The Oil and the Glory

The Weekly Wrap — Sept. 9, 2011

Osama, Obama and Uzbekistan [This item has been updated with an interview Saturday with a senior Obama Administration official]: The Obama Administration, concerned about extreme tension with Pakistan since the May killing of Osama bin Ladin, has significantly shifted military supply lines for Afghanistan to Central Asia, say people with knowledge of the move. A ...

Mikhail Mordasov  AFP/Getty Images
Mikhail Mordasov AFP/Getty Images

Osama, Obama and Uzbekistan [This item has been updated with an interview Saturday with a senior Obama Administration official]: The Obama Administration, concerned about extreme tension with Pakistan since the May killing of Osama bin Ladin, has significantly shifted military supply lines for Afghanistan to Central Asia, say people with knowledge of the move. A senior Administration official tells me that just half of Afghan-bound U.S. military cargo now moves through Pakistan, down from 80 percent, with the other half now moving through Central Asia. But critics are assailing what they say is the result — that the U.S. is cozying up to Uzbekistan, whose ruler, President Islam Karimov, has a long record of brutality.

The backdrop is that the Bin Ladin killing so embarrassed the Pakistani military, and shook up the Pakistan political edifice, that the already-troubled U.S.-Pakistani relationship became overtly bellicose. Given the risk that Pakistan could abruptly restrict or sever U.S. military supply lines, the U.S. acted to build up an existing alternative route north of Afghanistan called the Northern Distribution Network, people with knowledge of the move told me. U.S. officials have been holding intense meetings with officials across the oil-rich region in order to gain approval for increased traffic, including in Russia, Azerbaijan, Kazakhstan and Uzbekistan.

Uzbekistan actually borders Afghanistan, and has the best direct rail system right into the country. And it is the Uzbekistan discussions that have provoked criticism. Since 2004, U.S. aid to the country has been restricted because of its human rights abuses including summary imprisonments, torture and murder in prison. In 2005, Uzbek troops mowed down civilians in what is known as the Andijan Massacre.

New York-based Human Rights Watch has sent emails and issued statements highlighting an administration lobbying effort in Congress to loosen the aid restrictions. Providing aid in pursuit of the cargo buildup amounts to an attempt to "bribe the Uzbeks into greater cooperation on NDN," the activist group asserts.

The senior U.S. official, who asked not to be identified, argued that the U.S. is not bribing the Uzbeks, but "seeking congressional support so small amounts of non-lethal assistance can be provided so Uzbekistan can defend itself against possible retribution from militants who might attack them for supporting NDN." This assistance includes items such as body armor, he said. Regarding Karimov’s intolerance of opponents and critics, he said that the U.S. presses Uzbekistan to improve its human rights record and "we have acheived some progress."

This is not the first time that tradeoffs have been sought to obtain Uzbek approval for greater U.S. cargo shipments. In a Wikileaks cable dated Jan. 10, 2010, the U.S. Embassy in Uzbekistan pushed the State Department to work for a congressional waiver in order to deliver much-desired U.S. military equipment to the Uzbeks. The cable said:

As we prepare to ask for further enhancements to NDN, we must first demonstrate that we can deliver the goods in the military-technical area.  This will require … a clear commitment to pursue the necessary engagement with Congress to facilitate the delivery to Uzbekistan of some sort of military equipment.  Follow-through in this area, together with high-level Washington engagement, is necessary to secure expanded Uzbek cooperation and support on Afghanistan and NDN.

Another cable, dated Feb. 10, 2010, said 8,000 U.S. military cargo containers had already passed through Uzbekistan on the way to Afghanistan since early 2009.

Go to the jump for more of the Wrap.


Shortage, what shortage? The general narrative surrounding oil in recent years has pivoted on scarcity — the world is running out of oil, or at least oil pooled in large enough reservoirs to justify the enormous expense of pumping it out. But recent weeks have shaved some of the edge off such pessimism. This week, BP more than doubled its estimated reserves in a Gulf of Mexico field called Mad Dog, raising the figure to 4 billion barrels from the previous 1.5 billion (for comparison, 1 billion barrels is regarded as a "supergiant"). This came on the heels of the announcement of a Gulf of Mexico discovery called Moccasin by Chevron, which says it needs to study the reservoir more before estimating how much oil the field holds.

Meanwhile, oil and gas are being found in unexpected places. France’s Total announced a potentially enormous gas discovery off the coast of Azerbaijan, which had a long dry spell after the finds of the early- and mid-1990s. France says its Absheron block may hold the gas equivalent of billions of barrels of oil. Finally, the U.K.’s Tullow Oil and Shell say they have opened up an entirely new oil region — French Guiana, on the east South American coast just above Brazil. Tullow says its offshore Zaedyus field could hold 700 million barrels of oil.

This last find is especially interesting because, in Tullow’s view, it demonstrates that in fact Zaedyus and the oil rich fields off the West African coast of Ghana were once part of a single geologic structure. Basically, since there is oil in Ghana, there is also oil in French Guiana. As Bloomberg reports: "Geologists believe that when the Atlantic Ocean started opening between South America and Africa, organic sediment resulted in hydrocarbon deposits known as the Late Cretaceous turbidite sands. They haven’t been drilled to date because they are less visible than other types of deposits and drilling at such depths has only recently become viable."

Oil historian Daniel Yergin, whose new book The Quest will be published on Sept. 20, has been one of the few persistent voices saying that there is no oil shortage. In an email exchange, Yergin said:

Recent discoveries — now off French Guiana in the Caribbean, in the Gulf of Mexico,  plus Brazil and Ghana — and the growing  success with tight oil onshore in the United States and elsewhere, are providing counter-weight to the supply pessimism that was so pervasive a few years ago.


Solar and failure: Folks in Washington are gaining a painful lesson in Venture Capital 101. Washington has been a provenance of radical innovation for at least six decades. But since big wins generally stay remembered (the atomic bomb; the Internet; GPS), while flops are quickly forgotten, it can be a shocking experience when a superlative failure does happen. So it is with Solyndra, a Silicon Valley solar company that has gone south after burning through $535 million in federal stimulus money. FBI agents have raided the Freemont, Ca., company along with the homes of CEO Brian Harrison and Solyndra founder Chris Gronet. What’s getting congressmen upset is that Harrison was just in Washington for a House committee meeting a couple of months ago. In the meeting, he crowed about the company’s solid financial situation. "He did not convey to us the perilous condition of the company, and the committee should know why," Democratic Representatives Henry Waxman of California and Diana DeGette of Colorado wrote in a letter, Bloomberg reports.

Was Solyndra always a bad bet, and was it granted so much federal money because of ties to the White House, as critics suggest? Though of course both are possible, this does not have to be a case of venality. More likely, there is a more conventional answer: The two sides of Venture Capital 101 are that inventers trolling for private funding generally lean their projections toward optimistic outcomes, and VCs listening to them — if they get interested — can be more enthusiastic than warranted. VCs look for winners in 1 out of 10 cases. The U.S. Department of Energy gave out some $40 billion in grants, and Solyndra appears to be one of the 9 losers.


Oil prices: race to the bottom? It’s probably not called pessimism if you are super-cautious just three years after a huge market crash. So it is with some oil traders, who are surging into futures bets that would pay off if oil plunges to $50 a barrel by December, or 42 percent lower than the $87.01-per-barrel close today. At the Financial Times, Gregory Meyer reports that bets on $50 oil in December have risen by 60 percent over the last month.  "Buyers include money managers such as hedge funds which, despite an overall bullish outlook, want to avert catastrophe if the market suffers a repeat of 2008, when the financial crisis drove West Texas Intermediate down to $32 a barrel in the year’s second half," Meyers writes. This does not mean that these traders are certain this will happen. "It’s a protective strategy," Mark Benigno of options dealer HCEnergy tells Meyer.

For another take, I emailed energy trader Phil Flynn. He thinks traders are going through wild mood swings — becoming excessively bullish and forecasting oil far above $100 a barrel, and now protecting themselves against oil at half that price. Flynn sees oil in the context of the terrible economy overall. He said:  

While I give you that theoretically the fundamentals look bearish enough for a test of $50, the truth is that the [Federal Reserve] won’t let that happen. If we see demand and price drop more dramatically, the Fed will print more money before we can get there.

Why would the Fed do that? What is it that $50 represents to the Fed?

Well, the Fed’s biggest fear is deflation. A sharp drop in oil near $50 would perhaps be a sign to the Fed that the economy is falling apart. They are already getting ready to pull the stimulus trigger, and the drop in oil might be what sets them off.


<p> Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory. </p>