Russia has many interesting New Year traditions, but the most famous one, at least in the Western media, is its annual bickering over energy prices with neighboring states. It was Minsk’s turn to join Moscow in upholding the tradition this year.

No sooner had Belarus finished toasting the New Year than Russia halted oil supplies to Belarusian refineries through the Druzhba, or Friendship, pipeline. Although the Kremlin quickly restored the oil flow to pacify its European customers, the dispute over pricing is far from settled. Russia and Belarus are still arguing over terms of a new agreement on export tariffs to replace the deal that expired on Dec. 31.

Having subsidized Belarus for years on end, Russia is now asking it to pay full import duties for the oil resold abroad. While Russia agreed to Belarus’ continuing to buy crude for domestic market duty-free, the Belarusian government argues that the customs union between the two states obviates the need for duty on all oil imports from Russia, including the 14.4 million tons of oil that Belarus refines and re-exports.

The oil dispute has already driven oil prices to a 15-month high and elicited strong criticism from the Europe Union, which imports thirty percent of its oil from Russia, half of it traveling through Belarus. Were the oil supplies disrupted, Germany and Poland would be hit hardest because Russian oil comprises 15 and 75 percent of their total oil consumption, respectively.

In a Jan. 16 letter to The Washington Post, Dmitry Peskov, deputy chief of staff and press secretary to Russian Prime Minister Vladimir Putin, said “the so-called ‘dispute’ between Russia and Belarus is in reality an ongoing negotiation between supplier and customer.” Peskov likened Russia’s actions to what “any entity would do in a changing business climate.” But are things really as simple as Peskov claims?

To an extent, the assertive behavior of the Russian pipeline monopoly is not that different from the profit chasing of its Western counterparts. Elimination of subsidies to post-Soviet states by raising the price for natural gas and oil twenty years after the dissolution of the Soviet Union seems to be a good business decision. In fact, had the prices of Russia’s energy in the region depended on the market in the first place, Russia’s dealings with its former satellites would have been much more balanced and predictable.

But although Russia’s behavior can be partially explained by legitimate commercial interests, it also draws on the Kremlin’s desire to manipulate domestic politics in the post-Soviet states by controlling their energy infrastructures. To accomplish this goal, Russia has sought controlling stakes in the region’s key energy assets to secure both access to lucrative European markets and control over the internal markets of its smaller neighbors. In an earlier energy price dispute, with Moscow agreed to continue subsidies only after it bought a share in the Belarusian gas pipeline network.

Driven by the phantom pains from the loss of the empire, Russia would sometimes go as far as to cut off energy supplies to the facilities purchased by Western businesses and to construct additional pipelines to bypass infrastructure controlled by foreign companies.

The Russian-Belarusian dispute indicates the lack of diverse and original instruments in the Kremlin’s foreign policy toolbox. It is also a sign of the changing nature of the relationship between Russia and the states that it has unblushingly called its “zone of privileged interest” unwittingly prodding them to double efforts to escape the Russian orbit. Even Belarus, Moscow’s closest ally that has concluded a “union state” as well as the customs union with Russia, has been trying to chart a more or less independent foreign policy course.

Although Belarusian President Alyaksandr Lukashenka still remains persona non grata in most of Europe, in the past few years he has been flirting with the West. He released political prisoners, pardoned an American lawyer, refused to recognize the breakaway Georgian republics of South Ossetia and Abkhazia, and even agreed to participate in the EU’s Eastern Partnership. Lukashenka, whose authoritarian regime had thrived thanks to Russia’s energy subsidies, is continuing on the path of defiance bickering with the Kremlin over the oil prices today.

While Russia is unlikely to acquiesce to all Belarus’ demands, one can be certain that some sort of compromise is near. One can be even more certain that the Kremlin’s “crude” New Year’s tradition will be followed year after year, as long as Russia’s subsidies last. This means that the EU has a few more uncertain winters ahead. On the bright side, however, the EU will receive a compensation of sorts as more post-Soviet states crave its friendship. After all, the EU’s attractiveness in the post-Soviet region seems to be inversely proportional to the amount of Russian subsidies.

The Russian-Belarusian oil row is not as far from Washington as it seems. Russia’s desire to retain influence in the Near Abroad is to a great extent driven by fears of US influence in those countries. The Russian-Belarusian oil dispute does not put key U.S. interests at stake, but it does affect Washington’s relations with both the EU and the former Soviet republics. Therefore, it would be wise for Washington to follow the recent developments in the former Soviet region, encourage Europe to reduce its dependence on Russian energy, and engage states that seek to leave Russia’s orbit without adding more fuel to the flame of their financial disagreements with Moscow.

Related posts:

1. Shopping for allies in Moscow’s backyard
2. Russia: whose strategic partner?
3. Partnership for a Secure Europe?

By almost any standard, the outcome of the UN Climate Change Conference in Copenhagen last week fell well short of its increasingly humble expectations. Copenhagen was considered pivotal because the “Bali Roadmap” laid out in 2007 circled this meeting on the calendar as the conclusion of the negotiating period which was to create a legally-binding post-Kyoto agreement. But by the beginning of the conference, the goal had been reduced to just establishing a politically-binding framework that would set the world on a course toward reaching a comprehensive international agreement in 2010.

Modest yet politically significant emissions reduction pledges by the US, China, and others prior to the conference contributed to a mood of cautious optimism at the outset of the two-week summit. But on just the second day, the massive rift between developed and developing countries was exposed with the leak of the so-called “Danish text” – drawn up by delegates from Denmark, Australia, the UK, and the US – which would allegedly place most of the power in the hands of developed countries at the expense of developing countries. The text was dismissed by the executive secretary of the UNFCCC, Yvo de Boer, as just an “informal” draft. But China quickly fired back with its own draft text, flipping the blame and the burden onto wealthy countries. A day later, delegates from the US and China traded barbs as the US State Department Envoy Todd Stern told reporters that “there’s no way to solve this problem by giving the major developing countries a pass,” to which Chinese Vice Foreign Minister He Yafei responded that Stern either “lacks common sense” or is “extremely irresponsible”.

The controversy stirred up in the first few days served as a precursor for the deep division between rich and poor countries that would plague the remainder of the negotiations. The next week was remarkably unproductive. Countless controversial draft texts fluttered around the Bella Center amid a walkout by African countries and thousands of angry rioters – impatient with the lack of progress – taking to the streets. With the looming arrival of over a hundred heads of state, the symbolic dichotomy of rich vs. poor countries had grown ever clearer and was threatening to derail the negotiations.

On the second to last day, Secretary of State Hillary Clinton made a substantial overture, committing the US to help build a $100 billion annual fund by 2020, contingent upon an international verification system to monitor emissions cuts. But China insisted that it would not submit to any international monitoring, calling such a system “intrusive” and an infringement on its sovereignty. With the world leaders due to arrive the next day, the US and China had reached an impasse. On the eve of the summit’s conclusion, the high-level representatives worked round-the-clock until 5 am to produce a draft text for the heads of state. Three hours later, Air Force One touched down in Copenhagen and President Obama was presented with the two and a half page draft agreement. At the Friday morning plenary, Obama reiterated the need for an international verification system, declaring that “without such accountability, any agreement would be empty words on a page.” Evidently, Chinese Premier Wen Jiabao took offense, boycotting a pair of crucial negotiation sessions, instead sending his Vice Foreign Minister. A frustrated Obama reportedly said that “it would be nice to negotiate with somebody who can make political decisions.”

Obama finally managed to meet with Wen and, as time expired, the US, China, India, Brazil, and South Africa struck a mild deal to snatch the conference from the grip of complete catastrophe. Obama called the Copenhagen Accord a “meaningful and unprecedented breakthrough” but admitted its glaring deficiencies, citing the inability to overcome a “fundamental deadlock in perspectives.” The agreement is woefully inadequate, having stripped nearly all of the substance from the early morning draft. The Copenhagen Accord includes a three-year, $30 billion “jump-start” financing system for developing countries and an aspirational $100 billion per year Copenhagen Green Climate Fund to take effect in 2020. But it does not include explicit goals for near or long term emissions reduction targets, nor does it include a commitment to a sound international verification system. Most disappointingly, the Copenhagen Accord dropped the previously agreed upon timeline for sealing a legally-binding international treaty by the late 2010 COP16 meeting in Mexico City.

The US arrived in Copenhagen considered by most to be the main obstructionist to a global deal, but there is little doubt that the Chinese took home that ignominious prize. The tireless attempts by each side to cast the other as the villain may have doomed the negotiations long before the Obama-Wen showdown on the final day. Still, there is plenty of blame to go around, not the least of which should be placed on the US Senate for failing to pass legislation prior to Copenhagen. There were also flaws in the structure of the conference itself, as it was poorly organized and even more poorly executed. In the end, Copenhagen will likely be remembered as one small step in the right direction. But there remains a very long road ahead toward breaking the stalemate between the world’s rich and poor. Next stop: Mexico City.

Related posts:

1. Copenhagen Conference Kicks Off
2. Stop Playing the Blame Game on Climate Change
3. Adapting Along the Road to Copenhagen

In September, PSA released a statement signed by 33 prominent Republicans and Democrats urging Congress and the Administration to “develop a clear, comprehensive, realistic and broadly bipartisan plan to address our role in the climate change crisis.” The signatories warned that “if we fail to take action now, we will have little hope of influencing other countries to reduce their own harmful contributions to climate change, or of forging a coordinated international response.” The Senate has already failed to deliver legislation prior to the conference, but it is not too late for the U.S. to take the lead in the negotiations, especially since it will be impossible for a global consensus to emerge from Copenhagen without strong U.S. support.

President Obama will join many other heads of state in Copenhagen on the conference’s final day with an offer to cut U.S. emissions by 17% below 2005 levels by 2020. China and India have also proposed reduction targets of 40-45% and 20-25%, respectively, in the “carbon intensity” of the economy – or carbon emissions per unit of GDP – by 2020, which will not actually result in any tangible reduction in emissions as long as these countries’ GDPs continue to rise. None of these commitments satisfy the 25-40% emissions cuts sought by the UN and deemed necessary by leading climate scientists.

PSA’s statement also urged that “we must also help less developed countries adapt to the realities and consequences of a drastically changed climate. Doing so now will help avoid humanitarian disasters and political instability in the future that could ultimately threaten the security of the U.S. and our allies.”

In the days leading up to the conference, the U.S proposed a global fund, operating under the World Bank, which would devote billions of dollars to help poor countries adapt to the impacts of climate change. While the level of funding remains an extremely contentious issue, the structure of such a fund is a critical first step, and the initiative taken by the U.S. is a positive sign.

Significant progress in Copenhagen can lay the foundation for action in the Senate and for a legally-binding global agreement in the next year. The next two weeks in Copenhagen present an enormous opportunity for the U.S. and the world to move toward these goals in confronting global climate change. The world must act now, and the U.S. must lead.

Related posts:

1. Picking Up the Pieces in Copenhagen
2. Stop Playing the Blame Game on Climate Change
3. Adapting Along the Road to Copenhagen

On Wednesday, Barbara Boxer and John Kerry introduced the Clean Energy Jobs and American Power Act, the long-awaited Senate version of the climate change bill that squeaked through the House in June. With the UN Climate Change Conference in Copenhagen just nine weeks away, U.S. legislative action will be a key to successful global negotiations. Particularly, investment in international adaptation – the multilateral assistance to developing countries in order to withstand the impacts of climate change – is widely expected to be one of the central elements of the looming debate in Copenhagen. Whereas climate change mitigation policies aim to reduce greenhouse gas emissions, adaptation seeks to lessen the vulnerability and enhance the resilience of the most at-risk countries through disaster management and infrastructure capacity-building. Kerry has called international adaptation “part of the glue” holding together hopes of reaching a new global treaty to succeed the Kyoto Protocol. Still, investment in adaptation – at both the domestic and international levels – has been continuously overlooked.

The international security crises associated with climate change are dramatic and self-perpetuating. Drought, rising sea levels, and resource scarcity will lead to disease, mass migration, and political instability, ultimately causing fragile states to collapse into failed states. These cascading effects are intensified with the Earth’s population projected to reach nine billion by 2050. And in a cruel twist of irony, the most devastating effects will be felt in parts of the world that are least responsible for global climate change, specifically Africa, the Middle East, and South Asia.

In North Africa, subsistence farming will suffer a 20-40% reduction in crop yield due to prolonged drought and desertification. Drought will hit the Middle East hard as well, a region that is already home to 6% of the world’s population but just 2% of the Earth’s water supply. And with 60% of the Middle East’s bodies of water lying trans-boundary, the stage is set for conflict. As John Kerry said, “a demographic boom and a shrinking water supply will only tighten the squeeze on a region that doesn’t need another reason to disagree violently.”

In South Asia, the Indus river system, running from India through Kashmir and into Pakistan, may become seasonal as a result of the melting Siachen Glacier, thereby destroying the region’s agriculture and threatening the livelihood of 75% of Pakistan’s 160 million people.

Bangladesh is perhaps the most classic example of the devastation that climate change will cause. A sea level rise of one meter, as is expected in coming decades, will displace 20 million people in low-lying coastal areas of the South Asian country. Salt water intrusion will have further indirect impacts by crippling the rice crops. The Minister of Disaster Management, Dr. Muhammed Abdur Razzaque, has pleaded, to no avail, for $5 billion over the next five years from the international community to develop coastal defense mechanisms similar to those in the Netherlands, although that sum would still almost certainly amount to just a fraction of what Bangladesh needs.

All told, there will be about 200 million environmentally displaced people (EDPs) by 2050, mostly in areas of the world that are already among the most politically unstable. Needless to say, the importance – and cost – of adapting to these changes is enormous. Estimated funding needs range from $9-20 billion per year from 2010-2020 according to ClimateWorks’ Project Catalyst to as much as $40–170 billion annually, according to the most recent estimate by the UNFCCC. Preliminary results of the World Bank’s Economics of Adaptation to Climate Change (EACC) study – the “most in-depth analysis of the economics of adaptation to climate change to date” – estimates costs in the order of $75-100 billion per year from 2010-2050.

The U.S. would likely be called on to provide about 25% of the global total under an international agreement, based on existing international institutions and funding efforts. This figure is also roughly proportionate to the U.S. share of historical global emissions since the beginning of the industrial era (the U.S. has emitted about 90-95 billion metric tons of carbon since 1800). But Waxman-Markey allocates just 1% of the allowances from 2012 to 2021 under its cap-and-trade scheme toward international adaptation efforts. This translates to about $700-900 million per year. Even by the most modest funding projections, the numbers fall far short. This prompted an unusual coalition of environmental and faith-based NGOs to write a letter addressed to Senators Kerry and Lugar urging them to dedicate at least an additional 2% of allowances for international adaptation (which would raise the total investment to 3%). Yet the Boxer-Kerry bill is, so far, silent on precisely how much would be allocated to international adaptation.

If the U.S. delegation arrives in Copenhagen without a clear commitment to adaptation it would present a major setback for an international treaty. Copenhagen is not the end of the road for global climate change negotiations, but it is a crucial chance for real progress. With 50,000 delegates from 190 nations expected in Copenhagen, inability to make substantial strides would be a disastrous missed opportunity, especially when considering the Kyoto deal took eight years to finish and the Copenhagen negotiations are less than a year old. If a new international framework is not ratified by 2012, Kyoto will fall away without a successor agreement. If the Senate does not take strong action now, it would reduce U.S. leverage and send a poor message to the international community. Ambassador John Bruton, head of the European Commission Delegation to the United States, warned that inaction “would open the United States to the charge that it does not take its international commitments seriously, and that these commitments will always take second place to domestic politics.” He added, “the United States emits 25 percent of all the greenhouse gases that the Conference is trying to reduce. Is the US Senate really expecting all the other countries to make a serious effort on climate change at the Copenhagen Conference in the absence of a clear commitment from the United States?”

Now is the time for decisive action on the domestic front. A successful global treaty will be built around a core of strong U.S. legislation that, in particular, addresses the unavoidable needs of international adaptation. And the pressure is on from the international community. The U.S. never ratified the Kyoto Protocol, but both China and India did. Yesterday, India’s environment minister called the Senate bill a “measly” effort. A recent poll from WorldPublicOpinion.org found that the U.S. public ranked dead last out of 19 countries when asked how high a priority should be placed on addressing climate change. The developing world needs a powerful and convincing signal of commitment from the United States. If the U.S. arrives in Copenhagen dragging its feet, it will forfeit the credibility needed to play a leadership role in the negotiations.

Above all, climate change must be treated not as a national security issue or as a regional security issue, but as a human security issue. Instability in any part of the world is a threat to the United States. The longer the U.S. and the world delays action on international adaptation, the deeper the hole we will find ourselves in when we inevitably start to climb out.

Related posts:

1. Copenhagen Conference Kicks Off
2. Picking Up the Pieces in Copenhagen
3. Stop Playing the Blame Game on Climate Change

Every February and March, a black haze descends onto mainland Southeast Asia, lowering visibility and driving thousands of people with respiratory complaints into hospital emergency rooms. The cause of this haze has been known for years- the widespread use of slash-and-burn agriculture that results in large swathes of farmland going up in flames annually. What hasn’t been known until recently, however, is the global impact that hazes like this, made up of airborne soot, has had not only on air quality but on the earth’s rising temperature. Scientists now believe that soot, more formally known as black carbon, is responsible for almost twenty percent of the increase in the earth’s temperature over the past century, making it the largest contributing factor to climate change after carbon dioxide. Through legislation aimed at further reducing domestic black carbon emissions and promoting international projects and agreements aimed at emissions cuts, Congress can take immediate, definitive steps towards reducing black carbon’s effect on the rate of climate change.

The impact of black carbon on climate change is sobering. Produced not only by slash-and-burn agriculture but also rudimentary cook stoves and diesel engines, black carbon is found throughout the world. While the highest concentrations of emissions come from Asia- most notably India and China- the U.S. is also a major polluter, with per-capita emissions roughly equal to those of most Southeast Asian countries and responsibility for 6.1% of total global emissions. Incomplete combustion from fuel sources releases black carbon into the atmosphere, where it absorbs sunlight and creates heat. The particles then float out of the atmosphere and settle on the ground, often on ice or snow, where they cause additional damage. Indeed, the most serious problem that black carbon poses is its warming effect on glaciers and large ice masses. Almost half of Arctic melting to date has been caused by black carbon, which reduces snow and ice’s reflective properties and increases heat retention. In India, black carbon poses a serious threat to the Himalayan glaciers, an essential water source for much of Asia, and one whose demise would have devastating effects on population survival and productivity. In turn, Arctic and glacial melting themselves hold serious consequences for the earth’s climate, as a reduction in ice “can create positive feedbacks leading to even further warming.” The Arctic is already warming twice as fast as the rest of the world, making it the region most heavily affected by climate change. As permafrost in the Arctic thaws, the vast quantities of carbon and methane currently frozen will be released into the atmosphere, further accelerating climate change. Thus, black carbon is not only a heavyweight contributor to climate change but a critical catalyst for other processes that themselves contribute to climate change.

At first, the appearance of black carbon as a new foe in the fight against climate change appears to be yet another setback against progress. On closer examination, however, the opposite is true. The existence of black carbon is good news, not bad. Like carbon dioxide, black carbon is a significant contributor to global warming- experts estimate that the warming effect of black carbon is around 30-60% of carbon dioxide’s. However, unlike carbon dioxide, which can stay in the atmosphere for centuries, black carbon has a short life span, staying in the atmosphere for an average of two weeks. This means that measures taken to reduce black carbon emissions now would have an almost immediate effect on the rate of global warming. In their recent article in Foreign Affairs, Jessica Wallack and Veerabhadran Ramanathan calculated that “fully applying existing emissions-control technologies could cut black carbon emissions by about 50 percent [which] would be enough to offset the warming effects of one to two decades’ worth of carbon-dioxide emissions.” Simple, inexpensive technologies and strategies for effectively reducing black carbon- such as replacing traditional stoves in the developing world with more efficient ones, or retrofitting diesel engines with carbon filters-  already exist.

Furthermore, unlike strategies to reduce carbon dioxide emissions, reducing black carbon can be done without impacting economic growth. As Wallack and Ramanathan point out, black carbon emissions “can be reduced without necessarily limiting the underlying activity that generated them [as] black carbon [precursors] are not essential byproducts of energy use.” This means that developing countries like China and India, which are fond of arguing that emissions cuts are a Western ploy to slow growth, could theoretically agree to programs targeting black carbon without the painful, drawn-out, and impotent international agreements that have characterized climate-change policy so far.

So, the question remains, why aren’t we addressing black carbon in our national climate-change debate?  It certainly isn’t because the government is ignorant of black carbon’s existence. Congress has known about both the threats posed by black carbon and benefits of reducing it for years. In October of 2007, the Committee on Oversight and Government Reform held a hearing on black carbon and global warming which finished with six conclusions, the most important of which are:

-“Black carbon is the second leading cause of global warming”

-“Decreasing emissions will immediately slow global warming”

-“Decreasing emissions will immediately improve public health”

-“Opportunities to decrease emissions exist now”

Even so, Congress’s progress so far has been negligible, with one exception- the stimulus bill, which set aside an additional $300 million for reducing diesel emissions. Unfortunately, while reducing domestic diesel emissions is a good start, it is not a comprehensive solution for U.S. emissions and certainly not viable for international reductions. Excluding the stimulus bill, the only legislation that mentions black carbon does not call for immediate action but instead suggests further studies. In the house, the American Clean Energy and Security Act of 2009 devoted just a few pages to black carbon- Sections 333 and 851.  Section 333 stipulated only that the Administrator of the Environmental Protection Agency must submit a report to Congress on black carbon emissions in one year, while Section 851 required that in eighteen months the Administrator either propose regulations on black carbon emissions or determine that existing regulations are sufficient.

In the Senate, the only legislation on black carbon is S. 849, “A bill to require the Administrator of the Environmental Protection Agency to conduct a study on black carbon emissions.” But the bipartisan bill, is simply another example of Congress kicking the can further down the road. Even if S. 849 passes, it won’t exactly be a harbinger of progress, as the bill merely requires a report on black carbon a year after the bill is enacted.

The lack of legislative process on black carbon so far stands in contrast to public statements by members of Congress. “Taking bold steps to reduce black carbon emissions is a win-win situation because it will lessen the threat of global warming and improve global public health,” Senator Thomas R. Carper [D-DE], Chairman of the Subcommittee on Clean Air and Nuclear Safety, said. Senator John Kerry [D-MA] went even further in a speech delivered at the national press club this July, saying that “unless we act dramatically—and act fast— science tells us our climate and our way of life are literally in jeopardy.” Both Carper and Kerry, co-sponsors of S. 849, should be commended for taking a public stance on climate change. However, it is unclear why both senators- Kerry in particular- are not following their words with the dramatic action and bold legislative steps that they agree are so important, particularly when these steps are so uncontroversial.

What is clear is that by pushing back serious discussions on black carbon, Congress is ignoring the opportunity for politically and economically feasible action that would represent an important step forward for U.S. climate policy. With Boxer-Kerry (hopefully) making its way to the Senate soon, and Copenhagen 2009 in only three months, now is the time for Congress to live up to its declarations and take concrete action against black carbon.

Related posts:

1. Bipartisan breakthrough on climate change
2. Copenhagen Conference Kicks Off
3. Stop Playing the Blame Game on Climate Change

The nation can’t seem to get enough of Sarah Palin.  Many social conservatives adore her just as many liberals seem to be giddy over her repeated missteps.  Whether one loves her or hates her, there’s no question that she draws much attention whenever she speaks.  So, like many others, I was quite interested to read her recent op-ed in the Washington Post criticizing the proposed cap and trade plan to deal with energy and global warming.

Perhaps as one of the defacto figureheads of the Republican party, this would provide an opportunity for her to present some new ideas on these vexing problems.  The reality is that there’s no free lunch when it comes to energy and the environment.  All solutions have costs and will involve some pain.  Unfortunately, rather than addressing these tradeoffs constructively, Palin chose instead to just ignore the problem.  This is not to say that she was all wrong.  She raised some important points.  It’s just that her proposed solutions are the exact opposite of what needs to be done.

Probably the most concerning aspect of Palin’s piece is its glaring omission of any serious thinking about how to deal with the environmental impact of our energy usage.  The cap and trade program addresses two interrelated issues:  energy and environment.  While Palin seems eager to speak about utilizing domestic sources of energy, she says virtually nothing about how to deal with emissions.  I was struck by Palin’s dismissal of the cap and trade program.  She wrote, “It would undermine our recovery over the short term and would inflict permanent damage.”

Yes, there will likely be some short term financial costs to this effort.  However, I’m not sure how ignoring global warming can be considered good long term planning.  It seems to me that dramatically altering our environment such that coastal regions are flooded and the nation’s agricultural output is significantly altered could be considered “permanent damage.”

Palin is correct that there are going to be job losses and that energy will likely be more expensive.  She writes, “Job losses are so certain under this new cap-and-tax plan that it includes a provision accommodating newly unemployed workers from the resulting dried-up energy sector, to the tune of $4.2 billion over eight years.”

We must ensure that unemployed workers are retrained and put back to work.  It will take time and it will cost money just as  free trade has required that we restructure our workforce.  Many would argue that the benefits from free trade are worth the costs of retraining.  I would say the same for the benefits from a livable environment.

Palin writes, “The Americans hit hardest will be those already struggling to make ends meet. As the president eloquently puts it, their electricity bills will “necessarily skyrocket.” So much for not raising taxes on anyone making less than $250,000 a year.” Yes, she’s correct that some consumer prices will rise as companies adjust to the cap and trade program. However, some detractors have been arguing that consumers would need to pay thousands of dollars extra every year because of this program.  The nonpartisan Congressional Budget Office recently released its estimates which found that by 2020 the average American household would pay an extra $165 per year and that those in the lower income brackets would actually get $40 back.  In ensuing years, costs to consumers would actually go down as permits are sold and proceeds rebated back to consumers.

The criticism that Palin raises regarding other countries such as Saudi Arabia, Russia, and China is certainly a valid one.  We should be concerned that a cap and trade program in the US could make energy and industrial production in other countries cheaper.  This could result in capital flight from the US to less restrictive countries.  The solution, however, is not to scrap the cap and trade system.  Rather, maximum effort should be made in the upcoming post-Kyoto climate negotiations taking place in Copenhagen in December to make sure that countries such as China buy into the process.

Many developing countries argue that they too should have the same right to exploit their resources just as the wealthy countries have already done.  This can not be a justification for their inaction because they, like the wealthy countries, have a stake in a livable climate.  The world cannot afford for them to make the same mistakes that we did.  However, we must lead by example and the proposed cap and trade program allows us to do that.

This need not be a partisan issue.  Those that agree that there is a serious problem to be addressed generally have recognized the need to work together on a bipartisan basis.  In fact, the bipartisan National Commission on Energy Policy that spent years trying to identify solutions that could be supported on a bipartisan basis, includes a cap and trade component in their recommendations for policy changes.  Where there can be little compromise is with those who simply deny that there is actually a critical problem to be solved.  Sarah Palin’s op-ed makes me wonder if she is in that crowd.

Related posts:

1. Bipartisan breakthrough on climate change
2. Not time to throw out those fluorescent light bulbs
3. Adapting Along the Road to Copenhagen

The likely probability, as I noted in my last post, of Sen. Obama becoming president is now reality.

And though I normally shy away from using words like “historic” because it is such a cliché I think this may be a time when it can validly be used. If, for no other reason than, as a recent Defense Science Board report noted, “It has been more than two generations since the presidency transitioned with American troops engaged in significant combat operations—a deployment begun in the aftermath of the September 11, 2001 attacks.”

So now Americans get to indulge in one of their favorite perennial activities; telling him what he should do. Deal with the financial meltdown, close Guantanamo Bay prison, make Africa a greater priority, declare a moratorium on new “free-trade” deals, reaffirm U.S. commitment to international laws, treaties, the United Nations, and multilateral responses to violations of international peace, work for a comprehensive nonproliferation policy, institute a cap and trade policy for carbon emissions, et cetera.

Looking at all the things people want him to work on you would think we elected Superman as president instead of a mere mortal.

Yet let’s not be naive. Even though he has yet to assume office his victory is already starting to create change. For example, as the Washington Post reported , Iraqi officials, who see President-elect Obama’s views on the timing of a U.S. withdrawal as consonant with their own, appear to be leveraging his election to pressure the Bush administration to make last-minute concessions.

Indeed, the Wall Street Journal reported last Friday that the U.S. notified Iraqi Prime Minister Nouri al-Maliki it has accepted many of the changes proposed last week by the Iraqi cabinet in a draft security agreement between the two countries.

Doubtlessly U.S. military officials will advise President-elect Obama to adjust his campaign pledge to withdraw all U.S. combat troops from Iraq by mid-2010. Remember that while promising a 16-month timetable for getting all U.S. fighting forces out, Obama repeatedly insisted on what he calls a “responsible” withdrawal.

And, in truth, if the United States wants to take back the majority of its equipment from all the bases, major and minor it has in Iraq, it will take more than 16 months.

Like all administrations, Obama needs to take stock of the world. Eight years of Bush foreign and national security policies, plus ongoing globalization, emergence of new powers makes the world a very different place.

Consider what Thomas Barnett, well known defense intellectual, and author of the bestsellers The Pentagon’s New Map and Blueprint for Action says in his forthcoming book Great Powers: America and the World After Bush due out in February. He writes:

The Bush-Cheney administration came into power seeking to realign the strategic relationships among great powers: whipping NATO into shape; putting rising China, India, and Russia in their place; and reasserting American leadership. The irony, of course, is that now infamous neo-cons achieved the exact opposite across the board. Russia’s pounding of Georgia in the summer of 2008 gave us a glimpse of that unwelcome future; exercising its own perceived right for unilateral military action following 9/11, America’s modeled behavior inevitably spawns the worst sort of imitation. The chickens have indeed come home to roost.

One problem for any new administration in this era is that the problems it deals with will not only be the ones that now exist but ones that are totally unexpected. As a recent monograph by the Army War College’s Strategic Studies Institute notes:

The likeliest and most dangerous future shocks will be unconventional. They will not emerge from thunderbolt advances in an opponent’s military capabilities. Rather, they will manifest themselves in ways far outside established defense convention. Most will be nonmilitary in origin and character, and not, by definition, defense-specific events conducive to the conventional employment of the DoD enterprise.

So here is my two cents as to what an Obama administration should do.

First, be cautious. You have a plate piled high with policy issues to deal with. Some you have to deal with immediately, i.e., financial crisis. Others such as global warming and climate change and antiterrorism efforts are long term. Iraq and Afghanistan fall in between. And always remember that more are coming down the road.

Second, be confident. There are more people in the world who want to support America than attack it. There is actual and potential good will towards the country and you, both domestically and abroad, which you can tap.

Finally, as they said in West Side Story play it cool. One of your most attractive qualities is that you don’t utter many banalities. You know the problems we face are complex. If they were simple they would have been solved long ago. They require reasoned, critical, deliberative thinking and you’ve shown that you have that quality. I think you’re the right man at the right time. Now go forth and start solving problems.

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The Wall Street Journal reports that oil prices are up again today, apparently because of the fear of a disruption in the Strait of Hormuz. The price bump follows a series of events in what is becoming a familiar pattern. First, an Israeli politician said today that Iran is making “unacceptable” progress with its nuclear program and that an Iranian nuclear weapon would be an “existential” threat to Israel. Presumably investors fear that this statement indicates an increase in the probability that Israel will unilaterally attack Iran. In the past, Iran has promised to respond to an attack by disrupting oil flows, which would increase the price of oil. Traders, wanting to buy low and sell high, rush into the market to buy oil at its current “cheap” price, so the price goes up today.

Today’s Wall Street Journal report was better than most, because it suggested that an Israel-Iran conflict would threaten oil supplies in two ways:

The comments brought to surface long-held market fear over a potential attack on Iran, OPEC’s second-largest oil producer. Apart from a potential loss of Iran’s output of near 4 million barrels a day, conflict in the region could endanger the vast amounts of oil that move through the Middle East. Iran sits at the mouth of the Strait of Hormuz, through which about 20% of the world’s oil flows — a volume that couldn’t be made up fully through the release of emergency stockpiles in consumer countries.

Most articles just point to Iran’s threat to “close” the Strait of Hormuz. Regardless, these regular references — and their effects on oil prices, which affect consumers around the world — deserve deeper consideration. At the bottom of this post, I’ll point you to a tool that I hope will help you to think through the problems in the Strait.

Of course, Iranian leaders directly control their own production level and exports, so they may have some real leverage there. But Iran consumes a good fraction of its own production, so its exports only amount to a few million barrels a day. And the type of crude that Iran exports (relatively heavy and sour) is relatively substitutable with spare capacity from elsewhere in the world, notably Saudi Arabia. As a result, analysts take the next logical step: to really pose a threat to hurt the world (and, Iran presumably hopes, thereby to deter the Israeli attack), Iran would have to cut off not only its own exports but also other oil flowing out of the Arabian Gulf — including that Saudi spare capacity that might counterbalance any Iranian export embargo.

The next leap that analysts and reporters make, though, is the one that is much more questionable: they assume that if Iran wanted to do so, it could readily reduce the flow of oil through the Strait of Hormuz from its current level of 17 million barrels a day down to zero.

If the world didn’t lose its nerve and kept trying to send oil tankers through the Strait — a tremendously profitable activity at the current price of oil — it would require a complex military operation to interdict all of those oil tankers. Could Iran pull it off? How much could they succeed?

Oil markets need to do a better job of analyzing this threat — and so do politicians of all political stripes analyzing the threats to American interests around the world and making decisions about American foreign policy. In the spirit of improving the bipartisan debate on important policy questions, I worked with a group of graduate students over the past year to develop a web site that organizes a great deal of background information on the threats to oil flows through the Strait of Hormuz. The project was sponsored by the Robert S. Strauss Center on International Security and Law, and the Hormuz web site is now up. The site includes information on the strategic geography of the region, on how the oil market works, on how tankers and insurance firms have responded to military attacks in the past, on how the various weapons that might be used against tankers work and on how effective they might be in stopping a tanker’s transit, and on other relevant topics.

Ideally, this site would have been “live” at the beginning of July, in the last round of Hormuz excitement when Iran test-fired some medium-range ballistic missiles near Hormuz — weapons that are far too inaccurate to pose any threat to shipping but nevertheless sparked fears of increased Iranian capability to make trouble in the Strait. Or the site might productively have been up in June, when the previous round of Israeli comments sparked a surge in oil prices. Or last January, when an incident between Iranian boats and U.S. Navy ships sparked the release of some doctored videos (one by each side) and much hand-wringing.

Oh, well. The site is up now, and its material should still be useful. As the Journal reported, there was another incident today, and there are sure to be many more in the weeks to come. I hope that everyone will find the site useful in developing their views on the realistic level of threat. For what it’s worth, my views are summarized on one page of the site (here), although even people who disagree with me can surely make use of the data and organization of the rest of the site.

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But we need to remember, especially at Across the Aisle, that bipartisanship should rarely, if ever, be a goal for its own sake. The United States in recent years has made all sorts of “bipartisan” foreign policy errors.

And we’re on our way to another one, if the House-led effort to crack down on oil market speculators makes it into law.

In recent years as a New York Times columnist, Paul Krugman has often opined based on his values, and his columns can sometimes seem partisan and shrill. But when he writes as an economist, he is almost always sharp and clear and insightful (who am I to offer broad criticism of one of the leading international economists of our time? I once tried to get him to join my committee of advisors on my Ph.D. dissertation, but since I studied graduate international economics at MIT when he was on leave, meaning that I took the class with another great contemporary international economist, Avinash Dixit, Krugman demurred.  Bottom line: I have my personal views about Krugman’s economics writings, but a dispassionate observer would be perfectly justified in taking his views much more seriously than mine.).

Krugman’s column in today’s Times about speculation in the oil market seems solidly on point, based on well-argued economics. And he offers much more detailed analysis on his blog (here is the most recent post in a series, which started here). Blaming “speculators” for the run-up in oil prices and passing bipartisan legislation to crack down on speculators in hopes of driving down the price of gas in the U.S. is misguided.

I don’t have much to add to the specifics of the oil discussion. Krugman posts lots of detail and some useful graphs. The bottom line is that “paper barrels” traded by financial speculators rarely affect the price that consumers of oil pay for the ability to burn petroleum (whether in their cars or somewhere else). Financial speculators who never physically possess the oil both buy and sell in the market. They increase the number of trades, but they don’t change overall supply and demand. Every “paper” speculator who buys a futures contract then sells that same contract before the delivery date. So the added demand for purchases is exactly compensated by the added supply offered for sale within the lifetime of the contract.

Of course, if the speculator does actually take delivery of the oil and decides to hold it in inventory, then his purchase in fact reduces the supply available to people who want to take the oil and burn it. So if inventories rise along with “speculative” trades, then speculation can drive up the consumer price of oil, at least until the speculators decide to sell from their inventories (e.g., when tanks get so full that the rental cost of storage capacity is high enough that it’s no longer profitable to hold the oil hoping for a higher consumer price in the future).

The thing is that oil inventories have not been rising in this fashion, and the relationship between the futures price and spot price of oil does not appear to support the hypothesis that this hoarding dynamic is going on.

Of course, producers of oil may be speculating by leaving oil in the ground, and the fact that producers are organized into a cartel (OPEC) makes it more plausible that they might be do this. Whatever the level of demand (which surely has been rising in recent years), a working cartel will withhold some measure of supply, selling less than the amount at which price equals marginal cost. And it’s hard to tell today whether OPEC is pumping at full capacity and investing as fast as it can to increase its future ability to pump oil (that is, trying to “catch up” to rising demand), or whether OPEC is acting like a working cartel. We just don’t know enough about what’s going on inside OPEC’s fields, because they hold their technical data very close to the vest.

But if OPEC “speculation” is the problem, then the issue for U.S. policy is with OPEC not with financial speculators regulated by the CFTC. Directing the CFTC to limit the ability to trade oil futures will just reduce trading volume and create market rigidities that in principle may create losses in the American market.

For me, though, the real thing to consider is what makes someone a “speculator” (hence the quotes throughout this blog entry). No one ever seems to define carefully who the “bad guys” are in this plot. Definitions of speculation are hard to come by, and they are even harder to operationalize.

In my courses, I try something relatively simple, and although it is imperfect, I think it helps make some points: a speculator is someone who hopes to make a profit by buying an asset (e.g., a futures contract) and selling it to someone else at a higher price even though he has not taken any action to increase the value of the asset. A speculator’s goal is to profit by taking money from some other buyer rather than by creating additional value. If the speculator correctly buys “low” and sells “high” at the “right” price in each transaction, the speculative purchase has not created any new value; it has simply transferred the profit from the previous owner (who sold to the speculator) to a new owner (the speculator himself).

This definition is not too far from the one offered in Benjamin Graham’s classic business book, The Intelligent Investor, which seeks to differentiate between “investors” and “speculators” and to convince readers to be the former rather than the latter. Graham doesn’t include as clear a statement of the definition as I would like, but Jason Zweig’s commentary in the 2003 revised edition comes close: “An investor calculates what a stock is worth, based on the value of its businesses. A speculator gambles that a stock will go up in price because somebody else will pay even more for it.” The definition of an investor presumes what seems to me an unreasonable ability to calculate the true value of a business (and that the current owners won’t be able to calculate that same value), but again, Zweig is getting at something meaningful.

So what’s the implication of this investment? Speculators may or may not make money on particular trades, but it seems that their success depends more on luck than on reasoning — or perhaps on understanding human nature and animal spirits of other speculators more than on understanding the underlying business.  But the worst that speculators can do is lose their own money rather than change the underlying value of the asset. Their demand for the asset — and their money flowing into the market for the asset — is only a temporary aberration. The recent run-up in oil prices has extended over several years, which is a pretty long time to blame on purely financial speculation.

If OPEC suppliers are holding oil in the ground rather than pumping as fast as they can, are they speculating? Probably not. For one thing, they are taking direct action to increase the price of the asset (that is, they are constraining supply).  Is that good behavior, from the perspective of the United States and American consumers? Probably not (unless you really believe the climate change story that says we’re better off with much higher energy prices). But it’s a different problem from the one that the bipartisan consensus in the House of Representatives diagnosed this week.

Begging our friends in the Persian Gulf to pump more oil doesn’t seem very productive (as in the Bush administration’s recent effort), because Saudi Arabia and the other producers will decide what’s in their interest and what they are capable of doing in terms of investment and exploitation of existing fields. Our ability to tell them what to do is, well, limited. But the begging policy is based on a logic that is closer to the right way to think about the causes of current high oil prices than Congress’ anti-speculation jag.

So this post mostly has been about what is not causing high oil prices. I recently was interviewed at length about oil by the Romanian magazine Revista 22 (of all places — I have no special ties to Romania), and if anyone has the stamina to read on, here is the English version of a couple of my thoughts about what is causing oil prices to rise:

1.     What has triggered the current oil crisis-the post 9/11 price spikes? Which were the structural forces that shaped these trends? Which are the key factors that affect oil supply and prices? Which was their role in shaping these trends?

Many things affect oil prices. The market is incredibly complex, especially at the detailed level of trying to explain individual trades, as particular deliveries of crude oil depend on variations in the quality of the oil, the exact timing of deliveries, the number of oil tankers available to compete for the business, etc. But for broad understanding of the environment rather than an effort to make money on particular futures contracts, we can explain the run-up in oil prices in the past few years based on a couple of key factors.

The first big factor is that demand is rising around the world.  Economic growth in China and India have received a lot of attention in the press, and those countries are big factors to be sure, but demand has also soared in other countries, notably including the United States. Comparing to the immediate aftermath of 9/11 is a bit unfair, because the economic troubles at that point artificially depressed demand (so of course demand looks like it is “up” since then), but even comparing to the late-1990s, demand has increased worldwide. And that demand increase has helped raise oil prices, partly because it takes a few years for investment in production and distribution capacity to catch up and partly because the higher level of production to meet the demand involves exploitation of more expensive marginal resources. But I should stress that increases in the cost of producing oil cannot explain the run-up to a $130 per barrel price: there’s a lot of oil available that’s economically viable to produce at a price of $50 per barrel – for example, in Canada – that just takes a few years to get on line. 

Along with the increase in demand (relative to the rate of investment in supply), the second big factor in the rising nominal price of oil to the vicinity of $130 per barrel is the drop in the value of the dollar. If we monitor the price of oil in dollars, and each dollar is worth less, then the reported number for the price needs to increase just to maintain the same level of true cost for the oil. The drop in the value of the dollar relative to other currencies is not caused by anything in the oil market: the United States runs a trade deficit, and over time, economists expect that long-term exchange rates should adjust to bring that deficit back into balance. Indeed, at some point, the U.S. will run a trade surplus again. But because oil prices reflect a combination of the real cost of production and, probably more importantly, the real value of oil to consumers, when the numerical representation of that value changes because the value of what we use to measure prices – the value of the dollar – changes, then the nominal price of oil must change, too. This would be true even if the real value of oil stayed the same. One effect of this is that the real increase in the cost of oil for consumers in the United States has increased more than the real increase in costs for consumers in countries whose currencies have appreciated relative to the dollar (e.g., for European consumers).

2.     We live today in a global oil market that has become very tight on supply. The real issue seems to be a supply issue. So, in this context (of a very tight supply) has the market the capacity to respond to some major oil supply shocks caused by political disruptions (wars, terrorism)? In the past it seems to have a market pattern capable of dealing with major disruptions in the oil supply by compensating increases elsewhere. Has the today’s market enough slack production capacity in order to increase the output for dealing with a price spike triggered by political disruptions?

It is hard to divide the causes of the rising price into the “supply side” and the “demand side” of the oil market. The price is determined simultaneously by the amount of oil on the market at a particular moment (supply) and how much people want to use that oil (demand). You can only talk about “tight supply” in comparison to demand conditions. What we see today is that demand has broadly increased, and the amount of oil pumped into the market has increased, too, by a few million barrels a day – say, from 80 million barrels a day to 86 million barrels a day worldwide. Right now, people are willing to pay more than $130 for the marginal barrel of oil, given that 86 million barrels or so are on offer, but suppliers are not willing to reduce inventories or pump faster right now for a marginal price of only $130. There’s a lot of oil inventory around the world – in private and public stocks, owned by oil producers and by middlemen and by consumers – and all that oil could be additional “supply” tomorrow, if people thought that it was worth it to sell at the current price. 

Trying to trace a particular price or a particular restraint on selling to “supply-side” political disruptions like wars or terrorist attacks or fires or natural disasters is a mistake. Most supply disruptions are very small compared to the overall size of the market, and many market participants have opportunities to compensate for the disasters.  Iraq’s contribution to oil on world markets dropped after 2003 for several years, but the net drop of a few hundred thousand barrels of Iraqi oil did not cause the market price to double.  Supply disruptions have been one factor, but a relatively small one. The market generally over-reacts to news of an attack on oil supplies: most of the time, when pipelines are damaged or a tanker is attacked, the damage is minor and the asset gets back on line promptly.  It is hard for terrorists or even militaries to cause a lot of damage to such a large and diverse infrastructure of oil supplies. If one tanker does not make its scheduled delivery, some oil comes out of the market that day, but there is plenty of oil available in inventories to compensate – and the tanker will eventually make its delivery, a bit behind schedule, so the inventories can later be refilled. The only supply disruptions that really should affect oil prices are sustained disruptions that affect a lot of oil (millions of barrels per day) for a long time (weeks). 

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According to Secretary of State Condoleezza Rice in an article in the July/August issue of Foreign Affairs, China’s reluctant and belated concession to allow a skeleton UN-AU peacekeeping force in Sudan represents a newly “cooperative approach on a range of problems.” But the reality is that some newfound sense of Chinese responsibility on the world stage had nothing to do with Beijing’s decision to “cooperate.” The concession on Darfur (if you want to call it that) was entirely about the Beijing Olympics. Given that it took a threatened boycott by Western leaders for China to stop arms sales to Sudan and drop its veto of the peacekeeping resolution, I am dubious that we’ll see any further “responsible” behavior after the Olympic Games have come and gone. At this point, the Games are going ahead—with or without protesting Western leaders—and the leverage a coordinated boycott might have provided will be a mere memory.

But I’m not writing this to bemoan a missed opportunity or cast aspersions on Rice’s diplomatic optimism. I’m writing this to call some attention to the next opportunity down the road: Sochi 2014.

China and Russia are both rising powers, economically, militarily and diplomatically. Secretary Rice referred to both as carrying “special responsibility and weight as fellow permanent members of the UN Security Council.” Translation: they both have lots of nuclear weapons, so our military power doesn’t really scare them. China is also not the only rising power we’d love to see adopt a more cooperative stance as it claims (or reclaims) “full membership in the international community.”

Russian cooperation is essential for Western objectives on WMD non-proliferation, peace and stability in the Middle East and Central Asia, energy security, and combating international organized crime, to name just a few top policy priorities. But flush with newfound mineral wealth and confidence born of a resurgent central government, Moscow seems poised to extract a high price for cooperation with the West on these issues. Moreover, the Kremlin has effectively taken any Western efforts to encourage domestic political reform totally off the table. What are we going to do about it?

That’s where the 2014 Winter Olympics in Sochi might play a very valuable role. The West’s approach to Beijing on Darfur was clumsy and disorganized. We waited too long to exert significant pressure and we failed to speak with one voice. As a result, we put the Chinese in a position to lose face whether they cooperated with us or not. But we have the opportunity to try a different approach with Russia on Sochi.

Starting in 2009, the next US President, in concert with European allies, should put forth a set of positive incentives for cooperation with Russia on a timetable culminating in the 2014 games. For example, the West can offer full normalization of trade relations and Russian accession to the WTO in exchange for Russia’s commitment to spend a significant portion of its massive state oil and gas revenues on securing remaining WMD facilities and helping to find long-term alternative employment for WMD scientists. We can offer to promote the Russia-NATO Council to a much higher profile within the alliance, and even give Russia a say in NATO expansion, if Moscow applies and maintains pressure to halt Iranian nuclear enrichment. And we could propose Russian leadership of the Council of Europe, if it committed to a major reform of its police and court system consistent with the European Convention on Human Rights.

Those are the carrots. The stick, obviously, is a Western boycott of the Sochi Winter Olympics. A boycott would be a crushing blow to Russia, struck in the one area where it remains genuinely vulnerable to international opinion. But let us not merely hope that Russia cooperates when cooperation is needed, and haphazardly fling boycott threats in its face if it does not. Rather, let us forge a unified policy now, setting out clear incentives for cooperation, a timeline, and an equally clear and enforceable consequence for failure to cooperate.

With China, the West undermined its own leverage by so wantonly and disjointedly threatening boycotts of the Beijing Olympics that we effectively applied a wilted stick to deny the carrot. With Russia, the carrots should be openly and explicitly offered, and the stick reserved until absolutely necessary.

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