oil | Normative Narratives

August 24, 2017
by bzupnick Leave a comment

Could Venezuela Become “America’s Syria”?

Recently President Trump, seemingly out of nowhere, threatened Venezuela’s increasingly authoritarian President Nicolas Maduro with the possibility of military intervention. Where did this idea come from? How crazy is it? Lets dive in.

To answer the first question, I can just imagine at some point during a National Security Council meeting, someone mentioned the need for a military option should the situation in Venezuela continue to deteriorate. Trump, never missing an opportunity to put his foot in his mouth, turns that into his ad-libbed “military option” line.

It’s like a game of telephone that never should’ve happened between the National Security Council, Trump, and Maduro. What was supposed to be implicitly understood–that America will defend its interests and regional allies–was instead explicitly said in the worst way possible (much to the joy of Maduro, who is using Trump’s words as a rallying cry in hopes of gaining domestic and regional support).

But what about the second question, how crazy is the idea of a limited American military intervention in Venezuela? The answer: not as crazy at is sounds.

I have always said America would never let something like the Syrian Civil War happen in Latin America. For all the anti-interventionists out there, lets take stock of what European inaction in Syria has cost it–a refugee crisis and a crisis of identity: Brexit, a rise in right-wing populism, and the continued inability to address the large scale economic and social problems that have plagued the continent since the Great Recession and whose solutions require closer European integration. And that’s not even considering the suffering realized by the Syrian people.

So the next questions are obvious: is Venezuela “America’s Syria”? Could inaction in Venezuela lead to similar horrors in the United States?

Long answer short, no. There are some key differences between these two crises.

Most significantly, while there is certainly a humanitarian crisis in Venezuela, the government has not been particularly violent in its crackdown on dissent (at least compared to Assad’s response to protesters in Syria). The Venezuelan military, however, is loyal to Maduro, so it’s actions are certainly something to keep a close eye on as the situation unfolds.

Latin America as a region is more stable than the Middle East. It has experience with democratic governance and resolving disputes peacefully. At this point, it still seems unlikely that full scale civil war will break out in Venezuela.

The U.S., for its part, has vastly superior military and border control capabilities compared to the EU. Venezuela is also further from the Southern U.S. than Syria is from Southern Europe; greater physical distance will help insulate America from any negative spillover effects.

There is, however, one common thorn in the side of a reasonable solution–the spoiler you love to hate, Vladimir Putin. Putin has worked out a weapons and financing for oil deal with Maduro, giving Russia a strategic partnership in the region similar to what he had with Assad in Syria.

Putin’s Puppet?

As Maduro has been ostracized by the international community and seen the value of the Bolivar deflated away due to economic mismanagement, he has increasingly relied on Russian financing to keep his regime afloat. In exchange, Maduro has offered access to Venezuela’s lucrative oil reserves on very preferential terms.

In an attempt to stop this damaging, shortsighted behavior, the Venezuelan Congress took away Maduro’s authority to make oil deals without legislative approval. Maduro responded by using the courts to circumvent the rule:

“In March, the nation’s Supreme Court – whose members are loyal to Maduro – took over the powers of the opposition-controlled National Assembly. A majority of elected Assembly members opposed any new oil deals with Russia and insisted on retaining power to veto them.

Days later – after fierce national protests against the action – the court returned most powers to the national legislature at Maduro’s public urging. But the court allowed the president to keep the legal authority to cut fresh oil deals with Russia without legislative approval.

The episode was pivotal in escalating daily street protests and clashes with authorities that have since caused more than 120 deaths.”

Of course the Venezuelan Congress has since been dissolved and replaced with a rubber stamp assembly, so at this point it doesn’t matter what the Congress had ruled.

With this entanglement of Russian and Venezuelan money, arms, and oil, you can forget about any meaningful UN Security Council action against Maduro. Russia will shield him with its veto power under the guise of “national sovereignty”, because if Maduro falls, Russia’s influence and its oil deals would likely be in jeopardy:

“The Russian strategy has its risks. Many of the world’s top energy firms took a hit when Chavez nationalized their assets, and an opposition-led government could later reverse or revise any deals Maduro cuts without their blessing.”

Funny, I thought Maduro said America was trying to steal Venezuela’s oil? It seems like he’s doing a fine job of that himself, leveraging his country’s future in a desperate and costly attempt to remain in power.

Not Syria, But a Serious Situation

So if Venezuela is not “America’s Syria”, why did I say earlier that the idea of limited American military intervention is “not as crazy as it sounds”? This is because bad situations–and the Venezuelan crisis absolutely qualifies as one–usually fester and become worse if left unaddressed.

Anti-Maduro activists are becoming fed-up with the official opposition. If the people believe the organized opposition is ineffective, it could lead to more extreme measures like guerrilla warfare, which could ultimately lead to civil war. Venezuelan’s will not sit idly by as the collapsing economy and shrinking political space encroach upon their human dignity.

The fallout from a failed Venezuelan state would not be confined to the country’s borders. It could, for instance, trigger a refugees crisis. While Latin America is more stable than the Middle East, the region is not particularly wealthy or able to absorb large numbers of refugees. There could be cascading crises as other Latin American nations struggle with such an influx, ultimately threatening America’s national security and economic interests.

But most importantly, making sure Maduro does not turn Venezuela into a fully failed state (like Syria) is the right thing to do for the Venezuelan people. Sometimes the right thing to do aligns with short term national security and economic interests (they always align in the long run). When they do align, taking action suddenly seems less crazy, and inaction seems less defensible.

If the situation deteriorates further, America must be ready to commit resources to its Latin American and Venezuelan allies to remove Maduro. This would enable an interim government to restore Venezuelan democracy. Only then can the hard work of rebuilding Venezuela’s economy begin.

Trump wasn’t wrong that a military plan should be in place in case the situation in Venezuela further deteriorates–being prepared is a good thing. What he was wrong for doing, as usually, was not fully comprehending the situation and opening his big fat mouth. The “military option” should be a contingency plan, not a threat. Trump’s inability to say nothing, to not be the tough guy, has made a bad situation worse.

February 24, 2016
by bzupnick 3 Comments

Conflict Watch: Current Strategy Can Degrade But Cannot Defeat The Islamic State

UPDATE: With U.S. backed coallitons making advances in Mosul (Iraq) and Raqqa (Syria), and Sirte (Libya), with little news of IS expansion elsewhere, it seems like I may have been wrong on the need for a significant force of Western troops to defeat the IS on the battlefield.

I will leave this post up because it still contains important points about the multifaceted approach needed to defeat the IS ideology. But I believe it is important to admit when you are wrong, and in this case I was.

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It is commonly accepted that the fight against the Islamic State (IS) is not solely a military fight. When the U.S. led coalition outlined its plan for combating the group, three main fronts emerged:

Social Media
Financial
Traditional Warfare

Let’s examine how we are doing on each of these fronts, before considering the larger goal of defeating the IS:

Social Media

It is notoriously difficult to police social media sites. Creating an account is free and monitoring content costs money. When an account is shut down, another one pops-up.

The IS has proven itself adept at using social media as both a recruitment tool and as a platform to amplify its message of terror. Good production quality has had the effect of making the group seem more permanent.

Social media sites, understanding the importance of countering the IS message, are stepping up to the plate (perhaps due to the fact that their own infrastructure is being exploited by these groups). One weak spot until recently was Twitter, but a new report shows the company has started to make a stronger effort:

The Islamic State’s English-language reach on Twitter has stalled in recent months amid a stepped-up crackdown against the extremist group’s army of digital proselytizers, who have long relied on the site to recruit and radicalize new adherents, according to a study being released on Thursday.

Twitter Inc (TWTR.N) has long been criticized by government officials for its relatively lax approach to policing content, even as other Silicon Valley companies like Facebook Inc (FB.O) began to more actively police their platforms.

Under intensified pressure from the White House, presidential candidates and some civil society groups, Twitter announced earlier this month it had shut down more than 125,000 terrorism-related accounts since the middle of 2015, most of them linked to the Islamic State group.

In a blog post, the company said that while it only takes down accounts reported by other users it had increased the size of teams monitoring and responding to reports and has decreased its response time “significantly.”

It does not appear social media will become less popular anytime soon. As long as it is a platform that billions of people use, extremist groups will try to use it to further their causes (especially given the success the IS has had).

Therefore, it is the responsibility of social media companies to do everything they can to fight this misuse–it should be a liability issue, a cost of doing business for a very profitable industry.

Financial

Fighting a war and running a “state” are not cheap–the IS has to at least appear to offer some social services and run certain institutions if it wants to claim it is a “state”.

The IS primary revenue streams are selling oil, taxing the people in areas it subjugates, seizing money from banks in those areas, and (to a lesser extent) other illicit activities (selling stolen antiques, ransoming hostages, drug trade, etc).

Recent drops in oil prices and sanctions have helped squeeze the IS finances. But we cannot and are not relying solely on market forces to disrupt the group’s revenue streams:

Air strikes have reduced Islamic State’s ability to extract, refine and transport oil, a major source of revenue that is already suffering from the fall in world prices. Since October the coalition says it has destroyed at least 10 “cash collection points” estimated to contain hundreds of millions of dollars.

U.S. military officials say reports of Islamic State cutting fighters’ wages by up to half are proof that the coalition is putting pressure on the group.

In January, the coalition said air strikes against Islamic State oil facilities had cut the group’s oil revenues by about 30 percent since October, when U.S. defense officials estimate the group was earning about $47 million per month.

[U.S. Army Colonel Steve] Warren said air strikes against Islamic State’s financial infrastructure were “body blows like a shot to the gut”.

“(It) may not knock you out today but over time begins to weaken your knees and cause you to not be able to function the way you’d like to,” he told reporters last week.

It is true there is a limit to what airstrikes can accomplish against the IS without more soldiers on the ground. But airstrikes can be very effective in disrupting oil production and blowing up known cash storage sites. This is an area where the U.S. could expand its efforts more or less unilaterally.

One way to do this could be reconsidering what an acceptable target is. The U.S. led coalition has made an effort to avoid striking areas with expensive infrastructure, in hopes it can be used if wrestled back from the IS. But, as Ramadi has proven, the IS will rig any areas it loses with explosives before it leaves, so perhaps we should rethink trying to spare infrastructure if it means we can make a more significant dent in the IS finances.

What we cannot do is disregard civilian casualties–“carpet bombing” IS held areas is not a viable option. Not only would such a strategy be morally reprehensible, but it would be counter-productive, reinforcing the IS anti-Western message.

Traditional Warfare

In recent months, the IS has lost significant territory in Iraq and Syria. Unfortunately, the groups practice of rigging areas it loses with explosives makes it very difficult to turn liberated areas back to “normal” (safe for displaced people to return and lead productive lives).

Furthermore, these gains have not always been made in “sustainable” ways. In Syria, the Assad regime has gained much of the territory the IS has lost (although the Kurds, natural allies to the West, have also gained territory). In Iraq, a Shiite dominated government has made advances with the aid of Iranian fighters, risking further alienating Iraq’s Sunni population (which paved the way for the rise of the IS in the first place).

Further curbing the benefit of IS loses in Iraq and Syria is the group’s expansion into Libya, where it has an estimated 6,000 fighters and rising, exploiting the post-Qaddafi power vacuum. The U.S. led coalition has started an aerial campaign against the IS in Libya, but absent a unified Libyan government, it will be difficult to stop the groups expansion.

In Libya’s incredibly important neighbor Tunisia, the freedoms associated the country’s successful democratic transition have created more space for the IS to operate. Ultimately effective pluralistic democratic governance, which respects the human rights of all people, is the only way to defeat the IS. We must provide Tunisia with all the support it needs, to ensure that democratization does not become a tool the IS uses to its advantage in the short-run.

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Degrading AND Defeating the Islamic State

The good news is we have made progress on each of the three main fronts in the fight against IS (Social Media, Financial, Traditional Warfare). The bad news is that while we are able to degrade the IS, we have done so in a way that ignores the underlying factors that led to the groups rise in the first place.

Let’s not downplay the very real benefits of degrading the IS. It limits the groups ability to spread misery and death. It compromises the groups ability to carry out attacks abroad, and reduces the likelihood it will inspire lone-wolf attackers.

But the fight against the IS is expensive, and the longer the group is allowed to operate, the more it’s assertion that it is a “caliphate” becomes the fact on the ground. Moreover, time gives the IS (which has proven itself quite tactical and resilient) room to metastasize and evolve. Imagine if the group connected its Middle Eastern territory with large swaths of Northern Africa, transforming its ideological link to Boko Haram into an actual military alliance? This may seem like an unlikely scenario, but everything the IS has done up until this point has defied the odds against it.

To avoid perpetual war we must degrade the IS in a way that also attacks the groups underlying message–that there is no viable alternative for Muslims. On this front, much work remains. Governments in Islamic countries should put aside sectarian divides and treat the fight against the IS as the fight for the soul of Islam that it is. Unfortunately, there is little to suggest this will happen anytime soon, a point recently made by political comedian Bill Maher:

“Why don’t they fight their own battles? Why are Muslim armies so useless against ISIS? ISIS isn’t 10 feet tall. There are 20,000 or 30,000 of them. The countries surrounding ISIS have armies totaling 5 million people. So why do we have to be the ones leading the fight? Or be in the fight at all?”

If you consider the countries bordering Iraq and Syria — Iran (with 563,000 armed forces personnel), Jordan (115,500), Kuwait (22,600), Lebanon (80,000), Saudi Arabia (251,500) and Turkey (612,800) — you get a total of 1.6 million.

Add in Iraq (177,600) and Syria (178,000) themselves and that brings the total to 2 million. That’s less than half of Maher’s figure.

When we heard back from Maher’s spokesman, he said the comedian was also including the armies of Bahrain, Egypt, Oman, Qatar and the United Arab Emirates.

If they (reservists) are included as part of a country’s army, the total for those 13 countries Maher wants to include rises to 4.95 million, as Maher said.

If you don’t include the reservists, the number of troops in the countries cited by the comedian only rises to 3.6 million.

Looking at the largest Muslim players, there is little hope in sight. Turkey is more interested in fighting the Kurds–one of the strongest forces against the IS–than the IS itself. Saudi Arabia and Iran are wrapped up in proxy wars in Syria and Yemen, and are ideologically opposed to pluralism, democracy, and one another. Egypt under Sisi has become increasingly authoritarian, and as a result finds itself consumed by its own terrorist insurgency. Iraq, as mentioned earlier, is relying too heavily on Iranian forces. In Syria, Assad is hoping that with Russian and Iranian support he can knock out all opposition except the IS, completing his “fighting terrorism” narrative and cementing himself in power as he kills indiscriminately. Jordan seems like a true ally in this fight, but it itself is a monarchy that will not fight for democratic values, and even if it would it cannot be expected to take on this fight alone.

It often seems that the IS is everyone’s second biggest concern. The inability to rally a meaningful Pan-Arabic counter-insurgency against the IS is not ideal (and is actually quite sad), but it is a reality we must acknowledge if we are to put together a coalition that CAN end the group’s reign of terror.

To this end, we need more support from those who do share our values. America cannot be the World’s Police, but the world does need a “police force”. Every country that believes in and has benefited from democratic governance and human rights has a role to play. A global coalition (including ground troops) must include all these parties, and be proportionately funded and manned (meaning the U.S. will still have to play a major leadership role).

To some, such a coalition may seem even less likely than a meaningful Pan-Arabic counter-insurgency. But in my mind, corralling support from interdependent allies that share common values and coordinating financing to fairly and sustainably spreads the cost is more achievable than completely changing the behavior of historically adversarial actors.

We need this global coalition not just to defeat the IS, but to prevent the next Syrian Civil War. Global security is at a crossroads and must evolve–prevention is the cheapest way to maintain a peaceful international order. Having an effective deterrent, alongside promoting democracy and human rights, are indispensable elements of preventing conflict.

Global security is a global public good, absent visionary leadership it will be under-invested in, to the detriment of all.

December 8, 2014
by bzupnick 1 Comment

Economic Outlook: Time To Raise The Gas Tax

black lines represent significant increases in gas tax

Due to a number of factors, mainly the explosion of natural gas “fracking”, global oil prices have fallen steeply over the past 5 months. As highlighted in a recent NYT analysis, this is predominantly a good thing:

The plunge in oil prices — to about $66 a barrel from over $107 in late June — has many pundits wringing their hands. They have cited the risks of falling prices and social and political unrest overseas, not to mention the economic threat to the booming mid-American oil basin, running from Texas to North Dakota and Alberta.

“Every time you get a sudden move in oil prices, people say, ‘This is it, we’re finished,’ ” said Daniel Yergin, the author of “The Quest: Energy, Security and the Remaking of the Modern World,” and vice chairman of the energy consulting firm IHS. “People seem to forget that oil is a commodity, and like other commodities, its price moves in cycles set by supply and demand.”

While circumstances are never exactly the same, and the impact of cheap oil can be difficult to isolate from other economic factors, the broad consequence in each of these instances was the same: They stimulated global economic growth. Dr. Yergin estimated that global economic output would grow this year by an additional four-tenths of a percent with oil prices at $80 a barrel. If oil stays below $80, he said, “We may revise that to five-tenths.”

This year, the precipitating factor has been the waning of threats of disruption from Russia and the Middle East, slowing economies in Europe and Asia and, above all, a surge in production from the United States and Canada. “This time, the innovation is fracking,” said Philip Verleger, president of an energy consulting firm and former director of the Office of Energy Policy in the Treasury Department. “The sudden surge in U.S. oil production has profoundly changed the dynamics of the markets. The oil exporters have lost a third of the market they thought they’d have in 2014.”

OPEC met on Thanksgiving, but shocked markets when its members didn’t even pay lip service to the need for production cuts or price discipline. The price of oil, traded on international markets, fell about 6.5 percent that day. “Their strategy is to let prices fall and squeeze out the higher-cost producers,” Mr. Verleger said. “It’s a battle for market share.”

The time is ripe for raising the federal gas tax. I know what you may be thinking: if low oil prices increase consumption and spur economic growth, raising the gas tax will squander this economic boon. This is a classic growth killing tax!

But historically speaking, the last 3 major increases of the federal gas tax have not had a significant impact on consumer gas prices (see picture above). How is this possible?

A recurring theme here at Normative Narratives is the disconnect between industry rhetoric and market realities. Oil industry execs and lobbyists would have you believe than any increase in the gas tax will have to be passed on directly to the consumer–the reality is more nuanced.

Gas companies must compete amongst themselves–the industry realizes sizable profit margins (which can take a hit in the name of maintaining / increasing market share), and have seen a major dip in the price of their primary input, crude oil (true profits from selling American crude will also fall, but since America is a net oil importer, overall lower prices benefit American gas companies). Any gas company that tries to pass on the tax in the form of higher prices risks pricing themselves out of the market.

What are the benefits of raising the federal gas tax you ask? The gas tax feeds into the Highway Trust Fund, which in recent years has teetered on the brink of insolvency, relying on stopgap funding from the general treasury to finance highway construction and repairs.

Not surprisingly, there are huge economic costs associated with underinvestment in America’s highways:

Targeted efforts to improve conditions and significant reductions in highway fatalities resulted in a slight improvement in the roads grade to a D this year. However, forty-two percent of America’s major urban highways remain congested, costing the economy an estimated $101 billion in wasted time and fuel annually. While the conditions have improved in the near term, and federal, state, and local capital investments increased to $91 billion annually, that level of investment is insufficient and still projected to result in a decline in conditions and performance in the long term. Currently, the Federal Highway Administration estimates that $170 billion in capital investment would be needed on an annual basis to significantly improve conditions and performance.

The Highway Trust Fund once financed one of the most ambitious and economically beneficial public works projects in American History–the interstate highway system. But because of how the gas tax was structured–as a flat excise tax–the fund is now unable to adequately maintain our interstate highways.

The amount the gas tax should be raised is open to debate (previous increases of about 5 cents per gallon have had no discernible effect on average gas prices); the graphs below provide a potential benchmark. The costs of raising the tax would fall largely on major corporations (not consumers), while an improved interstate highway system would benefit everybody.

—

Update:

Thomas Friedman of the NYT has an interesting Op-Ed where he discusses Climate Change and the Gas Tax:

But what if Verleger is right — that just as the cost of computing dropped following the introduction of the PC, fracking technology could flood the world with cheaper and cheaper oil, making it a barrier to reducing emissions? There is one way out of this dilemma. Let’s make a hard political choice that’s a win for the climate, our country and our kids: Raise the gasoline tax.

“U.S. roads are crumbling,” said Verleger. “Infrastructure is collapsing. Our railroads are a joke.” Meantime, gasoline prices at the pump are falling toward $2.50 a gallon — which would be the lowest national average since 2009 — and consumers are rushing to buy S.U.V.’s and trucks. The “clear solution,” said Verleger, is to set a price of, say, $3.50 a gallon for gasoline in America, and then tax any price below that up to that level. Let the Europeans do their own version. “And then start spending the billions on infrastructure right now. At a tax of $1 per gallon, the U.S. could raise around $150 billion per year,” he said. “The investment multiplier would give a further kick to the U.S. economy — and might even start Europe moving.”

I am not advocating for such a steep increase in the gas tax, as such a plan would amount to regressive taxation on consumers and would be a political nonstarter.

But the article does raise the valid point that lower gas prices could hamper the global push to reduce GHG emissions.

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Update (1/8/15):

Good news everyone!

Today Reuters published an article proclaiming that raising the gas tax has gained some congressional support.

August 17, 2013
by bzupnick 1 Comment

Economic Outlook: In a Well Timed Shift, Mexican President Embraces FDI in Energy Sector

Total Oil Produced in barrels per day(bbl/day) Mexico

Original Article:

President Enrique Peña Nieto of Mexico on Monday, pushing one of the most sweeping economic overhauls here in the past two decades, proposed opening his country’s historically closed energy industry to foreign investment.

Mr. Pena Nieto’s goal, like those of presidents before him, is to recharge Mexico’s economy by tackling areas that analysts agree hinder its expansion, which has averaged just 2.2 percent a year since 2001, according to the Organization for Economic Cooperation and Development.

Perhaps the worst of those is the creaky energy sector. Demand for energy in the country is growing so fast that Mexico could turn from an energy exporter to an energy importer by 2020, the government says.

Already, Mexico must import almost half its gasoline, mostly from the United States. Mexican companies pay 25 percent more for electricity than competitors in other countries, the government says. Although Mexico has some of the world’s largest reserves of shale gas, it imports one-third of its natural gas.

“With the reform that we are presenting, we will make the energy sector one of the most powerful engines in the economy,” Mr. Peña Nieto said at a ceremony to present the plan on Monday.

Mexico’s left-wing parties have been adamant that the Constitution’s 75-year-old prohibition on private investment should remain ironclad. From the right, the National Action Party, or PAN, proposed energy reform last month that would go even further than Mr. Peña Nieto to invite in private investment.

Public opinion is also suspicious about opening up the industry. A survey last year by CIDE, a Mexico City university, found that 65 percent of the public opposed private investment in Pemex, the state-owned oil monopoly.

The proposal would allow private companies to negotiate profit-sharing contracts with the government to drill for oil and gas. Under such a scheme, the reserves would continue to belong to the Mexican state, but investors would get a share of the profits. Private investment would be allowed in refining, oil pipelines, and petrochemical production.

Since the 1994 North American Free Trade Agreement exempted energy from Mexico’s broad economic opening, presidents have attempted to loosen the prohibitions that give Pemex sole control over all oil and gas exploration and production. No joint ventures are allowed. Those past proposals have often withered in Congress.

But this time, the precipitous decline of Mexico’s energy industry may work in Mr. Peña Nieto’s favor.

Pemex, which was long an important source of crude imports into the United States, is spending more to pump less. As Mexico’s giant Cantarell oil field in the shallow waters of the Gulf of Mexico has declined, production has dropped 25 percent from the peak in 2004, to just over 2.5 million barrels of oil a day.

At the same time, the amount the government budgets for Pemex to invest has steadily climbed to $26 billion this year. To increase production and reserves, Pemex needs to drill in the deep waters of the Gulf of Mexico and in onshore deposits of shale oil and gas. But the company has neither the capital nor the expertise to increase production significantly, analysts say.

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There are a number of reasons why now is the proper time for Mexico to open up its energy industry to FDI. Mainly;

1) Economic: Loose monetary policy is conducive to FDI. Investors can borrow at historically low rates, while energy is a relatively safe investment (if anything energy prices will only go up as the global economy strengthens). Even if Mexico puts strict regulations and high taxes on foreign operations (which it certainly should, more about this later), the opportunities for a relatively low risk-high reward investment exist. These factors will attract many potential investors, allowing Mexico to drive a harder bargain and secure the best deal for the Mexican people.

2) Political: Political instability and armed conflict in the Middle-East and Northern Africa make Mexico’s main competition for FDI much less attractive. Venezuela and Russia ramped up anti-Western rhetoric in recent months; the trust needed for large-scale investments may be compromised. Look at the updated 2013 Political Risk Map; Mexico is arguably the most politically stable major oil producing country, both in terms of internal stability and in a regional context. When considering investing in extractive industries–with high start-up costs and very asset-specific capital investments–peace, stability, and trust are very important components of any deal. These factors are often more important than traditional “race to the bottom” incentives.

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The Mexican people are right to be wary of private investment in their natural resources. Natural resource rents can be a powerful tool for human development, if they are used the right way. However, globalization in extractive industries in the past decades has been marked with human rights violations, corruption, exploitation, and violence. This so called “natural resource curse” is not inevitable, but without proper oversight and accountability, “bad” governments will always be willing to cut lucrative deals from themselves and private corporations, at the expense of society as a whole.

I do not see this as an issue in Mexico for a few reasons. Primarily, the linkages between governance, extractive industries, corruption, and sustainable human development are now well understood by the international community. Mexico, by waiting to liberalize it’s energy sector, has the benefit of adopting best practices / avoiding worst practices from past ventures. There is also a strong belief in Mexico that the oil belongs to the people. Political opposition, once the energy sector is liberalized, will manifest itself as “watch-dog” organizations and other social accountability mechanisms. Social accountability (aided by social media and ICT), relatively good governance at the global and national level, alongside the comparative advantages addressed earlier, suggest that Mexico will have a very positive experience liberalizing its energy sector (assuming the political will to develop exists).

If Mexico’s natural resources stay underground, they cannot be utilized for development purposes. The article cites a lack of capital and expertise holding back the Mexican energy sector–FDI addresses both of these impediments. A new trend Mexico may want to utilize is having private investors pay for development projects–such as schools, hospitals, or other human capital enhancing institutions–as a way of signalling the investors desire for a mutually beneficial and long term relationship. Furthermore, because of high taxes, private companies will make it a point to run operations as efficiently as possible, maximizing both their share and Mexico’s share of profits. A quadruple layer of private, governmental, international and social accountability will exist, diminishing opportunities for embezzlement and corruption by state or private interests.

The time is right for Mexico to liberalize it’s energy sector from a policymaker and investors point of view. However, this does not necessarily mean that the Mexican lay-man will agree with this assessment. The Mexican people’s distrust of FDI in extractive industries is understandable; it is the Mexican governments job to educate the public, assuring them that policies and safeguards will be put in place to ensure that liberalizing the energy sector benefits society as a whole, not just vested interests.

“It is fine to appeal to rationality, but when it is about these issues, it’s indispensable to touch the audience’s heart,” wrote an analyst, María Amparo Casar, in the Excelsior newspaper last week.

In a democracy, big policy changes generally require popular support. The rational political economy argument for liberalizing Mexico’s energy sector is strong. The remaining road block is convincing the Mexican people that such liberalization is in their best interests.

July 5, 2013
by bzupnick 1 Comment

Transparency Report: The UK, Kazakhstan, Domestic and Extra-Territorial Human Rights Obligations

Original Article:

“British Prime Minister David Cameron helped inaugurate the world’s costliest oil project in Kazakhstan on Sunday on a trip aimed at sealing business deals but quickly beset by questions over the Central Asian nation’s poor human rights record.

Kazakhstan hopes Cameron’s visit, the first by a serving British prime minister, will cement its status as a rising economic power and confer a degree of the legitimacy from the West it has long sought.”

“With a $200 billion economy, the largest in Central Asia, and deep oil and gas reserves, Kazakhstan is a tempting target. Britain is already among the top three sources of foreign direct investment, according to Kazakh officials.

Since its 1991 independence, officials say British firms have invested about $20 billion in their economy, part of a total $170 billion ploughed into Kazakhstan since then.

But more high profile trade links carry political risks.

New York-based Human Rights Watch said Cameron had a duty to use his trip to denounce human rights abuses.

‘We are very concerned about the serious and deteriorating human rights situation there in recent years, including credible allegations of torture, the imprisonment of government critics, (and) tight controls over the media and freedom of expression and association,’ it said in a letter on Friday.

Answering questions from reporters in Atyrau on Sunday, Cameron said he never put trade and business interests before rights.

‘We will raise all the issues, including human rights. That’s part of our dialogue and I’ll be signing a strategic partnership with Kazakhstan,’ he said.

‘Nothing is off the agenda, including human rights.’

“[Nursultan] Nazarbayev, a former Communist party apparatchik, has overseen market reforms and maintains wide popularity among the 17-million strong population, but has tolerated no dissent or opposition during his more than two decades in power.”

“Nazarbayev, a former steelworker who now holds the title “The Leader of the Nation”, says that he puts stability and rising living standards before hasty political changes in his steppe nation, the world’s ninth-largest by area and five times the size of France.

Comparing Kazakhstan to ‘Asian economic tigers’ like South Korea and Singapore, he has said he wants to turn it into ‘the economic snow leopard of Central Asia’

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International human rights law places the state as the central and primary duty bearer for human rights obligations. Human rights include economic, social and cultural rights, in addition to political and civil rights. These rights are indivisible and interdependent, and must be upheld indiscriminately. Certain rights cannot be violated in the name of others—when Nazarbayev says he is putting economic and social progress ahead of political freedoms, he is failing to live up to international human rights law.

The reason behind this is that, without certain political and civil rights, developments are not sustainable. If standard of living gains are made at the benevolence of a dictator, these gains are unlikely to be made in an egalitarian way. Additionally, any gains made can easily be taken away in without any accountability or redress for society as a whole.

The state, however, is not the only actor accountable for the human rights implications of its actions. According to a recent publication, “Who Will Be Accountable”, released by the UN OHCHR and the CESR, “Under international human rights law, States are primarily accountable for respecting and protecting the rights of those within their jurisdiction. The proliferation of actors in international development—from business enterprises and multilateral economic institutions to private foundations—has made it necessary to develop a more multidimensional approach to accountability…However, the notion of shared responsibility has not led in practice to a clearer attribution of the respective and differentiated duties of each of the many actors in the development process. If all parties are responsible for achieving development goals, the risk is that no party can be held accountable for anything. (p 17-18)”

It certainly seems that nobody is willing to take responsibility for human rights violations in Kazahkstan—not the Kazakh government, not Cameron, not UK investors.

Cameron’s government has even been unresponsive to the UK and EU wide effects of austerity on human rights (the UK has been a strong supporter of austerity in the face of the Great Recession). Austerity programs have contributed to the prolonged economic slump in the UK (and the EU as a whole) that is some ways has been worse than even the Great Depression.

One would hope Cameron’s time spent as co-chair of the UN High Level Panel on the Post-2015 Development Agenda would make him more in-tune with the importance of human rights for conflict prevention, economic growth and sustainable human development. Even if it has, it is also clear that Mr. Cameron, as an elected official, has more short-term concerns to deal with.

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I am curious to hear what my readers think. Do states and private investors really have extra-territorial human rights obligations? Is it possible for external parties to even affect a dictator’s policies? Can economic and social progress be achieved without political and civil rights? Is international human rights law too idealistic and not pragmatic enough to be realistically applicable?

There is no question that whenever large sums of money are involved, human rights implications will follow. A large investment in Kazakh oil fields will undoubtedly further entrench the rulers. But if a government is unwilling to listen to even its citizens, will it listen to other world leaders and investors? Perhaps it will—as they say, “money talks”.

Is it realistic to expect UK actors, who greatly need new avenues for economic growth and are seemingly unresponsive to proximal human rights issues, will risk a “slam dunk” investment in order to champion human rights (especially when that demand would likely be rebuffed by an insulated authoritarian regime)?

The stability and security needed for long term investments to pay off seems to exist in Kazakhstan. Is this the extent to which international actors care about human rights issues, or does a greater moral and long-term sustainable human development imperative exist?