Informed Comment

Guerrillas Kill 25
Sistani supports Gradual US Withdrawal

Bombings and assassinations left some 25 persons dead in Iraq on Saturday, including 17 who just showed up in the street dead, with some showing signs of torture.

70 GIs have been killed in Iraq in the past month, and over 2400 have been killed since the war began.

Turkish military action against the Kurdish Workers’ Party along the border with Iraq has heated up, with Turkish mortars falling on the Iraqi city of Zakho, according to this report. That’s what we needed, more mortars falling on an Iraqi city from yet another quarter.

The curfew has been lifted in Baqubah, allowing the city to slump back toward semi-normalcy (Baqubah is a dangerous place). It was the site of an unusually large attack on checkpoints by 100 guerrillas.

Trudy Rubin, who knows a thing or two about Shi’ite politics from firsthand interviews, profiles the new PM-designate, Nouri al-Maliki.

The Iraqi Accord Front [Ar.], according to al-Hayat, has suggested the creation of a new ministerial position, the ministry of state for Arab foreign affairs. The sggestion comes as an attempt to end the deadlock over apportioning cabinet posts. The Sunni Arabs want the foreign ministry, held in the outgoing government by the Kurds, who won’t give it up. The Sunni Arabs say you should have a Sunni Arab to deal with the Arab League states.

Adil Abdul Mahdi, one of two vice presidents, went to see Grand Ayatollah Ali Sistani,and he says that the ayatollah said that he agreed with the idea of ending the US troop presence in Iraq gradually.

The Bush administration used to boast that Iraqis were more optimistic about their future than Americans. I’m afraid his policies have led to a surge in pessimism in both places. A new poll in Iraq shows that a majority of Iraqis thinks their economy is bad and getting worse. 3/4s say that security is bad.

For a wounded soldier with brain damage to later get a bill from the Bush administration for the cost of the weapon he left in Iraq’s sands is just about the worse thing I have ever heard.

The LA Times reports that “An American initiative to use private security companies to protect Iraq’s oil and power infrastructure collapsed amid reports of possible fraud, missing weapons and destroyed documents . . .”

Nearly half of the Japanese are afraid that events are moving toward a war with North Korea or China. I hope they are wrong. The US would get involved i such a thing, but doessn’t currently have an army available for it.

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Susan Sarandon and Death Threats

Susan Sarandon’s description of how alone and obviously afraid she felt as she received death threats and faced massive hostility from the public over her opposition in 2003 to the war is touching.

‘ In an interview to be shown on the Jonathan Dimbleby programme today, Sarandon recalled how she was labelled a “bin Laden lover” for raising concerns about the 2003 invasion of Iraq. The Oscar-winning actress, 59, said the way she and her family had been targeted for her moral stance by newspapers, radio phone-ins, teachers and people on the street was “horrifying” . . .

“I don’t think I ever thought someone would ever really kill me, although there were some people who said ‘I’d like someone to knock her off’ on the radio and stuff like that,” she said. “I don’t think I thought I’d really never work again, but when there is nobody else, when you look out on the field and everybody is quiet and they’re all looking away and nobody’s saying anything, it’s a really scary place to be.” ‘

It is a reminder that we can’t ever take our democracy, and the right to dissent, for granted. It has to be reasserted and reaffirmed in every generation.

Probably in this generation the practice of calling a signature a “John Hancock” has lapsed. It was a nice piece of folk wisdom. Hancock’s signature on the Declaration of Independence was bold and prominent,and while he did not say the things about it often attributed to him, it is certainly the case that he was signing his own death warrant if he lost. It wasn’t his signing in large script that was significant, but that he was the first to sign. We all have at least once in our lives to sign a John Hancock– to take a principled stance that could get us, if not killed, at least in serious trouble. Otherwise, we’ll have led the life of a timid slave and betrayed our own ethical beings, and we won’t even have anything interesting to put on our tombstones.

Here is what John Hancock really did say about his defiance of King George:

‘ May that magnificence of spirit which scorns the low pursuits of malice, may that generous compassion which often preserves from ruin, even a guilty villain, forever actuate the noble bosoms of Americans! But let not the miscreant host vainly imagine that we feared their arms. No; them we despised; we dread nothing but slavery. Death is the creature of a poltroon’s brains; ’tis immortality to sacrifice ourselves for the salvation of our country. We fear not death. ‘

John would have been mortified that over two centuries later some poltroons among our contrymen should have acted like the rowdy redcoats in trying to revoke an American’s liberty, and in making death threats against Susan Sarandon.

My hat is off to her and Tim.

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IAEA Finds no Proof of Iranian Nuclear Weapons Program

In its April 28 report, the International Atomic Energy Agency mentioned the UNSC mandate to Iran of last February:

‘ • re-establish full and sustained suspension of all enrichment related and reprocessing activities,
including research and development, to be verified by the Agency;

• reconsider the construction of a research reactor moderated by heavy water;

• ratify promptly and implement in full the Additional Protocol;

• pending ratification, continue to act in accordance with the provisions of the Additional
Protocol which Iran signed on 18 December 2003;

• implement transparency measures, as requested by the Director General, including in GOV/2005/67, which extend beyond the formal requirements of the Safeguards Agreement
and Additional Protocol, and include such access to individuals, documentation relating to procurement, dual use equipment, certain military-owned workshops and research and
development as the Agency may request in support of its ongoing investigations.

Despite not being fully in compliance with these demands, Iran maintains that it is in fact fulfilling its obligations under the Nuclear non-Proliferation Treaty.

The IAEA found no smoking gun.

Here is its conclusion, which others will not quote for you at such length:

‘ 33. All the nuclear material declared by Iran to the Agency is accounted for. Apart from the small quantities previously reported to the Board, the Agency has found no other undeclared nuclear material in Iran. However, gaps remain in the Agency’s knowledge with respect to the scope and
content of Iran’s centrifuge programme. Because of this, and other gaps in the Agency’s knowledge, including the role of the military in Iran’s nuclear programme, the Agency is unable to make progress in its efforts to provide assurance about the absence of undeclared nuclear material and activities in Iran.

34. After more than three years of Agency efforts to seek clarity about all aspects of Iran’s nuclear
programme, the existing gaps in knowledge continue to be a matter of concern. ‘

This ambiguity is being twisted by the Bush administration to make it seem as though Iran has done something illegal. The report can be read to say that there is no evidence that Iran is doing anything illegal.

In fact, under the NPT, countries do have the right to do the sort of experiments Iran is doing. Most of the complaints are not about substance but about something else.

Iran’s president pledged to continue to cooperate with UN isnspectors.

More about Iran later. For now see the next item, where an Iraqi VP says all hell would break loose in Iraq if the US attacked Iran.

This is the site for the IAEA report (pdf).

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Iraq VP Warns Bush against Iran Attack
Ramadi Fighting Leads to Evacuation of One District

Adil Abdul Mahdi, whom the Americans wanted for the prime minister of Iraq, warned Washington Friday not to attack Iran. “We will not allow anyone to attack anyone,” He said. (Since Iraqi politicians can’t keep bombs from going off all around them, this comment is somewhat grandiose). Abdul Mahdi is one of two vice presidents in Iraq, a largely ceremonial post. He is a member of the Supreme Council for Islamic Revolution in Iraq, which was hosted by Iran from 1982 through 2003. Its leaders are generall close to the hard line clerics of Iran, but they have also made a fairly close marriage of convenience with the US Pentagon.

Reuters reports guerrilla violence in Iraq on Friday, including three killed in Falluja and a US soldier killed north of Baghdad.

The NYT reports that US military deaths have spiked to their highest level in 5 months. It also reports more on the battle for Baqubah. Apparently the guerrillas consider western Diyala province with a fertlie plain that opens onto the capital, to be analogous to Panjshir Valley north of Kabul, the control of which usually had implications for control of the capital.

Al-Zaman reports that there was renewed fighting between guerrillas and Marines in Ramadi on Friday. The US military forced an entire downtown city quarter to evacuate, so they could make it their HQ inside the city, apparently in preparation for moving against the guerrillas. I am pessimistic that the Marines are ever going to subdue the guerrillas in Ramadi, without just destroying it the way they did Fallujah (which still isn’t safe). These search and destroy missions and displacement of populations just anger the locals and drive them into the arms of the guerrillas.

Well, so much for “fly-paper” or “fighting them over there” or attacking Iraq to end terror. The US government is now admitting that the Bush war in Iraq is generating anti-Western Terrorism. So far Madrid and London have been hit over it, and that is only the beginning. The jihadis getting training fighting Marines in Iraq will be a threat for decades, all over the world.

Ayman al-Zawahiri, the number 2 man in al-Qaeda, whom Bush and Cheney have left at liberty to taunt us after it planned and arranged for the implementation of 9/11, is at it again. He tells the radical Muslims that the guerrillas have broken America’s back in Iraq. He also calls for the overthrow of Perverz Musharraf, the General-President of Pakistan.

Al-Zawahiri lies when he tries to take credit for 800 suicide bombings in Iraq. He had nothing to do with them. But his claim will be widely believed in the region, and an image of al-Qaeda as resurgent is being created. Such an image itself endangers US national security. Meanwhile, I don’t see Bush going to Congress to ask for a special appropriate to get Bin Laden and al-Zawahiri. It doesn’t seem very important to him, compared with his unconnected drive to reduce the small city of Fallujah to rubble.

Al-Zaman reports insider speculation on negotiations over the shape of the new government. Since Iyad Allawi got no high posts (his list only got 9% of seats in Parliament), he is making a play for head of the national security council, a body envisaged to work like the one in Pakistan, constraining the civilian prime minister on security issues. There is some resistance to Allawi filling this post, among the Shiite religious deputies and among the Sunni hard liners of the Iraqi Accord Front. Al-Zaman says that the United Iraqi Alliance (Shiite) is increasingly tending toward claiming the ministries of petroleum and of finance, and relinquishing the ministry of the interior, which they say has caused them so many headaches. (I cannot imagine that this report, sourced to Sami al-Askari, who is said to be close to PM designate Nouri al-Maliki, is true.)

A Japan/Iraq timeline is now available via the Shigetsu Institute.

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Iraq and the Oil Crunch?

Update: See Alan Richards’s reply at end

Jim Krane of the Associate Press quotes analysts who seem to blame the high price of petroleum in part on the shambles in Iraq. Iraq could be exporting nearly 3 million barrels a day (bbd) if the guerrilla war was not resulting in massive sabotage. In 2005, Iraq did only 1.4 million bbd on average, down from 2.8 mn. bbd before the American invasion. Not only is Iraqi production way off (less than a million bbd per day on average in January of this year!), but Iraq actually imports over $4 billion a year in petroleum products, taking them off the market for other consumers.

I have to be very careful how I say this, because the oil market is a complicated subject and I am not an economist. But I can’t imagine that Iraq really is much of a factor here. The world petroleum production is on the order of 86 million barrels a day. so the lost 1.4 million bbd of Iraq is about 1.6% of the total. Even if you factor in Iraq’s imports (and remember it doesn’t have much of an economy at the moment), I can’t imagine that Iraq production issues account for very much of the current price spike.

Some economists argue that there is a lot of speculation, including a security premium, built into the current price, because you have war and rumors of war (i.e. Iran) going on in the Oil Gulf. A ten percent security premium is the difference between paying $3.00 a gallon for gas and $2.70. A 10% security premium of a speculative sort, deriving from nervousness about the future of Iraq and Iran, is actually much more consequential than the 1.6% reduction in world production because of sabotage in Iraq. The NYT implies that petroleum today, like the South Seas stocks or the tulips of the 18th century, is characterized by speculative investment bubble, just because the run-up in prices attracts investors. That really isn’t an Iraq effect.

Although I am not an economist, primary commodity markets are pretty sensitive to simple things like supply and demand that most of us can grasp without greek letters. Troubles in Nigeria, Venezuela and Mexico have taken 2 million barrels a day off the market, i.e. a good 2 percent. So with Iraq, that is a 3 1/2 percent production shortfall.

The main bottleneck in supply isn’t raw petroleum production but a shortfall in world refining capacity (in other words we have more crude oil than we have gasoline). And the rapid rise in demand is partially seasonal, with Americans and Europeans hitting the road in the summer (and the anticipation of it), along with an ongoing secular upward pressure on prices coming from the with heated economies in China and India.

So you know me. If I thought Iraq was a big cause of our frustration at the pump, I’d have no hesitation in saying so. I doubt it is all that important in this regard.

One of the economists seems to be arguing that over five to ten years, Iraq could have had an impact, if there hadn’t been all that sabotage and if $30 bn. had been invested in the industry. This is true. But for this summer, there are other and bigger phenomena driving Americans’ sticker shock at the pump.

The fact is that if Americans did some serious conservation, they could reduce consumption by 1/3. Since they use about 20 million barrels a day of petroleum, they could replace the production of both Iraq and Iran (Iran produces 4 million bbd and exports 2 of it) all by themselves, just by going on the kind of diet Europe did in the early 1980s. But the last politician who dared tell you that was Jimmy Carter and no one will ever, ever go on television and talk that way again, who aspires to hold public office.

=========

Alan Richards, a real economist, at UC Santa Cruz, replies:

‘ Dear Juan:

On the question of oil prices: I think you are underestimting the impact of the actual and threat of war in the Gulf on oil prices in your discussion today in your invaluable blog.

http://www.juancole.com/

. The key is that the price of oil is an “asset price”. That is, the price of a barrel of oil is like the price of your house. It reflects, certainly, conditions of current supply and demand. But because oil, like your house, can be stored, forecasts of the future are critical to its current price.

The war in Iraq and, even more, the saber-rattling around Iran have deeply spooked the market. They are right to be spooked–if the U.S. persists in its confrontational stance in the region, there will be more violence, more instability, more potential oil off the market (al-Qaeda did, after all, try to attack Abqaiq…).

Even more important from an expectations perspective is that for supply to be able to keep up with demand in the future, most analysts agree that there must be much investment in oil production IN THE GULF. This is basically for reasons of geology–it’s where the oil is. Violence scares this off (as, of course, does continued nationalism and other policies already in place).

Consider the following back-of-the-envelope consideration.

1) Let’s say, as you plausibly do, that the quantity reduction is some 3.5%

2) Price has risen from (about) $26/bbl in the run-up to the war to some $73/bbl today.

3) Conventional studies of short-run price elasticity (percentage change in quantity divided by percentage change in price) are usually somehwere between 0.2 and 0.4.

So: take the midpoint estimate for elasticity: 0.3

Then: 0.3 = % change in quantity/%change in price.

So, 0.3 = .035 (= % change in quantity)/%change in price.

so: % change in price = .035 / 0.3 = 11.6%

But: the observed % change in price is roughly 94% ($73-$26/($73 + $26)/2 = 0.94. The so-called, “mid-point arc elasticity”, which uses the average of the starting and ending points as the basis for the percentage change in price calculation). Result? The observed change in price is over 800% larger than what one would expect based on previous market behavior (which is where estimates of elasticity come from).

There are then several possibilities: a) previous estimates of elasticity do not reflect current conditions–this is tantamount to saying that the oil market today is somehow fundamentally different from the way it was from 1972-2003. Maybe so, but one would then want to know how, exactly, the market has been so transformed. War and related stupidities would surely play a role here.

b) A much more plausible, and simpler, hypothesis: expectations, as argued above.

Calling these expectations, as the press often does, “speculative” leads to ideas of “herd behavior” and manias, evildoers in eyeshades, etc. Without denying that bubbles exist (I think they do), one can just say, as most economists would: “The price of an asset reflects the collective judgement–right now–of all market participants about future demand ans supply conditions”.

In short, I think you are selling short the impact of the neo-cons’ lunacy on the oil market.

And, you are, of course, entirely correct that we could, and must for other reasons, get serious about conservation.

Alan Richards

Cole: I’m deeply grateful for Professor Richards’ intervention. Just to say that the oil analysts tell me that the market is in fact radically different now than in the 1970s-1990s, and that a key difference is the massive and continuing rise in demand from South and East Asia. I did say that I thought the “security premium” was likely a much bigger part of the price rise than the reduction in Iraq production. I am persuaded that the security premium is a central part of this story and is of course deeply related to Bush administration aggressiveness in the Oil Gulf region.

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