Politics – Page 222 – a sibilant intake of breath

On the price of oil

Tristan asked me a few days ago whether the status of oil as a non-renewable resource means that it must rise in price over the long term. It’s an interesting question. Here is a fairly classical economic answer. The point here is not to consider the possibility of short-term price shocks, which are quite a different sort of phenomenon, and one not related directly to the scarcity or abundance of oil in the ground. Rather, the point is to consider whether the fact that oil reserves develop at a rate that is negligible compared to the rate at which they are exploited means that oil as a commodity is destined to become ever-dearer.

I would contend that there are three prices of oil which we can consider, and two of them are highly relevant. The first cost is simply the nominal cost of any particular grade of oil at a point in time. That is to say, the cost in whatever unit of currency you care to use. These are not directly comparable, over time, because they do not factor in inflation. The second, more relevant, price is the nominal price adjusted for the rate of inflation. While there are difficulties in properly assessing the rate of inflation, a price that takes it into account as can best be managed does a better job of reflecting what the price of oil is, relative to other commodities. Economists call this the ‘real’ price of oil. The third price, which I will get into further below, is the relative price of oil as a factor of production, from the perspective of any firm and firms in aggregate.

Examining the price trend, firstly, there are considerations of supply and demand. These are fundamentally related to the rate of oil extraction, not to the total available reserves. That said, those watching the levels of reserves might anticipate future scarcity (doing things like choosing less oil intensive technology or making bets on higher oil prices in commodity markets). Sticking to flows for the moment, there does seem to be a considerable extent to which oil production can be increased in the medium term. Especially given today’s high oil prices, fields that were previously not commercially viable have become so. Likewise, fields that were depleted to the point where the cost of extracting an extra barrel of oil was at or below the value of that oil have become viable again. This kind of incentive will emerge whenever the real price of oil rises. The potential to bring new oilfields onstream in the medium turn should act to mitigate – though not eliminate – price rises in oil.

The next big issue is substitution. We use oil for a great many purposes: from powering vehicles to making plastics and fertilizers to generating electrical power. In some of these applications, it can be more easily replaced with alternatives than it can in others. While you would be hard-pressed to make many plastics without oil, electricity can certainly be generated in other ways. At present, the global system for distributing natural gas is far less extensive than the one for distributing oil. As greater scarcity and higher oil prices are experienced and anticipated, states will shift their energy production strategies towards those based on other technology. The degree to which such shifts can take place is called the elasticity of demand: the easier is it to substitute, the smaller price rises will be, both in the short and long term. In almost all cases, elasticity of demand becomes greater with time, as firms and individuals have more scope to modify their consumption and production choices.

Relative factor prices provide one market mechanism by which production choices are made. That is to say, if the price of an input – say labour – rises, firms will modify their production strategy in the short, medium, and long term to reduce the usage of that factor to an efficient level. How big the changes they make have to do with their anticipation of future movements in factor prices. Through the existence or anticipation of higher oil prices, firms will be driven to make production decisions that reduce their usage of oil, while increasing their usage of other commodities.

In the long term, major technological change also promises to help us shift away from oil. Biotechnology and genetic engineering promise ways to produce fuels and polymers from plants. Electrical generation based on renewable sources can offset that from hydrocarbons. Organizational change can also play a role. Power sources and power usage can be brought physically closer together, reducing the cost of transport. Likewise, the amount of travel undertaken by individuals and firms can be reduced through planning that minimizes it.

A final inductive point is that, while people have predicted for hundreds of years that all manner of minerals are in danger of running out, this has not taken place for any. Indeed, the real prices of commodities like gold, silver, and copper have been falling in the long term. For a lengthy statistical treatment of this, see Bjorn Lomborg’s The Skeptical Environmentalist.

The short answer, then, is that we have reasons to believe that the real price of oil does not need to increase as the commodity itself becomes scarcer, provided the above assumptions about the capacity for factor substitution and technological change are accurate. Even if not, the same considerations indicate that price rises will at least be moderated in the medium and long-term. It should also be remembered that the overall phenomenon of economic growth increases the buying power of individuals and firms. That is to say, they can each afford more goods and services than they could before. As such, the total proportion of an individual or firms spending power devoted to oil need not grow at the same rate as the price of oil.

A theory of Kenneth Waltz

While speaking with Roham this afternoon, we stumbled across what may be the perfect Oxford way to respond to a question about Kenneth Waltz. Obviously, the first step is to interrogate the question. What do we mean by ‘Waltz?’ I think we can analyze him usefully on the basis of three levels of analysis: the cellular, the individual, and the systemic. Clearly, parsimonious theory demands that systemic explanations be concentrated upon: in this case, the extent to which Waltzian theory is constrained and disposed on the basis of the system in which it exists: American academia. A fundamentally anarchical system, where economic power and the recourse to forceful argument is the ultimate arbiter, American academia effectively constitutes large parts of both the identity and interests of Waltz.

Indeed, while a systemic theory of Waltz may not capture all of the detailed minutiae of his history, or the internal processes by which his external policy is defined, it does provide good answers to the big questions of his fundamental behaviours vis a vis other academic actors. Consider the phenomena of bandwagoning and balancing, in response to Waltzian hegemony. Additionally, consider the emergence of counter-hegemonies in different parts of the system. All can be explained on the basis of the distribution of research capabilities, and the rational characteristics of academic actors.

While many would contend that in order to really understand Waltz, we need to go back to analysis at the individual and cellular level – with a particular focus on the cellular elite that comprises his central nervous system – the fact is that theory, once broadened to that extent, risks being overwhelmed with detail and particularity. If we can develop testable hypotheses about the behaviour of Waltz on the basis of systemic analysis alone – evaluated, of course, through rigorous statistical analysis – we will have developed a theory of Kenneth Waltz is both useful and parsimonious.

Iran, international law, and the bomb

While reading about US Secretary of State Condoleezza Rice explaining why Iranian nuclear enrichment should be referred to the UN Security Council, I immediately began wondering why such enrichment is a breach of international law. The United States has signed the Nuclear Non-Proliferation Treaty (NPT), creating certain legal obligations, as has Iran. India, Pakistan, and Israel are non-signatory nuclear powers. For Iran to actually develop nuclear weapons would be a violation of the NPT, but the process of enrichment – even at an industrial scale that could produce enough uranium-235 for bomb making – does not seem to be, in and of itself. Indeed, the NPT explicitly affirms the right of members to develop civilian nuclear technologies, including uranium enrichment.

The much publicized announcement of Iranian enrichment of uranium was about material enriched to the level of about 3.5% uranium-235: the variety necessary for fission bombs. Such bombs require a much higher concentration of uranium-235, in the vicinity of 90%. Without guessing about the ultimate purpose of the program, the present enrichment activity seems to be in keeping with the requirements of nuclear power, rather than nuclear weapons.

When it comes to the United States and their obligations under the NPT, the present scorecard definitely doesn’t look so hot. The nuclear deal with India that President Bush approved and is now seeking Congressional approval for is one such violation, since it includes the provision of nuclear fuel to a state without appropriate controls in place. Likewise, the push to develop new kinds of nuclear weapons is a definite violation of the spirit – if not the precise letter – of the treaty, which stresses the obligation of states to seek disarmament and the reduction of nuclear arsenals.

Maybe it is in the strategic interests of America to stop Iran from developing nuclear weapons, but they shouldn’t try to cloak that as being an enforcement of international law when it is not. More broadly, the United States should realize that using the United Nations at the times where it seems plausible that it might serve their interests, while ignoring it otherwise, seriously diminishes the credibility of their supposed commitment to multilateralism and international law.

All that said, it is certainly possible that Iran is conducting nuclear research with an aim to developing nuclear weapons. If so, evidence of that breach needs to be presented in an open and verifiable way.

Brief comment on Iran

The idea that the United States is planning to attack Iran seems to be gaining currency in the media. Let us hope that this is an intentional strategy of intimidation meant to bolster efforts to deal with the Iranian nuclear program diplomatically. Compared to Iraq – which had been crippled by sanctions and frequent military interventions in the years leading up to the second Gulf War – Iran certainly retains the offensive capability to inflict considerable direct and indirect damage to American and other western interests.

Consider the single possibility of rendering the Strait of Hormuz impassable. Given the sheer volume of oil that passes through there, a disruption could cause severe economic problems worldwide. Between air power and missiles, Iran also has the capacity to strike targets throughout the region. Any military action in Iran would lead to casualties that make the 2000 or so in Iraq so far look like nothing: and that’s just if the strikes are based around conventional forces. There is apparently talk of using tactical nuclear weapons to strike embedded facilities, such as the uranium centrifuge cascade that is supposedly under construction. Even without nuclear weapons, Iran could inflict massive casualties in retaliation for such an attack: an attack that would also be a gross violation of international law and any reasonable code of morality.

Anyone who is as terrified as I am by recent revelations that the United States may be planning an attack on Iran, or who maintains a general interest in the Middle East region, might want to take a look at a new Oxford blog: Middle East Wonks. Among the contributors is my friend and fellow M.Phil student Roham Alvandi, who I was impressed to learn writes about Iran for the Economist Intelligence Unit.

Questions of governance and respect

While I was revising IR theory, I found myself wondering how we establish whether an approach to development assistance is patronizing or not. For example, we can send a team of economic advisers to help create macroeconomic stability in a developing country. As Jeffrey Sachs’ role in ending hyperinflation in Bolivia seems to show, this is a strategy that can yield results. Of course, this kind of ‘we know better’ approach might hamper the development of governance structures and new ideas in the long run.

That said, leaving countries to sort things out for themselves could still be considered patronizing. Not only do we know better, but we know even better than that: we know to allow countries to make their own mistakes in the interests of developing legitimacy and their own capacity. Maybe, by that point, the patronizing aspect has become neutralized or non-corrosive.

These questions are relevant to my research when we start thinking about environmental governance and development. No problems crop up where new technology is both more economically efficient and cleaner. The trouble comes when situations like China’s growing need for energy and its huge reserves of coal are considered in combination.

There are situations where choices that would not be made in the rich world might make sense in the developing world, even at the cost of a somewhat damaged environment in those countries. Look how many forests were cleared in Europe during the period of industrialization. The trickiest issue is in places where the ecological harm is borne, in some measure, by everyone. How do we reconcile the teleological objective of a healthy planet with the deontological imperative to respect the freedom of states to make their own choices?

Great power history

While revising, I have realized that ninety percent of all the history I have ever done has been the history of six countries between around 1900 and the present. Here they are, complete with a crude trend line for their overall influence/affluence:

United States (Up)
Britain (Down)
Russia (Down, Up, Down)
China (Down, Up)
Japan (Up, Down, Up)
Germany (Up, Down, Up, Down, Up)

Top performer: USA
Most improved: Japan
Most troublesome: Germany
Most dramatic: Russia / China, tie
Most graceful decline: Britain

The history of other countries has mostly been bound up in their importance, vis a vis this crew. For instance, the transition from British to American hegemony in the Middle East, the role of France in developing and maintaining the interwar order in Europe, India as the jewel of the British Empire, American containment strategies in Europe and Latin America, or the various imperial phases of all and sundry.

I am fairly sure you could get a distinction on my International System 1900-50 qualifying test without mentioning any other states.

Queen of the North sinking

I don’t know too many of the details of the Queen of the North sinking, in British Columbia, but it’s excellent to hear that all or nearly all of the passengers and crew have been rescued. To have effective emergency response procedures demonstrated is always a welcome thing, though you tend to hear a lot more about those that prove ineffective. While it may be pointless, my appreciation goes out to all those who assisted in the rescue operation. In particular, the residents of Hartley Bay seem deserving of praise.

Hopefully, we will learn relatively soon what went wrong in the first place.

Milosevic’s death

After five years on trial in The Hague, Slobodan Milosevic died in his cell earlier today. On trial for genocide and war crimes committed in the former Yugoslavia, he is probably the highest profile individual to be put before an international tribunal. Now, despite the thousands of hours in court, the funds expended, and the various difficulties overcome, there will probably never be a verdict.

Of course, it may seem superfluous to deliver one after the death of the man on trial. In this case, however, I don’t think that would be true. It is important to show that these kinds of tribunals are capable of dealing with crimes of the extent Mr. Milosevic is accused of committing. The International Criminal Tribunal for the former Yugoslavia (ICTY) and the equivalent ad hoc tribunal for Rwanda (ICTR) were the precursors to the International Criminal Court (ICC), a body that is in need of establishing itself as an effective mechanism both for deterring crimes against humanity and for punishing those who violate international law in such egregious ways.

There seems to be no evidence, at present, that Mr. Milosevic died of anything other than the high blood pressure and heart condition that had previously served as the justification for an attempt to have him sent to Russia for treatment. It was a request that was not ultimately complied with. Mr. Milosevic died six days after Milan Babic, a fellow Serb prisoner, committed suicide.

Despite the length and expense of these trials, they serve an important documentary role: providing extensive evidence of what took place in Bosnia, Croatia, and Kosovo during the 1990s. They also allow us to look back on choices like the NATO decision to employ a bombing campaign against Serbia with the benefit of better information than we had at the time. To some extent, that uncovering, sorting, and verifying of information has already taken place for the series of wars embodied by the Srebrenica massacre. Hopefully, even without the conviction of Mr. Milosevic, that will serve to make us collectively wiser in the future.

Attempt to spark discussion

Relatively good news this week: The American armed forces have said that they will close the infamous Abu Ghraib prison in Iraq. Of course, with Guantanamo Bay and less well known detention centres in operation, this may be more of an exercise in public relations management than a demonstration of a genuine commitment to human rights.

Relatively bad news: President Bush struck a nuclear deal with India, largely sweeping away the restrictions put in place following its testing of nuclear weapons. The deal is evidence that the period of condemnation following the development of nuclear weapons is relatively short and likely to be truncated for short-term political reasons. Also, like the failure to pursue the reduction of existing weapons stock and experimentation on new designs, the provision of nuclear materials to India violates America’s commitments under the Non-Proliferation Treaty.

South Dakota passed a law criminalizing all forms of abortion in which the life of the mother is not at risk. Through the inevitable series of court challenges, the issue will once again be presented to the Supreme Court, where a danger exists that the legally questionable but highly important precedent of Roe v. Wade will be overturned.

For no particularly good reason, the bid of DP World, a firm from the United Arab Emirates, to buy P&O Ports, owner of six major ports in the United States, has been withdrawn due to political opposition. The Dubai-based company would have been subject to the same security requirements as American firms. This outcome seems to be a reflection of the kind of generalized hostility towards the Muslim world that exists in the Western liberal democracies, despite the efforts of leaders to stress that their objection is to terrorism, not to Islam.

Thinking about the Copenhagen Consensus

The Copenhagen Consensus was a project organized by Denmark’s Environmental Assesment Institute, meant to identify areas where relatively modest sums could lead to large improvements in human welfare. Unsurprisingly, most of the initiatives most strongly endorsed involved things like improving basic health and nutrition, as well as the control of infectious diseases. Almost without a doubt, these are the things that can produce the biggest gains in human welfare for the lowest cost. They should all be funded, using any available mechanisms for doing so.

At the bottom of their cost-benefit ranking come schemes to tackle climate change. This is a methodology that I feel inclined to challenge on a couple of grounds. Firstly, it’s fallacious to say that we have a simple choice between providing clean water in impoverished areas and developing less carbon intensive forms of electrical generation. There isn’t a set lump of spending to be allocated to one activity or another. When a government spends money to deploy aid supplies and sandbags to a flooded area, it should do so by dipping into funds for long-term environmental management.

Secondly, it may well be that things exist that are both exceptionally expensive and still necessary. When it comes to climate change, we are talking about the long-term habitability and character of the planet. This isn’t something that can be reasonably thought about in standard cost terms, because the value of it does not discount as we look farther into the future.

What is necessary to complete the Copenhagen Consensus project is an awareness of politics. It’s wonderful to know which areas can profit most handsomely from modest investment, but we must be mindful of the decision making processes that go into the allocation of such funding. We must take the sensible and identify the plausible within it. On the issue of climate change, that probably means continued efforts to learn just what the changes will entail, in terms of human beings and the planet’s biological and climatological systems. It also means developing means for mitigating the problems that are already certain to arise: especially for those who lack extensive means of their own to either deal with the problem of climate change or its consequences.