Iran Amuck 2 30 June 2019.

In the judgement of one expert,” the “Iranian economy has long been riddled by endemic mismanagement, corruption, cronyism, and brain drain.  Sanctions make all these problems worse.”[1]  However, the flaws are innate to the regime, rather than springing from the sanctions.[2]

American economic sanctions against Iran have a long history.  They began with President Jimmy Carter; were tightened by President Ronald Reagan; were greatly strengthened by President Bill Clinton, then were slightly eased by Clinton after the election of an Iranian president seen as “moderate” in the West; then were renewed under President George W. Bush.

In 2005, Iran announced that it would begin enriching uranium for its nuclear program.  At the behest of the Bush administration, the United Nations began imposing international economic sanctions.  In 2010, the Congress passed and President Barack Obama signed a law greatly strengthening sanctions.  Eventually, the pressure from the sanctions forced Iran to negotiate with an American-led coalition.  In 2015, the negotiations produced an agreement on delaying Iran’s march towards nuclear weapons in return for relief from some of the sanctions.

The agreement aroused controversy.  On the one hand, Iran remained under sanction for other actions.  Incomplete relief from sanctions continued to hamper improvements in the living conditions of ordinary Iranians.  Iranian hard-liners could argue that the sanctions relief hasn’t been worth giving up the chance at nuclear weapons.  On the other hand, Iran remained an active opponent of the United States and its regional allies.  Conservative critics of the Obama Administration could argue that only limiting Iran’s nuclear program, without addressing its other behaviors, hasn’t been worth sanctions relief.[3]

The Trump Administration falls heavily into the latter camp.  It has sought to re-open the negotiations with Iran with the intention of getting a better deal.  On 8 May 2018, Trump .withdrew the United States from the agreement.  Trump also announced that the United States would re-impose the previous sanctions and sanction any European companies that traded with Iran.  Within a year, Iran’s oil exports had declined by more than 50 percent.

On 8 April 2019, Trump designated the Islamic Revolutionary Guards Corps as a terrorist group.[4]  The designation carried with it further economic sanctions.

On 5 May 2019, after Iran had designated the U.S. Central command as a terrorist organization and after the U.S. had discerned Iranian preparations for action against American forces, a carrier battle-group and bombers were ordered to the region.

On 8 May 2019, the US increased sanctions on Iran’s exports and ended “waivers” granted to some countries to continue buying Iranian oil.

On 12 May 2019, four oil tankers were attacked in the Persian Gulf.  The Trump Administration claimed that Iran had attacked the tankers.  Iran soon .announced that it would return to enriching uranium.

On 13 June 2019, external explosions badly damaged two tankers in the Gulf.

The 2003 Iran War suggests a need for caution in all long-term projections.

[1] Helene Cooper, “How the U.S. Ratcheted Up Pressure on Iran and How Iran Responded,” NYT, 16 June 2019.

[2] The parallel to Venezuela is striking.

[3] See: https://waroftheworldblog.com/2018/07/24/iran-and-we-all-should-run/

[4] The IRGC handles terrorism abroad.

Tales of the South Atlantic II.

World oil supply has increased faster than has demand, so prices have fallen.[1] All sorts of changes have resulted. For example, most counties maintain some kind of petroleum reserve to be able to respond to emergencies. Many oil-consuming countries are seizing the opportunity presented by the fall in world oil prices to complete or expand those reserves. Asian countries, in particular, are buying oil where they can get it. Often, that means buying on the West Coast of Africa. “Years ago, you never saw the Chinese chartering [tankers] in West Africa,” said one shipping expert. “Now they are the largest charterer here.” The four chief oil export ports in West Africa are Luanda Oil Terminals in Angola; Warri Port , and Port Harcourt Terminals , in Nigeria; and Sogara Oil Terminal in Gabon.[2] All of them face out onto the South Atlantic.

The tankers themselves make an interesting story. Between the 1950s and the 1970s, tankers grew in size from about 500 feet in length and a capacity of 16,500 Dead Weight Tons to the “Very Large Crude Carriers” (VLCC) that run about 1,100 feet in length and can hold up to two million barrels of crude oil.[3] At Spring 2015 prices, that is a cargo worth $120 million. There are about 600 VLCC afloat at the moment.

Why did oil tankers grow in size? “Previously on LA Law,” Middle Eastern oil flowed to Europe and other Western ports through the Suez Canal. The Six Days War closed the Suez Canal for an extended period, forcing tankers to make the much longer voyage around the Cape of Good Hope.[4] To increase the efficiency and lower the transportation costs of oil, shipping companies started ordering bigger and bigger tankers. Then the oil port facilities had to be re-built because there was no way to bring these giants into any conventional port. (Indeed, the largest tanker built, the “Seawise Giant,” couldn’t use the English Channel.

The break-even charter rate for VLCC is about $25,000 a day. The global financial crisis caught tanker companies by surprise. The world economy—and demand for oil—slowed down, while they had to take delivery of a bunch of expensive ships that they had contracted for several years earlier. In 2013, average shipping rates for the VLCCs ran about $12,000 a day; in 2014 they averaged $22,000 a day. For the shipping companies, Asian entry into the West African oil market means more of their ships are making the longer runs to the Far East and back, rather than more and shorter runs across the Atlantic to ports in the Americas. This leaves fewer ships to handle that business, so the freight rates go up. In early 2105, the added Asian demand pushed rates up to $69,000 a day. More normal off-season rates run $40,000 a day.

Weird story: Speculators want to buy oil while it is cheap and sell it when the price rises. Where to store it in the meantime? Normally, in a tank farm ashore. However, there are a limited number of empty storage tanks, so the price charged by the owners tends to rise as more people want to use the tanks. Also, at some point, all the storage tanks are filled up, but the speculator still has to take delivery of the oil s/he bought low in order to sell high. Now what? Somebody chartered the VLCC “Alsace” and had it anchored off the Orkney Islands in February and March 2015. What did the crew do all day? Play cards, check on the anchors, watch the flat-screen TV? How would you like to be captain of an anchored ship? Garrr.

[1] Stanley Reed, “Oil Glut Benefits Those Who Ferry It,” NYT, date misplaced.

[2] http://globalenergyobservatory.org/list.php?db=Transmission&type=Oil_Ports

[3] By way of Ultra-Large Crude Carriers (ULCC) that were over 1,300 feet in length a capacity of 500,000 Dead Weight Tons.

[4] Avoiding that long, costly voyage had been why building the Suez Canal had been a good idea in the first place. Egypt’s loss of toll revenue from the re-routing of that traffic hasn’t helped the country’s always-struggling economy. “Thanks President Nasser!”

The Muslim Civil War.

With the “Arab Spring” of 2011, the “corrupt and dysfunctional Arab autocracies that had stood for half a century in places like Egypt, Syria, Iraq, Yemen, and Libya lost credibility because they had failed to meet the needs of the citizens.”[1]

Well, no. The “Arab Spring” counted not at all compared to American interventions. The corrupt and dysfunctional autocracies of Iraq and Libya were overthrown only by American attack. The corrupt and dysfunctional autocracy in Egypt quickly reasserted itself after a moment of panic induced by an American moment of panic. The corrupt and dysfunctional autocracy in Syria has retained the loyalty of many of its citizens and the Obama administration has tacitly abandoned its intemperate demand that Bashar al-Assad leave power.

Now, “an array of local players and regional powers are fighting skirmishes across the region as they vie to shape the new order, or at least enlarge their share of it.”

Well, no. We’re witnessing the outbreak of a Muslim civil war.[2] Sunni Saudi Arabia never got around to sending air or ground forces to battle the radical Sunnis fighting against the Shi’ite-dominated government of Iraq, but it has now intervened in the fighting against the Shi’ite Houthi rebels in Yemen. Shi’ite Iran is the principal supporter of the Shi’ite governments in Baghdad and Yemen and of the Alawite government in Damascus.

The Obama administration has claimed that there are “moderate” forces with which it can work to create stable states, if only people will get with the program.

Well, no. The Shi’ite-dominated government of Iraq began persecuting the Sunnis the minute the Americans were out the door. The Syrian “moderates” were virtually non-existent and unwilling to fight. Yemen is a primitive tribal society which a thin shellac of Western government titles could not disguise. Now Iranian forces have been introduced into Iraq’s fight against ISIS.

The administration claims to discern a difference between “moderate” and “hard line” forces in Iran. It hopes to strike a deal with the moderates over Iran’s nuclear program. The American drive to get a deal with Iran has most publically angered Israel’s prime minister Benyamin Netanyahu. However, Saudi Arabia and Egypt are just as concerned as is Israel that the United States has started to tilt back toward Tehran as its chief partner in the Middle East.

Iran is trying to obtain nuclear weapons to shift the balance of power in the Persian Gulf region. Saudi Arabia doesn’t want Iran to get nuclear weapons. Israel doesn’t want Iran to get nuclear weapons. Neither country places much trust in the fair words and promises of a distant United States. Both have modern American supplied air forces and airborne control systems. Aside from American objections, the chief impediments to an Israeli pre-emptive strike against Iranian nuclear facilities have been that the Israelis don’t have enough planes and they would have to over-fly Saudi Arabia. You do the math. (While you’re at it, Israel has nuclear weapons.)

If a “Muslim Civil War” does break out in flames, what course should the United States pursue? Intervene or stay neutral? Intervene against the country that already hates us (Iran)? Intervene on the side of those most likely to win in the short run (Saudi Arabia if backed by Israel)? Do a lot of off-shore drilling and tell the Middle East to solve its own problems? Head it off?  There’s no clear guide here, but there is the need to choose.

[1] Mark Mazzetti and David D. Kirkpatrick, “Policy Puzzle in the Middle East,” NYT, 27 March 2015.

[2] Or perhaps just a renewal of the long wars between the Shi’ite Safavid Empire of Persia and the Sunni Ottoman Empire.

Shock Waves.

The implications and possible effects of the drop in oil prices are complex and hard to predict.[1]

One effect of falling oil prices is to hammer oil producing countries at odds with the US (Russia, Venezuela, Iran). The fall in oil prices is putting far more pressure on Russia than are the international sanctions imposed over the unpleasantness in Ukraine. Both the Saudis and the Americans are quietly amused by the difficulties being encountered by the Iranians and the Russkies.

At least over the short-term (but likely over the longer-term) the fall in oil prices will reduce the revenues earned by the established oil producers. The effects could ripple through Middle Eastern politics. Saudi Arabia buys off domestic discontent with a high standard of living paid for by oil sales. Less revenue could translate into more discontent. When the United States scaled back aid to Egypt after the overthrow of the Morsi government, Saudi Arabia stepped in with generous assistance. Egypt plowed ahead with its suppression of the Muslim Brotherhood and other dissidents in open defiance of the United States. How long and how generously will Saudi Arabia be able to continue to support Egypt and other conservative regimes if the money stream starts to fall? Other Muslim states—like Algeria—are in something like the same boat in their dependence on oil revenues to fend-off unrest.

What does this suggest about climate politics in the United States? Will falling gasoline prices lead to more driving in bigger vehicles—with more emissions? Will the deflation of predictions about having passed “peak oil” reduce the pressure for the development of alternative energy sources?

What are the implications for the business-government relationship going forward? Eduardo Porter argues that government support for the development of the technology behind “fracking” endorses smart industrial policy. He suggests that this can offer a model for the development of new technologies to limit climate change. In particular, he endorses raising the gas tax during the period of low oil prices. The revenues “could be leveraged into a boon in tax revenues that the government could use to pick some of the winners that will help solve the [environmental] problems.”

The problem with “industrial policy” is that it’s just like other forms of politics. Established interest groups have a stronger position than do rising interest groups. The winners “picked” by the government are likely to be big campaign donors or the pet causes of political leaders. When government picks winners, we get farm subsidies and Solyndra. Porter’s own account of the development of fracking technology emphasizes the importance of research into new technologies paid for by the government, not that government picked winners. One thing that goes unmentioned by Porter is that government labs and subsidies were spread over a wide area. They didn’t focus on one technology or energy source. Continued investment in research certainly sounds like a good idea. So does an increase in the gas tax. Within that framework, however, would it be better to let the market pick the winners?

Why was this a surprise? Between 2008 and 2015 American domestic production of oil doubled. The European economy has been stagnant for a bunch of years. “Fracking” has been a loudly contested issue in American domestic politics for years. These are the key factors in the price decline. Yet markets, media, environmentalists, and politicians all seem equally surprised. Did no one see the rise in production/fall in prices coming? It’s a sort of Pearl Harbor in reverse.

[1] Eduardo Porter, “Behind Drop in Oil Prices, A Federal Role,” NYT, 21 January 2015.

Seismic Shift.

It’s probably hard for most people to accept this, but economic growth raised incomes all around the world by 28 percent between 2005 and 2013. All that growth required a rise in oil production of 19 percent. That rise in oil production never happened. In large part, it never happened because Saudi Arabia and other major producers never increased their production.[1] They preferred a stable target price of $100 a barrel. Instead, oil prices held steady. By June 2014, West Texas crude was selling for $107 a barrel. Revenues flowed in to oil-producers. But, as the Germans said about the Greeks, “they’ve had their fun.” Nemesis was at hand.[2]

It has been a long time coming. In October 1973 the Organization of Petroleum Exporting Countries (OPEC) launched the first “oil shock” against the industrial democracies. The target countries responded in a variety of ways. Some of the responses were ludicrous, but some had important long-run consequences. In the United States, Congress approved construction of a pipeline from Alaska’s Prudhoe Bay, tried to foster nuclear power generation, first imposed fuel-economy standards on car manufacturers, and created the Energy Research and Development Administration. All these were efforts to prepare a long-term strategy.

Eduardo Porter has argued that federal support for research and development paid big dividends.   In particular, Porter touts the role of government “industrial policy” in the developments that led to the recent shale revolution. The government helped pay for the development of “directionally deviated drilling,” the antecedent to the horizontal drilling that is used in “fracking.” The government pioneered large-scale hydraulic fracturing. The government subsidized the “polycrystalline diamond compact bits” that do the drilling. Micro-seismic imaging, originally developed in government labs to trace coal mine collapses, found application in identifying fracturing sites. The Reagan administration ended obstructive price regulations that had hindered investment.

The shale revolution took decades to develop. Recovering natural gas from shale formed the initial target. When natural gas produced by “fracking” entered energy markets in large quantities a few years ago, natural gas prices started dropping. The drillers’ effort shifted to releasing oil. By 2013 it began to pay off. That year American producers generated 3.5 million barrels of oil derived from shale. From June 2014 to January 2015 the price of oil fell from over $100 a barrel to $45 a barrel.

Why didn’t OPEC cut its own production to push the price back up? Probably because they could not cut back enough to off-set the rise in American production. Cutting production would just cede market-share to the Americans. They are hoping that prices will bounce back up in the future. A revival of world economic growth will increase the demand for energy. This will off-set the expansion of American production to a degree. Shale oil is expensive to produce in comparison to “regular” oil. The current low price will cause many American producers to shut down their operations until prices rise to a profitable level. However, no one now expects oil prices to rebound to anywhere near $100 a barrel. A ceiling of $70 a barrel is more likely.

Falling oil prices have dragged down prices for gasoline, diesel, heating oil, and natural gas. Consumers all around the world are enjoying the equivalent of a tax cut, which in the US amounts to $1,000 a year. That is a valuable prop to growth when strong growth tarries.

[1] Excluding a brief fun-up to counter the 2008 economic collapse.

[2] Eduardo Porter, “Behind Drop in Oil Prices, A Federal Role,” NYT, 21 January 2015.

 

A Marina on Baffin Island.

Global warming is causing the polar ice-caps to melt. There is forty percent less summer ice now than in the 1970s. By 2030 the Arctic could be free of ice during summer. And I ask, “What is the good in this?” Well, it creates all sorts of opportunities. Some of these come from resources exploitation. Some of them come from adapting to climate change.

In the case of the North Poles, this is freeing up access—after a fashion and in relative terms—to the seas north of Canada, Russia, and the Scandinavian countries.[1] In 1982 the United Nations adopted a “Convention on the Law of the Sea.” This grants signatories ownership of undersea resources up to 200 miles off their shores. One area of interest is oil and natural gas drilling.[2] Because the ice cap and terrible weather prevented people from exploring for gas and oil beyond Alaska’s North Slope, geologists are not sure how much oil and gas might be found as the ice cap retreats. One estimate is that 20 percent of the world’s as-yet-undiscovered gas and oil lay under the Arctic ice. This might include a third of the world’s natural gas and 90 billion barrels of oil.[3] Oil companies have rushed in to explore where angels fear to tread: Exxon, BP, Statoil (Norway), and Eni (Italy) have all begun exploration of the fields north of Russia. Since the “Deepwater Horizon” disaster in the Gulf of Mexico, they have been giving a lot of thought to how to deal with the inevitable spills that will happen in such a harsh environment. So far, they don’t have any good answers.[4]

Similarly, the retreat of the polar ice caps is liable to open a mining boom in Arctic areas. Ice, snow, permafrost, and brutal winters have kept people from exploiting some of the Earth’s resources. Russia stands to profit from a warmer, greener Siberia. Separatists in Greenland are already speculating on seeking independence from Denmark.

Some of the adaptive responses have a comical note to them. Artificial snow-machine makers face rising demand from imperiled ski resorts. Others responses have potentially bigger pay-offs. Environmental disasters in the 1950s spawned ideas that have great relevance today. In 1952 the British forester and conservationist Richard Baker proposed creating a tree-belt along the southern edge of the Sahara to hold back desertification. In 1953 a gigantic storm in the North Sea led to massive flooding in Holland and eastern Britain. Holland responded with a thirty year campaign of dike and storm surge barrier construction; Britain built the Thames Barrier downstream from London.[5]

In 2002, the African Union adopted Baker’s idea of a tree barrier against the Sahara. Then it was taken up by the African Union. To make this plan work, somebody is going to pay to plant a belt of trees thirty miles deep and four thousand miles long. Foresters, nurseries, and irrigation engineers will be in demand. In 2012, Hurricane Sandy demonstrated New York City’s vulnerability to storm surges and rising sea levels. Builders experienced with massive sea-gate flood control projects are likely to be in demand in a host of places.

If people don’t adapt to climate change one way, they will adapt another way.

[1] It hasn’t become the Gulf of Mexico yet. In summer there is still a lot of drift ice floating around for the high winds to blow into off-shore rigs; in winter the temperature still drops to 50 degrees below zero and the whole place ices up.

[2] The US Senate has not ratified this convention. Which isn’t the same as saying that the US will not defend what it conceives to be its national interests.

[3] So, you burn the gas and oil; that heats up the planet even more; it gets progressively easier to access the gas and oil. Neat. Sort of.

[4] “The battle for the Arctic,” The Week,” 6 December 2013, p. 11.

[5] McKenzie Funk, Windfall: The Booming Business of Global Warming (New York: Penguin, 2014).

Climate of Fear XI.

The International Energy Agency (IEA) issues reports on critical energy issues. It’s “Energy Technology Perspectives” reports offer an insight into climate change issues. So, is the glass half-full or is it empty?

The power industry produces almost 40 percent of America’s carbon dioxide emissions. There have been big technological gains in reducing greenhouse gas emissions. These improvements are what allowed President Obama to order a 30 percent reduction in emissions from a 2005 baseline by coal-burning power plants by 2030. (His recent agreement with the Chinese apparently merely ratified changes already underway.)

People have stopped believing in some of the alternative energy sources touted by environmentalists. All these technologies hold promise, but they are not yet anywhere near price competitive with carbon energy generation. Funding for things like bio-energy, offshore wind,[1] and geo-thermal dropped more than twenty percent between 2011 and 2013. It can be dangerous to extrapolate from brief periods of change. The price of photovoltaic solar cells dropped sharply from 2008 to 2012 because a land-rush of producers into the market led to savage price competition. The subsequent shake-out has led to a stabilization of prices. The “levelized” costs of solar energy generation have fallen by 40 percent from their 2010 estimate. Thus, as part of the stimulus, the Obama administration heavily subsidized alternative energy generation sources. As a result, in 2010, the US added 5 gigawatts of energy generation from wind-power; in 2011 it added 7 gigawatts; and in 2012 it added a whopping 13 gigawatts. The end of the stimulus left wind-power generation becalmed: in 2013, the US added only 1 gigawatt from wind-power, and 2014 isn’t shaping up to be much of an improvement. Lesson: in the current state of technology, alternative fuels are only competitive with carbon-fueled energy generation when the government “levels the playing field” by tilting it in one direction.

What are the real possibilities?

By 2019, onshore wind generation could cost $71/megawatt, “even without subsidies.” By 2040, in exceptionally windy places (Washington, DC?) the cost might be as low as $63.40/megawatt. By 2040 nuclear-generated power might cost $80.00/megawatt. By 2040 solar might generate power at $86.50/megawatt. None of this is going to amount to much.

The IEA predicts that by 2040 only 16.5 percent of energy will be produced from renewable resources. More than 65 percent will come from the burning of coal and gas. This means that “carbon capture” technology must develop rapidly. However, “carbon capture” technologies are failing to develop at an adequate pace. Costs are high relative to the return, so no one is interested in investing. Similarly, we need a 24 percent increase in nuclear power generation by 2025 to fend off drastic climate change.[2] Instead, nuclear generating capacity is falling.

The best solution to this problem is a severe carbon tax. Today the US emits about 5.4 billion tons of carbon dioxide. If carbon emissions were taxed at $25/ton beginning in 2015, with a 5 percent/year increase (i.e. rising to about $60/ton by 2040), lots of alternative energy sources would start to look more attractive—if not attractive.

Eduardo Porter, “A Carbon Tax Could Bolster Green Energy,” NYT, 19 November 2014.

[1] Migrating birds and drunken pleasure-boaters alike are happy about this.

[2] Build a lot of nukes in Maine. No one lives there and the winds aloft will carry the fall-out from the inevitable accident across the Atlantic to Portugal and Spain. Bad for the cork oaks and cod donuts I’ll grant you.