The Oil and the Glory

The Weekly Wrap — May 25, 2012

How to incentivize bad behavior for the greater good: Last year, Mark Dubowitz, a Washington-based advocate of regime change in Iran, was mulling a conundrum with a colleague — how to clamp painful oil sanctions on Tehran while harming no one else. They knew that members of both political parties opposed cutting off Iranian access ...

Atta Kenare  AFP/Getty Images
Atta Kenare AFP/Getty Images

How to incentivize bad behavior for the greater good: Last year, Mark Dubowitz, a Washington-based advocate of regime change in Iran, was mulling a conundrum with a colleague — how to clamp painful oil sanctions on Tehran while harming no one else. They knew that members of both political parties opposed cutting off Iranian access to the global export market if it meant an oil-price surge. And that, since everyone thought a price spike was inevitable, nothing was consequently done as oil revenue continued to flow freely into Tehran. So Dubowitz and Reuel Marc Gerecht, his colleague at the Foundation for Defense of Democracies, looked for an improbable, sanitized cordoning of fiscal pain. That’s when they hit an apparent brainstorm — a simple form of game theory that they thought would work.

The game went like this: You divide players into the "white hats" and the "black hats." Global players likely to honor sanctions (the white hats) would be incentivized to do just that — completely stop buying Iranian oil. But nothing would be done to discourage global players likely to ignore the sanctions from following those very dastardly instincts (the black hats, primarily China, but also India and perhaps another country or two). If everything worked right, Iran — selling only to this latter, much narrower band of tough-bargaining buyers — would wield much-diminished pricing leverage. It would consequently be forced to yield substantial discounts, putting great pressure on the regime’s ability to finance itself.

In November, Dubowitz and Gerecht distributed the idea as a confidential, 32-page white paper to the White House and Congress, in addition to European capitals, titled "Oil Market Impact of Sanctions Against the Central Bank of Iran." Synthesizing the idea in an op-ed in the New York Times, the pair argued that to move Iran, one needed "to learn how to leverage greed." As Dubowitz told me over palak paneer and dal yesterday, "You give market power to the black hats and allow them to push down the price to earn money."

As we know, the current sanctions regime closely resembles the devilishly clever white paper — you get obstinate forces and inveterate violators of norms to do what you want by appealing precisely to their baser instincts. Which made me wonder — what other big problems might be solved using the same logic?

I drew up with a short list of names, along with possible vulnerabilities for use as leverage. How about you — what problematic situation could you see shaken up?

Go to the Jump for the suggested list, and the rest of the Wrap

1.     Vladimir Putin

Vulnerabilities: Napoleon complex. Urge to strip publicly to his waist.

2.     Wall Street bankers

Vulnerabilities: Greed. Being called greedy.

3.     Mexican drug cartels

Vulnerabilities: Contempt toward other people with guns.

4.     U.S. gun lobby

Vulnerabilities: Contempt toward other people without guns.

5.     Climate change skeptics

Vulnerabilities: Contempt toward scientists afflicted with certitude.

 

Who’s the baddest dude in oil? Oil and gasoline prices around the world have been plummeting, zeroing out a surge that began with the Libyan uprising in March 2011. How much lower can they go? A lot, especially if Russia and Saudi Arabia maintain their full-tilt pumping, and saturation of the global market. Lower still if an improbable diplomatic agreement is reached between international negotiators and Tehran, and Iran’s 2.2 million barrels of oil flow back onto the market unimpeded.

Yet, when you talk about capacity to drive the oil price, who is bigger and badder — Russia or Saudi Arabia, the world’s two biggest producers? A few days ago, an agency with the acronym of JODI reported that it was Saudi Arabia — it had zoomed past Russia and for the first time in six years had the largest oil production, Bloomberg reported Sunday. Saudi was now pumping 9.923 million barrels a day, compared with just 9.920 for the Russians, whose numbers revealed a rapid, 400,000-barrel-a-day falloff. A mere fractional difference you might say. But in the game of oil patch pride, fractions matter. The Saudi crowing was bitterly hard for the Russians to accept.

The next day, Russia struck back. Not only had its production not fallen, said Russia’s Energy Ministry; it had in fact grown — to 10.33 million barrels a day from 10.31 million barrels a day in December, Reuters reported.

Chris Weafer, chief strategist with Troika Dialog Bank in Moscow, suggested a Saudi motivation in massaging the numbers. "The Saudis never really forgave Russia for making no effort to support OPEC’s efforts to prop up the oil price in 1999 or in 2008-’09," Weafer said in an email. "They accuse Russia of taking advantage of OPEC, i.e. mainly Saudi actions to support oil prices."

So who is the baddest? Let’s call it a draw: Russia is still the biggest producer, but Saudi is the biggest exporter, at 7 million barrels a day.

 

The oil trader John Deuss, the oligarch Boris Berezovsky, and a sentence in a banking case

(This report is from Henk Willem Smits, an Amsterdam-based writer for quotenet.nl, who has followed the John Deuss criminal case.)

A long-running Dutch banking case has produced its first verdict — a $409,000 fine and a suspended six-month jail sentence for John Deuss, once one of the most colorful figures on the global oil patch. Deuss was convicted yesterday of banking without a license and failing to report unusual transactions. The bank in question is the boutique First Curacao International Bank, which Deuss formerly owned and operated in the former Dutch colony of Curacao. While FCIB was based in the Caribbean, much of its activities were carried out in Deuss’s small castle in Berg en Dal, a prosperous Netherlands village near the German border; Deuss doesn’t have a Dutch banking license. And with whom were some of those unusual transactions? Ekaterina Berezovskaya, daughter of the London-based self-exiled Russian oligarch Boris Berezovsky. The judge called attention to Berezovskaya’s shuttling of monies among accounts attached to her father’s companies: "The transaction process points, in the opinion of the court, unmistakably to a suspicion of money laundering." Yet, Deuss did not report what was going on. Next up: Deuss faces a second trial on money laundering charges.

Deuss earned his fortune as an oil trader. His biggest trading coup came with the 1980s U.N. embargo against South Africa. Deuss earned hundreds of millions of dollars in fees by shipping oil out of Oman, shifting the oil mid-sea onto other, differently flagged tankers, and on to the South African port of Durban. In 1991, leveraging his close relationship with the Sultan of Oman, Deuss arrived in Kazakhstan aboard his private jet, accompanied by two dogs, statuesque models and British bodyguards, and forged a close relationship with the soon-to-be-independent republic’s leaders. By the mid-1990s, Deuss was striking fear into the hearts of Western oilmen working in Kazakhstan, especially those working for Chevron. The California company had just acquired the rights to Tengiz, the world’s sixth-largest oilfield. While Chevron possessed the field, Deuss held sole rights to any pipeline built to export its six billion barrels of oil. Chevron won the ensuing battle only after much intervention from then-U.S. Vice President Al Gore, and the timely death of Deuss’ Omani benefactor in a car wreck.

The banking case stems from 2006 British allegations against Deuss for "carousel fraud," in which Great Britain was struck by a sudden outbreak of fraudulent VAT refund requests by cellphone merchants. Investigating, British authorities found that almost every suspect in the case — some 2,500 people — had an account at Deuss’s bank.

In addition to Deuss, the judge sentenced his older sister Tineke, treasurer of FCIB, to a six-month suspended sentence. The sentences are lower than the Public Prosecutor sought — prison sentences of 12 months for John and 10 months for Tineke — because the court found no evidence of a criminal organization. Deuss lawyer Daan Doornbos said an appeal is being considered. "We wanted no less than acquittal," he said.

 

A public uprising over bad corporate behavior: I recently observed that there seems to be a diminishment of a traditional public stigma attached to corporate bribery. But a spate of attacks against perceived bad corporate behavior is making me reconsider. Wal-Mart, for example, is confronting a revolt against its board of directors over allegations of serious bribery in Mexico, detailed by a New York Times investigation; big shareholders want to expel members of the discount chain’s board of directors. Then there is Chesapeake Energy and its high-flying CEO, Aubrey McClendon, the target of accusations of self-enrichment; some of his key shareholders, too, are seeking to eject board members. Investors in the U.S. and the U.K. have risen up as well against companies carrying out hydraulic fracturing, the method used to extract natural gas from hard shale, reports the Financial Times’ Guy Chazan. Critics say fracking pollutes the air and ground water. Now, in the U.S., 55 institutional investors are pushing for "best practices" in the shale patch. In the U.K., the Scottish Widows Investment Partnership wants BP, Shell, ExxonMobil and Total — it is a large shareholder in all four companies — to reduce methane emissions from their drilling procedures. Are we watching a trend of greater investor and public boldness toward corporate boards?

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