As the pro-market "Washington Consensus" has unraveled, this decade has seen the emergence of two new Latin American trends: One group of countries favoring continued liberalization (Brazil, Chile, Mexico), and another opting for increasing state intervention (Argentina, Ecuador, Venezuela). Energy policy tells some of the story behind these two trends. This talk will focus on energy policy for three Latin American countries-- Brazil, Mexico, and Venezuela-- within the context of a larger fifteen-country study on National Oil Companies. The speaker will address how oil has both facilitated greater state control and created, though typically to a lesser degree, some pressures for market liberalization, as well as suggest some implications from recent oil market trends (new oil field discoveries in Brazil, falling oil prices globally) for state control in the region. 

Conventional wisdom holds that the OPEC oil cartel has the world in its grasp. It can manipulate prices by tinkering with supplies. Last month OPEC released a new study on world oil demand that seemed to signal the cartel was readying to tighten the taps because higher prices were slaking the world's thirst for oil. The American Petroleum Institute released fresh data showing that demand for oil products in the United States (the world's largest market) dropped a whopping 3 percent from the year earlier. The news about lower demand has caused oil prices to fall a bit, and all eyes are on OPEC's wizards to tighten supplies.

But the conventional wisdom is mostly wrong. OPEC (which stands for the Organization of the Petroleum Exporting Countries) is no wizard. For the most part, its actions lag behind fundamental changes in oil supply and demand rather than lead them. OPEC looks like a masterful cartel when, in fact, it is mainly just riding the waves.

It is hard to figure out exactly what goes on behind's OPEC's closed doors, but glimpses are possible by probing what the cartel members say about prices and how they set quotas. Over the last five years, OPEC members have announced ever-higher price goals only after the market had already delivered those high prices. As the market has soared, OPEC has followed. Only in the last few months has Saudi Arabia suggested that the cartel would be better off if prices reversed because high prices would encourage the world's big oil consumers to wean themselves from oil. It proffered $125 a barrel. The markets shrugged and kept on rising until real facts about slowing demand revealed that fundamentals were changing.

OPEC also sets quotas so that each member knows its role. Throughout its history, OPEC has faced the difficult task of holding the cartel in the face of strong incentives by each member to cheat. Today's oil market makes that job easy because nearly every member, except Saudi Arabia, is producing at full capacity. OPEC, more or less, has nothing to do.

In fact, the last time OPEC made a major adjustment to its quotas—September 2007—it jiggered them to reflect what its members were already pumping. Algeria got a big boost because it was already supplying nearly 50 percent more than its quota. Kuwait, Libya and Qatar also got boosts that aligned their OPEC quotas with existing reality. OPEC also set, for the first time, a quota on Angola's output. Since then, Angola has attracted a steady stream of new production projects, which makes it inevitable that OPEC will adjust Angola's quota to reflect the new reality. (Iraq has no quota; it has troubles enough without pretending to align its oil output to OPEC strictures.)

Nigeria and Venezuela got haircuts because their political troubles meant they were already producing far less than their quotas. Indonesia also cut its quota and a few months later left OPEC because it realized that as a big oil user it actually had more in common with oil importers than its fellow OPEC members. These changes in quotas were reflections of political realities that OPEC doesn't control.

Today's oil cartel, even more than in the past, is really about Saudi Arabia. But Saudi Arabia also is no wizard at the controls of the world market. The Saudis can adjust their output a bit since they control nearly all of spare capacity in the world market. (Earlier this month they pledged another 200,000 barrels per day to dampen pressure from the United States and other governments that are reeling from high oil prices. But that move was more symbolic than real as the markets were already expecting the new supplies.)

Saudi Arabia is on the front lines of the new reality in world oil supply. It is proving much harder and more costly to bring on more supplies. The Saudis have an ambitious plan to increase output about one third over the coming decade, but they are finding that will be a stretch. Their fellow OPEC members are in a similar situation, and those hard facts also produce high oil prices. In fact, the Middle East members of OPEC are, today, producing at just the same level as they were three decades ago because none of them invested much in finding and producing new supplies. High prices into the future reflect these fundamental facts rather than the assumption that OPEC is a masterful cartel.

Conventional wisdom holds that because OPEC is raking in more cash than ever, it has never been stronger than it is today. In fact, OPEC has rarely been weaker. It is the accidental beneficiary of forces that have caused today's high prices, and it will be nearly as powerless when prices come down.

The real solutions to today's high oil prices require more attention to demand. Blaming OPEC, while good political theater, won't have much impact. Legislation now working its way through the U.S. Congress would actually attempt to break up the oil cartel. Such schemes won't work, and the political effort would be better spent on policies that redouble the nation's efficiency, producing more oil from diverse sources here at home, and in finding ways to move beyond oil altogether.

As oil prices surge through $140/barrel at the time of writing, surely one can at least count on the invisible hand of the market to drive further exploration and production and ultimately bring more supplies on line, right? Or perhaps, more ominously, high oil prices presage a darker future of shortage and conflict as global oil fields pass their geological “peak”? In fact, both positions miss a crucial point about the dynamics of the world oil market — that it is increasingly animated by the counterintuitive behavior of the state-owned oil and gas giants that now control the vast majority of the world’s hydrocarbon resources.

“On average national oil companies (NOCs) extract resources at a far lower rate than international oil companies (IOCs), leaving about 700 billion barrels of oil effectively ‘dead’ to the world market.”So-called “national oil companies,” or NOCs, own about 80 percent of the world’s proven reserves of oil, a percentage that has been on the rise as the persistent high price environment encourages countries to assert even tighter control over the rent streams flowing from their resources. NOCs are curious and variegated beasts, and, contrary to the popular imagination, some are highly capable both technically and organizationally. Brazil’s Petrobras is an acknowledged world leader in deepwater drilling, while Norway’s StatoilHydro is highly regarded for its competence and transparent business practices. Saudi Arabia’s national champion, SaudiAramco, is secretive to the outside world but generally considered to be a well-run, technically capable organization. At the other end of the continuum, government infighting and micromanagement hobble Mexico’s Pemex and Kuwait’s KPC. Once-independent PDVSA in Venezuela has been remade by President Hugo Chávez into a government puppet that spends liberally on social programs but consistently undershoots its production targets. And indeed some national oil companies are hardly oil companies at all — Nigeria’s NNPC, for example, is mostly a rent-seeking bureaucracy.

What NOCs do share in common as distinct from the familiar international oil companies (IOCs) is being answerable to a host government, which inevitably brings with it some focus on objectives other than simple profit maximization. Typically, an NOC arises originally from the desire of resource-rich governments (“principals”) to gain more effective control over resource extractors (“agents”) by creating an oil champion owned by the state. Prior to NOC formation, governments are frequently (and often justifiably) wary of exploitation by the foreign oil operators providing hydrocarbon extraction services. Lacking a deep understanding of the costs of production, states are simply unable to be sure they are taxing their agents appropriately. In addition to enhancing control over the hydrocarbon sector and the revenue it brings, states may hope for other benefits from the NOC: cheap energy to fuel a growing economy, employment and development of local industry to support the hydrocarbon sector, or even foreign policy leverage derived from control of key resources.

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A detailed study of NOC performance and strategy at the Program on Energy and Sustainable Development at FSI suggests a useful way of thinking about the effects of NOC resource domination on world oil and gas markets. Price versus quantity supply curves from classical economics assume that increased price will spur efforts to expand supply. Unfortunately, the counterintuitive reality for NOCs is that, when it comes to expanding supply in the current high-price environment, most either 1) can but don’t want to or 2) want to but can’t. The end result is what one could call a “backward-bending” supply curve — additional price increases do little or nothing to boost supply.

“The world has plentiful hydrocarbons in the ground, but that’s where many of them are going to stay due to the unique organizational and political dynamics of the NOCs.”In the “can but don’t want to” category are resourcerich governments that have decided they cannot assimilate any more money. Already, their investments are running into political resistance around the globe — witness Dubai’s failed attempt to purchase U.S. port management contracts, CNOOC’s failed bid for Unocal, or the increasing calls for curbs on the activities of sovereign wealth funds. Nations may decide they have enough cash and are better off leaving resources in the ground where they safely await monetization at a later date.

In the “want to but can’t” camp are countries and their NOCs that are simply unable to provide the stable political and regulatory climate to support additional build-out of expensive production and transport infrastructure. This situation is particularly common for natural gas, where long investor time horizons are needed to bankroll the multibilliondollar capital costs of pipelines or liquefied natural gas (LNG) terminals.

Meanwhile, international oil companies are left on the sidelines salivating helplessly over the vast reserves in NOC hands. Venezuela’s Orinoco region could yield hundreds of billions of barrels of heavy crude, but the government and a nowpliant PDVSA invite favored countries and their NOCs to explore rather than selecting the operators most capable of extracting the challenging but plentiful resource. Technical expertise and massive investment are required to fully develop vast Russian gas fields including Kovykta, Shtokman, and Yamal, but IOCs already burned by nationalizations and shifting rules in these and other Russian ventures are unlikely to be in a position to supply enough of either. In the face of dwindling resources they can tap, IOCs will need to diversify their business models, perhaps tackling technologically challenging options like oil sands or liquids from coal in conjunction with the carbon storage techniques that could make these palatable from a climate change perspective. Ironically, the only “easy” oil for IOCs has become oil that is geologically and technologically difficult.

While oil price is dependent on many factors (including global economic health) and is impossible to forecast with certainty, one can confidently predict continued tight supply of oil and gas, especially given global demand that will be propped up indefinitely by rising consumption in China and India. The world has plentiful hydrocarbons in the ground, but that’s where many of them are going to stay due to the unique organizational and political dynamics of the NOCs. Leverage over the market is weak; measures to reduce demand for oil and gas (though politically unpopular) or to spur development of alternative fuels and associated infrastructure (though slow to develop at scale) may be all that we have.

“Emerging democracies must demonstrate that they can solve governance problems and meet citizens’ expectations for freedom, justice, a better life, and a fairer society.”

If the big global story of the 1980s and 1990s was the remarkable expansion of democracy, the bad news of this decade is that democracy is slipping into recession. In the two decades following the Portuguese revolution in 1974, the number of democracies tripled (from 40 to 120) and the percentage of the world’s states that are at least electoral democracies more than doubled (to about 60 percent). Since the late 1990s however, there has been little if any net progress in democracy. To be sure, significant new transitions to democracy took place in countries like Mexico, Indonesia, Serbia, Georgia, and Ukraine. But globally, the democratic wave has been neutralized and is now at risk of being overtaken by an authoritarian undertow, which has extinguished democracy in such states as Pakistan, Russia, Nigeria, Venezuela, Bangladesh and Kenya. In fact, two-thirds (15) of all the reversals of democracy (23) since 1974 have taken place just in the last eight years, since the October 1999 military coup in Pakistan.

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Two other negative trends are important to note. One is the implosion of democratic openings in the Arab world. Under pressure from the George W. Bush administration beginning in 2003, several authoritarian Arab regimes liberalized political life and held competitive, multiparty elections. Then, Islamist political forces made dramatic gains in Egypt and Lebanon and won a majority of seats in Palestine and Iraq — and suddenly the Bush Administration got cold feet. Arab democrats who had surfaced and mobilized felt abandoned and betrayed. The liberal secular politician Ayman Nour, who had the temerity to challenge President Hosni Mubarak in Egypt’s first contested presidential election, languishes in prison three years later. The country’s political opening is now frozen, while more than a billion dollars in American aid continues to flow to the regime.

The second negative trend is that authoritarian states have, unfortunately, learned some of the lessons of democratic breakthroughs of the past decade, particularly the color revolutions that brought down neocommunist autocracies in Serbia, Georgia, Ukraine, and Kyrgyzstan. As a result, they have closed political space, swallowed up or arrested independent media, crushed independent political opposition, sabotaged or shut down innovative uses of the Internet, and sought to block or sever external flows of democratic assistance. Vladimir Putin’s Russia (with its sinister cabal of savvy Kremlin “political technologists”) has blazed the trail in this authoritarian pushback, but China, Belarus, Iran, Azerbaijan, Uzbekistan, and other “post” communist and Middle Eastern dictatorships have followed suit. To make matters worse, China and Russia have drawn together with the Central Asian dictatorships in a new club, the Shanghai Cooperation Organization, to formalize and advance their authoritarian pushback.

To renew democratic progress in the world, we must understand the reasons for the democratic recession. Authoritarian learning is one. Another has been the inconsistent and often unilateralist policies of the United States. Although President Bush has done much to put democracy promotion at the center of American foreign policy and has substantially increased funding for U.S. democracy assistance programs, he has also alienated potential allies in the effort to advance democracy globally by associating democracy promotion with the use of (largely unilateral) force, as in Iraq; by promoting democracy with a tone that was often self-righteous and a style that was too often poorly coordinated with our democratic allies; and then by failing to sustain pressure for democratic change when the going got rough in the Middle East.

Structural factors have also driven the recession of democracy. One has had to do with the global political economy. As the price of oil has gone up, the prospects for democracy have receded. Russia, Nigeria, and Venezuela have all seen their democracies slip back into authoritarianism as oil prices have skyrocketed, sending huge new infusions of discretionary revenue into the hands of autocratic leaders, which they have used to buy off opponents and strengthen their security apparatuses. In Iran and Azerbaijan, surging oil revenues have shored up authoritarian states that once seemed vulnerable.

A second and more pervasive factor has had to do with the performance of the new democracies. Some new democracies are holding their own (like Mali) and even making progress (like Brazil and Indonesia) in the face of enormous accumulated problems and challenges. But the general reality, even in these countries, is that democracy often does not work for average citizens. Rather, it is blighted by multiple forms of bad governance: abusive police and security forces, domineering local oligarchies, inept and indifferent state bureaucracies, corrupt and pliant judiciaries, and ruling elites who routinely shred the rule of law in the quest to get rich in office. As a result, citizens grow alienated from democracy and become susceptible to the patronage crumbs of corrupt political bosses and the demagogic appeals of authoritarian populists like Putin in Russia and Hugo Chávez in Venezuela.

“If democracies do not work better to contain crime and corruption, generate economic growth, relieve economic inequality, and secure freedom and a rule of law, people will eventually lose faith and turn to authoritarian alternatives.”Before democracy can spread further, it must take deeper root where it has already sprouted. Emerging democracies must demonstrate that they can solve governance problems and meet citizens’ expectations for freedom, justice, a better life, and a fairer society. If democracies do not work better to contain crime and corruption, generate economic growth, relieve economic inequality, and secure freedom and a rule of law, people will eventually lose faith and turn to authoritarian alternatives. Struggling democracies must be consolidated, so that all levels of society become enduringly committed to democracy as the best form of government and to the country’s constitutional norms and restraints. Western governments and international aid donors can assist in this process by making most foreign aid contingent on key principles of good governance: a free press, an independent judiciary, and vigorous, independently led institutions to control corruption. International donors also need to expand their efforts to assist these institutions of horizontal accountability as well as initiatives in civil society that monitor the conduct of government and press for institutional reform.

The only way to stem the democratic recession is to show that democracy really is the best form of government — that it can not only provide political freedom but also improve social justice and human welfare.

Discussions began, tentatively at first, as the delegates slipped into the roles they had been assigned and for which they had prepared for several months. The tension mounted as they anticipated meeting with their heads of state, to whom they would propose their country’s goals for the upcoming U.N. Security Council meeting.

Thus began the Third Annual IDL Student Conference in International Security, sponsored by the Initiative on Distance Learning (IDL). IDL offers Stanford courses in international security to nine Russian universities via distance-learning technologies. Its annual conference brings together top students and instructors from each of the participating universities with students and faculty from Stanford. This was the first year that the conference centered on an international security simulation, led by political science professor Scott D. Sagan, director of CISAC, and Coit D. Blacker, director of FSI. Sagan has been conducting such security simulations for eight years at Stanford and other U.S. universities.

This year’s simulation scenario was the referral of Iran to the U.N. Security Council by the International Atomic Energy Agency (IAEA) for failure to fully disclose its nuclear activities. Council delegates convened in the Russian provincial capital of Yaroslavl, 150 miles northeast of Moscow, due to “security concerns”— as they were informed—about U.N. headquarters in New York.

Delegates’ opening statements reflected a wide range of views on Iran’s status with the IAEA. The U.S. delegation called for sanctions and showed little interest in negotiation. “We find the Iranian regime corrupt and repressive,” said Oleg Borisov, head U.S. delegate and a student at Petrozavodsk State University. He added, rather menacingly, “The United States is not intending to use military force unless Iran keeps up its nuclear capability and continues to support terrorism.”

At the other end of the spectrum, Venezuela, Pakistan, and Iraq indicated no willingness to consider sanctioning Iran. China urged delegates to “choose the only right option—diplomacy.”

By the end of the two-day session, delegates had overcome seemingly intractable differences during four intensive legal drafting sessions. The council’s resolution gave Iran three months to comply with IAEA demands and provided for Iran to obtain enriched uranium from Russia, with the production, transport, and waste disposal to occur on Russian soil under IAEA controls.

As a learning experience, the simulation is well matched to the IDL program’s goal of fostering critical analysis among a new generation of students in post- Soviet Russia. FSI director Coit Blacker wants to develop future generations of diplomats and policymakers whose worldview is shaped “by how they think, not what they’re told to think.”

After the session ended, students reflected on what they had learned. Putting themselves in others’ shoes seemed the most valuable aspect for many. Natasha Pereira-Klamath, one of the Stanford undergraduates who participated in the Yaroslavl simulation as a representative of the Russian Federation, said she was surprised at the “extent to which people reflected the views of their (assigned) countries.” This was echoed by other students, who expressed their surprise at how easy it was to begin thinking as a representative of another country, although their official position might be very different from their own.

“I’m glad to see the resolution passed today,” said Homkosol Bheraya, an exchange student from Thailand who attends Ural State University. “I hope that in the real world this can happen someday.” Perhaps she will be in a position to advance that goal. “My dream,” she said, “is to one day work for the IAEA.”