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.

lines of dispute over who owns oil and other resources

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:

Thoughts on Quantifying Feedback Loops

I had initially hoped to include quantities of oil shut in by each of these feedback loops broken down by country or area. The data simply isn't available to do that, especially to separate out exactly how much of oil shut in can be attributed to a discrete feedback mechanism. There are, however, two areas where I will discuss quantities briefly. The first is an overview of the amount of oil shut in at two notable hot spots. The second, and much more impressive, is Simon Tegg's work graphically displaying the correlation between quantifiable social factors and nations' net oil exports.

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.

Visualizing Feedback Loops

Below is an excellent graphic display of several social factors and net oil exports, created by Simon Tegg (thank you!) using data from the Failed State Index compiled by the Fund for Peace and Foreign Policy magazine. If the embedded display doesn't work for you, or you want to see the underlying data, here is the google spreadsheet.

While the data set, starting only in 2005, doesn't provide an obvious illustration of geopolitical feedback loops in action, it demonstrates the potential to quantify these forces and display them effectively.


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.

How about reduced demand from people aware of climate change? Less demand for fossil fuels could disrupt investment and hence production.

A bit of a negative outlook, I'll admit, but I think people in the rich West are quite interested in someone else reducing demand due to global warming, less interested in doing so themselves. People seem more interested in reducing personal demand due to high prices--but that tends to lead to reduction in the most discretionary demand first, which makes the remaining systemic demand more inelastic, which will likely exacerbate these feedback loops (same is true if people actually did reduce personal demand out of a concern for global warming).

Add to that two things:

1. people in the rich West who reduce demand out of concern for global warming make energy consumption more affordable for the developing world--so actual energy consumed may not decline.

2. to the extent that global warming begins to wreak havoc (which would certainly increase the desire to reduce demand to slow it down), the warming itself has the potential to exacerbate these feedback loops by reducing the availability of substitutes (mainly biofuels), increasing the weather-related damage to energy infrastructure, etc.

However, I think you still raise a good point--especially if there is some kind of temporary surge in demand destruction due to some newfound global warming concern. That could dirupt capital flows, or even more likely lead to new regulation that makes the energy investment environment highly uncertain...

"People seem more interested in reducing personal demand due to high prices--but that tends to lead to reduction in the most discretionary demand first, which makes the remaining systemic demand more inelastic, which will likely exacerbate these feedback loops (same is true if people actually did reduce personal demand out of a concern for global warming)."

On the other hand, spreading the reductions over a longer time period increases elasticity. If SUVs go the way of the dodo by 2010, you might initially have a lot of very upset people. By 2020 most people will only vaguely remember them, and by 2080 or so people will look at them the way we look at a steam locomotive.

Same goes with air conditioning. The initial impact will be huge on quality of life, but over time people's mindsets will acclimate and they'll be about as happy as they are today.

Refrigeration is another. Transitioning to non-perishables (with perishables a treat that must be quickly consumed) would certainly be a shock, but it's something that can be mostly acclimated to, given enough time. In addition, non-perishables generally have lower all-round energy demands than perishables, since most non-perishables are vegetarian whereas most perishables are usually meat or dairy.

Security (and all other wasteful) lighting is another one. Someone who has grown up with the belief that such lighting is 'good' might miss it, but their kids are unlikely to care about its absence.

In short, the more time a given set of cutbacks can be done over, the easier it is for people to acclimate to.

human psychology being what it is, I believe you're right. I may long for refrigeration, A/C, individual transport, lighting, but to those who know none of that, they don't miss it or even comprehend the benefits. Humans adapt to their conditions, as easy or harsh as they might be.

Having said that, I'd hope not to live in a world where energy is so dear as to require those sacrifices. it would not be a comfortable world. What I want and what will occur may be two completely different things.

*Lifts glass of COLD beer*
Here's to life in a brave new world.

Sitting in Denver, air conditioning is a luxury not a necessity. Air conditioning is a luxury in Phoenix or Las Vegas, too, but you need to write off a few million house designed under the assumption of continuing cheap energy as uninihabitable without it. If we reduce human living to true "necessities," civilization would look like a factory farm.

As long as we're bicycling and sweltering in our uncooled homes, you can add frequent bathing to that list of luxuries too. Hot water takes a lot of energy. Fortunately, a solar hot water heater is relatively low-tech and easy to build.

Funny you should mention a cold beer. Some friends and I were joking about the value of a cold beer in a Mad Max world. If you could build a hand-powered refrigeration pump maybe you could be the king of Bartertown.

I wonder which food preservation system uses less energy. For canning you first must cook the food to high enough temperature to kill any microbes and turn off any biochemical reactions which cause over ripening. For some foods brine or pickling may also be used. This heat is lost during storage and the food could be stored for several years with only enough energy to prevent freezing needed. Then before eating it is cooked a second time to be part of a hot meal.
Refrigeration and freezing is another preservation option. This usually involves flash freezing with the use of liquid nitrogen and the energy cost of liquifying, storing, and transporting the liquid nitrogen. Sometimes it involves just taking fresh cuts of meat and putting them in a simple freezer. Refrigeration uses very little energy compared to the benefits it provides to the world. It would not take much in the way of PVs to keep even a large freezer operating. The amount needed is proportional to its surface area but the amount kept frozen is proportional to its volume. Very large freezer are much more efficient than small ones. They have been proposed as a way to store wind energy since they can be made even colder during high wind power and allowed to warm back up during calm periods as long as the temperature stays below freezing.
Some foods like lettuce and eggs can not be canned or frozen without serious changes in their characteristics. Some foods like potatoes and onions can stay good enough for months in a root cellar. Grains need to be dried and will last for many years if kept dry and protected from pests. Drying though requires an energy input in order to evaporate its water content which is roughly 1,000,000 btus per ton at 50% moisture content.
I don't see these food preservation methods going away ever. They provide an enormous benefit for their energy buck. What may become very expensive are the highly processed foods found on many supermarket shelves. Hamburger Helper and breakfast cereals may become luxury items. I see potato chips becoming the luxury food it originally was.

I would mention smoking and seasoning as preservative
measures as alternatives also. "Prosciutto" for example, the most expensive sold today is not even cooked first, its salted and left hanging for months.
Then it is usually smoked. Fish can also be salted and
the cooking process avoided altogether. Spices can also "cure" meat thats raw without need for cooking.
The spices themselves create a sterile product that
lasts many several months or even a year.

The most expensive Prosciutto isnt cooked but rather
salted and smoked, its cost is approx $15.00 an ounce
and its addictive as it is expensive. I could mention several other methods which have seemed to become lost arts....maybe another time.
The Prosciutto thats the Dom Pérignon is approx 18 months old when sold.

I think freezers still need to keep a stable temperature. It may work out better to use surplus wind energy to make ice in an insulated tank to use for chilling. Some commercial AC systems do that now with off-peak electricity.

You have made a good point about the weakness of jeffvail's argument about in-elastic demand. If gasoline prices continue to rise as they surely must do post peakoil, then some very big structural changes are going to occur in US gasoline consumption ( and heating oil use). The issue is how much time the world will have; two years is not going to be long enough, 10-12 years would be adequate if the US and other governments provide more leadership that just proposing to drill more of the continental shelf. The 20% renewable energy plans by 2020 or 2030 are good starting points for the US, another is a big rise in gasoline taxes or accelerating the introduction and higher CAFE standards, sooner than 2015.
I don't see why people have to give up personnel transportation, refrigeration or air-conditioning, if much more efficient cars, and appliances are used( or legislated).

I think you've both missed the key to the argument about increasing inelasticity. These "very big structural changes" will target the most elastic demand first if they are driven by the market. The remaining demand will, as a result, be more inelastic, and therefore more vulnerable to geopolitical feedback loops...

A few examples of long term increases in elasticity would be an oil fired electric generator being modified to operate on duel NG/oil or a motor vehicle duel CNG/gasoline. These changes take time to occur, after a price shock, but result in long term increase in elastic demand( for oil). The really big one will be when a significant proportion of vehicles are PHEV, where gasoline will be directly competing with the price of electricity and the inconvenience of having to plug-in after every trip, versus the convenience of filling with gasoline once a week.
Some people will only use electricity and some will have to use mainly gasoline , but most consumers will adjust behavior depending upon price and thus regulating demand.
Other examples would be NG used for synthetic rubber versus plantation grown, again with perhaps a 10 year lag until trees are producing. If the price of NG keeps increasing a greater proportion of rubber will be derived from plantations, even though there is a high labor content in plantation rubber. If NG prices decline, plantations will be managed to give lower costs but less production.
Your example of US consuming 20 Million barrels/day, having higher elasticity than the US consuming 10 million barrels/day is only valid if this is achieved by short term measures such as gasoline rationing. Longer term adaptations such as vehicles becoming twice as fuel efficient, relocating housing closer to work or work closer to housing are all going to maintain the same elasticity.
The reason you have the oscillations between predator and prey is due to the slower reproduction rate of predators so that for example Eagles are unable to keep up with a rabbit or mouse plague, and the prey runs out of food and crashes. In the sense that the lag in responding to higher oil prices may cause oscillations in price the analogy is good, but not relevant to the brittleness of the economy. The price changes over one or two years are unlikely to be influenced by changes in vehicles, use of oil for home heating or even investments in new oil production, these cycles are likely to occur over decades.

I have to say, I'm not too thrilled with this kind of theorizing. It's very easy to find some feedback loops, identify some possibly relevant concepts, draw some diagrams, and then try to flesh them out with with examples.

But somehow in all of this, the very real, very concrete and very bloody history of primarily (but not exclusively Western) gov't, corporate and military efforts controlling third world resources get bleached into abstractions that somehow miss the point.

Take my "hero", Dick Cheney. Although I do not know exactly what went on at his Energy Task Force meetings, we do know there were maps of the Iraqi oil fields. Here we already see a first class mind at work -- one focused on the issues at hand. And specific actions were taken in the wake of those meetings.

Now of course I don't think every concrete analysis need be nailed down into war plans. But somehow, it should at least orient us in the wars (maybe the war) that are (is) step-by-step enveloping us.

I suppose you mean sahrawi or saharaoui when you talk about Morocco's conflict?
(or are sawaharis a different population?)

Yes... fixed it. Sawahari seems to be an alternate spelling (based on a very cursory Google search, but Wikipedia cites only sahrawi and saharaoui. Too bad spell checker doesn't catch such things...

Another GFL1 example in oil and gas is Bolivia. Currently intensifying problems are in part over distribution of income from selling gas to Brazil and Argentina. Gas fields are located in eastern provinces (called departments) that want greater autonomy, including greater control over gas and income from gas. National government wants to keep control and fund programs for the entire population of Bolivia.

I think Bolivia is a great example, and the situation in gas-rich Tarija Department is exacerbated by the desire for autonomy among many of the indigenous residents. Tarija has about 80% of Bolivia's oil & gas reserves and recently voted in favor of increased autonomy. At a minimum, the environment of political uncertainty is increasing the risk of investment in their oil & gas sector, and it wouldn't be very surprising if an indigenous insurgency started targeting energy infrastructure...

Yes, but now that a national government representing the indigenous is in power, it is a not-very-indigenous regional minority (in Tarija and other eastern department capitals) that is driving the autonomy movement. The opposition is trying to block the flow of gas, while the national government is trying to maintain control of the gas fields. This has not yet become violent, but might any day now.

Looks like the first cut in gas supply to Argentina and Brazil.

LA PAZ (AFP) — Demonstrators clashing with socialist President Evo Morales' government on Wednesday cut off Bolivia's natural gas supply to Argentina, a Chaco company executive told AFP.

"We have had to stop operations at Vuelta Grande" a natural gas plant in Chuquisaca department, which also supplies Brazil in part, Chaco's institutional relations manager Juan Callau said.

Vuelta Grande produces 83 million cubic feet (2.3 million cubic meters) a day which is exported to Argentina (1-1.5 cubic meters) and in varying volumes to Brazil, which consumes a total 31 million cubic meters.

Within these feedback loops is what I would call the 'co-dependence dilemma'. Saudi princes need the western economy to be vibrant enough to produce racehorses and Bentleys for themselves as well as groceries for the ordinary folks. A particularly telling example in the next few years could be China running short on coal. Within a decade only Australia and the US will have the coal export capacity but as the commentator suggests this may not be enough to keep the Chinese economy going. So commences the downward spiral but then again less CO2 emissions. The alternative is to manufacture locally or consume less which of course will be resisted by the big business lobby and their captive politicians.

One thing I think thats missing is that these feedback loops are used to further political agendas.
This tying between feedback loops at the political and economic level is in my opinion what really fans the fire so to speak. If they existed in isolation or were handled in a reasonable manner the existence of positive feedback is not in of itself cause for alarm. They would serve in a enlightened world as firm guides for policy and political changes to defuse them.

Instead almost all the interaction worsens the situation and tends to drive the feedback loops. Generally driven complex exponential process result in chaos in complex systems.

Regarding the motion chart,

For those unfamiliar with google's motion charts I reccomend setting Size to Net Liquid Exports; The horizontal and vertical axises to 'Uneven economic development along group lines' or 'Legacy of group grievance or group paranoia' or 'Failed State Index'; and Colour to Factionalization (a combination of the two group metrics.) Then drag the scroll bar accross to toggle between 2006-2007-2008. A larger clearer version is available through the spreadsheet link

What should become clear is that most of the world's oil exports come from countries where disenfranchised groups, antagonistic to the State, are present...

GFL n+1:
Most of our present day productive oil facilities, not to mention the new findings giving us the hope of postponing production decline (e.g. the colourful part of are located in particularly challenging environments, requiring substantial investment to develop and maintain. The low hanging fruits of easy oil have mostly gone. Given the first economic shocks and the developing crisis, many of these projects may turn out be too painful to keep -- even without military conflicts. This may lead to a faster depletion curve leaving some portion of the difficult oil eventually buried for ever -- or what's even worse, leaving us e.g. with several deserted oil spouting holes on the ocean floors...

Jeff, I think you were pedagogically right to list nation/state conflict first because, as you said, "it may be least understood". All too many people find it difficult (if not impossible) to appreciate any measure of what's right than what the state and the formal law say it is.

I appreciate that you used "nation" as a catch-all for all groups, but I wonder if class shouldn't be more emphasized, since many of these examples, international and domestic, involve fictional abstractions like "the economy" (national or global) used to elide the fact that such things as resource grabs are done to benefit a small elite at the expense of the non-rich majority.
An example we see in America today is the mania for drilling, which will have negligible effects on imports and price (and even those not for many years). The lie is that it would benefit "America", when it would really just be profitable for a handful of companies and bought politicians, while for the rest it would only increase their inevitable travails by obstructing and delaying the decisions which should be taken now to invest in movement beyond fossil fuels. (Not to mention the threat of environmental catastrophe and despoliation of public property like ANWAR.)
The examples could be compounded, in many non-energy areas.

I just tend to agree with Marx that national, religious etc. conflict is usually at least inextricably interwound with, if not really just the facade for, class conflict, and I wish that analyses like this more often took this into account.

Having said all that, I'll go back to "states" to comment on another example of broad, basically fictional abstraction, vs. concrete cui bono realities.
Regarding the New Mercantilism, in discussing its second feedback loop you refer to its "less optimal allocation of energy resources than market allocation".
I'm inclined to disbelieve in "the market" allocating anything, as opposed to what was always a more or less disguised mercantilism. Anyone can take aggregate data which does not reflect any reality in particular and use it to advocate or defend a self-seeking policy, whether the perception is zero-sum or not.

So my point is, to me China (i.e. its elite) seeking bilateral oil deals is the same as America (again, the economic elite) invading Iraq to help secure the oil of the Mideast in general which is the same as the administration's general domestic looting (including the general oil/gas leasing and drilling push). These are all examples of a power elite seeking to grab from others to further aggrandize itself, and using various ideological abstractions to cover up this otherwise naked Hobbesian fact.

I wrote all this just to offer another way of looking at these issues, another way of seeing them all as interlinked.
Indeed, many of these GFLs seem to me more like subspecies of GFL1 than species in their own right.

I'll make one other comment, on GFLs 2 & 8.
It's amazing how offended Americans get over this - that oil producers might actually have priorities other than feeding America's oil addiction. I often hear things like "social spending" in producer nations disparaged. Don't they know - they're not supposed to be investing in, say, health care infrastructure. They're supposed to invest only in exploration!

Of course, this idea of gauging the benefits of pumping oil now vs. any detriments or opportunity costs and concerns for the future, seems to have almost zero constituency in America.
Indeed, regarding offshore drilling, I've sometimes heard a domestic variation on the how-dare-you-have-any-priority-other-than-drilling notion, with politicians from the likes of Kansas calling coastal states selfish for being concerned about their tourism industries and the ecological integrity of their coasts.
How dare you not do all you can to feed Kansas' addiction!

Now for some light on the TNK-BP Affair:
BP's Russian defeat a market victory
By John Helmer

MOSCOW - If anyone needed convincing, the paper that BP, formerly known as British Petroleum, signed on Thursday with Mikhail Fridman and his Russian shareholding partners proves that defying the law of gravity is unlikely to succeed for long; even if the world's weakest prime minister, Gordon Brown, and his disloyal foreign minister, David Miliband, have tried to stake their short-term political careers on it; and even if the Financial Times of London has tried to make the inevitable fall appear to be a masterly exercise in BP negotiating skill.

In the middle of 17th century Paris, Savinien Cyrano de Bergerac (that's the real one, not the 19th century stage character), wrote a fantasy about a voyage to the moon. He described several

Click Here

contrivances to get there, in addition to his own. One, which reportedly delivered the biblical prophet Elijah, involved a large magnetic ball and an iron chariot. To propel the latter into the sky, and thence to the orbit of the moon, the prophet tossed the ball into the air so that the magnetic force would draw the chariot after it. He was obliged to keep catching and tossing to sustain the upward momentum. When it was within gravitational range of the moon, the magnetic ball was tossed downward, and then upward again, to break the speed of the chariot's fall.

Russia isn't the moon. But BP has been trying a variant of the magnetic-ball-and-chariot to hang onto the 23% of its global oil reserves located there, 25% of its current oil production, and a comparable amount of its market capitalization. Rarely has so much value in global energy resource depended on such a theory of motion. Robert Dudley, chief executive of TNK-BP - the 50/50 joint venture BP has operated for five years with Fridman, Len Blavatnik and Victor Vekselberg - has also been using several quaint contrivances to defy the laws of gravity.

Dudley was found out, having tried to negotiate secretly with Russia's Gazprom the sale and purchase of the 50% stake in TNK-BP owned by the Russian trio - collectively known as AAR, reflecting the names of their holdings, Alfa, Access and Renova.

Dudley, BP chairman Peter Sutherland and chief executive Tony Hayward may have thought their proposed deal had the blessing of Gazprom's chairman at the time, Dmitry Medvedev, and Gazprom's chief lawyer, Konstantin Chuichenko. By the time the latter duo had moved into the Kremlin in May, Medvedev as president, Chuichenko as head of the president's Main Control Department, Dudley and his masters had also convinced their contacts in Downing Street and in the British Secret Intelligence Service that their scheme was a test of strength between, on the one side, Prime Minister Vladimir Putin and his deputy, Igor Sechin, who are usually in charge of such matters, and on the other, the new Russian president. Sechin is also chairman of the board of Russia's leading oil company, Rosneft.

Fridman identified the folly of foreign companies playing Russian politics against Russians, claiming publicly that Dudley's secret not only violated the terms on which he worked as chief executive, that is he should report to both sets of shareholders on the TNK-BP board. It also violated the elementary rules of Russian politics - there are no secrets, and there are no one-sided deals.

According to the Financial Times, Russian media reports and public statements by BP and AAR, the agreement between Hayward and Fridman - if it sticks - requires Dudley to be ousted by December 1. This was the first and principal demand of the Russians throughout the public conflict, since BP's hapless Gazprom deal was uncovered at the start of the year, and Medvedev lined up with Putin and Sechin to repudiate it.

Alastair Graham, head of BP Russian Investments, had told the FT six weeks ago that the campaign against Dudley was "a smokescreen for [the Russian] attempts to seize control of TNK-BP". In fact, BP had been trying to take control of TNK-BP from AAR.

If you believe the British company, you can declare the reported new deal a victory for BP. According to the FT, the agreement is BP's victory because it
preserves its 50% stake in TNK-BP after a struggle with its local partners that focused attention on the rights of foreign investors in Russia. The memorandum of understanding (MoU), agreed this week by BP's board, follows a long-running dispute over BP's most important international venture ... The outline agreement, steered by Tony Hayward, BP's chief executive, and chairman Peter Sutherland, was reached after fears that BP's interest in TNK-BP could be at risk because of its fight with its Russian oligarch partners. BP's control of TNK-BP had also come under pressure from multiple investigations by the Russian authorities into its labor practices. Under the deal, the 50-50 equity split of the partnership would remain unchanged.
In a briefing on the agreement he signed, Hayward claimed, "The outline deal announced today, provided the details can be agreed in good faith, is an acceptable compromise." Sechin announced: "We are pleased that the conflict has been settled and the parties to the negotiations have reached an agreement on the shareholder level without involving third parties, including the state. This sends the right single to the entire market."

If you are the Russian shareholders, you see the outcome positively, but not in the way the British side has reported. According to the press reports, the replacement for Dudley, and new chief executive officer of TNK-BP, must be independent of BP, and his powers will be substantially reduced from Dudley's prior mandate - a big loss for the men who sit on St James Square, BP's headquarters in London.

Other reported provisions indicate that the holding company for the joint venture will now have three independent directors and four each for BP and TNK-BP. But the affiliated and subsidiary companies will remain at parity between the Russian shareholders and BP. BP thus loses operational control. In addition to Dudley, its key financial and operational executives have already resigned, and more than half of its secondees on the TNK-BP payroll have lost their Russian visas and been reassigned.

The MoU between BP and AAR allows for an initial public offering (IPO) of up to 20% of shares in TNK-BP's assets, to be issued in a year or two. This allows both sides to sell into the market, and it means two things - TNK-BP's share price goes up in anticipation; Gazprom and Rosneft, the two state Russian energy companies, will consider what they would like to do. The current freefloat is only 5%. A larger freefloat ought to lift the market cap of TNK-BP - another plus for the Russian shareholders, compared with the status quo ante. Predictably, TNK-BP's share price jumped 8% in Thursday's trading.

AAR had been clear from the beginning that Dudley's plot had been to oust them from their shareholding at a discount to the value BP placed on TNK-BP's assets in its own capitalization. An independent audit by DeGolyer and MacNaughton confirmed last year that TNK-BP's total proved reserves were 8.225 billion barrels of oil equivalent, applying US methodology on a life of field basis. BP says its reserve figure is 17.8 billion barrels, and includes in the count its share of TNK-BP.

That makes TNK-BP's reserves 23% of the BP total. If you were imaginative, and applied that proportion of BP's market capitalization (at the time the conflict broke into the open) of 105 billion pounds sterling (US$213 billion) to value TNK-BP, you might figure that TNK-BP should be worth $53 billion. And that should indicate that a half share of TNK-BP, held by AAR, should be valued at $27 billion.

But in June, the market cap of TNK-BP as a whole was just $35 billion; the half share $17.5 billion. The fight, which BP and its supporters portrayed in the London press as a defense of foreign investment rights in Russia against local predators, was in reality about the $10 billion difference between the two prices, and the much bigger difference BP has calculated that might accrue to BP's reserve balance if Fridman and his associates were replaced as the TNK-BP partner with Gazprom, and its enormous reserves.
Today's share prices reflect the fall of oil in global markets, a worldwide contraction in economic growth prospects, a slowdown in Russian growth rates, the dwindling of the pound, and the rise of the dollar. BP is currently worth 94.8 billion pounds. BP's share price fell 1% on the Russian agreement; TNK-BP's rose 8% on the news, making the company's market cap currently $27.4 billion.

The trajectory of TNK-BP's share had been rising through much of the six-month conflict - but not from Dudley's or BP's magnetic pull. So long as the Moscow market judged that AAR stood the better chance of winning the contest for operational control of the company, TNK-BP became more valuable, and BP less so. A clever arbitrageur should have been betting on the widening spread between the two share prices. That in turn has meant that no one in the market believed what they were reading in the bulletins issued from St James Square to the dutiful FT.

That is to say, the Russian investment community has believed that TNK-BP will be worth more if BP loses its battle than if it wins.

And so it will be. By trying to fight Fridman behind the arras, Dudley, Hayward and Sutherland, at their own expense, are going to enrich their adversaries. By trying to play Medvedev and Chuichenko off against Putin and Sechin, they have substantially increased the likelihood that the IPO price for a 20% stake in TNK-BP will be considerably higher than Fridman's sale target, and that a Russian state company may enter the shareholding to assure firm Russian control of the oil reserves.

BP has been forced to give up the lucrative scheme in which it paid its executives through TNK-BP revenues. But it preserves what counts at St James Square - the market cap of BP, the BP share price, and the bonuses Sutherland, Hayward and their associates earn, so long as the Russian reserves continue to be booked on BP's ledger.

A minor footnote to the conflict is likely to be buried by the MoU. However, it tells more about BP's tactics and intentions than the company should have allowed to be known.

On June 30, as part of what the FT reported as tit-for-tat by the British against legal action by the Russians, BP issued a London lawsuit, informing the court and BP's shareholders that for at least 15 months their company had a legal claim to 8.5 billion rubles

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(US$366 million), payable by the Russian shareholders of TNK-BP.

On request, BP has produced a copy of the Short Claim filed by Linklaters at the High Court. It is captioned BP Russian Investments Ltd versus Alfa Petroleum Holdings Ltd and OGIP Ventures Ltd, both of London. BP declines to say if it has served the claim on the defendants, nor whether it has filed in court the fuller Particulars of Claim. The amount of the claim, including the court filing fee but not legal costs and interest, is "the US dollar equivalent of rubles 8,462,102,278.92". Michael Bennett is the Linklaters solicitor who signed the claim on BP's behalf.

In a single page, however, BP and its lawyer revealed details of BP's relationship with TNK-BP and AAR, which BP shareholders had not been alerted to before - and which BP may now wish it had not exposed at all.

The legal basis of the claim is that in 2003, when BP acquired a 50% share of Tyumen Oil Company (TNK) - then owned by Fridman, Vekselberg and Blavatnik - the Russian shareholders signed an agreement to indemnify BP in the event that the Russian government, prosecutors or tax agency filed claims against TNK for the period prior to BP's deal. BP officials were reluctant at the time, and subsequently, to admit to the existence of this and related indemnities, and for two good reasons: BP did not want a public demonstration of how little it trusted its new Russian partners in TNK-BP; nor would it acknowledge how probable it thought TNK was liable for heavy back-tax claims from the Russian government.

Clause 4 of what is called the Tax Deed of Covenant, dated August 29, 2003, is now identified as the operative provision by which BP is now demanding the money it says was paid out of its share of TNK-BP's profit in either 2006 or 2007. The Claim Form doesn't provide details of the tax levies on TNK-BP. Asked what these were, BP spokesman David Nicholas referred to BP's annual report for 2006.

This says that on October 23, 2006, tax audits of TNK-BP group companies for 2002 and 2003 resulted in "a payment by TNK-BP of approximately $1.4 billion in settlement of those claims". There is no reference to how much of this amount was paid out of BP's share of TNK-BP monies, and thus subject to repayment by TNK-BP to BP. All BP admitted to its shareholders was that "at the present time, BP believes that its provisions are adequate for its share of any liabilities arising from these and other outstanding tax decisions not covered by the indemnities provided by our co-venturers ..."

This language appears to refer to tax liabilities BP might have to pay the Russian authorities, after the 2003 transaction was completed. It omits to disclose to shareholders that BP and TNK-BP had apparently agreed at the board of directors, and with chief executive Dudley, that no money, out of the $1.4 billion tax paid in 2006, would be owing to BP.

BP refuses to explain why it has apparently changed its mind - and so recently. Nicholas told Asia Times Online: "We consider the correspondence between BP and the defendants and the contents of this correspondence to be confidential. We have filed our claim with the High Court and you now have a copy of the claim form. The details of this claim will be fully examined when the case comes to court. We don't intend to make further comment on it."

The Claim Form reveals that BP's first letter of demand for payment was sent to the Russian shareholders on March 19, 2007. But the amount claimed in that letter by BP is reported in the court document to have been 3.4 billion rubles. Further letters of demand followed, BP says, on August 1, December 24, and May 9, 2008. BP then makes an unusual admission: on May 22, BP received a letter from the defendants, the Russian shareholders of TNK, in which they acknowledged "that each Defendant was liable to pay 50% of Roubles 1,835,147,027.73 in respect of the sum of Roubles 3,402,745,865.00 claimed by the Claimant in the aforesaid letter dated 19 March 2007".

Read that carefully again - BP admits that in its letter-writing campaign from March of 2007 to May of 2008, its demand was for 3.4 billion rubles (about $147 million at today's exchange rate); and that the Russian shareholders had agreed to pay it all.

Notwithstanding, just 38 days after receiving this payment undertaking, BP filed suit for an amount that is exactly two and a half times larger. BP was asked to explain why it sued so soon after the Russians agreed to pay on May 22; and why the amount of the claim had jumped skyward. Spokesman Nicholas refused to say.

Can there have been an agreement in 2006 between the BP and Russians on the board and in the senior management of TNK-BP not to reimburse BP, and not to invoke the indemnities? Then, through 2007, when BP was dispatching its letter claims, was there an understanding with the Russians that they would be obliged to reimburse BP for considerably less than BP is now demanding?

The difference between what BP told the Russian shareholders it was willing to accept in March 2007 and what it sued for nine weeks ago is almost 5.1 billion rubles (about $218 million at June 30). In retrospect, this appears to be a sum Dudley, the BP representatives on the TNK-BP board, Graham of BP Russian Investments, and the BP board were all willing to sacrifice - without issuing a notice to shareholders. Perhaps a year ago, this was a sacrifice they judged prudent to maintain amity between the BP and Russian shareholders.

But once the BP plot to oust AAR had been exposed, the appearance of amity was shot, and the stock markets turned against BP, the English tried to protect their stake, keeping Dudley in place, with a writ worth $218 million more than both sides had agreed to accept and pay in May. In the old-fashioned sense in which Cyrano de Bergerac meant the word, this was lunacy. Hayward's signature on the agreement of September 4 certifies it. In a commonsense world, lunatics will also be defeated in the end.

Brown and Miliband face the same fate.

John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business.