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What If We Never Run Out of Oil?

May 4th, 2013 · No Comments · Energy, Technology

From the Atlantic . .  excellent perspectives and background . . . . .

MAY 2013

What If We Never Run Out of Oil?

New technology and a little-known energy source suggest that fossil fuels may not be finite. This would be a miracle—and a nightmare.

Ralph Wilson/AP

As the great research ship Chikyu left Shimizu in January to mine the explosive ice beneath the Philippine Sea, chances are good that not one of the scientists aboard realized they might be closing the door on Winston Churchill’s world. Their lack of knowledge is unsurprising; beyond the ranks of petroleum-industry historians, Churchill’s outsize role in the history of energy is insufficiently appreciated.

Winston Leonard Spencer Churchill was appointed First Lord of the Admiralty in 1911. With characteristic vigor and verve, he set about modernizing the Royal Navy, jewel of the empire. The revamped fleet, he proclaimed, should be fueled with oil, rather than coal—a decision that continues to reverberate in the present. Burning a pound of fuel oil produces about twice as much energy as burning a pound of coal. Because of this greater energy density, oil could push ships faster and farther than coal could.

Churchill’s proposal led to emphatic dispute. The United Kingdom had lots of coal but next to no oil. At the time, the United States produced almost two-thirds of the world’s petroleum; Russia produced another fifth. Both were allies of Great Britain. Nonetheless, Whitehall was uneasy about the prospect of the Navy’s falling under the thumb of foreign entities, even if friendly. The solution, Churchill told Parliament in 1913, was for Britons to become “the owners, or at any rate, the controllers at the source of at least a proportion of the supply of natural oil which we require.” Spurred by the Admiralty, the U.K. soon bought 51 percent of what is now British Petroleum, which had rights to oil “at the source”: Iran (then known as Persia). The concessions’ terms were so unpopular in Iran that they helped spark a revolution. London worked to suppress it. Then, to prevent further disruptions, Britain enmeshed itself ever more deeply in the Middle East, working to install new shahs in Iran and carve Iraq out of the collapsing Ottoman Empire.

Churchill fired the starting gun, but all of the Western powers joined the race to control Middle Eastern oil. Britain clawed past France, Germany, and the Netherlands, only to be overtaken by the United States, which secured oil concessions in Turkey, Iraq, Bahrain, Kuwait, and Saudi Arabia. The struggle created a long-lasting intercontinental snarl of need and resentment. Even as oil-consuming nations intervened in the affairs of oil-producing nations, they seethed at their powerlessness; oil producers exacted huge sums from oil consumers but chafed at having to submit to them. Decades of turmoil—oil shocks in 1973 and 1979, failed programs for “energy independence,” two wars in Iraq—have left unchanged this fundamental, Churchillian dynamic, a toxic mash of anger and dependence that often seems as basic to global relations as the rotation of the sun.

All of this was called into question by the voyage of the Chikyu (“Earth”), a $540 million Japanese deep-sea drilling vessel that looks like a billionaire’s yacht with a 30-story oil derrick screwed into its back. The Chikyu, a floating barrage of superlatives, is the biggest, glitziest, most sophisticated research vessel ever constructed, and surely the only one with a landing pad for a 30-person helicopter. The central derrick houses an enormous floating drill with a six-mile “string” that has let the Chikyu delve deeper beneath the ocean floor than any other ship.

The Chikyu, which first set out in 2005, was initially intended to probe earthquake-generating zones in the planet’s mantle, a subject of obvious interest to seismically unstable Japan. Its present undertaking was, if possible, of even greater importance: trying to develop an energy source that could free not just Japan but much of the world from the dependence on Middle Eastern oil that has bedeviled politicians since Churchill’s day.

In the 1970s, geologists discovered crystalline natural gas—methane hydrate, in the jargon—beneath the seafloor. Stored mostly in broad, shallow layers on continental margins, methane hydrate exists in immense quantities; by some estimates, it is twice as abundant as all other fossil fuels combined. Despite its plenitude, gas hydrate was long subject to petroleum-industry skepticism. These deposits—water molecules laced into frigid cages that trap “guest molecules” of natural gas—are strikingly unlike conventional energy reserves. Ice you can set on fire! Who could take it seriously? But as petroleum prices soared, undersea-drilling technology improved, and geological surveys accumulated, interest rose around the world. The U.S. Department of Energy has been funding a methane-hydrate research program since 1982.


 

 


Nowhere has the interest been more serious than Japan. Unlike Britain and the United States, the Japanese failed to become “the owners, or at any rate, the controllers” of any significant amount of oil. (Not that Tokyo didn’t try: it bombed Pearl Harbor mainly to prevent the U.S. from blocking its attempted conquest of the oil-rich Dutch East Indies.) Today, Churchill’s nightmare has come true for Japan: it is a military and industrial power almost wholly dependent on foreign energy. It is the world’s third-biggest net importer of crude oil, the second-biggest importer of coal, and the biggest importer of liquefied natural gas. Not once has a Japanese politician expressed happiness at this state of affairs.

Japan’s methane-hydrate program began in 1995. Its scientists quickly focused on the Nankai Trough, about 200 miles southwest of Tokyo, an undersea earthquake zone where two pieces of the Earth’s crust jostle each other. Step by step, year by year, a state-owned enterprise now called the Japan Oil, Gas, and Metals National Corporation (JOGMEC) dug test wells, made measurements, and obtained samples of the hydrate deposits: 130-foot layers of sand and silt, loosely held together by methane-rich ice. The work was careful, slow, orderly, painstakingly analytical—the kind of process that seems intended to snuff out excited newspaper headlines. But it progressed with the same remorselessness that in the 1960s and ’70s had transformed offshore oil wells from Waterworld-style exoticisms to mainstays of the world economy.

In January, 18 years after the Japanese program began, the Chikyu left the Port of Shimizu, midway up the main island’s eastern coastline, to begin a “production” test—an attempt to harvest usefully large volumes of gas, rather than laboratory samples. Many questions remained to be answered, the project director, Koji Yamamoto, told me before the launch. JOGMEC hadn’t figured out the best way to mine hydrate, or how to ship the resultant natural gas to shore. Costs needed to be brought down. “It will not be ready for 10 years,” Yamamoto said. “But I believe it will be ready.” What would happen then, he allowed, would be “interesting.”

Already the petroleum industry has been convulsed by hydraulic fracturing, or “fracking”—a technique for shooting water mixed with sand and chemicals into rock, splitting it open, and releasing previously inaccessible oil, referred to as “tight oil.” Still more important, fracking releases natural gas, which, when yielded from shale, is known as shale gas. (Petroleum is a grab-bag term for all nonsolid hydrocarbon resources—oil of various types, natural gas, propane, oil precursors, and so on—that companies draw from beneath the Earth’s surface. The stuff that catches fire around stove burners is known by a more precise term, natural gas, referring to methane, a colorless, odorless gas that has the same chemical makeup no matter what the source—ordinary petroleum wells, shale beds, or methane hydrate.) Fracking has been attacked as an environmental menace to underground water supplies, and may eventually be greatly restricted. But it has also unleashed so much petroleum in North America that the International Energy Agency, a Paris-based consortium of energy-consuming nations, predicted in November that by 2035, the United States will become “all but self-sufficient in net terms.” If the Chikyu researchers are successful, methane hydrate could have similar effects in Japan. And not just in Japan: China, India, Korea, Taiwan, and Norway are looking to unlock these crystal cages, as are Canada and the United States.

Not everyone thinks JOGMEC will succeed. But methane hydrate is being developed in much the same methodical way that shale gas was developed before it, except by a bigger, more international group of researchers. Shale gas, too, was subject to skepticism wide and loud. The egg on naysayers’ faces suggests that it would be foolish to ignore the prospects for methane hydrate—and more foolish still not to consider the potential consequences.

If methane hydrate allows much of the world to switch from oil to gas, the conversion would undermine governments that depend on oil revenues, especially petro-autocracies like Russia, Iran, Venezuela, Iraq, Kuwait, and Saudi Arabia. Unless oil states are exceptionally well run, a gush of petroleum revenues can actually weaken their economies by crowding out other business. Worse, most oil nations are so corrupt that social scientists argue over whether there is an inherent bond—a “resource curse”—between big petroleum deposits and political malfeasance. It seems safe to say that few Americans would be upset if a plunge in demand eliminated these countries’ hold over the U.S. economy. But those same people might not relish the global instability—a belt of financial and political turmoil from Venezuela to Turkmenistan—that their collapse could well unleash.

On a broader level still, cheap, plentiful natural gas throws a wrench into efforts to combat climate change. Avoiding the worst effects of climate change, scientists increasingly believe, will require “a complete phase-out of carbon emissions … over 50 years,” in the words of one widely touted scientific estimate that appeared in January. A big, necessary step toward that goal is moving away from coal, still the second-most-important energy source worldwide. Natural gas burns so much cleaner than coal that converting power plants from coal to gas—a switch promoted by the deluge of gas from fracking—has already reduced U.S. greenhouse-gas emissions to their lowest levels since Newt Gingrich’s heyday.

Yet natural gas isn’t that clean; burning it produces carbon dioxide. Researchers view it as a temporary “bridge fuel,” something that can power nations while they make the transition away from oil and coal. But if societies do not take advantage of that bridge to enact anti-carbon policies, says Michael Levi, the director of the Program on Energy Security and Climate Change at the Council on Foreign Relations, natural gas could be “a bridge from the coal-fired past to the coal-fired future.”

“Methane hydrate could be a new energy revolution,” Christopher Knittel, a professor of energy economics at the Massachusetts Institute of Technology, told me. “It could help the world while we reduce greenhouse gases. Or it could undermine the economic rationale for investing in renewable, carbon-free energy around the world”—just as abundant shale gas from fracking has already begun to undermine it in the United States. “The one path is a boon. The other—I’ve used words like catastrophe.” He paused; I thought I detected a sigh. “I wouldn’t bet on us making the right decisions.”

A few years after I graduated from college, I drove with a friend to Southern California, a place I’d never been. I saw a little of Los Angeles, then went north and spent a few days bumbling through the San Joaquin Valley. Going about Bakersfield one night, I got hopelessly lost and ended up at a chain-link fence. Behind the fence were thousands of oil pumps, nodding up and down like so many giant plastic drinking birds. Enshrouding the pumps was a spiderweb of pipes and electrical wires, vast and complex beyond reason, lights and machinery stretching out across the desert farther than I could see. A giant, hypermodern petroleum operation barely 100 miles from Los Angeles! I couldn’t believe it. As I stood gawping, a policeman drove by. I asked him when this complex had sprung up. He looked at me like I was an idiot. “They’ve been drilling here since 1899,” he said.

“When will the world’s supply of oil be exhausted?” the MIT economist Morris Adelman has written. “The best one-word answer: never.”

I was standing by the Kern River oil field, one of the best-known petroleum deposits in the United States. Because I had somehow missed geology in school, I had been left with the vague idea that oil is found in big subterranean pools, like the underground lake where Voldemort conceals part of his soul in the Harry Potter series. In fact, petroleum is usually contained in solid sandstone or limestone strata, which are riddled, spongelike, with minute pores. Or it can occur in thin sheets between layers of shale. Looking at the nodding wells, I had the notion that they were drawing a uniform substance from the ground, a black liquid like the inky water in Voldemort’s lake. Instead, petroleum occurs as a crazy stew of different compounds: oil of various grades mixed with methane, ethane, propane, butane, and other hydrocarbons. Squashed into stone hundreds or thousands of feet underground, this jumble of liquid and gas is usually under great pressure. Layers, or “caps,” of impermeable rock prevent it from seeping to the surface. When drilling bores through the caps, petroleum shoots up in orthodox gusher fashion.

For a long time, companies collected oil and discarded the methane that burbled up with it, often by burning the gas in a cinematic flare atop special derricks, or even simply dumping it into the atmosphere. People did use natural gas for energy—gaslights have existed since the days of Jane Austen—but transporting it was costly. Unlike liquid oil, which could be poured into containers and carried on a railroad network that had already been built and paid for by somebody else, gaseous methane had to be pumped through sealed tubes to its destination, which required energy firms and utilities to lay thousands upon thousands of miles of pipeline. Not until the Second World War and war-production advances in welding did this effort gather speed. (Methane can be cooled into a liquid and transported in pressurized tanks that are loaded and unloaded in special facilities, but this is also expensive.) Oil from wells in Texas is readily dispatched via tanker to Europe or Asia, but even today, natural gas from the same wells is often effectively limited to use in the United States.

From the beginning, it was evident that the Kern River field was rich with oil, millions upon millions of barrels. (A barrel, the unit of oil measurement, is 42 gallons; depending on the grade, a ton of oil is six to eight barrels.) Wildcatters poured into the area, throwing up derricks, boring wells, and pulling out what they could. In 1949, after 50 years of drilling, analysts estimated that just 47 million barrels remained in reserves—a rounding error in the oil business. Kern River, it seemed, was nearly played out. Instead, oil companies removed 945 million barrels in the next 40 years. In 1989, analysts again estimated Kern reserves: 697 million barrels. By 2009, Kern had produced more than 1.3 billionadditional barrels, and reserves were estimated to be almost 600 million barrels.

What does it mean when oil companies say they have so many million barrels in reserves? How much energy is in the ground? When will we begin running out? As the history of the Kern River field suggests, these questions are not easy to answer. Indeed, Ph.D.‑toting experts have bombarded Americans for half a century with totally contradictory responses. On one side, pessimists claim that the planet is slowly running out of petroleum. “Turn down the thermostat!” they cry. “Stuff insulation in your walls!” “Buy a hybrid!” “Conserve!” From the other side come equally loud shouts insisting that there are vast, untapped petroleum deposits in Alaska and Alberta and off the coast of Virginia, that geysers of natural gas exist in the shale beds of Pennsylvania and North Dakota, and that huge oil patches await extraction in the deep ocean. “Drill, baby, drill!” “The end of oil!” Al Gore or Sarah Palin, Cassandra or Pollyanna, which side is right? The back-and-forth would be comical if the stakes didn’t involve the fate of human civilization.

When gasoline supplies drop, TV news reporters like to wring their hands at the drivers mobbing the corner Exxon. But the motorists’ panic reflects a basic truth: economic growth and energy use have marched in lockstep for generations. Between 1900 and 2000, global energy consumption rose roughly 17-fold, the University of Manitoba environmental scientist Vaclav Smil has calculated, while economic output rose 16-fold—“as close a link as one may find in the unruly realm of economic affairs.” Petroleum has wreaked all kinds of social and environmental havoc, but a steady supply of oil and gas remains just as central to the world’s economic well-being as it was in Churchill’s day. According to the National Bureau of Economic Research, the United States has experienced 11 recessions since the end of the Second World War. All but one were associated with spikes in energy costs—specifically, abrupt jumps in the price of oil.

Understanding this dependence, the oil industry was shaken by a speech in 1956 by M. King Hubbert, a prominent geophysicist at Shell Oil. When a company moves into a field, it grabs the easy, cheap oil first. Tapping the rest gets progressively more difficult and expensive. Eventually, Hubbert observed, conditions get so tough that production levels off—it peaks. After the peak, decline is unstoppable, the fall as ineluctable as the rise. Hubbert used his theory to predict that the crude-oil yield in the continental United States would flatten between 1965 and 1970 (he didn’t include Alaska and most offshore oil areas). Coming at a time when estimates by the U.S. Geological Survey and the petroleum industry were constantly rising, this claim was derided; indeed, Hubbert claimed that just before giving his speech, a Shell official tried to get him to back off.

Hubbert, not the least self-confident of men, stood his ground, even after he left Shell and in 1964 went to work for the Geological Survey. Unluckily for him, his most prominent critic was now his boss: Vincent E. McKelvey, a long-serving geologist at USGS who would become its director in 1971. As the University of Iowa historian Tyler Priest has documented, McKelvey’s USGS issued a stream of optimistic assessments about the country’s oil future. So did its counterparts in the oil industry. Meanwhile, Hubbert cranked out papers taking the opposite stance, none of them published by the Geological Survey. Inevitably, the dispute grew personal. Three days after McKelvey became the USGS director, he took away Hubbert’s secretary, a harsh measure in the days before e‑mail. According to Priest, Hubbert ended up having to write all his correspondence in longhand; his wife typed his reports at home. Hubbert struck back by helping to kill McKelvey’s nominations to the National Academy of Sciences and the American Academy of Arts and Sciences.

In a blow to McKelvey, Hubbert’s prediction proved to be correct. As domestic crude-oil production peaked and then fell, former Interior Secretary Stewart Udall mocked the sunny claims from the Geological Survey as “an enormous energy balloon of inflated promises and boundless optimism [that] had long since lost touch with any mainland reality.” If Udall were reappointed Interior secretary, he said, “the first thing I would do would be to kick McKelvey out.” In 1977, newly elected President Jimmy Carter, a Hubbertian, forced McKelvey to resign—the first such ouster, Priest notes, “in the Survey’s 98-year history.”

Hubbert’s message of scarcity resonated at a time when the United States was haunted by the specter of Middle Eastern oil blockades. In a nationwide address, President Carter proclaimed that the planet’s proven oil reserves could be consumed “by the end of the next decade.” To forestall the disaster, he fired a volley of energy-efficiency measures: gas-mileage regulation, home-appliance energy standards, conservation tax credits, subsidies for insulation and weatherization. Congress enacted incentives and restrictions to induce industry to switch from supposedly scarce oil and natural gas to coal, which the U.S. has in abundance.

Alas, petroleum firms found so much crude oil in the 1980s that by the 1990s, prices (after adjusting for inflation) had fallen to one-fifth of what they had been during the Carter administration. Estimates of reserves rose and rose again. Energy conservation faltered; oil and gas were too cheap to be worth saving.

Fracking is creating “the biggest change in energy in almost 100 years—a revolution.”

The argument has nonetheless continued, pessimists and optimists hammering at each other like Montagues and Capulets. Most of the Hubbertians are physical scientists; most of the McKelveyans, social scientists. Central to the conflict is their differing concepts of a reserve. Recall, as an example, the Kern River field. Its thousands of nodding pumps are siphoning up oil so thick and heavy that it almost doesn’t float on water. Although drillers knew from the first that the field was abundant, they could barely wrest any of this goop from the ground, a factor reflected in the first estimate of the reserve (47 million barrels of recoverable oil). Between that estimate and the second (697 million barrels), engineers developed a precursor to fracking: shooting hot steam down Kern River wells to thin the oil and force it out of the stone. At first, the process was hideously inefficient: heating the water to produce the steam required as much as 40 percent of the oil that came out of the wells. Burning unrefined crude oil released torrents of pollution: nitrous oxide, sulfur dioxide, carbon dioxide. But it squeezed out petroleum that had seemed impossible to reach.

At the same time, the industry learned how to burrow farther into the Earth, opening up previously inaccessible deposits. In 1998, an oil rig near the Kern River field drilled thousands of feet deeper than any previous attempt in the area. At 17,657 feet, the well blew out in a classic gusher. Flames shot 300 feet in the air. The blast destroyed the well and everything else on the site. Even after the fire burned out, petroleum flooded from the hole for another six months. Energy firms guessed that the blowout hinted at the presence of big new oil-and-gas deposits. Earlier assessments had missed them because of their great depth. Investors rushed in and began to drill.

To McKelveyan social scientists, such stories demonstrate that oil reserves should not be thought of as physical entities. Rather, they are economic judgments: how much petroleum experts believe can be harvested from given areas at an affordable price. Even as companies drain off the easy oil, innovation keeps pushing down the cost of getting the rest. From this vantage, the race between declining oil and advancing technology determines the size of a reserve—not the number of hydrocarbon molecules in the ground. Companies that scrambled to follow the Kern River gusher found millions of barrels of deep oil, but it was mixed with so much water that they couldn’t stop the wells from flooding. Within a few years, almost all the new rigs ceased operation. The reserve vanished, but the oil remained.

This perspective has a corollary: natural resources cannot be used up. If one deposit gets too expensive to drill, social scientists (most of them economists) say, people will either find cheaper deposits or shift to a different energy source altogether. Because the costliest stuff is left in the ground, there will always be petroleum to mine later. “When will the world’s supply of oil be exhausted?” asked the MIT economist Morris Adelman, perhaps the most important exponent of this view. “The best one-word answer: never.” Effectively, energy supplies are infinite.

Sweeping claims like these make Jean Laherrère’s teeth hurt. Laherrère spent 37 years exploring for oil and gas for the French petroleum company Total before co-founding the Association for the Study of Peak Oil and Gas. ASPO was born after Laherrère and Colin Campbell, another retired petroleum geologist, predicted in 1998 that “within the next decade, the supply of conventional oil will be unable to keep up with demand.” Given the record-high petroleum reserves of the time, the claim was gutsy. Campbell and Laherrère insisted that talk of ever more oil was nonsense. In the 1980s, the Organization of the Petroleum Exporting Countries, the intergovernmental cartel that controls most crude oil, discussed allocating sales on the basis of member states’ reserves: the bigger a nation’s reserves, the more oil OPEC would let that nation sell. In such a system, countries would have every incentive to overstate their holdings. As Campbell and Laherrère noted, six of the 11 OPEC members abruptly hiked their reserve estimates during these discussions. Incredibly, some nations more than doubled their estimates, without a word of explanation for why they now had so much more oil in the ground. (OPEC eventually decided not to allocate oil in this way.) The supposed glut was a charade, Laherrère told me when we spoke in February. The reserves didn’t exist. “We said the [plateau in oil production]would begin before 2010, and we were correct.”

Far from being infinite, Laherrère said, petroleum supplies are finite by definition. The Earth contains only so many hydrocarbon molecules that can be extracted by human effort. “Once we have used up the easy oil, new types of cheap energy will not appear by magic. We will keep drilling for oil, and it will not be easy to get. Look at the enormously expensive equipment they use now only to keep up production.”

Oil prices soared, as if on cue, after Laherrère and Campbell’s prediction. By 2008, they had hit levels unseen since the Carter administration. “The supply of oil is limited,” President George W. Bush declared that year, echoing his predecessor. “There is a growing consensus that the age of cheap oil is coming to an end,” announced the British government’s Energy Research Centre. “A peak of conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020.” Bookstore shelves shudder beneath the avalanche of warnings: The Big Flatline: Oil and the No-Growth EconomyPeak Oil and the Second Great Depression (2010–2030)The End of GrowthThe Crash Course. Peeking at Peak Oil. (All have come out in the past three years.)

McKelveyans remain undeterred. Morris Adelman is in failing health and could not speak to me, but I reached two of his students, Michael Lynch and Philip K. Verleger. Lynch, the president of the energy-consulting firm SEER, agreed with Laherrère that reserve estimates are sometimes manipulated for financial reasons—Shell’s chairman resigned in 2004, after the company was caught misstating its reserves—but didn’t think it mattered much. “Shell is still pumping oil,” he said. “The peak-oil people always say, ‘Look at this super-technological rig—see how expensive the equipment is now.’ I see it and think, Look at how good we’ve gotten at doing this.” Lynch added, “The airlines have jettisoned their wooden biplanes and now use 747s. That’s not because we’re running out of sky and it’s harder to fly. It’s because the technology is getting better and increasing our reach.”

More important, to Verleger’s way of thinking, the peak-oil battle has become irrelevant. Verleger, a former economic official in the Ford and Carter administrations, is now a visiting fellow at the Peterson Institute for International Economics in Washington, D.C. Since Hubbert’s time, the dispute has focused on “conventional” petroleum, the type found in regular oil wells, most of which is in the Middle East and controlled by OPEC. Production of conventional oil has indeed plateaued, as Hubbertians warned: OPEC’s output has remained roughly flat since 2005. In part, the slowdown reflects the diminishing supply of this kind of oil. Another part is due to the global recession, which has stalled demand. But a third factor is that OPEC’s conventional petroleum is being supplemented—and possibly supplanted—by what the industry calls “unconventional” petroleum, which for the moment mainly means oil and natural gas from fracking. Fracking, Verleger says, is creating “the biggest change in energy in almost 100 years—a revolution.” That revolution, in his view, will have a big winner: the United States.

The argument is simple. The need to import expensive foreign oil has been a political and economic burden on the United States for decades. Today, though, fracking is unleashing torrents of oil in North Dakota and Texas—it may create a second boom in the San Joaquin Valley—and floods of natural gas in Pennsylvania, West Virginia, and Ohio. So bright are the fracking prospects that the U.S. may become, if only briefly, the world’s top petroleum producer. (“Saudi America,” crowed The Wall Street Journal. But the parallel is inexact, because the U.S. is likely to consume most of its bonanza at home, rather than exporting it.) Oil may cost more than in the past, but prices will surely stabilize. No more spikes! Still more important, this nation is fracking so much natural gas that its price today is less than a third of its price in Europe and Asia—a big cost advantage for American industry. As companies switch to cheap natural gas, a Citigroup report argued last year, the U.S. petroleum boom could add as much as 3.3 percent to America’s GDP in the next seven years.

Until about 1970, the United States produced almost enough petroleum for its own needs. Then, just as Hubbert predicted, domestic oil production began to wane. Suddenly the United States was vulnerable. OPEC had launched an oil embargo in 1967, but it had next to no effect, because the U.S. produced so much of its own oil. Six years later, with U.S. imports surging, OPEC launched a second embargo. Oil prices quadrupled—and caused a massive panic, complete with fistfights at gas stations that were broadcast and rebroadcast on local TV news. “Energy independence!” was the new call from Washington. Perhaps the only ideal shared by Nixon, Carter, and Reagan, it became the holy grail of American politics. George W. Bush, flanked by Democrats, signed the Energy Independence and Security Act of 2007; Barack Obama, fighting with Republicans, has repeatedly touted the need to “get America closer to energy independence.”

Largely because of little-noticed research by government agencies and small companies, that goal is within sight, says Leonardo Maugeri, a former director of the petrochemical division of the Italian energy firm Eni. The United States will still import oil, he argued last summer in a report from Harvard’s Kennedy School of Government. But domestic production will increase so much that by 2020, all of this country’s oil needs “theoretically could come entirely from the Western Hemisphere.” Within a decade, in other words, the U.S. could, if it wanted, stop importing oil from the Middle East. In November, the International Energy Agency agreed, though it pushed the date of independence to 2035. The fracking-led oil-and-gas boom, Philip Verleger said in January, will lead to an American “economic Renaissance.” The United States will at last escape the world made by Churchill, at least for a while.

Nations like Japan, China, and India will still be stuck in that world, as will much of Europe and Southeast Asia. Many of these nations do not have shale deposits to frack, the requisite technological base, or, even if they have both the shale and the technology, the entrepreneurial infrastructure to finance such sweeping changes. Nonetheless, they want to be freed from their abrasive reliance onOPEC. The United States and Canada, mindful that the good times will not last forever, are also hunting for new supplies. All have been looking with ever-increasing interest at a still-larger energy source: methane hydrate.

The land sheds organic molecules into the water like a ditchdigger taking a shower. Sewage plants, fertilizer-rich farms, dandruffy swimmers—all make their contribution. Plankton and other minute sea beings flourish where the drift is heaviest, at the continental margins. When these creatures die, as all living things must, their bodies drizzle slowly to the seafloor, creating banks of sediment, marine reliquaries that can be many feet deep. Microorganisms feed upon the remains.

In a process familiar to anyone who has seen bubbles coming to the surface of a pond, the microbes emit methane gas as they eat and grow. This undersea methane bubbles up too, but it quickly encounters the extremely cold water in the pores of the sediment. Under the high pressure of these cold depths, water and methane react to each other: water molecules link into crystalline lattices that trap methane molecules. A cubic foot of these lattices can contain as much as 180 cubic feet of methane gas.

Most methane hydrate, including the deposit Japan is examining in the Nankai Trough, is generated in this way. A few high-quality beds accumulate when regular natural gas, the kind made underground by geologic processes, leaks from the earth into the deep ocean. However methane hydrate is created, though, it looks much like everyday ice or snow. It isn’t: ordinary ice cannot be set on fire. More technically, ice crystals are typically hexagonal, whereas methane-hydrate crystals are clusters of 12- or 14-sided structures that in scientists’ diagrams look vaguely like soccer balls. Methane molecules rattle about inside the balls, unable to escape. The crystals don’t dissolve in the sea like ordinary ice, because water pressure and temperature keep them stable at depths below about 1,000 feet. Scientists on the surface refer to them by many names: methane hydrate, of course, but also methane clathrate, gas hydrate, hydromethane, and methane ice.

Estimates of the global supply of methane hydrate range from the equivalent of 100 times more than America’s current annual energy consumption to 3 million times more. A tiny fraction—1 percent or less—is buried in permafrost around the Arctic Circle, mostly in Alaska, Canada, and Siberia. The rest is beneath the waves, a reservoir so huge that some scientists believe sudden releases of undersea methane eons ago set off abrupt, catastrophic changes in climate. Humankind cannot tap into the bulk of these deep, vast deposits by any known means. But even a small proportion of a very big number is a very big number.

Hydrates were regarded purely as laboratory curiosities until the 1930s, when a Texas petroleum researcher realized that they were clogging natural-gas pipelines in cold weather. Three decades later, exploration in Siberia revealed gelid bands of methane hydrate embedded in the tundra. Meanwhile, oceanographers were observing anomalies in sonar readings of the seafloor. Some areas of the bottom bounced sound waves back more sharply than one would expect from muddy sediment. It was like waving a flashlight in a dark room and being startled by the flash from a mirror. Three geologists suggested in 1971 that these reflective zones were layers of methane hydrate. Not until 1982 did researchers obtain a large chunk of methane hydrate—a three-foot section of a core sample. The gas inside was 99.4 percent methane. That year, the United States established a methane-hydrate research program.

The investigation was a small, belated part of a global push into unconventional petroleum that had been spurred by the oil shocks of the 1970s. For civilians, understanding unconventionals is difficult, not least because of the taxonomic hodgepodge the industry uses to describe them: tar sands, tight oil, heavy oil, shale gas, coal-bed methane, shale oil, oil shale. (Exasperatingly, shale oil is different from oil shale.) All of these different flavors of petroleum are “unconventional” simply because in the past they were too hard to pull from the earth to be worth the bother. Nowadays technology has made many of them accessible.

Stored mostly in broad, shallow layers beneath the seafloor, methane hydrate is, by some estimates, twice as abundant as all other fossil  fuels combined. The yellow squares show where methane hydrate has already been recovered; the blue dots, where it is thought to exist. (Map by Alice Cho)

Stored mostly in broad, shallow layers beneath the seafloor, methane hydrate is, by some estimates, twice as abundant as all other fossil fuels combined. The yellow squares show where methane hydrate has already been recovered; the blue dots, where it is thought to exist. (Map by Alice Cho)

With the odd exception, unconventionals can be broken into two rough categories: forms of petroleum that are heavier and less refined than the crudest of crude oil, and forms that are lighter and more refined than crude oil. Both are worth huge sums and entangled in dispute, much like conventional petroleum. But the second category, which includes the natural gas from methane hydrate, seems likely to play a much larger role in humankind’s future—economically, politically, and, most of all, environmentally.

The first, heavy category consists of petroleum that must be processed on-site to be transformed into oil. Tar sands, for instance, consist of ordinary sand mixed with bitumen, a sludgy black goo that hasn’t withstood enough geological heat and pressure to be converted fully into ordinary oil. The most important tar-sand deposits are underneath an expanse of subarctic forest in central Canada that is roughly the size of England; they make up the third-biggest proven oil reserve in the world. In most cases, mining tar sands involves drilling two horizontal wells, one above the other, into the bitumen layer; injecting massive gouts of high-pressure steam and solvents into the top well, liquefying the bitumen; sucking up the melted bitumen as it drips into the sand around the lower well; and then refining the bitumen into “synthetic crude oil.” Refining in this case includes removing sulfur, which is then stored in million-ton, utterly useless Ozymandian slabs around mines and refineries.

Economists sometimes describe a fuel in terms of its energy return on energy invested (EROEI), a measure of how much energy must be used up to acquire, process, and deliver the fuel in a useful form. OPEC oil, for example, is typically estimated to have an EROEI of 12 to 18, which means that 12 to 18 barrels of oil are produced at the wellhead for every barrel of oil consumed during their production. In this calculation, tar sands look awful: they have an EROEI of 4 to 7. (Steaming out the bitumen also requires a lot of water. Environmentalists ask, with some justification, where it all is going to come from.)

Conveying tar-sands oil to its biggest potential markets, in the United States, will involve building a huge pipeline from Alberta to Texas, which has attracted vituperative opposition from environmental groups and some local governments. The U.S. State Department has long delayed issuing permits to allow this pipeline to cross the border, a stall that has outraged energy boosters, who charge that the Obama administration is spitting in the soup of Canada, America’s most important ally. The boosters say little about the two 100 percent Canadian pipelines—one to shoot tar-sands oil to a port in British Columbia, a second to Montreal—that 100 percent Canadian opposition has stalled. All the while, indigenous groups in central Canada, people armed with special powers granted by the Canadian constitution, have carpet-bombed tar-sands country with lawsuits. Regardless of the merits of the protesters’ arguments, it is hard to believe that they will be completely ineffective, or that tar-sands oil will flow freely anytime soon.

Much more prominent is the second unconventional category, the most important subcategory of which is the natural gas harvested by fracking shale. Every few years, the U.S. government produces a map of American shale beds. Flipping through a time series of these maps is like watching the progress of an epidemic—methane deposits pop up everywhere, and keep spreading. To obtain shale gas, companies first dig wells that reach down thousands of feet. Then, with the absurd agility of anime characters, the drills wriggle sideways to bore thousands of feet more through methane-bearing shale. Once in place, the well injects high-pressure water into the stone, creating hairline cracks. The water is mixed with chemicals and “proppant,” particles of sand or ceramic that help keep the cracks open once they have formed. Gas trapped between layers of shale seeps past the proppant and rises through the well to be collected.

Water-assisted fracturing has been in use since the late 1940s, but it became “fracking” only recently, when it was married with horizontal drilling and the advanced sensing techniques that let it be used deep underground. Energy costs are surprisingly small; a Swiss-American research team calculated in 2011 that the average EROEI for fracked gas in a representative Pennsylvania county was about 87—about six times better than for Persian Gulf oil and 16 times better than for tar sands. (Fracking uses a lot of water, though, and activists charge that the chemicals contaminate underground water supplies.) Because of fracking, U.S. natural-gas reserves have jumped by almost three-quarters since 2000.

Shale gas has its detractors. Far from being a game changer, Jean Laherrère told me, shale gas is a “Ponzi scheme” in which oil companies acquire largely fictional methane deposits to polish their balance sheets for Wall Street. A February study from the Post Carbon Institute, an anti-fossil-fuel think tank, dismissed shale gas as, at best, “a temporary reprieve from having to deal with the real problems”; the group’s general tenor is indicated by the special URL it set up for the report: shalebubble.org. But these views are not widely shared. Two days after I last spoke with Laherrère, the head of the U.S. Energy Information Administration told a congressional hearing that the additions to America’s energy reserves ballyhooed in the agency’s most recent report “were—by a large margin—the highest ever recorded since EIA began publishing proved reserve estimates in 1977.”

As Economics 101 would predict, the arrival of vast quantities of methane from fracking has already made U.S. natural-gas prices plummet. In response, hundreds of wells have shut down, preserving methane deposits that can be tapped someday in the future. But U.S. natural-gas production has hardly been affected. Neither has demand: more and more industries, attracted by low prices, are switching to gas from oil and coal—especially coal.

Today, a fifth of U.S. energy consumption is fueled by coal, mainly from Appalachia and the West, a long-term energy source that has provided jobs for millions, a century-old way of life—and pollution that kills more than 10,000 Americans a year (that estimate is from a 2010 National Research Council study). Roughly speaking, burning coal produces twice as much carbon dioxide as burning the equivalent amount of natural gas. Almost all domestic coal is used to generate electricity—it produces 38 percent of the U.S. power supply. Fracking is swiftly changing this: in 2011, utilities reported plans to shut down 57 of the nation’s 1,287 coal-fired generators the following year. Largely in consequence, U.S. energy-related carbon-dioxide emissions have dropped to figures last seen in 1995. Since 2006, they have fallen more than those from any other nation in the world.

The U.S. coal industry has taken to complaining of a “war on coal.” But the economic hit has been less than one would expect; U.S. coal exports, mainly to Europe, almost doubled from 2009 to 2011. In the sort of development that irresistibly attracts descriptors like ironic, Germany, often touted as an environmental model for its commitment to solar and wind power, has expanded its use of coal, and as a result is steadily increasing its carbon-dioxide output. Unlike Americans, Europeans can’t readily switch to natural gas; Continental nations, which import most of their natural gas, agreed to long-term contracts that tie its price to the price of oil, now quite high. “It’s like someone said, ‘We’ll sell you all the tea you want, based on the price of coffee,’ ” Michael Lynch, the energy consultant, told me. “And you said, ‘What a great idea! I’ll lock myself into it for decades.’ ” He laughed. “Truly, you can’t make this stuff up.”

Here I should confess to personal bias. Twelve years ago, a magazine asked me to write an article about energy supplies. While researching, I met petroleum geologists and engineers who told me about a still-experimental technique called hydraulic fracturing. Intrigued, I asked several prominent energy pundits about it. All scoffed at the notion that it would pay off. To be fair, some early fracking research was outlandish; three early trials involved setting off atomic weapons underground (they did produce natural gas, but it was radioactive). I don’t want to embarrass anyone I spoke with. I failed to exercise independent judgment, and did not mention hydraulic fracturing in my article, so I was just as mistaken. But I also don’t want to miss the boat again. Even though plenty of experts discount methane hydrate, I now am more inclined to pay attention to the geologists and engineers who foresee a second, fracking-type revolution with it, a revolution that—unlike the shale-gas rush, mostly a North American phenomenon—will ripple across the globe.

Japan, which has spent about $700 million on methane-hydrate R&D over the past decade, has the world’s biggest hydrate-research program—or perhaps that should be programs, because provincial governments on Japan’s west coast formed a second hydrate-research consortium last year. (Several researchers told me that the current towel-snapping between Beijing and Tokyo over islands in the East China Sea is due less to nationalistic posturing than to nearby petroleum deposits.) In mid-March, Japan’s Chikyu test ended a week early, after sand got in the well mechanism. But by then the researchers had already retrieved about 4 million cubic feet of natural gas from methane hydrate, at double the expected rate. Japan’s Ministry of Economy, Trade, and Industry is eager to create a domestic oil industry; at present, the nation produces just one one-thousandth of its own needs. Perhaps overoptimistically, the ministry set 2018 as a target date for commercializing methane hydrate. India and South Korea are following along, each spending as much as $30 million a year on hydrate experiments; the Korean program is growing especially aggressively.

U.S.-style energy independence, or something like it, may become a reality in much of Asia and West Africa, parts of Europe, most of the Americas. The results in other nations would be turbulent.

By contrast, the U.S. Department of Energy program is small—its annual budget is about $15 million, most of which is devoted to basic research on gas hydrates’ formation and location. About $2.4 million goes to U.S. Geological Survey methane-hydrate researchers, who have been test-mining onshore deposits in frigid Alaska and northwestern Canada. Based in Woods Hole, Massachusetts, and Denver, Colorado, the USGS program has about eight full-time researchers, as well as collaborators from Japan, Canada, Germany, India, and several oil companies.

Although most U.S. research has been in the far north, the most promising U.S. deposits are in the Gulf of Mexico. Hydrates are thought to blanket about 174,000 square miles of the gulf, an area about the size of California. At least part of the deposit, seepage from conventional hydrocarbon reservoirs, is top-quality stuff, though nobody has any idea how much is actually recoverable. What is known, says Timothy Collett, the energy-research director for the USGS program, is that some of the gulf’s more than 3,500 oil and gas wells are in gas-hydrate areas. Extracting these hydrates, in his view, is the logical next step. “To keep feeding the infrastructure, you have to maintain a certain return. Otherwise, you’ll abandon it,” he told me. “For the individual manager of a large installation with a multimillion-dollar budget, it might be well within your interest, as you go into decline on deepwater production, to start looking at gas hydrate.”

If one nation succeeds in producing commercial quantities of undersea methane, others will follow. U.S.-style energy independence, or something like it, may become a reality in much of Asia and West Africa, parts of Europe, most of the Americas. To achieve this dream, history suggests, subsidies to domestic producers will be generous and governments will slap fees on petroleum imports—especially in Asia, where dependence on foreign energy is even more irksome than it is here. In addition to North America, the main sources of conventionally extracted natural gas are Russia, Iran, and Qatar (Saudi Arabia is also an important producer). All will feel the pinch in a methane-hydrate world. If natural gas from methane hydrate becomes plentiful and cheap enough to encourage nations to switch from oil, as the Japanese hope, the risk pool will expand to include Brunei, Iraq, Nigeria, the United Arab Emirates, Venezuela, and other petro-states.

The results in those nations would be turbulent. Petroleum revenues, if they are large, exercise curious and malign effects on their recipients. In 1959, the Netherlands found petroleum on the shores of the North Sea. Money gurgled into the country. To general surprise, the flood of cash led to an economic freeze. Afterward, economists realized that salaries in the new petroleum industry were so high that nobody wanted to work anywhere else. To keep employees, companies in other parts of the economy had to jack up wages, in turn driving up costs. Meanwhile, the surge of foreign money into the Netherlands raised the exchange rate. Soaring costs and currency made it harder for Dutch firms to compete; manufacturing and agriculture faltered; unemployment climbed, except in the oil industry. The windfall led to stagnation—a phenomenon that petroleum cognoscenti now call “Dutch disease.”

Some scholars today doubt how much the Netherlands was actually affected by Dutch disease. Still, the general point is widely accepted. A good modern economy is like a roof with many robust supporting pillars, each a different economic sector. In Dutch-disease scenarios, oil weakens all the pillars but one—the petroleum industry, which bloats steroidally.

Worse, that remaining pillar becomes so big and important that in almost every nation, the government takes it over. (“Almost,” because there is an exception: the United States, the only one of the 62 petroleum-producing nations that allows private entities to control large amounts of oil and gas reserves.) Because the national petroleum company, with its gush of oil revenues, is the center of national economic power, “the ruler typically puts a loyalist in charge,” says Michael Ross, a UCLA political scientist and the author of The Oil Curse (2012). “The possibilities for corruption are endless.” Governments dip into the oil kitty to reward friends and buy off enemies. Sometimes the money goes to simple bribes; in the early 1990s, hundreds of millions of euros from France’s state oil company, Elf Aquitaine, lined the pockets of businessmen and politicians at home and abroad. Often, oil money is funneled into pharaonic development projects: highways and hotels, designer malls and desalination plants. Frequently, it is simply unaccounted for. How much of Venezuela’s oil wealth Hugo Chávez hijacked for his own political purposes is unknown, because his government stopped publishing the relevant income and expenditure figures. Similarly, Ross points out, Saddam Hussein allocated more than half the government’s funds to the Iraq National Oil Company; nobody has any idea what happened to the stash, though, because INOC never released a budget. (Saddam personally directed the nationalization of Iraqi oil in 1972, then leveraged his control of petroleum revenues to seize power from his rivals.)

Shortfalls in oil revenues thus kick away the sole, unsteady support of the state—a cataclysmic event, especially if it happens suddenly. “Think of Saudi Arabia,” says Daron Acemoglu, the MIT economist and a co-author of Why Nations Fail.“How will the royal family contain both the mullahs and the unemployed youth without a slush fund?” And there is nowhere else to turn, because oil has withered all other industry, Dutch-disease-style. Similar questions could be asked of other petro-states in Africa, the Arab world, and central Asia. A methane-hydrate boom could lead to a southwest-to-northeast arc of instability stretching from Venezuela to Nigeria to Saudi Arabia to Kazakhstan to Siberia. It seems fair to say that if autocrats in these places were toppled, most Americans would not mourn. But it seems equally fair to say that they would not necessarily be enthusiastic about their replacements.

Augmenting the instability would be methane hydrate itself, much of which is inconveniently located in areas of disputed sovereignty. “Whenever you find something under the water, you get into struggles over who it belongs to,” says Terry Karl, a Stanford political scientist and the author of the classic The Paradox of Plenty: Oil Booms and Petro-States. Think of the Falkland Islands in the South Atlantic, she says, over which Britain and Argentina went to war 30 years ago and over which they are threatening to fight again. “One of the real reasons that they are such an issue is the belief that either oil or natural gas is offshore.” Methane-hydrate deposits run like crystalline bands through maritime flash points: the Arctic, and waters off West Africa and Southeast Asia.

In a working paper, Michael Ross and a colleague, Erik Voeten of Georgetown University, argue that the regular global flow of petroleum, the biggest commodity in world trade, is also a powerful stabilizing force. Nations dislike depending on international oil, but they play nice and obey the rules because they don’t want to be cut off. By contrast, countries with plenty of energy reserves feel free to throw their weight around. They are “less likely than other states to sign major treaties or join intergovernmental organizations; and they often defy global norms—on human rights, the expropriation of foreign companies, and the financing of foreign terrorism or rebellions.” The implication is sobering: an energy-independent planet would be a world of fractious, autonomous actors, none beholden to the others, with even less cooperation than exists today.

None of this is what makes Christopher Knittel use words like catastrophe. What Knittel is thinking of is, so to speak, the little black specks of Yulin, China. Five years ago, I traveled with a friend to Yulin, in the northwestern province of Shaanxi, not far from Mongolia. We visited the Great Wall, which passes just north of town. In that area, the wall itself had mostly crumbled to nothing, except for the watchtowers, which stuck up every half mile or so. People in one tower were supposed to be able to signal to the next, passing on messages like ships at sea.

When I climbed up one eroded tower, I was surprised to find that I couldn’t see its neighbor. There were little black specks all over my glasses. I cleaned the lenses, but was still unable to make out the next tower. The black specks were not just on my glasses.

Walking around town, my friend and I had noticed that almost every home had a pile of coal outside, soft dark chunks that people shoveled into stoves for cooking and heating. Thousands upon thousands of coal fires were loading the air with tiny dots of soot. Scientists have taken to calling these dots “black carbon,” and have steadily ratcheted up their assessments of its harm. In March, for instance, a research team led by a Mumbai environmental group estimated that black carbon and other particulate matter from India’s coal-fired power plants cause about 100,000 deaths a year.

Environmentalists worry even more about black carbon’s role in climate change. Black carbon in the air absorbs heat and darkens clouds. In some places, it alters rain patterns. Falling on snow, it accelerates melting. A 31-scientist team from nine nations released a comprehensive, four-year assessment in January arguing that planetary black-carbon output is the second-biggest driver of anthropogenic (human-caused) climate change; the little black specks I found on my glasses and clothes have roughly two-thirds the impact of carbon dioxide.

Natural gas produces next to no soot and half the carbon dioxide coal does. In coal-heavy places like China, India, the former Soviet Union, and eastern Europe, heating homes and offices with natural gas instead of coal would be a huge step. An MIT study chaired by Ernest Moniz, whom President Obama nominated for energy secretary in March, called natural gas “a cost-effective bridge” to a “low-carbon future.”

The Chinese government is aware of this, which is one reason it is pursuing both shale gas and methane hydrate. But environmentalists are less enthusiastic than one might imagine about the prospect of weaning ourselves from coal with gas. The reason is that methane itself—unburned natural gas—has a much greater capacity to trap solar heat than carbon dioxide does. (Because methane does not remain in the air as long as carbon dioxide, the precise comparison depends on the chosen time frame; researchers typically say that methane is about 20 or 30 times more potent.) Activists fear that the negative effects of obtaining natural gas could swamp the positive effects of burning it. They are entirely correct, although perhaps not in the way they suppose.

Almost every friend and neighbor I have spoken with about methane hydrate asked whether tapping these undersea deposits could release vast amounts of methane all at once, disastrously altering the planet’s environment. According to Carolyn Ruppel of the Geological Survey, these fears are understandable—but misplaced. If things go awry in a hydrate operation, some of the methane will escape into exactly the cold temperatures and high pressures that trapped it to begin with. Some will be consumed by bacteria, producing carbon dioxide, which dissolves in water; this raises the ocean’s acidity, but not enough to have much effect. Any remaining methane will rise out of the sediment and, like the carbon dioxide, dissolve harmlessly in the ocean. (None of this should be confused with a different source of methane: the decayed vegetation in permafrost, which will release methane if the permafrost thaws.)

Environmentalists are not enthusiastic about the prospect of replacing coal with gas, because methane has a much greater capacity to trap solar heat than carbon dioxide does.

The real concern, Ruppel and other researchers told me, is less an explosive methane release from under the Earth’s surface—the environmental disaster that might have caused havoc eons ago—than a slow discharge at ground level, from the machinery that will pull methane hydrate out of the seafloor. The problem already exists with fracking. “The rule of thumb is that if a well leaks more than about 3 percent” of its methane production into the air, “natural gas actually becomes dirtier than coal, from a climate-change perspective,” says Ramez Naam, the author of The Infinite Resource, a just-published book about the race between environmental degradation and technological innovation. “The amazing thing, though, is that we don’t have any data—nobody is required to monitor methane at the well. So there’s just a few studies, which vary tremendously.” Worse still, the aging natural-gas infrastructure is riddled with holes and seeps; early this year, a survey of gas mains along Boston’s 785 miles of road, the first-ever such examination, found 3,356 leaks. Last August, the Environmental Protection Agency amended the Clean Air Act to require well operators to recapture some methane; because nobody knows how much natural gas is gushing into the air, the new rules’ impact is uncertain.

Still, fixing leaks is a task that developed nations can accomplish. “In the United States,” Lynch says, “it is possible to hire inspectors and send them out in white vans to measure methane emissions. They can tell companies to spray more silicone in the wellheads. Maybe the companies will kick and scream about the bureaucracy and cost, but this is something that can be done.”

What we can’t do, or at least not readily, is overcome the laws of economics.

In these visions of the future, natural gas plays two roles. To politicians and economists, it is a vehicle for reasserting American might—cheap energy that will liberate the United States from foreign petroleum. To environmentalists, natural gas is a bridge fuel, a substitute for coal and oil that will serve until—but only until—the world can move to zero-carbon energy sources: sunlight, wind, tides, waves, and geothermal heat.

In the short run, these visions are compatible. Although the cost of renewable energy is falling rapidly, it is not yet equivalent to the cost of energy from fossil fuels. As an example, typical solar cells today have an EROEI of about 10—better than tar sands but worse than most oil and gas. (All such estimates are rough in the extreme, because the output of renewables, unlike that of petroleum, depends on where they are located. One recent estimate put the EROEI of Spain’s extensive solar-power network at less than 3.) Many advocates for solar power believe that its EROEI will match that of fossil fuels within a decade. Even if they are correct, though, sunlight is too fickle and inconstant for utilities. Modern electrical grids are in some ways like busy airports, with sweaty controllers staring at monitors, feverishly adjusting power outputs from big plants to the capricious swirls of human demand for air-conditioning, baseboard heating, and microwave popcorn. As more and more energy comes from sun, wind, tides, and other variable sources, the problem of balancing fluctuating supply and fluctuating demand will worsen. When renewables supply 20 to 30 percent of all electricity, many utility-energy engineers predict, the system will no longer be able to balance supply and demand. Brownouts will ripple across the landscape; control centers will call up big companies and beg them to turn off the lights; managers of ultrasensitive modern control centers will watch in horror as voltage drops lead to factory shutdowns. (Germany, a leader in renewable-energy use, is already facing this situation.) To ask utilities to take in large amounts of solar power—electricity generated by hundreds or thousands of small installations, many on neighborhood roofs and lawns, whose output is affected byclouds—is like asking a shipping firm to replace its huge, professionally staffed container ships with squadrons of canoes paddled by random adolescents. Other renewables can be more reliable than power from the sun, to be sure, but all are costlier than petroleum and hard to fit into today’s grid. Natural gas, from this point of view, seems like the perfect stopgap.

The clash occurs when renewables are ready for prime time—and natural gas is still hanging around like an old and dirty but reliable car, still cheap to produce and use, after shale fracking is replaced globally by undersea mining of methane hydrate. Revamping the electrical grid from conventionals like coal and oil to accommodate unconventionals like natural gas and solar power will be enormously difficult, economically and technically. Facilities must be constructed to store extra energy for dark, windless days; transmission lines will need to be built to move power from warm places like New Mexico to cold places like New England; grids will have to be reworked to allow small energy producers to share directly with neighbors rather than being forced to pump everything into large power centers. All of this will be a burden on businesses and consumers alike. But it must be done to avert climate change, because electricity generation is responsible for about a third of America’s greenhouse-gas emissions. Roughly similar figures hold true in other developed nations.

Most oil specialists agree that humankind is naturally progressing toward a no-carbon energy future. Our species has already moved from wood to coal to oil to gas, each fuel burning cleaner than its predecessor. Wind, solar, and other renewables are obvious next steps. The problem, scientists say, is that climate change is happening too quickly. Instead of evolving over decades, as happened with the building of the electrical grid, the changeover to renewables has to occurnow, faster than any change before.

True, there are ways of buying time. Scientists have experimented, for instance, with injecting carbon dioxide into methane hydrate; for complex chemical reasons, the crystals “prefer” the carbon dioxide, taking it in and expelling natural gas. If undersea methane hydrate could be mined in this fashion, the sequestered carbon dioxide, forever imprisoned in ice beneath the waves, would offset some emissions. This new kind of carbon sequestration could ameliorate some of the long-term environmental damage that widespread global use of cheap natural gas from methane hydrate will do. But even if such techniques work in the way researchers hope, the infrastructure transformation ahead is daunting in scale and scope. It’s like setting up a second Industrial Revolution, only all over the world and in one-third the time.

For years, environmentalists have hoped that the imminent exhaustion of oil will, in effect, force us to undergo this virtuous transition; given a choice between no power and solar power, even the most shortsighted person would choose the latter. That hope seems likely to be denied. Cheap, abundant petroleum threw sand in the gears of solar power in the 1980s and stands ready to do it again. Plentiful natural gas, a geopolitical and economic boon, is a climatological shackle. To Vaclav Smil, the University of Manitoba environmental scientist, the notion that we can move so fast is naive, even preposterous. “Energy transitions arealways slow,” he told me by e-mail. Modern energy infrastructures, assembled over decades, cannot be revamped overnight. Worse still, in his view, there is little public appetite for beginning the process, or even appreciating the magnitude of what lies ahead. “The world has been running into fossil fuels, not away from them.”

Smil is correct—the sort of rapid energy transition we need has never occurred before. At the same time, one should note that no physical law says these transitions must be slow. Societies have changed rapidly, even when it cost a lot of money. Nobody can predict the future, but it is dumbfounding to hear left and right alike bemoaning the “reality” that society cannot change, particularly at a time when both sides are bemoaning the consequences of convulsive social change. Natural gas, both from fracking and in methane hydrate, gives us a way to cut back on carbon emissions while we work toward a more complete solution. It could be a useful crutch. But only if we have the wit to know that we will soon have to lay it down.

Charles C. Mann, an Atlantic contributing editor, has been writing for the magazine since 1984. His recent books include 1491, based on his March 2002 cover story, and 1493.

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Hoisington Investment Management – Quarterly Review and Outlook, Fourth Quarter 2012

January 19th, 2013 · No Comments · Markets

 

Hoisington Investment Management – Quarterly Review and Outlook, Fourth Quarter 2012

Tax Consequences: From Gain to Drain

The American Taxpayer Relief Act has lifted the immediate uncertainty of the fiscal cliff. Nevertheless, tax increases that are already in effect from this act, as well as the Affordable Care Act, impose a major obstacle to growth for the U.S. economy in the first half of 2013. The result of these taxes is considerable, especially in light of the poor trend in household income. In addition, these tax increases will continue to act as a drag on economic growth until late in 2015 and are unlikely to produce the revenue gains advertised.

Based on static scoring, the initial direct impact of the federal tax changes totaled approximately $250 billion for 2013. The return of the FICA tax rate to 6.2% is the largest component ($127 billion), but several other federal tax changes also became effective. These include:

1. A 4.6% increase in the top marginal tax rate to 39.6%;

2. A phase-out of itemized deductions (mortgage interest expense, various state taxes – income, property and sales – and charitable gifts) for high-earners;

3. A phase-out and elimination of personal exemptions for high-earners;

4. An increase in the tax rate to 20% for capital gains and dividends for high- earners;

5. A 3.8% surtax on capital gains, dividends and other investment-type incomes for high-earners;

6. A 0.9% surtax added to the Medicare tax for high-earners;

7. A 2.3% excise tax on medical device manufacturers;

These taxes amount to a reduction in real household income, less transfer payments, of 2.6% ($250 billion divided by $9600 billion). While the corporate sector will collect the taxes on item 7, the ultimate impact of this tax will fall on the household, as such taxes invariably do. In addition to federal tax changes, California Prop 30 hiked marginal income tax rates retroactive to 1/1/12, adding another $12 billion tax increase for 2012- 13, with the impact falling almost all in 2013. In total, the new federal and state taxes amount to 2.7% of real household income. Households will not be able to easily absorb such an income reduction.

Fleeting Boost for the Fourth Quarter

The pending tax hike is, in all likelihood, the only reason real non-transfer income jumped in November following a four month decline. An unknown but significant amount of income was pulled from 2013 into 2012, as has been the case in all of the previous well-advertised tax increases. December income, which is not yet reported, should get a further boost from this effect. Numerous corporations borrowed multibillions of dollars to make early or special dividend payments. In addition, many large corporations, banks and securities firms paid 2012 bonuses in 2012 rather than early in 2013. This practice was undoubtedly repeated many times by smaller and privately held firms.

Indeed, this long observed effect of accelerating income in anticipation of tax increases will cause the fourth quarter national income and product figures to be dramatically overstated and will provide no guide to the prospects for 2013. However, as a result of the income transfer, or substitution effect, income should show a sharp decline early in 2013. The pending tax hikes provided a major plus for the fourth quarter, a support that will be more than reversed this year.

The Highest Marginal Tax Rates in 27 Years

Item 2, which is known as the Pease Amendment, is estimated to raise the marginal tax rate on the high-earners by up to 2%. Combining these hikes, the top marginal tax rate has just jumped to 46.3%, the highest effective tax rate since The Tax Reform Act of 1986 was enacted. Thus, the 2013 top marginal tax rate is nearly one third higher than last year. The current tax hike is on par with the one in 1937, which imposed the first FICA tax, boosted the marginal tax rate from 56% to 62% and imposed an excess corporate profits tax. The economy, which had made some recovery from 1934-36, fell back sharply in 1937 and 1938. While other factors, such as retaliatory currency devaluations and monetary policy mistakes, were also occurring, the 1937 tax increase served to prolong the Great Depression. The marginal tax rates are now above 50% in the high tax states such as California, Illinois, New York and New Jersey. Such high and permanent marginal tax rates render the static scoring method of calculating the restrictive effects of such tax increases completely inadequate.

Dynamic Scoring

The alternative and superior method for gauging the impact of tax changes is known as dynamic scoring, a procedure that takes into account the first, second and further subsequent round impacts of higher taxes, or what is referred to as the “tax multiplier.” The multiplier on permanent tax rate increases is strongly negative. At a minimum the multiplier is -2 for the upcoming three-year period. Alan Viard, a Harvard educated economist, has documented that the disincentive effects of changes in tax rates depend on the marginal tax rate. To quote Dr. Viard, “ Moreover, the distortion rises disproportionately with the marginal tax rate, roughly quadrupling when the marginal tax rate doubles” (The High-Income Rate Reductions, AEI Tax Policy Outlook, No. 3, September 2010). Christina and Paul Romer found the tax multiplier to be -3 over three years (The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Sh ocks, University of California, Berkeley, March 2007). The current tax rate increases, heavily concentrated on the high marginal tax rates, are likely to produce a persistent drag on economic activity.

A variety of factors explain the highly negative tax multiplier. Potential after-tax rates of return on risk-taking ventures are highly sensitive to tax changes. When taxes are raised, some activities will be transferred to lower tax countries and avoided in ways that tax code writers are unable to imagine. When they are lowered, more activities are brought home. Approximately 500,000 privately held firms employing 15 or more people will be directly impacted by changes on high marginal tax brackets. Some of the 2013 tax increases will be deflected to their suppliers, employees or customers.

Implications for Government Revenue and Debt

These multiplier effects mean that the gain in tax revenues will not be as large as indicated by the static measurement effects. Additionally, due to ongoing increases in federal outlays, the budget deficits will continue to exceed $1 trillion per year. Federal debt relative to GDP will continue its upward trajectory.

The federal debt to GDP ratio jumped to 103.5% at the end of 2012, the highest since 1947. In spite of the new taxes, this ratio will likely climb to 107% by the end of this year. Moreover, in 2010 the nonpartisan Congressional Budget Office (CBO) forecasted gross federal debt held by the public could reach 344% of GDP in 2050 and 947% in 2084, with entitlements playing an important role (Chart 1). This new tax legislation does not alter the looming explosion in entitlement spending, and it will not lift the U.S. economy out of its faltering growth pattern. Thus, the new legislation ignored the conclusion of the Simpson Bowles Commission that emphasized the need for tax and entitlement reform as well as expenditure restraint.

The Entitlement Problem

In the past three fiscal years, federal outlays averaged about 24% of GDP, the highest levels since World War II (Chart 2). As recently as 1998 to 2000, outlays averaged 18.7% of GDP. Federal outlays will grow sharply since 10,000 people will reach full eligibility for Social Security and Medicare each day in the next seventeen years.

Barry Eichengreen, a Yale Ph.D. in economics and University of California Professor, estimated that without law changes in Social Security and Medicare, federal outlays will reach a staggering 40% of GDP in twenty-five years (Exorbitant Privilege, Oxford University Press, 2010). Of course this assumes that the U.S. government will be able to borrow the funds to meet these obligations.

The Erosion of Economic Growth

The one complete decade of the 21st century (2000 through 2009) ranks as the 21st slowest growth in real GDP of the entire 22 decades since 1790 (Chart 3).

Only the experience in the 1930s was worse. The 1960s was the last decade when the economic growth rate was above the post 1790 average, indicating that the deterioration in economic conditions is not a new phenomenon. In the thirteen years of this century, the GDP growth rate has averaged just 1.8%, or less than half of the 3.8% average since 1790, suggesting that the erosion of the economy is continuing.

Other measures point to a loss of well-being. Real median household income is at the lowest level since 1995. Since 2010, the Misery Index, the sum of inflation and unemployment, has been well above its long term average. The loss of economic vitality has begun to adversely affect demographics. In 2011, the birth rate was the lowest since records began in 1920, while the percentage increase in the population, including legal and illegal immigration, was the slimmest since 1940. The percentage of those aged 25 to 34 living at their parents’ homes hit a record high. Those receiving food stamps recently surged to one out of every 6.5 Americans, while the percent of U.S. households paying federal income taxes has fallen to an all-time low. The employment to population ratio, the most accurate measure of labor market performance, currently stands very close to its lowest level in three decades. These circumstances, in part, may be traced to fiscal policy errors.

Fiscal Economics and the Growth Problem

Relying on logic and empirical testing, scholarly research on fiscal economics may be condensed into seven propositions. Logic for these conclusions reaches as far back as David Hume, leader of the Enlightenment in 1752 and David Ricardo, originator of the law of comparative advantage and diminishing marginal returns in 1821. They were followed by contemporary scholars such as Stanford Economist John Taylor, author of the famous monetary rule, Chicago Economist John H. Cochrane and Harvard Economists Robert Barro, Carmen Reinhardt, Ken Rogoff and Niall Ferguson. The empirical work supporting these conclusions has been conducted using data since 1800, as well as for shorter time spans, and has taken place in the United States, Europe, Italy and Sweden. Various scholars from different countries are broadly reaching similar conclusions, such as:

1. Government debt relative to GDP has reached extremely high levels. Rigorous statistical examinations of different countries and time periods, including the period since 1800, indicate that such debt levels have a deleterious effect on economic growth. High government debt diminishes long-term decision- making because the high debt raises the possibility of increased taxes or future financial crises. The high debt also undermines future growth when it primarily finances current consumption rather than productive investment.

2. Due to commitments made under Social Security and Medicare, the U.S. government debt to GDP ratio will rise dramatically because the default response is to borrow the funds needed until that option is exhausted. The elevated borrowing will accelerate the rate at which economic growth deteriorates.

3. The multiplier on government expenditures is trivial, if not negative. At the end of three years, deficit spending produces no higher level of GDP, but private GDP is shifted to the government sector. In addition, government debt is a higher percentage of GDP, and interest and repayment must be shouldered by the diminished private sector.

4. The marginal tax multiplier is significantly negative. Each 1% increase in the marginal tax rates will reduce real GDP between 2% and 3% by the end of three years, provided that tax rates are permanent. Short-term tax rate changes have a considerably lower multiplier because, as the studies show, households will save the bulk of what they consider to be transitory income.

5. Temporary fiscal policies destabilize the economy by creating uncertainty and eroding the foundation for long-term decision-making. The fiscal cliff is a result of temporary policies that reached their expiration point. When households and business don’t know the rules of the game, they are forced to forego longer- term, but higher return generating, projects.

6. The tax expenditure multiplier (itemized deductions) is slightly negative.

7. As high debt levels diminish economic performance, interest rates remain low for protracted periods of time. Ultimately, however, the marketplace may lose confidence in the government’s ability to sustain the debt levels, and a country will reach Reinhardt and Rogoff’s “bang point” or Cochrane’s “condition”, causing interest rates to rise.

These seven propositions strongly suggest that the latest fiscal policy actions will serve to further restrain economic growth. We cannot tax ourselves into prosperity as FDR’s 1937 effort and numerous other historical cases demonstrate. We can, however, deficit spend ourselves into poverty. Consistent with the academic research, we could not find historical precedent for the proposition that prolonged deficit spending achieved prosperity. Numerous examples of great empires like the Mesopotamian, Roman and the Bourbons of France collapsed under the weight of high government debt. Other countries have survived but have languished under increasingly miserable economic conditions.

Still valid is the thinking of classical economists like Adam Smith and John Stuart Mill: prosperity derives from the hard work, creativity and ingenuity of a country’s people, not by the federal government spending funds that it does not have. However, by diverting dollars from highly productive individuals and businesses through borrowing or taxes, government policy can spend a country into poverty. Transferring assets from income and wealth generators to consumption, unproductive or even counterproductive uses, however, produces failure.

Treasury Bonds

The global economic environment is best characterized by an insufficiency of aggregate demand. That is, the capacity to produce goods far exceeds the final demand for those products. The root cause for this circumstance is debated, but we believe academic studies point directly to overconsumption relative to income in recent decades. Borrowing, leading to over-indebtedness, has funded this excess spending. Economic systems must now repay or rationalize the debt in some manner. Whatever the cause of the inadequacy of final demand, the result has been a deflationary environment.

To be sure, prices of many items are rising, partially due to legislative changes in taxes, fees, regulation, compliance costs, medical mandates and other non-market forces. However, competition in the marketplace has created downward pressure on market driven prices. Thus, we have an unusual paradox whereby legislative and regulatory changes elevate the cost of living, yet with this inflation, there is no associated growth in income and standards of living decline. In this circumstance, real income falters, and purchases of non-mandated and discretionary items decline in value and price. Call it “the deflationary paradox of legislated increases in the cost of living.”

The central banks of the world have created vast amounts of liquidity to spur more consumption and greater demand, with the U.S. Federal Reserve qualifying as an outstanding example. In 2008, the Fed increased its liabilities by almost 1800%. This Fed process of paying for purchased securities is a mere accounting exercise. With a stroke of a bookkeeper’s pen it “creates” funds to pay for the purchased securities. This fund creation is assumed to be inflationary as it is often mislabeled and referred to in many articles as printing money. Increased Fed liabilities and an equivalent rise in Fed assets are not really money. However, it does create the potential for increased money. These Fed actions raise inflationary expectations which result in rising financial speculation and increasing interest rates. Recently, during QE infinity, long-term interest rates have risen, replicating the experience in QE1&2.

Despite the fact that most market participants expected higher inflation after the 2008 monetary explosion, the contrary has occurred. It has now been more than five years since the near 1800% increase in the Fed’s balance sheet, yet the economy languishes, and prices remain under downward pressure. Why? The Fed does not control the amount of money circulating in the economy nor the speed at which it turns over.

The key ingredient to fostering monetary growth, and thus final demand, is an increase in the kind of borrowing which (1) aids future productivity and income and (2) increases financial innovation. Presently, after sixty months of the most massive Fed balance sheet expansion, no evidence of an inflationary spiral can be found. Nor, in our judgment, is one likely to occur. The process of unwinding debt overhangs is a long one, and unfortunately our society continues to pile on debt at near record amounts. This action is deflationary.

We have been of the opinion that the 30-year Treasury bond rate could not go up and stay up since well before the initiation of QE1. It has been an expensive wait for those expecting higher interest rates, as they have actually declined. Today, with long-term Treasury yields around 3%, our view remains the same. Interest rates may, will and have gone up based on periodic changes in psychology. However, underlying fundamentals have insured they have not been able to remain elevated. The fundamentals of insufficiency of demand and its root cause, over-indebtedness, still point to an environment in which long-term interest rates remain on a path to lower levels.

Van R. Hoisington
Lacy H. Hunt, Ph.D.

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A Study of Youth in Three Post-Soviet States

November 29th, 2012 · No Comments · Geopolitics

A review of Nadia Diuk’s book by Vladimir Kara-Murza . .  relevant to the “revolutions” in the Middle-East and Eastern Europe.

What Are They Thinking? A Study of Youth in Three Post-Soviet States

Vladimir Kara-Murza's picture

The Next Generation in Russia, Ukraine, and Azerbaijan: Youth, Politics, Identity, and Change
Nadia M. Diuk (Plymouth: Rowman & Littlefield, 2012)

Since today’s politically active youth is tomorrow’s political establishment, Nadia Diuk’s study of The Next Generation in Russia, Ukraine, and Azerbaijan is a must-read not only for students of the former Soviet Union but for all those interested in the dynamics of modern-day anti-authoritarian struggles. One of Diuk’s aims is to discern the political and economic future of the three post-Soviet republics by compiling a comprehensive sociological portrait of the generation that is now entering civic maturity—as Diuk refers to it, “the first free generation after decades of Communism.”

The study is based on two sets of comprehensive polling data, collected in 2003 and 2010 from Russians, Ukrainians, and Azerbaijanis under the age of thirty-four. Taken together, they allow a comparison of the state and progress of youth public opinion.

The choice of countries is significant: Russia is the richest state and the most influential geopolitical player of the former Soviet region; Ukraine is the proverbial “bridge between East and West,” bordering NATO and the European Union on one side and Russia on the other; and Azerbaijan is a strategically located, energy-rich nation, a crossroads not only between Europe and Asia, but also between Christianity and Islam. What happens in these countries matters not only to their own citizens but also to the wider world.

Revisiting the recent history of post-Communist states, Diuk notes the important (perhaps indispensable) role that youth organizations have played in the demise of authoritarian governments: Otpor in Serbia (2000), Kmara in Georgia (2003), and Pora in Ukraine (2004). A similar pattern has been observed more recently in the “Arab Spring” uprisings in Tunisia and Egypt, where young people, in Diuk’s words, “have taken center stage . . . as the catalyst for change, the moving force that mobilizes the people, and as the leaders of popular protest movements.” The role of youth has been accentuated by the use of social media (such as Twitter and Facebook) in organizing and broadcasting the protests.

To be sure, The Next Generation agrees with—and corroborates—Karl Mannheim’s assertion that “nothing is more false than the usual assumption . . . that the younger generation is ‘progressive’ and the older generation is eo ipso conservative.” Diuk notes that “the education and shaping of views of the youth . . . is a critical element in determining whether they become active citizens, oppressed subjects, or perpetuators of the old system.” She continues: “Youth’s energy and enthusiasm are value neutral, and can be a blank slate for any ideology; they can either be co-opted to support the old regime or mobilized to lead a protest movement to challenge the old order.”

The ability of established regimes to “co-opt” a significant sector of youth is exemplified in Diuk’s study of Nashi (“Ours”), a youth movement created by the Kremlin immediately after Ukraine’s 2004–2005 “Orange Revolution” with the explicit aim of preventing its repeat in Russia. The organization solicited members by offering the prospects of professional and social advancement within the regime, as well as by a wide-ranging program of activities, including the infamous annual summer camp on Lake Seliger, attended by top government officials, including Vladimir Putin. (The tradition of politically themed youth camps in Russia had, in fact, been started in the 1990s by the now-jailed oil tycoon Mikhail Khodorkovsky, whose New Civilization initiative aimed at instilling in young Russians the values of democracy and civic awareness. The program was terminated soon after Khodorkovsky’s arrest in 2003.)

Over the years, the members of Nashi, buoyed by generous financial and administrative backing, have excelled in harassing opposition activists and human rights campaigners, as well as in ginning up an imitation of “mass support” for Putin at pro-regime rallies. Yet, as tens of thousands of Russians—mostly young people—went to the streets in December 2011 to protest a fraudulent election and demand democratic reforms, the regime’s supporters from Nashi were nowhere to be seen—the clearest indication of the movement’s manufactured,top-down nature.

The 2011–2012 anti-Putin protests in Russia fall outside the scope of the study, which was completed in 2011, but polling data presented in The Next Generation reveal the changing attitudes of Russia’s youth over the last several years and indicate why they took to the streets to protest Putin’s election fraud. In 2010, the top answer given by young Russians to the question “What does democracy mean to you first and foremost?” was “free and fair elections.” (The top answer to the same question from their Ukrainian and Azerbaijani peers was “prosperity, stable growth of the economy.”)

The much-discussed correlation between a growing middle class and a growing demand for political freedom is also confirmed by Diuk’s data. It shows that the proportion of Russia’s young people with high incomes has increased from 5.9 percent in 2003 to 15.6 percent in 2010. No less important to the rise of civic awareness was the expanded access to information. In 2003, the Internet, the country’s only truly uncensored source of news, was available to 18.4 percent of young Russians. By 2010, this figure had reached 60.5 percent.

While the numbers for the other two countries are lower, the overall trend is the same: the proportion of young people with incomes above $500 per month has increased from 0.1 percent to 1.3 percent in Ukraine, and from 0.0 percent to 6.0 percent in Azerbaijan (the largest increase of the three states in the study). Unlike Russia or Ukraine, Azerbaijan has never been considered an electoral democracy. (The only vote approaching accepted standards of political competition took place in 1992.) It also holds the dubious distinction of being the only post-Soviet country to have undergone a dynastic succession: the presidency was transferred in 2003 from Heydar Aliyev to his son Ilham Aliyev. With civil society under stronger pressure from the authorities arguably even than in Putin’s Russia, and with access to the Internet much more limited (only 27.8 percent of young Azerbaijanis were online in 2010), pro-democracy youth movements are not as visible in Azerbaijan as they are in the other two countries—although a number of groups, such as Yox! (“No!”), were formed at the time of the 2005 parliamentary election and actively participated in the post-election protests. Diuk concludes that Azerbaijan’s youth is somewhat behind the Russians and Ukrainians in its support for political freedoms. Yet a plurality (39.4 percent) of young Azerbaijanis described their views as social democratic, outnumbering both nationalists (31.6 percent) and Islamists (14.2 percent). Asked to name the most important aspect of democracy, 36.6 percent of Azerbaijani respondents named “free and fair elections.”

Ukraine offers the only example in the study where youth movements actually prompted change in the political system. The four-year civic campaign, initially called “Ukraine without Kuchma,” culminated in the now-famous “Orange Revolution” of November 2004, in which hundreds of thousands of Ukrainians successfully rallied to overturn the results of a fraudulent election. Initially welcomed into the new administration of Viktor Yushchenko, many young NGO leaders were later pushed aside, or left of their own will, disillusioned with political infighting and the slow pace of reforms. (Some, like Pora co-founder Vladislav Kaskiv, who now works for President Viktor Yanukovich, have switched camps for career reasons.) Like much of Ukrainian public opinion, these young people were disillusioned by the record of the “Orange” administration. By the end of Yushchenko’s presidential term in 2010, he was even more unpopular among young Ukrainians than President Leonid Kuchma had been in 2003 (respectively, 78.4 and 72.5 percent).

Since Diuk’s study was completed, events in Russia have shown in practice what polling trends had begun to point to in theory. Following the December 2011 parliamentary elections (in which, according to independent estimates, between thirteen and fifteen million votes were “stolen” by Putin’s United Russia party), tens of thousands of Russians came out on the streets of Moscow and other cities to demand new elections, the release of political prisoners, and the registration of opposition parties. These were Russia’s largest pro-democracy demonstrations in two decades. The rally on December 24th, which took place (symbolically) on Andrei Sakharov Avenue in central Moscow, attracted some one hundred and twenty thousand participants. According to the survey conducted at that rally by the Levada Center (the same agency that compiled polling data for Diuk’s book), fifty-six percent of the anti-Putin protesters in Moscow were aged eighteen to thirty-nine. More recent studies by the Levada Center have shown that while US- and European-style liberal democracy appeals to twenty-seven percent of the overall Russian population (thirty-eight percent want a democracy that takes account of “national traditions”), this figure rises to forty-two percent (a plurality) among those aged twenty-five and younger.

As Nadia Diuk shows yet again in this compelling book, generational change, while never one-dimensional, still remains “the dynamic of historical development.”

Vladimir V. Kara-Murza is the author of Reform or Revolution: The Quest for Responsible Government in the First Russian State Duma. A member of the federal council of the Republican Party of Russia–People’s Freedom Party, he was previously an opposition candidate for the Russian Parliament. He blogs weekly for World Affairs.

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A review : LIARS AND OUTLIERS: ENABLING THE TRUST THAT SOCIETY NEEDS TO THRIVE

October 14th, 2012 · No Comments · Cyber, Geopolitics, Technology

Have not read the book yet, but will soon . .  a nice review

 

LIARS AND OUTLIERS: ENABLING THE TRUST THAT SOCIETY NEEDS TO THRIVE

Liars and Outliers: Enabling the Trust that Society Needs to ThriveAuthor: Bruce Schneier
New York: John Wiley & Sons, 2012. 366p.
Reviewer: Paul Ekblom | September 2012Some years ago, I participated in a meeting of academic members and associates of the then recently-founded Jill Dando Institute of Crime Science at University College London (UCL). The aim was to define what exactly was meant by ‘crime science’, a new term challenging conventional criminology. In attendance was one of the originators of the term and the Institute, Professor Ron Clarke of Rutgers.The consensus definition quickly centred on an interest in the near or proximal causes of criminal events such as opportunities and provocations, rather than traditional concerns with criminality and even more remote societal causes; a readiness to draw on evidence, theory and scientific method; an interest in multidisciplinary applications of other sciences ranging from physics to microbiology; and a practical focus on reducing risks of crime. Then I posed a seemingly straightforward question: surely, to be fully scientific, we need a scientific definition of crime itself? Otherwise, at the heart of crime science is a mushy core of”we all know what crime means…don’t we?”

Awkward silence ensued, followed by expressions of disagreement, more or less polite. You see, this was at a time that crime science (mainly the brainchild of psychologists) was trying to distance itself from conventional, mainly sociological criminology focused on deviance, power relationships, inequalities, etc., and limited practical address to problem-solving. None of these features appealed to nascent crime scientists. Legal studies of crime were little use either, being trapped within the self-defining intellectual bubble and subculture of crime, law, justice and punishment, moreover with a dismal record of effectiveness in controlling offending. And crime science deliberately chose to be blind to the moral dimension of crime, focusing on purely causal analysis and intervention. Its interest lies in delivering crime reduction outcomes through changing the situations where people offend to make them riskier, requiring more effort, less rewarding and less provocative, rather than addressing social structure or criminal responsibility. So obsessing about what crime means would get us nowhere practically or intellectually.

This was a fair point for a “newbie” discipline, and crime science subsequently got on with the job, expanded (the Jill Dando Institute spawned the Department of Security and Crime Science at UCL), received accolades including from Rutgers (Toby, 2012), recruited or realigned other academic groups internationally and inaugurated a journal www.crimesciencejournal.com. But the mushy core remains. For me, this is intellectually unsatisfying, arguably culture-bound to Western conceptions of crime, vulnerable to attack from traditionalists and at some future point perhaps may seriously constrain the discipline (indeed, is it truly a discipline with one of its two keywords undefined?).

Another issue that bothered me was the scope of the field. Without first establishing a science of honesty, conformity and altruism, to which crime is a relatively rare contrasting behaviour and without which crime cannot fully be understood, the concept of crime science is somewhat rootless. Going deeper, the Rational Choice perspective as pursued within crime science almost always considers the socially bad, negative choice and shows little interest in the alternative choice of ”doing the right thing”; yet most people behave honestly most of the time – even criminals. Traditional criminology suffers here too; and in both medical science and psychology we’ve seen a growing focus on studying, and delivering, the positive – wellness not just sickness, happiness and effectiveness not just psychopathology. We do have the positive quality-of-life concept of ”community safety”, but that’s a different kind of thing from cooperative behaviour. Although the last decade has seen a stream of publications on altruism and cooperation, none has seriously attempted to combine the ideas with crime prevention and security.

Until now. Thanks to Bruce Schneier, we have a book, and an intellectual framework, which simultaneously fill the definitional void at the centre of crime science, and lift the fog obscuring the surrounding scientific territory within which crime science fits. My reasoning? The breadth of ”societal dilemmas”’ covered, the systematic attempt to define not just individual terms but an entire consistent suite, and the graphic and tabular illustrations used to communicate a standardised and readily-grasped way of summarising issues. And there is the way Schneier’s approach feeds readily into practical policymaking and intervention, focusing as it does on the armoury of ”social pressures”’ available to society to control people’s defection from making the cooperative choice, how these pressures work and when and why they fail. The book is a great read, too! The quality of writing is high with some wonderful literary artifices to distance ourselves from the familiar. Speaking of trusting the plumber who called to fix his drain: ”My wife was also home, but it never occurred to me that he was a sexual rival and I should therefore kill him” (p 1).

Schneier’s background is in security technology, but he addresses the broadest of societal questions in the broadest and deepest of ways. The territory within which I’m convinced crime science fits is the science of trust and distrust, cooperation and defection, and of societies’ means of maximising the former and minimising the latter. Or perhaps optimising, because Schneier makes much of the value, for societal adaptability and avoidance of stagnation, of defectors who challenge the status quo – whistle-blowers, revolutionaries, founding fathers etc. (Indeed, crime scientists can count themselves among these.)

The platform the book constructs comprises a discriminating and careful synthesis of neuroscience, evolutionary and here-and-now psychology, cultural anthropology, game theory, sociology, economics and legal/moral argument. Crime relates to how individuals, groups and corporations as actors seek to maximise selfish interest rather than the collective interest of society. The interest may be material, experiential/expressive or power-seeking. A society can range from a family group in suburbia or the African savannah to a large corporation or the national or global society. Its members can be geographically adjacent or connected online; honest or criminal (where defection can mean sell-out to rival gangsters, or grassing to police). This is a huge advance on, say, ‘crime is deviant behaviour proscribed by law’, and sufficiently distanced from everyday perceptions, assumptions and institutions, and privileged official perspectives, to provide that critical detachment and ‘de-enculturation’ that science needs. Yet it’s readily connectable back to practice and policy. (A further defining aspect of crime is institutional, more on that presently.)

Trust is what stands between individual actors and defection (as in the Prisoners’ Dilemma game); between civilisation and anarchy. Trust relates to the risks we must take and the relationships we must establish and maintain to promote sufficiently high rates of cooperation and low rates of defection or cheating for the society to hold together, whether a cycling club or the Roman Empire. Trust can be intimate – as within families – or impersonal, as where I trust the new contractor servicing my gas heating because I trust the certification and monitoring system that causes him to respect safety standards.

The issues to which trust, cooperation and defection pertain are defined as societal dilemmas, pitting actors in conflicting, competing or collaborating relationships. These are often ‘wicked’ issues, and many universal (like the Tragedy of the Commons). Well thought-out examples pepper the book, from price-setting/fixing among sandwich makers or industrial cartels, to bank misbehaviour, overfishing, military desertion, littering, adultery and volume crimes like burglary. These are neatly and consistently presented as tables which (adapted from p131):

  • Identify the dilemma (e.g. Doping in professional sports)
  • Identify the society (All the athletes in the sport)
  • Identify the group interest (A safe and fair sport) and group norm (Don’t take performance-enhancing drugs)
  • Identify the competing interest (Winning and making money) and corresponding defection (Take performance-enhancing drugs)

The analysis continues by describing the trust mechanisms available to the society in question to encourage people and corporations to act in the wider group interest. These come under four categories comprising the fundamental and universal ways whereby societies hold themselves together. The example continues:

  • Moral (e.g. guilt at not winning fair-and-square; shame at failing as role model)
  • Reputational (e.g. keep fans and commercial advertising opportunities by maintaining reputation of a fair player)
  • Institutional (e.g. civil or criminal bans on performance-enhancing drugs)
  • Security (e.g. testing for specific drugs)

The Institutional approach lies at the heart of defining certain behaviours in response to certain societal dilemmas, as criminal rather than merely defecting. So here Schneier’s framework offers an account wherein we can appreciate the meaning of crime and criminal law, without being confined within the world-view of our own institutions. This is, moreover, a functional account, where the institution of crime and the institutions handling it comprise one broad societal invention to resolve a particular set of social dilemmas in particular contexts.

We can now understand the wider ecosystem of societal dilemmas and pressures surrounding crime prevention and security. We’re also given a definition of security itself in terms of a means of inducing cooperation, preventing defection, inducing trust and compelling compliance, which uniquely among the societal pressures acts as a physical constraint on behaviour, irrespective of how trustworthy people are. Paradoxically, while security obviates the need for intimate trust, if applied thoroughly and consistently it can induce wider compliance and create fertile ground for the other trust mechanisms to operate. And security technology can protect the other mechanisms, e.g. stopping Internet traders from boosting reputation by falsifying high customer ratings.

Although (in abstraction) the societal dilemmas are often universal and timeless, the book fully addresses change – social, technological, evolutionary. Imperfect solutions and multiple dilemmas mean perpetually shifting ground. And scale is a major issue. As human societies grow from family bands to industrial and social conglomerates, what worked to hold together the former ceases to function as groups get bigger and more complex, regional and global travel become easier and so forth. Moral and reputational pressures continue to play important roles in maintaining trust and cooperation but must increasingly be supplemented and buttressed by explicit innovations in the institutional and security domains. You could call these ‘phase changes’ like melting or boiling. And co-evolutionary arms races drive things further and faster, never beneficially. Schneier’s analysis of institutional pressures and their failings has much to inform crime scientists struggling to get situational prevention and problem-oriented approaches into police and other often-resistant organisations.

Time to conclude. I found little to criticise (perhaps a tighter discourse on key concepts such as ‘risk trade-offs’ and ‘pressures’ – albeit minor concerns), and much that is positive. First, all crime scientists should read – and probably own – this book. Second, crime scientists should look to the liquid core of the field and consider what crime is, in scientific terms, and assess whether Schneier provides a sufficient basis for crystallisation. I think he does. I’m less sure about all the fine detail and the bounds of security, where the richness and depth of practical and theoretical knowledge we possess in situational crime prevention, and our strategic knowledge of running arms races can surely help to refine things. (One hopes in collaboration not competition with Schneier.) Third, I think we crime scientists can now tentatively step over our self-imposed defensive barriers against dilution by wider (and less than useful) societal understandings. This book offers a framework for crime science to get to grips in policy and practice terms with strategic and societal-level issues without being sucked into ‘sociology as we know it’. It also offers the prospect of applying our now well-developed techniques and concepts to resolving societal dilemmas beyond crimes (requiring a new name – cooperation science?). We have much to offer; and should count ourselves among the adapters and the leading edge of exploration, and avoid ourselves turning from pathfinders into a stagnating orthodoxy.

And if crime science takes this book’s understandings to heart and works Schneier’s ideas into its thinking, research and action, it will surely consolidate its aspirations to science beyond ‘physics envy’, scale even greater heights, safely outlive its founding generation and – the point of it all – help make the world a better place.

Paul Ekblom, Professor of Design Against Crime, Central Saint Martins College of Art and Design, University of the Arts London

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HFT and Order types

September 19th, 2012 · No Comments · Exchanges, Markets

 

  • The Wall Street Journal
  • MARKETS
  • September 18, 2012, 10:31 p.m. ET

For Superfast Stock Traders, a Way to Jump Ahead in Line

By SCOTT PATTERSON and JENNY STRASBURG

Haim Bodek was a Wall Street insider at Goldman Sachs and UBS before launching his own trading firm. Now he is taking on the financial establishment that spawned him.

[image]Jesse Neider for The Wall Street JournalHaim Bodek told the SEC what he had learned about order types. His sword was a gift from a friend who said he would need it in business.

Mr. Bodek approached the Securities and Exchange Commission last year alleging that stock exchanges, in a race for more revenue, had worked with rapid-fire trading firms to give them an unfair edge over everyday investors.

He became convinced exchanges were providing such an edge after he says he was offered one himself when he ran a high-speed trading firm—a way to place orders that can be filled ahead of others placed earlier. The key: a kind of order called “Hide Not Slide.”

The encounter set off an odyssey for Mr. Bodek that has fueled a sweeping SEC inquiry into the activities of sophisticated trading firms and stock-exchange operators—including Nasdaq OMX Group Inc., NYSE Euronext, Direct Edge Holdings LLC and BATS Global Markets—according to exchange and other officials, and lawyers with knowledge of the inquiry.

At issue is whether exchanges sometimes allow high-speed trading firms to trade ahead of less-sophisticated investors, potentially disadvantaging them and violating regulatory rules. The inclusion of Nasdaq and NYSE in this high-profile probe, and the role Mr. Bodek has played in it, haven’t previously been reported.

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High-frequency traders use computer algorithms to place blizzards of buy and sell orders—many of which they instantly cancel—in an effort to detect and exploit the tiniest shifts in demand for stocks.

This kind of trading now generates some two-thirds of all share volume on U.S. markets. Critics worry that the flood of orders driven not by investors evaluating stocks but simply by computers makes markets increasingly vulnerable to incidents like the May 2010 “flash crash,” when stocks plunged hundreds of points for no evident reason, and this summer’s mess at Knight Capital Group Inc., when a trade-coding problem caused a $440 million loss for the brokerage firm.

The upshot, say critics, is a stock market grown so complex and opaque that many investors have little idea how it operates, and are made wary by the repeated glitches. Any notion that the computer-armed traders are being given an unfair edge could only heighten investor concerns. Just last week, the SEC fined NYSE Euronext for providing data slightly faster to certain traders than to a public database, in allegations the NYSE settled without admitting or denying them.

The ongoing probe comes at a sensitive time for Nasdaq, which has acknowledged that technical problems bungled the Facebook Inc. initial public offering in May. The sloppy IPO appears to have worsened a continuing exodus of cash from stock mutual funds. Representatives of Nasdaq and the other stock exchanges all declined to comment on the inquiry.

Exchange officials don’t deny making available certain advantages, like data feeds with detailed information about trades, that the high-frequency traders can use. The exchanges’ position is that these are fully disclosed; they can be used by anyone with the right hardware and technical savvy; and they ultimately benefit all investors because by pulling in a higher volume of orders, they make it possible to buy and sell more easily and at better prices.

Many high-frequency trading firms similarly say that their activity in constantly buying stocks from investors who want to sell, and selling to investors who want to buy, helps keep the markets running smoothly. But it involves risk, and advantages such as detailed streams of trade data help compensate them for the risk, the firms and the stock exchanges say.

In papers filed with the SEC, Mr. Bodek took aim not at the data streams but at the way orders from high-frequency traders work. He focused on “order types”—programmed commands traders use to tell exchanges how to handle their bids and their offers to sell.

Hundreds of order-type options are available, which translate to thousands of variations because they behave differently depending on how an investor’s trading programs are coded. One thing investigators want to know is whether stock exchanges have worked with programmers or officials at high-speed trading firms to create order types that, when used with certain trading algorithms, can be unfair to less-savvy investors, people familiar with the probe say.

Looking closely at order types “is the first step for regulators to understand the fundamental interactions in the marketplace, which have literally gone unchecked and untested” in recent years, says Christopher Nagy, a consultant who formerly handled the routing of orders for brokerage firm TD Ameritrade Holding Corp., which serves individual investors.

A stock exchange that wants to offer a new order type must get it approved by the SEC, in a process that entails public notice and comment. That makes the probe tricky, because the SEC is examining the effects of procedures the agency itself approved. Among questions the regulators want to answer is whether exchanges have at times misled them in seeking approval for certain order types or mischaracterized to investors how the orders work, those familiar with the probe say.

A spokesman for the SEC said its staff “is in daily contact with market participants on a variety of market structure issues, including new ways exchange order types may be used by sophisticated firms in their evolving trading strategies. If the staff discovers that exchange order types are being used in ways that present concerns under the Exchange Act, it will develop an appropriate regulatory response or recommend enforcement action, as warranted.”

The spokesman didn’t comment on Mr. Bodek’s involvement in its inquiry. Mr. Bodek could gain from passing along information. The issues he raised were taken up by the SEC under a new whistleblower program that became effective last year. If the SEC were to collect a fine in an enforcement case growing out of the inquiry—there aren’t any cases at this point—Mr. Bodek might snare up to 30% of it.

A lawyer for Mr. Bodek described him as a Wall Street veteran who is “sounding an alarm.” Investors, said the lawyer, Shayne Stevenson of Seattle law firm Hagens Berman LLP, “needed to know the allegations he was bringing forward.”

Mr. Bodek’s career has tracked the rise of computer trading on Wall Street. Now 41, he began in the late 1990s creating programs to trade options—contracts that provide the right to buy or sell a stock for a certain price within a certain time.

He first worked with a sophisticated operation in Chicago called Hull Group. Goldman Sachs Group Inc. bought Hull in 1999, and Mr. Bodek worked at Goldman until 2002, when he helped launch a technology company. He later helped run a global options-trading desk at Swiss bank UBS AG. In 2007, with a partner, he started a high-frequency trading firm called Trading Machines LLC.

His firm did well at first, Mr. Bodek says, but in 2009 its performance worsened on several trading platforms, including Direct Edge, a computerized market based in Jersey City, N.J. Trading Machines’ profits fell by more than $10,000 a day, Mr. Bodek says.

He suspected a bug in his trading code and talked with officials of several trading venues. Then at a holiday party hosted by Direct Edge on Dec. 2, 2009, Mr. Bodek says, he spoke with the company’s sales director, Eugene Davidovich. Mr. Bodek says Mr. Davidovich told him his problem wasn’t a bug—he was using the wrong order type.

Mr. Bodek had been using common “limit orders,” which specify a price limit at which to buy or sell. Mr. Davidovich, according to Mr. Bodek, suggested that he instead use an order type called Hide Not Slide, which Direct Edge had introduced in early 2009, about the same time Trading Machines’ performance started to suffer.

Mr. Bodek says Mr. Davidovich told him Direct Edge had created this order type—which lets traders avoid having their orders displayed to the rest of the market—to attract high-frequency trading firms.

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To be sure he had it right, Mr. Bodek recalls, he sketched on a napkin how he understood it to work. The next morning, Mr. Davidovich emailed thanking him for attending the party and saying “I want to continue on our conversation about…our order types,” according to documents seen by The Wall Street Journal.

Regulatory guidelines generally require stock exchanges to honor the best-priced buy and sell orders, on whatever exchange they were placed, and to execute them in the order in which they were entered. Together, these principles are known as “price-time priority.”

Mr. Bodek says he realized the orders he was using were disadvantaged, compared with Hide Not Slide orders. He says he found that in certain situations, the fact that a Hide Not Slide order was hidden allowed it to slip in ahead of some one-day limit orders that had been entered earlier. He also learned that other stock exchanges had order types somewhat like Hide Not Slide, with different twists.

“Man I feel like an idiot. Never grasped the full negative alpha embedded in a normal day limit,” Mr. Bodek emailed Mr. Davidovich several days later. “Negative alpha” is trader jargon for poor performance.

Direct Edge declined to comment on details of how Hide Not Slide orders work. Direct Edge CEO William O’Brien says Mr. Davidovich, who declined to comment, doesn’t recall details of the conversation at the party. In any case, the CEO notes that Direct Edge had communications with Mr. Bodek’s firm about the order type prior to the party, which Mr. Bodek confirms.

Mr. O’Brien says one reason Direct created Hide Not Slide orders was to let fast-moving traders operate more efficiently. “It’s about giving people as many options as possible,” he says.

Mr. Bodek says he began using Hide Not Slide orders himself, and his firm’s performance quickly improved. But the firm was dogged by other problems, including a loss of key employees, and shut its doors last year.

Mr. Bodek began delving into order types, reading regulatory filings and asking others in the industry about them.

He came to believe these sometimes interacted with other orders in ways the exchanges hadn’t completely disclosed to investors or regulators. Exchange officials generally say that the way their order types work is fully disclosed.

Mr. Bodek also came to suspect that exchanges gave detailed instructions in how the orders worked to certain trading firms while leaving other investors in the dark. Asked about that, Direct Edge’s Mr. O’Brien said that the “notion of who knows what when—it’s not uniquely different than any other aspect of life.”

Mr. Bodek filed his concerns with the SEC’s enforcement division in July 2011, working through the Hagens Berman law firm. A month later he met with agency officials and described how the orders worked and could be filled before orders placed sooner, in what he called “queue jumping,” attendees say. Mr. Bodek says he was nervous and unsure whether he was doing the right thing. His wife worried he could harm his career.

Though the SEC was already looking narrowly at certain order types and at high-frequency trading practices, Mr. Bodek’s complaints expanded its effort into a much broader inquiry into thousands of variations, according to the people with knowledge of the probe.

About six months later, on Feb. 24, 2012, the head of the SEC enforcement group’s market-abuse unit, Daniel Hawke, said at a law conference that the SEC was examining computer-trading practices and the use of order types. He told the group the agency also was looking into ties between exchanges and high-speed firms and was interested in the firms’ ownership structure. Mr. Hawke declined to comment for this article.

A day before his speech, BATS disclosed in a regulatory filing that the SEC had asked it about the “use of order types, and our communications with certain market participants.” BATS said the probe focused on communications it had with “certain of our members affiliated with certain of our stockholders and directors.” High-frequency trading firms are among the BATS exchange’s owners. The same is true of Direct Edge.

Mr. Bodek, meanwhile, has been testing trading strategies and advising investment firms on high-frequency trading practices.

While he waits on the inquiry, he says he may hit the lecture circuit. One title he has toyed with for his speech: “Trick of the Trade: The Rigging of the United States Stock Market.”

Write to Scott Patterson at scott.patterson@wsj.com and Jenny Strasburg at jenny.strasburg@wsj.com

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George Friedman on Libya

September 18th, 2012 · No Comments · Geopolitics

 

From Gadhafi to Benghazi

September 18, 2012 | 0900 GMT

By George Friedman, Stratfor

Last week, four American diplomats were killed when armed men attacked the U.S. Consulate in Benghazi, Libya. The attackers’ apparent motivation was that someone, apparently American but with an uncertain identity, posted a video on YouTube several months ago that deliberately defamed the Prophet Mohammed. The attack in Benghazi was portrayed as retribution for the defamation, with the attackers holding all Americans equally guilty for the video, though it was likely a pretext for deeper grievances. The riots spread to other countries, including Egypt, Tunisia and Yemen, although no American casualties were reported in the other riots. The unrest appears to have subsided over the weekend.

Benghazi and the Fall of Gadhafi

In beginning to make sense of these attacks, one must observe that they took place in Benghazi, the city that had been most opposed to Moammar Gadhafi. Indeed, Gadhafi had promised to slaughter his opponents in Benghazi, and it was that threat that triggered the NATO intervention in Libya. Many conspiracy theories have been devised to explain the intervention, but, like Haiti and Kosovo before it, none of the theories holds up. The intervention occurred because it was believed that Gadhafi would carry out his threats in Benghazi and because it was assumed that he would quickly capitulate in the face of NATO air power, opening the door to democracy.

That Gadhafi was capable of mass murder was certainly correct. The idea that Gadhafi would quickly fall proved incorrect. That a democracy would emerge as a result of the intervention proved the most dubious assumption of them all. What emerged in Libya is what you would expect when a foreign power overthrows an existing government, however thuggish, and does not impose its own imperial state: ongoing instability and chaos.

The Libyan opposition was a chaotic collection of tribes, factions and ideologies sharing little beyond their opposition to Gadhafi. A handful of people wanted to create a Western-style democracy, but they were leaders only in the eyes of those who wanted to intervene. The rest of the opposition was composed of traditionalists, militarists in the Gadhafi tradition and Islamists. Gadhafi had held Libya together by simultaneously forming coalitions with various factions and brutally crushing any opposition.

Opponents of tyranny assume that deposing a tyrant will improve the lives of his victims. This is sometimes true, but only occasionally. The czar of Russia was clearly a tyrant, but it is difficult to argue that the Leninist-Stalinist regime that ultimately replaced him was an improvement. Similarly, the Shah of Iran was repressive and brutal. It is difficult to argue that the regime that replaced him was an improvement.

There is no assurance that opponents of a tyrant will not abuse human rights just like the tyrant did. There is even less assurance that an opposition too weak and divided to overthrow a tyrant will coalesce into a government when an outside power destroys the tyrant. The outcome is more likely to be chaos, and the winner will likely be the most organized and well-armed faction with the most ruthless clarity about the future. There is no promise that it will constitute a majority or that it will be gentle with its critics.

The intervention in Libya, which I discussed in The Immaculate Intervention, was built around an assumption that has little to do with reality — namely, that the elimination of tyranny will lead to liberty. It certainly can do so, but there is no assurance that it will. There are many reasons for this assumption, but the most important one is that Western advocates of human rights believe that, when freed from tyranny, any reasonable person would want to found a political order based on Western values. They might, but there is no obvious reason to believe they would.

The alternative to one thug may simply be another thug. This is a matter of power and will, not of political philosophy. Utter chaos, an ongoing struggle that leads nowhere but to misery, also could ensue. But the most important reason Western human rights activists might see their hopes dashed is due to a principled rejection of Western liberal democracy on the part of the newly liberated. To be more precise, the opposition might embrace the doctrine of national self-determination, and even of democracy, but go on to select a regime that is in principle seriously opposed to Western notions of individual rights and freedom.

While some tyrants simply seek power, other regimes that appear to Westerners to be tyrannies actually are rather carefully considered moral systems that see themselves as superior ways of life. There is a paradox in the principle of respect for foreign cultures followed by demands that foreigners adhere to basic Western principles. It is necessary to pick one approach or the other. At the same time, it is necessary to understand that someone can have very distinct moral principles, be respected, and yet be an enemy of liberal democracy. Respecting another moral system does not mean simply abdicating your own interests. The Japanese had a complex moral system that was very different from Western principles. The two did not have to be enemies, but circumstances caused them to collide.

The NATO approach to Libya assumed that the removal of a tyrant would somehow inevitably lead to a liberal democracy. Indeed, this was the assumption about the Arab Spring in the West, where it was thought that that corrupt and tyrannical regimes would fall and that regimes that embraced Western principles would sprout up in their place. Implicit in this was a profound lack of understanding of the strength of the regimes, of the diversity of the opposition and of the likely forces that would emerge from it.

In Libya, NATO simply didn’t understand or care about the whirlwind that it was unleashing. What took Gadhafi’s place was ongoing warfare between clans, tribes and ideologies. From this chaos, Libyan Islamists of various stripes have emerged to exploit the power vacuum. Various Islamist groups have not become strong enough to simply impose their will, but they are engaged in actions that have resonated across the region.

The desire to overthrow Gadhafi came from two impulses. The first was to rid the world of a tyrant, and the second was to give the Libyans the right to national self-determination. Not carefully considered were two other issues: whether simply overthrowing Gadhafi would yield the conditions for determining the national will, and whether the national will actually would mirror NATO’s values and, one should add, interests.

Unintended Consequences

The events of last week represent unintended and indirect consequences of the removal of Gadhafi. Gadhafi was ruthless in suppressing radical Islamism, as he was in other matters. In the absence of his suppression, the radical Islamist faction appears to have carefully planned the assault on the U.S. Consulate in Benghazi. The attack was timed for when the U.S. ambassador would be present. The mob was armed with a variety of weapons. The public justification was a little-known video on YouTube that sparked anti-American unrest throughout the Arab world.

For the Libyan jihadists, tapping into anger over the video was a brilliant stroke. Having been in decline, they reasserted themselves well beyond the boundaries of Libya. In Libya itself, they showed themselves as a force to be reckoned with — at least to the extent that they could organize a successful attack on the Americans. The four Americans who were killed might have been killed in other circumstances, but they died in this one: Gadhafi was eliminated, no coherent regime took his place, no one suppressed the radical Islamists, and the Islamists could therefore act. How far their power will grow is not known, but certainly they acted effectively to achieve their ends. It is not clear what force there is to suppress them. It is also not clear what momentum this has created for jihadists in the region, but it will put NATO, and more precisely the United States, in the position either of engaging in another war in the Arab world at a time and place not of its choosing, or allowing the process to go forward and hoping for the best.

As I have written, a distinction is frequently drawn between the idealist and realist position. Libya is a case in which the incoherence of the distinction can be seen. If the idealist position is concerned with outcomes that are moral from its point of view, then simply advocating the death of a tyrant is insufficient. To guarantee the outcome requires that the country be occupied and pacified, as was Germany or Japan. But the idealist would regard this act of imperialism as impermissible, violating the doctrine of national sovereignty. More to the point, the United States is not militarily in a position to occupy or pacify Libya, nor would this be a national priority justifying war. The unwillingness of the idealist to draw the logical conclusion from their position, which is that simply removing the tyrant is not the end but only the beginning, is compounded by the realist’s willingness to undertake military action insufficient for the political end. Moral ends and military means must mesh.

Removing Gadhafi was morally defensible but not by itself. Having removed him, NATO had now adopted a responsibility that it shifted to a Libyan public unequipped to manage it. But more to the point, no allowance had been made for the possibility that what might emerge as the national will of Libya would be a movement that represented a threat to the principles and interests of the NATO members. The problem of Libya was not that it did not understand Western values, but that a significant part of its population rejected those values on moral grounds and a segment of the population with battle-hardened fighters regarded them as inferior to its own Islamic values. Somewhere between hatred of tyranny and national self-determination, NATO’s commitment to liberty as it understood it became lost.

This is not a matter simply confined to Libya. In many ways it played out throughout the Arab world as Western powers sought to come to terms with what was happening. There is a more immediate case: Syria. The assumption there is that the removal of another tyrant, in this case Bashar al Assad, will lead to an evolution that will transform Syria. It is said that the West must intervene to protect the Syrian opposition from the butchery of the al Assad regime. A case can be made for this, but not the simplistic case that absent al Assad, Syria would become democratic. For that to happen, much more must occur than the elimination of al Assad.

Wishful Thinking vs. Managing the Consequences

In 1958, a book called The Ugly American was published about a Southeast Asian country that had a brutal, pro-American dictator and a brutal, communist revolution. The novel had a character who was a nationalist in the true sense of the word and was committed to human rights. As a leader, he was not going to be simply an American tool, but he was the best hope the United States had. An actual case of such an ideal regime replacement was seen in 1963 in Vietnam, when Ngo Dinh Diem in Vietnam was killed in a coup. He had been a brutal pro-American dictator. The hope after his death was that a decent, nationalist liberal would replace him. There was a long search for such a figure; he never was found.

Getting rid of a tyrant when you are as powerful as the United States and NATO are, by contrast, is the easy part. Saddam Hussein is as dead as Gadhafi. The problem is what comes next. Having a liberal democratic nationalist simply appear to take the helm may happen, but it is not the most likely outcome unless you are prepared for an occupation. And if you are prepared to occupy, you had better be prepared to fight against a nation that doesn’t want you determining its future, no matter what your intentions are.

I don’t know what will come of Libya’s jihadist movement, which has showed itself to be motivated and capable and whose actions resonated in the Arab world. I do know that Gadhafi was an evil brute who is better off dead. But it is simply not clear to me that removing a dictator automatically improves matters. What is clear to me is that if you wage war for moral ends, you are morally bound to manage the consequences.

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Argentina . . .

August 16th, 2012 · No Comments · Markets

 

  • The Wall Street Journal
  • OPINION
  • August 8, 2012, 7:04 p.m. ET

Pierpaolo Barbieri: A Lesson in Crony Capitalism

As the U.S. gears up for an important presidential election, Argentina is a sad reminder of how crony capitalism is the enemy of genuine development.

By PIERPAOLO BARBIERI

Jorge Luis Borges used to say that the Argentine people suffered under “too many messiahs.” Their current president, Cristina Kirchner, certainly preaches like one. At U.N. meetings she berates America and Europe for the global financial crisis, and at the last G-20 summit in June she attempted to reignite the Falkland Islands dispute with Great Britain.

At home, Mrs. Kirchner’s turned a law intended to broadcast key announcements into a permanent political platform. She’s constantly on TV speaking on issues both important (like her seizure of the oil company YPF from Spain’s Repsol), and banal (videoconferences featuring zealots on the government payroll). A routine debt payment last Friday presented an opportunity for yet another televised tirade against global capitalism, and a chance to extol the virtues of her own government, one “built on equity and human rights.”

As the U.S. gears up for an important presidential election, Argentina is a sad reminder of how government takeovers and crony capitalism are the enemy of genuine development.

Leftist economists relish pointing out that Argentina’s GDP has grown fast since the Kirchners came to power in 2003. Mrs. Kirchner is the widow of former President Néstor Kirchner and succeeded him as president in 2007. Under the Kirchners, a global commodities boom provided tailwind for an Argentine economy geared toward food production.

Amid the boom, the Kirchners denounced corrupt “neoliberalism,” promising to “free the people” through revitalized government. So while Peru and Colombia deepened structural reforms, Argentina expanded bureaucracy and eschewed liberalization. This led to decreased independence for institutions like the national statistics agency, Indec, which has lied about inflation so blatantly that The Economist magazine now refuses to print its cooked numbers. Indec’s falsified low inflation reports minimize indexed payments to retirees, as well as underrating poverty figures. Yet children starve in the rural provinces regardless of what the government chooses to print. Civil organizations that have spoken up about the lies have seen their funding cut and their leaders threatened. So much for freeing the people.

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EPAArgentine President Cristina Kirchner.

These lies help cover up more pernicious government meddling. In March, Mrs. Kirchner destroyed the Argentine central bank’s independence, rewriting its charter to allow the government unlimited use of the bank’s reserves to pay its debts—a surefire recipe for still more damaging inflation and a debased currency.

At a time when some argue the current “unchartered waters” of monetary policy call for more political oversight over the Federal Reserve and the European Central Bank, the Argentine experience is testament to how important price stability remains in unstable times. Particularly in developing countries, the rich find ways to protect themselves against inflation, while pensioners and the poor suffer the most.

The institutional deterioration permeates far and wide and is only getting worse. This week, the Kirchner government announced plans to expropriate the company that prints its currency, the Argentine peso.

Middle-class Argentines have sought to save in dollars to protect themselves. But as of late last year, the government introduced draconian currency and trade controls. This has alienated key trading partners like Brazil and led to routine shortages of essential supplies. Sadly, no company that relies on global supply chains can now produce in Argentina. Manufacturing survives only through inefficient import tariffs. So, predictably, productivity lags. An iPad in Argentina, for instance, costs more than anywhere else in the world.

Even worse, authoritarian controls have bred multiple exchange rates: If you are a friend of the government, a dollar costs 4.5 pesos. For anyone else, it is more than six. Instant arbitrage makes cronyism profitable.

Argentine pensioners have been especially hard hit. Shunned by global credit markets, private pensions were nationalized in 2010. If the private system lacked proper oversight, the new system is unambiguously designed to raid funds for political ends. How else can one explain a plan unveiled last month to offer housing at 20% negative real interest rates—funded by social security and to be built by Kirchner cronies—when a majority of pensions are below subsistence levels?

Social security funds have also been funneled into nationalized businesses like the seized YPF. But when management is trusted to cronies rather than experts, the unfortunate mix of corruption and ineptitude guarantees losses for both social security and company employees. Not surprisingly, no foreign oil company—not even Russia’s Gazprom or China’s Sinopec—has invested in YPF. Last week, the government’s handpicked CEO even threatened to quit YPF because of how little control he has over the company.

With a toxic mix of inflation, authoritarianism and corruption bringing the economy to a standstill, Mrs. Kirchner has been touring the world for new friends. For a government that focused on prosecuting the genocidal crimes of the 1970s military junta, it is rather surprising that the latest trade missions have been to dictatorial Azerbaijan, where democracy advocates are regularly imprisoned, and Angola, where a corrupt ruling family has maintained power for 30 years by perpetrating violent crimes against dissenters.

The architect of Argentina’s economic radicalization, neo-Marxist Axel Kicilloff, often labels critics as “reactionaries” while praising Keynesian aggregate demand management. Given that his policies have now brought about stagflation in Argentina, it should come as no surprise that Mr. Kicillof’s writings on Keynes are picked up from other, long-discredited academics. And yet Mr. Kicillof’s friends—now in leadership positions in newly nationalized businesses and throughout company boards because of social-security investments—have benefited handily from this “revitalized government.”

Back in the 1960s, situationist philosopher Guy Débord coined the phrase “the society of the spectacle” to describe the farce of Soviet bureaucrats pretending to defend the proletariat while benefiting only themselves. At a time when most of Latin America is implementing promising institutional reforms, Argentina needs less televised lecturing and more action to address the crony capitalism that pervades its government. Like other false prophets, the Kirchner government has come to represent the very evil it purported to fight. Argentina deserves better.

Mr. Barbieri is a fellow at Harvard’s Kennedy School. His book, “Hitler’s Shadow Empire: Nazi Economics and the Spanish Civil War,” will be published by Harvard University Press in 2013.

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Eugene Kaspersky and security

August 15th, 2012 · No Comments · Cyber, Geopolitics

 

Russia’s Top Cyber Sleuth Foils US Spies, Helps Kremlin Pals

 

Eugene Kaspersky, Soviet officer turned software tycoon.
Photo: Stephen Voss

 

It’s early February in Cancun, Mexico. A group of 60 or so financial analysts, reporters, diplomats, and cybersecurity specialists shake off the previous night’s tequila and file into a ballroom at the Ritz-Carlton hotel. At the front of the room, a giant screen shows a globe targeted by crosshairs. Cancun is in the center of the bull’s-eye.

A ruddy-faced, unshaven man bounds onstage. Wearing a wrinkled white polo shirt with a pair of red sunglasses perched on his head, he looks more like a beach bum who’s lost his way than a business executive. In fact, he’s one of Russia’s richest men—the CEO of what is arguably the most important Internet security company in the world. His name is Eugene Kaspersky, and he paid for almost everyone in the audience to come here. “Buenos dias,” he says in a throaty Russian accent, as he apologizes for missing the previous night’s boozy activities. Over the past 72 hours, Kaspersky explains, he flew from Mexico to Germany and back to take part in another conference. “Kissinger, McCain, presidents, government ministers” were all there, he says. “I have panel. Left of me, minister of defense of Italy. Right of me, former head of CIA. I’m like, ‘Whoa, colleagues.’”

He’s bragging to be sure, but Kaspersky may be selling himself short. The Italian defense minister isn’t going to determine whether criminals or governments get their hands on your data. Kaspersky and his company, Kaspersky Lab, very well might. Between 2009 and 2010, according to Forbes, retail sales of Kaspersky antivirus software increased 177 percent, reaching almost 4.5 million a year—nearly as much as its rivals Symantec and McAfee combined. Worldwide, 50 million people are now members of the Kaspersky Security Network, sending data to the company’s Moscow headquarters every time they download an application to their desktop. Microsoft, Cisco, and Juniper Networks all embed Kaspersky code in their products—effectively giving the company 300 million users. When it comes to keeping computers free from infection, Kaspersky Lab is on its way to becoming an industry leader.

But this still doesn’t fully capture Kaspersky’s influence. Back in 2010, a researcher now working for Kaspersky discovered Stuxnet, the US-Israeli worm that wrecked nearly a thousand Iranian centrifuges and became the world’s first openly acknowledged cyberweapon. In May of this year, Kaspersky’s elite antihackers exposed a second weaponized computer program, which they dubbed Flame. It was subsequently revealed to be another US-Israeli operation aimed at Iran. In other words, Kaspersky Lab isn’t just an antivirus company; it’s also a leader in uncovering cyber-espionage.

Kaspersky has 300 million customers. His geek squad uncovers US cyberweapons. And he has deep ties to the KGB’s successors in Moscow.

Serving at the pinnacle of such an organization would be a remarkably powerful position for any man. But Kaspersky’s rise is particularly notable—and to some, downright troubling—given his KGB-sponsored training, his tenure as a Soviet intelligence officer, his alliance with Vladimir Putin’s regime, and his deep and ongoing relationship with Russia’s Federal Security Service, or FSB. Of course, none of this history is ever mentioned in Cancun.

What is mentioned is Kaspersky’s vision for the future of Internet security—which by Western standards can seem extreme. It includes requiring strictly monitored digital passports for some online activities and enabling government regulation of social networks to thwart protest movements. “It’s too much freedom there,” Kaspersky says, referring to sites like Facebook. “Freedom is good. But the bad guys—they can abuse this freedom to manipulate public opinion.”

These are not exactly comforting words from a man who is responsible for the security of so many of our PCs, tablets, and smartphones. But that is the paradox of Eugene Kaspersky: a close associate of the autocratic Putin regime who is charged with safeguarding the data of millions of Americans; a supposedly-retired intelligence officer who is busy today revealing the covert activities of other nations; a vital presence in the open and free Internet who doesn’t want us to be too free. It’s an enigmatic profile that’s on the rise as Kaspersky’s influence grows.

 

Eugene Kaspersky as a young Soviet military cadet.
Photo: courtesy Eugene Kaspersky

Eugene Kaspersky was a bright kid. At 16 he was accepted to a five-year program at the KGB-backed Institute of Cryptography, Telecommunications, and Computer Science. After graduating in 1987, he was commissioned as an intelligence officer in the Soviet army. A quarter century after the fact, he still won’t disclose what he did in the military or what exactly he studied at the institute. “That was top-secret, so I don’t remember,” he says.

Kaspersky is more open about the day in October 1989 when a virus first infected his computer. It was a playful little thing calledCascade that made the characters on a PC screen tumble to the bottom like Tetrisblocks. Curious, Kaspersky saved a copy of the virus on a floppy disk to study how the code worked. A couple of weeks later he encountered a second virus, and then a third. His interest grew with each discovery. “For Eugene, it was an addiction,” his friend Alexey De Mont De Rique says. Each time a new virus appeared, Kaspersky would “sit in front of the computer for 20 hours straight,” trying to pick it apart, De Mont De Rique recalls. In the small world of antivirus researchers, the Soviet officer quickly made a name for himself.

By the early ’90s, Kaspersky wanted out of the army so he could study viruses full-time. There was one small problem: “It was almost not possible,” he explains. The only way to get out was to go to jail, get sick, or prove yourself to be extremely incompetent. Kaspersky’s old instructor at the Institute of Cryptography had a company that sold everything from athletic shoes to PCs. Somehow—Kaspersky won’t answer questions about this either—the former professor was able to get Kaspersky a discharge and hire him. Kaspersky’s wife, Natalya, and De Mont De Rique soon joined him at the company.

In 1997 the three of them went into the antivirus business for themselves. Their software was advanced for the time. They were the first to allow users of Internet security software to watch malware operate in an isolated “sandbox,” quarantined from the rest of the computer; they were among the first to store entire programs in a virus database. The young company flourished even as Kaspersky’s marriage to Natalya fizzled. The couple divorced in 1998, but she continued to handle sales and finance while he worked in the “virus lab,” classifying new threats himself. “The typical analyst would process maybe 100 pieces of new malware a day,” says Aleks Gostev, one of Kaspersky’s top researchers. “Eugene would do 300.”

Today Kaspersky Lab employs about 200 virus researchers—some in the US and China, but the bulk of them in a converted electronics factory 6 miles northwest of the Kremlin. On a sunny April morning when I visit, the old factory feels more like a grad school, with tattooed twentysomethings from across the former Soviet Union roaming the curved halls. The school mascot seems to be Kaspersky himself. Some employees wear Che Guevara T-shirts—with the boss’s face replacing the revolutionary’s. On the walls are black-and-white photos of long-serving employees dressed in war paint and moccasins like Native Americans. “Eugene the Great Virus Hunter,” reads the caption under the CEO’s image—in which he’s drawing a bow and arrow. Some 12,543 emails about suspicious programs came into the company just this morning, bringing the grand total to nearly 7.8 million.

‘Rule number one of successful companies here is good relations with the secret police.’

The accumulation happens automatically. When a user installs Kaspersky software, it scans every application, file, and email on the computer for signs of malicious activity. If it finds a piece of known malware, it deletes it. If it encounters a suspicious program or a message it doesn’t recognize—and the user has opted to be part of the Kaspersky Security Network—it sends an encrypted sample of the virus to the company’s servers. The cloud-based system automatically checks the code against a “whitelist” of 300 million software objects it knows to be trustworthy, as well as a “blacklist” of 94 million known malicious objects. If the code can’t be found on either of these lists, the system analyzes the program’s behavior—looking at whether it’s designed to make unauthorized changes to the computer’s configuration options, for example, or whether it constantly pings a remote server. Only in the rare instance that the system is stumped will one of Kaspersky’s T-shirt-clad virus researchers step in. They’ll characterize the code by function: password stealer, bogus web page server, downloader of more malicious programs. Then they’ll suggest a “signature” that can be used to spot and filter out the malware in the future. In just minutes, a software update that incorporates these new signatures can be pushed out to Kaspersky’s tens of millions of users.

This is the core of the $600-million-a-year business that grew out of Kaspersky’s virus hobby. It’s really not all that different from the way US security companies like Symantec or McAfee operate globally. Except for the fact that in Russia, high tech firms like Kaspersky Lab have to cooperate with the siloviki, the network of military, security, law enforcement, and KGB veterans at the core of the Putin regime.

The FSB, a successor to the KGB, is now in charge of Russia’s information security, among many other things. It is the country’s top fighter of cybercrime and also operates the government’s massive electronic surveillance network. According to federal law number 40-FZ (.pdf), the FSB can not only compel any telecommunications business to install “extra hardware and software” to assist it in its operations, the agency can assign its own officers to work at a business. “Rule number one of successful companies here is good relations with the siloviki,” says one prominent member of Russia’s technology sector.

Kaspersky says the FSB has never made a request to tamper with his software, nor has it tried to install its agents in his company. But that doesn’t mean Kaspersky and the security agency operate at arm’s length. Quite the opposite: “A substantial part of his company is intimately involved with the FSB,” the tech insider says. While the Russian government has used currency restrictions to cripple a firm’s international business in the past, Kaspersky faces no such interference. “They give him carte blanche for his overseas operations, because he’s among the so-called good companies.”

 

Eugene Kaspersky’s lab isn’t just an antivirus company; it’s also a leader in uncovering cyber-espionage.
Photo: Stephen Voss

Next door to the Moscow virus lab is the home base for another arm of the operation—a team of elite hackers from around the world that Kaspersky hand-selected to investigate new or unusual cybersecurity threats. Kaspersky calls this his Global Research and Expert Analysis Team—GREAT, for short. Two of them are waiting for me in their office. Sergei Golovanov sports rectangular glasses and a beard out of a ’90s nu-metal video. Aleks Gostev is skinny as a rope and has dark circles under his eyes.

With Kaspersky’s encouragement, GREAT has become increasingly active in helping big companies and law enforcement agencies track down cybercriminals. Gostev assisted Microsoft in its takedown of the Kelihos botnet, which churned out 3.8 billion pieces of spam every day at its peak. Golovanov spent months chasing theKoobface gang, which suckered social media users out of an estimated $7 million.

One of GREAT’s frequent partners in fighting cybercrime, however, is the FSB. Kaspersky staffers serve as an outsourced, unofficial geek squad to Russia’s security service. They’ve trained FSB agents in digital forensic techniques, and they’re sometimes asked to assist on important cases. That’s what happened in 2007, when agents showed up at Kaspersky HQ with computers, DVDs, and hard drives they had seized from suspected crooks. “We had no sleep for a month,” Golovanov says. Eventually two Russian virus writers were arrested, and Nikolai Patrushev, then head of the FSB, emailed the team his thanks.

Kaspersky’s public-sector work, however, goes well beyond Russia. In May, Gostev and Kaspersky were summoned to the Geneva headquarters of the International Telecommunication Union, the UN body charged with encouraging development of the Internet. The Russians were ushered into the office of ITU secretary-general Hamadoun Touré, where the Soviet-educated satellite engineer told them that a virus was erasing information on the computers of Iran’s oil and gas ministry. This was coming just two years after the discovery of the Stuxnet worm, which had damaged Iran’s centrifuges. Touré asked Kaspersky to look into it.

Back at the lab, analysts from GREAT began combing through archived reports from customers’ machines. One file name stood out: ~DEB93D.tmp. The virus was eventually found on 417 customers’ computers—398 of which were in the Middle East, including 185 in Iran. Some machines had been infected since 2010, but the file had never been deeply analyzed. The researchers were able to isolate one piece of the malicious code—and then another and another.

One module of the software surreptitiously turned on a machine’s microphone and recorded any audio it captured. A second collected files, especially design and architectural drawings. A third uploaded captured data to anonymous command-and-control servers. A fourth module, with the file name Flame, infected other computers. The analysts discovered about 20 modules in all—an entire toolkit for online espionage. It was one of the biggest, most sophisticated pieces of spyware ever discovered. In honor of the transmission program, the researchers called it Flame. On May 28, a Kaspersky analyst announced what the team had found.

Flame was another part of America’s shadow war against Iran — and Kaspersky killed it.

The spyware was too complex for simple crooks or hacktivists, the researchers said. Flame had been coded by professionals, almost certainly at a government’s behest. The company called it a cyberweapon and speculated that it was related to Stuxnet.

On June 1, The New York Times revealed for the first time that the White House had, in fact, ordered the deployment of Stuxnet as part of a sophisticated campaign of cyberespionage and sabotage against Tehran. Then, on June 19, The Washington Post was able to confirm that Flame was yet another part of this shadow war against Iran. Kaspersky had outed—and in effect killed—it.

For Kaspersky, exposing Flame reflects his company’s broader ambition: to serve as a global crime-stopper and peacekeeper. Malware has evolved from a nuisance to a criminal tool to an instrument of the state, he says, so naturally he and his malware fighters have grown in stature and influence too. “My goal is not to earn money. Money is like oxygen: Good idea to have enough, but it’s not the target,” he says. “The target is to save the world.”

In a locked room down the hall from his office, Kaspersky is working on a secret project to fulfill that lofty ambition. Not even his assistant has been allowed inside. But after we’ve spent a day together—and knocked back a few shots of Chivas 12—he unlocks the door and offers me a peek. It’s an industrial control system, a computer for operating heavy machinery, just like the ones that Stuxnet attacked (and, Kaspersky researchers believe, Flame may also have targeted). Kaspersky’s team is quietly working on new ways to harden these systems against cyberattack—to protect the power grids and prisons and sewage plants that rely on these controllers. The idea is to make future Stuxnets harder to pull off. The controllers haven’t been engineered with security in mind, so the project is difficult. But if it succeeds, Kaspersky’s seemingly outsize vision of his company’s role in the world might become a little less outlandish.

In the meantime, there’s always politics.

 

Kaspersky at the 2011 Brazilian Grand Prix, flanked by drivers from the Ferrari F1 team that he sponsors.
Photo: courtesy of Kaspersky Lab

Kaspersky has cultivated the image of a wild man with cash to burn—the flamboyant say-anything, do-anything, drink-anything gazillionaire. In Asia, he’s clowned around in TV commercials with Jackie Chan. In Europe, Kaspersky sponsors the Ferrari Formula One team and goes on Dublin pub crawls with Bono. Back in Russia, he throws New Year’s parties for 1,500. The most recent one had a rock-and-roll theme; Kaspersky took the stage in a Harley jacket. Last summer he took some 30 people to Russia’s Kamchatka Peninsula for a volcano-hiking excursion. Then there are the Kaspersky Lab conferences disguised as boozy getaways (or perhaps vice versa): the “analysts’ summit” on Spain’s Costa del Sol, the “VIP executive forum” in Monte Carlo, the “press tour” in Cyprus, the whatever-it-was thing in Cancun.

All of this might lead some to dismiss Kaspersky as a dilettante plutocrat who drinks single-malt and gets made up for TV while his employees do the real technical work. But the critics would be missing the point: One of the systems Kaspersky is now trying to hack is politics, and his antics are part of the act. Every trip to Shanghai’s Formula One race or the London Conference on Cyberspace is another chance to court diplomats and politicians, another chance to extend his company’s influence. And one of his goals is to persuade policymakers to refashion the Internet into something more to his liking—and, as it happens, something more to the liking of the Putin government as well.

Kaspersky says it’s time to give up privacy online: ‘By protecting our right to freedom we actually sacrifice it!’

In one hotel ballroom after another, Kaspersky insists that malware like Stuxnet and Flame should be banned by international treaty, like sarin gas or weaponized anthrax. He argues that the Internet should be partitioned and certain regions of it made accessible only to users who present an “Internet passport.” That way, anonymous hackers wouldn’t be able to get at sensitive sites—like, say, nuclear plants. Sure, it might seem like we’d be sacrificing some privacy online. But with all the advertisers, search engines, and governments tracking us today, Kaspersky argues, we don’t really have any privacy left anyway. “You can have privacy if you live somewhere in the jungle or the middle of Siberia,” he recently told a confab in the Bahamas.

The Internet grew from a network of researchers to the global nervous system in large part because practically anyone was able to access any part of it from anywhere—no ID needed. And the values of openness, freedom, and anonymity became deeply embedded in net culture and in the very architecture of the network itself. But to Kaspersky, these notions no longer work: By “protecting our right to freedom we actually sacrifice it! We sacrifice the right to safe Internet surfing and to not get infected by some nasty piece of malware at every step.”

The idea of stripping some amount of privacy from the Internet is gaining traction in many sectors, thanks at least in small part to Kaspersky’s lobbying. In Cancun, he was joined onstage by Alexander Ntoko, a top official at the International Telecommunication Union. “Why don’t we have digital IDs as a de facto for everybody?” he asks. “When I’m going to my bank, I’m not going to cover my face.” In other words, why should things be any different online?

The ITU was once a bureaucratic backwater. In recent years, however, the Russian and Chinese governments have been pushing to give the agency a central role in governing the Internet. Instead of the US-dominated nonprofits that currently coordinate domain names and promote technical standards, they want to turn authority over to a gathering of national governments represented by the ITU. It’s a move that one of the Internet’s creators, Vint Cerf, told Congress risks “losing the open and free Internet,” because it would transfer power from geeks to government bureaucrats. The ITU is set to revisit the 24-year-old treaty governing international telecommunications in December.

Whether or not it secures this power, the ITU has found a willing ally in Kaspersky. When he traveled to ITU headquarters in Geneva, a few months after Cancun, Kaspersky not only agreed to look into the attacks on the Iranian oil ministry, he also told ITU chief Touré that he would assign some of his top researchers to be on call to help the organization with any future investigations. It’s a good deal for both men. Kaspersky gets to extend his influence—and maybe catch the next big cyberweapon. Touré and the ITU get a personal cybersecurity team.

But Kaspersky’s closest political ties remain in Russia. As one of his country’s most successful technology entrepreneurs—and, in many ways, Russia’s spokesman for all things Internet—Kaspersky has hosted former president and current prime minister Dmitry Medvedev in his offices (see video below); Medvedev, in turn, appointed Kaspersky to serve in Russia’s Public Chamber, which is charged with monitoring the parliament.

Kaspersky and the Moscow government have espoused strikingly similar views on cybersecurity. This goes beyond the security industry’s basic mission of keeping data safe. When Kaspersky or Kremlin officials talk about responses to online threats, they’re not just talking about restricting malicious data—they also want to restrict what they consider malicious information, including words and ideas that can spur unrest.

Kaspersky can’t stand social networks like Facebook or its Russian competitor, VK (formerly known as VKontakte). “People can manipulate others with the fake information,” he says, “and it’s not possible to find who they are. It’s a place for very dangerous action.” Especially dangerous, he says, is the role of social networks in fueling protest movements from Tripoli to Moscow, where blogger Alexei Navalny has emerged as perhaps the most important dissident leader and sites like VK and LiveJournal have helped bring tens of thousands of people into the streets. Kaspersky sees these developments as part of a disinformation campaign by antigovernment forces to “manipulate crowds and change public opinion.”

Nikolai Patrushev—the former FSB chief who now serves as Putin’s top security adviser—makes a nearly identical case. In June he told a reporter that outside forces on the Internet are constantly creating tensions within Russian society. “Foreign sites are spreading political speculation, calls to unauthorized protests,” he says.

Russia’s government and its most famous technology entrepreneur have long had each other’s backs, cooperating on cybercrime investigations and supporting each other’s political agendas. But the two became utterly intertwined at 6:30 in the morning on April 19, 2011, when Kaspersky’s cell phone rang in his London hotel room. According to the caller ID, it was Ivan, Kaspersky’s 20-year-old son. But the voice on the other end was not Ivan. It was an older man who politely told Kaspersky: “We’ve got your son.”

 

Eugene Kaspersky now travels in Russia with bodyguards, after the kidnapping of his son.
Photo: Stephen Voss

Outwardly, Kaspersky didn’t react to the news of Ivan’s kidnapping. He said he was tired and asked the caller to ring him back later in the morning—which the caller did, from another number. This time, Kaspersky said he was in an interview and told the guy to make a third call.

It was a ploy, a stall for time while Kaspersky hurriedly reached out to his corporate security manager, who reached out to the FSB. Ordinarily the Russian intelligence service isn’t in the business of freeing kidnap victims. But Ivan Kaspersky wasn’t your average abductee. “My first thought was that this is serious. Second, immediately call the FSB. And third, they are stupid to attack me,” Kaspersky says. “I was 100 percent sure—well, 99 percent sure—that FSB and police would find them. We have very good relations with both the FSB cybersecurity department and the Moscow police department. They know us. They know us as people who support them when they need it. They started to work like crazy.”

That night Kaspersky took the red-eye back to Moscow. He plodded his way through the morning rush hour, his phone ringing every few minutes. As the kidnappers made their demands—3 million euros in denominations of 500—they tried to cover their tracks, switching cell phones and SIM cards constantly. But with every call, the kidnappers were giving the FSB more data to track them down.

According to the caller ID, it was Kaspersky’s kid. But the voice on the other end was an older man’s, saying: ‘We’ve got your son.’

Kaspersky arrived at a police station in central Moscow and promptly passed out from anxiety and exhaustion. He and his ex-wife stayed there for the next four days, pacing the halls while the FSB pored through call records and the Moscow cops staked out a suburban cabin where they believed Ivan was being held. After a few days, the officers lured the kidnappers out of the house with the promise of a ransom payment. They were captured without a shot. Ivan was freed, a little grimy—there was no running water in the cabin—but otherwise fine. “It was probably the only period in his life when he was reading books,” jokes his mother, Natalya Kaspersky, who met him at the scene.

At first, Kaspersky publicly blamed himself for not adequately protecting his family. But later he started blaming something else: VK. Kaspersky said that the Russian social network had tempted Ivan into posting his address, phone number, even details of his internship at InfoWatch, Natalya’s security company. “Social networks shouldn’t encourage users to post that sort of information. If a site asks for private information, then criminal charges should be brought against it in the event of a leak,” Kaspersky told Russia’s RT television channel in October. Widely viewed as a Kremlin propaganda outlet, RT aired the remarks as part of a documentary on the death of online privacy and the dangers of social networks, with Ivan’s kidnapping as a primary example. The program encouraged people to protect themselves by dropping offline completely. As it happened, the documentary ran just as online opposition to the ruling party was starting to bubble up. In the months that followed, top bloggers and activists were detained by the government, and the FSB tried (unsuccessfully) to force VK to purge the pages of some groups from its network.

The Kaspersky kidnapping ended up being a tool for the ruling party. But according to Natalya, the whole kidnapped-because-of-VK story is nonsense. “They found him on social networks? It’s not true. They followed him for a month or more. They knew all his ways, where he is going, whom he contacts,” she says. Yes, Ivan posted an address online—”a false address from an old house.” There’s no way, she says, that this helped the kidnappers.

So why did Eugene Kaspersky publicly blame VK? Perhaps Kaspersky simply let his emotions get the better of him—his son had been kidnapped, after all. Perhaps he mistook the fake address Ivan posted for a real one. Whatever the reason, in the end, the son’s kidnapping became a way to attack the father’s political foes.

 

Eugene Kaspersky now travels in Moscow with a team of bodyguards. He moved to a duplex in a gated community bordering a park—better for keeping his girlfriend and their infant son safe, he explains. A wraparound balcony overlooks the still-frozen Moskva River and the site of Kaspersky Lab’s new five-story headquarters. To the left you can almost see Kaspersky’s childhood home: a one-room shack originally built for prison laborers in the Stalin era.

It’s an early Sunday afternoon in late April. Kaspersky, smoking a Chinese cigarette, is wearing the same bargain-rack striped shirt he was wearing Friday. His mother, who also lives in the complex, heats up blintzes and opens some canned caviar. Up close it becomes clear that Kaspersky’s image as a mega-rich, hyperconnected playboy is mostly an act. In truth, he stays away from Russia’s oligarchs, whom he sees as little different from the cybercrooks he chases. He views his move into politics as a necessary evil, an offer he’s in no position to refuse. Kaspersky doesn’t bother with political rallies or Moscow’s famously immoderate nightlife; he’d rather be in an airplane seat on his way to some conference to share ideas with other technophiles. When he goes to places like Kamchatka, he says, he takes employees or clients. “I don’t have any friends outside of work.”

Sure, Kaspersky touts a Kremlin-friendly line. In Putin’s Russia, executives who don’t have a habit of disappearing.

While critics assume that Kaspersky’s company is a virtual arm of Russian intelligence, he and his staff insist, not unconvincingly, that their work with the FSB has its limits. They argue that using its software to spy on users would undermine the company’s credibility worldwide; it would be like the local locksmith moonlighting as a cat burglar. That credibility is at the heart of Kaspersky Lab’s business. Without lots of customers, there would be no Kaspersky Security Network, no database of known threats or tally of infected machines.

Yes, Kaspersky publicly touts a Kremlin-friendly line. But in Putin’s Russia, executives who neglect to do so have a disturbing habit of winding up in jail or being forced into exile. Besides, you don’t need to be a Moscow crony to push against free speech and privacy online. Plenty of Western officials are doing that too. Until 2011, Italians had to present their ID cards before using Wi-Fi at an Internet café. The European Commission is now mulling a continent-wide system of “electronic authentication.” British prime minister David Cameron contemplated cracking down on social media after the 2011 London riots. And retired US vice admiral Mike McConnell wrote in The Washington Post about the “need to reengineer the Internet to make attribution … more manageable.” He previously served as US director of national intelligence—America’s top spy.

In many ways, the relationship between the Kremlin and Kaspersky Lab is the same as the one between Washington and the big US security companies. Moscow gives millions to Kaspersky to help secure government networks—much as the Pentagon pours millions into contracts with McAfee and Symantec. Kaspersky helps the FSB track down cybercrooks; McAfee and Symantec work with the FBI. Kaspersky employees brief the Duma, Russia’s parliament; American researchers brief Congress and the White House. These security firms have all become key players in their home countries’ network defenses and in cybersecurity investigations worldwide.

But while the American and Russian companies are similar, there are important differences. Stuxnet was a highly classified US operation serving one of the government’s top geopolitical goals. Symantec, a US company, went after it anyway. It’s hard to find a similar case of Kaspersky and the Kremlin working at cross-purposes.

In December 2011, Kaspersky came under criticism for appearing to do the opposite—ignoring an act of online criminality when it was politically convenient. On the eve of Russia’s parliamentary elections, massive denial-of-service attacks brought down social networks like LiveJournal, media outlets like Kommersant.ru, and the independent election watchdog Golos. It seemed to be a politically motivated hit on potential opponents and critics of the ruling regime. Yet Kaspersky Lab—which boasts that its software can spot and fight DDoS attacks—denied the existence of any such activity. “We detected none. Very strange,” Kaspersky tweeted. The next day he wrote on his blog that the attacks actually had been detected, but he speculated that many of the sites were victims of technical problems or perhaps their own popularity.

Kaspersky denies that he blew off the DDoS attacks in an attempt to curry favor with the ruling powers. (Then he claims that pro-Putin sites got hit by the online strikes as well.) But Andrei Soldatov, a muckraking investigative journalist whose Agentura.ru site was hammered in the attacks, has a very different view: “I cannot explain Kaspersky’s ignorance by anything but conscious intention to take the Kremlin’s side, a position very weird for the independent expert he claims to be.”

Kaspersky’s office has just the trappings you’d expect for someone who rose from a kid in a shack to become a continent-hopping mogul: a Ferrari racing jacket, boxes of his software in Chinese and German, a model of SpaceShipTwo, the aircraft that’s going to fly well-heeled tourists to the edge of the atmosphere (Kaspersky already has a $200,000 ticket). Late one afternoon, he reaches into a small closet and pulls out a lab coat with his company’s logo to show me. Behind that is a basketball jersey from the New Jersey Nets, the NBA team owned by Russian billionaire Mikhail Prokhorov. At the very back of the closet I glimpse the dark green dress jacket from Kaspersky’s Soviet Army uniform. The garment is in pristine condition; it looks like it could still be worn in a military parade.

There are plenty of Russian magnates content to use their Kremlin connections and corruption-fueled profits to bully and buy their way into the global arena. Kaspersky has long tried to play a different game: He’s an international entrepreneur and thinker who is from Putin’s Russia, but not of it. Kaspersky’s financial success and influence is a testament to how skillfully he has walked this fine line. Yet the questions endure: Can a company so valuable to Moscow’s government ever be truly independent of it? And what else is hidden in the back of the closet, that the rest of the world can’t see?

I go in for a closer look at the jacket. Kaspersky shuts the door. “It’s nothing,” he says, walking out of the room. “Let’s find a drink.”

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The Election, the Presidency and Foreign Policy

August 3rd, 2012 · No Comments · Geopolitics

The Election, the Presidency and Foreign Policy

July 31, 2012

BY GEORGE FRIEDMAN

The American presidency is designed to disappoint. Each candidate must promise things that are beyond his power to deliver. No candidate could expect to be elected by emphasizing how little power the office actually has and how voters should therefore expect little from him. So candidates promise great, transformative programs. What the winner actually can deliver depends upon what other institutions, nations and reality will allow him. Though the gap between promises and realities destroys immodest candidates, from the founding fathers’ point of view, it protects the republic. They distrusted government in general and the office of the president in particular.

Congress, the Supreme Court and the Federal Reserve Board all circumscribe the president’s power over domestic life. This and the authority of the states greatly limit the president’s power, just as the country’s founders intended. To achieve anything substantial, the president must create a coalition of political interests to shape decision-making in other branches of the government. Yet at the same time — and this is the main paradox of American political culture — the presidency is seen as a decisive institution and the person holding that office is seen as being of overriding importance.

Constraints in the Foreign Policy Arena

The president has somewhat more authority in foreign policy, but only marginally so. He is trapped by public opinion, congressional intrusion, and above all, by the realities of geopolitics. Thus, while during his 2000 presidential campaign George W. Bush argued vehemently against nation-building, once in office, he did just that (with precisely the consequences he had warned of on the campaign trail). And regardless of how he modeled his foreign policy during his first campaign, the 9/11 attacks defined his presidency.

Similarly, Barack Obama campaigned on a promise to redefine America’s relationship with both Europe and the Islamic world. Neither happened. It has been widely and properly noted how little Obama’s foreign policy in action has differed from George W. Bush’s. It was not that Obama didn’t intend to have a different foreign policy, but simply that what the president wants and what actually happens are very different things.

The power often ascribed to the U.S. presidency is overblown. But even so, people — including leaders — all over the world still take that power very seriously. They want to believe that someone is in control of what is happening. The thought that no one can control something as vast and complex as a country or the world is a frightening thought. Conspiracy theories offer this comfort, too, since they assume that while evil may govern the world, at least the world is governed. There is, of course, an alternative viewpoint, namely that while no one actually is in charge, the world is still predictable as long as you understand the impersonal forces guiding it. This is an uncomfortable and unacceptable notion to those who would make a difference in the world. For such people, the presidential race — like political disputes the world over — is of great significance.

Ultimately, the president does not have the power to transform U.S. foreign policy. Instead, American interests, the structure of the world and the limits of power determine foreign policy.

In the broadest sense, current U.S. foreign policy has been in place for about a century. During that period, the United States has sought to balance and rebalance the international system to contain potential threats in the Eastern Hemisphere, which has been torn by wars. The Western Hemisphere in general, and North America in particular, has not. No president could afford to risk allowing conflict to come to North America.

At one level, presidents do count: The strategy they pursue keeping the Western Hemisphere conflict-free matters. During World War I, the United States intervened after the Germans began to threaten Atlantic sea-lanes and just weeks after the fall of the czar. At this point in the war, the European system seemed about to become unbalanced, with the Germans coming to dominate it. In World War II, the United States followed a similar strategy, allowing the system in both Europe and Asia to become unbalanced before intervening. This was called isolationism, but that is a simplistic description of the strategy of relying on the balance of power to correct itself and only intervening as a last resort.

During the Cold War, the United States adopted the reverse strategy of actively maintaining the balance of power in the Eastern Hemisphere via a process of continual intervention. It should be remembered that American deaths in the Cold War were just under 100,000 (including Vietnam, Korea and lesser conflicts) versus about 116,000 U.S. deaths in World War I, showing that far from being cold, the Cold War was a violent struggle.

The decision to maintain active balancing was a response to a perceived policy failure in World War II. The argument was that prior intervention would have prevented the collapse of the European balance, perhaps blocked Japanese adventurism, and ultimately resulted in fewer deaths than the 400,000 the United States suffered in that conflict. A consensus emerged from World War II that an “internationalist” stance of active balancing was superior to allowing nature to take its course in the hope that the system would balance itself. The Cold War was fought on this strategy.

The Cold War Consensus Breaks

Between 1948 and the Vietnam War, the consensus held. During the Vietnam era, however, a viewpoint emerged in the Democratic Party that the strategy of active balancing actually destabilized the Eastern Hemisphere, causing unnecessary conflict and thereby alienating other countries. This viewpoint maintained that active balancing increased the likelihood of conflict, caused anti-American coalitions to form, and most important, overstated the risk of an unbalanced system and the consequences of imbalance. Vietnam was held up as an example of excessive balancing.

The counterargument was that while active balancing might generate some conflicts, World War I and World War II showed the consequences of allowing the balance of power to take its course. This viewpoint maintained that failing to engage in active and even violent balancing with the Soviet Union would increase the possibility of conflict on the worst terms possible for the United States. Thus, even in the case of Vietnam, active balancing prevented worse outcomes. The argument between those who want the international system to balance itself and the argument of those who want the United States to actively manage the balance has raged ever since George McGovern ran against Richard Nixon in 1972.

If we carefully examine Obama’s statements during the 2008 campaign and his efforts once in office, we see that he has tried to move U.S. foreign policy away from active balancing in favor of allowing regional balances of power to maintain themselves. He did not move suddenly into this policy, as many of his supporters expected he would. Instead, he eased into it, simultaneously increasing U.S. efforts in Afghanistan while disengaging in other areas to the extent that the U.S. political system and global processes would allow.

Obama’s efforts to transition away from active balancing of the system have been seen in Europe, where he has made little attempt to stabilize the economic situation, and in the Far East, where apart from limited military repositioning there have been few changes. Syria also highlights his movement toward the strategy of relying on regional balances. The survival of Syrian President Bashar al Assad’s regime would unbalance the region, creating a significant Iranian sphere of influence. Obama’s strategy has been not to intervene beyond providing limited covert support to the opposition, but rather to allow the regional balance to deal with the problem. Obama has expected the Saudis and Turks to block the Iranians by undermining al Assad, not because the United States asks them to do so but because it is in their interest to do so.

Obama’s perspective draws on that of the critics of the Cold War strategy of active balancing, who maintained that without a major Eurasian power threatening hemispheric hegemony, U.S. intervention is more likely to generate anti-American coalitions and precisely the kind of threat the United States feared when it decided to actively balance. In other words, Obama does not believe that the lessons learned from World War I and World War II apply to the current global system, and that as in Syria, the global power should leave managing the regional balance to local powers.

Romney and Active Balancing

Romney takes the view that active balancing is necessary. In the case of Syria, Romney would argue that by letting the system address the problem, Obama has permitted Iran to probe and retreat without consequences and failed to offer a genuine solution to the core issue. That core issue is that the U.S. withdrawal from Iraq left a vacuum that Iran — or chaos — has filled, and that in due course the situation will become so threatening or unstable that the United States will have to intervene. To remedy this, Romney called during his visit to Israel for a decisive solution to the Iran problem, not just for Iran’s containment.

Romney also disagrees with Obama’s view that there is no significant Eurasian hegemon to worry about. Romney has cited the re-emergence of Russia as a potential threat to American interests that requires U.S. action on a substantial scale. He would also argue that should the United States determine that China represented a threat, the current degree of force being used to balance it would be insufficient. For Romney, the lessons of World Wars I and II and the Cold War mesh. Allowing the balance of power to take its own course only delays American intervention and raises the ultimate price. To him, the Cold War ended as it did because of active balancing by the United States, including war when necessary. Without active balancing, Romney would argue, the Cold War’s outcome might have been different and the price for the United States certainly would have been higher.

I also get the sense that Romney is less sensitive to global opinion than Obama. Romney would note that Obama has failed to sway global opinion in any decisive way despite great expectations around the world for an Obama presidency. In Romney’s view, this is because satisfying the wishes of the world would be impossible, since they are contradictory. For example, prior to World War II, world opinion outside the Axis powers resented the United States for not intervening. But during the Cold War and the jihadist wars, world opinion resented the United States for intervening. For Romney, global resentment cannot be a guide for U.S. foreign policy. Where Obama would argue that anti-American sentiment fuels terrorism and anti-American coalitions, Romney would argue that ideology and interest, not sentiment, cause any given country to object to the leading world power. Attempting to appease sentiment would thus divert U.S. policy from a realistic course.

Campaign Rhetoric vs. Reality

I have tried to flesh out the kinds of argument each would make if they were not caught in a political campaign, where their goal is not setting out a coherent foreign policy but simply embarrassing the other and winning votes. While nothing suggests this is an ineffective course for a presidential candidate, it forces us to look for actions and hints to determine their actual positions. Based on such actions and hints, I would argue that their disagreement on foreign policy boils down to relying on regional balances versus active balancing.

But I would not necessarily say that this is the choice the country faces. As I have argued from the outset, the American presidency is institutionally weak despite its enormous prestige. It is limited constitutionally, politically and ultimately by the actions of others. Had Japan not attacked the United States, it is unclear that Franklin Roosevelt would have had the freedom to do what he did. Had al Qaeda not attacked on 9/11, I suspect that George W. Bush’s presidency would have been dramatically different.

The world shapes U.S. foreign policy. The more active the world, the fewer choices presidents have and the smaller those choices are. Obama has sought to create a space where the United States can disengage from active balancing. Doing so falls within his constitutional powers, and thus far has been politically possible, too. But whether the international system would allow him to continue along this path should he be re-elected is open to question. Jimmy Carter had a similar vision, but the Iranian Revolution and the Soviet invasion of Afghanistan wrecked it. George W. Bush saw his opposition to nation-building wrecked by 9/11 and had his presidency crushed under the weight of the main thing he wanted to avoid.

Presidents make history, but not on their own terms. They are constrained and harried on all sides by reality. In selecting a president, it is important to remember that candidates will say what they need to say to be elected, but even when they say what they mean, they will not necessarily be able to pursue their goals. The choice to do so simply isn’t up to them. There are two fairly clear foreign policy outlooks in this election. The degree to which the winner matters, however, is unclear, though knowing the inclinations of presidential candidates regardless of their ability to pursue them has some value.

In the end, though, the U.S. presidency was designed to limit the president’s ability to rule. He can at most guide, and frequently he cannot even do that. Putting the presidency in perspective allows us to keep our debates in perspective as well.

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Syria . . . a perspective

July 11th, 2012 · No Comments · Geopolitics

The Country That Is the World: Syria’s Clashing Communities

The population of Syria is so inharmonious a gathering of widely different races in blood, in creed, and in custom, that government is both difficult and dangerous.

— Sir Mark Sykes, Dar Ul-Islam: A Record of a Journey through Ten of the Asiatic Provinces of Turkey (1904)

The mufti recounted with fondness a drive he made with his wife from Montreal via Toronto to New York in 1994. Somewhere past Niagara Falls, the couple stopped at a McDonald’s. All the seats were taken. “I was dressed like this,” the mufti said, pulling at the lapel of his robes, “and my wife was in hijab.” An American man, aged about sixty-five, got up and offered them his table. When the mufti declined, the man insisted, “I’m an American, and I can go home and eat. You are my guest.”

The gesture impressed Ahmad Badreddine Hassoun, who became grand mufti, or chief Sunni Muslim religious scholar, of Syria eleven years later: “A good human being is a good human being. I don’t know if that man was Jewish, Christian, or Muslim.”

Mufti Hassoun belies the stereotype of the Muslim clergyman. He has preached in the Christian churches of Aleppo, Syria’s second city, and he has invited bishops to speak in his mosque. His official interpreter is an Armenian Christian. “I am the mufti for all of Syria, for Muslims, Christians and non-believers,” he says, an ecumenical sentiment placing him at odds with more fundamentalist colleagues among the religious scholars known as the ulema.

The contrast with many other Sunni Muslim clergymen is stark. Another Syrian mullah, Sheikh Adnan al-Arour, broadcasts regularly from Saudi Arabia with a different message: “The problem is actually with some minorities and sects that support the regime . . . and I mention in particular the Alawite sect. We will never harm any one of them who stood neutral, but those who stood against us, I swear by Allah, we will grind them and feed them to the dogs.” Another Sunni preacher, the Egyptian Sheikh Mohammad al-Zughbey, went further: “Allah! Kill that dirty small sect [the Alawites]. Allah! Destroy them. Allah! They are the Jews’ agents. Kill them all. . . . It is a holy jihad.”

“I don’t believe in holy or sacred wars or places,” Hassoun said. “The human being is sacred, whether Muslim, Christian, Jewish, or non-believer. Defend his rights as if you are defending the holy books.” His tolerance and acceptance of the secular state in Syria have earned the mufti condemnation as a mouthpiece for a repressive regime and threats from Salafist Muslims, whose interpretation of Islam excludes tolerance of atheists, Christians, and Shiites. Yet the mufti’s views are not atypical in Syria, where Islam and Christianity have co-existed for fifteen centuries, and which the Greek poet Meleager of Gadara called, in the first century BC, “one country which is the whole world.”

The world of communities dwelling in Syria includes its Sunni Muslim Arab majority alongside a multitude of minorities: Sunni Kurds; Armenian and Arab Christians of Catholic, Orthodox, and Protestant denominations; Assyrians; Circassians; Kurdish Yazidis, with their roots in the teachings of Zoroaster; and the quasi-Shiite Muslim sects of Druze, Ismailis, and Ala-wites. The Syrian population included several thousand Jews, descendants of ancient communities, until President Hafez al-Assad lifted restrictions on their right to emigrate in 1992. The country is one of the few places where Aramaic, the regional lingua franca at the time of Christ, is still spoken. In one Aramaic-speaking village, Maalula, it was not unusual for Muslim women to pray with Christians for the births of healthy children at the convent of Saint Takla.

 

In April of this year, in both Damascus and Aleppo, the country’s two largest cities, three Sunni Muslim taxi drivers offered unprompted assessments of their Christian fellow citizens as we passed their churches. All of them said they were “very good people.” In my Damascus hotel one day, a young Muslim man was listening to the radio. “It’s not a song,” he explained, as the Lebanese singer Feyrouz and a choir chanted a cappella. “It’s church music. My name is Hussein, but I love this music.” These statements came not from officials, nor even in interviews, and indicated strong attachments to diversity within the country.

Everyone in Syria interprets phenomena and events through the prism of political loyalty. To regime opponents, all car bombs—including those that kill busloads of security forces—are planted by the regime. To its supporters, all killings—even from shells fired by artillery pieces, which the rebels do not possess—are opposition crimes. (Human Rights Watch reports offer evidence of murder and kidnappings by both sides, although the regime, with its greater firepower, has been able to inflict more damage.)

The disjunction is equally clear when it comes to minority communities. Defenders of the Assad regime claim the government protects the minorities, especially the Assads’ fellow Alawites and the Christians, against Muslim fundamentalists who would expel or oppress them if they came to power. Michel Samaha, a Lebanese politician with strong public links to the government in Damascus, calls the revolution against President Bashar al-Assad “a Salafist awakening.” Opponents insist the minorities’ security is part of the historical nature of Syria rather than the gift of the regime that came to power with Hafez al-Assad’s bloodless coup of November 1970. A Christian woman, who spent several months in prison for unspecified political crimes a few years ago, told me, “It’s wrong to say the government was helping the minorities. They are using the minorities.”

Anwar al-Bunni, a crusading lawyer released from prison in May last year after five years as a political prisoner, is a Christian whose opposition to the regime is total. His family has a tradition of resistance to dictatorship. He told me that he, his four brothers, and his sister have spent a combined sixty-five years in prison. Bunni’s offense was publicly to condemn the torture that his clients suffered. “There are thirty-seven ways to torture people in Syria,” he said in a basement office he has borrowed from a legal colleague because he cannot afford one of his own. “You cannot imagine the beatings, putting people in cold water. The German chair. This is a security force term. To crush the back, they fasten the hands and feet from behind.” He demonstrated this by contorting his arms behind his chair. “They make people stand for a week with their hands in the air.” He demanded a change of regime, saying it is too late for the regime to change itself. “I see suffering,” he said, referring to his clients. “I touch the torture. I need my children’s life not to be like mine.”

Unusually for a Christian, he did not fear Muslim fundamentalists’ taking power. “In the history of this country, there was no time Islam ruled this country,” he said, speaking of the post-Ottoman period. “In 1954, the Muslim Brothers lost the election.” Other Christians feared that, if genuine elections were held now, fundamentalists might win and deprive them of their religious and social freedoms.

When Bunni and I left the office, we drove by a vast sports complex. He told me it had recently been transformed into a security center, where some of the thirty-five thousand dissidents he believed the regime was holding were detained. It is difficult to know whether his figure is accurate. As Human Rights Watch has declared, “The exact number of those being held in incommunicado detention is impossible to ascertain given the lack of access to detention facilities.” The regime has granted the International Committee of the Red Cross access to the central prisons in Aleppo and Damascus, but other detention centers remain out of reach of international scrutiny.

 

Fear forces people into the ostensible safety of sectarian or ethnic enclaves, repeating a pattern established during the civil war in Lebanon and the American occupation of Iraq. Mixed neighborhoods, so prominent a feature of Syrian life now and in the past, are making way for segregated ghettos where people feel safe among their own. Nabil al-Sammam, an engineering professor in Damascus, recently wrote in Syria Today, “The current crisis proves that you cannot depend on the government, but only on your immediate family, your tribe, and other’s charity.” Some Christians who fled from Homs following vicious fighting there between the army and the dissident Free Syrian Army blamed Muslim fundamentalists for seizing their houses to use as firing positions, while others left because of the violence or the threat of kidnapping, rape, and murder. Alawites loyal to the regime in and around Homs stand accused of killing Sunni men and raping Sunni women, while the rebels are blamed for committing the same crimes against Alawites. The effect has been the same: to drive each out of the other’s areas and into tribal laagers that further divide the country into armed and hostile camps.

Assad’s use of the military to deal with the opposition may be working, but it has cost him support among those inside and outside the country who had hoped that he would liberalize the ossified system he inherited from his father in 2000. Shortly after the rebellion began last year, prominent Syrians in London went to Damascus to urge him to make significant reforms that would both preserve his regime and respond to the opposition’s legitimate demands for change. His subsequent speech to Parliament, in which he made no concessions, left them disappointed and baffled. The loss of their support appears less important to him than the alliances with Russia, Iran, and Iraq that he is relying on to maintain power and preserve the economy from the worst effects of sanctions.

Nabil Sukkar, a World Bank economist from 1969 to 1972 who manages a consultancy in Damascus, believes the regime is holding up economically: “We had good rainfall this year. Agriculture is twenty percent of GDP. The most important crop is wheat. We are almost self-sufficient, overall almost eighty percent self-sufficient, in food.” In addition, he says, the country’s external debt of $7 billion is only ten percent of GDP, a proportion Greece, Spain, and Italy could envy. With foreign reserves of $17 billion, the country, in his view, could go on importing for another ten months. Syria is receiving assistance from Russia, Iran, and Iraq, which helps further to ease the burden. In any case, as in Iraq from 1990 to 2003, the sanctions are affecting the populace more than the regime. Further harming the people and the economy is the endemic corruption of some within the regime, who have treated the state as their personal business enterprise to be looted at will.

Hatred of Assad’s cousin Rami Makhlouf as the primary symbol of economic corruption is not confined to the opposition. Even some of Assad’s strongest supporters have called on him to curb Makhlouf’s activities. That he has not done so to placate public opinion disturbs them as much as his initial failure to arrest the officials responsible for torturing children involved in the March 2011 demonstrations in Deraa that sparked the uprising. One impoverished man in Latakia, for the most part a regime stronghold, told the humanitarian group Khobz wa Meleh (Bread and Salt) that he would not accept their food donations, saying that “if this is from Rami Makhlouf, we do not need it.” Makhlouf lives with his wife in the Palm Springs of Syria, Yaafour, west of Damascus. Guards protect his walled estate, but when I drove past one afternoon, his wife looked like any California matron in shorts and golf cap, walking unguarded with her personal trainer on the tree-shaded streets of the luxurious suburb.

Mufti Hassoun criticizes the system that permits such unearned wealth. “A huge number of people want a change,” he says. “I don’t believe in a one-party state.” Yet his criticism of the opposition has been stronger than his criticism of the state. He has received death threats. “When I refused to leave Syria,” he says, “they threatened me on my cell phone,” referring to callers whose numbers were in Saudi Arabia. “They left messages.” When he did not answer, his enemies took their revenge. On October 2, 2011, his twenty-two-year-old son Sariya and one of his professors were driving from their university in the countryside to Aleppo when armed men fired on their car and killed both men. When the mufti recalled the murder in our conversation, he wiped tears from his cheeks: “He was twenty-two years old, a student at the university. What did he do to be killed? At his funeral, I said I forgive you all. I expected them to show remorse. They said we don’t need your forgiveness. We are going to kill you. They say this on television in Saudi Arabia, Egypt, and Britain. They say the mufti of Syria speaks of Christianity in a positive way. He believes in dialogue, even with Israelis and non-believers. He goes to churches. They say I do not represent Islam. When you say a mufti does not represent Islam, it’s a fatwa to kill him. This is the Arab revolution.”

In Damascus, I asked a friend involved in the peaceful opposition about Hassoun. She said that Hassoun’s son was, in fact, in the opposition. She assured me that the regime had killed him. When I told her that a childhood friend of his had told me Sariya supported his father and his secularism, she admitted she might have been wrong. It was only what someone had told her.

The May massacres in the Houla region near Homs of as many as forty-nine children and an estimated fifty adults, sparked accusations from both sides that the other was responsible. Because the victims were Sunni, it appeared more likely that the perpetrators were Alawites from the surrounding villages and possibly some shabiha militiamen working for the government. (The government strenuously denied this.) Although Major General Robert Mood, commander of the UN Supervision Mission in Syria, called the circumstances “unclear,” the escalation of the conflict and its increasingly sectarian coloring points toward more killings of unarmed civilians by both sides—effectively, the Lebanization of the conflict.

The unwillingness of both the regime and the armed opposition to compromise is plunging the country deeper into war. Their history has taught Syrians the danger of extremes. During the centuries of productive co-existence, there were only two outbreaks of sectarian conflict that resulted in massacres. Both took place in the mid-nineteenth century, when Christians were accumulating wealth thanks to their association with Christian businessmen from Europe. In the first, a minor incident in Aleppo in 1850 sparked a Muslim massacre of Christians and the burning of several churches. No more than a dozen Christians were killed, but many more lost property to looters and vandals. Ten years later, a similar incident in Damascus led to the massacre of eleven thousand Christians. Nineteenth-century Christians were close to the Europeans who came to dominate the country’s economic life, and today’s Christians and Alawites are seen as too close to a regime that many Sunni Muslims detest as much as their ancestors did the Europeans. Those who have done well out of forty-two years of Assad family rule now fear the revolution may end with that bloody history repeating itself.

Charles Glass was the chief Middle East correspondent for ABC News from 1983 to 1993. His travel narrative on Syria, Tribes with Flags, will be reissued this year.

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