Politics/Intel
From Russia With Love - Another Bush Debacle
The world, in particular the US, seems shocked! that the Russians have invaded South Ossetia and Abkhazia this past weekend. Perhaps asleep at the wheel is a more apt description. The Russians have managed to play Georgia and its president Mikhail Saakashvili pefrectly. They set him up by stirring up sporadic altercations within South Ossetia - baiting a politician already eager to deliver on his campaign promise to 'reunite' Georgia - to seize upon those attacks as justification to pursue a military action to retake first the S. Ossetian capital Tskhinvali and later the rest of the break-away territory. But this played right into Russian PM Putin's hands - he could now use the sizable Georgian offensive as justification to take both South Ossetia and Abkhazia in the name of 'protecting' the population, many of whom had recently been conveniently given Russian citizenship. Thus the attacks by Georgia were said to be attacks on Russia itself. Georgia now finds itself thrown out of both regions and under attack from the north and the Black Sea in the west. The only questions that remain in our mind are a) will Russia increase their assault and attempt to permanently cripple the Georgian military and remove Saakashvili from power, b) will Russia incorporate S. Ossetia and Abkhazia as republics thus ending Georgian dreams of reclaiming those areas forever, c) will Russia seek to take all of Georgia "back" and thus have control over additional resources in the Caspian and Black Sea at the same time increasing the buffer zone around Russia proper?"I've expressed my grave concern about the disproportionate response of Russia and that we strongly condemn the bombing outside of South Ossetia," Bush said in an interview with NBC Sports. And that appears the best that the US and the 'West' can do. If Saakashvili thought US bluster was going to prevent the Russians from responding he was beyond stupid. Did he expect that the US or NATO would come rushing to his aid with tanks, planes and troops? Europe made it very clear this past year they wanted no part of a Georgia in NATO until the questions of S. Ossetia and Abkhazia were settled. Europe was not going to be dragged into a regional, ethnic conflict on Russia's doorstep. The same Russia they count on for a large share of energy supplies.
Meanwhile, the right wing is abuzz in outrage at the fighting, some going as far as to demand a US military response. Comments made over the weekend are always subject to possible drug or alcohol influence but we suspect these individuals really want that outcome, one that was avoided for over 40 years of cold war between the US and USSR. Perhaps it was this which egged them on?
"The vice president expressed the United States' solidarity with the Georgian people and their democratically elected government in the face of this threat to Georgia's sovereignty and territorial integrity," Cheney's office said in a statement.
It said Cheney, in a phone call on Sunday, told Saakashvili that "Russian aggression must not go unanswered, and that its continuation would have serious consequences for its relations with the United States, as well as the broader international community." Source: AP
Has Cheney promised the Georgians a few B-2 bombing runs? Cruise missile attacks? A division of armour?
John McCain meanwhile is determined to look tough, damnit! So tough that he has called on the G-8 to boot the Russians out and become the G-7 again. While the G-8 may think of itself as some tony exclusive club, in reality they accomplish very little at their annual meetings and with huge capital inflows from selling energy and hard commodities to the world, it seems it is the G-8 that needs Russia, not the other way around. In addition, McCain has called on NATO to convene to "demand" a ceasefire and prepare to send "peacekeepers" to the region. These are the same Europeans who can't even manage their NATO responsibilities in Afghanistan and McCain wants to put them on the Russian border in a hot fight? The rest of McCain's thoughts on the situation are similar to what the other presumptive nominee has said - condemn the violence, stop the shooting, maintain Georgian territorial integrity, send in the diplomats, hurry!
But what is left unsaid is why the situation even got this far. For that, blame must be laid squarely on the Bush administration. They have had nearly eight years to agressively seek a diplomatic resolution to the situation in Ossetia and Abkhazia and done little, if anything to this end (Nagorno-Karabakh and Trans-Dniester too.) Instead, the US has continued to antagonize Russia by pushing the NATO envelope ever closer to the Russian border while also employing rhetoric in non-member countries such as Georgia and Ukraine. Sec. State Condi Rice was purported to be the Russian expert of the administration but by all measures relations between the US and Russia have declined since 2001 with Russia becoming more autocratic, wealthy and economically powerful. All that remains is for Putin to accelerate the modernization of Russian forces. Recent high level staff changes indicate the move to a modern, professional army will shift into high gear while efforts are already underway to modernize Russian strategic (nuclear) forces. Russia may no longer wish to be able to roll its tanks across Europe but they certainly will be able to defend their own territory and nearby neighborhood.
This whole event can be viewed as the mirror image of the Kosovo/Serbia confrontation in the 1990s. Then it was NATO (well, the US) coming to the 'defense' of the break away territory which claimed nasty, unprovoked attacks by genocidal Serbs. The Serbs on the other hand wanted to retain what had been theirs for a very long time. The US intervention destroyed much of the Serbian military and put Kosovo on the fast track to becoming an independent state with de-facto military backing from the West. Now the shoe is on the other foot. South Ossetia and Abkhazia are soon to be 'independent' states with Russian backing and if they so chose, to be incorporated as republics within Russia. During the Kosovo conflict Russia was very weak economically and militarily was involved with Chechnya in its own backyard. Once the shooting started in Kosovo, there was little that Russia could do to prevent the US from taking charge. Now the US must endure the humiliation of watching one if its 'partners' in Iraq be torn to pieces by the Russians. Will the US go to war with Russia over the break-away regions or even to defend Georgia's territorial integerity? Not a chance. Will Europe impose sanctions against Russia? Not while they depend on Russian natural gas to heat their homes in the winter. For those who have asked what the limitations of US hard power are, turn on your TV and take a look at Gori.
In fact, we can even see parallels between Iraq's invasion of Kuwait in 1990 and the current crisis. Many speculate that Saakashvili misread US intentions or the degree of support he might receive from the US and NATO. Saddam apparently made the same mistake, misinterpreting the US failure to diplomatically discourage him from action over a border dispute with Kuwait as a wink-wink green light to invade. Interesting that in both cases a Bush was at the helm.
As we write this, Gori is for all intents gone and the key transportation hub at Samtredia is also now a target. A loss there would be devastating to Georgia both militarily and economically. Gerogia would no longer have access to the Black Sea, land routes to Turkey and no control over the Baku-Tbilisi-Supsa (BTS) pipeline from which transit fees provide a good piece of Georgia's income. Russia will destroy the Georgian military, some of its economic assets (mostly in the energy sector) and will remove Saakashvili from power. The speed and precision with which this is occuring does lead one to believe Russia has gamed this for quite some time. That Georgia, a US ally, is so hopelessly unprepared to counter the attack is surprising. It remains to be seen if the CIA/NSA failed to sound the alarm and warn the administration in the days and weeks prior to open hostilities or if the White House, Cheney in particular, chose to again ignore sound advice.
Expect South Ossetia and Abkhazia to hold referendums in the near future to 'join' their brethren as Russian republics. We wonder if NATO will then be ok with admitting Georgia now that the question of the disputed territories is resolved? Probably as likely as the Germans, French and Belgium taking the lead in fighting the Taliban in Afghanistan. These are not good days to live next door to Russia. Victor Yushchenko and the Ukrainians will undoubtedly be a lot nicer to Putin the next time they speak.
Obama Boxscore on Oil: Swing and a Miss; Broken Bat Single
This will be one of a very few posts on the two principle candidates for president in 2008. Keep in mind we find both have serious flaws, so much so that neither is likely to receive our endorsement or support.
Over the past week or so, Senator Obama has attempted to put forth a number of suggestions concerning the high price of oil/gasoline which we expect he would attempt to enact were he to win the presidency. Two of his ideas stand out: releasing 70 million barrels of light sweet crude oil from the strategic petroleum reserve (SPR) and $1,000 per family 'emergency rebate checks' financed by a windfall profits tax on oil companies.
We start with the bad: robbing Peter to pay Paul with a windfall profits tax. This idea is not just a strike, its a whiff. First off - what constitutes an oil company? Are we only speaking of the so called 'integrated' petroleum companies like ExxonMobil or Chevron? What about smaller E&P's like Devon? Or Range Resources which obtains most of its revenue through the sale of natural gas - another product whose price has risen dramatically. Should we also include companies which provide oil field services or transport crude? Logic says they too are benefiting from higher prices of crude and natural gas.
Second, what defines a windfall? What exactly is a fair profit and who gets to decide what that figure is? The table below shows various profitability ratios for a number of firms: Microsoft, Oracle (database software), Linear Technologies (semiconductors), Google, Chevron, British Petroleum and Range Resources (natural gas e&p):
| MSFT | ORCL | LLTC | GOOG | CVX | BP | RRC | |
| Operating Margin | 39.5 | 35.7 | 48.4 | 30.0 | 12.7 | 10.9 | 15.8 |
| Net Profit Margin | 29.3 | 24.6 | 33.0 | 24.6 | 8.6 | 7.4 | 5.4 |
| Return on Assets | 22.0 | 12.2 | 25.3 | 14.5 | 12.3 | 9.3 | 2.6 |
| Return on Equity | 52.5 | 27.6 | 16.4 | 21.2 | 25.4 | 26.5 | 3.6 |
Looking at this table it is quite clear: integrated and other energy companies do not show any significant excess of return when compared to firms in other industries. The media does a good job of winding people up with statements like 'Oil company makes $10 billion profit in last quarter, a new record!' but of course that only tells part of the story. The capital employed to produce that $10 billion is substantially greater than that of other firms. It is somewhat akin to comparing your childhood lemonade stand to Minutemaid - the scale of the operation is entirely different.
So when Obama proposes such a plan he is doing nothing more than stealing from the shareholders of ExxonMobil, Chevron, etc to give to those he feels are more deserving of the money. That is decidedly not the American way and far afield from capitalism. It also igores the near certain increase in prices charged downstream to recoup the tax - ultimately the consumer will pay as prices reach a new equilibrium.
On the other hand, Obama's proposal to release 70 million barrels of light sweet crude from the SPR does have some merit but does not go far enough. In targeting the supply of light sweet crude oil Obama does hit on the very real issue of demand. US and European refineries are primarily designed to crack light sweet crude oil as it is a) easier and b) has given higher profits. The problem today is that most of the excess oil supply is heavy sour crude, such as what Iran has been producing. And one of the larger 'swing' producers of light sweet also happens to be the least stable - Nigeria. For two years now there have been rebel and bandit attacks on Nigerian pipelines and production facilities. The resultant decrease (and irregularity) of production has been a sizable contributor to the pressure on the price of light sweet crude oil such as is indicated by the West Texas futures contract.
The most serious flaw in this proposal, however, is that 70 million barrels will not go very far - the state of Texas alone produces 1 million bbl/day and the US consumes over 20 million bbl/day. While it is impossible to predict the exact effect the extra supply will have on price, the more important consideration is that it will be very short lived. With no likely political or military settlement to the situation in Nigeria and no significant additional light supply to come on line in the near term, this plan amounts to nothing more than taking two aspirin in the hopes of curing chronic pain. It just won't work.
Also absent is a look to the future. At the same time that Obama is releasing light sweet crude from the SPR (and replacing it with heavy sour), he should be dramatically reducing the regulatory burden to build new refineries which only crack heavy crude. We have previously proposed the use of abandoned or decommissioned military bases or other federal land for the construction of new refineries. This is an urgent need and another example of where Bush completely failed to lead. Even if there were adequate supplies of light sweet crude, the underlying economic growth will soon require all refiners to operate at 100% capacity 100% of the time. That is a recipe for chaos and economic catastrophe.
In conclusion, the Obama plans are nothing more than political posturing (dangerously in the case of the windfall tax) which at best will provide a very short reduction in prices but do nothing to cure the underlying problems. Grade: D-
