Rare success
I’m no expert on Colombia, but you don’t have to be one to welcome the ceasefire negotiated with Cuban mediation between the government and the Revolutionary Armed Forces of Colombia (the FARC) after 52 years of rebellion. The Economist gives an excellent overview of the accomplishment and the problems that lie ahead.
I would just signal the capital importance of preventing FARC cadres from going the way of rebels in El Salvador and Guatemala. In the aftermath of their civil wars, which ended in the 1990s, criminality has remained a major problem and even grown dramatically in El Salvador. Colombia has had significant success against its once rampaging drug cartels, but demobilization of the guerrillas will increase the challenge. Thousands of unemployed youth with few talents other than avoiding the authorities and handling a gun constitute a serious problem. Nor will their commanders miss an opportunity to organize protection and smuggling rackets, especially if they don’t do well in the post-war political competition.
Colombia has a neighbor to the east, Venezuela, already in desperate straits. Its left-wing Chavistas have wrecked the country’s economy, despite sitting on what are arguably some of the world’s largest, albeit low quality, oil reserves. They have also made a hash of the government’s institutions, which include a parliament now controlled by the opposition. The power struggle there and its consequences may well boil over to Colombia as Venezuelans flee economic implosion, straining Bogotá’s capacities just as it embarks on the challenge of implementing a complicated and for some people not very palatable peace deal.
A slowdown in Colombia’s economic growth will likely worsen in the aftermath of Brexit as the world slips into recession. The government will have trouble anteing up all the resources needed to implement the peace deal, which includes commitments to rural development among other things. The US has spent about $8 billion on Plan Colombia, one of Washington’s more comprehensive efforts to strengthen a fragile state and help it block both drug cartels and leftist guerrillas from damaging US national security. While criticized on human rights grounds and for its efforts at drug eradication, the Plan appears to have contributed a good deal to Colombia’s current success.
Sustainment will not be automatic. A special tribunal and disarmament, as The Economist reports, will be particularly important to the Colombian public. Jobs and political inclusion will be important to the guerrillas. Colombia is the third most populous Latin American country, with 50 million people (only Brazil and Mexico are larger). It needs to make at least as much success of its post-war transition as it has already made of its internal wars. Success in negotiating the end of a rebellion is rare, but success in managing the post-war process is even rarer.
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Iznenadjenje!
Former Foreign Minister and Ambassador Mico Vlahovic, whose own reaction to Brexit is published here, has provided a translation into Montenegrin of mine for the Podgorica daily Pobjeda:
Da, glas da Britanija napusti EU me je iznenadio. Očekivao sam da ekonomska recionalnost i politička smirenost odnesu prevagu nad nezadovoljstvom zbog imigranata i nad onima koji mašu zastavama i viču “Engleska na prvom mjestu”. Politika identiteta je ponovo trijumfovala. Neka mi to bude lekcija.
Neposredne ekonomske implikacije su već poznate: oštar pad britanske funte, rasprodaja na berzama širom svijeta, još više uzdrmani euro i još izvjesnija obnovljena recesija u Evropi i jače [ekonomsko] usporavanje u ostatku svijeta. SAD bi mogle biti izuzetak za sada, jer će mnogi potražiti sigurno utočište u dolaru, ali će ga sve ovo poskupjeti, što će oslabiti izvoz i dodatno usporiti razvoj. Nesigurnost će opstati: Škotska će ići na drugi referendum, Vels može poći tim stopama, a i Katalonija će pokušati isto.
A što je sa Balkanom i Srednjim Istokom, na koje je usmjerena moja pažnja?
Na Balkanu, kratkočni i dugoročni efekti su vrlo ozbiljni. Region je u velikom mjeri zavisan od evropske trgovine i investicija, koji će i sami biti odmah u teškoćama. Ali, politički efekat će biti značajniji. Balkanci su i do sada imali sumnje u svoju evropsku perspektivu, koja se sada čini daljom nego što je to bio slučaj prije pet godina. Sada bi oni bili budale ako ne posumnjaju u spremnost Evrope umanjene za Veliku Britaniju da im omogući članstvo.
Te sumnje će otvoriti vrata povećanom ruskom uticaju, ne samo na Balkanu, već i u Ukrajini. Niko od britanskog referenduma na političkom planu nije dobio više od Putina: rezultat slabi njegove protivnike u Ujedinjenom Kraljevstvu i u Evropskoj Uniji, čini njegovu aneksiju Krima i okupaciju jugoistočnog dijela Ukrajine prihvatljivijim i opravdava njegov etnički nacionalizam. Mora da ovih dana votka teče potocima u Moskvi. Stići će votka i do Balkana. Putin će, bez sumnje, pojačati napore u Srbiji, Republici Srpskoj i u Makedoniji kako bi odvratio Slovene od njihovih evropskih i NATO snova.
Srednji Istok je teži slučaj. Ima puno bogatih šeika iz Zaliva sa uloženim novcem i imovinom u Britaniji. Njima se neće svidjeti da vide kolaps funte. Neki od njih su već toliko izgubiki zbog niske cijene nafte da se mogu uspaničiti i napustiti Britaniju. Ali, ipak mislim da će mnogi ostati. Usporeni ekonomski rast na globalnom nivou će nastaviti da obara cijenu nafte, poslije njenog nedavnog povratka na nešto preko pedeset dolara. Zbog toga je sudbina zalivskog novca u Britaniji još i gora nego ranije.
Britanska uloga na Srednjem Istoku može biti izmijenjena. Britanija je bila najveći evropski kontributor ne samo u Iraku, već i u Libiji i Siriji. Britanija koja je više okrenuta sebi samoj i sa smanjenom ulogom vani neće imati iste resurse i neće biti u stanju da nastavi sa takvim angažmanom.
S druge strane, Britanija će, naravno, podići barijere imigrantima sa Srednjeg Istoka, mada ni do sada nije primila neki veći broj. Glavni fokus nezadovoljstva je bio usmjeren prema istočnim Evropljanima i prema prijetnji imigranata sa Balkana. Mladi Albanci, Srbi, Bosanci i Makedonci će izgubiti mogućnosti za školovanje i posao, koje su imali posljednjih godina.
Ironično, jedan od mnogih problema koji mora biti riješen u toku dvogodišnjih pregovora o primjeni Bregzita, će biti Britanci koji žive u ostatku Evrope, kojih ima oko milion i dvije stotine hiljada. Tri miliona ljudi iz zemalja Evropske Unije živi u Velikoj Britaniji. Ukoliko se ne postigne sporazum koji će omogućiti ovim ljudima da ostanu, mogli bi biti suočeni sa masovnim kretanjima stanovništva sa nepredvidljivim posljedicama. Čak i ako im bude dozvoljeno da ostanu, ovoj vrsti migracije je došao kraj. Sljedeća britanska vlada će biti primorana da učini sve što bude mogla da spriječi strance da se domognu njenih, uskoro – manje značajnih, obala.
Dakle: Bregzit je loša vijest za Ujedinjeno Kraljevstvo, za EU, za SAD, Balkan i Srednji Istok. To je dobra vijest za Vladimira Putina. Ja i moji prijatelji nemamo što da slavimo.
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Continued dependence on Gulf oil
Doug Hengel, formerly at the State Department and now at the German Marshall Fund (and also teaching at SAIS), allowed me to republish his excellent notes for his talk at Woodrow Wilson last week, already posted here:
There is a great deal of uncertainty in oil markets at the moment. The big questions, beyond when the market will rebalance, include:
- Are we in the midst of another boom and bust cycle in the oil market or are there structural changes that define a new paradigm? Has U.S. tight oil changed market dynamics forever?
- Has the Saudi/Iranian rivalry evolved to the point where geopolitics now dominates Riyadh’s approach to oil? Are the Saudis using oil as a weapon?
- Is the Saudi 2030 Vision OPEC’s “obituary notice” as some have declared? Will the Saudis continue to invest in oil or are they pumping all out now due to concerns that oil demand is going away?
- Are we in a “lower for longer” scenario for oil prices? Or have the large cuts in investment by oil companies in the past couple years simply planted the seeds for the next price spike?
As we think about these questions, and more importantly what the future of oil geopolitics might look like, it is helpful to ground ourselves with a few facts. It is important to remember:
- The countries of the Persian Gulf account for almost 1/3 of global oil production and hold roughly 50% of proven oil reserves. They generally have the lowest cost oil to produce.
- About 17 million barrels a day (mbd) of crude oil and refined products move through the Strait of Hormuz, only a small fraction of which could get to market via alternative routes if the strait was blocked.
- Oil fields have a natural decline rate averaging 3-6 percent a year, much higher for U.S. tight oil. This means that every year investment in existing or new fields is needed to bring to market about 4 mbd of additional oil just to keep global production at current levels (not including any increase in demand). Those 4 mbd are equivalent to the total surge in U.S. tight oil production over the 2011-14 period. It also means we need to add the equivalent of a new Saudi Arabia to the market every 3 years.
By one estimate, global upstream project cancellations could create a 4 mbd ‘‘hole” in global oil supplies by 2020. Estimates of production in Brazil, Canada, Mexico and elsewhere in coming years have been revised downwards. There is growing concern that the large reduction in investment by the international and national oil companies will lock in the world’s reliance on OPEC, and in particular on the lower-cost supplies from the Persian Gulf, for decades. The International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) have pointed to this risk in their most recent global energy outlooks.
Are there structural issues that might mitigate against greater reliance on OPEC and the Persian Gulf? Two are often cited – the U.S. tight oil boom and climate change.
U.S. TIGHT OIL: While U.S. tight oil production jumped by an average 1 mbd per year from 2011 through 2014, over the past year U.S. tight oil production is down about 1 mbd. In the meantime U.S. gasoline consumption has increased sharply and is expected to hit a record in 2016. So U.S. oil imports are growing again. Last year U.S. net crude oil imports dropped to only a quarter of U.S. consumption, the lowest level since 1970. This year it looks like we will need to import one-third of our oil. Some believe that with prices of $50 or more per barrel there could be a renewed surge of U.S. production this year adding perhaps as much as 1 mbd to U.S. output by the end of the year. But that is a very optimistic scenario. And after that? There is no doubt U.S. production could resume an upward climb with higher prices, but almost certainly not enough to offset reduced output elsewhere in the world.
CLIMATE: All scenarios that would reduce carbon emissions enough to keep global warming to 2 degrees or less require a huge shift away from petroleum for transportation. Both Statoil and the IEA have modeled what very aggressive introduction of electric vehicles (EVs) might do to oil demand, in the case of Statoil’s “renewal” scenario new car sales would be 90 percent EVs or hybrids by 2040. Even with such an enormous change in how light duty vehicles are powered global oil demand would still be in the range of 75-80 mbd by 2040 — as much as 20 mbd below today’s consumption but still requiring very large investments to compensate for the decline of existing fields. Supply could well decline much faster than demand.
So what does this all mean for the U.S. and the world?
- We are not in a new paradigm. Oil is not going away and the world’s dependence on the Persian Gulf for global supplies is very likely to increase going forward. Therefore the U.S. will need to play an active role in the region to ensure the oil keeps flowing, including protection of sea lanes.
- U.S. “energy independence” remains a chimera even if we were self-sufficient in oil, which is very unlikely to happen in any case.
- OPEC is not dead. Notwithstanding the Saudi/Iranian rivalry, they are likely to be able to and want to work together to influence the oil market once markets are more in balance. Recent statements by the new Saudi oil minister indicate they will continue to invest heavily in maintaining their production capacity.
- We need to keep our eye on the ball regarding constraining oil demand – continued progress on more efficient vehicles, facilitating the move to EVs, to natural gas for trucking, etc.
- Innovation is essential (e.g., autonomous vehicles), ideally in cooperation with international partners.
- We should continue to encourage and assist new and non-OPEC oil producers seeking to boost their output, in particular Mexico and emerging suppliers in Africa.
- We should not be treating our Strategic Petroleum Reserve as a piggy bank – selling off oil to meet other budgetary requirements. We may need the SPR to cushion a supply disruption, U.S. tight oil is not a substitute. At the same time we should continue to promote cooperation by China and India with the IEA on a coordinated response to an oil supply disruption given their increasing importance to the market (and since they are building their own strategic reserves).
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The Gulf’s still risky future
Wednesday the Middle East Program at the Wilson Center hosted The Gulf, Iran, and Future Oil Geopolitics, featuring David Goldwyn, President of Goldwyn Global Strategies; Douglas Hengel, Senior Resident Fellow at the German Marshall Fund; Elizabeth Rosenberg, Senior Fellow and Director of the Energy, Economics, and Security Program at the Center for New American Security; and Jean-Francois Seznec, Non-Resident Senior Fellow and Director at the Atlantic Council’s Global Energy Center. Jan Kalicki, Global Fellow at the Wilson Center and Senior Fellow at the Watson Institute for International and Public Affairs at Brown University, moderated the discussion.
Rosenberg discussed how lifting most sanctions on Iran has influenced Iranian politics. While the economy has opened up considerably since January, there are still many obstacles to doing international business in Iran. The prohibition on doing business with the Iranian Revolutionary Guard Corps (IRGC) leaves much of the economy untouchable by foreign investors. Many of the remaining sanctions are secondary, which requires Iranian companies to cut ties to groups like the IRGC that control 20-60% of the Iranian economy.
Iran is currently producing 3.5-3.8 million barrels per day and exporting 2 million. Iran could get up to 4 million per day. Beyond that, Iran would have to make substantial infrastructure investments. Several international oil companies have signed exploratory contracts, but there are still a lot of unknowns. With Iran upping the ante in Syria and around the region, the future of the broader Middle East is in question.
Goldwyn said that Iraqi oil production had recently reached 1.8 million barrels per day, its highest level ever. This is Iraq’s peak. It will not even be able to maintain this level. Iraq suffers chronic problems:
- the government is weak and unable to make plans or execute them;
- failure to resolve ethnic and sectarian conflicts opened the door to the Islamic State (ISIS) and maybe worse in the future;
- the government is spending a huge portion of its budget on the war effort: $33 billion between 2009 and 2014.
The Iraqi army’s progress in retaking Fallujah is promising, but Fallujah has been liberated many times—each time escalating ethnic tensions to still higher levels.
Iraq will barely be able to maintain production in the coming months. The Iraqi government is spending all of its diminished oil revenue on its military, and low oil prices have limited the government’s ability to function on a basic level—let alone invest in infrastructure to boost oil production. Iraq’s near future looks grim.
Seznec commented on how Saudi Arabia’s deputy Crown Prince Mohammed bin Salman is transforming his country in dramatic ways. His new “Vision 2030” intends to wean Saudi Arabia off oil dependence and diversify its economy. Saudi Arabia intends to maintain its current production of 10.2 million barrels per day, while growing its private sector. To accomplish this, King Salman bin Abdulaziz Al Saud appointed Khalid al-Falih as minister of the newly revamped Ministry of Energy, Industry, and Mineral Resources.
A major component of “Vision 2030” is selling 5 percent of the government’s shares in Aramco. Aramco is currently valued at 2 trillion dollars, so this will likely be the biggest IPO (initial public offering) in history. Part of Mohammed bin Salman’s plan is to revolutionize the workforce. By 2030, the government hopes that women will fill 45 percent of public and private sector positions. There are big changes on the way for the Kingdom, and we will have to wait and see what else the young deputy crown prince has in store for us.
Hengel addressed major factors that will affect all the countries discussed. His bottom line is that dependence on the Gulf will continue. The natural decline in current production means that continued investment in existing oil fields and new discoveries are essential. Hengel predicts that the United States and the world will continue to be dependent on OPEC. There is much uncertainty about the future of consumption. Many countries have started shifting towards electric vehicles and are moving away from their dependence on oil. But the United States continues to lead in consumption with the lion’s share, 10%, of global consumption. Gulf oil supplies are likely to remain important for the foreseeable future.
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Surprise!
Yes, the “leave” vote surprised me. I expected economic rationality and political equanimity to prevail over distaste for immigrants and flag-waving England firsters. Identity politics has triumphed once again. Let it be a lesson to me.
The immediate economic implications are already clear: a sharp fall in the British pound, a sell-off in stock markets worldwide, an even shakier euro, and more than likely renewed recession in Europe as well as a sharp slowdown elsewhere. The US may be the exception for a while, as many people will seek safe haven in the dollar, but that will drive it up, weaken exports, and slow already slow growth. Uncertainty will persist: Scotland will proceed with a second referendum, Wales may follow suit, and Catalonia will try to do so. Will the Netherlands or France put the EU to a vote?
What about the Balkans and Middle East, where my attention is focused?
In the Balkans, both the immediate and longer term effects are dire. The region is heavily dependent on European trade and investment, which are going to be hit hard right away. But perhaps more important will be the political impact. Balkanites (that’s what I call people who live in the Balkans) have already been finding it hard to believe in their European prospects, which seem farther away than they did five years ago. Now they would be fools not to doubt the willingness of Europe minus UK to accommodate their membership.
These doubts will open the door to increased Russian influence, not only in the Balkans but also in Ukraine. No one gains more politically than Putin does from the UK referendum: it weakens his antagonists in the UK and the EU, makes his annexation of Crimea and occupation of southeastern Ukraine look more acceptable, and validates his ethnic nationalism. The vodka should be flowing freely at the Kremlin today. It will also flow into the Balkans. Putin will no doubt intensify his efforts in Serbia, in Bosnia’s Republika Srpska and in Macedonia to wean Slavs from their EU and NATO dreams.
The Middle East is a harder call. There are a lot of wealthy Gulf sheikhs with money and property in Britain. They won’t like seeing the pound collapse, and some may already be so strapped by low oil prices that they panic and get out. But my guess is that most will hang on. Slowed world economic growth will however crimp oil prices once again, after their recent rise to $50 and change. So the future of Gulf money in Britain is likely dimmer than it was in the past.
Britain’s role in the Middle East may also change. It has been a major European contributor to intervention not only in Iraq but also in Libya and Syria. A more inward-looking and reduced Britain is not going to have the same resources and will to underwrite such efforts.
Britain will of course raise its barriers to Middle Eastern immigrants, but it hasn’t been taking many of them in any event. The main focus of resentment has been against East Europeans and the threat of immigration from the Balkans. Young Albanians, Serbs, Bosniaks and Macedonians are going to lose both education and job opportunities that many have been enjoying in recent years.
Ironically, one of the many problems that need to be resolved during the two-year negotiation to implement Brexit, will be Brits abroad living in the rest of Europe, who number 1.2 million. Three million people from other EU countries live in the UK. If no accommodation is reached to allow these people to stay, we could see a massive population movement with unpredictable implications. Even if they are allowed to stay, this kind of migration is finished. The next British government will have to do everything it can to prevent foreigners from reaching its soon to be diminished shores.
Net net: Brexit is bad news for the UK, the EU, the US, the Balkans and the Middle East. It is good news for Vladimir Putin. My friends and I will not be celebrating.
PS: It took a couple of days, but John Oliver did a great, if pretty gross, explainer:
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Dear Russian friends,
Moscow is apparently again using incendiary weapons against civilian areas, according to the Syrian opposition delegation to the UN talks:
HNC Letter to Ban Ki-Moon
UNOFFICIAL TRANSLATION
H.E. Mr. Ban Ki-moon
United Nations Secretary-General
New York
23 June 2016
Your Excellency,
It is with great concern that I report to you, in your capacity as the depositary for the Convention on Conventional Weapons (CCW), regarding a dangerous escalation in the illegal use of air-delivered incendiary weapons by Russian forces against civilian objects and in areas with a strong concentration of civilians across Syria, including most recently in Syria’s largest city, Aleppo.
Article 2 of Protocol III of the Convention on Conventional Weapons prohibits parties in all circumstances from “making the civilian population as such, individual civilians or civilian objects the object of attack by incendiary weapons.” Protocol III of the CCW also prohibits parties from making a “military objective located within a concentration of civilians the object of attack by air-delivered incendiary weapons.” Security Council resolutions 2139 (2014) and 2254 (2015) prohibit parties from deploying indiscriminate weapons in populated areas or engaging in methods of warfare of a nature to cause superfluous injury or unnecessary suffering.
Since the start of its intervention in Syria, Russian air forces have repeatedly deployed incendiary weapons and cluster munitions to kill, main and terrorize Syrian civilians, including in at least 10 documented incidents as described in Annex I. Recent incendiary aerial attacks by Russian forces have been documented in Aleppo, including in DaratAzza, Anadan, Ein Jara, Kafr Hamrah and Haritan. Recent video footage taken in Aleppo shows incendiary weapons likely to be thermite mounted in a Russian Su-34 fighter-ground attack aircraft. Thermite, which ignites while falling, has been likened to ‘mini nuclear bombs’ and was deployed repeatedly by Russian forces in residential areas.
Incendiary weapons rank among the world’s most powerful explosives and are known to have devastating effects on civilians. They cause immensely painful burns and prompt fires that are hard to extinguish. Yet Russian forces have systematically and deliberately used such weapons to kill innocent civilians, including women and children. In so doing, they have violated the CCW and breached international humanitarian law.
Your Excellency, as the depositary for the Convention on Conventional Weapons, we urge you to:
(i) Launch an investigation into the use of incendiary aerial weapons by Russia in Syria;
(ii) Demand the protection of Syrian civilians from the use incendiary aerial weapons in Syria;
(iii) Call on Member States to impose consequences for repeated breaches on international humanitarian law by Russian and Syrian forces.
Your Excellency, the failure to impose consequences for the Syrian regime and Russia’s repeated breaches of international humanitarian law has allowed the Syrian crisis to worsen—costing Syrian lives, encouraging a global refugee crisis, and giving new life to extremist terrorist groups. The whole world is less safe because the world has failed to act on our people’s behalf. Syrian civilians need protection. We rely on you to demand it.
Please accept, Your Excellency, the assurances of my highest consideration.
Dr. Riyad Hijab
General Coordinator, High Negotiations Committee
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