The oil renaissance in the Western Hemisphere

Bunch of big ads run by Cambridge Energy Research Associates (CERA) in the WSJ last week. All part of its annual confab of industry biggies.

The most interesting factoid to me was the rise in liquid fuel production in the W Hem from 2000 to 2020: from 12.2 million barrels a day to 19.6.

With conventional oil decreasing in both US and Canada, the three reasons for the up-tick are "tight oil" production in the US, oil sands production in Canada and Brazil ramping up new production. US will be up over 10mbd - just barely - come 2020, with about 1/4 coming from unconventional sources.

Wikistrat post @ CNN/GPS: What Comes After Chavez?

Editor’s Note: The following piece, exclusive to GPS, comes from Wikistrat, the world's first massively multiplayer online consultancy.  It leverages a global network of subject-matter experts via a crowd-sourcing methodology to provide unique insights.

This Sunday, the historically disorganized Venezuelan opposition movement is holding its first-ever presidential primary to decide upon a single candidate to challenge long-time strongman Hugo Chavez. With regional governor Henrique Capriles expected to prevail, the aging Chavez faces a younger version of himself: namely, a dynamic rising star promising to transform the political landscape. This time, however, the figure is moving it away from the heavy-handed populism initiated by Chavez after he swept into office in 1998.

Over the course of his tenure, Chavez’s pursuit of “21^st century socialism” in Venezuela has propelled him to self-declared “president for life” status. Among his accomplishments are the systematic and brutal persecution of political opponents and critical journalists, the stacking of parliament with his supporters, various cash-payment programs to the voting poor to ensure his popularity, and - in a related dynamic - the general undermining (aka, looting) of the country’s primary economic engine, the national oil company known as PDVSA. Chavez has also turned Venezuela into one of the most crime-ridden nations in the world with the annual inflation averaging close to 30 percent.

Still, El Comandante has inspired copycat Chavista leaders in Bolivia, Ecuador and Nicaragua, and has reinvigorated Cuba’s communist dictatorship - all the best friends that money can buy.

But with the de facto dictator mysteriously seeking cancer care in Havana last year, widespread talk has surfaced that this election may well be Chavez’s last. Taking that hypothetical as our starting point, this week’s Wikistrat crowd-sourced analysis looks at what just might lie ahead for a post-Chavez Venezuela.  Here are five pathways to consider.

Read the entire post at CNN's GPS blog.

Chart of the day: Flat-liners versus climbers on L.T. energy demand

From an otherwise regurgitating Economist special report on state capitalism, a wonderfully clear chart on primary energy demand, aggregated as billion tons of oil equivalent.

Not amazing: semi-flat growth for Russia, given its demographic slide.

Impressive for US and EU: the efficiency angle keeping growth flat, despite modest economic growth and significant demographic growth for US.

Curious is Brazil's capacity to keep its curve semi-flat.

So that leaves only the two great risers as demand climbers: China's stunning trajectory and India's late-blooming-but-likely-to-skyrocket-from-that-point-on curve (India surpasses China in labor around 2030 and then grows 50% larger, suggesting it will replicate China's trajectory on some level, understanding that its energy profile could be dramatically different in those future decades).

To me, this is a great example of why the military containment strategy (keep the PLA boxed-in in East Asia is dangerous - and counterproductive.  China needs to go so incredibly global due to its energy demand that it's only natural that it build up power projection and become more contentious on the issue of energy security. America can address all that or go super-unimaginative and make it all about an arms race in East Asia, believing that we'll temper China's behavior by doing the same things we did with the Sovs in the Cold War.

But making China feel nervous at home makes it harder for it to address its growing overseas dependencies in the very same regions where the U.S. is becoming less interested in providing stability and more focused on just killing bad guys. Conceivably, our willingness to go anywhere we want, when we want, to kill anybody we want, would make the Chinese feel better about their interests in these regions. But this thin-green-line approach, augmented with the transparent encirclement strategy in East Asia, essentially works to keep China nervous on both scores by insinuating that growing Chinese military capacity is automatically bad - both at home and extra-regionally, unless, of course, the Chinese become "transparent" in the direction of the very same superpower that threatens them in their home region with its world-class military (the same one that's just declared China to be its primary force-sizing threat from here on out).

Bit much, huh?

Wikistrat's "The World According to Tom Barnett" 2011 brief, Part 6 (Flow of Security)

In this section I cover the symmetricization of the Long War, nuclear proliferation (and the lack thereof), how America shaped this world with its grand strategy, and who the key superpowers will be in the post-2030 landscape.

China will spend where it can own

It's becoming clear that China won't bail out Europe, simply because it sees no political will and has no desire to buy more Western debt.  Same will apply to US as things get worse.

What China will buy is access to stuff it truly wants: resources and management talent.  So, as the cited FT story makes clear, China is ready to invest in Brazil's new offshore hydrocarbon discoveries.

And as the Center for America-China Partnership made clear in our grand strategy agreement, China is interested in buying into US companies.

But no, it's not interested in throwing hard-earned money after bad.

WPR's The New Rules: The New World Order-After-Next

There is no faster route to second-tier great power status than for an actual or aspiring superpower to fight a crippling conflict with another country from those same ranks. Moreover, if history is any guide, the glass ceiling that results is a permanent one: This was the fate of imperial Britain, imperial Japan and Germany -- both imperial and Nazi -- in the first half of the 20th century, and the same was true for Soviet Russia in the second half of the century, despite Moscow's conflict with the West being a cold one. The lesson is an important one for Washington, Beijing and New Delhi to keep in mind in the years ahead, given that the two most likely dyads for major war in the 21st century are America-China and China-India. 

Read the entire column at World Politics Review.

The evangelical bloc . . . in Brazil!

WSJ story.

Lula does the always impressive and wins himself an additional proxy term through a hand-picked successor. Great men tend to do this, like Andrew Jackson with Martin Van Buren or TR with Taft or Reagan with George H.W. Bush.  So less a win for women (although Rousseff seems more than qualified) than a vindication of Lula's highly successful tenure.

What the article highlighted, though, was the important role played by the rising Protestant/Pentecostal voting bloc, now powered by about 1 out of every 5 Brazilians.   They won 50% more votes in the congressional election than last time, and now claim 71 of 600 seats there. Yes, they do tend to the right on social issues, and make themselves known when they unite as a bloc within the congress. 

Remember my theme:  the 21st century will be the most religious ever in terms of great awakenings.  Why?  So many people shifted from substenance to abundance, so much industrialization/urbanization uprooting lives, so much connectivity afforded by globalization, and some pretty big human milestones coming (peaking of human population around 2050, serious life-extension technologies, etc.).  

The evangelicals were considered crucial for Dilma Rousseff's second-round win over her opponent.  When it came down to the binary choice, she scored better with Pentecostals (mostly on economics and the other guy was more anti-abortion) and her campaign actively sought to mobilize them.  

Much like the rising Hispanic quotient here in the U.S., this election in Brazil signals a tipping point, after which no one will run for, or likely win as, president without going hard after this vote.

This week in globalization

Clearing out my files for the week:

• Martin Wolf on why the US is going to win the global currency battle:  "To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US."  We win because we have infinite ammo.  But better that we come, per my Monday column, to some agreement at the G-20. 

• Sebastian Mallaby, also in FT, says that, despite the current currency struggles, the "genie of global finance is out of the bottle" and not to be stuffed back in.  Wolf had noted $800B capital inflows to emerging markets 2010-2011, which is gargantuan, thus the crazy struggle of some places to keep their currencies low.  As for America stopping China from buying US bonds in retaliation for our not being able to buy Chinese assets?  China holds only about one-third of the US T-bonds abroad ($3T total), so it can buy all its wants from others in the system.  There is no turning back, he says.

• Meanwhile, the Pentagon makes plans to turn back the clock on the globalization of defense manufacturing.  A new spending bill provision--inserted at DoD's request--includes the power to exclude foreign parts suppliers (read China). Just about every US-based defense firm uses offshore suppliers, so this is going to get very expensive very fast.  It'll be a lot harder to find that $100B in savings over five years. This is almost a fifth generation warfare version of shooting yourself in the foot--first, before the other guy can.  China does nothing here, that frankly we shouldn't be able to handle, but we move down a path that instantly adds a significant tax to everything we buy in the growing-by-leaps-and-bounds IT realm.  One hopes there's a half-billion for that American rare earths mining co. that's looking for a new investor.  Interesting how China's becoming vulnerable to, and dependent on, so many unstable parts of the world for resources, and we're going to cut off the tip of our IT nose to spite our face.  I can imagine a cheaper way, but that would be so naive in comparison to spending all this extra money.

• China continues to buy low, as a ruthless capitalist should. Giving us a taste of what it could be like if we don't get too protectionist, it's buying up Greece's "toxic government bonds."--and plenty more in Europe. All of the EU is getting a taste, says Newsweek, as Chinese investors are snapping up bankrupt enterprises and--apparently--putting people back to work.  China also, like a ruthless capitalist, seeks to make bilats reduce the chance of EU-wide restrictions on its trade. Old American trick.

• Another sign of globalization on the march:  emerging economies buying up food and beverage companies in the West that would otherwise naturally be targeting them for future expansion. Bankers expect the trend to continue.  Gotta feed and water that global middle class that keeps emerging at 70-75m a year.  Emerging economies are buying up the companies from equity firms that had previously bought them during down times.

• Great FT story on how Turkey has the Iranian middle class in its sights.  Long history of smuggling inTurkey dips a toe in, would like to drink entire tub eastern Turkey.  Sanctions hold up what could be a major trade, so the black-marketing local Turks mostly smuggle gasoline--and a certain amount of heroin.  But the official goal is clear enough:  be ready to take advantage whenever Iran opens up.  A local Turkish chamber of commerce official floats the notion of a free trade zone at the border. Those 70m underserved Iranian consumers beckon.

• Bloomberg Businessweek stories on how China's working aggressively to get western technology and cooperation to allow it to work its significant coal-bed and shale gas reserves.  Russia's exporting nuclear reactors like nobody's business, and Mongolia's beginning a long boom as "one of the last places on earth with huge, untapped metal ore resources" (guess who's showing up in numbers--with cash).

• India's airline industry can't keep up with demand generated by itsGet me planes and pilots--now! booming middle class. Boeing says Indian airlines will buy over 1,000 jets in the next two decades. Already they're forced to have one-in-five pilots be foreigners.

• Fascinating WSJ story on how China's car economy is going wild, with ordinary Chinese exploring the freedom of the road.  Drive-in service is taking off, weekend jaunts mean hotel business, etc. In past visits I saw a lot of this coming down the pike.  Just like when America's car culture went crazy after WWII, this is a serious social revolution.

Don't forget your meal of eternal happiness!

• "Brazil and China banks join list of world's top credit card issuers."  And so it begins.

• Funny thing about all this South China Sea hubbub: "Corporate ties linking China and Japan have never been stronger," says the WSJ.  Serious driver?  Japan is exporting its mania for golf to China--the fastest growing market for the sport.  It's what middle-class guys do.

Coming soon: the "golf wars"

• WSJ story on Vietnam creating its own Facebook to keep a closer eye on its netizens.  Defeat the anti-capitalist insurgents!What caught my attention: "The team has added online English tests and several state-approved video games, including a violent multi-player contest featuring a band of militants bent on stopping the spread of global capitalism."  I would say we finally won the Vietnam War.

Does China rebalance the world economy in its search for resources?

FT full-pager analysis definitely worth a read.

It explores the notion that China's reach for raw materials around the planet is creating such a self-sustaining bond between Asia and Latin America/Africa as to constitute a real rebalancing in the works--truly post-American consumer, so to speak.

China's outbound FDI was about $5B in 2003.  By 2013 it could be $100B, with two-thirds staying in Asia (a pattern found among all Asia states), one-sixth going to LATAM and presumable most of the rest going to Africa.  On this basis, China comes out of nowhere to become Brazil's biggest trade partner and--next year--its biggest foreign investor (filling up all those CHINAMAX mega ships with iron ore and what not).

Meanwhile, with China experimenting through Hong Kong with letting foreign companies hold and thus settle their business with China in yuan, Beijing is described--accurately I think--as rerunning the same strategy they pursued with the US over the previous three decades:  recycling the trade surplus back into the partner's financial nets so as to stimulate further demand of Chinese exports.  In effect, that means China will run up trade surpluses with a lot of poor countries just like it did with rich America.  We'll see how that works in terms of triggering a political backlash.  My guess is that it won't run three decades before China feels the friction.

And yet, is this not what we asked for?

Well, not exactly.  What we really wanted was for Asia's stubborn trade surplus with America (ably consolidated by China over the past two decades) to shift over into something far more even. This isn't happening, in large part because China seeks to have its cake (surplus with America) and eat it too (replicate it across the Gap).

The one good thing:  by slowly increasing the circulation of the yuan, Beijing progressively loses control of its exchange and interest rates, meaning it becomes harder to "cheat" through monetary means.

Charts of the day: Brazil as rising ag superpower

Economist briefing:  Two compelling take-aways are that Brazil has more potentially farm-able land than anybody in the world and that it's successfully raising its productivity on the land it's using.

The Gap is Asia's to shrink economically

image here

Bloomberg Businessweek with goofy title (Really?  The new silk road doesn't lead to the U.S.?  Wow!  I would have expected otherwise, given our geographic position on the planet.)

All this piece confirms is that the economic integration and development of the Gap will be done primarily by the New Core--not the Old.  That's something I've argued for many years now.  It just makes sense:  the last in, the next integration begin.  Think of it as a staircase:  the higher up you are in the production chain, the less sense it makes for you to be the primary agent of slotting in those who come immediately behind you.

So Europe slotted in North America way back when, then we did the same to Asia and the ABCs of Latin America, and now they do the same to the Gap.

As one expert is quoted in the piece, "We saw the same phenomenon with American and European companies 100 years ago."

Yes, this all means more competition for markets and resources for companies across the Core, but the best of the Old Core's companies will clean up nicely--like a Caterpillar.

A good byproduct:  as the New Core-Gap trade explodes, more of it will be done in currencies other than dollars and euros, and that's a good disciplining pressure on the Old Core--especially the US.

BP's disaster alter Brazil's future

One big casualty of the BP disaster in the Gulf:  Brazilian estimates of how easy it’s going to be to tap that huge oil find off its coast.   Insurance goes up, as will regulations, as will safety margins in general.  Worst, the whole planning process currently underway has seen a huge injection of uncertainty added to the mix, especially since the technological challenges of the Brazilian fields significantly surpass those of Gulf wells (deeper drilling and further out at sea).

Brazilian regs on deepwater drilling are already viewed as more stringent than those of the US, but many in the industry wonder if the NOC (national oil company) in question, Petrobras, is really up to the challenge.

The market seems skeptical:  of the global majors, Petrobras’ stock is the second-worst performing this year, trailing only that of stricken BP.

Brazil pushes the soft power

Economist story on Brazil's punching-above-its-weight approach to foreign aid:

ONE of the most successful post-earthquake initiatives in Haiti is the expansion of Lèt Agogo (Lots of Milk, in Creole), a dairy co-operative, into a project encouraging mothers to take their children to school in exchange for free meals. It is based on Bolsa Família, a Brazilian welfare scheme, and financed with Brazilian government money. In Mali cotton yields are soaring at an experimental farm run by Embrapa, a Brazilian research outfit. Odebrecht, a Brazilian construction firm, is building much of Angola’s water supply and is one of the biggest contractors in Africa.

Without attracting much attention, Brazil is fast becoming one of the world’s biggest providers of help to poor countries. Official figures do not reflect this. The Brazilian Co-operation Agency (ABC), which runs “technical assistance” (advisory and scientific projects), has a budget of just 52m reais ($30m) this year. But studies by Britain’s Overseas Development Institute and Canada’s International Development Research Centre estimate that other Brazilian institutions spend 15 times more than ABC’s budget on their own technical-assistance programmes. The country’s contribution to the United Nations Development Programme (UNDP) is $20m-25m a year, but the true value of the goods and services it provides, thinks the UNDP’s head in Brazil, is $100m. Add the $300m Brazil gives in kind to the World Food Programme; a $350m commitment to Haiti; bits and bobs for Gaza; and the $3.3 billion in commercial loans that Brazilian firms have got in poor countries since 2008 from the state development bank (BNDES, akin to China’s state-backed loans), and the value of all Brazilian development aid broadly defined could reach $4 billion a year (see table). That is less than China, but similar to generous donors such as Sweden and Canada—and, unlike theirs, Brazil’s contributions are soaring. ABC’s spending has trebled since 2008.

"Far reaching implications" are explored in the piece, but hard to see anything but pure upside for the system. China can use the competition, and whatever Brazil's ambitions are, its heart is in the right place.

Biggest worries are that the aid flow is growing too much too fast.

Chart of the day: Poverty reduction in Brazil in the age of globalization

Economist story on Dilma Rousseff's apparently successful job to win the presidency in Brazil on Lula's coat-tails.

Taking a lot at the chart, it's easy to see why that strategy should work.

Proof positive:  opening up to markets and globalization can reduce poverty while not increasing income inequality.

Yes, the inequality is still high in Brazil by international standards, but the poor are increasing their income faster than the rich, and that's a success story no matter how you slice it.

The article says, region by region, inequality is also decreasing.  Just over half of Brazilians now sit in the lower-middle class.

Another take on cleaning up Brazil's favelas with better policing

Economist story.

Starts with "City of God" (2002) film reference to Rio's rundown Cidade de Deus housing project, where a gang of drug traffickers kept 60k residents in lives of constant fear.  The film cemented Rio's reputation for lawless favelas (a Brazilian term for tightly-packed slums), as well as its sad decay after the country moved the capital to Brasilia in 1960.

With the Olympics teed up for 2016, Rio now seems to be undergoing a renaissance:

Last year the police tool control of Cidade de Deus--this time for keeps, they say.  A force of 318 officers, backed by 25 patrol cars, is based in a new community-police station in a side street between two fetid, litter-strewn drainage channels.  The result has been dramatic.  IN 2008 there were 29 murders in Cidade de Deus.  So far this year there has been just one . . . Other crime has fallen too.

A key factor:  getting all levels of government to chip in and double the salaries of front-line cops. The focus: to formalize the existing economic activity with legality and infrastructure.

Sounds like your basic COIN, yes?

The external driver:  Rio becomes the hub for off-shore oil development of that huge oil field just found, plus there's those Olympics and all the construction triggered.

Rio has a ways to go, but the trend is positive.

Brazil targets Africa . . . with media!

Outgoing Brazilian president Lula da Silva announces that TV Brasil, a Portuguese-language network will target former Portuguese colonies in Africa (there are a bunch) via rebroadcast through Mozambique.  In all, 49 nations will be targeted (out of 55 on the continent or on neighboring islands).  

Lula presents this as a pure soft-power play:

I want a channel that speaks well of the country, that can show Brazil as it really is.

The biggest draws will be Brazilian soccer and soap operas, which already have a large following there. These two are big media draws in the Western hemisphere as well.

The BRIC car market: zero to 60

chart here

FT front-pager.

Brazilians per car sat at 9.1 in 1997 and is expected to drop to just 4.3 by 2014, meaning by then everybody ought to be able to fit in a vehicle!

VW, GM and Fiat all with about 1/5th shares, Ford at 1/10th.

When Brazil passes Germany (possibly this year), it'll be:

1. China
2. US
3. Japan
4. Brazil
5. Germany.

GM expects 5% annual growth for next five years, with some thanks due to World Cup 2014 and Olympics 2016--the kind of things that define New Core membership along with lots more cars.

Fascinating piece by Matt Armstrong in WPR on next-generation UN peacekeeping

 The starting premise intrigues:

A subtle evolution of United Nations peacekeeping operations is underway. If the first of these missions kept an agreed-upon peace, and later missions sought to make peace, several countries now use these operations to advance their foreign and economic policy agendas, and raise their global profile. This shift, selective as it is to date, may potentially raise the standard of conduct in U.N. peacekeeping operations increasingly fraught with charges of criminal behavior, corruption, lack of accountability, and general ineffectiveness. However, there are significant downsides to this approach. 

China, Brazil and India are thereupon presented for being "well-positioned to leverage this new facet of peacekeeping."

Some cool background precedes the country analyses, to include the factoid that, "Since 2001, more than half of all U.N. peacekeeping forces have come from seven countries: Pakistan, Bangladesh, India, Nigeria, Jordan, Nepal and Ghana."  Body-intensive operations, occurring at heightened frequency, means the UN ends up turning to cheaper militaries--in every sense--that are rich in numbers.

Africa, we are told, is China's primary target for public diplomacy through peacekeeping.  I myself have been surprised, whenever I met with Chinese military officers, how many of them have done time on the continent. It is really viewed as a prime operational experience.  True to form, the Chinese provide purely SysAdmin troops (docs, police, observers, engineers) and no combat-capable personnel.  China explicitly explains its expanding role as filling the vacuum created by the decline of Western military participation in such peacekeeping ops.  

As natural as the day is long to me.  You go with the frontier integrators of the age--not last century's version.

Brazil is presented as seeking more peacekeeping roles as part of its long campaign to win a permanent seat in the UN Security Council, although the geographic purview of its participation remains tight on LATAM.

India, a long-time supplier of peacekeepers, is presented as lacking the tight strategic focus of China--as in, it's not yet sure what it wants to become as a great power.

Conclusion:  mostly upside for the UN with some danger that rising great powers will pick only their preferred missions.

Smart piece.

Brazilian favelas: subject to modern COIN reformating?

By way of Craig Nordin, a post on Tech Crunch by Sarah Lacy.

Gist:

While it’s hard to match the lack of infrastructure like water and sewage systems in an Indian slum, there’s little that can compare to the violence of a Rio favela. So it was understandable, as I entered a Rio favela a few weeks ago that my guides kept impressing on me that a year ago I couldn’t under any circumstances have come here. One year ago, a cab wouldn’t have taken me here. One year ago, no one would even deliver pizza here.

What’s changed in a year? Specifically, the city is doing something about the problem, embarking on a project of “pacification.” As it was explained to me, newly-trained, SWAT-style cops take each favela back, driving out the drug dealers, by any means necessary, in a recognition that the situation isn’t just a bad neighborhood, it’s an urban war-zone. Being new to the force, these police officers have a clean slate with the residents of the favela, and so are able to continue to protect it, keeping the peace. So far, eight favelas have been pacified. Residents I spoke with talked about the relief of being out from under the daily violence: Suddenly they can be a part of the city. But many are still wary. “This is the best I’ve seen the community in a long time, but I’m still scared,” said Nivea Mendes of the pacified favela Babilonia. “Very few people trust the government. They are just out for an election. I’m still skeptical.” Put another way, even though they’re physically gone, the drug dealers still have power in these neighborhoods—for now.

There’s another tactical problem with pacification that never would have occurred to me: Violence aside, the move basically shoved the richest people – the criminals -  out of the favela, creating a need for a new livelihood for merchants and survival-level entrepreneurs (like the boy to your right and his family) in these neighborhoods. This is where technology is coming in.

For more than ten years a non-profit organization called CDI has been giving favela residents a different kind of freedom, setting up computer labs and offering training in everything from basic computer services to IT skills.

What caught my eye:  this is peacetime COIN or SysAdmin at its best.

Chart of the day: Brazil's PAC-2 infrastructure program

Earlier this spring Luiz Inacio "Lula" da Sivla, outgoing president of Brazil, announces the second phase of the government accelerate growth program (PAC2).  First phase (2007-2010) was for half a trillion.  Didn't meet all its targets, but met plenty and was significant factor in Brazil's growth.  With PAC2, investment as a percentage of GDP rises from just under 17% to above 21%.

The key bottlenecks are electricity and roads.  Of the 1.6km of highways, only 12% are paved.  Moving stuff on unpaved roads costs, on average, one-third more.  At 8.5m square km, Brazil is close to the size of the US and China (both roughly 9.5m square km).