Russia - Georgia Analysis We Can Support

Mark Safranski, also known as Zenpundit, has an article out on Pajamas Media regarding the Russian - Georgian conflict called Lets Not Rush Into Cold War II. Mark nails every point perfectly, scores on every possession, and generally educates at a level even the politicos should be able to understand.

From administration to administration, we zigzag with the needs of the moment in our dealings with Russia without a clear vision of what America’s vital interests in the former Soviet states actually are.

Georgia is a textbook case. While America has a legitimate concern in encouraging former Soviet states to develop into market democracies, there is no intrinsic economic or strategic American vital interest in Georgia per se and even less in South Ossetia. Georgia is our ally for only two reasons: Tblisi was enthusiastic to send troops to help in Iraq in return for military aid and it occupies a strategic location for oil and gas pipelines that will meet future European energy needs. In other words, Georgia’s role is of a primary strategic interest to the EU, not the United States. Which is why European and British companies have such a large shareholder stake in the BTC pipeline and why European FDI in Georgia exceeds ours. Yet it will be American troops in Georgia handing out bottled water and MREs, not the Bundeswehr or the French Foreign Legion. Something does not compute here.

Exactly, our policy with Russia is a step by step tactical approach absent a comprehensive strategic approach. Slam and Dunk. So what do the politicos do? The commenter's claim the Zenpundit is a liberal infiltrator. However, had the Zenmaster posted the same piece on DailyKos I'm betting he would have been nailed with the neocon label. In my book, what is missing is a clearly stated foreign policy from either side of the isle of politics, so any clearly stated strategic discussion of foreign policy commentary from an economic first perspective that doesn't follow a traditional ideological mindset will be rejected by both sides until we collectively find our national strategic vision articulated by a President.

While Mark got my blood pumping, the adrenaline gave me a natural buzz when I followed up Mark's piece with Thomas Barnett's 3000 word passion statement. When I use the F bomb, it means I'm having an emotional moment and care about a topic, and that is generally how I see it when the bombs drop on other blogs. Quoting any part of the 3000 words to summarize the whole is futile, so go read it and come back.

Russia and the US are not equals, but can be in their approach to the gap. I would also include other major powers in this equation. I love that piece by Tom, because in a great many words, he is essentially invoking our Yin Yang theory for strategically approaching our national interests.

When any major power exercises power in the gap, it ultimately represents an opposing (competitive) and, at the same time, complementary (completing) application of power towards the ends of shrinking the gap. Tom found the Yin Yang.

In this case, Georgia, which has a relationship with the United States is being consumed by Russia, and ultimately will be regardless of what the United States does. This represents a loss of influence for the United States and Europe, a gain of influence for the Russians. BUT this also represents a long term complimentary action to the strategic goals of everyone in the core. Why? Because successful military intervention by a core nation into the gap shrinks the gap.

Apply the same theory to Iraq. The US military intervention there represented a loss of influence by Russia and Europe, and a gain of influence by the United States. The result is an action that is complimentary to the strategic goals of other core nations (think China and energy here), and the effects of this intervention are broad. Consider what we see in the UAE, Bahrain, and Kuwait and we have movement towards more shrinking of the gap. There is no reason to believe that Russian intervention in Georgia couldn't have a similar effect on regional nations, including Ukraine.

The major powers in competition with the United States can be described as 7 primary regional powers (US makes 8, and is unique because it is the only true global power). In no particular order.

1) Europe
2) China
3) Western Pacific Nations (South Korea, Japan, Taiwan, and Australia)
4) Russia
5) India
6) Brazil and South Africa
7) Canada and Mexico

Those seven power bases represent the "core" of where the focus of American strategic interest lies in globalization. If the State Department backed by the president can manage the competing relationships the US has with these 7 powers, the DoD can then manage the threats that emerge in the gap. If we do not maintain a good relationship between the United States and those 7 powers, the United States cannot guarantee the global system that currently governs economics. Those 7 major power regions represent the map for the State Department.

Everything else represents the map for the DoD. Part of the role of State and the DoD is to remember, when any of the above 7 engage militarily in the gap, while it is factual to say it is in our competing interest, it is also factual to say it is in our completing interest.

One point here I'll expand on later... we have been talking about operational capabilities and strategic environment a lot on the blog since this post. We firmly believe the DoD must maintain acquisition focus against the operational capabilities developed by nations in the core, but align those capabilities in a way that gives them creditable capability in the gap. Why? Because the market for military technology in the gap is the core, which means we must expect to see core capabilities in the gap.

Anyway... Mark and Tom are both on the money here. The driving force behind both our political and strategic national interest is economic. The other seven major powers we describe above represent the stakeholders in that economic system, and the system is key. While the US faces major economic challenges in the near term due to debt issues, long term stability of the economic system is also the solution to that problem as the gap becomes the emerging consumer market.

And while i shouldn't have to say it, the competition between the powers of the core is obviously about one thing: Resources, including energy. This is why bio-diesel, and other alternative energy sources not named ethanol should be a national security priority, which takes enormous priority over a climate issue. Georgia isn't the first gap nation to see military intervention by the core, it is essentially the same strategic choice the US made in Iraq except from a Russian interest point of view. It also represents the beginning of what will be a century of interventions throughout Africa by core nations, after all, that is ground zero for the future competition in the 21st century.

If Mark is the liberal, and Tom is the neocon, I must be the globalization nazi. So be it, in my realist world, world peace requires tough men with guns defending a global economic system where all regional powers are stakeholders, and in my academic world, economic prosperity requires measured cooperation as part of the competition of major powers.

OPEC's Strategic End Run on Progressive Energy Policy

While on the road this week, we couldn't help but think about the energy situation that our nation finds itself in. In New York, a gallon of gasoline is running above the $4.15 a gallon mark, and yet everywhere we went, business was still good. Both companies and individuals are making choices to deal with the rise of energy prices, and while those changes aren't welcome, they can be done without significant impact to most people and businesses we interacted with.

We are not delusional, we recognize high energy prices likely impacting some people on fixed budgets very hard.

One of the most interesting bits of knowledge we picked up this week was a political discussion of Progressive Energy Policy, something we were not well familiar with. It is the first time in years I have spent so much time looking at the Dailykos, of which most of the information explained could be found in discussion. While not necessarily linked with Barak Obama, progressive politics in America has generated several policy papers on energy dated back mid 2006, leading into the election where Democrats took power. In review, given the circumstances of the time, we believe it was a pretty interesting policy position. Taking a look at the changed conditions, the progressive action plan associated with the progressive energy policy has become as useful as toilet paper... which is what we think makes it a great discussion.

The progressive policy position, as explained to us by a highly credible source, was built on the theory to capitalize on conditions prior to peak oil, which is expected sometime next decade, and transition the US towards an alternative energy solution. The idea is something we have previously seen discussed over at CDR Salamanders, tax gasoline to raise the price, tax the oil companies, and take the tax earned and create six initiatives towards alternative energy. Interestingly enough, all six are listed on Obama's official website under the "energy and environment" section, except the last seventh on Obama's website wasn't in the Progressive Plan we saw.

Invest $150 Billion over 10 Years in Clean Energy.
Double Energy Research and Development Funding.
Invest in a Skilled Clean Technologies Workforce.
Convert our Manufacturing Centers into Clean Technology Leaders.
Clean Technologies Deployment Venture Capital Fund.
Require 25 Percent of Renewable Electricity by 2025.
Develop and Deploy Clean Coal Technology.

We believe that when the policy was written, this might have been a very workable plan. We are almost never impressed with government market manipulation, but we strongly believe one strategic failure of the Bush administration has been the absence of a strong energy policy that didn't result in paying OPEC for fuel while we send our troops to the Middle East to provide strategic protection of the global energy system. The Progressive Policy, the one we saw written just prior to the 2006 election, had a good chance to be very successful but also had some important strategic flaws, flaws we believe OPEC is exploiting to their advantage.

Enter several facts.

1. Exxon Mobile, the largest US oil company, is the 14th largest oil company in the world.
2. 94% of the world's oil supply locked up by foreign governments.
3. Exxon Mobile buys 90% of the crude oil that it refines from the 13 larger companies.
4. The price of gasoline when the Democrats took control of Congress was around $2.25 per gallon.
5. 75% of all known oil reserves are completely controlled by national oil companies
6. The major driver of energy cost increase is the soaring cost of crude
7. The United States produces less than 10% of the total crude oil daily worldwide

Source: Energy Debate, Senate Judiciary Committee, Thursday 05/22/2008 - 11:00 AM

We don't know who does strategic forecasting for the Democratic Party, but we are not impressed. If we accept the facts, which we have to because as Congressional testimony there is liability for dishonesty, and we account for the rise of gasoline prices due to the devalue of US currency, accept that distribution costs have increased slightly, and accept that new production is expensive, we still can't find anyone who can account for the rising cost of crude through speculation. Democrats believe the rise in total crude is artificial, that costs to put fuel to market have not increased well over 150% in just 18 months. Given the facts, we tend to agree.

Because OPEC has the most influence over the supply of crude, the most accurate statistics regarding demand, and the most to gain from high crude costs, we believe they have found a way to leverage supply, demand, and speculation to recreate the conditions that faced Jimmy Carter, primarily exploiting the progressive political position. Understanding that the world economy can manage costs that increase fuel up to around $4.50 a gallon, a target discussed in the progressive energy policy paper we read, and exploiting the no drill policy of progressive politicians, OPEC has essentially cashed in on the money progressive politicians had expected to utilize to implement their progressive energy policy. Recall Obama's frustration that the price of energy has gone up to fast, not too high, citing the term "gradual adjustment" which would be the tax policy towards gasoline towards $4.50 a gallon. The reason for his frustration is because now instead of the US getting the money via the Progressive Energy Plan, progressives are watching that money go to OPEC instead. In reflection, they really should have seen this coming.

OPEC is capitalizing on the weaknesses of both parties in American politics, but give away their position by waiting until the moment Democrats took power to make their move. The Republicans held executive and congressional power for 6 straight years, and while they did an OK job managing the energy prices at that time, they did a poor job planning for the future. Why did OPEC wait until Democrats took power? Several reasons, including capitalizing on the split power struggles, but also because they can read the tea leaves of the American public. They needed to make their move before Democrats could, which means the time period between their Congressional power and when they would presumably take the presidency.

Republicans have a tendency to dismiss the possibility of market manipulation, particularly with energy, because despite being the worlds dictatorship club, OPEC is an important player in Republican foreign policy and economic policy. Democrats on the other hand traditionally lack the ability to see their policies exploited by forces outside the United States, they always focus against internal forces first. Their reaction to date is evidence, they blame "Big Oil", even though American oil companies are trivial players in the global oil market, and they blame speculators in America, which is just as ridiculous because energy speculators exist in every financial marketplace, and US speculators can't control the price from the US alone.

Where from here.

To understand the economic forces at play it is instructive to visualize the scale of OPEC's potential wealth in comparison to that of the consuming countries. At $140 a barrel, OPEC's oil assets stand at roughly $128.8 trillion, equivalent to well more than half of the world's total financial assets and nearly three times the market capitalization of all the companies traded in the world's 25 top stock markets.

According to the Energy Information Agency, America uses an estimated 20 million barrels a day, with gasoline consumption in 2007 about 142 billion gallons, an average of about 390 million gallons per day, and the equivalent of about 61% of all the energy used for transportation, 44% of all petroleum consumption, and 17% of total U.S. energy consumption. About 47 barrels of gasoline are produced in U.S. refineries from every 100 barrels of oil refined to make numerous petroleum products. With a two dollar per gallon federal tax under the Progressive Energy Policy, the United States would have been earning around $580,000,000 per day in potential tax revenue, some of which would have been shifted towards alternative energy. That amounts to more than $250 billion tax revenue in a year, making the tax on energy company profits look like an exercise in pettiness. Instead of raising enough tax revenue to pay for the total cost of war in 5 years, including rebuilding and retooling the military towards the GWOT in those same five years, the money is going to OPEC instead.

For the record, gas taxes today are roughly 14% of a gallon of gas, about $.56 a $4.00 a gallon of gas, meaning that the government already takes in $218,400,000 per day on gasoline taxes of $4.00 a gallon, which is below the current estimated national average. That means government is pulling in roughly $75 billion in tax revenue on gasoline per year today, and they are going after the profits of "Big Oil" which the facts clearly show aren't big players on the market. Our elected officials are going after the symptoms, and appear oblivious to the problems. This is not change I can believe in.

If the Progressives ever intend to implement their energy policy short of a Jimmy Carter style disaster, they must address the new strategic conditions that have essentially made their plan an action plan for economic disaster. The only solution we see is for the American government to go all in and adjust the laws to compete at every level of the energy sector, specifically against OPEC, and build up the capacity for crude output in the United States to its maximum potential. While doing so, as the prices fall, for the progressive energy plan to work the government should attempt to control the price of oil at the gas pump at around $4.00, take all tax revenue generated from the price up to $4.00 and continue to implement the investment plan for alternative energy. This strategic adaptation to conditions carries with it two primarily strategic objectives, and while it may have a marginal short term impact, it will produce the desired conditions to influence long term.

In the mid term, the United States will be able to effectively manage the conditions of global energy price, and bring the United States back into balance with the global wealth accumulated through energy export, essentially reducing the wealth of OPEC who is currently doing the same to us. By transitioning the domestic energy sector towards alternative energies, building conditions that make the US a strategic player in the export of crude oil will allow the United States to build a dissuasion strategy against China, who will not transition as quickly. This places the United States, and specifically the Progressive Energy Policy, which is tied to environmental concerns, exactly where they need to be long term to influence the environmental debate.

By building towards becoming a major player in the crude oil industry, the US government positions itself to be exactly what OPEC is today, a player in the price control through supply and demand. This allows the United States to price the crude market higher in an effort to promote the global export of alternative energy solutions developed in the United States, a critical aspect of leveraging change in emerging markets that will not consider environmental conditions in their energy policy if crude is more affordable than rebuilding clean energy infrastructure. We have seen the alternative energy options, and while ethanol gets a lot of attention, only 2% of all farmland in America can be used to completely replace all transportation fuels currently using crude in the US with bio-diesel, and the businesses that intend to do this are months, not years, away from hitting the commercial market. What really impresses about their business plans though, bio-diesel companies we have observed are all net exporters of carbon credits in addition to energy companies. That is not trivial as environmental policy continues to go global.

If Barak Obama ever intends to implement anything similar to the Progressive Energy Policy (because he is a major investor in ethanol companies we expect him to do exactly that), and if Progressives have any intention to ever have leverage short of military power in linking global energy policy and global environmental policy, the Democratic Party needs to adapt to the strategic conditions that are being put forward by OPEC that appear to be specific to destroying their plans. Essentially, they have to leverage the nations capacity and competitive spirit to compete these guys into submission, before they do the same to us. The consequences of not adapting to the strategic conditions, what amounts to an assault on the progressive political platform for energy in America, will almost certainly lead to Barak Obama being remembered as the President to repeat the mistakes of Jimmy Carter, and be the whipping boy for the Middle East national oil community. Does anyone think Barak Obama is really different as he claims? The ability to adapt to strategic conditions, a weakness of Bush II, would be one area he could set himself apart.

We don't have high expectations, and believe the next 4 years are going to be very painful without a major shift in US policy towards energy. However, in the global economy the rulesets are well established, you have to control the market if you want to control the market. It really is that simple. OPEC controls the energy market, the US doesn't have nearly enough influence to make a dent against them right now, and will get left behind trying to force change without the influence to be effective.

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Note: Sources for much of research not cited specifically above is available at the following links:

Oil Drum
Investors Business Daily: Breaking the Back of High Oil
Energy Information Agency
The Committee on the Judiciary Antitrust Task Force and Competition Policy
Dailykos: Would take a long time to review all the sources examined for the Progressive Energy Policy discussion. Our hard copy was not found in full print online, but can be sourced to many discussions at this and other progressive political communities.