The Power and the Money

“Frankly, I’d like to see the government get out of war altogether and leave the whole feud to private industry.”

Thus spoke Major Milo Minderbinder in 1943.

Was he right? Does contracting out combat support functions save money? I mean, that is not quite the whole feud, but it is some of it.

The best answer comes from study published by John McGrath, at Fort Leavenworth. Below are the figures from Table B-2 for various American wars. The figures apply only to the Army but rightfully include staging areas in Korea and both Gulf Wars: Japan and Kuwait, respectively.

So what do we got? At first glance, success! A higher tooth-to-tail ratio, awesome sauce!

We are back to the levels of World War 2! (AEF = American Expeditionary Force of WW1; ETO = European Theater of Operations in WW2.) Hooah!

Only, well, that does not include the contractors. We really should put them back into the mix, since they did jobs that soldiers did in Gulf 1 and before.

Ah. Well. Not so good.

Now, to be fair, these figures do not include the extensive host-country support the U.S. received in Korea, which would make that war look pretty bad. (Korea would fall to 28% combat troops on a BOTE calculation.)

They also do not include potential cost savings. After all, if private contractors are cheaper, then you would expect that the military would use more of them. Calculating that, however, is incredibly complex, because American operations have become far more capital and resource-intense over time. The simple calculations show ever-rising real deployment costs, but that could be a reflection of the fact that the American soldier in Gulf 2 was rather more lethal (and well protected) than the American soldier of Gulf 1, who was both more lethal and better protected (and better fed) than the American soldier in Vietnam, who was more lethal than the American soldiers who beat Hitler.

It is hard to figure.

But the headline figures should induce skepticism.

This, note, is just for outsourcing support functions; we have not gotten into questions of outsourcing actual genuine combat. You know, what Major Minderbinder really wanted to see. That is an even less-satisfying topic for another post.

Was Sykes-Picot treacherous?

 I used to go to the Middle East a lot. But then stuff happened. I got disinvited by the government of Bahrain, wound up on Hezbollah’s side of a debate over energy policy in Lebanon, and experienced a surprisingly less-than-warm trip to Israel. Plus, the one time my wife and I get to Dubai, the Burj was closed! These days I have not been travelling there as much.

But this is the 100th anniversary of the Sykes-Picot. So let’s visit the agreement. In the Arab middle east, Sykes-Picot is usually used as a shorthand for the European carve up that laid out the modern borders of the region between Turkey and Saudi Arabia. (Inasmuch as those borders still mean anything.)

But Sykes-Picot, in fact, laid out a rather different plan from the borders that actually emerged, as the below map shows.

Well, the map sort-of shows the agreement. You need to read the text of Sykes-Picot to really make sense of it. In essence, it worked as follows:

1. There would be an Arab state encompassing both area A and area B on the map. France and Britain would each retain preferential rights in A and B respectively, but those rights were economic, paralleling the Anglo-Russian Entente in Persia:
   • Preferential investment rights;
   • Limits on the presence of advisors to the Arab state from the other country.
2. France and Britain would engage in separate negotiations with the Arab state over their “direct or indirect administration or control” of the territories colored blue and red. 
3. The brown area around Jerusalem would be internationalized, with the exceptions of Haifa and Acre, which will go to Britain. 

The agreement is often blamed for the current chaos, In the words of the Economist:

Even so, Sykes-Picot has become a byword for imperial treachery. George Antonius, an Arab historian, called it a shocking document, the product of “greed allied to suspicion and so leading to stupidity”. It was, in fact, one of three separate and irreconcilable wartime commitments that Britain made to France, the Arabs and the Jews. The resulting contradictions have been causing grief ever since.

 Except, well, the agreement does not seem to have contradicted British promises to the Arabs. See the Hussein-McMahon Correspondence. In letter no. 4, the British say, “With regard to the vilayets of Bagdad and Basra, the Arabs will recognise that the established position and interests of Great Britain necessitate special administrative arrangements in order to secure these territories from foreign aggression, to promote the welfare of the local populations and to safeguard our mutual economic interests.” The Arabs agree to that in letter no. 5, as long as the occupation is temporary and accompanied by compensation. In letter no. 6, the British state that they have to give Aleppo and Beirut to the French; the Arabs agree in letter no. 7.  

As for the Zone A/Zone B division, that was not a partition; rather, it laid out spheres of influence inside a sovereign state, along the lines (as mentioned above) of the Anglo-Russian Entente in Persia. The British were committed to handing back the “indirect” administration in the east ... but the Arabs agreed to allow London to decide for how long it would be held.

In other words, Sykes-Picot only violated Arab expectations by hiving off the Mutasarrifate of Jerusalem ... although the Sharif of Mecca was to get a seat at the table in administering it. Otherwise, Sykes-Picot wasn’t the betrayal; the betrayal was that the ultimate borders didn’t follow it. 

That said, it’s hard to see how the Sykes-Picot borders would have been any, you know, better. You would have had one giant state combining most of what we call Syria, Jordan, and Iraq, including big swathes of Kurdish territory. You would have had an “Iraqi” province, mainly Shia, eventually turned over to the giant Arab state. (I am sure that would go well, as the peoples of East Timor and Spanish Sahara can attest.) France would have carved out a strange country combining Arab Alawites, Arab Christians, Arab Shia (non-Alawite Shia), Druze, Arab Sunnis, and a whole bunch of Turkish peasants. Jewish settlers would have still flowed into the area under international administration. It would have been a mess, albeit a different mess.

Just not a “shocking” mess.

The French dilemma

 I found out about the attacks in Paris the old-fashioned way: reading about them on the front page of a Mexico City newspaper. (I was there briefly for a conference on organized crime; an in-and-out two-day visit.) I would like to make two points, both of which I am sure are being made elsewhere.

First, the attack was not unprecedented. Mass casualty events of this size are rare, but they do happen. The below figure uses data from the Global Terrorism Database and removes all incidents in Northern Ireland. (The Troubles would otherwise drive the results; they more resembled a low-level civil war than “terrorism” per se.) Political violence was far more common in the 1970s and 1980s. There were fewer mass-casualty attacks, but they did occur. After removing airplane bombings in 1970, 1974 and 1988, you have 76 people dead in the 1980 explosion at the Bologna train station, 61 dead in the botched hostage situation at the Rome airport in 1973, 37 dead in the 1980 London nightclub firebombing, and 19 other incidents with double-digit death tolls over those two decades.

If the Islamic State manages to make this the first of a wave of attacks, then it would be something new ... but I would be surprised if they have the operational capability to carry out multiple mass casualty assaults.

Second, France is limited in what it can do. French airstrikes are not likely to accomplish more than the U.S. coalition has already accomplished, as Kevin Drum has pointed out. Now, the air war against the Islamic State is not played out. The coalition has only now started to target the oil trade, which will weaken the Islamic State’s finances. But it is not clear how stepped-up French participation in the air war will alter the correlation of forces. It is more likely to simply let the USAF ease up a bit on its operational tempo.

Now, with U.S. airlift and cooperation from neighboring countries, France could assemble three brigades to invade and destroy the Islamic State. Inasmuch as attack planning happens in Syria, that might even have a salutary security effect. (The U.S. really did disrupt Al-Qaeda’s ability to plan after it invaded Afghanistan.) France has fallen behind its 1999 commitment to be able to deploy 30,000 troops on short notice, but with American airlift and ISR support it has enough capacity to deploy and sustain half that figure (see also here and here and here). Consider how rapidly French deployed to Mali (including allied African forces):

But what then? Three brigades could probably disrupt ISIS forces on the ground and retake all of the territory it occupies. But it would not be enough to hold it. You could turn the area over to the Syrian National Army, but that seems impossible (on multiple levels) unless you had a political settlement of the civil war.

You could also try to magically cook up a third force capable of holding the area, but good luck with that ... it did not work terribly well in Iraq the first time around. Invite in the Egyptian army? Paging Marco Rubio: That would be a bad idea even were it possible, as the commentator here argued convincingly.

You could leave the area in chaos, but then you would have accomplished precisely nothing in terms of preventing terror attacks against the Hexagon or other parts of the West. 

Moreover, with such a small footprint, it is hard to see how the collateral damage from retaking Iraqi and Syrian cities would be anything less than enormous. Which means a lot of angry civilians and some awful propaganda losses.

So you could settle in for a long-term occupation, but I do not believe that anyone in their right mind wants to try that again.

In short, while the French (with American help) probably could dispatch the Islamic State in short order, they won’t. 

Unless there is another attack, in France or in the United States. Now, I doubt that it will come to that; it seems unlikely that ISIS has the capability to launch multiple mass attacks. Moreover, intelligence and law enforcement is now on high alert. But unlikely does not mean impossible. It just means mildly improbable.

Should another attack happen I fear that a ground war would be politically inevitable. Futile and likely counterproductive, but inevitable. A terrible dilemma for whomever is in charge.

A request below the fold.

Discussion bait forthcoming

 But a foreshadowing: I do not agree with Mr. Drum that Senator Rubio gave that bad an answer to the question of what U.S. strategy against the Islamic State should be. The Islamic State also control Syrian territory, so Baghdad’s opposition is not a deal-breaker. Moreover, it might be worth trying to persuade the Iraqis to cooperate if a suitable Sunni force can be raised. It is hard to see which countries could put up the troops, but Bangladesh certainly has a long-standing tradition of hiring out their armed services. So does Pakistan. And it is not crazy to try to persuade Jordan and Saudi Arabia, even if I doubt that it would work.

I am not saying that I agree with Senator Rubio. To be honest, I think it would be impossible to persuade Sunni nations to put up the forces. And if it were, I would worry about Phase V operations: can a combination of Arab Sunni forces and Muslim peacekeepers from South Asia establish order? Would their governments be willing to bear to cost in blood of a prolonged operation, even if the United States paid the cost in treasure? I do not think that I would try to set up such an operation, were I somehow elected president. 

But it is not crazy on its face. Even if Senator Rubio thinks the effort to raise such a force will fail, it is not unreasonable for him to suggest it. 

I agree with Steve Benen that the Senator is trying too hard to distinguish himself from the President, but Mr. Benen is being completely disingenuous. He knows exactly why the Senator has to do that. The weird Iran flub is more disconcerting, but it does not strike me as dealbreaking or a sign that Senator Rubio is clueless. Rather, it strikes me as a simple gaffe, understandable in the heat of a CPAC conference, where Iran policy is a separating issue for the gathered faithful.

Messrs Benen and Drum strike me as bringing up small potatoes in a (gulp) slightly partisan way. Go ahead, talk me into why I should disrespect the good Senator from the great state of Florida regarding his Levantine policy. Because right now I don’t.

The new Kurdish oil deal is too good to hold for long

 Baghdad and Erbil have reached a temporary accomodation. Erbil will turn over 550,000 barrels per day to the Iraqi central government. In return, it will receive the 17% of federal revenues due it under the 2007 revenue-sharing deal (never-ratifed), plus an addition $1 billion to pay the peshmerga. 

If this happens, it would be a big win for Kurdistan. Under article 4 of the revenue-sharing deal, the federal government could deduct all “sovereign expenditures of the federal government and strategic projects ofbenefit to all to be agreed with the governments of the regions and provinces.” The federal government never consulted the Kurds about said expenditures, of course. (After all, the law was never ratified!) Rather it just made unilateral deductions. As a result, the 2014 budget allocated only 9.9% of projected revenues to Kurdistan. 

If Baghdad follows through, then Kurdistan will stay in the federation until Baghdad gets annoyed that the place is independently exporting production above 550,000 bpd. At that point, independence.

Or Baghdad will cheat. At which point once the Islamic State is safely contained, independence. 

I am not saying that this is not good news; it is. I am saying that it is just a temporary stopgap, even if it holds.

The numbers point to Kurdish independence rather soon

 Last week I was in Boston. There I met the man who would be the foreign minister of Kurdistan, if Kurdistan had a foreign ministry. I asked him about the ongoing battle between Kurdistan and the central government over the region’s oil sales.

He responded simply. “It is a matter of principle. We want to sell our own oil.”

Oh boy. Not that I blame the Kurds, but oh boy. Given that the Kurds do not consider the dispute a simple deal to be negotiated, I do not expect yesterday’s settlement between Baghdad and Erbil to hold for long. Kurdistan will be declare independence within two years.

Under the Iraqi constitution, Kurdistan is due 17% of all Iraqi oil revenues. That is a lot; rather more than what the region can earn from its own production. The deal requires Kurdistan, however, to give up all control over its internal oil production to the central government.

That never happened. Rather, until January the post-occupation status quo (hammered out and guaranteed by the Americans) was that Kurdistan could sign production contracts with foreign companies in contravention of Iraqi law. Any oil produced under those contracts, however, would be turned over to the central government, which would sell it. Kurdistan would receive its 17% of total national oil revenues, from which it would pay the oil companies according to their contracts with the Kurdish government. 

In January, though, Kurdistan started selling its oil directly. It promised to deduct those revenues from bill due it from Baghdad. One problem with that is that the government take in Kurdistan is much lower than in the rest of Iraq, which in effect meant less revenue for the central government. The other problem was that it violated Iraqi law. So Baghdad cut off all revenues to Kurdistan and threatened to sue anyone who bought Kurdish oil.  

The U.S. played a passive-aggressive role towards Baghdad. It supported Iraq verbally, but when the Iraqis tried to enforce their rights in American courts it did nothing. The Justice Department could have weighed in ... but no. Radio silence. And so, the Texas judge ruled that the dispute was outside his jurisdiction. (By the way, this was the right thing for Washington to do. We owe the Kurds but we cannot be seen to be abetting violations of Iraqi law. Difference, split!) A good legal analysis from some Baker Botts lawyers can be found here. 

Kurdistan succeeded at selling a lot of oil, but at a 20% discount. From January to last week, the Ministry of Natural Resources reported selling 34.5 million barrels. Of that, 21.5 million went through the new pipeline to Turkey and the rest went on trucks. Kurdistan earned $2.87 billion from the sales; $2.1 billion in cash and $775 million in swaps of crude for refined products. ($1.3 million of the cash is being held in escrow in Turkey.) That means that Kurdistan earned $83 per barrel on its exports at a time when Brent traded (on average) for $104 per barrel. And that is before deducting the $400 million that the country had to pay the truckers to move the stuff. (Some of the $400 million went to upstream producers, but Kurdistan has understandably mostly not been paying them. $31 per barrel is not an unreasonable trucking cost considering as trucking runs about $20 per barrel in the United States.) 

Might the discount on Kurdish oil be due to low quality? After all, crude oil comes in different flavor. Heavier and more sulfur-ridden crudes are harder to refine and command lower prices per barrel than lighter “sweeter” crudes. Kurdish oil, however, is neither particularly heavy nor particularly sour. Oil from the Taq Taq is very light. Other grades from Kurdistan are relatively sour, but overall the quality resembles the Urals blend from Russia. Urals trades at around a $1-$2 discount against Brent, much less than $20. (The link will take you a historical time series; the discount has occasionally touched $3 for short periods; it has also occasionally fallen to zero.) Maya is heavier and more sour than Kurdish production, and its spread below WTI is only around $10. In other words, the Kurdish discount appears to be somewhere between $10 and $18 per barrel.

Kurdistan is earning less than it would under its deal with Iraq. Between January and September, Iraq exported $66.0 billion worth of crude. (We will avoid asking why Iraq cannot field a decent army with such revenues.) Add Kurdish production minus an $18 per-barrel-discount and Iraq as a whole exported more than $69.4 billion. 17% of that is $11.8 billion. Even the smaller 11% that the Kurds were actually receiving would have come to $7.6 billion. That is a whole lot more than the $2.5 billion the country actually got net of price discounts and transportation costs. And even that figure is deceptive, since Kurdistan will eventually need to start paying the oil companies their share of the revenue.

The rub is that Kurdistan expects its exports to grow. Right now, the place has been exporting about 126,000 barrels per day. The country hopes to hit 1m barrels per day by the end of 2015. At that level, Kurdistan is likely better off on its own unless oil production in the south also explodes. Which is likely in the long run (to a level of 7m bpd or more) but not by 2015 ... maybe around 2020.

In short:

1. Kurdish independence makes no economic sense right now. Nor does it make sense in the long run. But it will make sense for a brief shining period between 2o15 and 2020;
2. But Kurdistan has shown that it is willing to pay the economic cost of independence (and say so publicly to American academics);
3. The United States has only half-heartedly backed the Iraq central government in its legal fight against Kurdish oil exports;
4. Iraq has taken Kurdistan to international arbitration but that is a long slow process; and
5. Kurdistan is stepping up to the plate against the Islamic State.

Conclusion: the recent revenue-sharing deal will not last. Kurdistan will declare independence within two years. 

The Islamic State is an easy problem

 My friend and colleague, Meghan O’Sullivan, worries that the Obama administration has provided a muddled rationale for intervention in Iraq. And she’s right! The rationale is muddled. Saving Yazidis? Protecting Americans in Erbil? Huh?

Her criticism is not Republican boilerplate or McCainiac war-now interventionism. She supports the actual U.S. policy. What she worries about is that by playing-down the real strategy in favor a made-up humanitarian intervention and a specious protection-of-Americans the administration is setting itself up for problems in the future.

What is the real strategy? Simple: containment of the Islamic State at the borders of Kurdistan and Jordan. (Jordan has not been attacked yet, but the Islamic State certainly has it in its cross-hairs.) But the administration will not defend the rest of Iraq unless and until the Iraqi government gets its act together. The reason is simple. From the point of view of the Kurds, the Islamic State is a foreign state that is trying to conquer it, WW2-style. Ditto the Jordanians, with a wrinkle that the Islamic State might have a fifth column in Jordan. From Erbil and Amman, the Islamic State is Nazi Germany.

But from the point of view of the rest of Iraq, the Islamic State is more like North Vietnam. They have taken advantage of Baghdad’s terrible discrimination against the Sunnis. The U.S. cannot protect the rest-of-Iraq without encouraging that discrimination. Moreover, the North Vietnam analogy breaks down because the Shia are rabidly unwilling to live under ISIL rule: the Islamic State can trigger a lot of violence in Baghdad, but its forces are not about to sweep down to Basra and take all the oil.

So once you take invading the Islamic State’s homeland off the table, a containment strategy with the lines drawn at Kurdistan and Jordan makes perfect sense. 

But that is not what the administration has publicly-presented. I understand why, but I agree with Meghan that it does not make sense. Sure, it is humanitarian, but it is also strategic ... and I do not think that the American people have a problem with that. Heck, I don’t think the public would have a problem with putting our forces on the ground if it really were a containment mission, like Gulf War 1: throw the ISIL bastards out and stop. But that kind of mission will be harder to organize if the public thinks that the Administration lied to them.

Anyway, go read Meghan! If only to see that there still is some bipartisanship in America.

Kurdistan will not fall to the Islamic State

 I have been to Erbil. I like Erbil. I support American boots on the ground to protect Erbil from the Islamic State; we owe the Kurds at least that. But I am not sure that we will need to intervene on the ground.

People at DoD (using open-source unclassified data) say that Sinjar was at the very far end of the Kurdish supply lines; under pressure, the troops ran short of ammunition and other materiel. That is bad, but it is a very different thing from having your army simply collapse the way Iraqi regular forces fell apart in Mosul.

Kurds are continuing to fight; interestingly, the various Kurdish factions are beginning to coordinate with Turkey.

Air support should be enough.

Glad to be wrong

 The seizure of Mosul and continuing ISIS advance has now captured the attention in the United States that it deserves.

I still think that the U.S. should do nothing, with the possible exception of some limited air support. ISIS does not have the power to take Baghdad. Shia soldiers and militia will fight to defend “their” territory, and the Iraqi army is becoming increasingly sectarian anyway. Air support might help contain bloodshed by stopping an ISIS advance, but it is not clear to me that abetting an Iraqi counteroffensive is a good thing. The only reason to allow for an Iraqi counteroffensive is if we believe both that Maliki can extirpate ISIS and that the resulting deaths would be necessary for American security. I tend to doubt either proposition. 

I am, however, open to counterarguments. My inner isolationist can be overwhelmed by my inner imperialist, given enough evidence. 

ADDITION (three minutes later): The reason I do not believe that Maliki can extirpate ISIS is simply that he has proven remarkably uninterested in making the political accomodations necessary to gain Sunni acquiescence. He might be able to lead a genocidal campaign, but I doubt his army’s ability to carry that out ... and it is certainly not something that the United States wants to support.

Mosul just fell to the people we used to call the “enemy” and nobody cares

 ISIS forces just took Mosul. Mosul. Let me repeat that: Mosul. 

Worse yet, Iraqi forces fell apart in a way that reminds of Batista’s army during the tail end of the Cuban Revolution. This is bad news. Now, ISIS has been building an infrastructure in Mosul for quite some time. (The link alludes to a parallel tax system in the city.) But this is shocking. 

When you add to it evidence that ISIS is in the process of establishing a tax system in the areas under their control it gets very worrisome. 

And strangely, the TV news and the big-traffic interweb sites seem to find Eric Cantor’s loss more important. Which, of course, shows you how little we really cared about any of the things supposedly at stake in the Iraq war.

I would like to think that Americans will remain more vested in the Afghan war after the last U.S. soldiers leaves. But this is mostly because I was, you know, there. I might hope that should the Taliban retake Jalalabad we would pay a little more attention, but somehow I doubt it.

In defense of apathy, there really is no American option on the table in Iraq. Moreover, for all the parallels this isn’t Cuba in 1959 let alone Indochina in 1975; ISIS is not about to sweep into Baghdad. In a sense, then, why not ignore the news from Mesopotamia? It tastes of defeat and there is nothing to be done. 

But rational or not, that feels wrong. I am sad.

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.

Occidental, Iraq, France, Britain, travel, my wife (♥) and whatever else

 The short answer to Bernard's question about Oxy is that they bid too high. They were the minority partner in a field with Eni, Sonangol, CNOOC and Kogas ... and they lost.

The rest of the final post in the Iraqi oil series is going to be held up for a bit. The reason is left for an exercise by the reader, but it is a good one. The worst case scenario is that you will see it here fast.

This month begins a horrendous travel month during which I will go from Boston to Los Angeles to New York to Tulsa to Shamrock TX to Burlington to New York to Miami to Atlanta to home and my wife!!! (Who will be visiting me in both New York stops, thank the Lord.) France was much more fun. Oddly enough, I'm really only looking forward to the Tulsa-Shamrock bit of the trip, although I will enjoy smoking cigars in New York and Miami with my hermanos if I get the chance.

As someone who has a great affinity, even a love, for both Britain and France (maybe it's a color-combo thing, or a losing land wars in Asia thing, or some else ... thing) I present you with the following:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Sarkozy Visits the U.S.
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Reform

I eagerly await the Ranter's informed commentary.

The new Iraqi oil contracts

 LT asks, “What is your professional-grade suggestion for aligning the interests of oil ministry and oil drillers?”

Have the Oil Ministry pay the oil companies’ development costs. That way, the per-barrel fee turns into a true service fee, and the IOCs really are reduced the status of service companies. Which is exactly what the Iraqi government did in November, in the wake of failed auctions. (Perhaps they had a ringer from my old high school sitting in the HBS class? Omar? No, he was in the nuclear power class. Carlo!!)

Under the new terms, ExxonMobil and Shell retroactively agreed to the Iraqi government’s insistence on a fee of only $1.90. After all, if the government is going to subsidize most of their capex, then they can make money even at such a low fee. They signed a contract in November. In February, the Oil Ministry arranged auctions for a second group of fields.

Unsurprisingly, the next round was far more successful than the first:

Field	Consortium	Percent	Fee per barrel	Target, mbbd	Bond	Annual revenue, $m
West Qurna 1	ExxonMobil	80%	$1.90	2.33	$400	$1,197
	Shell	20%
Majnoon	Shell	60%	$1.39	1.80	$150	$878
	Petronas	40%
Halfaya	CNPC	50%	$1.40	0.54	$150	$238
	Petronas	25%
	Total	25%
Qaiyarah	Sonangol		$5.00	0.12	$100	$411
West Qurna 2	Lukoil	85%	$1.15	1.80	$150	$706
	Statoil	15%
Garraf	Petronas	60%	$1.49	0.23	$100	$106
	Japex	40%
Badra	Gazprom	40%	$5.50	0.17	$100	$340
	Kogas	30%
	Petronas	20%
	TPAO	10%
Najmah	Sonangol		$8.50	0.11	$100	$279
Rumalia	BP	67%	$2.00	2.85	$500	$804
	CNPC	33%

The Rumaila field at the bottom is actually the successful contract from Round 1. I put it in for completeness. The “bond” is actually the “recoverable signature bonus,” in millions of dollars.

A few things stand out about the second round. First, no American companies made it. ExxonMobil got its foot in back in November, but that was technically during the first round. In fact, only one American company even bothered to bid, despite the phenominally good new terms. The other bidders were:  B.P. (U.K.), CNOOC (China), CNPC (China), Edison (Italy ... although really France), Eni (Italy), Gazprom (Russia), Japex (Japan), KazMunaiGas (Kazakhstan), Kogas (Korea), Lukoil (Russia), Occidental (U.S.), Pertamina (Indonesia), Petronas (Malaysia), PetroVietnam (fairly obvious), Oil India (again, fairly obvious), ONGC (India), Shell (U.K.), Sonangol (Angola), Statoil (Norway), Total (France), and TPAO (Turkey).

Second, most of the bidders were state-owned, among them CNOOC, CNPC, Edison (indirectly, by France rather than Italy, via EDF), Eni (the Italian government owns a controlling stake), Gazprom, Japex (the Japanese government owns a third), KazMunaiGas, Kogas (owned by the Korean government), Pertamina, Petronas, PetroVietnam, Oil India, ONGC, Sonangol, Statoil, and TPAO.

Third ... Sonangol? In both fields, the company bid more than the Iraqi government would allow, and decided to agree to a lower price. But still. It is a good company, but this is going to be a reach. Qaiyarah (in Nineveh province, up near Kirkuk) has been in operation since 1936, but produces very heavy oil and poses a lot of technical difficulties. Najmah is a little easier, but not by a lot. And both are in a very politically fraught area.

(The fourth thing that seems to stand out is not really surprising, which is the presence of ostensible gas companies. Gazprom has an oil subsidiary, Gazprom Neft, which will be the operator on the Badra field; Kogas is just a financial partner. The field, by the way, spans the Iranian border.)

If successful, Iraq’s output will rise from 2.4 million bpd (figures vary) to 10.5 million bpd by 2015. That’s a lotta oil, considering as world production was only 84.4 mbpd in the third quarter of 2009, up from ... well, down from 84.5 mbpd in 2005.

Thoughts?

Why aren’t all oil contracts service contracts? Evidence from Iraq

 When I first started to study oil contracts in a serious way, something puzzled me. Why weren’t all oil contracts service contracts? That is, why didn’t countries simply hire oil companies to extract their oil at a fixed fee per barrel? After all, that’s what many oil contracts turned into after the fact. Consider Venezuela: Chávez’s “nationalizations” basically had the effect of keeping the oil companies’ revenues per barrel around a flat $11. Or consider Chad, where the World Bank and major oil producers acquiesced in the Chadian government’s demands for more revenue as oil prices spiked above all expectations. (They didn’t have to: the government’s oil revenues were deposited with the World Bank, E.U. troops protected the facilities, and President Déby relied upon French military support to stay in power. But why not? It avoided all sorts of trouble.) Ecuador temporarily raised its windfall profits tax to 99% of all revenues when oil rose above the price at which the contracts had been signed, but implementation has been spotty. (Hm. Bernard may have been right about Mr. Correa, although the jury is still out.)

	Oil revenue		Payments to Chad
	Actual	Original	Actual	Original
2003	$234	$0	$45	$0
2004	$2,063	$600	$166	$31
2005	$3,138	$1,186	$300	$80
2006	$3,444	$1,197	$774	$88
2007	$3,600	$1,210	$1,220	$96
2008	$5,040	$1,216	$1,564	$1,000
Cumulative	$17,519	$5,409	$4,069	$1,295

Source: Ben Esty, World Bank.

The answer to the puzzle is simple: exploration risk. Lots of fields turn out to be much harder to work than anticipated. Similarly, exploring for oil is a very costly undertaking these days — in general, if the oil were easy to find, somebody would already be extracting it.

And that is exactly what Oil Minister Al-Shahristani realized made Iraq unique: the exploration risk was minimal. The fields had all been explored back in the 1970s. If it hadn’t been for the Iran-Iraq and First Gulf War, they would have been developed and on-line a long time ago. So why not auction off service contracts to the fields? Competing consortia were allowed to bid on how much they would increase production from the fields. They were also allowed to bid on the per barrel fee they would receive above a minimum level fixed by the Iraqi government. The winners would have to post a bond which they would lose if they didn’t invest a specific amount within a certain amount of time.

So how did it go? Not too well in the first round. There were few bidders—most fields were uncontested, in fact—and all the consortiums posted per-barrel fees that the Iraqi oil ministry considered too high. Lifting costs in Abu Dhabi are about $1.50 a barrel, and Baghdad considered $2.00 a reasonable maximum for most fields. The only bid to be accepted came from a consortium of British Petroleum (which isn’t called that anymore, but hey) and the China National Petroleum Company. The two bid $3.99 per barrel on the Rumaila field, but accepted the government’s insistence on $2. They also put up a bond (called, perplexingly, a “recoverable signature bonus”) of $500 million, and pledged to take production up from the current 1.02 million barrels per day to 2.85 million … although they would only earn a fee for production over 1.75 million bpd. The lowest bids on the other fields were rejected.

If that doesn’t sound like a good deal, that’s probably because it wasn’t. There were real questions as to whether BP-CNPC would exercise the option that it had (in effect) purchased for $500 million. Would it? Should it? What was BP thinking? Had Shahristani gotten a deal that really was too good to be true?

Many questions. Thoughts? More questions? Anyone? What about you, LT?

Obedezco pero no cumplo, o al revés

 The oil industry under direct and indirect American rule has an interesting history. It starts out paralleling the old Spanish Empire, and then reverses itself.

 
The Future of Iraq Project, the report by the liberal goo-goo State Department about how the U.S. should run its new satrapy had some pretty radical things to say about the future of the Iraqi oil industry. “There has been a massive trend to privatization or at least de-monopolization of national oil companies throughout the world and we are unaware of a single instance of re-nationalization or re-monopolization of a national oil company.”

That would have surprised Hugo Chávez, who was in the middle of remonopolizing the Venezuelan oil industry, but State used the above stylized fact as the basis for proposing that the industry be privatized.

They came up with three options. The first was straight privatization. Split the Oil Ministry into three or four corporate entities, sell up to 30% of ‘em, then give them and the international oil companies (IOCs) a straight shot at the oil. The second was the same, but keep the three or four resulting companies in the hands of the Iraqi state. The preferred third option, was to do things post-Soviet style, because it had worked so well the first time around. “IOC participation might be induced through their participation in private Iraqi oil companies that are themselves widely-held by the Iraqi public, through the issuance of vouchers to all Iraqi citizens. The citizens are then free to ... sell them.”

The Coalition Provisional Authority appointed Phillip Carroll ( formerly of Royal-Dutch Shell) to head the oil ministry. Carroll was the man in charge of Iraqi oil, he ran the ministry and he represented Iraq at OPEC meetings. He also refused to privatize Iraqi oil assets. The Bush Administration replaced Carroll with Robert McKee (R-ConocoPhillips) ... who issued a report calling for the retention of Iraqi control over a national oil company and self-financing of petroleum reconstruction. This led to a food fight within the CPA ... until Dick Cheney, of all people, intervened to prevent privatization. After all, the IOCs were used to doing business with national oil companies (NOCs), and nobody wanted to set up an institutional environment in Iraq that local governments would immediately start doing their damndest to reverse. Obedezco, pero no cumplo. 

McKee’s report was optimistic about the future of the Iraqi industry. “At oil prices of $25/bbl [barrel], about $12 billion will be available annually as the government’s share of oil revenues, after subtracting the real costs of sustaining oil production at 2.5 mmbd [million barrels a day], and after accounting for domestic consumption. Industry analysts believe that restoring pro-duction to 3-3.5 mmbd over 2 years will require about $5 billion in new investment. Financing such expansion out of current cash flow will take about $2.5 billion annually over 2 years, or about 21% of the government’s share of oil revenues. A more ambitious program, one aimed at reaching production in the 5.5-6 mmbd range is projected to cost about $20-30 billion over 5 years, or $4-6 billion annually. Iraq could afford this as well, though the initial proportion of the government’s annual share of revenues could be as high as 50%. However, during periods of unfavorable crude oil prices, say $18/bbl, an ambitious expansion plan could require as much as 85% of the government’s take.”

Needless to say, the Iraqi industry was not privatized. Problem was, the Iraqi parliament that took over legislative authority from the CPA — I know, in theory the CPA had no legislative authority, but whatever — couldn’t come up with a new oil law. In 2007, Baghdad and the Kurdistan Regional Government came up with a draft revenue-sharing law, but it wasn’t ratified. The Kurdish government was not willing to wait, so it started to issue its own exploration licenses. It stuck to the draft revenue-sharing agreement. In case of commercial discovery, the foreign investor would receive 15%, while the remaining 85% would be paid to Iraqi accounts. The KRG would keep 17% of the Iraqi revenue, and the central government would get the remaining 83%. In addition,the KRG reserved the right to demand equity participation in any oil projects up to 25%. All without any sort of federal authorization. No obedezco, pero cumplo.
 
And so, the Kurdish government started to sign production sharing agreements. Which infuriated Baghdad. Washington, worried about anything that could spark Arab-Kurdish tensions, discouraged American companies from prospecting in Kurdistan. They didn’t completely succeed: Hawler Energy, Hunt, Texas Keystone, HKN Energy, and General Exploration Partners all jumped in. But they mostly succeeded, and Americans mostly stayed out.

Of course, it was all new exploration in Kurdistan. Risky, tough, expensive, huge downside risk for the companies. The real prize was the oil down in the south, where all the really hard exploration work had already been done. But that brings us back to the problem that the Iraqi parliament could neither organize its own oil company to manage the needed investment nor come up with a framework to allow foreign companies to manage it for them. With an insurgency on and the Iraqi oil ministry working the good fields, wildcatting was not going to happen, but neither was any growth. 

So in July 2008, with the Iraqi insurgency winding down (sort of) and the American election coming up, Oil Minister Hussein al-Shahristani basically said to hell with it. If the Iraqi parliament couldn’t come up with a plan, he would come up with one on his own.  No hay que obedecer, pero cumplo.

Thoughts?

Who won Gulf War 2?

 Some say it was China.

T. Boone Pickens to Congress : “They’re opening them (oil fields) up to other companies all over the world ... We’re entitled to it. Heck, we even lost 5,000 of our people, 65,000 injured and a trillion, five hundred billion dollars. We leave there with the Chinese getting the oil!”

Wait … wasn’t the war about nuclear weapons in the hands of a dangerous regime? I won’t deny that’s true. It might even have been what President George Bush had in mind.

One thing that I can say, however, is that when the 369th Corps Support Battalion (aka the Harlem Hellfighters) was preparing to go to war back in 2002, one sergeant liked to motivate his soldiers by saying (among other things) “We’re in, we’re out, and by next year gas will be 60¢ a gallon!”

In other words, it wasn’t just Texan oilmen who thought that the war was fought for the economic benefit of the residents of the United States; cops and roofers and public school teachers (and at least one dude working in the Economic Growth Center at Yale University) pretty much thought the same thing. Moreover, the State Department’s Future of Iraq Project proposed that the industry be privatized after the war, and no less than Ahmed Chalabi promised, “American companies will have a big shot at Iraqi oil.”

So is T. Boone Pickens right? Did China win Gulf War 2? Let me propose here that the answer is “no.” Given the disasterous decision to go to war, America has probably won Gulf War 2, in callous economic and strategic terms. The decision by the Bush Administration to discourage Americans from investing in Kurdistan, followed by the (apparent) decision by the Obama Administration to extend that discouragement to the rest of Iraq, was quite smart. If it works out, two things will follow: (1) the U.S. will gain a huge amount of diplomatic leverage over a dangerous regime that is trying to procure nuclear weapons, and (2) the Second Gulf War may turn out to be a paying propostion in straight-up economic terms.

Don’t believe me? I don’t blame you. I’m not even sure that I believe me. But after writing a case about the Iraqi oil industry, teaching it to a bunch of mostly-American MBA students and then again to a group of mostly-European executives, and running some numbers, I’ve come to think that there’s a reasonable case to be made for the defense.  Over the next few posts, I’m going to try to make it.

The limits of empire

 The world really needs a good game-theoretic model of informal empire.  I suppose Bruce Bueno de Mesquita already has one, but I’d like to see something more specific. 

What’s informal empire?  Well, if “empire” happens whenever one sovereign state exerts its authority over an area previously under a different sovereignty (or none at all) then that empire is “formal” when the imperial state exerts its authority through a bureaucratic chain-of-command that runs from the imperial executive through the local government and down to the person in the street in the new territory.   (Similarly, an empire has formal characteristics if judicial decisions can be appealed upwards to courts in the center, or if the imperial legislature can pass laws for the subordinate territory.) 

Since 1898, the United States has generally eschewed formal empire.  The exceptions are Haiti in 1915-34, the Dominican in 1916-24, Japan in 1945-52, Germany in 1945-55, Okinawa in 1945-72, and Iraq in 2003-04.  (The European Union exercises formal authority over parts of the governments of Bosnia and Kosovo.)  The U.S. has relied on a combination of treaty arrangements, sanction mechanisms, and moral suasion to get its satraps to do what the government of day wants them to do.  The famous SOFAs kinda sorta sometimes formalize quasi-imperial arrangements by giving U.S. troops special privileges inside host countries, including sometimes the right to shoot people, but that is not the same thing as giving the American government the right to give local bureaucrats direct orders under the threat of unemployment or imprisonment.

Sometime informality works and sometimes it doesn’t.  Right now, informal empire has hit its limits in Afghanistan and Honduras.  The U.S. can’t make President Karzai crack down on corruption, form a coalition with Abdullah, or negotiate with the Taliban.  Considering both the number of troops we’ve got running around the country and the number of dollars we pour into its government budget, the lack of influence (let along control) is pretty depressing.  What kind of an empire is that?

In Honduras, the recent agreement between Micheletti and Zelaya appears to have collapsed.  The Honduran legislature has not voted to reinstate Zelaya, and Micheletti is continuing his modus operandi of “what the hell?” by picking a fight over who will lead the interim cabinet until Congress votes.  Washington may be able to pick something up out of this mess, but U.S. leverage is limited.  Aid is suspended and visas were as well until recently; stronger sanctions, meanwhile, will just sock it to a lot of very poor people.  We could give up and run out the clock, which would be the best option if the rest of the hemisphere agreed.  They don’t, so something had to be done, and a few days ago it looked as though the Secretary of State had done it, by brokering a solution.

Only now Micheletti keeps going off the reservation, and there seems to be no quiet easy way to keep him on it.  There is still something a little ridiculous about the lack of American leverage.  What kind of an empire is this?

Not much of one, actually.  To be honest, I suspect that the U.S. will be able to knock some sense into Micheletti.  If pushed, I’d bet on the agreement coming back to life.  But still, the limits of informality are clear.  Even in Afghanistan, let alone Honduras, local political actors are autonomous, and the threats that the U.S. could use to sanction them are not credible. 

Running an informal empire is complicated, and running a formal one is often impossible.  The implications are left as an exercise for the reader. 

Interlude: You might like him, but so what?

I like John McCain.  He seems like a genuinely nice fellow.  And unlike other past decisions of mine, I will say that while I would not have supported McCain in 2000 knowing what I know now, my decision stands given what was knowable at the time.  I do in fact think that his heart is in the right place, and unlike many of my fellow American lefties, I believe that his calls for national service and national greatness are respectable.  Mass economic sacrifice for social insurance and the environment, mass government service for emergency response and the occasional crazy man's strike at Pearl Harbor, all good things.  Matt Yglesias thinks that his call for service for its own sake is crazy; I think that the country would be well-served by sticking most of our youth in uniform for a couple of years, preferably to pick up trash and receive EMS training, but possibly to serve in You Know What.

But ... even though my respected colleague Niall Ferguson has attested to the man's character, the more I find out about Senator McCain, the more I think he's simply flat-out stupid.

And so, as a public service, here is a slightly overlong video of their man's greatest hits.  Enjoy.

UPDATE:  "Stupid," I'm now convinced is far too harsh, and certainly incorrect.  My difficulty with McCain is how readily he  abandoned so many of his 2000 positions in 2004, without any new facts coming to light that might have caused such a re-evaluation.  It was pure, crass political expediency.  Now the man feels free to dissemble all the time --- about the political complexities in Iraq, the history of American diplomacy, and even Obama's factual statements.  He's also taken nonsensical positions on taxes and health care while fearmongering about Iran. 

I can only find three positive things to say.  First, his climate change plan, while a giveaway to emitting companies, is a giveaway that reduces corporate opposition and might be smart politics.  Second, he supports free trade, and while my own doubts are growing, that's still probably the best position on average.  Of course, that means diddly with a Democratic congress, which is the third positive thing:  with no coattails to speak of, Congress would constrain him from doing crazy things at home (like his tax plan) ... emphasis on at home.   

But here's an opposing view from the fellow with the office next to mine.  If you're pressed for time, skip ahead to minute 4:00.  If you want to hear, well, things that are quite hard to understand, skip to minute 23:15.  It's quite ... judge for yourself. 

McCainiacs

How Others See Us:  "Obama wins Grammy and whitest US state," Times of India.  The Grammy does not, I should point out, refer to the "Yes We Can" video.

Of course, one great video begats another.  Go click the link.  Then watch the following.

Which brings me to an admission and an admonition.  The admission is that back in 2000 my journal tells me that I was a McCainiac.  I even gave my first ever recorded campaign contribution to the guy, a full $500.  What seems to have excited me was that he was against reducing federal taxes even one penny until the national debt was paid off, and in an election where nobody was talking about health care (Gore hadn't yet proposed to add a pharmaceutical benefit to Medicare) and war seemed far away, that seemed like the big issue.  Pay down that debt, baby!  Andrew Jackson's one good idea.  Plus, he didn't seem to, like, hate the environment. 

That McCain, well, I wouldn't vote for him now.  Times change, other issues take on salience.  But the new McCain?  Even less. 

The admonition is that anybody who is trying to decide between John McCain and whichever of the Democrats gets the nomination is simply not paying attention.  That is a decision that makes no sense.  One guy has pledged to make the Bush tax cuts permanent, keep us in Iraq for a century, confront Iran, and keep our insane health care system.  The others will do none of the above.  If McCain's platform seems reasonable, even desirable, then there is no way in hell that you should be even thinking of voting for the Democrat.  And vice versa. 

Will, I promise to get around to the Latino question that you posed, but c'mon man.  His choice of veep could sway you?