;
2. In accordance with general international law, a warship enjoys immunity, including in internal waters, and that this is not disputed by Ghana;
3. Any act which prevents by force a warship from discharging its mission and duties is a source of conflict that may endanger friendly relations among States;
4. Attempts by the Ghanaian authorities on 7 November 2012 to board the warship ARA Libertad and to move it by force to another berth without authorization by its Commander and the possibility that such actions may be repeated, demonstrate the gravity of the situation and underline the urgent need for measures;
5. The urgency of the situation requires the prescription by the Tribunal of provisional measures that will ensure full compliance with the applicable rules of international law.

And so, the decision! Argentina gets its ship back, although the two parties can continue to argue about the underlying principles. The Argentines also wanted Ghana to salute the flag and otherwise genuflect, but the Tribunal wisely seems to have ignored all that.

The decision was unanimous, but some of the judges added their own wrinkles. Anthony Lucky of Trinidad thought the Tribunal should have been more forceful in asserting sovereign immunity. Chandrasekhara Rao of India was annoyed that the Ghanaian government took a different view before ITLOS than before its own courts. He also wanted the Tribunal to state more forcefully that a state that allowed a foreign warship into its waters automatically gave up jurisdiction over that ship. Finally, Rüdiger Wolfrum of Germany and Jean-Pierre Cot of France had ... well, what seems to this non-lawyer to be a lot of hair-splitting that ends up in the same place as Lucky and Rao.

And thus, this latest attempt to seize Argentine assets comes to naught. Even in today’s world of limited sovereign immunity, it is hard to collect on sovereign debts. An expropriation case would be different (at least if it involved export industries) since foreign courts could easily go after production from the expropriated assets. But when it comes to sovereign debt, about the only leverage seems to be going after new issuances.

In short, Argentina won and Ghana lost. Sorry, LT.

Some headlines should be accompanied by exclamation points!!!!

Today I read in the Financial Times, “Philippines backs rearming of Japan.”

My reaction was, “Philippines backs rearming of Japan!!!”

When China gets a Philippine official to state “We would welcome that very much,” in reference to having Japan ditch the pacifist clause in its constitution, then you know that the People’s Republic has completely botched its diplomacy. (The Philippines is a country that still remembers the Japanese occupation, albeit not near as vividly as China or Korea.)

I currently believe that the United States is still what preserves the peace in East Asia. China is being aggressive. The Chinese public (at least portions of it) seems to have some militaristic tendencies. (Click the link for the pictures.) So it is not hard to imagine a Chinese government trying for a splendid little war with the Philippines or Vietnam. Nor is the converse impossible: since Japan currently hold naval superiority, Japanese politicians might try to goad the big fellow into a similarly splendid little Sino-Japanese naval war. 

It is not just China. Don’t forget the stunningly hostile South Korean reaction to Japanese possession of the Dokdo (aka Takeshima) islands.

I know, Steven Pinker tells us that we live in a less violent age. And he is right! But still ... sometimes a weird whiff of 1914 drifts over from East Asia. And it seems like the offshore balancing of the United States is what keeps the smell of gas from igniting.

Anyway, to bring it back full circle, when the Philippines calls for Japanese rearmament, then China’s attempt to assert its claim over the potentially energy-rich (and strategically located) South China Sea has now officially backfired.

Intangible drilling costs

This issue came up off-line, so I figured I should post about it. Some people in the oil industry claim that the deduction for intangible drilling costs is not a subsidy but an allowance for real expenses. And they are correct! Which is why nobody proposes to eliminate it.

When oil and gas companies drill, they incur all sorts of expenses beyond the cost of the materials used in the well. They need to prepare the site, build roads and gathering fields, install tanks, etcetera and ad naseum. In addition, they often pay service companies for, you know, services. These costs are real costs (there is nothing intangible about them) and the companies should be able to deduct them. Otherwise the tax code would be treating expenses as income, and that would be crazy.

The rub is that all companies incur similar costs. When Nissan builds a factory, it pays for all sorts of things beyond the cost of materials for the buildings and machinery. These costs are deductible. But when costs are used to build an asset that will produce for a long period of time, then the standard rules are that the company has to deduct those costs over a long period of time. For example, if you build a $5 million factory in one year, you cannot deduct the expenses the year you make them. You need to spread them out, (say) one million per year for five years.

Oil and gas companies, for some reason, are allowed to deduct those expenses up front, in the year that they are made.

The debate is over whether that special treatment should be allowed. (An overivew of oil and gas tax issues in the 2012 budget can be found here.) There are reasonable arguments on both sides of this debate, but do not allow oil company representatives to mislead you into thinking that anybody is considering the nutty idea of removing the deduction for intangible drilling costs.

That is all.

Why learn a foreign language?

 Geocurrents is a fun blog. I recommend it.

But they can, like all blogs, post some ill-thought-out stuff. They have recently posted a putative takedown of Larry Summers’ argument that universities should cut the resources that they use to teach foreign languages. 

The argument: English is widely-spoken and pretty much all you need for business. Add that to the ever-increasing efficiency of machine translation, and the case for expending mass resources to teach foreign languages disappears. Thus, we should cut back. 

I was looking forward to a solid criticism of this argument. Instead, Geocurrents avoids Summers’ substantive points and then at the end undercuts itself. Since I think that Summers is probably wrong, I find this frustrating.

Let’s proceed, in a lesson about How Not To Build an Argument:

(1) The author points out that most of the world does not, in fact, speak English. Since Summers never argued that they did, it is hard to see the relevance of this point.

(2) The author then points out that a lot of immigrants to the United States speak a language other than English. Of course, their children lose those languages super-fast. Moreover, Summers never claimed that there were no non-English-speakers in the United States, and I have never anybody justify the resources spent on foreign-language teaching by saying that we need to communicate better with immigrants. If that is the author’s argument, then she needs to make it explicitly.

(3) Finally, after two non sequiturs, the author states that machine translation is imperfect. This is perfectly true. Some students of mine recently presented me with a Pemex integrated service contract machine-translated from Spanish: it was so incomprehensible that we went back to the Spanish and translated it ourselves. But ...

First, machine translation is getting better all the time. Summers’ argument is about the future. I want to know why the author of the Geocurrents post believes that translation will be as bad in 2050 as it is now! And I am superlatively annoyed that she does not tell me.

Second, the author then presents a frighteningly good and clear machine translation of a Russian poem. No, it isn’t as poetic as the human translations. But it is completely comprehensible. And since Summers is talking about “doing business in Asia, treating patients in Africa or helping resolve conflicts in the Middle East,” she needs to explain why the level of machine competence shown by her own example is not sufficient to those tasks.

At which point she also needs to explain why machine translation won’t become good enough by 2050. (Or, heck, by 2015!) But I repeat.

In short, the riposte does absolutely zero to grapple with Summers’ contention. It is an example of how not to construct an argument, because it doesn’t actually construct an argument.

Comments are more than welcome. How would you argue against Summers?

More on the legalization of marihuana in Uruguay

It seems that the Uruguayan government has decided to send a new legalization proposal to Parliament. It is considerably more detailed than the original, and its text can be found at this link.

The new bill establishes a National Cannabis Institute to regulate the drug (including sales) and allows for the creation of “membership clubs” of up to 15 people licensed to grow 7,200 grams per year for the use of the members. The institute will be able to fix the price of its licenses to grow or sell cannabis. I presume that the Parliament will also be able to impose taxes in excess of the license fees. I am a little surprised as to the budgetary autonomy that the legislation seems to grant the Institute.

It appears that the Broad Front legislators have abandoned the idea of having the state control the entire value chain in favor of a more ordinary regulatory approach.

The experiment will bear watching.

Legalizing marijuana in Uruguay

So Colorado and Washington have legalized marijuana! This is a big step, although it is going to be a problem that the federal government still bans the substance.

Now, it looks like Uruguay might be the first country on Earth to fully legalize marijuana. (Or “marihuana,” as they spell it.) The Netherlands tolerates it, but it is not fully legal.

It is pretty neat that a serious country may legalize marijuana, but to give away the punchline, I doubt very much that it will be a harbinger of much until the American or Canadian federal government moves. There is a lot of opposition to legalization in Latin America, and Uruguay is not considered a bellweather. (It is one in practice, but that is more because Uruguay gets to the future first and less because other nations deliberately emulate the Eastern Republic.)

The bill is pretty vague. Here is the complete text:

“The State will assume control and regulation over the importation, production, acquisition in any form, storage, commercialization and distribution of marihuana and its derivatives, under such terms and conditions as fixed by regulation.

“Likewise, the State will undertake such material activities as are necessary before, during and after to carry out the activities referred to in the previous paragraph, under such terms and conditions as fixed by regulation.

“The activities referred to in the previous paragraphs shall be realized exclusively under a policy of damage reduction that shall, therefore, alert the population to the consequences and adverse effects of marihuana consumption, as well as the effects of minimizing the risks and damages to the population of potential consumers under such conditions as fixed by regulation.”

It is worth noting here that the Uruguayan president is quite a bit more powerful than the American president. (At least inside the country. Outside Uruguay, I do not believe that Mr. Mujica has the ability to order flying robots to kill anyone.) As long as his cabinet concurs, the Uruguayan president can send bills directly to Parliament. (Officially, the “General Assembly,” but everyone calls it Parliament.) In fact, under Article 168 the president can designate bills as urgent. “Urgent” bills must be approved or disapproved with 85 days or they automatically become law. The catch is that the president can only submit one urgent bill at a time.

The marihuana bill is not urgent.

So it is taking its own sweet time through Parliament. Of the six security measures proposed by the President (the marihuana deal is considered a security measure) the legislature has approved only one, which reduced sentences for low-level drug dealing while increasing the penalties for corruption. Right now, the marihuana bill is in a dicey spot. It can pass, but only with support from the President’s Broad Front. So far, only one opposition legislator has come out in support.  President Mujica seems reluctant to pass such a significant bill on a party-line vote.

In order to get support, the administration has announced what the regulations might look like after the bill is passed. The drug will cost ₱700 per gram, around US$36. That is higher than the U.S. price of $14 per gram, but roughly the price in Uruguay. (Since marijuana is still illegal, it is hard to come up with a standardized price, even for tolerated medical marijuana.) If the law passes, Uruguayan consumers will receive a photo ID armed with a photo and bar code (that is high tech?) and be limited to 40 grams a month.

To sum, the bill looks likely to pass, but it is still generating controversy.

But I would also bet that the Mexican government is going to consider legalization but do nothing until the U.S. federal government moves. There is a great deal of conservative opposition in Mexico, deeper and wider than in Uruguay, and with a weaker president and a divided Congress everything is tougher.

In fact, contrary to popular belief, a great book by Isaac Campos shows that opposition to marijuana actually originated inside Mexico; it was not imposed by international norms. The reverse actually: had Mexicans been less anti-marijuana, then the world might not have gone prohibitionist.*

Does gerrymandering matter now? A question for political scientists

There is a political science literature that gerrymandering, as an empirical matter, has had less effect on American politics than the pundits like to claim. There is little past evidence that gerrymandering leads to more polarization or less competitive elections. The U.S. Senate provides perhaps conclusive evidence about polarization: you cannot gerrymander state boundaries, but the Senate is just as polarized as the House. Politicians are polarized because the U.S. now has polarized ideological political parties.

Still, it is hard for me to reject the hypothesis that gerrymandering is very important. Why is that? Well, two things:

1. California: it moved to nonpartisan districting, and Democrats pulled out a two-thirds supermajority. Of course, there could be other explanations: nonpartisan primaries, continuing Mexican-American population growth and leftward shifts in public opinion. It certainly seems as though the new cleaner districts helped the Democrats pick up Congressional seats;
2. The GOP seems to have lost the overall Congressional popular vote, but maintained its majority.

I do not know, but it seems as though gerrymandering may have made a very large difference in this election. What does the literature say? Anyone?

Ecuador attacks Chevron in Argentina: world governance runs both ways

I hate the word “governance,” but it is useful. After all, there are things that are governed without a single government. When those multiple governments are hierarchically ordered (even if legally sovereign) then I prefer the word “empire.” But sometimes imperial institutions can run both ways.

The bilateral treaties that govern the investor-state arbitration system tend to be unequal. Consider for example the U.S.-Ecuador treaty. The United States exempts Ecuadorean investors from using anything but U.S. courts in the following sectors:

• Air transportation
• Banking
• Customhouse brokers
• Government grants
• Government insurance and loan programs
• Energy and power production
• Insurance
• Maritime services and maritime-related services
• Mining on the public domain
• Ocean and coastal shipping
• Ownership of real property
• Ownership and operation of radio and television stations
• Ownership of shares in the Communications Satellite Corporation
• Primary dealership in United States government securities
• Provision of common carrier telephone and telegraph services
• Provision of submarine cable services
• Use of land and natural resources

Meanwhile, the Ecuadoreans exempt:

• Traditional fishing (not including fish processing or aquaculture)
• Ownership and operation of broadcast radio and television stations

Quite a difference! Looks pretty damn imperial, no? You can kinda understand why President Correa wants to withdraw from ICSID and abrogate the investment treaties.

Thing is, these treaties are ultimately enforced not by ICSID or some other sort of world-government-in-drag, but national courts. And the same conventions that allow national courts to enforce foreign rulings (the way Argentina lost its ship in Ghana) can be used to establish extraterritorial jurisdiction. That can do it a bit to reduce the imperial feel to the international system that protects property rights. The Ecuadoreans, in short, can use foreign courts to enforce their laws.

Last year, Ecuadorean courts levied a $18.2 billion damage claim against Chevron for polluting watersheds in the country. Ecuador’s legal team knows that ChevronTexaco doesn’t have many assets in Ecuador, so its strategy is to go around the world looking for Chevron assets that it can attach. (You can read a copy of the plan from the legal team here. They call it the “Invictus memo.”) In February, Chevron won a preliminary victory when it got an arbitration tribunal to take its side. Problem is the ruling applied only to Ecuador.

So it was big news in October when the U.S. Supreme Court ruled [CLARIFICATION: It was not a ruling per se; the SCOTUS decided not to hear an appeal, thus allowing the plaintiffs to proceed] that Ecuador could freely continue its search for Chevron assets. A week later an Ecuadorean court let the plantiffs seize $96.3 million owed to Chevron by the Ecuadorean government (yes, that would be in effect Ecuador taking cash from itself) and all licensing fees owed Chevron from the use of its logo. And now ...

... an Argentine judge has given the plantiffs all of Chevron’s shares in Chevron Argentina, all of Chevron Argentina’s dividends, its 14% stake in the Oleoductos del Valle pipeline, 40% of its bank deposits and 40% of the revenue from future Argentine crude sales!

How much is the above worth? Well, I don’t know how much cash-on-hand Chevron Argentina enjoyed and it’s safe to assume that they won’t be paying any dividends as long as the judgment is in place, but it is possible to calculate the value of its crude production. (Oleoductos del Valle loses money.) The June domestic price of crude in Argentina was US$467 per cubic meter. (If you click the link and download the data, you’ll find that the price didn’t vary much.) Using production data from January through September of 2012, you’ll find that Chevron Argentina will produce crude worth about $833 million in 2012. 40% of that is $333 million; not a bad chunk of change. Of course, the Ecuadorean government will only get about 35% of that, since the income is actually due the plantiffs and their lawyers. Still, $117 million per year is nice, and if the precedent holds it could wind up with a lot more than that as more Chevron assets are attached around the world.

Eventually the Ecuadorean government might even net enough to pay off Occidental.

Thirteen billion dollars is not a lot of money when ...

... it could stop things like Sandy from happening again.

The Dutch company that came up with this proposal (presumably there would be another smaller seawall around Arthur Kill between Staten Island and New Jersey) estimated that it would cost $6.5 billion. Double that price, heck, triple it, and you have not spent a lot of money relative to the benefit.

There are problems, of course. There are environmental issues. (Although stupid ones, in my opinion. This, for example, should have been built.*) There are political issues: the gates would leave Staten Island, Long Island and the Jersey Shore unprotected. And there are engineering issues: could a storm surge still come up through Long Island Sound? How high does the seawall need to be?

And there are smaller things. For example, burying power lines. Of course, that will be expensive. And as Manhattan shows, it is not a panacea. But it works to prevent outtages in outlyings areas. How expensive would that be? Well, in 1990 the city of Anaheim, California, decided to bury its lines. The cost? A four-percent surcharge on electric bills. That is high ... but as an insurance premium, not so much.

Infrastructure like the above needs to be built. The question is whether New York State (perhaps with New Jersey) can break through the sclerosis that afflicts American megaprojects and get it done. Or at least get it done before the third or fourth or fifth superstorm wreaks havoc.

I am not optimistic. I hope that I am wrong.

* The judge who killed Westway turns out to be same Thomas Griesa who has made all the rulings in the Argentine default cases.

UPDATE: Via Matt Yglesias (and a few intermediate links) you can find more detailed proposals from a 2009 conference.

I never did think that the border wall would work but ...

... this is ridiculous.

It looks like some smugglers were trying to use makeshift ramps to move marijuana from Baja into the Imperial Sand Dunes Recreation Area near the Arizona state line. The Jeep Cherokee got stuck on top. The smugglers ran south as the Border Patrol agents rolled up: seems as though they got away with the marijuana.

I guess it’s worth pointing out that the fence is not really built on the border, but about 30 feet north of it. So it’s impressive that they not only got away, but got away with their cargo.

I guess it isn’t quite a Darwin Award moment, but really. A Cherokee over a fence? Caray.

Argentina loses in the United States, but as the Rock said, it doesn’t matter

It isn’t quite as dramatic as the frigate trapped in Ghana, but Argentina lost a big one in the U.S. Court of Appeals last on October 26th. The court upheld an earlier ruling that Argentina broke its contracts when it offered to restructure the debts of its creditors on pain of repudiation for those who refused to take the deal. If everyone had taken the deal, that would be one thing; but the Argentine government can’t go ahead and pay some creditors but not others.

On October 25th, Foreign Minister Héctor Timerman provided a list of the assets that stiffed creditors have tried and failed to seize. It’s pretty remarkable:

1. In 2004, NML Capital (same fellows who have grabbed the frigate) grabbed 12 properties in the United States, including the residences of the Argentine ambassadors to the U.S. and the OAS, the residences of the heads of the Argentine army and naval attachés (in Maryland and D.C., respectively), the Washington offices of all three military attachés (Army, Navy and Air Force), the Argentina mission to the OAS (the whole damn building, at 1816 Corcoran Street N.W.), and four Air Force storage units. On August 3, 2005, the D.C. District Court ruled that all of these properties were covered by sovereign immunity.
2. In May 2007, creditors seized the presidential jet in California. A judge in California rapidly returned the wonderfully-named Tango One to Argentina within a couple weeks.
3. In September 2008, creditors went after the accounts of the Miami consulate and the New York tourism office. A New York district judge tossed that one out on September 30, 2009.
4. In May 2010, creditors grabbed Argentine funds owned by the Banco de la Nación Argentina in New York. That was overturned on September 24, 2010. To be honest, I do not understand this ruling: the Banco de la Nación is not the Argentine central bank, but state-owned commercial bank. (It is worth adding that two months earlier, in March 2010, the U.S. Supreme Court pre-emptively blocked an attempt to seize the nationalized pension funds. The Argentines quickly repatriated the funds after the SCOTUS decision.)
5. In April 2011, creditors seized an Argentina space ship. Really! They attached the SAC-D satellite. The Central District Court of California ruled against the creditors on May 25th, 2011; on June 6th the creditors announced that they would not appeal.
6. On August 1st and 9th of 2011 creditors managed to embargo central bank funds held in the Federal Reserve Bank of New York — that was overturned on June 26, 2012, when the Supreme Court refused to hear the case.
7. On May 16th, 2011, creditors claimed Argentine state-owned patents in New York worth about $1.2 billion. That failed on March 22nd, 2012. I’ll admit that I don’t understand this decision either; patents seem like commercial assets to me.
8. In December 2009, creditors went after Argentine central bank reserves in Switzerland. That took until October 17, 2012, to resolve, but the Argentines kept their money.
9. On April 3, 2009, creditors grabbed the accounts of the Argentine embassy in France. That was quickly lifted, although a final decision in Argentina’s favor didn’t come down until September 28, 2011.
10. On December 22, 2009, creditors seized an Argentine Air Force storage unit in Nanterre. The Argentines got that back on November 22, 2011.
11. Ditto, creditors tried to freeze the French accounts of the Argentine military in August 2010. Judges overturned that within days.
12. Also in France in 2009, creditors claimed the General San Martín Museum in Boulogne Sur Mer. That was overturned on March 5th, 2010.
13. In Germany, the Argentine embassy’s accounts were frozen on April 23, 2003. A court ruled against the creditors on December 6, 2006, and the German supreme court confirmed it on July 4, 2007.
14. A second attempt to grab the Frankfurt consulate’s account in December 2010 failed in September 2011.
15. In Belgium, creditors froze the Argentine embassy’s accounts in August 2009 ... and still have them frozen! The case has been appealed multiple times, with varying decisions, and is now going to be decided in early 2013. Precedent is on Argentina’s side.
16. Ditto creditors grabbed the Argentine Agriculture Commission to the European Union in Brussels. That one is still in court but the smart money is on Argentina.
17. In Italy creditors grabbed a whole bunch of stuff, but the Italian high court declared that Argentina enjoyed general immunity on May 27th, 2005.

In short, courts have gone out of their way to protect the Argentine government. In most of these cases, the decisions have been clear-cut, but even in the fuzzy cases of #4 and #7 the Argentines have won. So why should this recent decision matter?

Well, mostly it doesn’t. The decision means that Argentina can no longer make payments on its restructured debt in the United States. In December, Argentina is supposed to make $3.3 billion in coupon payments in New York, so it looks like a big deal. Thing is, Argentina has three simple options:

1. Pay the holdouts according to the original deal, while paying the holders of restructured debt the new payments. Plausible ... but in addition to the cost, it would open a host of new lawsuits and be a political humiliation. Ixnay on this option.
2. Pay outside the United States. Sounds easy, but all it would take is a few holdouts to push Argentina into technical default and trigger all the credit default swaps on the debt. Argentina could restructure the debts as domestic law with the agreement of 85% of the creditors ... but that would also trigger the credit default swaps even if Argentina remains current on all payments. Of course, the Argentine government won’t be on the hook for the swaps. Since it can’t issue new debt anyway, there really isn’t much downside.
3. Screw everybody. Just stop paying.

Me, I vote for option (2), but it doesn’t matter. Argentina is going to go into technical default, the insurers are going to lose money, and the holdout creditors are going to be no closer to being paid. Plus, Argentina is also going to get its ship back, although like Jon Rabinowitz, I kinda hope that it doesn’t.

Argentina v. Ghana, round 1½

The Argentines are going to fly their sailors home ... on an Air France plane. The reason is obvious: they are nervous that Ghanaian courts would just seize any Argentine aircraft!

It looks like the Ghanaian port authorities are going to move the Libertad. It’s clogging up a needed berth, costing the port $3,667 per day.  To be fair, that is a lot less than the $50,000 that the Libertad is currently paying in docking fees ... well, that Argentina is ratcheting up in fees. I suspect that Argentina isn’t actually paying them. After all, it has stated that it is going to claim those fees in damages in the suit it plans to file against Ghana at the U.N. Law of the Sea Tribunal in Hamburg.

Speaking of the U.N., nobody should be surprised that the Security Council is not treating this as a threat to world peace. So much for hyperventilating about an Argentine strike on Ghana ...

P.S. No, nobody in Argentina is seriously discussing war with Ghana!

Martinelli must be really bummed about the Yankees

There are few rational explanations for this. (Hat tip: Will Baird.) The story at the link is that President Martinelli of Panama told Chancellor Merkel that he would like to have the euro circulate alongside the dollar in Panama as legal tender. Seriously, he wants to be only country in the world with two currencies in legal circulation.

The proposal makes no economic sense. (As in, why would you want to force everyone in Panama to post prices in two currencies and start accepting euros as tax payments?)

But it was a very nice thing to say to Ms. Merkel. The video is below: Martinelli makes his proposal around 3:30 ... twenty seconds later, the Chancellor nods sagely. He goes on to say he has “complete faith in the euro.” I suspect that he was just trying to reinforce that point. Either that, or as Carlos Yu suggested, he is seriously pissed off about the Yankees.

Argentina loses round one in Ghana

In most countries, military and diplomatic assets owned by foreign states are untouchable by judicial action. That’s why the attempt to attack Argentine embassy accounts in France ultimately failed. But that does not — so far — seem to be the case in Ghana. The creditors are winning.

On October 11, 2012, Judge Richard Adjei Frimpong of the Commercial Division of the Ghanaian High Court held that the Argentine government had waived sovereign immunity in the initial bond contracts. (Technically, in the 1994 fiscal agency agreement attached to them.) I have not yet been able to get a copy of the ruling, but I have some idea of what the two sides in the case argued. Argentina’s lawyer, Latty Otu, argued two things. First, you can’t seize military vessels under the Law of the Sea. Second, the fiscal agency agreement only covered assets inside Argentina.  

The creditors’ lawyer, Ace Ankomah, posed several counterarguments. First, he argued that while the Law of the Sea recognizes that naval vessels are immune, it says nothing preventing states from waiving that immunity. Second, the fiscal agency agreement applies outside Argentina — the clauses specifically applying to assets located inside Argentina involved the assets that the government refused to allow to be attached.

This is not what I expected to happen. Now, there are two more appeals to go in the Ghanaian court system. The first is the Court of Appeals. The second is the Supreme Court. The fastest that these could go is three months. One thing that won’t happen is an intercession by the Ghanaian government. Government lawyers took Argentina’s side in court, but the Ghanaian government is not going to interfere with the legal process. Just yesterday, Argentina’s deputy foreign affaris and defense ministers  returned empty-handed from a visit to Ghana. Meanwhile, in Buenos Aires the head of Argentina’s intelligence services has had to resign — understandably, she should have seen the Ghana incident coming — as has the head of military strategic intelligence and the Chief of the Navy. Meanwhile, Argentina continues to rack up $50,000 a day in docking fees and around $550 per hour for a good lawyer. Still, there’s one good thing. After reports came out that the sailors on board the ARA Libertad reacted very badly to the visit by the Argentine negotiating party, Ace Ankomah’s office brilliantly announced that they stand willing to fly all the sailors home immediately at no charge.

If the Ghanaian court decision surprised me, the reaction of the Libertad’s crew to a visit by the Argentine negotiating team has me completely stonkered. From Clarín:

The team announced, “We want to bring the greetings and support of the Argentine people.” The sailors’ cold anger was visible. Witnesses to the visit stated that the team spent no more than 15 minutes on board before abandoning the ship for the Ghanaian capital. After the [pair of Argentine officials] left, the Libertad’s sailors dropped the pretense: they confessed to their superiors that they wanted to “punch them.”

 Oh, my.

I suspect that Argentina is going to get its ship back, but now it is just a hunch. Argentina is going to the International Tribunal for the Law of the Sea (located in Hamburg) for a judgment. Does anyone know anything about law to make a prediction about the Ghanaian appeal or the Tribunal’s ruling? If this one sticks, and a naval vessel really can be seized to force repayment of debt, we really will be in a revolution.

UPDATE: Argentina will evacuate the crew of the ship. No word on whether they will take the creditors’ offer to pay for their flights home.

A too-brief history of zoning

As most of you know, I am not a big fan of zoning. In fact, my wife and I recently made the mistake of attending a Cambridge zoning hearing. It does bad things to my blood pressure to hear people state with apparent sincerity that limiting buildings to three stories will keep rents lower.

Seriously, this building should be at least as tall as the 1970s-era one right next to it.

Here is a nice short economic history of zoning. The argument is that the streetcar first enabled the creation of informal residential districts. (Before that, you just could not cleanly separate residential and commercial functions, since city size was limited and commutes painful. Workplaces and residences had to be close.) Then the truck and bus came along and busted up the informal zoning that had emerged. Ergo, formal zoning.

I am only partially convinced. After all, it should not have been surprising to anyone that apartment buildings would follow townhomes along the streetcar lines. Why wait until cars and trucks came along? In addition, the explanations for the 1970s spread and tightening of zoning laws are ad hoc. I would like to know more.

Las Malvinas no serán ... oh, just read the post

President Kirchner has recently tried to raise a ruckus about the Malvinas. The reasons have to do with domestic politics, but recent changes have done two things: they have made the islands far more tempting for Argentina and made it far less likely that the country could retake them.

The first thing is oil. On May 6, 2010, Rockhopper discovered oil on its infelicitously- named Sea Lion block just north of the islands. (Then again, Sea Lion was impossible, so maybe it’s a good name.) So far, seven of nine Rockhopper appraisal wells have come up positive. Production will start in 2017; estimates are that Sea Lion will eventually produce somewhere between 85,000 and 120,000 bpd. At $80 per barrel wellhead and $10 lifting cost, that would be about $3 billion per year in rents to scrap over. (Even fully costed at $50 per barrel, that would be a cool $1.3 billion.)

So there is something to fight about besides national pride. Of course, Argentina would need to have international backing if it was to sell that oil ... but the country has a big enough domestic market.

Nonetheless, any planning for a war would need very careful diplomatic preparation these days, much more than in 1982. Back then, Argentina was following a long line of actions that held that the “1945 line” did not hold for European overseas territories. Morocco could invade the Spanish Sahara, India could fight a war with Portugal for Goa, Indonesia could march into East Timor and Dutch New Guinea. Given this history, it was not (completely) crazy for the Argentine generals to think that the world would accept their victory. (And to be honest, I suspect that they were right: if they had won, las Malvinas hubieran sido argentinas.) 

But that is not the case today, even though plenty of countries support the Argentine claim. So problem #1 would be to secure enough backing to prevent the imposition of U.N. sanctions.

And problem #2? Well, military technology has advanced:

You got it. The Exocet, so devastating in 1982, is not worth much against a modern British destroyer. It gets worse. The U.K. keeps four modern Typhoons on-station at the Mount Pleasant air base in the islands; Argentina would need to take it out somehow with an air force consisting mostly of outdated Mirages and Super Etendards. (The Mirages are scheduled to be withdrawn from service this year, leaving a few Skyhawks ... a 1954 design acquired in 1997.) Add to all that the 1,200 men at the airbase and British access to intelligence. The result? No chance of success.

Well, there are always people ready to concoct James Bond-like plans where Argentina packs in a bunch of special forces into a civilian airliner, assaults the base from the ground and then dares the U.K. to take it back without access to an aircraft carrier. That scenario is silly. And even if it happened, expect the Argentines to be pounded from the sea and air.

In other words, even if Argentina assembled the necessary diplomatic support, a war will not happen because a war could not be won.

Around the Revolution again

Hugo Chávez just won re-election by a convincing margin in Venezuela. If I may, my friend Francisco Rodríguez at Bank of America called it correctly. To be honest, although Capriles did have a few good poll results, most of them showed a Chávez win. Anyway, the Bolivarian Revolution will go on until 2019 , even if the President passes away in office in the meantime. His successor probably won’t be Vice-president Elías Jaua. If something happens to Chávez between now and January 10, 2017, a new election will be held within 30 days. If he passes away after that date, then the vice-president will take over, but the Veep serves at the pleasure of the President and there is no guarantee that the person in the office will be the person in the office then.

In Ecuador, meanwhile, the big news concerns Assange and Occidental. With the former, not a whole lot is likely to happen. The Ecuadorians are settling in for the long haul: it is an easy way for Correa to take an anti-imperialist posture and distract attention from press measures at home. Correa is ahead in the polls for the 2013 election, but there is a while yet.

What I love is that Rafael Correa is going to advise Tunisia about dealing with debt! That is awesome.

Bolivia is having a rougher time. Two different groups are in conflict over the mining industry: unionized employees and cooperative independent miners. Until June, the government could play a conciliatory role, with Glencore as the foreign villian. But by nationalizing the mines, Evo has lost his cat’s paw. Now he is smack in the middle of a fight between the union and the small independent miners, which is a bad place to be. Moreover, his nationalization fights are starting to go bad. He just told a Canadian silver mining firm to go hang, no compensation. Legal recourse is not the problem, since the investment happened after Bolivia left ICSID (although there are other options, see next paragraph). Rather, the problem is that the nationalization, like earlier ones, has put the government smack in the middle of a conflict between different local interests. This is trouble.

President Morales has made a habit of nationalizing something every May Day, usually with compensation, but Rurelec has taken Bolivia to arbitration over a 2010 electricity nationalization. Since ICSID is no longer available, the arbitration will be held under looser U.N. rules. The nationalization beat the hell out of Rurelec: it lost 80% of its revenues and its share price crashed from 16p to 9p (U.K.). So it wants its money. It is less clear if it can collect, although the new nationalizations are making its life a little easier. The company sounds confident.

Finally, all-quiet on the Nicaraguan front, including a giant sigh of relief that President Chávez won re-election, what with this project getting underway. We think.

Ecuador is not a colony of China

Since its big default on its foreign debt (which I should really write about, it was ingenious) Ecuador has made a lot of oil-for-loans deals with China. The FT reported that Ecuador sold oil at $14-$15 per barrel. Felix Salmon wrote a post entitled “How Ecuador sold itself to China.” Neat stuff.

But exaggerated. The Bolivarians in Quito have not sold their sovereignty to China. Here’s the deal. The China Development Bank (CDB) loans money to Ecuador. Petroecuador repays by shipping oil to China. The Chinese pay for the oil at market prices. The money is deposited in the CDB, which withdraws 21% of the revenue to repay the loan. China has made three of these loans, at fairly cheap interest rates: 7.25% for the first , 6% for the second and 6.9% for the third, at a time when Ecuador basically could not borrow and paid 8.45% on its outstanding issues.

OK, so no Chinese empire ... but is China freeing Ecuador from dependence on the United States? (We will ignore that whole dollarization thing.) Not really. There are some reports that the country is now exporting all its crude to China and Latin America. The official figures for the first half of 2012, however, tell a different story. By value, 59% of oil exports went to the United States; another 11% went to Chile and 10% to Peru. Only 2% worth (or $137 million) went to China. Ditto, imports of refined products from the U.S. of A. came to 55% of Ecuadorian petroleum imports; an additional 8% came from Panama. Only 5% came from Venezuela and nothing from China. Ecuadorian crude isn’t the best quality, but it’s good enough for Chinese refineries ... except they do not seem to really want it.*

(A useful resume of different oil blends is here: scroll to Table 1.)

OK, then. Unless something drastically changes, Ecuador is going to pay Occidental. Maybe not for a while, but it will pay. And China does not have a colony across the Pacific, fun as it is to imagine such a thing.

I should mention that the international courts thing runs both ways. Maybe Ecuador will pay Occidental with assets taken from Chevron ...

* UPDATE: I imagine that Petroecuador is swapping its oil for oil from other sources to send to China. PDVSA does this all the time, so it would not be unprecedented, and it would explain why the Central Bank reports almost no crude exports to the PRC despite the loan deals.

Ecuador loses round one to Occidental

Ecuador just lost at ICSID, where the panel ruled that it owes Occidental $1.77 billion, plus interest at 4.2% compounded annually back to May 16th, 2006. If the Ecuadorians paid right now, they would owe $2.4 billion. If they delay, it will add up at the six-month LIBOR, compounded monthly. (FWIW, Occidental initially asked for $3.4 billion, but companies always highball their claims.)

What now? Ecuador will attempt to have the award annulled on the basis of some procedural or factual error. If they fail at that, then they will pay. The reason is simple: Ecuador is an oil exporter and its export sales can be attached. There won’t be the need to go fishing around the world for small change (or sailing ships) the way Argentina’s creditors need to do. It gets better: Ecuador exports crude to be refined for the home market! If it thumbs its nose at ICSID, not only will it lose export revenues, it will see domestic gasoline prices spike upwards hard. (Of course, Ecuador has been working overtime to try to get Chinese or Venezuelan interests to finance a refinery expansion.)

Ecuador might, however, pay Oxy and stiff the other claimants. There have been some declarations in this direction. Depends on how much they think China cares about its stake.

Few appreciate how Saudi Arabia undergirds the viability of this system. Ecuador exports 212,000 bpd to the United States. That is not a lot, but its sudden disappearance could upset a tight market ... except for the fact that Saudi Arabia stands every-ready to step in with its extra capacity.

Next up: another entry in the long China-doesn’t-have-an-empire series.

Observatorio argentino 17: Where do we stand in the courts?

As debtors attempt to use U.S. courts to collect on Argentina, the verdict is mixed but mostly negative. Good luck with that ship thing.

The biggest blow occured on March 1, 2010, when the U.S. Supreme Court ruled that Argentine pension funds in the United States could not be attached. Actually, there was no ruling as laymen understand it, but the Court denied an appeal, and so that was that. The next day the Argentine pension agency repatriated $200 million. (The actual chain of events was an attachment order by Judge Griesa in New York, that the Second Circuit Court of Appeals tossed out in October 2009.) Soon afterwards, on March 8, Griesa ruled that billions in pension assets were “immune from attachment, restraint and execution.” A second attack on $105 million in Argentine central bank assets failed in June of this year for different reasons: central bank reserves are immune under the Foreign Sovereign Immunity Act of 1976 (FSIA).

Thing is, all hope is not lost. The Second Circuit tossed the decision not on the grounds that pensions are an essential state function and not commercial activity, but because the Argentine government had not had a chance to use the recently-nationalized funds for any purpose at all. (Really, it makes sense: read the decision.) 

Still, it looks grim for creditors. The Second Circuit declined to interfere with Argentina’s payments to creditors who accepted its restructuring deal: so much for the court orders I referred to in the last post. And that ship in Ghana? Argentina is gonna get it back.

In other words, the creditors are gonna keep going around the world hassling Argentina but it amounts to a hill of beans ... unless two things happen. One, Argentina suddenly needs to borrow on world markets again. Two, ICSID rules against Argentina. It is weird for ICSID to take on a debt case, but it seems to have done so ...

Ghana declares war on Argentina, seizes naval vessel! Or not.

Argentina, like a lot of countries, keeps a few old-line sailing vessels in its navy. They use them to train sailors and show the flag. They don’t fight, they don’t get involved in disputes. So imagine how surprised 200 sailors must be to find themselves trapped in Ghana, their ship being held as if war had just been declared!

The ARA Libertad pulled into Tema, Ghana, on graduation tour down the West African coast. A hedge fund with a legal claim on Argentina had been monitoring its movement. The ship docked to find a bailiff from the Superior Court of Judicature waiting there with a court order to hold the vessel. “The Accused (the Foreign Ministry of Argentina), its officials, agents ... including the captain of the Ship, Pablo Lucio Salonica, and the crew are prohibited from moving the frigate ARA Libertad from Puerto Tema without a new order from this court.” The crew then had to surrender to the court. Argentina can release the ship by paying a bond: the local press has mentioned $10 million; technically, the bond will have to be equal to the value of the ship.

Elliott Capital is chasing money it claims Argentina owes it. Argentina defaulted on its debts back in 2002, and then essentially repudiated most of it. Most creditors accepted the deal, but Elliott did not. (More accurately, Elliott bought Argentine debt on the secondary market after the default but before the repudiation.) Elliott owns bonds with a face value of $630 million; including past-due interest, they are now worth $2.3 billion. (That is a lot of interest!) Elliott has done relatively well in New York courts, getting judgments worth about $1.6 billion. That is what the Ghanaian seizure is about.

The thing is, the New York courts have been pretty strict about what the creditors can actually seize. They have ruled out going after Aerolineas Argentinas, stating that it is in receivership and not really a state entity. Ditto for state funds held in New York. On the other hand, the court only just declared in favor of the bondholders in these two orders here and here, which changes things from the days when creditors were just looking around for assets without a legal decision in their favor.

Anyway, I predict that the Argentine ship is released: it is a naval vessel, protected by sovereign immunity. But I also predict that Argentina is going to find itself in a gigantic heap of trouble, particularly as the economic situation continues to deteriorate. It will be basically locked out of foreign markets, although it might be able to raise dollar funds at home. (Maybe. And at high cost.)

Any interest in a post on the state of Argentina?

An utterly irrelevant slam on Tucker Carlson and other goofballs

A few posts back, I mentioned that Chris Christie appealed to me on the basis of his accent and body language. Did that somehow exclude people not from greater New York or not of Italian-Jewish-Irish descent? Nope. So when Tucker implies that the president was divisive back in 2007 because he ... well, what is Tucker’s reason?

Is the not-yet-president’s accent really different from his normal cadence? I can’t hear it. But I am from New York.

Anyway, even assuming that Tucker can hear something that I cannot, I am at a lost as to the problem with the putative accent switch. Is Tucker suggesting that putting on an accent when talking to a particular audience is un-American. It seems so, which would indicate that Tucker is a moron.

That is all. I am sure my friend Bernard will agree. Reasonable people can disagree on the other stuff. Word to the mother. Enjoy the debate.

One of the things that is wrong with America is ...

... that people can actually stop the construction of high density apartments in Little Havana in the name of historic preservation.

Preserving “historic residences, including bungalows and small apartment buildings”? In Little Havana?? Are you kidding me?? Words fail. Seriously, folks, if the market wants to tear this crap down and build anything else, especially high-rises, we should let it.

He would agree were he still with us. And that is actually Coral Gables, which would also be well-served by being rebuilt from scratch. The construction bubble in Miami did many things, but destroying stuff worth preserving was not one of them. People, there is no place in this city that would not be improved by plonking a 30-story high rise on top of it. Caray.

Matt Yglesias is wrong!

I like Matt’s work a lot, which is why I am getting frustrated at his continual repitition of the incorrect claim that energy independence is meaningless. This is just plain wrong.

First, he ignores natural gas completely. He needs to stop and state that he is talking about oil independence. Natural gas is extremely difficult to transport across continents, which is why it is so much cheaper in North America than elsewhere. We have already seen big and positive effects from energy independence in natural gas!

So let us focus on oil.

Oil is not some super-fungible instantaneously-transportable commodity. It is much more like lobsters than it is like ... uh ... well, the mythical conception of oil as some super-fungible instantaneously-transportable commodity. Oil prices vary by geography and by quality. There is something called the realization spread, which is the difference between the Brent benchmark oil price and the price actually received by oil producers. In 2011, it was $45 per barrel.

Infrastructure bottlenecks create all sorts of odd overland pricing differentials. (Ocean transport is different: the cost of shipping from Venezuela to China is not much more than shipping to the Gulf coast of the United States.) A Kinder-Morgan report, for example, estimates that if the Northern Gateway pipeline from Alberta to the west coast is built, then the price of crude oil in Canada will rise. (Canadian Western Special fetches a higher price in Asia than it does it North America, where it sells for about $20 less than West Texas Intermediate.) In total, the firm estimates that the pipeline will cost Canadian refiners $432 million a year. If the refiners pass that on to consumers, then it will raise prices by 6¢ per gallon. The converse, of course, is that preventing the pipeline will save Canadian consumers 6¢ a gallon. That is from one pipeline. One unpopular pipeline.

Third, it is completely legal for the United States to stop exports.

Now, in a perfect world, it is true that limiting oil exports would not make economic sense. Why not? Well, a government could limit exports, thereby lowering domestic prices ... or it could sell the stuff overseas and use the profits to subsidize domestic consumers. The problem is that the United States does not practice the sort of socialist resource nationalism that would make the second option feasible. The government does not own the subsoil rights, nor are confiscatory windfall taxes particularly likely. That leaves export restraints as the only way to transfer rents from producers to consumers.

Now if Matt wants to attack the idea that oil independence will do any good, he has many solid arguments:

1. North America (e.g., the U.S. and Canada) will never become oil independent;
2. North America might become oil independent but domestic production costs will be so high that it won’t mean anything;
3. North America might become oil independent but (2) will apply and domestic supply and demand shocks will produce significant price volatility;
4. North America might become oil independent but refiners will capture any and all benefits (there is some evidence that refiners are already capturing the benefits from the price differentials between the central United States and the coasts);
5. The idea that a U.S. administration will use its authority to limit exports is a political fantasy;
6. Limiting exports is a bad idea for other reasons. For example, high oil prices at home help phase out a fuel that is wrecking the planet, and it would be stupid to try to lower them.

In short, Matt Yglesias is wrong! Energy independence will have economic impacts: it already has in natural gas. Even oil independence will have economic impacts. It will (to a small extent) even if we do nothing because oil is not a free-to-transport completely-fungible product. But it will to a very large extent if we do what other oil-producing countries regularly do, which is restrict exports.

What he should do is rephrase . Right now, his arguments are akin to the Republicans who claim that Obamacare will raise the deficit, when what they really mean is that they do not believe that the Medicare reimbursement cuts will actually happen. He claims that energy independence is meaningless, when what he really means is that doing what you would need to do to make oil independence meaningful is a bad idea.

If that is his argument, then I wish he would make it. The conflation of oil and natural gas combined with the silly rhetorical flourish that energy independence is a myth strikes me as most unbecoming.

Ethiopia, North Korea, and Some Half-Formed Thoughts on Dictatorship

North Korean dictator Kim Jong-Il died late last year. He was promptly succeeded by his twentysomething son. Some observers questioned whether the son would be able to take over and impose effective personal rule, but nearly a year has passed and he seems to be doing just fine.

Ethiopian dictator Meles Zenawi died last month. He hasn’t been succeeded by anyone yet. (Formally, officially, the Deputy Prime Minister has stepped up. But nobody seems to be taking him too seriously. He’s a mild-mannered guy, not a member of the revolutionary generation, and the wrong ethnicity to boot.) Zenawi was a “slash the tallest flowers” kind of guy; years of life on the run as a guerrilla in the bush seem to have rendered him permanently paranoid. Anyone who seemed too popular or too competent got demoted. At best demoted. So there’s no obvious successor.

I think the odds of Ethiopia staying a dictatorship are pretty good. It’s a country that has never known democratic rule or any sort of pluralism. Since the Emperor Haile Selassie consolidated his rule in the late 1920s, Ethiopia has had exactly three rulers: Selassie himself, Stalinist dictator Haile Meriam Mengistu, and the recently deceased Mr. Zenawi. That’s just three guys in almost 90 years, all of them absolute rulers with little or no tolerance for dissent. The country has almost no liberal traditions. Civil society does exist — there are NGOs and labor unions and even a few lawyers who are willing to sue the government — but it’s young and small and weak. It won’t be too surprising if a new strongman emerges. But it may take a while, and Ethiopia may go through a period of oligarchic rule and jockeying for power before things sort out.

Regimes with clear lines of succession are generally stronger regimes. Part of the reason is that they’re slightly harder targets — you not only have to take out the top guy, you have to get rid of his designated successors as well. But I think the bigger reason is that everyone knows what’s coming next after the dictator. Even if the successor is a dubious character, he’s likely to seem better than chaos and uncertainty.

Traditional monarchs have known this for millenia. But the lesson applies to dictatorships as well. We currently have at least five extant examples of non-royal dictatorships that have been successfully transferred to a son or brother of the dictator: Azerbaijan, Congo, Cuba, Syria, and North Korea (twice). Gabon and Togo are authoritarian regimes run by sons of former dictators; if we include them, the club expands to seven.

Examples of transfer to a non-relative are much much rarer. There have been a couple in the past. (Ataturk hand-picked his successor; Mexico in 1934-94 had an extremely powerful president who chose his successor from the party leadership, but they did not meet the definition of dictator. After all, they had to leave after six years in office.) But not a single extant dictatorship fits this pattern! (Burma’s dictator chose a successor who is still in power, but the successor seems to prefer being primus inter pares to being a true lone ruler.)

Now, it’s a long established principle that old age is a dangerous time for a dictator. All three of the dictators picked off by the Arab Spring were in their golden years. (Porfirio Díaz in Mexico and Juan Velasco in Peru also went down in their dotage.) More generally, an old dictator with no clear successor is pretty clearly putting himself at risk. That said, some dictators do run the course and die, more or less peacefully, in office.

So what happens when a dictator manages to pull this off — grows old and dies without first being overthrown or losing an election or whatever? Well, we can sketch out a tentative typology.

1. A son or other close relative steps up. (Several extant examples, see above.)
2. A hand-picked successor takes over. (Rare; no extant examples.)
3. There is a party or other system independent of the dictator that chooses a new dictator. (Rare outside of the Communist world; Mexico in 1934-94 comes closest. No extant examples, though we might see one soon in Cuba.)
4. After a period of uncertainty, brief or prolonged, a new dictator takes over. (A couple of extant examples — Turkmenistan, South Sudan.)
5. There’s a shift to authoritarian but non-dictatorial rule, either by a single ruler, an oligarchy or junta, or a party system. (China, Vietnam, Ivory Coast.)  This seems to be the single most common outcome in the last decade or two.
6. There’s a relatively rapid shift to relatively liberal or democratic rule. (Portugal, Spain. In the former, it took six years and revolution to get democracy.) This happens, but it’s less common than we might like to think. A shift in the direction of liberalism is much more likely when the dictator has been overthrown, or has voluntarily stepped down (Indonesia, Tanzania, Singapore), or agreed to elections (Chile, Zambia, Senegal). A system that lets the dictator die in office seems less likely to produce democracy at first go.

Numbers 2 through 6 include the possibility of foreign intervention; the United States, France and the Soviet Union have all intervened in this manner at one time or another. We may call these 3a (party picks a new dictator, foreign approval makes the difference: the Eastern European model, 1945-1990), 4a (new dictator takes power subject to foreign approval) and so forth. There aren’t really any extant examples of these at the moment — the U.S. seems to have lost interest in installing dictators in Central America and the Caribbean — but I would not be surprised if Russia’s “near abroad” in Central Asia were to throw up a 4a or 5a in the next little while.

6a is damnably rare, actually nonexistant: Panama would be one of the rather few cases since WW2 in which foreign intervention replaced a dictatorship with a democracy. Iraq sort of maybe kinda if you squint really hard. The jury is out (to be charitable) in Libya. And all of those interventions happened when the dictator in question was very much still alive and in power.

Anyway. There are enough elderly dictators out there that we should expect to see some more examples in the next few years. I expect that (5) “a shift to authoritarian but non-dictatorial rule,” will continue be the most common outcome. Which means that some countries that are currently dictatorships will drop off the list! If the number of dictatorships is to remain constant, then new ones will have to emerge. How likely this is ... well, this post is long enough. In a bit.

Oh, well, that’s all right, then

I am trying not to comment about the presidential race. In this case, though, I am perplexed. After all that noise and yelling, we now have the GOP nominee saying that:

1. He is going to replace Obamacare with Obamneycare! No, really. He wants to insure that people with pre-existing conditions can get coverage. “I say we’re going to replace Obamacare. And I’m replacing it with my own plan. And even in Massachusetts when I was governor, our plan there deals with pre-existing conditions and with young people.” 
2. He is not going to cut taxes on rich people. “I want to make sure people understand, despite what the Democrats said at their convention, I am not reducing taxes on high-income taxpayers.”
3. He is not going to alter Medicare, not even the way it reimburses providers. “No change,” he says. Of course, that last applies only if you are over 55, but still. And us younger folk will still have traditional Medicare as an option.
4. He won’t repeal the immigration order, he will supercede it.

Etch-a-sketch, indeed. Or perhaps just actual small-c conservatism? Maybe confusion. Or confabulation. (See #3.) Still, I would imagine it all makes it very confusing for a Republican voter to know exactly what it is they are supporting when they check the (R) box.

Syrian September

Four days ago, I wrote this:

Foreign military intervention is (for reasons I’ve discussed) unlikely, though not out of the question; watch for Turkish agitation to create a “safe haven” in northern Syria or rebel attacks on Syrian Air Force bases and other assets. (That Turkish plane that got shot down a few weeks ago? Very probably a probe of Syria’s air defenses. As long as those are still working, military intervention will be hard and expensive. So if the rebels suddenly start going after bases and air defense batteries, then that’ll be suggestive.)

This morning comes the news that Syrian rebels have attacked and looted an air defense base in Eastern Syria. In fact, it looks like this may be part of a sudden shift towards attacking air defense facilities; there was another, separate attack on an airbase yesterday, and one last week that went unnoticed until now.

Now, there are other reasons for the rebels to be attacking airbases. The Air Force is widely and particularly hated — traditionally because it’s long been a stronghold of Alawite influence, more recently because of indiscriminate bombings of civilian neighborhoods. And air defense bases have surface-to-air missiles, which the rebels will be delighted to get their hands on. But multiple attacks on bases and air defense sites in a few days? Yeah, that looks a lot like someone has been whispering in the rebels’ ears.How this plays out... well, I doubt the rebels can severely damage Syria’s air defense capability. But they can definitely degrade it. A lesson going back for decades, to Algeria and Vietnam, is that it’s damnably hard to maintain air bases in the midst of a hostile countryside. (I’m writing this post in Belgrade, Serbia. Belgrade has a fascinating Air Museum out at the airport. It includes half a dozen German and Italian aircraft, captured during WWII when the Yugoslav Partisans launched surprise attacks on Axis airbases in occupied Yugoslavia. The Partisans didn’t capture that many aircraft, of course — most, they just blew up.) It’s not impossible, by any means — that’s another lesson from Vietnam — but the regime will have to allocate money (in short supply) and loyal soldiers (in dangerously short supply) to garrisoning its air bases. Over time, it will probably have to consolidate its air defenses in fewer sites and bases, making it strategically more vulnerable. So, definitely an ominous development.

Now, since this is the Middle East, it’s also possible that there’s a second game. The attacks on airbases may be a signal that someone — the Turks, the West — is getting serious about intervention. A signal to who, though? The regime is probably past caring. The Russians?

Three charities

First things first: John Quiggin wants to know where to make his donation to charity. I’ll give him three choices! And I’ll make a post of it, in case anyone else is looking to throw a few dollars at a worthy cause somewhere.

One, he can make a donation to Kiva, which funds microfinance loans to the poorest of the poor. (Kiva also allows you to put money forward to be lent. You get an e-mail telling you to whom it has been lent — we funded a wheel for a potter in Peru — and then another telling you when the loan has been repaid.)

Kiva has a positive evaluation from Charity Navigator — it’s transparent, largely independent of outside influence, and spends relatively little on administration. Here’s how Kiva works and here’s the loan page. (When you make a loan, they ask if you want to make an additional donation to help cover administrative expenses. Interestingly, you can’t make a donation unless you first make a loan.)

Second option: ANERA, the American Near East Refugee Aid. Founded after the 1967 war, it focuses on Palestinian refugees around the Middle East. It gets an A+ for transparency and accountability from CharityWatch.  ANERA’s “about us” page is here (click through to donate). 

Third: the White Ribbon Alliance for Safe Motherhood. It’s exactly what it sounds like — an umbrella group devoted to supporting maternal and child health around the world. You can donate to them directly, or click through to one of the various groups that they support. Their website is here. 

(For the record, while I work in development, I have no professional connection to any of these charities. I recommend them because I’ve seen their work in the field and/or have researched them and think they’re good.)

Leave Clint alone!

Seriously, people, it was funny. My wife is a Democrat, and she thought it was hilarious. So did the Obama campaign! And now the world has “Invisible Obama.” Leave Clint alone!

It was not super respectful, but it was not out of bounds. And believe you me, gentle readers, I am hypersensitive about that sort of thing. I get angry at the use of “this” instead of “the” to refer to the President. I was no fan of President George Bush the Younger, in fact I was the opposite of a fan, and I didn’t even like to call him “Bush” instead of “President Bush” or “George Bush” because that did not show the proper respect. You gotta respect the President, man, even if you wish he would leave office yesterday. I think Governor Jan Brewer owes the current President an apology, a grovelling apology, as does Bill O’Reilly. (You ... do ... not ... interrupt ... the President!) The Congressman who yelled during the State of the Union should be made to beg forgiveness. And oh Sweet Mary has President Obama had to put up with stuff that no person should have to put up with, let alone the President of the United States. I take this stuff serious, old pre-hipster Brooklyn serious. And my wife more so.

So when we say that Clint was fine, then Clint was fine. Leave the man alone!

Anyway, if you were wondering how it played in Farsi, go here.

Syria: the next six months

Okay, so I’ve won the first bet with John Quiggin. More on that in a bit. Meanwhile: what lies ahead for Syria?

Well, the best summary I’ve yet seen can be found in this excellent article from our friends at the Crisis Group. It’s so good that I’m going to quote it at considerable length.

One is tempted to say that the regime has been uniformly cold-blooded and indiscriminate from the start, but that is not so. The conflict experienced several phases: from the regime’s political concessions, both half-hearted (which prompted stronger popular demands) and coupled with brutal repression (which further undermined their credibility); to its so-called security solution (which, by seeking to force entire communities into submission further energised the opposition and pushed it toward armed resistance); and, finally, to its so-called military solution (a scorched earth policy of rampant destruction and looting that turned what once was viewed as a national army into a broadly reviled occupation force).

With each stage, the regime burned yet another bridge, leaving it with neither way back nor way out. Just as the political solution undermined those involved in politics and the security situation wrecked the security services’ ability to operate, so did the military solution eviscerate the army’s credibility.

This strikes me as a cogent summary of the regime’s shifting strategies over the last 18 months. It’s largely forgotten now, but the Syrian government did attempt to make some minor political concessions, including local and municipal elections in 2011 that were (by Syrian standards) remarkably free and fair. If I were to point to a moment when the political strategy stalled out and failed, it would be the parliamentary elections held earlier this year. The government seems to have dithered at first, then decided that the purpose of elections was not to allow opposing views in the legislature, nor to co-opt moderates and broaden the base of popular support, but to reaffirm the legitimacy of the Baath party and the regime. The result was, unsurprisingly, a landslide “victory” for the Baath and a further alienation of moderate opposition.

One thing that’s not discussed is the regime’s strategy towards the Kurds. Short version: they’ve basically given autonomy and near independence to the Kurds in return for Kurdish neutrality. And they’ve done this by deliberately handing over power to the Kurdish faction that’s associated with the PKK, the anti-Turkish Kurds. This is a calculated risk, because it increases the probability of Turkish intervention in Syria. But it means that the Kurdish regions will be run by people who are violently hostile to the opposition forces that are backed by, or friendly with, Turkey. From here it looks like a thoughtful strategy that is, so far, paying off — while there are a few small Kurdish groups working with the opposition, the majority of Kurds look likely to sit this thing out.

As to what may happen going forward, the article offers this bracing analysis:

Of all the ongoing changes, perhaps the most significant and least appreciated is what, over time, has become of the regime. The one that existed at the outset of the conflict almost certainly could not have survived the spectacular killing of top officials in the heart of its traditional stronghold; street combat in Damascus, Aleppo and a string of other towns; the loss of important border crossings with Turkey and Iraq; all amid near-total economic devastation and diplomatic opprobrium. That, a year and a half later, its new incarnation not only withstood those blows but vigorously counterpunched sends a message worthy of reflection.

As its political backbone disintegrates, the regime is being reduced to its repressive apparatus, while the latter itself gradually morphs into an entity more akin to a militia than an army in both make-up and ethos. The regime essentially has been stripped down to a broadly cohesive, hardcore faction fighting an increasingly bitter, fierce and naked struggle for collective survival. It is mutating in ways that make it impervious to political and military setbacks, indifferent to pressure and unable to negotiate. Opposition gains terrify Alawites, who stand more firmly by the regime’s side. Defections solidify the ranks of those who remain loyal. Territorial losses can be dismissed for the sake of concentrating on “useful” geographic areas. Sanctions give rise to an economy of violence wherein pillaging, looting and smuggling ensure self-sufficiency and over which punitive measures have virtually no bearing.

That the regime has been weakened is incontrovertible. But it has been weakened in ways that strengthen its staying power. (emphasis ours)

The regime has been undergoing a very rapid Nietzschean “what does not kill us” evolution. It has become much less effective as a government — indeed, it may end up hardly being a government at all. But it has become much more effective at surviving. And this leads to a sobering conclusion:

There can be nothing more to expect from a regime that, by its very nature – never much of an institutionalised state, no longer genuinely a political entity – has ceased being in a position to compromise, respond to pressure or inducement or offer a viable solution. Which means that the traditional international panoply of actions, from public blandishments to condemnation, from threats to sanctions, is not about to work. And that, while one still can hold out hope for a “clean break,” that moment when the regime neatly collapses or surrenders, it hardly warrants holding one’s breath.

This leads to my own tentative prediction (which matches my co-blogger’s assessment): six months from now, Assad will still be in Syria, and still the leader of an internationally recognized (though very diplomatically isolated) government. It’s possible that he might be assassinated by then, but I don’t think it likely. I don’t see a blue-on-blue coup taking him out now, and I don’t think he’s anywhere close to cutting and running. Foreign military intervention is (for reasons I’ve discussed) unlikely, though not out of the question; watch for Turkish agitation to create a “safe haven” in northern Syria or rebel attacks on Syrian Air Force bases and other assets. (That Turkish plane that got shot down a few weeks ago? Very probably a probe of Syria’s air defenses. As long as those are still working, military intervention will be hard and expensive. So if the rebels suddenly start going after bases and air defense batteries, then that’ll be suggestive.)

Six months from now, the regime may well have lost control of large swathes of the country. Syria will probably be increasingly violent, impoverished, and immiserated. And Assad may well be — in effect — just a powerful warlord in a country that has a number of warlords. But he’ll still be there, and will still be at least nominally the head of state. More’s the pity.

Maybe we shoulda fought for 54-40 ... stop the B.C. pipeline!

If North America is independent in crude oil production and crude exports are banned, then supply or demand shocks in the rest of the world will have no effect on U.S. prices. Prices will still be as high as they are now, but price volatility can be greatly reduced. Awesome!

Matt Yglesias, a smart guy, issued a really dumb tweet on this issue. He then blogged, “But unless you're planning to actually isolate North America from worldwide commodity markets, you're not ‘independent’ of anything.” Well, yes! Sweet Mary, why not isolate North America from worldwide commodity markets? Aaaarrrgh!!! Noooooo! The neoliberal brain eater gets another one! Expand your mind, Matt!

Still, there is a real rub. It is unlikely that North America will achieve oil independence without Canada, that poses a dilemma. Enbridge is trying to build the Northern Gateway pipeline from Alberta through British Columbia. Build that pipeline, and North America will still be linked into global markets. The benefits from crude oil independence will be lost.

We have established that the President can stop hydrocarbon exports from the U.S. Unfortunately, because we totally lost the War of 1812 back in the day, the President cannot stop hydrocarbon exports from Canada. Does that mean that the battle is lost?

Nope. First, the pipeline runs through B.C., but the oil is produced in Alberta. B.C. is holding Alberta hostage for more money. The B.C. government can afford to walk away: the revenues from the deal as-is are that low.

Second, the First Nations are sitting in a catbird seat. The land law is a mess. Consultations could stretch on forever. Payoffs are tough, because there are around forty different groups.

Third, while Ottawa could step in, the federal incentives are not clear. Equalization payments do spread around some of the bounty of Albertan production, of course. But there is an alternative that would give Alberta a new market and let Canada enjoy the benefits of “isolation from worldwide commodity markets”: ship the stuff east! Right now, eastern Canada imports oil from Algeria and Venezuela, which is a little crazy when you think about it. Eastern Canada, then, is at best indifferent to Enbridge and at worst mildly hostile.

Finally, the New Democratic Party in B.C. has already gone all-in against the pipeline. It will be next to impossible to walk that back if the NDP wins, and why would they want to anyway? 56% of voters in B.C. oppose the pipeline, and the NDP looks set to kill the Liberals at the next provincial election.

(I have no idea if U.S. oil companies are trying to sabotage the pipeline. It would be in their interests, but it also might set a bad precedent for Keystone. I suspect not, therefore.)

In short ... this pipeline could very easily not happen. That is the way I would bet. Call it 2:1 odds. Answer your question, Bernard?