Sunday, June 04, 2006
Azerbaijan, the Clinton administration, the non-fortunes of Exxon stockholders, and the dangerous myth that America wants to "grab the oil"
Gasoline prices are high, at least by the absurdly cheap levels that have prevailed for most of the past twenty years. They will be lower again someday -- I speculate that they may once again drop below $2, at least in constant dollars -- but not before the next American election. As surely as the sun rises in the east, high gasoline prices make for the bashing of oil companies for profiteering and other unnamed economic crimes. Never mind that these accusations -- which have become routine -- make no economic sense. Never mind that oil industry employees and operations executives risk their lives to discover and extract oil -- both physically and politically -- from some of the most dangerous and revolting countries on the planet.
And never mind that the people who will do the most bashing have done their bit to help those companies in the past.
Last night I was making my way through Robert Baer's highly entertaining See No Evil: The True Story Of A Ground Soldier In The CIA's War On Terrorism
Aliyev started the conversation with a rambling account of the failed March 1995 coup, the one the CIA suspected Prime Minister Ciller had a role in. According to Aliyev, just about everyone was involved, from Russia to Turkey. He even named some Azeri dissents living in the U.S. I took notes for a while but lost interest as Aliyev waded deeper and deeper into the details; anyhow, I was half asleep. My interest perked up, though, when Aliyev brough up Exxon and Iran. I noticed Aliyev himself became more animated. There was even a trace of anger.
"You know, gentlemen, I am ready to help the United States and its oil companies, but I expect you to live by your bargains."
Aliyev looked around the room. It was clear no one knew what he was talking about.
Aliyev filled us in. In March 1995 he had received a call from the State Department's undersecretary for economic affairs, Joan Spiro. She said he was speaking in the name of Secretary of State Warren Christopher. In unmistakable terms, Spiro threatened that if Azerbainjan wanted to maintain good relations with the U.S., Aliyev would have to give Exxon its 5 percent. When Aliyev countered that he would face a lot of heat from Iran, Spiro brushed it off: "Don't worry, you'll get help." The next call was from Deputy Energy Secretary Bill White. White also insisted on Exxon's 5 percent. When Aliyev again mentioned Iran, White said, "We'll take care of it, just make sure Exxon gets its deal."
"So now that Exxon has its five percent, what are you going to do about Iran?" Aliyev asked. "I share a long, porous border with that country."
Listening to Aliyev, I found it hard to avoid the conclusion that the Clinton administration was pimping for Exxon. Naif that I was in the ways of the White House, I had assumed that the job of the government was to back U.S. business in general but never a specific company, especially when other American oil companies, including Mobil, gladly would have taken the 5 percent and probably paid even more for it.
After it broke in the press that Tony Lake and his wife had skirted the law by holding on to $304,000 in energy stocks when he was appointed national security advisor, I wondered if Lake had anything to do with Spiro's and White's calls. If so, the tension at home must have been thick enough to cut: Lake owned Exxon stock, while his wife held Mobil.
Context
The Clinton administration was famously concerned with the price of gasoline, to the point that he may have reined in the investigation into the 1996 attack at Khobar Towers because he did not want to rile the Saudis. Clinton advisor Dick Morris:
Clinton was obsessed with gas prices. We would talk about them all the time. Every poll probed the issue and measured the level of popular animosity over their increase and the extent to which Clinton himself was blamed. When we were alone in the White House, after the staff had been put to bed, Clinton would ask my advice on the issue and we would discuss the need to get the Saudis to increase petroleum production.
In direct and indirect ways, Clinton sent messages to the Saudi monarchy: If you want to help me, you'll increase oil production and hold down prices. When oil production rose and the price began to level off as the summer faded and then return to normal, the president was very relieved.
Until Freeh spoke out, I didn't know that Clinton had failed to press the Saudis to let in the FBI. But his reasons for not doing so are quite clear. For him to have picked up the phone and demanded that the Saudis let the FBI question their suspects would have risked annoying them by implying skepticism about their toughness on terrorism. And Clinton could not risk alienating Riyadh.
So even as Clinton was mouthing his determination to find those responsible for the Khobar Towers bombing, he was sending the Saudis a message, by his refusal to make the phone call, that Freeh's demands were not his top priority, gas prices were.
Exxon and Mobil merged in 1998, presumably resolving the imagined financial conflicts inside the Lake marriage. At that time, the combined market capitalization of the two companies was approximately $240 billion.
Azerbaijan is no democracy. Heydar Aliyev was succeeded by his son, notwithstanding American pressure for honest and open elections. Azerbaijan has in its foreign policy balanced between Russia, which is opposed to an actual American military presence in that country, its concern over Iran, and its ability to leverage both its geography and its oil to secure American help against both. That having been said, Azerbaijan is a member of the "Coalition of the Willing" in Iraq, and in that regard is an open supporter of American policy in the region.
Commentary
While America has a strong national interest in the continuing flow of oil into the international market, it is hard to detect a principled reason for any American administration to lobby on behalf of American integrated oil companies over foreign ones. It is even harder to imagine why an administration might prefer one American company over another equally American company.
Now, the oil business is extremely competitive, dangerous, and politically complex. It is obvious why Exxon would pull the strings at its disposal to push for a concession at Mobil's expense. The question is, why would the Clinton administration care? Baer's suggestion that it had something to do with Tony Lake's ownership of a small number of Exxon shares does not make any sense -- the appreciation expected from the announcement of the Azerbaijan deal on a couple of hundred grand would have been inconsequential, even to a poor Democratic national security advisor. More likely, Exxon played the better Washington game, broadly defined, to induce the Clinton administration to make a "pie crust promise" -- that it would "help" deal with Iran in return for directing the first Azerbaijani concession to Exxon (probably the top row on this table).
In any case, the Azerbaijan deal was hardly a bonanza for Exxon. Exxon stockholders did do a bit better than the Dow Jones Industrial Average between the signing of the concession on September 30, 1994 and the end of that year -- they were up about 7%, and the DJIA was virtually flat. But Chevron -- which was not in the Azerbaijan deal -- was up more than 8% during the same period, as were most other integrated oil companies.1
What actually was the Clinton administration's policy toward Azerbaijan at the time of Robert Baer's visit? See this Woodrow Wilson School policy paper(pdf), which describes the policy objectives of the United States, as determined by the National Security Council, in the spring of 1995:
The Deputies Committee, a group consisting of high-level department and agency officials and chaired by then Deputy NSC Advisor Sandy Berger, met during the spring and issued policy guidance recognizing the importance of the Caspian oil reserves and the need for greater U.S. attention to this issue. The Deputies committee agreed on the policy objective of “multiple pipelines” (discussed below)and called for the convening of an interagency group to be directed by Berger, which would manage the implementation of U.S. policy on the Caspian Sea. As this interagency group surveyed the implications of the direction and placement of possible Caspian pipeline routes, the U.S. national interests in the issue quickly emerged. They can be enumerated in the following manner:1) Strengthening the sovereign independence of Azerbaijan and its fellow newly independent states bordering the Caspian Sea and, conversely, reducing Russian influence over a traditional “sphere of influence”.
2) Promoting a westward orientation of Azerbaijan and the other Central Asian states and creating a regional framework of cooperation with Turkey, the primary U.S. ally and NATO partner in the region. The states of Central Asia have lived under the predominant cultural influence of Russia for most of the 20th century. As they emerge from under the shadow of Moscow, Azerbaijan, Kazakhstan, Turkmenistan and other Central Asian states can use three models for guidance: the benign authoritarianism of Russia, the Islamic fundamentalism of Iran, or the secular Western outlook of Turkey. Clearly, the U.S. supports the final approach for Central Asia, because it coheres with American values and it offers greater influence for Turkey. Indeed, the Clinton administration views the construction of one or more export pipelines through Turkey as vital to its ally’s future economic stability and Western orientation. By playing host to pipelines, Turkey would accrue significant revenues through the collection of transit fees and other payments. Moreover, Central Asia offers a safe alternative in regional integration for Turkey in the event that the European Union continually rebuffs Ankara’s bid for membership.
3) Diversifying the world’s energy supplies, including reducing global overdependence on the oil reserves of the Persian Gulf. The accelerating world-wide demand for oil, especially in the surging economy of China, will likely renew concern over the excessive Western, especially European, reliance on the Persian Gulf for its energy resources. Secure Western access to the Caspian Sea oil deposits, even if they do not match the high estimates made at the beginning of the 1990’s, will offer an alternative energy source and reduce the strategic significance of the Persian Gulf for the U.S.
4) Excluding Iran from any access to the economic benefits of regional development, based upon the firm U.S. containment policy against Tehran for its support of terrorism and attempted acquisition of weapons of mass destruction. In Congressional testimony, Deputy Secretary of State Strobe Talbott declared,We continue to caution nations throughout the [Caucasus] region about the development of close relations with Iran. As a state-sponsor of terrorism and a nation bent on the development of weapons of mass destruction, Iran still poses a threat to all its neighbors. Moreover, we are against any state in the region being allowed to dominate the region, politically or economically. We will continue to work with all the states of the Caucasus to thwart the growth of Iran’s influence in the region.
5) Advancing U.S. corporate interests in the region. Every major oil company in the world is jockeying for a share of the Azerbaijani and other Central Asian oil production once it comes fully on-line during the next decade. The White House, using its leverage to the extent possible, wants to ensure that American companies receive a fair shot at all tendered contracts.
The advancement of U.S. corporate interests -- separately and distinctly from insuring the flow of oil from diversified sources -- was, in fact, a specific objective of the Clinton National Security Council. For the life of me, I cannot understand why the people charged with our national security should view getting business for American companies to be part of their brief, but they quite explicitly did under Clinton. If there has been a similarly explicit initiative under the present administration, I am sure that our regular lefty readers will tell us about it.
In any case, what are the dangers in declaring that the advancement of U.S. corporate interests -- as opposed to our general interest in keeping the oil flowing -- is a national security objective? Those corporate interests then become leverage in the hands of our enemies, which makes them more vulnerable, not less. From the same Princeton policy paper (pdf):
This increasing military-to-military cooperation between the U.S. and Central Asian states is raising some concerns that Washington may be promising too much and will not deliver on its rhetoric in a genuine crisis. The deputy economics minister of Azerbaijan declared earlier this year, “When Iraq invaded Kuwait, remember what the United States did and why,.....the Americans went to war because the U.S. had oil interests there”.
If our own government conflates our general interest in seeing that oil reaches the world market with a specific interest in seeing American companies profit, we create the dangerous impression that we are interested in the ownership of oil, in addition to a robust market in the trading of it. That impression puts the assets of American companies in jeopardy and it sullies American foreign policy with the odor of mercantilism. The opponents of the war in Iraq have exploited this impression, which was explicitly promoted not by the Bush administration but by its Democratic predecessor, to undermine the credibility of Operation Iraqi Freedom.
The Clinton administration obviously did not invent the idea that the U.S. government should promote the interests of American multinationals. It did however, extend the tradition by making it explicit American policy articulated by the National Security Council, complete with hints at military guarantees. How often do we see the press making this point when they publish the claims of the left and other anti-Americans that the purpose of the war in Iraq was to "grab the oil"?
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1. In any case, these above-market gains in late 1994 were ephemeral. How have Exxon stockholders faired since the merger with Mobil in 1998? Today the market capitalization of ExxonMobil is $373 billion, a compound rate of increase of 6.22%. Throw in the dividend, and XOM stockholders as a class have earned less than 10% a year since the merger. Now, people who have held XOM stock throughout this period have done somewhat better -- they are up about 10% per year before dividends. The price of the individual shares have gone up faster than the total market capitalization because XOM has been buying in its shares in addition to paying cash dividends. It is, in effect, liquidating, which is why individual stockholders can do much better over time than stockholders as a class.
10 Comments:
By 
Admin, at
Sun Jun 04, 01:35:00 PM:
with the exception of very few politicians, democrat or republican, both are entrenched in a paradigm that will soon shift.
gasoline below $2.00 a gallon? i'll come on board and make my prediction - never again.
interesting read, tigerhawk!
grab the oil - prop up the oil tyrants, as long as they friendly to us.
grab the oil - means disposing the oil tyrants if they not friendly to us.
=/
By TigerHawk, at
Sun Jun 04, 02:00:00 PM:
See, I don't get how "grabbing the oil" means "disposing the oil tyrants if they not friendly to us." Our only concern should be that the oil flows into the world market. Clearly, the best path to lower gas prices, at least in the short term, is to lift sanctions no matter how sleazy the regime. A cynic would even say that is why the Clinton administration did not twist more arms to stop the smuggling of Iraqi oil through Turkey and Jordan, and why it supported the Oil-for-food deal. History may yet reveal the invasion of Iraq to be the catastrophic mistake that its critics claim it is -- I doubt it, but I cannot deny that it is possible. There is just no way, though, that ownership of oil per se was a significant motivation.
By TigerHawk, at
Sun Jun 04, 02:03:00 PM:
As for our dueling predictions on the price of oil, I believe that there is a huge geopolitical risk premium built into the current price. Every time there is even a glimmer of hope in the standoff with Iran the oil price drops a few bucks. If the United States adopted a pro-conservation national policy -- even if it enacted a $0.10/gallon federal gasoline tax increase -- the price decline would be dramatic.
I have even put my money where my mouth is. If you want a nice conservative bet that the price of oil will decline, buy JBLU, which will double if oil drops back below $50/barrel.
By Dawnfire82, at
Sun Jun 04, 02:17:00 PM:
Wow, it turns out that American policy really is "all about the oil" and "securing the wealth of the corporations," a la Team America. But not from the administration I've always been told to expect.
*looks into becoming a hippy*
By Admin, at
Sun Jun 04, 08:23:00 PM:
i believe it was vice president cheney who said something to the effect of "conservation has no place in an energy plan."
one of the issues of price relates to number of new nations whose economies are booming, say india and china.
there is only a limited amount of oil that can be taken out of the ground on any given day; unfortuately for the everyone, this causes the price to rise.
my bet is that it will only rise further.
peak oil is a non partisan issue, our nation has been ignoring the evidence for 30 years, liberal and conservative, democrat and republican.
we need to invest heavily in clean burning coal technology for our railsystem, as well as revamping what we have let go practically to ruin.
By TigerHawk, at
Mon Jun 05, 11:07:00 AM:
I get nervous when we pick and choose technologies -- if the last twenty years is any indication, we really have no idea how the energy economy will play out in the long run. In my opinion, the role of government should be to break down barriers to innovation. We need to make it vastly easier to develop new energy infrastructure. One should be able to build and license a nuclear power plant -- heck, any power plant -- without a lot of local interference. Same for wind farms. We should take a less ideological view of hydroelectric power. We should eliminate subsidies for agriculture, which may tend to shift some food production offshore to less energy intensive countries. We should "require" states to develop comprehensive reformed zoning laws that emphasize mixing commercial and residential use. We should give communities incentives to encourage the use of bicycles, Segways or even mopeds for local travel. I also believe that we should impose a small incremental gas tax that increases by a small amount every year for the next, say, twenty years. Perhaps a $0.20 gallon new federal tax, increasing by a nickel or a dime every year for an extended period. I think that would be largely "free" to consumers, because it would send a strong signal to the oil markets that the United States was finally getting serious about cutting petroleum consumption. My guess is that there is more than $20 in speculation and risk premium in the current price of oil, and that prices would fall significantly if the political and geopolitical climate changed.
By 
, at
Mon Jun 05, 03:59:00 PM:
Where do you ghet the idea that a surcharge on gas at the gas tank will reduce the price of gas. Unbelievable.
The only thing which will reduce the price of gas is reduced consumption. Any reduction in useage by the US will be more than made up by the increasing use by countries like India and China.
We need to drill off our coasts and in ANWR. The availability our own oil may have a small effect on price but more importantly this will reduce the effect of any attempt on the part of OPEC to use the price of oil to blackmail us.
We can use the breathing space provided to more fully expore or just change the energy infrastructure to a different energy supply.
By , at
Mon Jun 05, 04:01:00 PM:
PS:
Left out of the energy equation is portability of supply. There are few energy sources as portable as oil.
By , at
Mon Jun 05, 04:10:00 PM:
I apologize for the spelling errors in my earlier post.
Where do you get the idea that a surcharge on gas at the gas tank will reduce the price of gas. Unbelievable.
The only thing which will reduce the price of gas is reduced consumption. Any reduction in usage by the US will be more than made up by the increasing use by countries like India and China.
We need to drill off our coasts and in ANWR. The availability of our own oil may have a small effect on price but more importantly this will reduce the effect of any attempt on the part of OPEC to use the price of oil to blackmail us.
We can use the breathing space provided to more fully explore or just change the energy infrastructure to a different energy supply.
By TigerHawk, at
Mon Jun 05, 08:09:00 PM:
davod -
At the moment, I guess -- and I admit that it is a guess -- that there is maybe $20 of speculation/political risk premium in the price of a barrel of oil. I think one of the reasons for this is that the United States is seen as lacking the political will to do anything about the supply of petroleum. If we do something durable to increase the supply of petroleum, I think the market will take out a big chunk of that premium.
Now, the next question is, what constitutes increasing the supply of petroleum? If the supply increases more slowly than the demand, the fact of the increasing supply won't reduce the price. Similarly, if demand falls faster than supply falls, the price will decline notwithstanding declining total production.
So, the trick is to increase the supply relative to demand.
I'm all for generating increases in the supply of petroleum. By all means, pump the ANWR. I'm not too wrapped up in this issue, because I am highly confident that we are going to pump the ANWR someday -- the oil will be there whenever we decide to take it out. But do it now. Fine.
But, and this should be obvious to everybody, the cheapest and easiest way to increase supply, at least compared to the present position, is to reduce total demand. We can probably achieve a 5% decrease in demand for gasoline (a subset of petroleum, to be sure) without having the slightest impact on the economy. We don't, because gasoline remains dirt cheap as a relative value, even if it has risen significantly in price recently.
So, yes, I think that if the United States sent a strong signal that it was going to increase the relative supply of oil by (i) boosting production in heretofore off-limits areas and (ii) taking small but permanent steps to reduce demand, the speculation premium would shrink and the price of oil would fall dramatically -- perhaps down to $50 or less.
