THE BEAR'S LAIR The new cold war era
By Martin Hutchinson
The often repeated refrain "we don't want to be in another cold war" is
nonsense - we are in one. And Russian Prime Minister Vladimir Putin is a much
more dangerous opponent than dozy old former head of state Leonid Brezhnev.
However, the latest demonstration of this truth in Georgia is only a week old,
so it's worth reviewing its implications on the world economy.
There's no question the political map has been redrawn. British statesman
Winston Churchill wrote, referring to problems in Ireland, how "the dreary
steeples of Fermanagh and Tyrone" disappeared from thought when the
overwhelming crisis of World
War I appeared, only to emerge again afterwards as the world war deluge
subsided.
This time around, it is the miserable minarets of Palestine's Ramallah that
have faded into insignificance as a more geostrategically urgent danger appears
to disturb the quiet Western August. We feel less disturbed about the imagined
capabilities of a modestly funded rag-tag group of Islamic extremists when we
are faced with the real and present threat of Russian military resurgence.
Although Putin and his puppet President Dmitry Medvedev may believe that the
map redrawing has been confined to Georgia, that is not what has happened. The
stationing of a US missile defense force in Poland had been stalled because
Poland had wanted a force of Patriot missiles to accompany it, in case of
Russian aggression, which the US had refused, as it would antagonize the
Russians. Now the missile defense installation will go ahead, accompanied by
the Patriot missiles. The border between the European Union and Russia has
suddenly become a major barrier, across which mutually hostile forces gaze.
The reversion to a Cold War world has a number of economic implications. The
United States and the European Union (which post-Georgia is highly vulnerable
to Russian energy blackmail) will need to spend considerably more on a defense
buildup, to ensure they remain competitive with the Russian military machine.
Since Russia has a population of only 140 million, its defense profile is
likely to be fairly high-tech, unlike that of China, which has more or less
unlimited manpower. Hence conventional defense spending will be most needed,
with anti-guerilla equipment less relevant. The EU, having run its defenses
down further, will need to rebuild exceptionally vigorously; the European
political class has not yet recognized this.
Multilateral international trade agreements such as the late lamented Doha
Round will continue to be impossible to arrange, while cross-border investment
will be bedeviled by the successor to the international COCOM (Coordinating
Committee for Multilateral Export Controls) procedure - a much beefed-up
version of its feeble Wassenaar Arrangement successor - which will ensure that
Russian companies will not be able to buy strategic Western assets. Investment
in Russia is in any case both restricted and futile, so reciprocity will be
maintained. Cross-border lending into the former Soviet Union will be limited
and expensive because of the political risks involved - the principal sufferer
here will be Ukraine, which would like to reorient itself to the West but may
not be able to.
China, India and Brazil, the other three of the BRIC quartet (Russia being the
fourth), will be more or less unaffected. China is economically so powerful and
militarily so invulnerable that it will be able to play both sides off against
each other. Economically, it would benefit most by remaining on good terms with
the West, but the temptation to make mischief by allying with Russia might have
been irresistible had Putin not timed his invasion to coincide with China's
Olympics, a major affront to "face". India and Brazil, large countries
relatively remote from the conflict, will probably benefit, especially if it
results in a reduction of the global foreign policy focus on Islam, an Indian
vulnerability.
The economic cures for Russian adventurism and Middle Eastern jihadism are the
same: much lower oil prices. The inexorable rise in oil prices since 2002 has
produced very little beneficial economic development that makes the lives of
ordinary citizens better, in any major producer. Canada, already wealthy, and
Brazil, moving beyond self-sufficiency as new discoveries are made, have
benefited significantly from higher oil and commodity prices, but Venezuela,
most of the Middle East, Nigeria and Russia have not, while huge amounts of
resources have flowed into their corrupt governments. Thus the oil revenues
have fed the poisonous miasmas of Latin American Guevaraism, Middle Eastern
jihadism, African kleptocracy and Russian megalomania.
The global economic case for reducing oil prices to the long-run production
expansion cost of around US$60 per barrel is clear-cut; the question is how to
do it. At $60, tar sands remain economically viable provided they are
controlled by competent oil companies, while offshore exploration also yields a
very nice profit when it is successful.
The difficulty in reducing oil prices to this level is twofold. Demand,
particularly from the rapidly industrializing countries of China and India, is
rising at rates well above the historical trend. Conversely new supplies have
been subject to political obstacles both in the West and in many Third World
countries, incapable of developing complex new resource pools themselves but
ideologically rigidly apposed to allowing the oil majors in to develop them on
their behalf.
There are a number of steps that the United States and other Western countries
could take to reduce oil prices to $60 a barrel over a 12-18 month period.
First, interest rates could be increased to levels at which they are sharply
positive in real terms, say 9-10% on the US Federal Funds target compared to
the current 2%. Much of the surge in oil usage has been due to excessively
global low interest rates, which have caused Chinese demand in particular to
grow excessively quickly, causing inflation but also an upsurge in Chinese
demand for energy. Higher interest rates will deflate demand for Chinese
exports, which will reduce the overheating in the Chinese economy. A similar
rise in interest rates within China, facilitated by high interest rates
elsewhere, will affect Chinese demand directly. We do not need a sharp
contraction in the Chinese economy to reduce global demand for oil, simply a
reduction in the pace at which demand is growing.
Second, restrictions on oil development should be abolished, except for
environmental controls that would be imposed for any activity of similar
environmental impact. In this context, the actions of US politicians are a true
disgrace. To impose a presidential ban on offshore drilling in 1990, when all
other countries with significant offshore reserves were drilling, and countries
such as Britain and Norway were meeting the majority of their needs from
offshore sources, was egregious enough, though typical of the vacillating and
time-serving president George H W Bush.
However, to maintain the ban until 2008, for seven-and-a-half years of the term
of the nominally Republican President George W Bush, for the first six of which
the Republicans controlled Congress, at a time of rocketing oil prices, was
truly disgraceful. It was especially a disgrace as after September 2001 Bush
declared a national emergency and conducted a military campaign expensive both
in money and lives in the world's major oil-producing region. Lifting the
drilling ban was an obvious step in reducing US dependency on the volatile
Middle East. Had the ban, and that on drilling in that Arctic National Wildlife
Reserve (again with appropriate environmental controls) been lifted in 2001, as
they could and should have been, the US could be producing substantial
quantities of offshore and Alaskan North Slope oil today and thereby depressing
global oil prices.
Finally, taxes should be imposed on US gasoline to bring its price up to
European levels, thereby reducing consumption. The taxes could be justified on
environmental grounds, and the money raised should either be remitted in other
tax cuts or spent on the military buildup that seems likely to be necessary.
The real purpose of these taxes would not be environmental, nor to finance
public expenditure; they would simply reduce US oil consumption and provide
another downward pressure on oil prices.
With these three measures in place, and a measure of help from other oil
consuming countries such as the EU, China and India (in particular, abolishing
any consumption subsidies), the global supply-demand pattern for oil would be
changed by that 2-3% necessary to bring prices down to around $60 a barrel at
which exploration and unconventional oil sources remain sufficiently attractive
to be worth exploiting.
At that point several nice things would happen. Russia's export income would be
halved, so its ability to finance a massive military buildup would be
decimated. Meanwhile, its people would come to realize what a fraud the
Putin/Medvedev regime has been; it has failed to provide more than a temporary
lift to the living standards of the Russian people, but has instead engaged in
kleptocracy and massive empire-building, funded by unearned oil revenues. Even
BP and Shell might benefit, as Russia came to realize that their expertise was
valuable in developing new oil resources with the maximum efficiency.
Hugo Chavez of Venezuela would also suffer devastating financial stringency,
would be unable to continue financing the export of his petty revolutions, and
would soon be forced out by the Venezuelan populace, who would come to realize
that, bad as were the traditional corrupt "democratic" rulers of Venezuela,
Chavez has made things infinitely worse. Iran too would feel the pinch; it
might or might not continue developing nuclear weapons, but its limited
democratic mechanisms would soon produce a less hostile and frightening
government.
It took presidents Harry Truman through Ronald Reagan nearly half a century to
figure out how to win the first Cold War. With will and competence, this one
should be much quicker and easier.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-07 David W Tice & Associates.)
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