Back from the holidays, and a bit of media

I'm back from a bit of a holiday break. Two media links and a brief commentary on the Gaza conflict for today:

First, I recently appeared on the C-Realm podcast with KMO. We discussed hierarchy, energy, and the "Peter Principle."

Second, here's a video of my presentation at the 2008 ASPO-USA conference in Sacramento. You'll need to skip past the first presentation (though it's also worth watching) to get to my presentation on energy geopolitics.

Finally, a few thoughts on the Gaza conflict. I'm not going to talk about the actions of Israel or Hamas. Instead, I'm going to talk about the problems created by America's hypocritical support of Hosni Mubarak. Despite the consistent American talking point of "supporting democracy," the US has consistently supported Mubarak, a defacto dictator at the healm of a military-industrial oligarchy, as the leader of Egypt, the most populous Arab state. President George W. Bush resolutely supported Mubarak for his support in the "War on Terror. There has been (to my knowledge) no indication from the Obama camp that we will put any serious pressure on Mubarak for democratic reforms in Egypt, despite ongoing rhetoric about supporting democracy. Why? Because it has been, and will continue to be expedient in the short term to support an autocratic strong-man in Egypt.

A democratic Egypt will, at least for now, mean an Islamic fundamentalist Egypt--if truly free and fair elections were held today, the Muslim Brotherhood (a banned, grass-roots organization) would almost certainly win. We support Mubarak because he is a barrier against the spread of Islamic fundamentalism. Mubarak, however, is exacerbating the situation in Gaza because he views Hamas as an extension of the Muslim Brotherhood (they grew out of the same basic movement), and therefore views them as a threat to his rule. The US, by supporting what the "Arab street" (largely) correctly views as a series of thugs and dicatators bent on exploiting Arab poverty and sentiment for their own good, continues to draw the ire of Islamists. We like to say that "they hate our freedom" or some political drivel like that, but the simple truth is that they hate the way we have selfishly supported their exploitation by local dicatators and monarchies for nearly a century (and for over a century if we tack on our imperial predecessors).

Americas claim to stand for a set of very noble principles. Yet we seem to think that we can "win" a war on terror that started and continues due our our incessant pissing off of the vast majority of the Arab world. We don't have to bow to terrorists or surrender to stop pissing them off. In fact--shocking as this may be--we would likely find that if we just start acting on the very principles we espouse we would achieve the best resolution possible in the war on terror. The catch? It would take time, and it would appear to get worse before it gets better (oh, and it would undermine our remaining vestiges of economic imperialism to a certain extent).

This isn't much of a New Year's post (that will be coming soon--predictions and reviews of 2008 predictions), but this is the theme for 2009: we have the opportunity to make the hard choices that will hurt now and actually improve our long term situation, or we can continue to reach for the quick fix and make the ultimate, necessary accounting that much worse. Here's a preview for my 2009 predictions: we won't have the guts to make the difficult but correct choice.

Geopolitical Risk: Derivatives Markets without the Upside

There has been a lot of discussion about derivatives over the past few months, and for good reason. Derivatives--a broad class of complex financial instruments--include collateralized debt obligations (securitized-mortgages) and credit default swaps, which are right at the core of our current financial crisis. It's easy to get down on derivatives because when things go wrong, they can go terribly wrong (potentially much worse than we're currently seeing). But there's also an up-side to derivatives: they spread risk, allow parties to risk to effectively insure themselves, enable projects and ventures that would otherwise be untenable, etc. In this post, I want to compare and contrast the kinds of financial risk addressed by derivatives with geopolitical risk.

Defining geopolitical risk. Geopolitical consists of the following: the risk that the political or legal environment will change (e.g. nationalization, money transfer restrictions, etc.); the risk that the security environment will change (military coup, civil war, insurgency, etc.); the risk that the probability of either of these increase, thereby creating a positive-feedback loop that destabilizes the environment. That's all a fancy way of saying "all risk that isn't financial risk."

Can you insure against geopolitical risk? Yes. But there's a fundamental difference between insuring against financial risk and insuring against geopolitial risk. When we insure against financial risk, we make the whole system more stable (to a point, admittedly, and one we've been testing of late). Therefore, the more that people insure against financial risk--default, bankruptcy, etc.--the more stable the system becomes. This means that more insurance activity (more volume on the derivatives market) makes that insurance less expensive. Not so with geopolitical risk. You can essentially place a bet with one of a variety of geopolitical risk insurance providers that, say, your oil lease in Nigeria won't be reposessed, or that your employees in the Ogaden won't be kidnapped. But that activity of insurance doesn't make these events less likely to happen. Arguably, it actually makes them more probable (in the case of leasing, it commits more desirable and seizable infrastucture and resources to countries that might nationalize, for kidnapping it provides an alternative to investing in security services and ensures there's money via K&R insurance to pay ransoms).

In the end, this is because financial risk is spread through dillution, whereas geopolitical risk spreads through contagion. When we use derivatives to spread financial risk, we create both positive and negative effects. On the negative side, more parties are exposed to the risk, creating a higher degree of interdependency. A potential shock is no longer contained, but rather spreads to all involved parties. However, on the positive side, the speading of financial risk also dilutes that risk (you can argue this is undone by simultaneously facilitating yet more leverage, but up to a point this is still a good thing). That isnt' true of geopolitical risk. With geopolitical risk, hedging against geopolitical risk doesn't dilute the risk at all--it just shifts it from the insured to the insurer. And, because the shield of insurance facilitates increased involvement in geopolitically risky regions, the net effect is actually to increase interconnectedness. Geopolitical risk can't be diluted (only redistributed), and hedging against it actually makes the shock waves travel further.

Why these differences are important, especially to energy supply. It is critically important to understand this difference between financial risk (and associated markets) and geopolitical risk (and associated markets), especially when it comes to understanding our energy future. Right now, high energy prices create an incentive to explore and produce energy resources everywhere--including the most geopolitically riskly locales. Normally, the geopolitical risk would make many such areas financially inaccessible. However, with inaccurately priced means to hedge geopolitical risk (both through pure geopolitical risk derivatives and through various other vehicles such as long-term futures contracts, tax deductions, etc.), all comers are wading waist-deep into the fast running waters of Nigeria, Angola, Sudan, Ethiopia, Khazakstan, Bolivia, and elsewhere. As a result, we're maintaining global energy production and facilitating our ongoing profligate consumption of these resources while dramatically increasing our exposure to geopolitical risk. In part because of the positive feedback-loop nature of this risk (see my brief on the topic), this creates a self-fulfilling prophecy of geopolitical supply shock. And here, just like with the credit markets, the longer it takes for this shock to materialize, the more severe it will be.

At the end of the day, while financial derivatives markets are a key component of our current financial mess, they are a truly powerful tool that can be used for great long-term good if regulated (with an understanding of long-term systemic risk issues) to ensure they are not abused for short term profit. Derivatives markets that address geopolitical risk, on the other hand, only delay an inevitable accounting for the underlying causes of the risk--rather than diluting risk they merely facilitate increased exposure to that risk. When this incrased exposure is combined with the geopolitical positive feedback loops that I've discussed previously, it is a recipe for disaster. In particular, because the "force of nature" character of geopolitical positive feedback loops is not well understood, geopolitical derivatives tend to be priced incredibly inaccurately, ensuring that the future geopolitical situation comes as a severe shock.

The Geopolitics of Energy: A Systems-Thinking Approach

Here's my presentation from last week's ASPO conference in Sacramento. I've taken my speaking notes and turned them into a narrative after each slide, so the text is probably quite close to what I actually said. Here's the PowerPoint file if you're so inclined. Thanks to Guy Kawasaki--though I've given innumerable Power Point presentations in the past, in the spirit of continual innovation I tried some of his "Top 10" format for this presentation and I've received nothing but positive feedback.



I think that this concept of “Energy Geopolitics” is extremely broad and complex. As a result, it’s necessary to take a systems-thinking approach, addressing the issues of complexity and feedback loops head-on. My goal here is, in only 10 slides, to start with the sources of geopolitical conflict and tie them up into a coherent model of a system of geopolitical disruption to energy and resource supplies.



1. The first source of conflict is the result of simple economic processes. Here, rational extraction sets the stage for increasing geopolitical problems. It’s well understood that we pursue the geologically “easy oil” first, and are now left with the more geologically and net-energy challenging oil reserves. This same process also operates in the realm of geopolitics. Just as we exploited the geologically easy oil first, we also exploited the geopolitically easy oil first. Now, what is left is increasingly geopolitically challenging.

So, geologically, we exploit the East Texas field before we go to Tupi or the Arctic. By the same process, but applied to geopolitics, we go to Pennsylvania before we go to Nigeria.

While such simple and linear explanations are useful, we need to move beyond exclusively linear models and recognize that geopolitics form complex, non-linear systems. So, BOTH of the following are true (and they aren’t the same thing): 1) oil is increasingly in geopolitical trouble spots, and 2) there is increasingly geopolitical trouble where there is oil.



2. The character of our energy demand also exacerbates geopolitical problems. As we pass peak oil, reduction in oil consumption will increase the inelasticity of remaining demand as we choose to cut the most elastic demand first. This tightens the system: all actors will take increasingly extreme measures to ensure supplies to meet their increasingly inelastic demand.



3. There are a number of catalysts to geopolitical conflict. First, there is the division between State and Nation. Where, especially in post-colonial and globally networked environments, the demands of the Nation and the desires of the State don’t line up, there is conflict. Likewise, there is conflict where there is disparity between the demands of State and Non-State groups such as religious sects, or ideological or affinity groups. There is also conflict between the “Legal” owners of a resource and those who claim “Moral” ownership. Consider, for example, an Ijaw villager in the Niger Delta region. He sees that his land, and the land that his people have occupied as long as anyone can remember, is now being exploited by a foreign oil company. He feels that he has moral ownership to this land and this oil. He isn’t concerned that, because the British amalgamated 250+ distinct ethnic groups into the colonial construct of the Nigerian state over 100 years ago, there is a legal structure in place that gives ownership to a distant government that is then leased to an IOC. Instead, this disparity between moral and legal ownership drives conflict.

All of these sources of conflict fall under the general heading of “Mutually Exclusive Overlap.” When the minimum demands of groups A and B can’t be simultaneously met, this situation perpetuates conflict, causes sides to dig in, escalate the conflict, and choose to use violent means to forcibly meet their minimum demands. We certainly see this today in regions such as Iraq and Nigeria.


4. Additionally, in a world of dwindling resource supply, actors must make tough choices: do they accept reduced supply or fight to maintain current levels of consumption? Generally, actors will seek to secure their slice of a shrinking pie.

This creates a resource insecurity issue, and harkens back to the old (but increasingly new again) economic philosophy of Mercantilism. These mercantilist tendencies manifest in a number of ways. One is pipeline mercantilism. There is this tendency to accept without qualification the assertion that oil and natural gas are globally fungible commodities, but in reality there is a certain element of fixedness of resource flows introduced by the sunk cost in energy infrastructure. Actors seek to ensure that this infrastructure, these pipelines, direct resource flows toward their markets. Another mechanism of mercantilism is the long-term, bi-lateral supply contract coupled with aid deals. This is a favorite of China and India of late. And finally, if these fail, there is always military adventurism. This is something that we already see in the headlines: Iraq and the Georgian conflict just to cite two obvious examples. However, this has the potential to spread to many more areas: the Spratly Islands, Ethiopia’s Ogaden province, North Africa (with increasing Russian influence), and the dark horse, the Arctic.



5. In a sense, the Nation-State conflict and the mercantilism/resource insecurity issues both become issues of a changing military landscape: a shift in power relationships and a democratization of the state’s traditional monopoly of the use of violence (at least in theory). This evolution in military tactics is exacerbating the geopolitical threat to energy supplies (spreading understanding of targeting methodology that leads to selecting energy infrastructure targets as critical nodes capable of inducing cascading failures, recognition of the increasing ROI of energy targets as energy becomes increasingly scarce, network-innovation advantage held by decentralized adversaries, innovations in modern “swarming” and “guerilla” tactics, etc.).

So, simultaneously you have a situation where disenfranchised groups of all stripes have an improved ability to challenge established power structures militarily AND a situation where the increasingly preferred and effective means of doing so is to directly disrupt energy supplies.

These tactical developments certainly aren’t new—the graphic above shows a swarming span style="font-size:100%;">situation encountered by Alexander the Great over two millennia ago, but it is resurgent.These military developments really close the circle, taking discrete causes of geopolitical tensions and wrapping them up into a system of geopolitical feedback loops disrupting resource supply.

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6. All of these developments act as positive feedback loops (they are driven by the scarcity and value of energy, and by taking energy supplies off the market they increase that scarcity). These phenomena form a system of positive feedback loops—a system that will only grow more intense as we pass peak oil and peak energy.



7. So here’s the dramatic graphic. The right side of civilization’s oil supply curve will not look like the left. Peak oil is dramatic enough in suggesting that the right side might look as bad as the left, but my argument is that geopolitics will actually make it look significantly worse.

Is this an over-dramatization? My answer: IF peak oil is a problem, then geopolitical feedback loops will make it worse. If we find a suitable energy substitute to continue fueling global economic and population growth indefinitely, then neither peak oil nor geopolitical feedback loops will pose a real challenge to humanity. The danger presented by geopolitical feedback loops is that, while we may understand the geological and economic nature of peak oil, we may persist in underestimating the problem if we fail to understand that geopolitics are not a separable set of phenomena, but rather are the inextricable result of geologically-driven scarcity.

So where are we now on this graph? As we’re all well aware, there is legitimate debate about the exact timing of peak oil. There’s debate about not just the timing but also the very existence of peak energy. But geopolitical feedback loops aren’t driven by the date of peak. Rather, they’re driven by the transition point from accelerating supply growth to decelerating supply growth, and there can be little doubt that we’ve passed that point.

What about the sharp cliff at the end of the geopolitical curve? Shouldn’t geopolitically determined supply mirror the gradual tail-off of the classic peak oil production curve? Not necessarily. While we’ll never run out of oil, it is certainly possible that we run out of the necessary geopolitically-permissible environment and level of economic complexity necessary to produce, export, or import oil in any substantial quantity.



8. I think it’s tempting to think of these phenomena as a bunch of conceptually and geographically separable problems. However, my argument is that this is a global feedback system (conflict in Nigeria increases scarcity which, in turn, drives energy targeting choices in Mexico, which further invigorates the conflict in Nigeria). As long as there is increasing global scarcity, there will be increasing catalyst for localized geopolitical problems even in regions that have not yet peaked.

This is a critical concept because events in regions that are clearly out of control—like Nigeria—are substantially impacting the geopolitical environment in formerly very stable areas like Scotland and Canada. Just a few years ago that might draw laughs, and I’m certainly not suggesting that we’ll soon see hoards of Picts and Scots wielding bucklers and swords advancing on York. But what I think is not questionable is that increased scarcity due to events in Nigeria are exacerbating the very real tensions around resource nationalism that already exist in places like Scotland.



9. There’s also a temptation to think of geopolitical troubles as a group of discrete, “solvable” problems that just need a good does of “good governance” or a bit more “democracy.” This may be true, to a degree, in an environment of decreasing scarcity, but in an environment of increasing scarcity of energy and resources it is not.

Instead, attempts to solve one geopolitical symptom often leads to an alternative negative outcomes. Nigeria’s corruption and failure to distribute oil wealth effectively to its people inflames existing conflicts between state and ethnic groups. However, it also keeps Nigeria’s people in abject poverty. If we “solve” the problem of Nigerian governance and properly distribute oil revenues to the people, we may close the door on one problem (ethnic insurgency) and open the door to another (rising domestic consumption). If the objective is good governance and supporting human rights, then the choice is clear. If the objective is to alleviate global energy woes, both outcomes make the situation worse.



10. “Solving” the geopolitical threat to energy requires far more radical restructuring than many assume. A global economy predicated on the notion of perpetual growth is fundamentally incompatible with reliance on a scarce and dwindling resource. Radical decentralization of energy sources, transition to truly renewable energy sources, reliance on vernacular modes and levels of consumption, and moving away from growth-generating hierarchal structures MAY be able to truly solve the problem. However, this “solution” would require such a radical restructuring of human affairs that it is highly unrealistic as a proactive choice. Individuals, communities, even regions may be able to pursue such a radical agenda to insulate themselves from the grinding effects of these geopolitical feedback loops but, in my opinion, the most pragmatic approach to these geopolitical phenomena is to treat them much like we treat geology: an immutable force of nature.

Regardless of whether you think that the problem of geopolitics can be “solved” or not, here is the key take-away:

Our energy future is not controlled solely by the comparatively straight-forward issues of geology, economics, and technology, but also by the much less concrete limiting factor of geopolitics. Oil supply under geopolitical reality will always be less than what is geologically, economically, and technologically possible. How much less? I don’t know—but I think it will be a significant and ever increasing difference. If you aren’t planning for this kind of uncertainty beyond the issues presented by economics and geology, then you aren’t prepared.

Geopolitical Disruptions #2: Identifying the Feedback Loops

This post, the second in a series on Geopolitical Feedback Loops (see part 1 here), will outline the various geopolitical feedback loops that operate to disrupt oil and resource production. I've tried to link most of these feedback loops around a common theme of ownership dispute, illustrated below. There are several examples for each feedback loop, but in the interest of time I've just listed them and linked to further information--each could be a post in its own right.


Figure 1: Does the state own oil reserves or the nation? When the two are contiguous it makes little difference, but as they become increasingly dissimilar the dispute drives conflict. While I haven't divided the feedback loops explicitly along ownership lines, this graphic may help conceptualize these processes as a single system.

GFL1: "Nation"/State Conflict

Explanation: Who owns the oil, the state or its constituent nation(s)? Throughout the 20th Century, the international order was defined by the Nation-State system that developed out of the Peace of Westphalia. As Philip Bobbitt explained in his seminal work, The Shield of Achilles, the constitutional basis of the modern Nation-State is that the State provides for its constituent Nation. For this system to work, there must be close overlap between the State and the Nation.

This, of course, has always been a fiction to some degree as States have generally cobbled together numerous national and affinity groups with less than total exclusivity and attempted to mold a "national character" out of them that is contiguous with the boundaries of the State. Today, for a variety of reasons, this order is rapidly falling apart. As a result, nations and states are increasingly in conflict over self-determination and, critically, resource control.

When a Nation (or any other non-state group such as a religion, issue group, or affinity group--I am using the broad term "Nation" here only for simplicity) has a dispute with a controlling state over control or use of a resource such as oil, gas, etc., the importance and motivation to escalate to violence in pursuit of resource control is, at least partially, a function of the value of the resource in dispute. Because these conflicts have the tendency to increase the scarcity, and therefore value, of the resource, this type of conflict forms a positive feedback loop. In addition to this positive feedback nature, this process also expands in scope as it intensifies: resource ownership that was minimally relevant a few decades ago (e.g the Arctic, or Canada's tar sands) is now becoming an important source of conflict (this tendency towards scope-expansion also runs though many of the feedback loops identified below).

In the interest of brevity, for a more in-depth look at the fundamentals behind this feedback loop see my paper The New Map. I list this feedback loop first because I think it may be the least understood, and has the potential to mushroom into one of the largest sources of supply disruption within a decade or two. It serves as the foundation of the concept of resource ownership disputes illustrated in the headline graphic. As with all the opposing pairs illustrated above, when the two overlap perfectly (e.g. "nation" and "state" or "legal owner" and "moral owner") there is no problem, but as these opposing notions begin to diverge the foundation for sustained conflict is created.

Examples (Oil & Gas): Nigeria (Ijaw/Igbo/etc.), Iraq (Kurd, Shia, Sunni), Canada (First Nations), Iran (Awhaz, Baloch), Angola (Cabinda), Mexico (Zapatistas/EPR), Saudi Arabia (Islamists), Yemen (al-Qa'ida, tribes), Sudan/Chad (SLA, Darfur), Ethiopia (Ogaden), UK (Scotland). Other resources: Morocco (Sahrawi Rebels - Rock Phosphate), Indonesia (Iriyan Jaya - various metals), Democratic Republic of Congo (LRA - diamonds & other minerals), Israel/Palestine (aquifers & surface water), American West (surface water compacts).

GFL2: Production Conservation

Explanation: Who has moral ownership of oil and other resources, today's population, or posterity? Among oil exporting countries, the realization that oil supplies (and quite possibly overall energy supplies) will soon peak and begin to decline forces them to weigh maximizing production (and, generally, also revenue) today against maximizing revenue over the long term by consciously producing at less than maximum capacity. There are numerous political, economic, and social considerations involved here, but in general this is a positive feedback loop because reducing production now increases scarcity and price today, which in turn increases revenue from the remaining production and makes it more politically viable today for the same nation, and other nations, to reduce production today in order to maximize long-term revenue. If Saudi Arabia can make $800 million exporting 8 million barrels of $100 oil per day, and a billion dollars exporting 7 million barrels of $150 oil each day, it isn't a very difficult political choice to both make more money now AND save more oil for future generations.

Example: Saudi Arabia, United States

GFL3: The "New Mercantilism"

Explanation: Before the era of globalization and "free trade," the dominant global economic paradigm was mercantilism--the belief that the size of the global wealth pie was effectively fixed, and the only way to increase one's share was to take some away from someone else. In an environment where it is increasingly clear that production of energy and many other resources are severely constrained, mercantilism is making a comeback. Under a mercantilist paradigm, if China decides that it needs 10 million barrels of oil per day to improve the standard of living of its population, it needs to take the additional 2.5 million barrels per day from someone else. This is done by developing long term relationships with exporting countries facilitating long-term bilateral supply contracts, by fixing infrastructure (such as pipelines) to deliver oil to one consumer over another, etc. Mercantilism raises this question: if "my" share is to grow, whose share will I take?

Mercantilism becomes a positive feedback loop for at least two reasons: first, because one country engaging in mercantilist practices pressures others to follow suit to protect their share of the pie or lose out; second, because mercantilism is a less optimal allocation of energy resources than market allocation, effectively removing oil from the open export marketplace, thereby increasing the price on that market and further pressuring countries (and firms, and individuals) to resort to mercantilism to lock in their share of the energy pie. Additionally, as the energy pie shrinks, these forces will increasingly intensify.

Example: United States, EU, China (and here), Russia, and India

GFL4: Privateering

Explanation: Does the "legal" ownership of the rich few or the self-defined "moral" ownership of the impovershed masses (or justification as such by greedy criminals) control? High oil prices increases the incentive to bunker oil, to extort oil producers, and to otherwise leverage violence or the threat of violence against oil producers for personal gain. This forms a positive feedback loop for two reasons. First, privateering physically shuts in some oil production, as it may take an example attack to demonstrate capability, and kidnappings often remove critical personnel from a project resulting in delays or production shut downs. Second, whether producers pay off privateers or pay security to protect themselves from privateers, privateers impose a significant cost on production operations. In both cases the result is greater scarcity and higher prices, both of which create more motivation for new or expanded privateering operations.

Example: Nigeria seems to be the only clear cut example of the privateering feedback loop currently in place with regard to oil. Arguably it is also in place in Colombia and possibly Ecuador where the militas that attack oil infrastructure are often as motivated by profit and extortion as they are by ideology. Privateering is also commonplace in the broader resources sector (e.g. organized copper theft rings).

GFL5: Resource Insecurity Driving Military Adventurism

Explanation: Why is the oil we "need" under their sand? As the price of energy and resources increase, many nations realize that their dependence on once cheap imports is a strategic Achilles heel. As this problem grows worse, they are increasingly willing to embark on military adventurism to secure their energy and resource needs. This can manifest itself in strategic partnerships where importing nations sell arms to energy exporters, or it can go to the extreme of invading a resource rich country to improve future control of resource flows. Either way, these actions increase resource insecurity, may increase scarcity (such as the lengthy drop in production following the US invasion of Iraq), and form a positive feedback loop as they increase the motivation for other resource-insecure countries to take drastic steps to improve their own strategic situation.

Example: Iraq (US), Iran (US?), Venezuela (US?), Arctic (Russia, US, Canada, Denmark, Norway), Georgia (Russia, US, EU), Chad (Sudan), China/Japan, Spratly Islands (China, Vietnam, Philippines).

GFL6: Corrupt Governance

Explanation: If someone else can get rich of this oil, why not me? High oil and resource prices increase the incentive for everything from low-level graft and corruption to a military coup with the intent of expropriating as much personal wealth as possible from the country's resources. Corruption and rotating dictatorships reduce oil production for several reasons: they present a less efficient and more costly business environment, they undermine property rights protections that often facilitate resource production, and they are likely to spawn armed conflicts, civil wars, etc. that are likely to destroy infrastructure or shut in production capacity. This, in turn, increases the scarcity and value of the oil in dispute and forms a positive feedback loop.

Example: Mauritania, Nigeria, Sudan, and Equitorial Guniea.

GFL7: Targeting by ROI

Explanation: I've listed this feedback loop second to last as it doesn't really fit within the "ownership dispute" framework of the above feedback loops. Scarce energy, and more expensive energy, increase the return on investment for an attack on energy infrastructure. An attack that effectively shuts in 100,000 barrels of oil per day has roughly double the financial impact when oil costs $100/barrel compared to when oil costs $50/barrel. Therefore, when targets are being selected (whether by state actors such as Russia targeting the Georgian port of Poti or rebels in Mexico, etc.), higher energy costs make energy targets more rewarding, and more likely to be selected. When energy infrastructure is successfully attacked, it increases the scarcity of oil, increases the price of oil, and makes this a positive feedback loop by further increasing the attractiveness of energy infrastructure targets.

Example: Iraq, Nigeria, Mexico, Saudi Arabia, Philippines, Thailand, Turkey

GFL8: Export Land Model (ELM)

Explanation: Rising oil prices increase revenues for oil exporting countries. These rising revenues generally drive consumption in exporting countries (e.g. more wealth means more people can drive larger cars, more food security means rising populations, etc.), which in turn reduces exports. In some circumstances (generally where the exporter is a major player such as Saudi Arabia or Russia) declining exports may increase price enough to keep net export revenues rising--in these situations this forms a positive feedback loop. In other cases, where rising consumption results in lower overall export revenues, a negative feedback loop is created. Westexas, Khebab, and others have already done outstanding work on this topic--I have included this feedback loop at the end of this list not because it is least important (it is probably most important, at least in the near term), but because it has been most exhaustively covered previously.

Example: Real world examples of ELM in action include Indonesia, Egypt, Malaysia, and Mexico. In the near future, its impact in major exporting states like Saudi Arabia and Russia may be most significant. Here is a graphic of this process in action in Indonesia:

Quantifiable Disruptions in Nigeria & Iraq

The EIA estimates that, as of April 2007, Nigeria had 587,000 barrles per day of production shut in by violence--primarily the Nation/State, Priavateering, Corruption, and Targeting/ROI feedback loops. However, the EIA also estimates that Nigeria has 3.2 million barrels per day of production capacity. A single attack has shut in as much as 345,000 barrels per day for a brief period, and the amount shut in at any given time is highly variable. Recently, Nigerian production has been hovering just below 2 million barrels per day, and has even dropped briefly below 1 million barrels per day, suggesting the actual shut-in figure is far higher.

In Iraq, oil production is just now nearing pre-war production levels of 2.6+ mbpd. While some officials claim Iraq could surpass 3 mbpd in 2008, critical political compromises splitting resource ownership between the federal governments and Iraq's three main ethnic/sectarian groups have not been reached. The oil shut in since the invasion (and the oil that future violence may shut in) can be attributed to various feedback loops: military adventurism driven by resource insecurity, nation/state violence, corruption, and targeting/ROI.

Conclusion

Here, I've listed the examples that I can think of for each feedback loop. If readers have additions, changes, etc., please add these in the comments. The links are not intended to be definitive sources of information about each feedback loop in action, but rather a jumping-off point for research and discussion.

The next and final post in this series will discuss the interrelationships between these feedback loops and prospects for solving, or at least mitigating, their impact.

Geopolitical Disruptions: Building a Theory of Disruptions to Oil & Resource Supply

The peak and gradual decline in world oil production is beginning to spawn a set of geopolitical positive-feedback-loops that seem likely to exacerbate depletion and accelerate the effective rate of decline of world oil production. Rather than isolated incidents, these geopolitical feedback loops are the direct result of geological peaking in oil production. Unlike geologically driven peaking, however, the effective rate of decline caused by geopolitical feedback loops has the potential to continually accelerate. This post will lay out a theory to better understand the impact of this system of geopolitical phenomena.

I've discussed the impact of various types of geopolitical disruptions to oil production previously at The Oil Drum. One of these geopolitical phenomena, the Export Land Model (ELM), has been well developed by TOD members Westexas and Khebab (see their Iron Triangle post and Wikipedia article). While I think that ELM is already proving to be the most significant of the geopolitical factors--especially in the earlier phases of peak oil--I think that it is important to place ELM into the context of a larger set of geopolitical pheonomena. In part, this is the case because of a similarity between the various geopolitical forces at work. In part, it is because these forces tend to act as alternatives to one another, and their full implications cannot be properly understood in isolation.

In this post, the first part in a series, I hope to lay the framework of a theory for better understanding these phenomena, for extrapolating trends, and for predicting their future impact. It is also important to place the problem of geopolitical disruptions in context, and to highlight the danger of dismissing these phenomena as isolated and separate "above ground factors." The next post in this series will review and update the set of geopolitical feedback loops currently in action, looking not only at disruptions to oil production, but also at the larger issue of resource production, including gas, coal, fertilizer, metals, etc. The final post will discuss the interrelationship between the various geopolitical forces at work as well as the potential approaches to "solve" this system of problems.

Building a Theory of Geopolitical Disruptions to Resource Supply

Since this theory is still very much in formation, I'll proceed by asking a series of questions, followed by my best answer at present. I hope that readers will help to both refine these answers, as well as propose additional questions that must be addressed:

1. Are Geology and Geopolitics Separate?

When considering peak oil, it is tempting to look at the issue as a purely a matter of depletion due to geology and production economics. While peak oil certainly begins with the study and understanding of geological depletion, it spawns a set of exacerbating geopolitical factors that are critical to understanding the ultimate scope and impact of peak oil.

Some commentators consider "above ground factors" to be separate, stand-alone phenomena that are neither related to nor driven by the geological peaking of oil production. This is a critical mistake. Rather than being merely isolated phenomena, these geopolitical forces are best viewed as phenomena that would not exist but for geological constraints. Without geological constraints on oil production--specifically without geographical constraints on where remaining viable oil reserves are located--oil producers would produce sufficient oil from geopolitically stable locations. In reality, resources are almost always subject to uneven geographical distribution.

For economic and political reasons, consuming nations tend to produce domestic supplies first. When consuming nations produce oil in foreign nations, regions with geopolitical stability and stable legal systems to protect property interests are favored, so oil from these countries tends to be produced first. As a result, when the world has produced roughly half of its reserves, and when world production approaches peaking, the majority of remaining reserves (especially the majority of economically viable reserves) tend to be located outside consuming countries in the least geopolitically and legally stable regions.

This, roughly, is why "our oil" is increasingly likely to be located "under their sand." As a result, today's increasing geopolitical problems in oil and resource production are a direct result of geological factors combined with picking the low hanging fruit first. If it had made more sense to produce oil from offshore Nigeria, Azerbaijan, or the Arctic first, and save Texas and Alaska oil for later, we would have done that. But because that wasn't what made sense, today's geopolitical problems are a direct result of geography when viewed from a macro perspective. Additionally, this process of explaining why geopolitical problems exist today also demonstrates that it is useful to view geopolitical problems as a global system of phenomena, not as isolated events.

2. Are Geopolitical Disruptions Feedback Loops?

It seems that geopolitical forces act as positive feedback loops. I'll detail the feedback inside and between various geopolitical forces in my next post, but for now I'll outline the general concept: 1) global scarcity of oil, energy, or other resources increases the likelihood of disruption to the supply of that resource (for various reasons that I've discussed before and will outline in more detail in the next post in this series); 2) when these disruptions occur, they further increase the global scarcity of the resource, increasing the effect noted in #1 and creating a positive feedback loop.* For that reason, I call this set of exacerbating factors "geopolitical feedback loops" as they are subject to positive feedback both from their own operation and from the rate of geologically-driven depletion. I think that term is appropriate, but admittedly a bit cumbersome--I'll shorten it to "GFL" for now.

*Some GFLs may not be positive feedback loops--the Export Land Model, for example, is probably a positive feedback loop to the extent that the drop in net exports from one exporter causes global prices to rise enough to make that exporter's export revenues increase despite the decline in net export volume. However, it would be a negative feedback loop if the rise in domestic consumption due to high export revenues (the system's output) has the result of decreasing export revenues (feeding the system's output back into the system in an inverted manner) and thereby causing a decrease in domestic consumption (acting to re-establish equilibrium).

3. How Does the "Rate" of Disruption from Geopolitics and Geology Compare?

There are also critical differences between the rate of geological depletion and the potential rate at which geopolitical disruptions cumulatively impact oil supply rates. Unlike depletion, whereby oil production from a given field or set of fields decreases rapidly after peaking before beginning to "tail off" and decrease more slowly (the black line in the graphic above), geopolitical forces may disrupt production catastrophically, or may disrupt production at a rapidly accelerating rate (the red line in the graphic above).

This is not to say that GFLs will have a greater impact than geology--while it is certainly possible that a single geopolitical disruption will dramatically outpace geological depletion over a short time period, geological factors will likely be the main determinant of oil production declines during the initial phases of peak oil. However, depending on our society's ability to mitigate Peak Oil with substitute energy sources and to adapt to a lower energy world, it also seems likely that geopolitical disruptions will eventually overtake depletion as the most significant problem. Because geopolitical disruptions will have a disproportionately greater impact in an environment of increasing oil scarcity, as well as due to factors involved in secondary and tertiary recovery methods, the right half of the global oil production curve will not look like the left--when the impact of GFLs are added to the rate of geological decline, the drop in global oil production may be much faster than generally expected.

4. Along What Timeline Will Geopolitical Disruptions Unfold?

Geological forces do not require an actual peak in global oil or energy production to begin to form positive feedback loops--rather, the catalyst for positive feedback is the onset of diminishing marginal returns in investment in energy, where energy begins to become more expensive in relative terms. While global oil and energy supplies may not have peaked, we have almost certainly crossed the threshold of more expensive energy. Also unlike depletion, geopolitical feedback loops may disrupt production in a region that is still far from geological peaking. For this reason, it is reasonable to expect GFLs to increasingly disrupt global oil production alongside an increase in the scarcity of oil, and before an actual peak in global production. Annecdotal evidence supports this view of the the timing of geopolitical disruptions: while some degree of scarcity of oil has coincided with geopolitical disruptions in the past, increasing scarcity over the past decade has coincided with easily observable increases in geopolitical disruptions. While I think the general issue of timing is obvious, one critical unanswered question remains: how fast will geopolitical disruptions impact overall production rates?

5. Will the Aggregate Effect of Geopolitical Disruptions be Smooth or Unpredictably "Bumpy"?

Unlike geological depletion, geopolitical disruption is uniquely susceptible to "black swan" events--things that simply cannot be predicted. This is problematic because, unlike geological depletion which can be understood as a slow but compounding process, geopolitical disruptions may appear non-existent, but then suddenly exert a huge toll on global production. This makes predictions of future oil production levels even more uncertain than predictions that account for only geological factors, and increased uncertainty in estimating future oil production makes selecting and mobilizing the necessary political will for various mitigation options more difficult.

Some GFLs, such as the Export Land Model, will likely produce fairly smooth and predictable effects. Others, like the increased motivation to target oil production infrastructure, will likely produce relatively smooth aggregate effects, but will be subject to significant and sudden disruptions--for example, if al-Qa'ida successfully destroys the export terminal at Ras Tanura, or if Iran blockaded the Strait of Hormuz. The critical unanswered question here is whether, in aggregate, the impact of GFLs will be predictably smooth (as assumed in the graphic at the top of this post) or unpredictably volatile.

6. Is the System of Geopolitical Feedback Loops Solvable?

Because individual geopolitical disruptions can be "solved", there is a tendency to think of them as separate from geological challenges (and thereby a convenient alternate explanation for those who don't like the implications of geological depletion). Additionally, there is a tendency to think that because individual problems are solvable, the system of geopolitical forces can also be solved as a whole (specifically, solved by the same tool-set of security, military force, etc.). In reality, while the occurrence of individual events and geopolitical disruption in individual regions is highly uncertain (and too complex to predict mathematically), the increasing scarcity of oil and other resources caused by geological factors creates an ever increasing catalyst to geopolitical disruption.

In the face of geological depletion, geopolitical disruption is not a question of if, but a question of where and how fast. If a single geopolitical disruption--say, a militant group attacking a pipeline--can be solved, why can't the larger system also be solved? In theory, it can, but there are systemic problems to solving the larger system. In general, this is because the "solutions" to the individual problems are actually to overwhelm and repress the root cause locally--something which will become increasingly difficult globally.

For example, the Nigerian rebels can, theoretically, be defeated by overwhelming government force, but this does not solve their grievance--that their ethnic group is being oppressed and resources that are rightfully theirs are being appropriated. Rather, it relies on overwhelming military force and expenditure to repress it (and, it should be noted, this "solutions" is being discussed theoretically, as the massive military force and expenditure by Nigeria's government at present is failing miserably to repress rebel attacks on oil infrastructure). It seems, at least to me, far more likely that the world can concentrate resources to temporarily repress geopolitical flare-ups regionally, especially in the earlier phases of peak oil. However, if global resources are spread thin, it is impossible to address every trouble spot simultaneously. Because of this, it seems unlikely that there would be enough pressure at individual points to repress disruptions across the entire system.

Finally, while many geopolitical problems can be repressed by favoring one side in a dispute as leverage against the other (the Exploitation Model), it is often not fundamentally possible to actually resolve the issue by making all parties happy (thereby eliminating the root cause of the geopolitical disturbance) because the minimum demands of opposing groups are often mutually exclusive. I've written about this problem of Mutually Exclusive Overlap before, and I think that it makes the global system of geopolitical feedback loops an inevitability. However, while I think that the broader system is not "solvable," I do think that it is possible to buffer their effect, a topic I will discuss in a later post.

7. Is Price the Sole Catalyst of Geopolitical Disruptions?

While demand destruction and economic troubles may grant a temporary reprieve from increasing geopolitical tensions (because they may temporarily reduce the underlying catalyst of scarcity), the steady march of resource depletion will eventually catch up and cause geopolitical tensions to escalate again unless a truly economical, scalable substitute for fossil fuels is built out sufficient to negate depletion and accommodate continued economic and population growth. In that sense, if peak oil is not a problem for humanity, neither will we suffer the exacerbating effects of geopolitical feedback loops. However, to the extent that peak oil presents a serious problem, it will be increasingly exacerbated by geopolitics.

Additionally, demand destruction is particularly inefficient at buffering these geopolitical feedback loops because the lowest value consumption tends to be "destroyed" first. In a demand destruction scenario, when consumers are forced to reduce consumption out of economic necessity, they will choose to first eliminate the consumption that is least necessary to the maintenance of their quality of life. As a result, as demand destruction gradually decreases consumption, the consumption that remains is, by process of elimination, increasingly inelastic. For this reason, demand destruction actually exacerbates the positive-feedback nature of these geopolitical phenomena.

A pipeline bombing, cartel action, or rise in domestic consumption that removes 500,000 barrels of oil per day from the international market exerts far more leverage on a future United States that consumes only 10 million barrels (due to demand destruction) per day of oil than it does on today's United States that consumes roughly 20 million barrels per day. However, if this same future United States only consumes 10 million barrels per day of oil due to the development of economically viable substitutes and voluntary efficiency measures, then this would not be the case. I'll address this point in more detail in my discussion on buffering GFLs in a later post. In general, if scarcity is the underlying catalyst to geopolitical disruptions, I think that price is not the best indicator of that scarcity--rather, price of a barrel of oil as a percentage of purchasing power parity may be more appropriate.

8. Are Geopolitical Feedback Loops "Scale Free"?

A scale free system (aka a fractal) is one that exhibits the same behavior at all levels. Do GFLs operate as a scale free system? Assuming that, at a point in the future where total oil production is rapidly declining, there would be a world wide catalyst for geopolitical disruption to oil supplies, would it also be true that a region where oil production is rapidly declining will see a regional catalyst before world supply begins to decline? The answer is still unclear. Mexico, for example, is already well beyond its peak in oil production--ahead of the global process of peaking. Does this mean that internal pressures in Mexico are greater than elsewhere, that the driving forces behind geopolitical feedback loops are greater than elsewhere, or that the attacks on Mexico's gas pipelines can be attributed to GFLs being more advanced in Mexico than elsewhere? We don't know.

In theory, it seems reasonable to suggest that a country experiencing the problems with its own early peak may experience greater geopolitical pressures than others, but it is far from clear that this is the case in Mexico where oil export revenues are still rising, and where there are ample alternative explanations for the gas pipeline attacks. Additionally, other countries where production peaked well before global production (e.g. the US, Norway, UK, though arguably not Indonesia) haven't experienced a localized rise in geopolitical tensions. There are many complicating factors (especially when viewing the US and UK and their position on the world stage), but this is a possibility to keep track of as some regions progress past peak before others.

9. How Should Quantitative Data be Integrated in this Model?

One criticism of this model of geopolitical feedback loops is, quite understandably, its lack of hard, quantitative data at its base. In one sense, the subject matter is fundamentally less suitable to quantitative, data-driven analysis than the core issue of geological depletion. Some exceptions stand out--the Export Land Model, mentioned above, is a prime example of a geopolitical feedback loop that is well suited to data-driven analysis.

Even ELM, however, presents problems for data-driven analysis. For example, when an exporting state that currently subsidizes domestic fuel prices decides to cut that subsidy when export revenues begin to decline, or if a state decides to buy domestic political support by using some of its export revenues to boost subsidies, how do we integrate the impact of this fundamentally political maneuver with the more pure analysis of net export declines? Similarly, it is quite challenging to gather accurate data of nationalist sentiment (and the degree to which this sentiment may lead to violence), the ability to mobilize political will to conserve resources for future generations, the degree to which resources motivated a military "adventure"--all of these demonstrate the challenge of bringing data-driven analysis to inherently "fuzzy" topics.

Perhaps the most important question is the degree of importance of data-driven analysis to this topic. Will the quest for mathematical analysis of these topics provide more predictive power for a given amount of effort, or will it create a misleading appearance of accuracy and predictive ability while actually creating faulty conclusions? If quantitative analysis is appropriate here, how, specifically, should it be carried out? This question, in particular, is one where I hope the many TOD readers with experience in this area will weigh in.

I plan to begin to introduce some quantitative data in the next post in this series by attempting to tally the amount of production currently shut-in or otherwise disrupted due to the various categories of GFLs around the world. I expect it will be difficult to accurately track this data over time (at least when compared with our ability to track actual oil production), but it seems like the best place to start with quantitative analysis, and may provide some insight into the rate and timing of geopolitical impacts on oil production.

10. Is the Potential for Financial Crash a Geopolitical Feedback Loop?

It's purely artificial to separate the financial impact of peak oil from the geopolitical impact--in fact, there are broad areas of overlap between the realm of finance or macroeconomics with geopolitics. How should these issues be integrated into this model, if at all? It is unclear to me whether financial markets are an exacerbating or mitigating factor in the context of broader geopolitical disruptions.

In one sense, the financial turmoil caused by high oil prices makes it more difficult to raise capital necessary to exploit new technologies, develop substitutes for oil, and to produce more economically challenging oil reserves. Likewise, price volatility and peak oil combine to exacerbate both financial and geopolitical issues. However, it can also be argued that financial turmoil mitigates the geopolitical problems of peak oil by destroying demand and reducing scarcity (though, as mentioned above, this is a double edged sword because it may increase inelasticity of the remaining demand).

I hope that readers can propose the best way to integrate models and predictions of financial turmoil (such as Gail the Actuary's recent financial market predictions) with this model of geopolitical feedback loops.

Conclusion

I've recently finished the book "We Think" by Charles Leadbeater. This book is an outstanding discussion of the advantages and pitfalls of collaborative innovation. I'm not proposing that the theoretical framework I'm setting forth in this and later posts is in any way gospel truth--it is an initial effort to tackle a very complex system of problems, and certainly needs further development. The Oil Drum is, in many ways, an ideal example of a "we-think" collaborative environment, and I hope that the amazing breadth and depth of knowledge of TOD readers will help to further develop this theory. Developing a better understanding of the impact of a system of geopolitical feedback loops in resource production is a critical first step in both improving our ability to predict future energy and resource supplies, and in understanding how to best act to mitigate resulting problems. Hopefully my answers to the above questions begin to lay out a foundation for a broad theory of geopolitical disruption to resource supply. In the next post I will look at several discrete geopolitical phenomena within this analytical framework, but for now my hope is to start a discussion of the overarching issues raised in this post.

This post also appears at The Oil Drum, where readers may be interested in following the comments (over 170 so far).

Georgia, the New Map, and Oil Pipelines

I thought I would talk briefly about the current situation in Georgia/South Ossettia between Georgia and Russia. The news seems to be ignoring the critical aspect of this situation--that it is a symptom of the larger issue of the decline of the Nation-State.

In a recent diary entry, Jerome a Parils makes a good point that neither side here has any claim to a "moral high ground"--this isn't an issue of principle about supporting territorial integrity or supporting a national group, but rather an issue of realpolitik. It's also been building for quite some time. Stratfor has been screaming about the impending war in Georgia for years (they must be quite pleased to sound less like they've been crying wolf right now). I wrote about Georgia in the context of enveloping Central Asia's resources by the Shanghai Cooperation Organization back in 2006. The US has long maintained a sizable signals intelligence ground station in Georgia, and has been advising Georgia on fighting Islamist rebels in the Pankisi Gorge region. This is something to watch for--one angle the US may use to argue the moral high ground approach is that they need to ensure the "territorial integrity" of Georgia in order to deny a training ground to Islamist "terrorists" in the Pankisi Gorge (sound familiar?).

It's also important to ground what's happening in Georgia in the larger context of the decline of the Nation-State system. I wrote and presented a paper about this at the 2006 Yale Journal of International Law conference which some people may find worth reading, and highly recommend Philip Bobbitt's "Shield of Achilles" for an in-depth look at the topic. The basic issue is not that the "state" is going away, but that the constitutional basis of a "state" in providing for the welfare of a contiguous "nation" is increasingly invalid, leading to the rise of the "market-state" (where the constitutional basis for the state comes from its ability to provide market opportunity to those within its borders) and a growing conflict with disenfranchised and marginalized nations (and other non-state groups) that exist wholly or partially within the borders of the new market-state.

This "market-state"/"nation" conflict is the new lever of choice in the new "great game." Where it serves Russia's interest, they will support a non-state "national" group against the integrity of a "market-state" (Georgia). Where it is against their interest, they will support the "market state" (here, Russia) against separatist "national" groups (e.g. Chechnya, Dagestan, and a dozen other internal problems--Siberia, for example, has some serious separatist problems). Similarly, the US will support the "market-state" where it must (as in Georgia, Iraq, Pakistan, etc.) and will support non-state "national" groups where it serves its interest (Kosovo, the Ahwaz rebels in the Iranian province of Khuzestan where most of Iran's oil is, the Baluch rebels in the East of Iran, but not the same rebels in the SW of Pakistan, etc.). Where this "market-state"/"national" conflict overlaps with key resource production or exportation infrastructure, look for increasing problems, in part because the conflict between nations and state will intensify, and in part because growing resource scarcity will make resource infrastructure an increasingly popular and effective target within the context of these struggles...

Just for context, here is the route of the Baku-Tbilisi-Ceyhan pipeline that connects Caspian Sea oil with the West (it was also bombed, probably, last week by Kurdish separatists in Turkey, so is currently shut down):





Russia also bombed the trunk pipeline from the BTC and associated export port to Georgia's black sea coast, thereby requiring all Azerbaijani oil to transit Russia. Before this bombing, a portion of the oil carried by the BTC could have been re-directed via the Black Sea without transiting Russia:

Upcoming

I'll be back to regular postings starting this week. Over the next few weeks I have a series on geopolitical feedback loops in oil production planned that will all feed in to my presentation on the topic at the Association of Peak Oil & Gas conference in Sacramento this September 21st. I'll be speaking in one of the Sunday panels, which all look like they will sell out based on early registration numbers. I also have planned a series on various aspects of demand destruction.

Algeria & Morocco: Natural Gas Cartels, Fertilizer Mercantilism, and Rising Tensions

This originally appeared last week at The Oil Drum. I may have a brief, original post this week if time permits.

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Algeria is one of the world’s most important oil and gas exporters. Morocco has no significant oil and gas production, but has about 2/3 of the world’s rock phosphate reserves, a critical component in global fertilizer supply that increased 300% in price in the past year (.pdf) and may peak alongside global oil production. The two nations have historically been at odds, especially over the phosphate-rich territory of Western Sahara. Now, more than ever, their exports are critical to the energy and food supplies of the world. Alongside increasing importance, tensions between the two are on the rise as the US and Russia provoke the situation with massive opposing arms deals and bi-lateral trade agreements. This article will look at the forces behind these rising tensions and consider issues of fertilizer mercantilism, infrastructure vulnerability, and the potential formation of a natural gas cartel.


Will Demand for Gas & Fertilizer Bring New Conflict to Morocco & Algeria?
Country Briefs:

Algeria: Algeria is an important exporter of both oil and natural gas (background .ppt on NG supplies to Europe). Algeria is Europe’s third largest supplier of natural gas, providing 30+ bcm via pipelines and 20+ bcm via LNG tanker in 2007. Major projects are currently underway to expand pipeline infrastructure to Italy (via Tunisia) and to Spain (both direct undersea and via Morocco), and to expand LNG export capability. Algeria hopes to expand total natural gas exports to 85 bcm/year by 2010, making their production roughly the equivalent of Norway (Europe’s 2nd largest provider). Significantly, the potential to expand natural gas supplies to Europe enhances Algeria’s importance as an alternative supplier in light of current dependence on uncertain Russian gas supplies. Algeria also faces an active Islamist insurgency, a separate threat from the rising al-Qa'ida in the Land of the Islamic Maghreb, and serious demographic challenges in the form of a 1.22% population growth rate (graph) and sharp ethnic divisions (map).


Figure 1: Algeria's Place Among African Natural Gas Reserves

Morocco: Morocco's importance to the global economy is due to its control of at least 2/3 of the world's reserves of rock phosphate. The USGS has stated that there are no substitutes (.pdf) for rock phosphate in agriculture. With biofuel demand increasing steadily, and world food shortages hitting the headlines, rock phosphate is arguably as important to the world situation as oil supply. Importantly, Patrick Dery has performed a Hubbert Lineraization on world phosphorus production and estimates that we have already passed peak phosphorus (see graph below). While the importance of rock phosphate has been discussed here before, its impact on the situation between Morocco and Algeria has not. Additionally, fertilizer supplies are a critical component of many biofuel projects, creating an interrelationship between phosphate and energy supplies. Like Algeria, Morocco faces an internal Islamist insurgency (though currently less troublesome than in Algeria) and has significant demographic challenges with a population growth rate of 1.6% (graph) and sharp ethnic divides (map).


Figure 2: Peak Phosphorus? A Hubbert Lineraization of Global Phosphate Production

Tensions: The Sand War, Western Sahara, and Islamist Insurgencies

There are several sources of tension between Morocco and Algeria. The two states fought the Sand War from 1963-64 over a mineral-rich border territory. In 1975, when Morocco took control of Western Sahara, Algeria began overtly backing the Polisario Front in an ongoing insurgency that continued unchecked until a 1991 cease fire. Both states also suffer from internal Islamist insurgencies, exacerbated by increasing demographic problems. The situation in Algeria is most severe: after independence from France, the revolutionary National Liberation Front ruled the country until Islamists won the first free elections in 1991, prompting the military to immediately seize control. More than 160,000 people were killed in the ensuing civil war between 1992 and 2002. While the country is relatively peaceful today, factions of the Islamist rebels have remained, operating out of rural regions inside the Malian border and elsewhere in the Sahara, and have recently merged with al-Qa'ida to form AQIM (al-Qa'ida in the Land of the Islamic Maghreb). The group has recently carried out several attacks in Algeria, including the April 11 2007 Algiers Bombing, the December 11 2007 Algiers bombing, the 2007 Batna bombing, and the 2007 Dellys bombing, as well as being possibly involved in the 2007 Casablanca bombing in Morocco. The pace of attacks has not slowed, with at least five bombings in the last two months alone.

Infrastructure Targeting?

While Algerian Islamists have generally mirrored target selection of Islamist groups elsewhere, one attack in December, 2006, specifically targeted Haliburton workers in Algeria. This tactic, of targeting critical infrastructure and energy industries, has been increasing around the world as non-state groups everywhere realize that they can maximize their return on investment with these targets. With rising internal threats and state sponsored proxy conflicts, and the potential for direct state military attacks no longer too remote to consider, it is concerning that both Algeria and Morocco present some extremely high ROI energy and resource infrastructure targets:

- Morocco: The Fosbucraa Conveyor, the world’s longest conveyor belt, transporting phosphates from the world's largest phosphate mine at Bou Kra 100km to the port of el Aioun. The conveyor was successfully attacked several times by the Polisario Front. Here's a satellite image.

- Algerian pipelines & LNG infrastructure: Algeria is chock full of high-vulnerability, high-consequence targets. Algeria recently signed a 100 million euro contract with French defense firm Thales to secure oil and gas pipelines. With 16,200 km of major pipelines to protect in Algeria alone (and scheduled to increase to 21,000 km by 2010), the task is daunting. Additionally, two potential future infrastructure projects may represent appealing targets. The proposed Trans-Saharan natural gas pipeline, that would deliver Nigerian natural gas to Europe via a 4,550 km pipeline, would represent a lengthy and vulnerable target to multiple groups if it is ever built (construction is “penciled in” to start in 2015). Additionally, speculative plans (such as the Trans-Mediterranean Renewable Energy Cooperative, or TREC) to leverage high solar insolation in the Sahara to generate electricity for Europe would require huge transmission infrastructure that would be both highly vulnerable and highly attractive. Neither the Trans-Saharan pipeline nor TREC is in any danger of being built in the immediate future.

Thoughts on the Future: Proxy Wars & Proxy Mercantilism

Recently, the fragile 1991 cease fire agreement with the Western Saharan Polisario Front has become increasingly unstable. Complicating the situation with Western Sahara, French President Sarkozy announced his support to Morocco's decision to postpone indefinitely the self-determination referendum promised in the 1991 accord, along with increased Algerian support to Polisario leadership. All this comes against a backdrop of rising military tensions between Morocco and Algeria. In 2008, the US doubled military aide to Morocco and announced arms deals worth billions of dollars. At the same time, various sources confirmed that Russian concluded a $7.5 billion deal to provide advanced arms to Algeria.

Is there any deeper meaning behind these moves? At least two possibilities must be considered. The first is proxy-mercantilism by the United States to secure control of phosphate supplies. In 2004, the US entered into a bi-lateral free trade agreement with Morocco. This can be explained as a natural extension of the long history of economic and military cooperation between the US and Morocco, but in light of proposed biofuel programs, skyrocketing rock phosphate prices, potentially peaking phosphate production, and mercantilist moves by other great powers, the more nefarious possibilities must be considered. The second possibility is that Russia hopes to leverage increased influence with Algeria to exert greater influence in global natural gas markets. Because Algeria is one of Western Europe's few true alternatives to Russian natural gas supplies, especially given the prospect of sharp increases in Algerian natural gas exports, Algeria represents either a threat to Russian natural gas leverage, or a great enhancement of that leverage by entering a defacto gas cartel. At a minimum, we know that Russia and Algeria are actively engaged in talks on this topic. Also, a recent offer by Gazprom to buy all of Libya's additional oil and gas production supports this suggestions that Russia hopes to control Europe's alternative sources of natural gas.

Both notions of phosphate mercantilism and a gas cartel are merely informed speculation at this point, but the stakes are so high that these possibilities must be considered. While there may be no deeper motive behind recent moves with Morocco and Algeria, at a minimum the stakes and tensions are increasing. Because both Algeria and Morocco are fragile Nation-States, with active Islamist separatist movements, significant internal terrorist threats, and complicated ethnic/territorial problems, the potential for interruption in critical exports of phosphate, oil, and gas is increasing.

Preparing the Battlefield: Iran

In light of Seymour Hersh's latest article, "Preparing the Battlefield," about stepped-up US involvement in Iran, here's post I wrote over 2 years ago on the topic:

Keep an Eye on Khuzestan

And a graphic of the oil resources and ethnic makeup of the region worth a thousand words:

Nigeria - Significance of the Bonga Attack

NOTE: An updated version of this post is now available at The Oil Drum.

Militant attacks have shut in as much as 345,000 barrels per day of Nigerian oil production in the past few days. One of the attacks was against a facility 120 km offshore, demonstrating a significant new militant naval capability. This may prove to be an extremely important development: 1.25 million barrels per day of new offshore production is scheduled to come online in Nigeria over the next 6 years, and all of it was previously believed to be beyond the reach of militants.

Shell’s $3.6 billion “Bonga” Floating Production, Storage, and Offloading vessel (FPSO), 120km from shore in 1000m deep water, was recently attacked by MEND militants.

Overnight on June 19th, militants from the Movement for the Emancipation of the Niger Delta (MEND) struck Shell’s offshore Bonga facility, resulting in Shell declaring force majeure for deliveries of 225,000 barrels per day in June and July. Bonga, the first and largest Nigerian offshore facility, is 120km offshore. Then, on June 20th, militants destroyed a key Chevron pipeline near Escravos, Nigeria, forcing Chevron to shut-in and declare force majeure on 120,000 barrels per day. This article will analyze the significance of the Bonga attack in light of Nigeria's efforts to grow its offshore oil production.

What is at Stake?

This recent attack is particularly troubling in Nigeria, where a February, 2006 Citigroup report noted that "clearly most of the (oil production) growth near-term looks to be in the Nigerian deepwater and as such should be less subject to current disruptions." While offshore production currently only accounts for 16% of Nigeria’s oil production, it is expected to account for 90% of future growth. MEND has already demonstrated its capability to shut in significant portions of Nigeria’s onshore oil production, and now it is threatening to re-attack offshore facilities, urging expatriate workers to abandon them immediately. Significantly, Nigeria’s onshore production is already mature, and government hopes of raising total production to 4 million barrels per day are entirely dependent on the success of the offshore sector. If MEND can continue to interrupt offshore production, the prospects for any increase in production from Nigeria look dim. The situation in Nigeria is particularly important as Nigeria is one of the few states with the potential to significantly increase both production and exports. The megaproject list on WikiPedia shows 345,000 bpd of offshore production set to come online in 2008 (Agbami field, Oso field); 220,000 bpd of offshore production in 2009 (Akpo field, Oyo field); 220,000 bpd of offshore production in 2010 (Bonga North, Bonga Ullage fields); 285,000 bpd of offshore production in 2011 (Bosi, Ukot, Usan fields); 250,000 pbd of offshore production in 2012 (Bonga SW, Nsiko fields); and 150,000 bpd of offshore production in 2013 (Egina field).

That’s 1.25 million barrels per day of new offshore production planned in the next 6 years. None of it was previously considered vulnerable to attack. Now it all appears to be within the demonstrated reach of MEND.

MEND: Potential for Innovation & Improved Capabilities

This most recent offshore attack also highlights significant development in MEND’s capabilities. Comments as early as 2006 noted that MEND’s offshore capabilities are continuously improving, and that facilities as far as 50-60 km offshore may be at risk. Bonga is twice that far offshore, at 120km.

I predicted a year ago that MEND would increasingly focus on Nigeria’s offshore facilities for two reasons: to differentiate their ideologically-grounded struggle from the privateers and criminal bunkering that is also interrupting Nigerian production; and as a result of the innovation that naturally results from their decentralized structure. While this most recent attack demonstrates MEND’s ability to operate in the deepwater environment, it also shows significant room for improvement. MEND’s press release stated that their goal was to gain access to and destroy the facility's main control room, but that they were unable to do so. Their failure, however, most likely provided MEND with the specifics of what capabilities, training, and equipment they will need to succeed in the future, suggesting that the improvements in capability demonstrated in this attack are part of a larger cycle of capability improvements (an OODA Loop).

The recent attack demonstrates three significant and separate advances by MEND: targeting, naval equipment, and training. By targeting far-offshore infrastructure that was previously considered to be beyond their reach, and by targeting projects that are key to the Nigerian government’s revenue plans, MEND has accurately identified a very high return on investment target. This demonstrates an advancement in their ability to pursue “effects-based targeting”—that is, the ability to carefully select targets for their ability to produce the desired effect. For MEND, the desired effect is to force the Nigerian government to better meet the needs of the Delta peoples. Previous tactics of kidnapping and attacking pipelines were poor choices for several reasons: they spawned criminal activity within the Delta, they increased pollution in the already polluted Delta region, and they did not effectively compel the desired action on the part of the Nigerian government. While it is yet to be seen if the current targeting choices will be more successful, in my opinion they are an advancement in targeting skill on the part of MEND.

The Bonga attack also demonstrates a significant advance in MEND’s ability to operate far offshore. While MEND has always been noted for their riverine naval capability, their demonstration of offshore capability suggests an improvement in naval equipment. No information is available on what types of watercraft were used by MEND in the recent Bonga attack, but at a minimum they have demonstrated that their boats have 120km range.

Additionally, MEND demonstrated a fairly advanced set of navigation skills. Standing in a rigid inflatable boat, at 1.7 meters above the water, the visible horizon is only 5km away. Even if Shell’s Bonga facility flares at 100m above the surface, the flare is still below the horizon at 40km. Reports that the attack commenced at 1 a.m. suggest that MEND has developed fairly advanced offshore and nighttime navigation skills, that Nigeria’s naval presence in the region is not currently capable of protecting offshore facilities, and that all major Nigerian offshore facilities are within MEND’s reach.

Conclusion: Geopolitical Feedback Loops in Action

The recent attacks in Nigeria should be viewed as a product of geopolitical feedback loops. I’ve written previously about these feedback loops in operation in Nigeria, and will begin to reassess and update them in upcoming posts. These geopolitical feedback loops are significantly undermining Nigeria’s ability to deliver on their potential to increase oil production and exports. While it may be tempting to view these geopolitical feedback loops as separate from the geological phenomenon of Peak Oil, it is more accurate to view the geopolitical factors as a direct result of geological peaking—-but for geological factors, disruptions in Nigeria would simply cause oil exploration and production to move to other, equally fertile grounds. Instead, the geological reality that there are very few “geologically fertile grounds for increasing oil supply” forces companies to accept the high costs of doing business in Nigeria.

**Note: for those hoping for a rhizome post this week, I apologize... world events are conspiring against my efforts to write on a non-oil topic. Next week! Maybe...

Center for a New American Security: More Palliatives from Policy Wonks

A friend at the Pentagon recently sent me a copy of this article from Jim Thomas of the Center for a New American Security entitled "Sustainable Security: Developing a Security Strategy for the Long Haul." CNAS seems to be something of a democratic alternative to PNAC (Project for the New American Century--the incubator for "NeoCon" thinkers in the Bush administration). Its approach, while somewhat different from PNAC (well, radically different if you only consider the highly constrained spectrum of "conventional" options), is equally, disappointingly misguided. Thomas's policy proposals in "Sustainable Security" are particularly misguided. He essentially suggests that we pour more concrete on the Maginot line, and his "solutions" are equally "sustainable." Saddly, CNAS is likely to play a role in any upcoming democratic administration similar to that of PNAC from 2000-2008 (here's Hillary Clinton speaking along these same lines while giving a keynote address at a PNAS event).

First, Thomas fails completely to understand the constitutional basis of our Nation-State system, and why it is breaking down: increasing discontinuity between a State and its constituent Nation, and the simultaneously increasing failure of the Nation to justify the Nation-State order by actually ensuring the ongoing welfare of its component Nation. The Author clearly hasn't read (or absorbed) Phillip Bobbitt, who's "Shield of Achilles" is the seminal work in this area. Then, the author proposes to solve a problem the genesis of which he fails to comprehend. That's a tall order...

2. After assuming that A) the viability of the Nation-State system is a prerequisite to our security, and B) we can prevent its decline without addressing the increasing discontinuity between State and Nation (both inaccurate assumptions, in my opinion), the author proceeds to offer a number of palliatives about how we can shore up that system and create effective partners for cooperative action through simple (to articulate, not necessarily to implement) policy means. And they'll greet us with flowers on the streets of Baghdad--this has failure written all over it.

The mess in Iraq is a classic example of how the post-Colonial Nation-State fiction rests on a fundamentally rocky (and worsening) foundation (there, when the French and British draw nice lines in the sand pursuant to the Sykes-Picot accord and then assume that this haphazard jumble of disparate national groups can form the "Nation" to underly a "Nation-State"). One maxim: a suggested solution that clearly demonstrates a lack of comprehension of the cause of the problem is highly unlikely to be successful.

Of course, it wouldn't do for me to simply critique another's solution without offering one of my own. Here's a link to my paper, "The New Map: Terrorism and the Decline of the Nation-State in a Post-Cartesian World" (also now available in German). I presented it at the 2006 Yale Journal of International Law symposium, and developed it further with feedback from Ved Nanda (of the Nanda Center for International Law). It discusses the genesis of the declining Nation-State system, the forces that are currently exacerbating that trend, how the Nation-State system is not our end goal per se but rather an outdated means to achieve our end goals, and how, in light of the inevitability of its decline, our policy position should be to support the development of an alternative paradigm to the Nation-State system (among the many alternatives currently in competition) the supports our end goals. Specifically, develop networked nodes of localized self-reliance. Radical solution, I know, but interestingly another theorist out of USAFA, John Robb, has recently shifted to saying much of these same things in his new "resilient community" set of briefs and is grabbing the ear of many Pentagon insiders. I think that the institutional inertia is, frankly, too great to adapt such a radical (but I think fundamentally necessary) change, and that current leadership would rather take the safe route of pedaling just another set of palliatives as if it were substantive policy change, but maybe I'm wrong...

...either way, you heard it here first: Judging by the buzz inside the Pentagon and the list of email addresses that are enthusiastically forwarding this article to friends (note: my source was not among the enthusiasts), CNAS is an acronym that we will hear much more of, especially when it is time to for the party out of power to start apportioning blame for our next round of failed energy/security policy.

Interesting Times for Saudi Oil Production

Two interesting developments in Saudi Arabia this week. First, sources tell us that their oil production has decreased from9.2 million barrels per day to 9.0 million barrels per day. Second, and more interesting, the Saudi king is now publicly stating that they are delaying the development of some new oil finds because "our children need it."

While this may seem fairly innocuous, a bit of analysis leads to some very interesting possible motivations.

Let's look first at the decrease in oil production. A 200,000 bpd decline is pretty significant. The source quoted by Gulf Daily News claims that this decline in production "reflects the demand from our customers." Well, maybe at $110/barrel. But compare this to President Bush's recent request to the Saudi king to ease prices by increasing demand. It's a bit disingenuous to say that you're pumping 200k bpd less because that reflects demand at $110+/barrel, when putting an additional 200k barrels on the market each day would invariably decrease prices and increase that demand. If they offered those 200k barrels each day at $80/barrel, I'm pretty sure there would be buyers! So it seems apparent, at least to me, that IF the Saudis are voluntarily cutting back production, it is because they want to increase prices, or at least they want to keep prices at present levels, not because they can't find buyers.

This begs the question, of course, of whether this cut-back in production is voluntary. Consider the interesting timing with the claimed start of production from their Khursaniyah field. Saudi Arabia claims that production from that field will reach 300k barrels per day within a month, and eventually 500k barrels per day. In combination with the planned addition of an additional 250k bpd from Shaybah field set to come online later this year, the timing of the current production decline is odd. Some possibilities:

1. They're shutting in more expensive production (e.g. very high and increasing water cut) to make way for Khursaniyah without driving down oil prices.
2. They're shutting in quickly depleting fields, or fields at risk of advancing water flood stranding oil pockets, in favor of the more technically sound Khursaniyah and Shaybah.
3. The timing of Khursaniyah is a ploy--the field has "been coming on line soon" for years now, yet hasn't produced any significant oil to date, and this latest round of Khursaniyah press releases provides cover for them to either a) cut production to continue to increase oil prices, or b) cover the decline from aging fields (as in "we still have 2mbpd of spare production potential, but we didn't anticipate this latest round of Khursaniyah delays, so we're temporarily behind...").

We simply don't know which--if any--of these motivations led to the cut of 200k bpd of production.

Now consider the statement by the Saudi king that they are also intentionally holding back on the development of new oil production capacity. No details are provided about which fields, which discoveries have been mothballed to provide for posterity. Instead, it sounds to me like a PR move to explain why they can't ramp up production right now to bring down oil prices, despite their claim that they have plenty of spare production capacity. It's one thing to ask them to put on line more production to ease oil prices and help America out of economic troubles. It's an entirely less reasonable request to ask them to sacrifice their children's future to help us now! More troubling, to me, is that this is exactly the kind of PR move that would also precede a voluntary reduction intended to maximize near-term revenue, or to conceal the near-term onset of oil production declines. After all, if the Saudi king really cared so much about posterity, he would be well advised to reduce current spectacular levels of conspicuous consumption by the royalty and consider addressing the kingdom's population explosion that is creating a demographic tidal wave that will soon overwhelm their economy--even IF oil production remains steady.

The revenue curve for oil production for a producer like Saudi Arabia is an unusual animal. Because of the current tight global markets, and the high inelasticity of demand for oil, cutting production probably increases prices enough to maintain stable total revenue. There is probably some sweet spot where a cut in production will actually increase revenue. Either way, these are certainly interesting times for Saudi oil production. We simply don't have enough reliable information to know whether this is the onset of irreversible oil production declines, whether this is a new phase of self-interested revenue maximization, whether this is a natural part of the transition from aging fields to new production coming on line, or some combination. Maybe we will get sufficient information in the next few months to better understand where Saudi production is going. The greatest problem is that the Saudis have no motivation to be forthright with their disclosures, and attempts (like this one) to read between the lines will almost invariably result in the conclusions that "it's some combination of factors." Most likely we won't have a definitive answer until it is provided by a clear historical record. The problem with this is that it will be much more difficult to sell the necessary economic adaptations necessary to compensate for a significant decline in Saudi production AFTER that decline has already happened. The Saudis are possibly the only people who could, with a unified shift in policy, quickly convince the majority of skeptics that the world is facing an ongoing 5%-10% annual decline in oil production beginning very soon. They also appear to be one of the last groups that will come out and say this...

Peak "Surge Success"

NOTE: Early post this week as I'll be traveling for the next few days. Next post will be Monday, April 7th.

The much hailed success of the “Surge” of American forces in Iraq, led by Gen. David Petraeus, is beginning to fall apart. It’s important to understand why it worked (temporarily), why it’s falling apart now, why this will be a gradual disintegration, and why this was inevitable all along.

The surge provided impressive initial results. Why? While many cite the shiny new & improved counterinsurgency approach implemented by Gen. Petraeus, which did manage to seize upon a period where Shi’a groups were temporarily electing cease fire over insurrection for reasons discussed below, there is a potentially more significant trend behind the (until recently) reduction in violence. What has often been termed the “Sunni Awakening,” where Sunni insurgents miraculously decided that violence is counter-productive and that they should join with the Americans and fight al-Qa’ida, is probably more accurately understood as the “short-sighted Sunni pay-off.” The Americans, acting both independently and through the Iraqi government, leveraged Sunni tribal leaders, provincial officials, and existing militia leaders by offering them a deal they couldn’t refuse: stop fighting us, put up at least a convincing guise of “fighting al-Qa’ida,” and we’ll pay you huge sums of money, arm you, and give you legitimacy. This worked great, especially considering that the Shi’a militas that had been conducting what was essentially ethnic cleansing against Sunni neighborhoods had either 1) finished successfully, or 2) declared self-imposed cease fires to improve their political position within the Shi’a political block. Absent the ongoing catalyst for tit-for-tat sectarian attacks, the Sunni seized upon a huge opportunity. Seizing upon America’s inability to sacrifice without payoff for more than two to four years (as driven by domestic political cycles), the Sunnis knew that they could use America’s desire for some kind of positive news about Iraq now to arm and prepare themselves for the inevitable conflict with the Shi’a down the road. As long as the sectarian violence remains in the background, the Sunnis will continue to take all the arms and funding they can get, and are happy to temporarily refrain from violence against Americans in the mean time. This is, of course, a generalization, as many Sunni groups, to include al-Qa’ida in Iraq, haven’t bought into this program, but to the extend that the Surge has produced results, this has been the main drive.

The success of the surge is falling apart now, in part, because Moqtada al-Sadr is seizing a political opportunity presented by the weakened Prime Minister Maliki. Maliki is either greedy or simply short-sighted in his quest to please his imperial overlords, hoping to show that his government was capable of taking charge of its own security just in time for the Petraeus report to the US Congress. Sadr’s Mahdi Army recently extended its self-imposed cease fire, but thanks to Maliki’s misstep can now claim more legitimate self-defense. So Sadr is using this opportunity to “justly” demonstrate his capability to drag Iraq into chaos and quite possibly remove Maliki from power by resisting the government from Baghdad south to Basra.

What is Sadr’s plan? I haven’t spoken to the man recently, but my guess is that he plans to demonstrate his ability to destroy the semblance of order recently prevailing in Iraq, and then just as quickly to demonstrate his ability to restore that order. This serves twin purposes. First, it allows Petraeus to testify to Congress that the surge continues to work without getting laughed out of the room. This ensures the ongoing reduction in American forces, which continues to increase Sadr’s relative strength and freedom of operation. Second, and most important, it creates a very powerful negotiating platform for Sadr. The Maliki government is holding on by a string as it is, and will not be completely dependent on Sadr not exercising his demonstrated capability to bring it down. This fits with Sadr’s past behavior—he is a politician, not a warrior, at heart, and uses his military force to expressly political ends. He has learned from his mistakes in the past where he pressed for pitched battles with superior forces that he could not win. This time he is walking away from a prolonged fight he quite possibly could win in Basra and the South because he realizes that the viable threat of re-starting that battle at any time has more political weight than actual victory in that battle.

What does Sadr hope to achieve with this political maneuvering? There are many possibilities, but I think that he wants to keep the central government weak, teetering on the brink of collapse, dependent on him for support, until he can get his plan for Southern Iraq through the assembly: create one “super federation” of southern Shi’a provinces rather than the alternate plan of creating several individual Shi’a federations, each comprising only one or two provinces. This is critical for two reasons: 1) while Sadr relies on Iran for support, he needs a single Shi’a federation of sufficient size to effectively stand up to Iran, as well as to effectively stand up to the remnant central government in Baghdad. It’s easy to play divide and conquer against many smaller southern federations, and it also enhances the relative position of the central government. 2) Sadr needs to unify Iraq’s southern oil infrastructure inside a single federated region to bring it truly under the control of that region, otherwise the central government will retain effective control of export revenues by virtue of being the intermediary in balancing the separable interests of the various southern federations through which the oil must run. It’s worth noting here that Sadr will gain significant support for this approach to a de-facto oil law from the Kurds, who have already formed just such a super-federation of provinces for the purpose of unifying control of the northern oil resources, and will support any plan that validates their hold rather than supports the central government’s claims. With Sadr in a position of power in the current central government (where he will likely accept a “Sunni awakening” style “fund and legitimize my militias in exchange for peace” deal of his own design), and in a future position of power in the southern super federation, Sadr’s Mahdi Militia will gain the same funding and legitimization of the Kurdish Peshmerga, and with it the ability to forcibly control the southern super-federation and its oil revenue.

If this strategy is what Sadr has in mind, then it makes sense to me to demonstrate (at least to internal audiences) that he can cause great chaos in the South, but then to quickly call a cease fire and cash in his political capital. It makes sense to me to push this cease fire a few days past Maliki’s Saturday (March 29, 2008) deadline to clarify who is in charge, but probably not to wait far into April before ending the uprising.

All of which brings me to why the surge was doomed to failure in the first place. While Petraeus’s updated counterinsurgency strategy was elegant and interesting, it never stood a chance because it does not address (or comprehend) the foundational problem of mutually exclusive overlap. I’ve been writing about this since immediately after I returned home from the Persian Gulf in 2004 as it creates the post-colonial terrain upon which everything else in Iraq must be surveyed. Mutually exclusive overlap is the result of the ebb and flow of empire over time, and must be seen as a four-dimensional problem. Since the Sykes-Picot Accord of 1918 arbitrarily drew lines in the Middle-Eastern sand and created notional “Nation-States” where none had been before, colonial powers (as well as those later powers practicing economic colonialism) have pitted one ethnic group against another to most effectively control their far-flung empires. This is what I call the “exploitation model,” and typically involves empowering a minority group to rule a territory with the implicit understanding that the minority group must act according to the will of the colonial power or be abandoned to the mercy (or lack thereof) of the majority. In Iraq, this took the form of long-standing British and then American support for a Sunni minority government in a Shi’a majority territory. The problem of mutually exclusive overlap arises with the development of Iraq’s vast oil potential. The Sunni majority enjoyed several decades of wealth and prosperity, subsidized entirely by their disproportionate share of oil export revenue. Now that the Shi’a are in power, they expect at a minimum a proportionate share of Iraq’s oil revenue (60%), which is virtually all of Iraq’s southern oil production as the Kurds have geographic and de-facto control over Iraq’s northern oil reserves which make up about a third of Iraq’s pre-war oil production potential. So this creates a situation where the Sunni society, economy, and psyche in Iraq is predicated on the subsidy of more than half of Iraq’s oil production, because they have enjoyed exactly this for decades. Likewise, the newly empowered Shi’a have an expectation of more than half of oil production. For both groups this is a non-negotiable minimum, and they will fight for what they consider their birthright. Unfortunately, this represents mutually exclusive overlap—with both groups expecting, at a minimum, essentially all the oil production available outside the Kurdish zone, they cannot both be satisfied. This cannot be solved by increasing Iraq’s oil production because the expectations are proportional, not empirical, and will only suffice to provide a relative advantage, not actual wealth, even if Iraq’s production were to reach 8 million barrels per day (a wildly optimistic figure four time current production) due to their growing population and dire economic problems. There is no nice way to put it: this problem will not be solved, and will result in conflict—the only question is when.

The Petraeus surge worked, either through happenstance or devious planning, by scheduling simultaneously the period when the Sunni factions realized they should pause and take advantage of an American-provided opportunity to re-arm for this coming conflict, and the time when the Shi’a factions realized they should pause to consolidate for the same. The surge is now disintegrating because the value to both sides of further “strategic pause” is winding down. Moqtada al-Sadr’s maneuvering in the South, combined with a gradual increase in Sunni violence around Baghdad, signal the transition to the next phase. This next phase may be remarkably contained, or it may bring Saudi Arabia and Iran into much more direct involvement. What is relatively certain is that neither 45,000 nor 145,000 American troops on the ground will be able to keep the peace. We entered this conflict with an almost awe-inspiring naïveté, and I have little confidence that we’ll figure out how to exit any more gracefully.

Further Reading: See John Robb's post on Moqtada al-Sadr's strategy in Iraq HERE. Also see my suggestion for solving Iraq's problem with mutually exclusive overlap (yes, gardening *is* the solution...)

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The Iranian Gambit Opening

Chess analogies are overdone, but chess is a good way to explain the narrative fallacy--the tendency of humans to be able to explain things in hindsight much better than understand them as they unfold. So I'll explain in hindsight how two current events led to our bombing Iran:

Trying to invade and hold Iran is a fool's errand. OK, so was bombing Iran, but it seems that the we didn't understand that at the time. Rather, we opted for a strategy of bombing key sites, and holding and occupying a few other key areas (Khuzestan, Bandar-e-Abbas, etc.), without attempting to occupy the entire country. In order to do that, we needed to address a force problem: all of our ground forces were tied up on the ground in Iraq. Specifically, the US Marines, the force most capable of larger expeditionary actions, was spread thin in a counter insurgency and peacekeeping role. We needed to make a significant chunk of Marine Corps manpower available for use against Iran. The problem was that the American people (before that rather effective PR blitz and those statements by Hillary) were quite opposed to attacking Iran. We couldn't just pull back an entire expeditionary force into a staging area in some Gulf Emirate airbase without raising several red flags. And anything originating out of the Vice President's office would look suspect, as well. BUT, if we got the Commandant of the Marine Corps to say that the Marines are meant to operate in an expeditionary role, and that they should leave Iraq and go to Afghanistan, that would have exactly the same effect, but seem quite legitimate. Suddenly, the Marines would be nicely staged for aerial redeployment within theater when they would be unexpectedly re-tasked (from their trans-shipment point conveniently near Bandar-e-Abbas) before they were actually spread thin on the ground in Afghanistan. It's easy to explain these kind of set-up moves on the chess board eight moves later, but understanding how today's move is intended to set up an attack eight moves down the road is much more difficult.

Of course, we needed more than just ready-to-deploy Marines. There was that sticky issue of American public opinion that was, at the time, against attacking Iran. Discussions of their nuclear ambitions were too speculative after the WMD debacle, we needed something more tangible. We had been issuing press releases to everyone who would listen that Iran was supplying the weaponry used by Shi'a insurgents against our forces in Iraq for months, but it really hadn't galvanized American behind attacking Iran. However, sometimes your enemy is your friend. The insurgency in Iraq had been operating under a model of open-source innovation for quite some time. They had tried many indirect fire attacks against US bases with mortars and rockets, and on occasion had minor success. It was natural to expect them to learn and improve over time. But this time, their tactical improvements (combined with a re-entry of certain Shi'a militias into a more active role) allowed us to point the finger at Iran. Beginning with the relatively minor but accurate attack on Camp Victory that killed 2 and injured 40, and escalating into the string of more deadly attacks that followed, we were able to spin this increase in accuracy to point the finger not at the expected improvements of an open-source enemy, but as a result of training and improved guidance systems and munitions provided directly by Iran. It was surprising, even to the most cynical among us, how quickly the American people rallied around the flag.

The rest, as the saying goes, is history...

Mexico Collapse?

My article on the Decline of the Mexican Nation-State is now up at The Oil Drum. This comes, as promised, as an update to my New Years prediction that 2007 would see the collapse of the Mexican economy. This article comes on the heels of a very significant--and largely ignored by the MSM--event: a string of rebel attacks on oil infrastructure in Mexico. Significantly, these attacks shut down production at several "just-in-time" production facilities of major international companies such as Honda, Kellogg's, Hershey's, and Nissan. It is not yet clear whether this was the goal of a highly advanced, effects-based targeting plan by these guerrillas, or just luck on their part. However, as the effects from these shut-downs ripple through the logistics chains of these multinationals, the ultimate economic impact of this attack will likely be enormous. The greatest danger is that the rebel group's own evaluation of this new targeting focus drives them to continue a campaign of attacks against oil infrastructure--the significant, if partially unintended, impact of these first attacks will strongly support exactly that conclusion.

The discussion on my article at The Oil Drum is already proving quite interesting, with some particularly important graphs courtesy of Khebab:





From the looks of things, unless something miraculous happens with production out of Chincopec and Ku-Maloob-Zaap fields in the next two years to offset decline in Cantarell, the situation is about to get much worse...

Geopolitical Vocabulary: Cabinda

Energy Intelligence Note: 12 May, 2007

A recent trend at Energy Intelligence has been assessing the geopolitical impacts of Peak Oil. While it is easy to discern these impacts today in places like Nigeria and Iraq, it may not be long before we must add a new term to our collective geopolitical vocabulary: Cabinda.

Cabinda is a small ethnic exclave of Angola. It is where most of Angola's oil is produced, and where most of Angola's future production increases will come from. It is also the only Angolan province with an active insurgency and independence movement. In my opinion, Cabinda--and Angola's oil production along with it--may be the next geopolitical casualty of Peak Oil. There haven't been any attacks on the oil infrastructure yet (unless Thursday's "suspicious fire" at a Total platform in next-door Congo turns out to be the first such incident), but the situation is the perfect tinder-box.

For more information on Cabinda, and on the potential for an "Oil Insurgency," see my article in today's Oil Drum: Cabinda: Prospects for an Oil Insurgency in the Angolan Exclave.

Five Geopolitical Feedback-Loops in Peak Oil

Energy Intelligence Note: April 23, 2007

It is quite common to hear “experts” explain that the current tight oil markets are due to “above-ground factors,” and not a result of a global peaking in oil production. It seems more likely that it is geological peaking that is driving the geopolitical events that constitute the most significant “above-ground factors” such as the chaos in Iraq and Nigeria, the nationalization in Venezuela and Bolivia, etc. Geological peaking spawns positive feedback loops within the geopolitical system. Critically, these loops are not separable from the geological events—they are part of the broader “system” of Peak Oil.

Existing peaking models are based on the logistics curves demonstrated by past peaking in individual fields or oil producing regions. Global peaking is an entirely different phenomenon—the geology behind the logistics curves is the same, but global peaking will create far greater geopolitical side-effects, even in regions with stable or rising oil production. As a result, these geopolitical side-effects of peaking global production will accelerate the rate of production decline, as well as increase the impact of that production decline by simultaneously increasing marginal demand pressures. The result: the right side of the global oil production curve will not look like the left…whatever logistics curve is fit to the left side of the curve (where historical production increased), actual declines in the future will be sharper than that curve would predict.

Here are five geopolitical processes, each a positive-feedback loop, and each an accelerant of declining oil production:

1. Return on Investment: Increased scarcity of energy, as well as increased prices, increase the return on investment for attacks that target energy infrastructure. Whether the actor is an ideologically driven group (al-Qa’ida), or a privateer (youth gangs in the Niger Delta), the geologically-driven declines increase the ROI for attacks on energy, which will drive both decisions to act, as well as targeting decisions for that action. This is a positive feedback-loop because attacks on energy infrastructure and supply drive up the price, which further increases the ROI for such attacks. John Robb's analysis of the September attacks on Mexican oil and natural gas pipelines suggest an ROI as high as 1.4 million percent.

2. Mercantilism: To avoid the dawning “bidding cycles” between crude oil price increases and demand destruction, Nation-States are increasingly returning to a mercantilist paradigm on energy. This is the attitude of “there isn’t enough of it to go around, and we can’t afford to pay the market price, so we need to lock up our own supply.” Whether it’s the direction of a pipeline flow out of Central Asia, defending only specified sea lanes, or influencing an occupied nation’s laws on Production Sharing Agreements, there are signs of a “new energy mercantilism” all around us. This is a positive feedback-loop because, like an iterated “prisoner’s dilemma” game, once one power adopts or intensifies a mercantilist attitude all others must follow suit or lose energy share. It will act to accelerate oil production declines because mercantilism prevents the most economically efficient production of a resource, accelerating the underlying problem of diminishing marginal returns. The rise of mercantilism is highlighted by the recent coverage of the race to control the Arctic, and its potentially vast hydrocarbon reserves.

3. “Export-Land” Model: Jeffrey Brown, a commentator at The Oil Drum, has proposed a geopolitical feedback loop that he calls the “export-land” model. In a regime of high or rising prices, a state’s existing oil exports brings in great revenues, which trickles into the state’s economy, and leads to increasing domestic oil consumption. This is exactly what is happening in most oil exporting states. The result, however, is that growth in domestic consumption reduces oil available for export. In states, such as Mexico, where oil production is also in decline, the “export-land” model predicts that oil exports will decline much faster than oil production—and this is exactly what is happening, with the latest PEMEX report showing 5% production decline year-on-year, but 11% export decline. Ultimately, the effects of the “export-land” model itself suffers from diminishing marginal returns—when exports shrink sufficiently, the oil-export revenue per capita will actually begin to decline (eventually reaching zero, no matter how fast prices rise), at which time the force behind rising domestic consumption will be eliminated. The likely unwillingness of governments to allow their valued oil export revenues to be totally consumed by rising domestic consumption will create pressure for domestic rationing, price-hikes, or uneven distribution of oil and gas domestically. We are already seeing this as many oil exporting countries are scaling back the subsidized pricing of domestic gasoline. The inequalities that will arise out of domestic rationing will act as a catalyst and accelerant to the last two feedback loops...

4. Nationalism: Because our Westphalian system is fundamentally broken, the territories of nations and states are rarely contiguous. As a result, it is often the case that a nation is cut out of the benefits from its host state’s oil exports. This will be especially apparent when the “export-land” effect reduces the total size of the pie to be divided, or as domestic rationing is introduced to maintain export revenues. As a result, nations or sectarian groups within states will increasingly agitate for a larger share of the pie. We see this already within Iraq, Iran (Khuzestan), Nigeria (Delta State), Bolivia (indigenous groups), etc. This process will develop local variants on the tactics of infrastructure disruption, as well as desensitize energy firms to ever greater rents for the security of their facilities and personnel—both of which will drive the next loop…

5. Privateering: Nationalist insurgencies and economies ruined by the downslide of the “export-land” effect will leave huge populations with no conventional economic prospects. High oil prices, and the willingness to make high protection payments, will drive those people to become energy privateers. We are seeing exactly this effect in Nigeria, where a substantial portion of the infrastructure disruption is no longer carried out by politically-motivated insurgents, but by profit-motivated gangs. This is the ultimate positive feedback-loop: infrastructure disruption further degrades any remnants of a legitimate economy, increasing the incentive to engage in energy Privateering, and compensating for any diminishing marginal returns in Privateering caused by enhanced security or competition from other privateers.

We may see some or all of these effects in any given area, and are already seeing this in some trouble spots. Some states, like Iraq, have been thrown into full-fledged “Nationalism” and “Privateering”-driven geopolitical disruption by the actions of an outside power—in this case, the US invasion was itself largely the byproduct of a shift towards energy mercantilism. This is just one illustration of the synergistic interrelationship among these feedback loops. The important take-aways are these:

1. So-called “above-ground factors” are driven by the geological reality

2. These geopolitical processes are positive feedback-loops

3. They will accelerate the decline in global oil production beyond that predicted by models derived from logistics curves.

Geologically driven decline follows a classic logistics curve, with a "long tail" of declining production continuing indefinitely. Geopolitical positive feedback-loops not only have the potential to accellerate that rate of decline, but can potentially drive it to zero in short order. Oil production requires certain threshold levels of economic functioning, security, and rule of law to proceed. These positive feedback-loops have the potential to cut off the "long tail" of declining production abruptly. It practically dogma in peak oil circles that peak oil doesn't mean the end of oil production, just the beginning of inexorable declines. In light of the potential impact of geopolitical feedback-loops, it may be time to reassess that idea, at least on a regional basis.