Offensive of the Weak

The motivation for a major offensive in Basra that was almost certain to force the Sadrists to have a de facto end to their mostly unilateral ceasefire has been bugging me. It does not make a whole lot of sense, especially as the primary prize in Basra, the oil export revenue, is easily deniable by any group with some popular support and access to high explosives, AND the forces committed to the fight are a single light army division and three brigades of police. That force level is absurdly low, especially if there is any reason to believe that there is significant chance of defections.

I was able to bounce some ideas off of Cernig on Thursday night as we did some mutual head-scratching and what this looks to be is an offensive of desperation and some elegance, although it could be extremely ugly if anything slips. There are some massive assumptions in this analysis, and we'll be fleshing it out over the next couple of days. I'll start outlining some assumptions.

1. 1 Sadr and his movement are significantly more popular on the street and in the Shi'ite electorate than Maliki, DAWA and ISCI/BADR
2. 2 Throwing lots of money around has been a major driver of the decrease in violence
3. 3 The great choke point in the money flows is Basra and its oil export infrastructure.
   
4. 4 Sadr and most of his movement have developed a tacit working relationship with Petreaus and MNF-I --- harassment is tolerable in both directions but nothing too big too often. This has allowed Sadr et al to consolidate their positions.
   
5. 5 The hold-up on the provincial election law approval was the Maliki factions being very concerned that they would be on the losing end of the stick if unfettered elections were to be held in the South given present trend lines.
6. 6 The Cheney visit/pressure/promises to get this group to sign off on the election law included a promise of support on changing the political facts on the ground in the South via high explosives....

From assumptions 1 through 5, one concludes that Maliki's political position is weak. Given current trends he looks to get weaker over the next eight months going into the local elections. His allies and government are discredited for not being able to provide basic public goods and for being seen as too pro-Iranian and pro-American by too many interested actors. Furthermore, he is behaving as a good weak client by making sure as much money is out of the country in order to fund his potential exile.

One of his big problems is that the Sadrists will beat him politically and can go even with him on the corruption and distribution of spoils. So he has to take down Sadr or at least massively rejigger the political equation. And this offensive is his attempt to do so, and it has two interesting option trees. The first is that it actually works in defeating and seizing (intact) the Basra oil export profit center. This allows for a zero-sum transfer of spoils from Sadrists to Maliki's coalition while also embarrassing and weakening the Mahdi Army and enhancing the prestige and loyalty of Badr loyal units. This is very unlikely for multiple reasons. The other option tree is far more interesting.

Let us assume that this is a deliberate provocation exercise.

In this scenario the Iraqi Army attack into Basra's Mahdi neighborhoods does not go well, but it provokes a national Sadrist response which starts a strategic countdown clock. This count down clock includes increased Sadrist/JAM actions against Iraqi government and US Forces such as rocket/mortar attacks on the Green Zone, and attacks against the oil export infrastructure. It includes concerns over US logistics lines as the combination of Basra shutting down and general insecurity in the Shi'ite bridge cities increases.

It puts MNF-I in a very tough position as MNF-I is justifiably paranoid about its supply lines and the new routes coming in from Jordan to Anbar and terminating near Baghdad are insufficient to adequately supply the entire force. The supply lines are much harder to hit today than they were in 2004 but they are still the weak point of the American presence. Additionally the level of fighting increases significantly so SOMETHING HAS TO BE DONE.

And that something could be the deployment of American combat troops to Basra, as reports indicate that Marines may be sent to Southern Iraq. The British could provide logistic base security as the Marines bail out the Iraqi Army and take over patrolling activities in Basra. And unless the live and let live arrangment that minimized conflict in Sadr City is quickly put into place, the Marines and the Sadrists will be knocking each others heads in. There will be a strong temptation on the Sadrists fighters to horizontally escalate and raise the level of their activities and attacks in other southern cities. This will be a good test to see how much control Sadr and other senior leadership really have over JAM activities or if they just provide strategic guidance.

If there is horizontal escalation of fighting to other southern cities, two things will happen. The first is that implicit working relationship that MNF-I has been building with elements of the Sadrist movement is scuttled. The second is that the South is now too unstable to have free and fear elections due to those 'thugs' and that elections are suspended until peace breaks out (and coincidentally Sadr and his followers are either killed or de-legitimized. )

This is pure speculation, but as Cernig points out in his post on this subject, everyone is looking for informed speculation as to motive.

Maliki decided to launch the offensive without consulting his U.S. allies, according to administration officials. With little U.S. presence in the south, and British forces in Basra confined to an air base outside the city, one administration official said that "we can't quite decipher" what is going on. It's a question, he said, of "who's got the best conspiracy" theory about why Maliki decided to act now.

And this is not that outlandish of a conspiracy theory as there are few hard to reconcile with reality assumptions in it.

Compression, Distance and Gas Prices

Transportation and distance can be translated in economics in several different forms. The most common is to draw iso-time and iso-cost lines so that all points on the line are equally costly or equally time consuming to traverse from that point to a common central point. Decreasing costs or increasing velocity allows for regions that were previously marginally unattractive for certain economic activity to now become attractive and feasible for a given economic activity.


For instance, reliable overnight air transport has made the proliferation of high end seafood restaurants in Pittsburgh, St. Louis and Chicago feasible as fresh supplies can cheaply be brought in while fifty years ago, the radius of fresh delivery off the docks was limited to a half day worth of driving, or maybe three hundred miles. Anything else had to be frozen and then shipped. Now the fresh off the docks time is still half a day, but that means that all metro areas served by large airports are now within the economically feasible radius.


Menzie Chinn at Econbrowser is looking at the increasing price of transportation and is advancing the idea that international trade flows will slow down or potentially decrease as the iso-cost lines are shrinking.

Several implications flow from these musings. First, more goods will now be "nontraded". This would lend more "home bias" to US consumption (and more home bias to each other countries' consumption, as well). Second, one might think that as transport costs rise, foreign and domestic goods would become less substitutable, holding all else constant...

To the extent that the development of cross border supply chains relied upon low trade costs and rapid transport, higher oil prices should be expected to retard this process.

I think we can expand this analysis to intra-national, regional analysis. The most common distance as cost trade-off people make is where they live within a metropolitan area. Shorter commutes tend to lead to location premiums/higher property prices, while living on the periphery leads to lower property prices, but higher commuting costs (both on a cash and implicit time basis). The dominant trend in the United States over the past fifty years has been to sprawl towards cheaper lands on the periphery and accepting the higher commute times and costs, partially mitigated by a trend decrease in automobile usage costs. That trade-off may be breaking down.

CNN Money is running a series of vignettes on the middle class squeeze, and the first one features a couple from my hometown of Lowell, Massachusetts. Lowell is an old cotton mill town whose mills left in the 1960s, and it has become a combination of high tech manufacturing, high tech software support, skilled craftsmen, comparatively cheap housing for people leaving the inner Boston suburbs but want to stay within the Boston city region, and a massive immigrant community with great food. It is an interesting place, and it is still comparatively 'cheap' compared to any place ten miles closer to Boston.

I work in Belmont, MA, which is in the Cambridge area. I am in LOVE with what I do....'

Sadly, my husband and I were priced out of this community when we decided to buy our first home almost two years ago. We decided to move to Lowell, about 10 minutes shy of the New Hampshire border....

I will most likely need to leave my wonderful job as program coordinator due to the rising cost of gas. It costs me about $250 a month to commute to work,

As transportation within regions gets more expensive, less movement will occur. The trade-offs are becoming more pronounced, and the value of savings on property versus the direct and indirect commuting costs may have been worth it when annual commuting costs for this individual was only $1,500/year but the trade-off reverses itself when cash commuting costs come out at $3,000/year. Depending on one's assumptions, the increase in gas costs has led to a devaluation of the Lowell property to this family of $20,000 (interest rate and amortization schedule sensisitive of course).

If we continue to see higher gas prices, which I think is likely, the peripheral and outer ring suburbs (which Lowell is one within the Boston economic region) will see a further acceleration of home price declines as people will try to move closer to their jobs and closer to the center of their economic regions (assuming job density is higher towards the center). Shorter trips and better substitution of trip modes will occur as the alternatives to driving increase in higher density places.

Revisiting Profits of Instability and Extortion

A couple of years ago, I did some quick calculations at what the US invasion and occupation was doing to the oil market via the direct fear premium . Updating those assumptions with a little bit more depth, we get a more useful number. Assuming a $10/bbl risk premium and a short term elasticity of demand of .10, the Iraq War has pumped an extra $30 to $60 billion dollars per year into Russia's coffers, and $40 to $70 billion dollars per year into Saudi coffers. The rest of the price appreciation has been a combination of tight supply/demand, and a weakening dollar, with the potential of Peak Oil sitting atop of any major net production increases.

The results --- a Russia that is flush with money who sees itself as a great power with a recently embarrassing decade or two instead of a weak power with a grandiose past, and the OPEC-11 running massive current account surpluses. Fairly predictable that a major shooting war in the Middle East will have negative impacts on oil pricing.

BJ @ Northman's Fury saw some vultures circling around this pool of money and making demands at the Astute Bloggers ( I had to make sure this was not a parody site first)

I think that Saudi Arabia and Kuwait and Qatar and the rest of the nations in the region - (including Iran!) - should help underwrite the costs of this heroic and noble effort. They should give the USA $400 billion.

They have the money. Especially now with oil at/near/or over $100/barrel.

AND WITH THE DOLLAR SO WEAK, IT'LL BE EVEN LESS PAINFUL FOR THEM.....

ARABS: ARE YOU DOGS, OR ARE YOU HONORABLE MEN? ARE YOU EVEN CAPABLE OF HONOR? THEN SHOW US. Actions speak louder than words. If you don't send us the money, then you have really told us who you all really are: ungrateful dogs.

About the only ones who strategically benefited from the removal of Hussein and continued instability in Iraq is Iran and Isreal. And neither of them have any reason or ability to pay up. The GCC lost a counterweight to Iran's power, Turkey is routinely launching division sized raids into Kurdistan, and Syria and Jordan are facing mass refugee movements. Even the extra revenue that is being derived from a war that most countries did nothing to get in the way of, but little to support is insufficient to provide the extortion payment that the Astute Bloggers demand.

Rove's Math is faulty again

One of the M.O.'s of George W. Bush's political and business careers is the ability and willingness to create an 'after me, the deluge' so don't replace me situations. Fear, Uncertainty and Doubt is created so that although Bush and his associates have created a bad situation, the FUD keeps people from being willing to switch to other management for the fear of the higher associated costs of cleaning up after Bush. This was best captured by the Economist [h/t Unqualified Offerings]

In 2000 he beat an incumbent vice-president after eight years of peace and prosperity: the wry slogan among his inner circle was: “Things have never been better. Vote for change.” Four years later, with the economy stalled and Iraq in flames, he won again. This time, the backstage slogan was: “Things have never been worse. Stay the course.”

And we are getting the same playbook in Iraq. It is a clusterf*ck, the state has been delegitimatized to a ridiculous Nth Degree, the US is funding both the insurgency, and the counterinsurgency efforts (usually the same people), Iran's President was welcomed with flowers and chocalate while President Bush, Sec. State Rice and Sec. Def Gates have to make nighttime unnanounced visits and the success that is being trumpeted is returning to violence levels of 2005 when Iraq had already become a failed state. Oh yeah, two major US allies (Turks and Iraqi Kurds) are setting themselves up for a multi-division slug-fest once the ground dries out in the spring.

And yet, Bush allies are arguing that doing more of what Bush is doing with the same management team is the course with the lowest cost of action. Karl Rove is arguing that pulling out of Iraq would send oil to $200 a barrel. This after seeing the price of oil triple in the past five years, and ignoring either a static or dynamic analysis of the situation.

If we were to give up Iraq with the third largest oil reserves in the world to the control of an Al Qaida regime or to the control of Iran, don’t you think $200 a barrel oil would have a cost to the American economy?

This is wrong on several levels. First, Al-Quaida as the right's talking points like to trumpet this week, is not that strong in Iraq. It never has been until it was a convienent bogeyman. Instead the primary combatants shooting at the US in Iraq have been native-born Iraqis, Sunni Arab nationalists/revanchists/Ba'athists, [at least one, usually two, sometimes all three], Sadr's Mahdi Army which is overwhelmingly urban Shi'ites, and criminal/smuggling operations. The foreign fighters have been at times extremely useful idiots, but always idiots in the eyes of the Sunni Arabs. Al-Queada can't take over the central government; their best objective is hollowing out the central government.

Secondly, the economics don't work out. Iraq is exported in 2007 an average of 1.6 million barrels per day. More recently Iraqi oil exports were roughly 1.9 million barrels per day out of total production of about 2.4 million barrels. Global oil and oil near substitute production in January 2008 was 87.2 million barrels. Iraq produces 2.7% of global crude in January 2008.

If we were to assume for the argument that complete US withdrawal would lead to a complete shutdown of Iraqi oil production and exports and thus lead to a doubling in spot prices, this implies an elasticity of demand of less than .03 in the short run. Elasticity of demand is an economic concept that estimates how much prices would change in response to a percentage change in supply. For instance an elasticity of demand of 1.0 would have prices increase 1% for every 1% of a good that is no longer available. An elasticity of demand of .5 would have prices increase by 2% for every 1% of supply removed from the market etc.

The best short run estimates of the elasticity of demand for crude oil range from .10 to .16. Over the longer run, these elasticities increase, but in the short run using the lowest accepted estimate, removing all Iraqi oil from market would lead to a price increase of 27% +/- a bit, and using the .16, removing all Iraqi oil from market would lead to a price increase of 17% +/- a bit.

And these estimates assume all Iraqi oil comes off the market when we have proven history that there is a good deal of capacity for limited Iraqi production no matter how many people are being shot and pipelines being blown up.

And this is just the simple static counter-argument against Rove. If one wants to get a little more complex and attribute at least a portion of the nominal dollar price increases in oil over the past five or six years to a weakening US dollar, and low US interest rates, we can construct an interesting counterfactual. Right now the entire Iraq expenditure is being placed on the US credit card. Iraq is costing in cash terms about $200 billion per year right now. Removing a significant amount of that cost from our ongoing and recurring expenses will reduce US debt loads, and marginally reduce the downward pressure on the dollar. A strong US dollar means US consumers pay less per gallon/barrel than in a scenario with a weaker US dollar.

This part of the argument that Joseph Stiglitz has been making recently. The Federal Reserve failed in 2003/2004 to counteract the massive fiscal stiumulas of war spending by tightening monetary policy. This led to a bubble, and the subsequent credit crunch.

The war has fed into the weakness of the wider economy, he said, adding, "To cover that up, the Fed and the regulators flooded the economy with liquidity - giving cheap money to anybody this side of a life support system."

He said there was a direct correlation between the extent of the current crisis in financial markets and the cost of the conflict.

So in this counterfactual, the US dollar is a little stronger and oil is a little cheaper. Rove is factually wrong, but he is throwing out a marker of blame against anyone advocating that they want to clean up George W. Bush's failures. Par for the course.

Resiliency of coal???

Chris Briem over at Nullspace pointed Dan Gross of Slate towards an interesting obscure economic indicator, the price of coal coming out of the Big Sandy River. This is the eastern US spot price of coal that fills the marginal demand that is not covered by long term power plant, coke and steel mill contracts.

The spot prices reflect marginal demand, what buyers need or want beyond the amounts contracted for. And these prices have been spiking. This chart shows that Central Appalachian Coal Futures are up 59 percent this year—to $63 per ton—and that the price has doubled since July 2003.....

Why is this obscure economic indicator rising, and what does its rise tell us?

The recent rises seem to be more about growing demand than concerns about supplies. Ironically, the rise in spot prices for U.S.-produced coal has come at a time when the supply of the commodity seems to be growing

coal is one of the few areas where rising global demand for power and electricity plays to the United States' advantage. America may largely be a helpless victim of the continuing global rise in demand for crude oil, but when it comes to coal, we're more like Saudi Arabia. In 2001, the United States, according to this chart, produced more than one-quarter of the world's bituminous coal supply. And America is a swing supplier of coal to the rest of the world, which means that when demand is greater than anticipated, extra cash flows into our coffers. U.S. coal exports rose 11.6 percent in 2003.

The Wall Street Journal (via John Robb)notes that Chinese industrial and electrical demand is forcing a significant run up in coal prices as China is shifting from being a major coal exporter to a major coal importer:

But in the first half of last year, it imported more than it exported for the first time....Chinese coal demand grew nearly 9% last year, raising its share to a quarter of the world's consumption. According to the China Electricity Council, China's power-generating capacity rose by 18% just from last July to December, most of it fueled by coal.

How resilient is the coal production, distribution and consumption networks when compared to the similiar questions about petroleum networks that have been under systemic pressure for the past couple of years. I think the greatest area of difference between the two commodities is that the major coal producers, and especially the swing producer is much more politically stable and internally cohesive than Saudi Arabia and other OPEC members. Iraq right now is a significant fraction of the world's supply buffer and that buffer is miniscule in relationship to demand while a significant fraction of world's surplus supply of coal sits in Wyoming.

Furthermore coal has fewer brittle and linear single points of failure. Rail lines are the dominant coal transportation systems, but there tends to be more near substitutes in river barges and trucking within the major supply regions. Pipelines are more fragile with less network density to cover the need to switch flows away from breaks caused by attack or accident. Furthermore, coal seems like it needs less processing for most uses (coking is an exception) so there are fewer intermediate steps in the value chain compared to the need to refine almost all crude oil into usable end products. However both still require massive central consumption facilities that distribute their intermediate and end products via the electrical grid, so this is a potential common point of failure.

This is just speculation on my part, but the risk and resiliency of coal seems to be a little less than petroleum so a black carbon OPEC is far less likely to form than the probable and implict shadow OPEC. What do you think?

Bottlenecks and seccessions

The American South in 1861 thought that it was the swing producer of a key industrial commodity and through this economic bottleneck it could squeeze foreign support and recognition in its rebellion against the North. Cotton diplomacy and the belief that major power economies would fail if cotton was withheld or made too expensive was one of the impetuous for the Southern belief that they only needed to be able to fight a short war as that was the only war that they had a chance of winning.

Instead the combination of large strategic cotton reserves from the bumper crop of 1860, European fear of a general war with the Federal United States (probably due to still fresh memories of US successes as commerce raiders in 1812 as well as a potential fracturing of the Concert of Vienna), and fairly rapid substitution of cotton supplies from Mexico, Egypt and India dramatically reduced the value and credibility of Confederate cotton diplomacy.

In my post on Bolivian natural gas rent seeking a couple of days ago, I had pointed out a few other examples of local sub-national groups seeking to use at least the perception of a key commodity bottleneck to overleverage their bids for greater de facto or de jure autonomy in southern Iraq and Nigeria. The Sunni Arab insurgencies pounding of the northern Kirkuk-Ceyhan pipeline system has been a counterbid to reduce the leverage of Iraqi Kurds to do the same thing.

I am speculating, and would love to be corrected, if bottleneck intensification and rent seeking behavior is more common at the dawn of change in economic systems as the bottlenecks that can be manipulated to apply the most pressure on major power economies are narrowest when they have become the most exploited and that substitution is near, but not quite available just yet.

The US Civil War was at the dawn of the transition from internal water power to coal and steam power and now we seem to be at a transitional stage where the marginal increases in energy expenditures are electrical and non-petroleum derived. Yet we are still at least a few years off from this change-over and the value of the chokepoint commodity is very high and anyone with more than three wells can credibly claim to be a swing producer at this time....

Bolivian Rent Seeking Opt-Outs

The news from Bolivia is very interesting as four provinces with the money, natural gas resources that can create hard currency, and the home of the traditional elites within the country has become very interesting.

Tensions were rising in Bolivia on Saturday as members of the country's four highest natural gas-producing regions declared autonomy from the central government...

The officials displayed a green-bound document containing a set of statutes paving the way to a permanent separation from the Bolivian government.

Council representatives vowed to legitimize the so-called autonomy statutes through a referendum that would legally separate the natural-gas rich districts from President Evo Morales' government.

The move also aims to separate the states from Bolivia's new constitution, which calls for, among other things, a heavier taxation on the four regions to help finance more social programs....

Some indigenous pro-Morales groups claim Bolivia's richer, white-ruled Eastern regions want to control the country's natural resources. Bolivia has South America's second-largest natural gas reserves, behind Venezuela. Most of it is produced in the Eastern regions.

I am not a South American expert; I took a couple of classes freshmen and sophomore years in college, and my Spanish is not even good enough to order food at Taco Bell, so I am mainly applying a theoretical framework here.

Tyler Cowen at Marginal Revolutions is placing this emerging conflict within a colonialist perspective, which is interesting, but I think limited:

If there is any trend over the last five hundred and fifteen years, it is that indigenous peoples in the Americas are losing control over natural resources.

I think two other conflicts are more interesting comparisons. The first is the MEND movement in the Nigerian delta. The common complaint among the many distinct actors making up MEND is that the Nigerian central government and non-local populations historically disproportionally benefit from the hard currency flow derived from the oil production in the Delta. MEND's response has been several system disruption campaigns to reduce central government revenue and raise the cost of exploration in order to get a better deal for the Delta region.

Swopa at Needlenose in the continuing series of intra-Shi'ite conflict, maneuvering and goal seeking is following a strong echo of what is occuring in Bolivia with the actions of SIIC/Badr Organization via a riff on the New York Times:(italics are from the Times)

Najaf’s governor, Asaad Abu Gulal, says his mission is to prepare the city to become the premier place in southern Iraq. “If we happen to have a southern region, Basra may be the commercial capital, but Najaf would be the political capital,” he said. “We have the political leadership, and we have the religious authority.”The depth of the city’s sense of its separate identity becomes clear when a driver enters the greater city limits. The security controls are akin to crossing an international border. “The Islamic State of Najaf,” joked one driver recently as he waited in one of five lines where a phalanx of local and national policemen checked each car for bombs and illegal guns. Anyone with a “foreign” license plate, meaning a plate from outside the Najaf Province, is subject to a thorough search and is required to go to a nearby police station to register.

The artists-formerly-known-as-SCIRI's fortunes have seemed to be on the rise lately, and if they can manage to deliver services to the key provincial areas (such as Najaf) under their control, they might even be able to steal some of al-Sadr's popular support. The lingering question that I've wondered about for some time, though, is whether Team Shiite aspires to add an ethnically-cleansed Baghdad to their southern breakaway state semi-autonomous region

SIIC/Badr/Dawa are all in favor of opting out of a unified, strong central government for Iraq's future. Instead their major objective has been to opt-out of Iraq by grabbing the heavily Shi'ite southern provinces that coincidentally have slightly more than half of current Iraqi oil production capacity, most of its export capacity and the largest chunk of the unexplored or unexploited reserves, and form a de facto state if not a de-jure state. This willingness to decentralize and secede has been a binding agent for the relationship with the Kurdish factions as they share the same goal for different turf. Both are seeking to keep the rent producing resource (oil) revenue as close as possible and to keep both Baghdad and the Sunni Arab populations as revenue starved as possible.

The natural gas producing regions are pulling a MEND/SIIC without the high explosives or the foreign army of occupation to beat down their local rivals. I think this trend will become more common as rent seeking natural resource extraction will become more common; local production regions will see little benefit in being part of a larger polity if the commodity in question is an international bottleneck commodity.

How long has this been going on?

By Libby

I have to admit I've become a little lazy about following the news on Iran. I tend to rely on Cernig to tell me what I need to know and don't read every little thing, but I would think this would have been making more news. Or I am just the last one to notice that Iran has stopped taking US currency?

TEHRAN (AFP) — Major crude producer Iran has completely stopped carrying out its oil transactions in dollars, Oil Minister Gholam Hossein Nozari said on Saturday, labelling the greenback an "unreliable" currency.

"At the moment, selling oil in dollars has been completely halted, in line with the policy of selling crude in non-dollar currencies," Nozari was quoted as saying by the ISNA news agency. [...]

Iran has in the past months been whittling down the proportion of dollars in its oil revenue income. Officials in October said that dollars accounted for only 15 percent of payments and predicted the amount would fall to zero. [...]

Iran has also reduced its dollar assets held in foreign banks and urged OPEC to take collective action to price oil in other currencies such as the euro, instead of the US currency which is used across the world at present.

I used to hear a lot of speculation that the real reason we invaded Iraq was because Saddam was proposing the same sort of scheme. Could this be why the administration continues to overstate the threat of Iran? [h/t Lester]

France Does Algerian Nuke Deal

By Cernig

I just thought it was interesting that France - which is saying the new NIE makes no difference to treatment of Iran - has today signed a nuclear deal with Algeria (and a deal for a big petrochem complex too). It's an axiom of European politics that the French only ever do what serves France - so what's in it for France if Iran keeps taking a beating from sanctions? This deal may give a hint.

(As an aside, Sarkozy has a more personal Algerian problem - his son is embroilled in a legal scandal involving a scooter. Police and three judges have apparently gone out of their way to make his life easier after he was accused of leaving the scene of an accident. And US conservatives wonder why little things like this, part of a pattern, might be taken as bigotry by the poor in the suburbs.)

Incentives for Chaos Revisted

In the summer of 2004 I wrote about the wealth transfers and thus incentives major oil exporting nations were receiving due to the highly probable security/insurgency premium in Iraq. Here are some quick blurbs from this piece:

stability in Iraq and in the Middle East in general is a continuum of choices, and the extremes on both ends have extremely expensive payoffs. Extreme levels of stability in Iraq will cost the Russians between fifteen and thirty billion dollars a year, and the Saudis even more money ($17-$35 billion is my best guess)....its resultant payoff matrix leads to some very mixed incentives that we see acted upon every day.......

same basic set of payoffs are being calculated and played by all of the non-industrialized oil-exporters. Some level of instability is extremely profitable to them, especially an instability that so far has not resulted in the destruction of any actual production or export ability. The importance of this realization is simple; the incentive to cooperate with the United States is low for these countries, and if Iraq and the rest of the Middle East begins to stabilize, there is some direct economic incentive beyond the clear national security incentive that Iran possesses, to help the insurgents in Iraq.

Swedish Meatballs (via John Robb) expands on this insight today based on the reporting that the US is claiming that a significant portion of the insurgencies are financially motivated and the news is not good if the objective is a tampering down of violence to pre-April 2004 levels.

Disrupting the insurgents' finances is certainly to be encouraged, but if the new IO theme is factually correct -- meaning that Iraqi men are joining AQI for the pay -- then we are completely farked.

The ubiquity of monetary incentivization is the reason that we long ago lost the "War on Drugs." People will do almost anything to feed their families. [my emphasis]

As long as the insurgency was considered to be ideologically or sectarian-based, there remained at least some hope that political accommodation with some faction (or factions) could be reached.

We can never de-motivate a pecuniary insurgency -- the money will always manage to come from somewhere.

There are quite a few players who receive very good rates of return on minimal investments in instability in Iraq, and the situation is such that small groups can and have created cascading failures that change the entire incentive structure back towards destabilization and decentralization. Assuming a global short run elasticity of demand of crude oil is roughly 0.03 as this paper suggests or the more conventional assumptions of short term elasticity of .10 to .15, a 1% increase in supply in world crude markets which is roughly what the Kirkuk fields would provide if there was reliable working export routes would lead to anywhere from a 7% to 30% decrease in global oil prices with the most probable range of 7% to 12% decrease.

That is a lot of money to be lost on a daily basis. And if the insurgencies are financially motivated to a working degree, instability is a cheap investment. In the same Washington Post article concerning the interview with the AQI cell leader, he states that the Mosul operations cost him little:

"In a 30-minute interview, Abu Nawall described his work managing the $6 million or so annual budget of the Mosul branch of the Islamic State of Iraq, an insurgent umbrella group believed to have been formed by al-Qaeda in Iraq..... [my emphasis]

The 28-year-old said he was responsible for running the bureaucracy and arranging payments to the 500 or so fighters for the group in the city, who he said try to carry out as many as 30 attacks a day.

So $6 million a year for anywhere for up to 10,000 attacks per year or at least $600 per attack for material, labor, bribes, and pensions/death benefits to families; this is a dirt cheap operation here. A US infantry squad patrolling for a night without contact probably costs about the same. The cost figure per attack is probably higher due to the fewer attacks per day actually carried out, but even if you divide by ten, the attack figure is cheap from the perspective that a 7% reduction in oil prices means a global loss of ~$500 million dollars per day in oil revenue.

The top 15 oil exporters, as of 2006, with US EIA data, exported roughly 39 million barrels per day. They would be looking at daily revenue losses of $240 to $250 million dollars if Kirkuk-Ceyhan opened up at full capacity compared to the counter factual of an effective shut-in continuing. Over a year, that is a loss of $87 billion dollars. Now that is serious revenue and it could be greater depending on how inelastic you believe oil prices are.

If subsidizing the Iraqi insurgencies to the tune of a couple hundred million dollars per year prevents Kirkuk-Ceyhan from coming on line, the return on investment of instability is 8,000% to 10,000%. And given the toxic waste that was passed through the US financial system to get a couple dozen extra basis points in return, an investment that could plausible yield an 8,000,000 basis point spread over US Treasuries looks pretty damn attractive.

An oily excuse

Via the Oil Drum, the AP is reporting what is, I think, one of the lamest excuses ever for a major program that was already going to occur:

This month's discovery of a monster offshore oil reserve justifies Brazil's plan to build a nuclear submarine because it would be used to protect the find, the defense minister said.

"When you have a large natural source of wealth discovered in the Atlantic, it's obvious you need the means to protect it," Nelson Jobim said Thursday at a defense conference in Rio de Janeiro.

Jobim said Brazil must safeguard the Tupi field and its 5 billion to 8 billion barrels of oil reserves from other nations and from "actions that could come from the area of terror," the government's Agencia Brasil news service reported.

Let's hit the tape as to why this is ridiculous. First, nuclear submarines are wicked expensive for oil field defense missions against small bands in small craft or hijecked/pirated merchant vessels. It is massive overkill for this mission especially since the field is not too far from shore, according to CNN.:

The Tupi field lies under 2,140 meters (7,060 feet) of water, more than 3,000 meters (almost 10,000 feet) of sand and rocks, and then another 2,000-meter (6,600-foot) thick layer of salt. The company drilled test wells that lie under 2,166 meters (7,100 feet) of water, 286 kilometers (177 miles) south of Rio de Janeiro.

Even when Canada used their (much) cheaper diesel submarines to sneak up on Spanish fishing trawlers near the Grand Banks, it was a matter of using available assets instead of best assets which in both protection cases would have been numerous small, rather lightly armed, very seaworthy surface patrol craft.

Secondly, the Brazillians have been seeking a nuclear submarine capacity for most of my lifetime. They have not been working that hard at it, nor have they devoted massive resources, partially because for a good chunk of my lifetime hard currency has been hard to come-by until the resource extraction boom took off in 2002 or so with the increased Chinese demand. Brazil has a navy that is split between an efficient coastal patrol and defense force and a mid-tier regional power navy with single ocean power projection desires. It is in this role of a regional power that nuclear submarines make sense compared to either diesel electric or AIP subs, or other surface patrol craft. The oil field is a convienent red herring for international consumption.

I wonder if Robert Farley at Lawyers, Guns and Money would want to discuss the early 20th Century South American Dreadnought race as a potential parrallel to the Brazilian desire for nucler submarines....

Pinching the pocketbook

by shamanic

First of all, I'm really pleased to see my fellow Atlantan posting at Balloon Juice. I don't know Michael D. (that I know of, anyway), but he's a really good writer. Today he heralds rising gas prices as the only mechanism to bring new and cheaper fuel sources on line for us demanding Americans, and he's exactly right.

During the first Gulf War, I always thought that George H.W. Bush should have used the occasion to announce a Manhattan Project for alternative fuel sources. It seemed the perfect occasion to note that the Middle East is not a place where it's good to do business, that the governments of the region are no one's friend, and that we would spend the cash to find a way to credibly opt out of their system. But I was fifteen and idealistic and certainly didn't have my family fortune tied into what the oil companies and war machines needed in any given moment.

So now, a decade and a half later, with my own personal climate changing before everyone's eyes, the much prized "market forces" (which are always susceptible to manipulation by those with their own substantial enough market force) are pushing for ad hoc approaches to change the game. It's overdue and it's welcome, however much it hurts to fill up the tank. It's also an object lesson for future leaders, who perhaps will actually lead when there is such an obvious confluence of problems surrounding such a key resource.

Kurds Defiantly Issue More Oil Contracts

A guest post by Ken Anderson from the Bonehead Compendium

In a move certain to raise hackles in Baghdad and Washington, the Kurdistan Regional Government (KRG) today announced that seven more oil contracts have been unanimously approved by the Kurdish Regional Oil and Gas Council (ROGC). The oil companies involved all appear to be, as Resource Investor calls them, "international oil minnows" from Europe, the Gulf States (UAE), India as well as the Kurds' own Kurdistan National Oil Company (KNOC). One notable exception is Texas Keystone, based in Pittsburgh.

The move follows directly on instructions from the US State Department that oil companies should eschew contractual entanglements until a national oil law is passed. Deputy assistant secretary in the Bureau of Near Eastern Affairs, Lawrence Butler, said that any PSAs signed with the Kurds "have needlessly elevated tensions between the KRG and the central government."

We continue to advise companies from outside of Iraq that they incur significant political and legal risk in signing any contracts with any party inside of Iraq before a national (oil) law package is passed by the Iraq parliament.

The KRG, on the other hand, continue to assert that their own regional oil law is "the supreme law governing oil and gas activities in the Region," that the KRG oil law is constitutional and that oil revenues garnered will be "shared proportionately throughout Iraq pursuant to the Constitution." Fears that such PSAs would be heavily weighted in favour of the oil contractors appear to be allied, at least by these particular contracts, as the Kurds claim to have negotiated an 85% share of revenues. These contracts are further notable in light of recent economic sanctions imposed by Turkey on Kurdistan in a bid to force the Kurds and Baghdad to try and contain the PKK. Such sanctions could have a serious impact, both on the economy of Kurdistan and the US military, which received large quantities of supplies from Turkey.

Interestingly, Big Oil players continue to remain on the sidelines, mindful that they will have a much larger role in Iraq, if and when the Iraq Parliament finally does approve a national oil law. They clearly do not want to risk raising ire in Baghdad, especially in light of the fact that the Iraqi government continues to smack down LUKoil and their claims to an Hussein-era production sharing agreement. This, despite the fact that US oil major ConnocoPhillips holds a 20% share of LUKoil.

It is hard to know what the fallout from this wrangling will be. Considering that the contracts in question are really small change in the large Iraq oil drawer, once Baghdad does approve an oil law, and the big PSAs start rolling out, such lightweight deals may be considered negligible and quietly allowed to stand. Right now, the noise emanating from State and Baghdad over KRG's defiance is more political than pragmatic.

Into the Void: Iraq, White House nullify Russian Oil Contract

A Guest post by Ken Anderson from The Bonehead Compendium

Little noticed amid the wonk-frenzy generated by Musharraf's call to martial law is news that the Iraqi government -- helped in their decision with White House "advice" -- have cancelled a controversial and pre-existing Production Sharing Agreement (PSA) with Russian oil giant Lukoil. This is a complete reversal of the situation in May of this year, when Lukoil said that it was "optimistic" that the oil contract would be approved. This is a move that, while widely expected by this White House, was sure to bring acrimony to an already roiling situation in Iraq. Indeed, Moscow has already threatened to renege on its Paris Club promise to forgive some $13 billion of Iraqi debt owed Russia. Sweeping debt forgiveness by many foreign powers was something that Bush's special envoy, James Baker III, had engineered for post-Hussein Iraq, though Russia, among other countries, initially balked at blanket forgiveness and said that any such agreement would be dependent upon Iraq's treatment of Hussein era oil and gas contracts.

Originally, it was the White House that sought debt forgiveness for Iraq and now it is White House policy that is threatening to undo their own earlier efforts. Which is, sadly, something we have seen many times before. Despite the fact that it has also been White House policy to encourage the Iraqi government to honor Hussein-era contracts with foreign agents -- it is doing just that with companies from China, Vietnam, India and Indonesia -- this particular contract's disposition is shrouded in legal murk; Hussein reportedly canceled the contract just prior to the 2003 invasion. But it seems likely that this murk is being promoted by the White House for other reasons. Or, perhaps, one big reason.

The PSA in question involved development of the giant West Qurna oil field in southern Iraq, thought to contain some 11 billion bbls of light sweet crude oil, a field surely seen by western oil interests as a "high value target." Hussein-era PSAs that have been honored so far by the Iraqi government have not involved a petroleum resource anywhere near approaching the size of West Qurna. Hence the dilemma the White House faces in Iraq. The Bush administration knows full well that cooperation with Russia -- and China -- is vital in the Middle East and Central Asia. Unfortunately, radical forces within the administration do not see it that way, and, in spite of Russia's strategic positioning, growing influence and economic might, those forces appear to be choosing to set off further conflict in the region rather than act as an unbiased mediator. And for good reason. They are not unbiased mediators in Iraq, especially when it comes to oil resources there. One can imagine the howling in West Wing: "We ain't spending $1 trillion on the war so that Russia can move in and develop giant oil fields! No freaking way!"

As stated earlier, this move is exactly what was feared would transpire once these contracts were reviewed. While it appears that the White House is amenable to honoring PSAs for development of smaller and less strategic resources, the big ones are in danger of being canceled. Legality may be the foot the White House chooses to stand on in this case, but it surely is not co-operative move and only risks further hampering any solution to the problem of Iraq.

Gnossis Politics

Chris Bowers at Open Left is riffing off of something that has been floating in the back of mine, the particularly sharp edges of being at an intellectual/political edge and the temptation to engage in gnostic politics.

Yes, there is a certain eschatological feel about some of the writing coming from the Draft Gore movement, which one can also find at times from peak oil junkies. For both groups, the end of the world / second coming is always near, and the unfaithful are often mocked for their ignorance.....

I think I gave $10.00 to Graft Gore in the summer of 2006 and I have been following the ideas behind Peak Oil since soon after I started to blog.

The other two areas of edge thinking that I have routinely engaged in has been 4th Generation warfare, or at least non-traditional kinectic defense thinking, and the initial argument that the housing market was massively out of whack with reality and it was propped up by massive amounts of easy credit. When I first came across these ideas, opinions, theories, and storylines, they were fringe opinions with highly estoric knowledge required to understand them.

Who the hell outside of a small group of strange intellectuals heard of Lind? Who thought of decision making as OODA? What the hell is Hubbert Linearization? Secondary bubbles --- what are they and do they form only with glycerin? The terminology was different, the initial operating assumptions were in stark contrast to prevalant majority group assumptions, and the predicted end results are significantly different than consensus forecasts. And right now the Housing Bubble folks, and the 4th GW/alt. defense strategy thinking are being heavily validated by reality conforming much closer to their expectations nnd predictions than predictions made three to five years ago by the consensus groups. Peak Oil is still in the undecided category, although the evidence is starting to come in that there is at least a global plateau if not a peak in conventional crude production.

Alternative theories have done a better job of describing the behavior of the economy's primary growth sector, the critical production bottleneck of expansion, and the (in)ability of the state to impose its will through force than traditional theories this decade. And here I am worried; both that the consesnus explanations are so consistently wrong ---- 30,000 troops in Iraq by Christmas 2003, New Housing Paradigm, and the Alberta Oil Sands will save us ---- and the fact that the initial creaters and early adapters of non-traditional explanations operate at the margin and submargin of debate.

The initial steps of understanding that debate is a revelation and a rejection of the commonplace, and here exists the danger of gnossis, a dismissal of the everyday world. There is a temptation of contempt, and distancing of oneself from the common debate. Election revealed through the knowledge of an alternative explanation is a strong current in American releigous-political history, and the quasi-secret but open source knowledge that is available for anyone to stumble across invites an inward turn....

Heavy Oil and Nukes (Revisited)

A couple of years ago, I laid out a reasonable story for the Iranians wanting to go down the nuclear power path and independent fuel cycle, and two things stood out to me today that wanted me to revisit this story. There are two parts to the story; the first is a distrust of pure market mechanisms where energy is concerned. The second is an implicit concession to the Export Land quandry where an oil exporting nation with a growing population sees its exports fall precipitously over time.

First, the Oil Drum passed along this interesting little note about Kuwaiti plans to expand their daily production from roughly 2.6 million barrels per day to roughly 4.0 million barrels equivilant per day in 2020. The vast majority of the incremental increase would be from heavy oil production. Currently Kuwait effectively produces no heavy oil; instead it produces and exports almost exclusively light and non-sour crude which the refineries love.

As estimates of heavy oil reserves worldwide are up to six times greater than those of light oils, according to industry reports, an increased consumption depletes light crude reserves, making heavy crude increasingly sought-after.
Demand for oil will continue to grow. The question is do we have enough resources? Yes, we have. We have plenty of heavy oil," said Al-Sumaidi last week. "The conventional oil will decline even with the new technology, I don't think there is an escape from using heavy oil," he added.....

There are several differences between light and heavy crude. In simple terms, the gravity of light crude begins from 25 API and higher. Light crude is cheaper and easier to process and to transport, though it is more expensive in price. Light crude is also easier to refine because of its low viscosity, meaning that it needs less energy to extract sulfur and other impurities from it. Kuwait's heavy oil, on the other hand, varies from 11 to 17 API.

In general heavy crude doesn't flow easily making it more environmentally damaging than light crude. The high gravity and viscosity of heavy crude also makes its production more difficult, as the techniques to extract light crude will not work for heavy oil.

The second thing that piqued my interest was Cernig's catch that most of the Middle East is interested in building nuclear reactors for domestic electical consumption. Egypt wants to use the power from its yet to be built nuclear plants as a substitute and supplement for power from burning hydro-carbons. Egypt does not have massive oil or natural gas reserves so being able to substitute for these resources should allow the country's hard currency position to improve over the long term.

Two years ago, I was making the same argument with Iran, the combination of a shift in production from light sweet crude to heavier and more sour crude, as well as growing energy demand from a growing population makes a nuclear substitution effect economically practical:

The story would go that Iran sees a world that is running out of easily available light sweet crude oil and that the overwhelming majority of Iran's reserves are at least a little bit heavier, and much more sour than West Texas Intermediate or Brent Light crude oil. Heavy and sour oil is more expensive to refine, and thus sells at a significant discount. If Iran believes that they are in a future where there is little new supply capacity, then they want to capture as much of the profits and work spent refining their lower quality crude oil into higher quality quasi-processed oil before shipping it overseas.

However, the process of changing heavy sour to sweet light is energy intensive. The plan would be, to quote Stirling Newberry of BopNews to "use nuclear power to augment and enrich heavy oil.. In essence, nuclear power will be amplified by pumping steam into... oil, generating hydrogen to enrich that heavy oil, and then sending this to the packaging stage."

Nuclear power plants are an extraordinarily good producers of waste heat that can be used to generate steam. If Iran believes that oil will remain expensive, and that natural gas as a nearer substitute and feedstock of petroleum production will continue to become more expensive in the future, the opportunity cost of nuclear power goes down rapidly, especially if these assumptions hold true AND Iran continues to be an overwhelming mono-exporter; it would not make a lot of sense to eat into the primary hard currency stream for domestic consumption.

Additionally Iran's leaders could make the argument that if they are to go into the value added production of low quality crude into high quality crude, they would not want to leave their entire economy or at least a significant segment of it vulnerable to economic blockade or spare part restrictions. That would be the argument against relying on a First World supplier of nuclear fuel --- strategic independence is a very valuable commodity especially as Iran has seen many of its neighbors and near neighbors experience painful adjustments to critical nodes of their economies and states once certain supplies had been cut off. Paens to free trade's magic can only go so far before geo-political mercantilism and strategic flexiblity overwhelm economic efficiency.

This is story for Iran is pretty much the combined Kuwaiti-Egyptian stories highlighted this week --- a need for energy to accomodate the downshift in crude quality as well as to compensate for growing domestic energy demand.

Kurdish Systems Disruption Limited?

The new report of a PKK ambush of a Turkish Army column resulting in at least twelve dead Turkish soldiers and seven or eight prisoners is showing that the PKK is not willing to let the Turkish Army conduct a set piece, mechanized attack against their base camps in northern Iraqi Kurdistan. Instead cross border raids, ambushes and strikes are the preferred PKK tactic. However, I do not think that the PKK will conduct signficant energy transportation infrastructure destruction and sabotage despite the threat that they would consider this action in August.

Here is the problem from my perspective --- Turkey produces very little oil and in the grand scheme of accounting, receives little moeny from the major pipelines that run through its territory. Knocking out the pipelines, either the Kirkuk-Ceyhan or the Baku-Ceyhan pipeline does not significantly disrupt the Turkish economy, or more importantly, the government's ability to mobilize funds. There will be mild price increases on all petroleum products worldwide due to marginally decreased supply, but this is a second and third order impact on the Turkish government's ability to exercise force or mobilize its population.

We have seen successful oil interdiction and system sabotage in Iraq and Nigeria that have been successful as the governments heavily rely on oil export revenue to produce an overwhelming majority of both hard currency and government funds. Without either, people do not get paid, services do not get provided, and the incentive structure towards more bunkering, destruction and fragmentation strengthens. This is one of the worse case scenarios for Mexico also. Turkey really does not have this networked system/financial stability center of gravity that can be successfully hammered.

Putin's Progress

By Cernig

Russian leader Vladimir Putin has been unexpectedly forthright about Russia's intentions when it comes to Iran recently, telling the world that, based on his own country's intelligence and the findings of the IAEA, he doesn't believe Iran has a nuclear weapons program.

Today, in Teheran for a meeting of the five Caspian Sea nations, he went even further.

Vladimir Putin, in a landmark visit to Tehran, on Tuesday agreed with other ­Caspian Sea states to endorse “peaceful” nuclear activities in the region.

The Russian president and leaders of Iran, Kazakhstan, Azerbaijan and Turkmenistan also agreed not to allow their territories to be used for a military attack – an indirect reference to the US.

Washington has not ruled out the possibility of military action in its stand-off with Iran over Tehran’s nuclear programme.

The states stressed that “under no circumstances will they allow their territories to be used by other countries for aggression or other military operations against. . . member [states]”.

Azerbaijan has a partnership with Nato, which has led to speculation that the US could use Azeri airfields for a possible strike on Iran.

Mr Putin said at a press conference at the end of the summit that the Caspian states were committed to non-proliferation of nuclear weapons.

The Caspian States, it should be noted, include Iran - and so Putin was including Iran in that committment.

Now, the Caspian is a vast trove of wealth for the five nations who claim it - and some commentators have argued that Putin's really only interested in securing that trove before his bank-book demands he accede again to the West's push for an encirclement of Iran. I think that's short-sighted in the extreme. For one thing, it misses an important Russian motivation best put by Ezra today:

The more our aggressiveness unsettles the world, the more they'll seek curtail our hegemony, create states able to asymmetrically "balance" our threat, unite against our interests, and throw down markers signaling that we can't take international dominance for granted. Put another way: The more we scare the world, the less they'll cooperate on vanquishing countries we perceive as threatening.

As I've written before, a world where there is a sole superpower which speaks about looking after everyone's interests but is essentially selfish about its own interests and is willing to make any number of exceptions to its own supposed rules for its allies is an inherently unbalanced one. To coin an analogy, having a cop around can be good - but a corrupt cop who plays favorites, looks out for his own pocket before those of the citizenry and is subject to no meaningful oversight is almost as bad as not having any cop at all. In such a situation, it is inevitable that other nations will look to create counterbalances to that superpower and will be mistrustful of said superpowers plans.

For a second, it misses what the Russian motive for agreeing to any sanctions in the first place was. As has been shown by Russian games over providing fuel for the Bushehr plant, they've spotted a nice little earner if they can block Iran's enrichment program. Iran would have little choice but to pay whatever Russia asked at that point - who else is going to sell power-plant level enriched uranium to Teheran? Moreover, a guaranteed Russian fuel supply might well be the needed bait for Iran forgetting its own claims to more of the Caspian than is currently on offer. That would put Iran firmly in the "economic satellite state" bracket. Which, it should be noted, is Putin's preferred method of empire-building rather than the tanks and soldiers of the Soviet past.

an economically resurgent Russia views the Iran standoff as another opportunity to reclaim some of the strategic ground it lost after the Soviet collapse. It is pushing back against the U.S. because it sees Washington's power as having been used to decimate Moscow's influence in the former Soviet territories it considers its backyard. That strategic orientation has led Russia to make common cause with other regimes at odds with Washington, most important among them China; ironically, perhaps, Moscow and Beijing are more closely aligned now, against U.S. power, than they were during the Cold War, when their respective Communist Parties were at loggerheads.

Although both China and Russia have a stake in Iran — China is heavily invested in its energy sector, while Russia is building the country's nuclear reactor at Bushehr and also selling billions of dollars of weapons to the Islamic Republic — each has more important, and immediate strategic concerns of its own. Both could more easily live with a nuclear-armed Iran than Washington would, and neither sees Iran as a strategic threat. Still, Russia has plainly dragged its feet (by measure of years) over completing the Bushehr reactor, suggesting it may be keeping the Iranian reactor offline as leverage. The friendship between Tehran and Moscow is, at best, an uneasy one.

Russia may hold the key to the Iranian standoff, but it is unlikely to be moved by entreaties by Western leaders for President Putin to "act responsibly" on Iran. Gone are the days when gaining Western approval and gratitude would have been a Kremlin objective. Now, Russia's response will be driven by its own agenda. And in Putin's mind, it's unlikely to be separated from his broader strategic agenda, which most certainly includes a greater leveling of the global balance of power.

The London Times thinks Putin has now sunk any chance for further sanctions - suggesting that Iranian claims of a final deal being struck behind the scenes for enriched fuel are true - and also notes that Iran's nuclear program isn't being considered in isolation by Putin vis-a-vis his dealings with America:

His discussions about co-operation over Caspian Sea energy resources, and likely talks about the completion of a Russian-made nuclear power plant at Bushehr, signal that meaningful sanctions are no longer realistic. The only option left would be unilateral sanctions of the type already imposed by America against Tehran with little effect.

Iran’s press and politicians have not been slow to grasp the significance of the move.

“Just the fact of Putin’s presence on Iranian soil is evidence that the West’s policy of isolation is a failure and can be interpreted as a victory for Iranian diplomacy,” said the newspaper Iran News.

Kazem Jalali, an Iranian MP, described Russia and Iran as “strategic partners” and told state television that the two countries were now on “the same front”.

The biggest casualty from the rapprochement is Iran’s old adversary, America. In the wake of the attacks on September 11, 2001, President Bush relied on Russia’s support in its war on terror. But the Kremlin broke with Washington in the run-up to the invasion of Iraq and has since aggressively pursued its own interests.

Iran will be hoping that the Putin visit has finally destroyed the brief international unity that existed against its nuclear programme and that it is now free to continue its uranium enrichment work undisturbed.

Russia is now at odds with the West over the fate of Kosovo, the breakaway Serb province, policies towards former Soviet republics like Georgia and Ukraine and action against regimes like Iran and Burma.

Part of Moscow’s behaviour is motivated by a sense of betrayal. In particular, it regards Nato’s easterward expansion and America’s plans to build an anti-missile defence shield in Poland and the Czech Republic, as threats to its security.

This could partly explain why it has begun resuming long range strategic bomber patrols over the Pacific and Atlantic Oceans.

The Times also cautions, however, that sinking any plan for UNSC sanctions may actually push the Bush administration further towards an attack on Iran.

Some today have asked whether Russia is mad enough to intercede militarily if the Cheneyites succeed in getting their oft-wished-for war with Iran. Perhaps a better question would be: are even the Cheneyites mad enough to push that war forward if there's any chance at all that Russia might defend it's satellite Iran?

The oil law is not relevant

I laughed this morning when I read the following lede from Reuters:

Iraq's Kurdish Regional Government (KRG) has signed new oil deals in defiance of Baghdad's wishes but the landlocked region still needs central government approval before it can export any oil.

The semi-autonomous KRG approved four oil and gas production sharing agreements with international oil companies this week, as it moved ahead with plans to lift output to a million barrels per day (bpd) from just a few thousand bpd in about five years.

Iraq's Oil Minister Hussain al-Shahristani said last week that all deals signed by the KRG since February were illegal and that crude from the deals could not be exported legally.

al-Shahristani is speaking as if the writ of law and power that emenates from the Green Zone means much of anything more than three hundred miles away. There is always a good question of the writ of the Maliki government three miles away from the Green Zone too, but the oil law is not the relevant hard constraint on the export of Kurdish oil to Turkey.

It is the willingness of Sunni Arab groups to NOT blow up the oil pipeline network both to the refineries and the export system that is the critical bottleneck on Kurdish ability to export significant quantities of oil. And even after an oil law is passed in Parliament, the law is irrelevant as long as a small proportion of the Sunni Arab population thinks it is getting screwed in the deal or there is no horizontal escalation value of blowing up the pipeline in regards to other goals.

The oil law and the writ of the Baghdad central government will only be relevant trailing indicators, not coincident or leading indicators of either complete victory by one side or another or robust and resilient power/resource sharing agreements with all relevant stakeholders.

Maybe next year......

I am a Red Sox fan, although far less committed ten years after leaving Boston than I was back then, so I grew up with the hope that maybe next year the Sox could find a way to beat the Yankees, five pitchers could go the season without slicing their hands open while taking out the trash, or blowing out their shoulders, and their amazingly potent left fielder's head is screwed on straight and does not demand and then retract his demands for multiple trades during the season. Next year has always been a beacon of hope that the Japanese import pitcher could dazzle the league with his gyroball, that the rookies would have natural progression towards hoped for stardom, that Nomar's wrist would heal correctly....

And occassionally next year came and met our expectations; it came in 2004 after the entire Red Sox Nation had already muttered 'Maybe next...', and it may come again this year as the Red Sox finally won the AL East, but next year seldom comes as quickly or as well as Red Sox fans want it to be.

The International Energy Agency (IEA) evidently are Red Sox fans or at least use our methodology in projecting future oil production:

The oil output of Iraq and Angola, two members of the Organisation of Petroleum Exporting Countries (Opec), which are outside the Opec-10, is set to rise over the next two years, according to the International Energy Agency (IEA).

The Paris-based IEA, which advises 26 member countries on energy policy, said the Iraqi export and refining infrastructure can accommodate some 2.4 million barrels per day of production.

"Full reactivation of Iraq's idled domestic refining capacity, together with feasible export potential, could take outlets for Iraqi production into a 3.5 million bpd-4 million bpd range," the IEA noted.... While in July 2007 the Iraqi oil supply hit a three-year peak of 2.18 million bpd, renewed pipeline outages saw output dip in August to 1.97 million bpd.

I do not know enough about Angola to comment intelligently, so I will restrict myself to Iraq. The phyiscal capacity of Iraqi infrastructure may support 3.5 to 4 million barrels per day after significant short term investment. But this is irrelevant if there is not widespread shared political agreement backed by the effective, pervasive social pressure and cohesion to divide up the revenue from oil exports. Oil can only be exported with the consent of all interested parties.

The Sunni Arab population has demonstrated great expertise in denying the Kurds a viable export route for the northern crude oil via the Ceyhan export line, while the three sided scrum in the South will intefere with crude export expansion capacity until there is a clear winning coalition and divide of spoils. JAM, SIIC/Badr, and Fadillah all control veto chokepoints in the southern oil infrastructure and could choose to exercise those vetos if their position weakens too much.

So maybe the IEA is right, but right now their projections rely on the hope that maybe next year is the year the sees stability and a comprehensive political-economic-social-military solution to Iraq....