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By Ariel Cohen & Anton Altman
Tensions are rising between Israel and Lebanon, this time over underwater gas reserves. After months of debate, Israel’s cabinet approved last week a proposed maritime border that overlaps with a competing Lebanese claim, creating a sliver of some 430 square miles in dispute.
By Ariel Cohen
Last Friday, the United Arab Emirates acknowledged that [2] damage sustained by a Japanese supertanker on July 28, 2010, in the Persian Gulf, was the result of terrorism——not a “huge wave” as was announced earlier. The attack demonstrated the increasing danger of maritime terrorism against critical energy infrastructure. Prior to this , both UAE and Iran discounted the possibility of a terrorist attack.
By Ariel Cohen
During the past decade, the Arctic re-emerged as an area of vital U.S. interest. In addition to the oil and gas bonanza, two strategic maritime routes cross the region: the Northern Sea route along the northern coast of Eurasia and the Northwest Passage along the northern coast of Canada.
By Ariel Cohen
President Hugo Chavez recently announced that Venezuela will purchase dozens of Russian tanks and other arms, signaling growing military ties between the two countries -- and trouble ahead in the hemisphere.
The deal comes amid tensions with Colombia as Mr. Chavez continues to support the narco-terrorism of the Revolutionary Armed Forces of Colombia (FARC) and as he campaigns against the United States using Colombian facilities for anti-drug efforts in the Andes.
By Ariel Cohen
There are voices in the Obama Administration who believe that the Kremlin is able and willing to exert pressure on Iran to prevent it from acquiring nuclear weapons. However, perceived geopolitical and economic benefits in the unstable Persian Gulf, in which American influence is on the wane, outweigh Russia’s concerns about a nuclear-armed Iran.
By Ariel Cohen
While Azerbaijan had a bumper year in 2008, the Caucasus at large suffered a shock as Russian tanks rolled into Georiga. This was only one symptom of a deteriorating security situation in Eurasia and the Middle East. With the gas war and the Gaza clash, people shudder as to what else may be coming.
By Ariel Cohen
Despite feverish negotiations with participation of the European Union, Russia and Ukraine failed to agree on resolution of the gas dispute between them. Mutual disdain escalated haggling and acrimony between leaders in Moscow and Kiev to hysterical pitch.
WASHINGTON, Dec. 19 (UPI) -- As UPI reported, at the end of November Russia successfully test-launched its new-generation land- and sea-based ballistic missile designed to penetrate U.S. missile defense systems such as the one planned for deployment in Poland and the Czech Republic. The new Russian missile can be equipped with up to 10 warheads, including decoys, to overwhelm or mislead American sensors.
By Ariel Cohen & Owen Graham
The global financial crisis has caused a massive slide in energy prices, down to $40-$50 a barrel of NYMEX light sweet crude from the July 2008 highs of $147. While oil prices, along with other commodities, are expected to continue their fall in the short term, over the medium to long term, economic recovery is likely to generate growth in demand, and oil prices are expected to recover as energy markets tighten.
By Ariel Cohen
The Arctic is quickly reemerging as a strategic area where vital U.S. interests are at stake. The geopolitical and geo-economic importance of the Arctic region is rising rapidly, and its mineral wealth will likely transform the region into a booming economic frontier in the 21st century.
By Ariel Cohen
Steadily and stealthily, a natural gas cartel has emerged over the last seven years. On October 21 in Tehran, the Gas Exporting Countries’ Forum (GECF) agreed to form a cartel. Russia, Iran, and Qatar announced that they intend to form a yet–unnamed group to "coordinate gas policy." The Group of Three (the "troika") will meet quarterly to coordinate and exercise control over close to two–thirds of the world’s gas reserves and a quarter of all gas production.
By Ariel Cohen
The forthcoming Russian anti-air craft system in Iran may precipitate an early Israeli strike- or promote the posture of mutually assured destruction (MAD) between Israel and Iran. Both options look bad.
In March 2009, Russia will deploy modern S-300 long-range anti-aircraft missiles in Iran. By June 2009, they will become fully operational, as Iranian teams finish training with Russian instructors, according to U.S. and Russian
By Ariel Cohen
Lord George Robertson, deputy chairman of TNK-BP’s board and former secretary-general of Nato, has blasted BP’s Russian partners at a closed-doors luncheon meeting at the Nixon Center in Washington on Thursday, July 25.
By Ariel Cohen
Oil demand appears in unexpected places, where there was very little demand in the recent past. The oil thirst is mounting in the Persian Gulf, Russia, even in Africa, due to expanding wealth, booming construction projects, and growing populations. Government fuel subsidies, typical in energy exporting countries, are increasing demand for gasoline. No wonder that the oil prices are going up, up and away.
By Ariel Cohen
U.S. Secretary of the Treasury Henry (Hank) Paulson is heading to Saudi Arabia, Qatar, Kuwait and the United Arab Emirates, to ask the oil producers to pump more oil to get gasoline prices down. He will also ask their Sovereign Wealth Funds, the ships of the line and aircraft carriers of the 21st century geo-economics, to pump more cash into the ailing U.S. banking system, which is already suffering in the aftermath of the sub-prime crisis.
By Ariel Cohen
The announcement by Gazprom CEO Alexei Miller that his company is aiming for the largest market capitalization in the world is an unmistakable indicator how the global financial tectonic plates are shifting. Russian and Chinese energy and telecommunication companies are leading the global Fortune 100 list; India’s Tata and Mittal Steel have become true multinationals.
The Real World: Runaway Oil
05-23-2008
Many oil producing countries benefit greatly from the rising oil prices. Oil at $135 a barrel brings them windfall profits and allows social and economic development unlike anything people can remember.
By Ariel Cohen
Caspian gas producers will come under the increasing pressure from the troika of the founders of the natural gas cartel which has emerged stealthily and steadily over the last seven years. The governments inBaku, Ashgabat, Astana and Tashkent– the four smaller Eurasian gas exporters -- need to coordinate their policy to keep their sovereignty in the face of the growing clout by Moscow and Teheran.
By Ariel Cohen
As you go deeper into debt filling up your tank with $4 gas this weekend, look on the bright side - you’re helping to fund countries that hate you.
From Russia to Iran to Venezuela, America’s adversaries are splurging on oil windfalls, while programs directed against Uncle Sam and his allies are funded by petroleum revenues. Big bucks are allowing the oil sultans and dictators to intimidate US allies, buy politicians and academics, and purchase election outcomes.
By Ariel Cohen
Skyrocketing gasoline prices may be pushing the U.S. economy over the edge, but the oil-rich lords of the Organization of Petroleum Exporting Countries oil cartel don’t give a hoot.
Chakib Khelil, OPEC’s president and Algeria’s oil minister, has warned that oil may go to $120 a barrel. Khelil is an optimist – if one or more of the major oil producers, such as Iran or Venezuela, gets embroiled in a conflict or otherwise destabilizes, oil could go up beyond $130 a barrel.
Ariel Cohen
The world is on the eve of a new energy order, which is going to change the way the Middle Eastern suppliers and consumers world wide do their business. This is not the opinion of a radical environmentalist or even Al Gore.
Fatih Birol is Chief Economist of the International Energy Agency (IEA), the Organization of Economic Cooperation and Development-affiliated agency created after the oil shocks of the 1970s to coordinate the West’s reaction to energy crises. Birol, a former Organization of Petroleum Exporting Countries (OPEC) official, presented the findings of the new “World Energy Outlook 2007 (WEO): China and India Insights” this week to US Congress on Capitol Hill in Washington, Mr. Birol have highlighted several trends that will pose major challenges to advanced economies and developing nations alike.
The rise of demand in China, India, other developing countries and even oil and gas producing states, insufficient levels of available supply, and a woeful lack of investment driven by “resource nationalism”, are quickly transforming energy markets. This will have major implications to both Middle Eastern producers and consumers world wide.
OPEC Rules
The Persian Gulf is the richest and most important oil region in the world. In 2006, Persian Gulf countries produced 28 percent of the world’s oil and contained over half of the world’s oil reserves.
Birol stressed that the non-OPEC production is projected to fall by 2015, and most of increases in production must come from OPEC, primarily the Gulf. Saudi Arabia is they key oil producer that holds 25 percent of the world’s reserves and holds the title of the world’s only swing producer.
Saudi Arabia maintains the world’s largest crude oil production capacity, estimated to be around 11.3 million barrels a day (MMBD). The Kingdom plans to increase its oil production capacity to 12.5 MMBD by 2009. Saudi Arabia is seeking to stay ahead of the demand curve, with a policy that seeks to maintain excess capacity. However, its swing producer power is declining as it currently has only between 1-2 million barrels a day (mbd) of excess capacity.
In Birol’s opinion the are some serious issues with transparency of the Saudi reserves. In a revealing interview for the French daily Le Monde in July 2007, he effectively says that peak oil is just around the corner, and that without a drastic increase in Iraqi production the world will be in a crunch by 2015:
The Saudi government claims 230 billion barrels of reserves, and I have no official reason not to believe these numbers. Nevertheless, Saudi Arabia - as well as other producing countries and oil companies - should be more transparent in their numbers. Oil is a crucial good for all of us and we have the right to know how much oil, as per international standards, is left.
This is the closest an international civil servant can come to criticize the most powerful member of OPEC.
Most of the increases in production will have to come from OPEC areas and the national oil companies therein, IEA says. OPEC members outside the Persian Gulf (excluding Angola) are projected to increase their production capacity only moderately. This leaves the Persian Gulf and, specifically, Saudi Arabia, Iran and Iraq.
Factors that Limit Supply
While the Saudis at least are trying to contribute their share to supply increase, Iranian oil sector mismanagement is famous. Due to massive subsidization ?nd growing demand for gasoline, and shortage of gas for oil well injection, Iran might stop exporting natural gas by 2015. Iraqi political instability is effectively closing the door on their production increases, cutting the global supply and driving prices up.
Another important trend is resource nationalism. International Oil Companies (IOCs) no longer wield their historic power. It is the National Oil Companies that (NOCs) that will largely determine future oil supply.
The other trend taking place with net oil exporters: the negative feedback loop. The higher the price of oil, the more oil exporting economies boom, and therefore domestic demand is stimulated. This leads to falling net exports, and even higher prices. According to a recent report by Lehman Brothers Inc, OPEC countries combined will rival China in global oil demand growth through 2008 and beyond. It is this rising demand from oil exporting countries and major consuming countries that may offset the Saudi increases.[1]
China and India Driving Up Demand
As IEA report makes clear, much of China and India’s future oil imports will have to come from the Middle East. China and India are transforming global energy markets through their sheer size and pace of growth.
In the IEA’s WEO Reference scenario, (projections based on government policies and current economic growth rates) China is set to surpass the U.S. as the world’s top energy consumer in 2010. What is more, between now and 2030, China and India will account for 70 percent of new global oil demand, and 80 percent of global coal demand.
Together, the two countries will account for about 45 percent of the increase in global demand through 2030. This growth will not occur in a vacuum: during this period, the world’s energy needs are expected to be more than 50 percent higher in 2030 than current levels. It is unclear how this energy gap will be bridged and by which producers. Suffice it to say, the IEA is not optimistic.
Recently, when speaking about the rising demand from China and India and a host of pressing supply problems, Nobuo Tanaka, executive director of IEA, stated that between now and 2030, "a supply-side crunch in the period to 2015, involving an abrupt escalation in oil prices cannot be ruled out.”
Fatih Birol explained the numbers behind this potential crunch. According to Mr. Birol, an additional 37.5 million barrels per day (MMBD) will be required to meet demand by 2015, but only 25 MMBD are planned. Consumption is expected to rise from today’s 85 MMBD to 116.3 MMBD in 2030.
Huge Investment Needed
In order to meet this demand the world is going to need a lot more production capacity—more than may be available. A tremendous amount of investment will be necessary. In fact, the IEA report states that an incredible sum, $22 trillion of investment in new fields and supply infrastructure will be needed between 2006 and 2030!
Clearly, mobilizing these investments will be challenging. While there are a number of fields under development, new finds are expected to be of a more challenging kind geologically and geographically. The concern is that these fields will be expensive and whether brought to the market in time to satisfy demand.
While the peak energy demand may be good for Middle Eastern supplier, increasing geopolitical scrambling by global players and unstable domestic politics will remain a threat. At times, a boom is as difficult to manage as a bust.
Vigilance, economic liberalization, developing financial infrastructure and the rule of law, diversification away from crude exports – and away from oil and gas altogether—may mitigate future risks.
Developing astute domestic, diplomatic and security policies are the only prescriptions that may see the producers through these uncertain times.
-- Ariel Cohen, Ph.D., is a Senior Research Fellow at the Heritage Foundation. The views expressed here are author’s only. Owen Graham contributed to this research.
by Ariel Cohen
The cold shower Russian President Vladimir Putin unleashed on the United States at the international security conference in Munich should not have come as a surprise. After all, Mr. Putin himself and a host of other senior spokesmen, including his defense minister and one of the official heirs-apparent Sergey Ivanov and military Chief of Staff Gen. Yuri Baluevsky have said as much in the past.
The list of complaints Mr. Putin heaped against the United States is long. The main beef is that the American "hyperpower" is pursuing its unilateral foreign, defense, cultural and economic policy, disregarding international law and ignoring the U.N. (where Russia has a veto power). French President Jacques Chirac would be proud. However, Russia takes its opposition much further.
Mr. Putin accused the U.S. of expanding NATO to Russian borders and deploying "5,000 bayonets" each in forward bases in Romania and Bulgaria. He blasted the future U.S. missile defense bases in Central Europe, possibly in Poland or the Czech Republic. Mr. Putin said the missile defenses aim to neutralize Russian retaliatory nuclear strike capability -- a destabilizing factor in Russia"s nuclear playbook.
He further accused Washington of not meeting its obligations on nuclear disarmament treaties and trying to hide hundreds of nuclear weapons in warehouses, "under the blanket and under the pillow."
In a rhetorical overkill, Mr. Putin blamed U.S. policies for the failure of nuclear nonproliferation, implying justification for North Korean and Iranian efforts to acquire weapons of mass destruction.
Mr. Putin lambasted NATO members which refuse to ratify Conventional Forces Europe (CFE) Treaty; criticized the Organization for Security and Cooperation in Europe (OSCE) for democracy promotion and criticisms of Russia"s track records in human rights.
Many Russian and Western experts perceive Mr. Putin"s speech as a declaration of a new Cold War. The outburst has a number of domestic and international "drivers," which add up to a picture of Russia craving strategic parity with the United States and defining its national identity in opposition to the West.
Domestically, several years of increasingly loud anti-American and anti-Western propaganda in pro-government and nationalist media have nurtured a generation of Russians who are ethnocentric, and reject liberal values. Sixty percent in the recent poll supported the slogan "Russia for Russians." Sustained nationalist and anti-American brainwashing bridged the gap between the Soviet superpower chauvinism and the new Russian assertiveness.
An "America-as-the-enemy" construct bolsters legitimacy of the current regime, headed largely by former KGB officers, as the defender of Mother Russia. It rejects fully integrating Russia into the global economic and political community, as the other official "heir-apparent" Deputy Prime Minister Dmitry Medvedev suggested in his January 2007 speech at the Davos World Economic Forum.
Russia also plans to spend $189 billion in the next five years for a rapid military modernization. Defense Minister Sergei Ivanov has announced the program on Feb. 8, which includes new nuclear submarines; aircraft carriers; a fleet of supersonic strategic TU-160 bombers; and development of the fifth generation fighter jet. Clearly, such a program aims at balancing off the US military power, not fighting terrorists in the Caucasus Mountains. It needs U.S. as "glavny protivnik" the principal adversary.
Russia is also trying to corner weapons sales markets, especially those of rogue and semi-rogue states. Russia is the largest arms supplier to China and Iran; it signed a $3 billion arms deal with Hugo Chavez"s Venezuela over U.S. objections; and is courting Middle Eastern buyers.
Russia is happy to play into the Arab and Muslim street"s anti-Americanism and to signal that the U.S., which faces severe difficulties in Iraq, does not have exclusive strategic dominance in the Persian Gulf and in the Middle East. Moscow is back -- with vengeance -- in the most important energy depot of the world. It is no accident that the speech was delivered on the eve of Mr. Putin’s historic visit to Saudi Arabia, the first for any Russian or Soviet leader, and to Qatar and Jordan, America"s allies in the Middle East.
The timing of Mr. Putin’s speech couldn’t be worse from Washington"s perspective. With Iraq in limbo, and Iran remaining truculent, the chances for Russian cooperation in taming Tehran"s nuclear ambitions are dwindling. Russia was recalcitrant in providing necessary pressure on Iran during the December 2006 U.N. Security Council Resolution 1737 negotiations, and may refuse to do so when UNSC revisits the Iranian dossier in a few weeks.
Russia is putting not just a military might behind its rhetoric, but also an economic muscle: Mr. Putin publicly approved of the Iranian Supreme Leader Ayatollah Ali Khamenei"s idea of creating a natural gas OPEC-style cartel. Whether such a coalition materializes, and whether it may translate itself into a military alliance, remains to be seen.
The image of a new Cold War may be too simplistic to describe the emerging global world architecture. Clearly, the postcommunist honeymoon is over, dead and buried. A realistic reassessment of the relationship is in order.
The United States should avoid a rhetorical confrontation with Moscow. Deeds, not words, are necessary to send a message to the Kremlin that the U.S. and its allies will not by bullied but that Washington is not interested in a renewed hostility.
The United States should continue cooperation with Russia on issues and interests of mutual concern, such as energy, nonproliferation and space.
It is time to build bridges to potential Russian allies, to prevent the emergence of anti-American blocs. U.S. should also appeal to its traditional allies in Europe and elsewhere to recognize the changing geo-strategic balance in the Eastern hemisphere, to boost mutual defenses, to coordinate energy policy and cooperate on energy security among the consumers.
This is hardly the end of history, but rather continuation of an old and tasking game.
State of the Union 2007: Recognizing the Threat of Strategic Oil Dependency
01-24-2007
In the State of the Union address, President Bush called a spade a shovel. Building on his earlier statement that America is “addicted to oil”, he said:
For too long, our Nation has been dependent on oil. America’s dependence leaves more vulnerable to hostile regimes and to terrorists, who could cause huge disruptions of oil shipments, raise the price of oil, and do great harm to our economy.
The President called on Congress to double the capacity of the strategic petroleum reserve and for America to provide global leadership to encourage our friends and allies to consider policies to enhance their energy security. To improve the global energy balance, America’s friends and allies should increase their production of oil, natural gas, and substitute fuels; diversify their supplies as much as possible away from unstable regions; make fuel consumption more efficient through technological innovation; and increase their Strategic Petroleum Reserves (SPRs).
The United States, said the President, must oppose “foreign actions that undermine free, open and competitive markets for trade and investment in energy supply”—a not-so-veiled reference to the policies of Organization of Petroleum Exporting Countries (OPEC) and its individual member states.
A Strategic Threat
The United States is the largest oil importer in the world, importing 13.5 million barrels per day (mbd), which accounts for 63.5 percent of total U.S. daily consumption. Oil from the Middle East—specifically, the Persian Gulf—accounts for 17 percent of U.S. oil imports, and this dependence is growing.
The U.S. government predicts that by 2025, the country will import 68 percent of its oil.The measures of the Energy Policy Act of 2005 will slow the growth rate of U.S. dependence only slightly. Recognizing the threat of strategic oil dependency, President Bush has suggested a number of measures, including increasing domestic drilling.
The President is right about this threat. Today, the U.S. faces a dire geopolitical challenge. Two-thirds of the world’s oil reserves are concentrated in the increasingly unstable Middle East. The Persian Gulf will remain the largest and most important oil producer on the planet. Today, the leadership of the Islamic Republic of Iran is launching a bid to acquire both conventional and nuclear capabilities that will threaten its oil-producing neighbors, as well as America’s allies, such as Egypt, Turkey, and Israel. Iranian dominance of the oil fields of the Gulf countries, some of which are populated by Shi’a Muslims, is an escalating strategic threat.
So are the virulently anti-American policies of the Venezuelan President Hugo Chavez, who embarked on Marxist-style nationalization of foreign-owned energy assets, including those of Chevron, Conoco, Exxon Mobil, BP, Norway’s Statoil Arlington, and American Energy Systems. Chavez, a self-proclaimed Marxist and Trotskyite, has called President Bush the “devil” at the U.N. General Assembly and told Yankees to “go to hell.” He recently rolled out the red carpet for Iranian president Mahmoud Ahmadinejad, a long-term friend and ally. Vladimir Putin’s Russia is selling billions of dollars of arms to both Iran and Venezuela.
Russia, the main Eurasian oil exporter, at 4 million barrels per day, is increasingly nationalistic. Western energy companies in the giant Sakhalin-2 project were given the boot. Chevron is restricted from expanding the vital Caspian Pipeline Consortium route to export more Kazakhstani oil, and Gazprom reneged on its promise to admit American and European companies to develop the giant Shtokman field in the Barents Sea of the North Atlantic.
Nigeria, another major producer, faces chronic corruption and ethnic violence, while Angola, another fast-growing African exporter, is joining the the quasi-monopolistic Organization of Petroleum Exporting Countries (OPEC) cartel.
Not a single oil producing province is stable and at peace. It is only a matter of time until a major conflagration in the Middle East or simultaneous crises in two or more secondary energy producing regions will lead to a massive spike in oil prices, possibly triggering a global recession.
Monopolistic Price Controls
Since its creation in 1960, OPEC, which is dominated by Persian Gulf producers, has successfully restricted its member states’ petroleum production, artificially distorting the world’s oil supply to line its members’ pockets. Over the years, OPEC has been quick to cut supply and slow to increase production, bringing oil prices to today’s high levels.
Most OPEC member countries and other oil producers have high levels of government economic regulation and corruption, as documented in the Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal. Thus consumers are effectively paying two premiums on oil: one for security and one for its suppliers’ economic inefficiency and monopolistic behavior.
Several times, OPEC’s supply-fixing strategy has brought devastation to the U.S. and global economies:
The 1973-74 Arab oil embargo resulted in a worldwide economic recession, lasting from 1974 to 1980.
OPEC’s 1980 failure to increase production in the face of the Iranian revolution resulted in historically high oil prices of $81 per barrel in 2005 dollars.
OPEC’s refusal in 1990 to increase production sufficiently to keep prices stable when Saddam Hussein occupied Kuwait caused another spike.
OPEC’s resistance since 2004 to add productive capacity has sent oil prices to over $70 a barrel, once again endangering the world’s economic growth.
Transferring Wealth, Enabling Terrorism
The only serious challenge to the organization came in 1978 when a U.S. non-profit labor association, the International Association of Machinists and Aerospace Workers (IAM), sued OPEC under the Sherman Antitrust Act, in IAM v. OPEC. The case was rejected in 1981 by the U.S. Court of Appeals for the Ninth Circuit. OPEC, the court ruled, could not be prosecuted under the Sherman Act due to the foreign sovereign immunity protection it claimed for its member states.
That decision was wrong. Government-owned companies that engage in purely business activities do not warrant sovereign immunity protection, according to prevailing legal doctrines.
High oil prices, which OPEC facilitates, serve to transfer wealth from Western consumers to petroleum producers. This wealth transfer, among other things, funds terrorism through individual oil wealth and government-controlled foundations. It also permits hundreds of millions of dollars to be spent on radical Islamist education in madrassahs (Islamic religious academies).
Furthermore, the oil-cash glut in the Gulf states and elsewhere blocks much-needed economic reform in oil-producing countries. State subsidies for everything from health care to industry to bloated bureaucracy continue unabated, funded by Western consumers.
Congress Gets Into Action
Growing concerns over energy prices have at last prompted the 109th Congress to examine the legal hurdles that prevent the United States from defending its economic and national security interests. In the early part of 2005, a group of senators introduced the “No Oil Producing and Exporting Cartels Act” (S. 555), known as NOPEC, to amend the Sherman Act to make oil-producing and exporting cartels illegal. This amendment would modify sections of the Sherman Act to allow the U.S. Department of Justice or the Federal Trade Commission to bring suits against OPEC for its monopolistic practices.
Recommendations for Congress
Building on President Bush’s initiatives the U.S. Congress should:
Defend American businesses and consumers. Congress should send a strong and long-overdue signal to OPEC oil barons that they must stop limiting production and investment access. Any legislation should allow private suits against OPEC. If OPEC is to be reined in, individuals and companies that it has damaged must also be allowed to bring suits against the cartel. As the IAM v. OPEC decision made clear, it is up to Congress to amend the Sherman Act rather than rely upon the courts.
Remove tariffs on imported ethanol. Making fuel-flexible cars viable will require lifting the U.S. tariff on imported ethanol (currently 54 cents per gallon). The U.S. ethanol industry relies on corn and grain sorghum, which yields much less ethanol per pound than the sugar cane that is used abroad.
Call on major energy consumers to expand energy policy coordination. While European countries have a joint petroleum reserve and national petroleum reserves that can withstand up to 12 weeks of a major oil market disruption, Asian countries" SPRs (with the exception of Japan"s) have insufficient capacity. Congress and the Bush Administration should call on Asian countries to cooperate in building a system of SPRs to supply major consumers, including China, India, and Japan. The Administration should encourage the European Union countries to coordinate their energy policy, especially vis-à-vis Russia and the Middle East, on which they are woefully dependent. The U.S. should also initiate a global effort to coordinate the energy policies of major energy consumers, including China and India. This can be done under the aegis of International Energy Agency (IEA).
Conclusion
President Bush sounded a clarion call to promote U.S. energy security, which, due to America’s growing dependence on imported oil, is inseparable from increasing instability of the oil markets. Congress and the Administration should work together to reduce dependence on foreign oil; to allow import of a cheap alternative fuels, such as sugar cane ethanol; and address, with US allies, threats to oil supplies at home and abroad.
On November 19, 2006, America and Russia signed a bilateral market access agreement that details U.S. requirements for Russia"s accession to the World Trade Organization (WTO). Russia will now work to combine the bilateral accession agreements into a formal multilateral draft Protocol of Accession that the WTO General Council must approve before Russia can become a member of the WTO. As part of this process, Russia will likely face calls for additional commitments to bring its trade regime into compliance with WTO rules, including the elimination of domestic subsidies, improved customs and regulatory transparency, privatization of state-owned enterprises, and stronger intellectual property rights (IPR) protection. The final multilateral accession agreement should both integrate Russia into the global, rules-based trading system and help lock in the reforms needed to improve Russia"s long-term economic potential.
In order for the U.S. to share the benefits of Russia"s eventual accession to the WTO, Congress must vote to ratify Permanent Normal Trading Relations (PNTR) with Russia. America"s businesses, farmers, and households stand to gain from Russia joining the WTO, but, without PNTR, they will be at a disadvantage competing with their foreign counterparts in the Russian market. The successful approval of such legislation is also an important step in strengthening the U.S.–Russia economic relationship and maintaining open channels for discussions to advance issues of concern to the United States, such as access to hydrocarbons and other natural resources.
The Case for PNTR
As a member of the WTO, the United States is generally obligated to provide reciprocal, unconditioned most-favored-nation (MFN) treatment to the goods of all other WTO members. As such, the U.S. must either extend PNTR to Russia or invoke the non-application provision of Article XIII of the WTO agreement. The non-application provision allows member countries to exclude other members from MFN benefits at the risk of reciprocal treatment. If the U.S. opts to invoke the provision, Russia would have the right to deny the U.S. equal treatment under the WTO agreement. Thus, the U.S. would be left to watch other countries reap the benefits of Russia"s accession. These benefits include:
Even before these new commitments to liberalize trade were made, U.S. companies, such as Boeing, ConocoPhillips, Johnson & Johnson, General Motors, and Ford, have enjoyed unprecedented profits in Russian markets. Russia has enjoyed unprecedented economic growth, averaging around 7 percent a year, which has been bolstered by high oil prices since 1999. This growth has also helped expand the bilateral trade relationship between the U.S. and the Russian Federation, with total two-way trade growing an average of 15 percent per year between 2000 and 2005 and valuing over $19 billion in 2005.[5] With Russia"s new accession commitments, this relationship should only become stronger and more important to the two economies.
No trade agreement alone, no matter how comprehensive, can solve all of the economic policy and structural issues a country faces. But, trade agreements can help maintain the momentum for economic reform and put additional pressure on foreign governments to enforce the rule of law. The growing Russian market is an opportunity that American businesses cannot and should not miss. The provisions of the U.S.—Russian bilateral accession agreement go far toward insuring that the final protocol pulls Russia into a world trade regime that promotes fairness and opportunity for Russia and other WTO members.
Conclusion
The U.S.–Russia bilateral agreement is especially effective in insuring that Russia"s accession will result in greater opportunity for all WTO countries. Farmers, manufacturers, and service exporters will gain new, meaningful market access to Russian markets. Russia must reduce or dismantle tariffs and non-tariff barriers to trade, and Russia will have to operate according to international rules of trade or be subject to action by the WTO dispute settlement process. And, the agreement will strengthen intellectual property rights protection. Importantly, U.S. ability to raise important issues in the WTO framework, such as providing a level playing field to all companies in the natural resources sectors, will also be strengthened. Russian economic reformers" capacity to push forward with domestic economic reform will also be enhanced.
Congressional approval of Permanent Normal Trade Relations with Russia will successfully conclude a process that began 13 years ago with the establishment of the Working Party on the Accession of the Russian Federation to the WTO. America would benefit from Russia, an increasingly important global trader, joining the WTO"s rules-based trade regime.
Daniella Markheim is Jay Van Andel Senior Analyst in Trade Policy in the Center for International Trade and Economics, and Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.
[1] Office of the United States Trade Representative, “Trade Facts: Results of Bilateral Negotiations on Russia’s Accession to the World Trade Organization (WTO) – Non-agricultural Goods Market Access,” November 19, 2006, athttp://www.ustr.gov/assets/Document_Library/Fact_Sheets/2006/asset_upload_
file693_9979.pdf (November 27, 2006).
[2] Ibid.
[3] Office of the United States Trade Representative, “Trade Facts: Results of Bilateral Negotiations on Russia’s Accession to the World Trade Organization (WTO) – Agricultural Goods Market Access,” November 19, 2006, athttp://www.ustr.gov/assets/Document_Library/Fact_Sheets/2006/asset_upload_
file346_9977.pdf (November 27, 2006.
[4] Office of the United States Trade Representative, “Trade Facts: Results of Bilateral Negotiations on Russia’s Accession to the World Trade Organization (WTO) – Action on Critical IPR Issues,” November 19, 2006, athttp://www.ustr.gov/assets/Document_Library/Fact_Sheets/2006/asset_upload_
file151_9980.pdf (November 27, 2006).
[5] U.S. Department of Commerce, International Trade Administration, “National Trade Data,” at http://tse.export.gov/ (November 29, 2006).
On November 19, President George Bush and Russian President Vladimir Putin will discuss dominant global security issues—the Middle East, including Iran and Iraq, North Korea, and Georgia—at a summit in Hanoi, Vietnam. ?his meeting will take place alongside the meeting of the Asia Pacific Economic Cooperation Organization (APEC). Both presidents, along with U.S. Trade Representative Susan Schwab and the Russian Economics Minister German Gref, are also expected to preside over the signing ceremony of a bilateral protocol on Russia’s accession to the World Trade Organization (WTO).
Despite a troubled relationship between the U.S. and Russia in the last three years, the U.S. has an interest in Russian membership in rules-based organizations, such as the WTO. Furthermore, expansion of U.S. and Western trade and investment ties with Russia integrates Russia with the outside world and hopefully will prevent Russian isolationism and aggression. If President Bush receives assurances from Putin on two key issues—Iran and foreign access to Russian oil and gas reserves—the U.S. should sign the bilateral protocol.
Iran: The Key Issue
Russia has been insufficiently cooperating with the U.S. on the key international security issue—Iran—by stalling and backtracking on the earlier, agreed-upon U.N. Security Council (UNSC) draft resolution sponsored by Great Britain, France, and Germany. That document calls for sanctions against Iran’s nuclear, missile, and military programs.
Moreover, Russian Foreign Minister Sergey Lavrov recently downplayed the International Atomic Energy Agency’s (IAEA) discovery that Iran has concealed highly enriched uranium and plutonium—even as President Mahmud Ahmadinejad promised to make Iran a nuclear power by March 2007 and announced the launch of a 3,000-strong centrifuge cascade capable of enriching weapons-grade fissile material. Ahmadinejad also threatened to expand the cascade to 60,000 centrifuges, which would eventually give Iran a powerful nuclear weapons-producing capability.
Moscow is concerned that support of tough UNSC sanctions may diminish its leverage in Teheran and the Middle East as compared with Washington and European capitals. The Kremlin may also be concerned that sanctions could jeopardize its Bushehr nuclear reactor deal and the sale of TOR M-1 mobile anti-aircraft system worth $700 million. Proposed sanctions could affect many other transactions of weapons and technology: For example, Russia supports technology transfer to the Iranian space program, a precursor to the intercontinental ballistic missile (ICBM) production capacity. Earlier this week U.S. Ambassador to the U.N. John Bolton rejected Russia’s alternative, and toothless, sanctions resolution draft.
Promises on Trade
President Bush has promised Putin repeatedly to abolish the Jackson-Vanick Amendment. The amendment, passed in 1974, denied the USSR the Most Favored Nation (MFN) status in trade. He also promised Putin to facilitate the passage of Permanent Normal Trade Relations (PNTR) through Congress. So far, neither has been accomplished, and the new Democratic majority in Congress is likely to stall ?n these issues, citing concerns about trade, insufficient protection of intellectual property rights, democracy shortcomings, and harsh treatment of Russia’s neighbors, such as Georgia.
The U.S. business community supports liberalizing trade with Russia and has lobbied for Russian accession to WTO. Boeing, Shell, Ford, Microsoft, and a number of agribusinesses have market access issues to address and businesses to expand in what is one of the most dynamic economies on the planet. Russia has been growing at about 6.5 percent of GDP a year since 2000.
The WTO agreement does have clear achievements, such as Russia’s recognition of 100 percent foreign owned banks, broker-dealers, and investment companies. The agreement also provides for some liberalization of the insurance sector.
Russia has also softened its stance on major agricultural dispute resolution issues regarding U.S. exports of meat and poultry. President Putin had to override the intransigent and allegedly corrupt Russian Agricultural Ministry and the meat-and-poultry lobby to do this.
Energy Access
A major concern remains unanswered: foreign company access to the Russian mineral resources fields and deposits, including hydrocarbons, and private ownership of oil and gas pipelines. Russia promised and then denied Western companies partnership in development of the giant Shtokman gas field in the Barents Sea. Russia is also facing difficulties in the Sakhalin Island oil projects. Additionally, the Russian pipeline monopoly Transneft is increasing tariffs for transit through the Caspian Pipeline Consortium (CPS) pipeline from Kazakhstan to the Black Sea. The tariff increase is a major bottleneck in development of exportable Russian energy resources, and the U.S. should achieve progress before granting Russia PNTR.
Georgia on Moscow’s Mind
Russia rejects any official mediation of the Georgian conflict, which it deems within its “sphere of influence.” Moscow is threatening to recognize independence of Abkhazia and South Ossetia, both parts of Georgia, following the model of Kosovo. The U.S. rejection of the South Ossetia’s November 12 independence referendum complicates the issue. Moscow must conclude a bilateral WTO accession agreement with Tbilisi, but this will not be easy, as Russia severed trade, financial, and transportation ties with Georgia and banned the two Georgian key exports to Russia: wine and mineral water.
Danger and Opportunity
Moscow and Washington are facing the lowest point in the bilateral relations since the end of the Cold War, with Russia providing arms and diplomatic cover to Iran, the main anti-status quo power in the Middle East and the world. Moscow, at the same time, strives to join the developed nations as a respected power and a key supplier of energy, raw materials, and, increasingly, machine tools, industrial goods, and services. It cannot achieve such status while challenging the U.S. on vital security issues. Signing the WTO protocol is a step away from confrontation and, hopefully, toward cooperation on the two issues of great importance to the U.S.—Iran, and access to oil and gas.
At the Hanoi summit, President Bush should strive to receive guarantees from President Putin that Russia will end its fence-sitting on the Iranian nuclear program and will recognize the threat to world peace, including the threat to itself, from a missile-wielding, nuclear-armed Iran. Russia should support and be part of the U.S.-European policy on bringing sanctions against Iran and not ruling out the use of force if sanctions fail.
In exchange, President Bush should recommit to passing PNTR for Russian and abolishing the Jackson-Vanick Amendment in the lame duck session of Congress. However, Russia must agree to allow Western companies access to its natural resources and energy transportation infrastructure. Russia also needs to demonstrate that it is serious in protecting intellectual property rights.
Finally, the U.S. may consider offering its services in resolving the Russia-Georgia dispute, which should include lifting Russian economic and transportation sanctions in exchange for lifting Georgia’s objections to Russia’s WTO membership.
Conclusion
Presidents Bush and Putin, like their countries, have experienced ups and downs—and a lack of trust—in attempting, and often failing, to reconcile conflicting national interests for the greater part of the decade. Addressing U.S. concerns about Iran and energy and signing Russia’s WTO accession is a good place to start in turning a new page in this complicated relationship.
