The Unintended Consequences of an Oil Embargo on Iran

[Copy of my post on The Monkey Cage]

On January 30, the European Union will decide whether to place an oil embargo on Iran in an attempt to dissuade it from its nuclear weapons ambitions. This would add to the existing sanctions recently put in place by the United States and Europe on financial transactions with the Iranian central bank. The trouble with such an embargo is that it could drive Iran into the waiting arms of the Chinese.

While the nuclear nonproliferation goal is certainly laudable, policymakers need to weigh the potential benefits of the sanctions against their costs – some of which are not well understood. Currently, most attention focuses on two issues. The first is the transaction costs associated with European refiners needing to switch to other suppliers. The plan to phase in the embargo should make these costs manageable.

The second is Iran’s threat to close the Straits of Hormuz in reaction to such sanctions. Such a threat could be very damaging, but it is also fairly unlikely, as Caitlin Talmadge points out. This threat should not be ignored, but neither should it be the sole focus.

The real problems are the potential unintended consequences. The market for oil is global. In the absence of a genuinely multilateral action, a European embargo on Iranian oil will only cause Iran to find new customers in Asia, especially in China. China’s growing thirst for oil and other resources is such that it will happily absorb such supplies, especially if they come at a discount.

EU countries bought about $15 billion worth of oil from Iran in 2010, according to UN data. An embargo would shift that business to China instead, deepening the relationship between Iran and China. What easier way to ensure China continues to protect Iran from UN sanctions in the future?

Worse still, the more successful the embargo is, the more it will deepen Iran’s relationship with China. An embargo has the potential to impose two kinds of costs on Iran. First, in the short-term, Iran’s previous oil sales to Europe will be disrupted while it reorients its sales to new customers. Yet previous embargos suggest that a re-jiggering of oil flows can be done quickly, in a matter of weeks. And to the extent that the EU embargo is done gradually, Iran will be able to reduce this disruption.

So the main cost to Iran of an embargo would be the discount it would have to offer to new customers to replace its previous sales to Europe. This is the second kind of cost, and it could be long-term. Yet either these discounts are small, in which case the sanctions are not hurting Iran much, or the discounts are large, which will create a very profitable relationship for Iran’s new customers – and thus one that they would be loath to give up. The largest new customer for Iran is likely to be China, and hence the problem. The EU oil embargo could enamor the Chinese to their Iranian oil suppliers.

Just as importantly, oil embargos have a long history of futility and unintended consequences.

The embargo on Iraq’s oil after Saddam Hussein’s invasion of Kuwait in 1990 is a case in point. The sanctions were ineffective, laden with corruption, and had perverse consequences. It was ineffective because its chief target, Saddam Hussein, hung on to power until after the sanctions had ended. It was corrupt because it created opportunities for graft in the United Nations, causing a scandal that went all the way up to then-Secretary General Kofi Annan. And it had perverse consequences because it principally hurt lower- and middle-class Iraqis, depriving them of basic economic necessities.

Similarly, the United States imposed a unilateral oil embargo against Libya in the 1980s, and made little headway in changing the Qadhafi regime’s behavior until the UN imposed multilateral sanctions in the 1990s. The UN sanctions were targeted at Libyan elites and government officials, and included travel bans and financial restrictions – but not an oil embargo. Over time, the UN sanctions appear to have taken a significant toll, contributing to Qadhafi’s eventual decision to give up his nuclear weapons program.

None of this necessarily means that the EU is wrong to impose an embargo on Iran. Particularly if the embargo can generate significant leverage in the short-term, perhaps by engendering an increased sense of global isolation among the Iranian public, it might be justified in the name of nuclear non-proliferation.

Yet oil embargoes should not be undertaken lightly, as they frequently generate significant unintended consequences. Policymakers contemplating one should have their eyes wide open.

Is Now the Time to Leave Afghanistan?

Osama bin Laden is dead. Is now the right time to leave Afghanistan?

I ask because I think the decision to keep troops in Afghanistan has been agonizing for many Canadians and Americans. I have argued with people in both of my homes about whether our troops should still be there, almost ten years after invading.

The reasons to leave are powerful. The human cost of the mission is terribly high, both in terms of Western troops/aid workers and Afghan victims of the war. The financial and political costs are high, too. And it's debatable how much good we're doing in terms of 'nation building' or even preventing future terrorist attacks.

But I have usually argued that, on balance, there were still sufficiently good reasons to stay. Simply put, the job wasn't finished: Osama bin Laden was still at large, the Taliban were still awful, and running away would have given the jihadis greater scope to commit evil.

Does bin Laden's death change that equation? I'm not sure, but it's certainly possible. Until now, one of the real costs of leaving was the image of NATO cutting and running when the going got tough. With Osama dead, there is now a window of time open in which NATO could leave Afghanistan with its head held high. It would still be a mistake to say 'mission accomplished', given all the wreckage of Afghanistan and the turmoil that is likely to accompany NATO's departure, but Osama's death is a tangible victory to show for NATO's efforts.

Of course, Osama bin Laden's death is probably more symbolic than a real blow to al Qaeda's operations. I don't want to equate Osama's death with victory over terrorism. Still, it's a major milestone.

And I emphasize that it is really a window of time. If NATO continues major combat operations in Afghanistan for a significant period of time even after Osama is dead, the window will close.

Now is the time to think hard about the rationale for the operation. I'd love to hear what others think. Is now the time to leave Afghanistan?

Really bad ideas on energy

One thing that you can always count on about the US political process is that it will generate a few good ideas and a great many bad ones. Energy policy is a perennial source of the bad ones, and right now is no exception. Let's pick one from both the Democrats and the Republicans.

First, some of the Dems seem to think that the US should tap the Strategic Petroleum Reserve (SPR) because the current troubles in the Middle East are driving up gasoline prices here in the US. This is a ridiculously dumb idea.

The whole point of having an emergency reserve like the SPR is for ... uh, emergencies. An extra thirty-five cents per gallon at the pump is emphatically not an emergency. In fact, for anyone who cares about providing economic incentives for the development of renewable energy sources and new cars, high oil prices are actually a very important market signal. The US government absolutely should not blunt that signal by tapping the SPR.

Just as importantly, the SPR should be preserved for a true emergency, such as the kind of major oil disruption that could occur if Saudi Arabia experienced something like the conflict we're seeing in Libya. Given that there is a reasonable probability that we haven't seen the last of the revolutions in the Middle East, now is precisely the time when we should be extra careful with oil reserves.

Ok, what about the Republicans? Well, some of them seem to be seriously considering Newt Gingrich as a presidential candidate. Even if we were to look past the raging hypocrisy that Mr. Gingrich displayed when he tried to impeach Clinton for having an affair even as he was having one himself -- and I can't imagine why we would look past it -- I'd still have a dim view of Gingrich's candidacy because of his ideas for energy policy.

Gingrich is the author of a 2008 book entitled, "Drill Here, Drill Now, Pay Less." He is, in short, the "intellectual" force behind the chants of 'drill, baby, drill' that we heard in the 2008 campaign. The idea of America obtaining "energy independence" by replacing foreign oil imports with US oil production is profoundly unrealistic. At least within the foreseeable future, the US is completely incapable of self-sufficiency in oil.

Moreover, policies that try to rapidly expand US oil production are much more likely to do harm than good. Too much haste in developing offshore resources, for instance, could lead to another spill akin to the BP disaster in 2010. Even if we get lucky and avoid an accident, what exactly would the US gain by depleting its own geological reserves at a rate far faster than the rest of the world?

So here's my recommendation: let's bundle up Gingrich and the geniuses who want to tap the SPR, and see if we can trade them to Qadhafi for a little peace in the Middle East.

Libya unfolding

For over 40 years, Muammar Qadhafi has had a way of surprising the world. This time, the surprise is on him. His people are rising against him.

As I write, the government is reported to have lost control of Benghazi, Libya's second city, and much of the eastern part of the country along with it. Still, Benghazi has long been a site of anti-Qadhafi protests, so it was even more remarkable that the protests reached the capital, Tripoli, a few days ago.

Qadhafi wasn't the only one surprised. Recently I noted that the oil-rich autocrats in the Middle East had a firm hand on power, even with turmoil in oil-poor states Egypt and Tunisia. But now the protests have spread to Bahrain, Algeria and especially Libya. (Bahrain isn't oil-rich but tends to act like a petrostate because of subsidies from Saudi Arabia.)

I should have noted the fact that petrostates have not one but two characteristics that are relevant for current events. On one hand, oil gives incumbents political power, so incumbent leaders remain in office far longer than in non-petrostates (Africa's longest leader until recently was the president of oil-rich Gabon; when he died in office after 43 years in office, Qadhafi became Africa's longest serving leader). On the other hand, oil tends to weaken political institutions in petrostates (through patronage and corruption), meaning that they also have a higher proclivity towards civil wars than non-petrostates: think Nigeria, Angola, Algeria. This creates an odd paradox: is oil a force for stability or instability? Political scientists are still working that one out -- and clearly the debate is not just theoretical.

For the time being, let me just draw attention to two differences between Libya and Egypt or Tunisia. First, Libya has oil. Second, Libya has Qadhafi. Both of these are going to make the confrontation in Libya a good deal more bloody than its counterparts in Egypt and Tunisia.

Libya's oil money allows Qadhafi to afford an extensive security apparatus, and a patronage network for a hard core of regime supporters. It also allows him to hire foreign mercenaries to fight the protesters, in the event that some or all of the Libyans in his army defect. All of these things make it harder for the protesters, and violence more likely. There is even the possibility that the protesters might be able to get foreign mercenaries of their own, drawn by the promise of oil money once the government has been toppled.

Libya also has Qadhafi, and he is no Mubarak. Mubarak was personally corrupt and clearly enriched himself at the expense of his people. Qadhafi is a megalomaniac. Characteristically, he said yesterday on Libyan television: “Muammar Qaddafi is history, resistance, liberty, glory, revolution.” This is a man for whom being the "Brother Leader" is central to his identity, not just a means to get rich. That makes him even harder to dislodge.

Qadhafi's son, Seif, promised 'rivers of blood' in the event of a civil war. Civil wars are rarely if ever won on the battlefield. It is the loyalty of the armed forces that usually determine the outcome, as it did in Egypt. The loyalty of Libya's armed forces is already showing cracks and strain. Still, it has not yet broken, and even if it does, Qadhafi might have enough mercenaries to make up the difference.

The outcome of the Libyan struggle is far from certain, but I fear the prospect of 'rivers of blood' looms mightily.

Governance in the Middle East

Across the Middle East, common people are standing up to their governments in protest even as I write. This demonstration of resolve for self-governance, in protest of corruption, tyranny, and repression, is nothing short of inspiring.

Of course, the outcome of these protests is still far from clear. Democracy and good governance is far from certain, even if the current autocrats are ousted from power. And even if democracy does emerge, it will need a combination of great leadership and great luck to stabilize and take root.

Still, these protests are an opportunity the likes of which has not been seen in decades.

Being a scholar of global oil politics, I cannot help pointing out which countries are experiencing these opportunities, and which ones are not. Tunisia and Egypt, which have relatively little oil, have had the most significant protests; their oil-rich neighbors Libya and Algeria have not. The leaders in Jordan, Syria, and Yemen have been shaken; the monarchs in Saudi Arabia, Kuwait, and the other Gulf states have not. What's the common denominator? The oil-rich autocrats have a firm hand on power; the states with little or no oil are experiencing popular protests of far greater magnitude.

There are exceptions, of course: the government in oil-rich Iraq has also been shaken by the outbreak of protests. But then, I think it is fair to say that Iraq is exceptional in a lot of ways, and stability was not its strong suit even before the protests in Tunisia.

At the risk of only moderate simplification, the lesson ought to be clear: so long as the global economy remains dependent on oil, it continues to fund autocracy in the Middle East.

US: Follow up on the oil-drilling decision

In late March, I wrote a blog entry arguing that Obama's offshore oil drilling decision was a terrible one. Obviously I cannot claim to have foreseen April's massive oil spill in the Gulf , but it has brought to light some of the things I was talking about.

Specifically, in March I wrote: "In theory, the Department of the Interior will regulate the oil exploration to protect the environment. But there is really no reason not to expect regulators to be captured by the oil industry in exactly the same way that regulators were captured by the financial industry in the years leading up to the 2008-09 financial crisis."

Now the New York Times is reporting evidence of exactly this kind of regulatory-capture:
http://www.nytimes.com/2010/05/08/us/08agency.html?hp

To its credit, the Whitehouse has temporarily suspended its March decision to authorize more offshore drilling. But it should go further: reverse it completely. It was a bad idea then, it's a bad idea now. Only now, its obvious that it's a bad idea.

US: Obama's terrible decision on oil drilling

I must admit, I just don't see what public benefit the Obama administration believes it will generate by opening large portions of the US coastline to oil exploration.

The private benefits to oil companies, of course, could be huge. And perhaps that's the whole explanation behind the decision right there.

Yet when announcing the decision today, Obama made noises about this decision being a step towards American energy security, and part of a long-term energy strategy. So let's examine those claims.

First, this decision is supposed to be sensitive to environmental concerns. In theory, the Department of the Interior will regulate the oil exploration to protect the environment. But there is really no reason not to expect regulators to be captured by the oil industry in exactly the same way that regulators were captured by the financial industry in the years leading up to the 2008-09 financial crisis. Environmental watchdog groups are unlikely to be able to muster much resistance, precisely because any damage done to the environment will be dozens of miles off coast and therefore invisible to local residents.

Second, the decision supposedly helps America's energy security. But as Obama points out, the US has less than 2 percent of global reserves but consumes 20 percent of global production. Drilling now only means that America's dwindling reserves will be used faster.

Even worse, the decision does harm to America's energy security. It gives US industry a greater stake in oil, thereby perpetuating the cycle of political resistance to policies and technology that would shift America away from oil. It delays even further the day when the US car and truck fleet runs on electricity, natural gas, or a renewable biofuel.

Finally, despite being sold as a temporary stop-gap, exploratory drilling is unlikely to happen for at least five years and commercial production is even further away. So instead of providing a short-term, temporary supply of oil, Obama's decision instead sends a long-term signal to world markets that there is less incentive to invest in oil production in other parts of the world.

In theory, Obama's move might be part of a larger strategy for getting a meaningful climate change law passed by Congress. Yet it's unclear the current Senate bill on climate counts as "meaningful", even if it does pass. And if this is a political overture from Obama to independents or Republicans, it seems like a terrible time for an attempt at bipartisanship: senior Republican Senators have already sworn to refuse cooperate with the Administration, and are already condemning today's decision.

So color me skeptical: it looks very much like energy strategy and environmental concerns are being thrown under the bus for short-term economic interests. Not that we should be surprised, of course.

US: The Case for a GasolineTax

The last US President to take seriously the idea of a gasoline tax was Jimmy Carter. He was the last because the idea was so unpopular that Ronald Reagan used it to defeat him in the 1980 election. Yet while the idea of a gasoline tax, or an oil tax, might be bad politics, it is good policy.

A gasoline tax means that consumers pay more, but it also give the government a whole lot of tax revenue. As a nation, an oil tax does not change the financial position of the US; it's only a matter of distribution. Hopefully Congress puts that money to good use, such as by paying for universal health care or reducing the deficit, but even if it wastes it entirely, that is sort of beside the point. The really issue is the effect of the tax on market behavior.

Once the tax is applied, oil producers have a choice: they can reduce the price of oil to offset the tax, or they can pass the tax on to consumers. (To simplify things, let's suppose that there is no middle ground: either they reduce the price by the whole amount of the tax, or not at all.) If the producers reduce the price of oil, America wins: consumers pay no more for their gas than they were already paying, and instead of sending hundreds of billions of dollars overseas each year to foreign oil producers, the US now keeps the money at home in the form of tax payments.

If the oil producers don't reduce the price of oil, and the tax drives up the cost of gasoline, then consumer behavior is going to shift -- people will drive smaller cars and/or drive less frequently. We saw this happen in the 1970s, and again in the summer of 2008. It means less oil is consumed, and that has all kinds of benefits: it reduces greenhouse gas emissions that drive global climate change; it reduces the US dependence on foreign and especially Middle Eastern oil; it reduces the money available for terrorist financing in the Middle East; and it reduces the effect of various forms of the "resource curse" that afflict oil-exporting countries, such as anemic economic growth and even civil war. Again, America wins.

To be fair, there are some downsides to an oil tax. Since a disproportionate share of the poor's income is used on gas, an oil tax could be quite regressive if it is not accompanied by a rebate program aimed at low-income households. An oil tax also could lead to government waste if the revenue from the tax is not wisely spent -- though right now the US desperately needs that money to reduce its ballooning deficit.

On balance, an oil tax has enormous potential for economic, political, and environmental good. The idea is rarely discussed in the US anymore because it is dismissed as politically infeasible. Yet if we don't talk about it at all, it never will become politically feasible.

Energy and climate security

The US Congress is currently considering multiple bills on climate change and energy security. In December, the world will meet in Copenhagen to consider a framework for a post-Kyoto agreement. Perhaps it is time we had a serious discussion about what these issues mean for US national security.

Environmentalists often point to climate change as the source for all manner of ills, including the destruction of Pacific Islands and low-lying coastal areas, massive immigration issues in South Asia, and perhaps even war. There may be a grain of truth to these claims, but they seem distant from the average American voter. Let's focus instead on three issues that are clear and present dangers from America's current energy and climate policies.

First, there is the full cost of America's oil dependence. As the global economy shows signs of recovery, the price of oil has quietly crept above $70 a barrel, a price far above the historic trend. Indeed, the recent collapse in investment in the oil sector means that oil prices could continue to rise. Follow the money: America is sending more than $500 billion a year overseas to oil-exporting countries. Most of those countries have autocratic political systems that are unprepared to handle that kind of financial influx. Oil money often turns into military spending and advanced weaponry, which in turn leads to civil and international war. Ironically, this costs America even more money in the long-run, as it spends billions on the military to try to maintain "stability" in oil-exporting regions.

Second, there is the full cost of doing nothing about climate change. The US Navy has hundreds of concrete piers around the world that are likely to be submerged by rising seawater, and the cost to replace them is estimated at $100 billion. Insurance companies will raise premiums for natural disasters. The government will spend millions developing early-warning systems and mitigation systems in light of more frequent hurricanes like Katrina and Gustav. These are just a few examples of the costs climate change will impose on the public. Whenever some pundit complains about the cost of environmental policies, remember the implicit price tag of doing nothing.

Third, there is the real but unquantifiable risk of catastrophic climate change. The single biggest risk is that the ocean currents will change, diverting the warm Gulf current from the North Atlantic and bringing a rapid ice age to Europe. If this sounds like the stuff of Hollywood, well, it is, but it is also a significant risk that has been highlighted by the UN International Panel on Climate Change. This risk is real, and it is a threat to the US military in two ways. First, chaos in Europe would threaten many of America's most important allies, not to mention the thousands of US troops posted in Germany and elsewhere. Second, this sort of disruption in Europe would destabilize the US-Russia relationship in ways that are impossible to predict.

You don't have to be a tree-hugger or a radical hawk to see energy and climate change as serious issues of US national security. It's time to see these issues as a statesman would: from a bipartisan, long-term perspective. Obama's move to increase the gas-mileage was a good first step, but more is needed. It will take decades to convert the capital stock of US power plants into cleaner, more efficient technology, even if the right policy incentives were put in place today. To make that happen, the US needs to see the issue not just as an environmental problem, but also a security imperative.

But have hope. Far-sighted politicians are starting to watch for the first moment when the words "carbon tax" become politically palatable. It will pay to be out front on this issue.

Iran's questionable election

While it is hardly clear who really won in Iran's election last Friday, one thing is clear: the clerics are still firmly in control of the regime. Whether they remain so depends largely on how they handle the present protests.

Optimists in the West hoped that hardliner Ahmedinejad would be replace by the kinder, gentler Moussavi as President. There are two big problems with that notion. First, Moussavi is no teddy bear. He was the militant Prime Minister who guided Iran through the Iran-Iraq war, in which the use of waves of boy-minesweepers was one of one of Iran's favored tactics.

Second, even if Moussavi were the Iranian version of Gandhi, it isn't clear how much of a difference it would make. The President is not the most powerful person in Iran: that's the job of the Supreme Leader Ali Khamenei. The President is probably not even the second most powerful, or the third, or the fourth -- those are all occupied by the unelected clerics in Khamenei's inner circle, and those who run the Iranian Revolutionary Guard.

Don't get me wrong, if Moussavi were elected, that would be (have been?) better than Ahmedinejad. But I'm not sure that it was ever really that important who was President.

Paradoxically, the real question is how the clerics handle the aftermath of this election. If they do as they have done twice before when faced with calls for reform (in 1999 and 2000), and send in the military, they may have a real problem. They could end up legitimizing their opponents and strengthening an underground resistance. (Of course, this isn't guaranteed: the Chinese roled out the tanks in 1989 and got away with it.)

If instead the clerics give ground, perhaps even by declaring fraud by Ahmedinejad and giving Moussavi the Presidency, they will likely strengthen their own long-run position. The reason for this is simple: Moussavi is highly unlikely to be able to get anything done once in office. Khamenei can veto anything he really doesn't like, and there are more subtle ways of derailing reforms. Giving the reformers hope and then strangling it slowly with Iran's infamous bureaucracy is likely a far, far more effective tactic for the clerics.

Either way, let's hope the clerics screw it up. It is high time for reform in Iran.

Remembrance Day / Veterans Day

At the 11th hour of the 11th day of the 11th month this year, I found myself in the DC Metro system. It wasn't a very memorial occasion, but I paused for two minutes of silence anyway. I tried to appreciate the vast contribution made by boys and men who have fought in the front lines of the wars in the last century.

I was ignored by all those around me. Veterans Day has little emotional meaning for most Americans, and Remembrance Day has almost as little impact for most Canadians.

It's understandable I suppose. It might all seem quite removed. Some people don't even like to honour the contributions of soldiers, as it seems like war-mongering to them. I respectfully disagree.

So long as there are dictators and greed, so long as their is nationalistic fervor, so long as their is religious hatred, there will be people who want to make war and do evil. There need to be good people there to stop them. I thank those who have done it in the past, making our future possible.

US: Give Obama a break

Senator Obama's victory as President-Elect this week was stirring, dramatic, and as a symbol of change in this country, long overdue. Naturally, he is getting all kinds of advice about what he should do now. I have a little piece of advice too.

Go on a vacation.

Obama has been campaigning almost continuously for two years straight. He's got to be exhausted.

Very soon, this man will have responsibility over the nuclear codes. He will have responsbility for wars in Iraq and Afghanistan. He will have try to rescue the American economy from an incredible mess. He needs to craft smart policies on climate change, energy independence, health care, and social security. This is a man who needs to be well rested.

I'm not saying he needs to take as much vacation as the current President. But look, JFK took six weeks off after his campaign, and it was far shorter and less demanding than Obama's. A week in the sun wouldn't be too much to ask.

Give the man a break.

US: The Financial Crisis Is Not That Complicated

For the last month, the press has been raging about how insanely complex the current financial crisis is. So complicated that financial wizards are still reeling to understand what happened. So complex that even mighty titans of finance like Greenspan and Paulson don't know how to fix it.

At the risk of hubris, I disagree. The problem seems pretty simple, really.

Here's what happened. About a decade ago, the financial community dreamed up something called Credit Default Swaps (CDS). These financial tools are basically an insurance policy against something going bankrupt. The "something" could be anything, like a corporate bond or a sub-prime mortgage. So if I sell you a CDS, you pay me a certain amount of money each year, like an insurance premium, and if the mortgage goes bust, I give you a big payout. Just like having car insurance: your insurance company pays you if your car gets creamed.

Here's the catch: "insurance" is regulated. "Swaps" aren't. This means that the Wall St guys don't have to have financial reserves in case they actually have to make the CDS payouts to someone. That's like if I sold all my friends car insurance, took their premiums, and hoped that no one crashes their car. If a bunch of my clients do happen to have car crashes -- especially at the same time -- then everyone is screwed. I can't make the payments, and the car owners suddenly don't have insurance. That's what happened this fall, except that it was mortgages that crashed, not cars.

The heart of the problem is that regulators were convinced by financial lobbyists that they didn't have to regulate CDS because they were called "swaps" instead of "insurance." That's just idiotic. But there you have it: highly-paid Washington lobbyists influenced legislation for special interests, to the detriment of the Joe Taxpayer. Joe Taxpayer just got screwed.

Greenspan admits now that he thought banks would have the self-discipline to hold sufficient financial reserves to back the CDS's even in the absence of regulation. Even without the benefit of hindsight, that's a staggering assumption: it should not be surprising that banks wanted to trade these enormously profitable CDS's while they could, and knowing that if the system collapsed, the government would have to pick up the pieces. The financial system of the US really is too big to fail.

Admittedly, the solution to this problem is not simple. But I think it has to start with the recognition that this is a classic, recurring problem: the financial wizards on Wall St will always be one step ahead of the regulators, and they will always try to hire high-priced lobbyists to create loopholes in regulations. This isn't new: the Savings and Loans crisis in the 1980s was created in much the same way. It almost certainly won't be the last time.

So it seems to me that if we know this is a recurring problem in the financial industry, we ought to structure long-term solutions around that principle. It's true that the exact form and timing of these crises are unpredictable, but the fact that they will happen is entirely predictable. Instead of letting them take everyone by surprise and the cost being passed on to taxpayers, why not find ways to ensure that the fat cats on Wall St foot the bill when financial collapses occur?

The Canada-Obama Free Trade Agreement

Obama's campaign is being accused of soft-pedaling his policy concerns about NAFTA to a foreign government, namely Canada. A leaked memo from the Canadian consulate in Chicago appears to confirm it. It comes just days -- hours -- before the big showdown on March 4.

What a mess.

Despite Obama's strident denials, there probably is something to this story. Either he or his campaign thought it would be good idea to use some weasel words about his true intent on free trade.

The real damage from this episode is that it is driving both Democratic candidates further and further into the wrong policy position: protectionism. Obama is now publicly digging in his heals on free trade, insisting that he would renegotiate NAFTA and pull out if he wasn't satisfied. Still worse, Hillary Clinton is clutching to this controversy like a drowning swimmer, hoping that if she can prove that she is more anti-NAFTA than Obama is, it will win her Ohio.

The tragedy is that both of the candidates appear to know better. Hillary Clinton publicly supported NAFTA when it was passed, and she's smart enough to know that NAFTA has been good for the economy of all three countries involved. But now she says she was against it all along, and was just being loyal to her husband. (Clearly a guy who knows what loyalty is about.)

So the Democrats should feel ashamed of themselves, but the real buffon here is the Canadian government. By allowing that memo to get into the press, the Canadiang government has driven both Democrats into a more anti-NAFTA position, which won't be good for Canada if either of them is elected.

The fact that the Canadian embassy doesn't seem to get it is galling. They issued a statement that says: “The Canadian Embassy and our consulates general regularly contact those involved in all of the presidential campaigns and, periodically, report on these contacts to interested officials. There was no intention to convey, in any way, that Senator Obama and his campaign team were taking a different position in public from views expressed in private, including about NAFTA.”

Hey guys, I got a genius idea for you: stop trying to get private concessions out of Presidential candidates and then leaking them to the press!

International: Blood and oil in Chad

Violence is spreading in Chad as rebels attack the capital. The flow of blood is, unfortunately, all too connected to the flow of oil.

In 2003, Chad became a significant oil exporter thanks to the World Bank-sponsored Chad-Cameroon pipeline. The World Bank stipulated restrictions on how the oil money could be used, but of course once the pipeline was built, the Chadian government as a lot less willing to follow the rules.

Chad's neighbours do not give us much hope for responsible leadership. North of Chad, Qaddhafi has ruled Libya for almost 40 years, where he has used oil money to sponsor violence around the world. To the East, Sudan is a major oil-exporter and, not coincidentally, embroiled in a genocide in Darfur.

Why does this seem to happen in oil-exporting countries? There are two basic reasons.

First, oil erodes the legitimacy of government. The oil industry is famously corrupt, perhaps second only to the global arms trade in terms of bribes paid and officials bought off. Along with corruption, oil money usually brings economic mismanagement and government incompetence. In a desparately poor country like Chad, this all adds up to a highly unpopular government that lacks any real legitimacy. That opens up the door to extreme, revolutionary leaders who are little interested in ruling the country for the good of the public.

Second, oil income is highly concentrated. This makes a successful revolution potentially very profitable: if the rebels can seize control of the government, they seize control of a very lucrative oil business. High stakes attracts big sharks: again, radical leaders.

How should the internatoinal community respond to the situation in Chad, and oil-exporters elsewhere? Well I'm working on that -- I'll let you know when my dissertation is finished. But the logical starting point is that countries should at least avoid doing harm.

This is what France appears to have done over the last 3-5 years: it has continued to back the President of Chad, even as his people have turned against him. Doing so has robbed France of any legitimacy in the eyes of the people, greatly reducing its ability to help re-establish peace. The international community has simply got to learn the lesson that continues to haunt the global arena: backing a unpopular and illegitimate but compliant dictator might work in the short-run, but it frequently comes back to bite us in the rear-end -- with disastrous consequences.

International: Pyrric success in Bali

You have to hand it to the Bush administration: the US is getting world-wide acclaim for the "success" of the Bali global climate change talks, and it cost them nothing.

In one deft move, the US snapped up the label of the magnanimous "compromiser" at Bali. Initially opposed to the proposed agreement, the US delegation did a U-turn and gave its support to the proposed agreement.

But what is this agreement, exactly? It's not a Kyoto-style set of emissions targets, of course. There's no way Bush's core constituency could accept that. It's not even a promise to negotiate binding targets. Its an agreement to talk about undefined targets, and maybe make even make those targets binding. Moreover, the deadline for those talks isn't until the end of 2009 -- well after Bush leaves office.

Instead, it was the greens (mostly the EU) that did all the compromising. There is no agreement to make the emissions targets for industrialized countries binding, and there's no agreement for the developing countries like China and India to do much of anything.

Still, perhaps the Bali conference was not a total failure. It contributes to the long, slow struggle to get the world's attention and build the political will to take real actions to reduce climate change. For now, the best the international community can do is talk about voluntary targets, but that doesn't mean we have to settle for this at home. We can, and should, urge our national and local governments to accept binding targets, even in the absence of a real international agreement.

Canada: Hypocrisy in Bali

Canada's "principled stand" at this week's global climate change talks in Bali is, not to put too find a point on it, a farcical display of hypocrisy.

PM Stephen Harper argues that until all major emitters -- including developing countries like China and India -- have signed up to emissions reductions targets, Canada refuses to accept any limits on its own activity.

But Yvo de Boer, the normally diplomatic UN climate chief, exposed the absurdity of this position this week. “I personally find it interesting to hear Canada just a little while ago indicating it would not meet its commitments under the Kyoto protocol and now calling on developing countries to take binding reduction targets,” he told a press conference Monday.
“So I wonder how that's going to be received,” he added.

One wonders if Harper ever thought about how galling it would sound to developing countries that, after admitting that Canada won't meet the Kyoto targets, we are insisting that they take action. Either he didn't think about, which makes him mildly incompetent, or he did, which suggests his argument is really much more about avoiding binding commitments than it is about any "principled stand." Indeed, Harper's principles look an awful lot like a cynical masquerade.

Not exactly what Canadians expect of their Prime Minister in terms of leadership on the global stage.

International: When Syria comes to dinner

Syria announced this week that, contrary to expectations, it would attend the meeting on Arab-Israeli conflict hosted by the US in Annapolis at the end of November. This could be a chance for a step forward in the peace process, if it were seized correctly.

It is not clear that Syria has ever actually been interested in peace with Israel. Having a foreign enemy serves a useful purpose for the Ba'athist regime: it gives them a scapegoat on which to blame any and all troubles faced by the Syrian people.

But one crucial thing has changed in Syria: its oil is running out. In 2007, for the first time in recent history, Syria became a net oil importer. This has significant consequences: income from oil exports have long been a crucial source of revenue for the Syrian government, and rather suddenly they have lost it -- just as oil prices are skyrocketing.

So why is this an opportunity? The loss of oil revenues means that the Syrian government is desparately looking for a way to balance its books. The first time the US was able to create peace between Israel and one of its neighbors, Egypt, it did so by offering massive side payments to an Arab state in need of revenues. Now Syria falls in the same camp: maybe, just maybe, it could be tempted to offer a lasting peace in exchange for a new source of funding for its cash-strapped government.

This is not to argue that the Syrian regime is either pleasant or trustworthy. Granted, there is a certain stench associated with American payments to a Ba'athist dictatorship. Maybe the best thing to do is to hope that the Ba'athist regime runs into so much trouble that it gets overthrown by its own people, and replaced by a regime more interested in peace. But opportunities to create peace in the Middle East do not come everyday, and the US should think twice before throwing it away.

US: Democrats at the Temple of Cowardice

It's hard to grasp how the US Senate, especially the Democrats, can be so weak, so cowardly, and so stupid.

Recently they approved Michael Mukasey as the new Attorney General, despite his unwillingness to answer a simple question about the legality of torture. Asked whether "waterboarding" is illegal, he refused to answer.As the International Herald Tribune put it so well: "It was not a difficult question. Waterboarding is specifically banned by the Army Field Manual, and it is plainly illegal under the federal Anti-Torture Act, federal assault statutes, the Detainee Treatment Act, the Convention Against Torture and the Geneva Conventions. It is hard to see how any nominee worthy of the position of attorney general could fail to answer 'yes.'" (IHT, Nov 11, 2007)

There really is a right and wrong answer on this one. America prides itself on its claims to freedom and liberty. It is also plainly failing to live up to its values on this issue.

My recent visit to three Arab countries reminded me that charges of hypocrisy are central to the low regard of America in the Arab world. No one admires it when Saudi Arabia locks up political dissidents, but the Saudi regime makes no pretensions to civil rights or democracy. When the US adopts similar practices, it is not just its actions but also its hypocrisy that tears into the American image.

It would be bad enough if this was just a matter of bad policy; it also seems like bad politics. The Financial Times reports that Dianne Feinstein, a Democratic senator whose support for Mr Mukasey was crucial, made clear that she had voted for him in part because "Mr Bush had threatened that if Mr Mukasey were rejected, he would not provide another nominee." (FT, Nov. 6) The fact that the Senate Democrats can be bullied around by Bush so easily -- still, after 7 years -- is appalling.

Democrats hope that if and when they seize the White House in 2008, all will be well in the world. Think again. Unless they learn to wield power responsibly, America's reputation will continue to suffer.

US: Monday morning quaterbacks

Better late than never, the saying goes. But as Alan Greenspan is proving this week, when it comes to the words of influential commentators, the difference between late and never seems awful small.

In Greenspan's new biography he finally airs some criticism of the Bush Administration. The New York Times reports it this way: "Though Mr. Greenspan does not admit he made a mistake, he shows remorse about how Republicans jumped on his endorsement of the 2001 tax cuts to push through unconditional cuts without any safeguards against surprises. He recounts how Mr. Rubin and Senator Kent Conrad, Democrat of North Dakota, begged him to hold off on an endorsement because of how it would be perceived. 'It turned out that Conrad and Rubin were right,' he acknowledges glumly. He says Republican leaders in Congress made a grievous error in spending whatever it took to ensure a permanent Republican majority." (nytimes.com, 9/15/09)

I'm glad to see Greenspan is finally showing regret about that. The trouble is that it is precious too little, too late. Greenspan is a canny political operator, and couldn't possibly have been so naive as to fail to realize how his endorsement of Bush's tax plan was going to be taken. Greenspan had his chance to stand for fiscal discipline, and he blew it.

Greenspan seems to be following in the footsteps of Bob Woodward, another influential writer who could have shaped Washington opinion on the early Bush policies, but lacked the backbone. Pity.