Daily Sources 12/2

1. President of the Republic of Georgia Mikheil Saakashvili has an op-ed in the Wall Street Journal today in which he asserts that his decision to send military force into South Ossetia it was in response to Russian troops and tanks pouring into the region. Saakashvili writes that his op-ed was made necessary by

"a fierce, multimillion-dollar Russian PR campaign that hinges on leaked, very partial, and misleading reports from a military observer from the Organization for Security and Cooperation in Europe (OSCE)."

However, there is also the matter of the story in the New York Times on November 26 of the former Georgian Ambassador to Moscow telling the Parliament in Tblisis that government officials had told him that Saakashvili planned for war with the breakaway regions as early as April. (Daily Sources 11/26 #3)

I do not want to seem unsympathetic to the Georgian cause, but the straw man argument is hard to stomach. After all, Presidents of foreign nations seldom seek to place opinion pieces in national papers without the assistance of a US public relations firm or two or three. And, in the case of the Republic of Georgia, we have a good idea of who Saakashvili's PR agent would be--Randy Scheunemann, who also happened to be a foreign policy adviser (for reasons unknown) to Senator John McCain. (It is generally bad form to be a foreign policy adviser to a Presidential candidate who might most benefit from a conflict involving a client of yours.) He also happens to work for the Caspian Alliance, a lobbying firm that pushes the interests of US oil companies involved in the formerly Soviet Caspian littoral. My guess is that Scheunemann advised that this op-ed was placed and that, for the most part, he wrote it.

It is very hard, from my far remove, to judge the veracity of the claims and counterclaims of Russia and Georgia in the South Ossetian and Abkhazian conflicts. Both are, without doubt, spinning. But it's hard not to scoff at the notion that Georgia has been victim to a PR onslaught by agents of Moscow. Clearly, the US press was firmly in Tblisi's camp from the get-go and it was only after some European reporting, in particular that of the BBC, began to trickle into the American consciousness that reporters in the US broadcast and print medias began to question the narrative of Georgia as bullied victim.

Clearly it is not in the interests of the United States to encourage, by indifference, the adventurism of Moscow. On the other hand, to deliberately encourage Georgian adventurism is plainly contrary to the national interest. One primary reason it is so is because there is little political will in the US, under any circumstances, to deploy blood and treasure on behalf of Tblisi. In part because there would be so little to gain from such deployment and in part because there would be so much to lose.

Worth reading in full in any case.

2. Platts reports that OPEC President Chakib Khelil told reporters today that the organization would like Russia to join:

"What we would like is that they become full members. If they have a problem with that, they should just cut production. We don't need an agreement to create solidarity with those that have the same objective as us."

3. Eric Watkins at the Oil & Gas Journal reports that the Cairo Court for Urgent Cases plans to hold a hearing December 15 to consider an appeal of a decision on November 18 by the Cairo Administrative Court (CAC) to halt natural gas exports to Israel. The appeals plead that the CAC did not have jurisdiction, because the export agreement is between private, not national, corporations. The CAC holds that resources like natural gas are the national patrimony and that thus it has jurisdiction.

"The agreement to supply Egyptian gas to Israel was signed in June 2005 by Egyptian oil minister Sameh Fahmi and Israeli infrastructure minister Binyamin Ben Eliezer."

The commercial agreement is rumored to be a 15 year term contract for natural gas at $1.50/MMBTu without any provision for prices to change to reflect market conditions. Although it is a somewhat misleading benchmark, on NYMEX natural gas is selling at $6.53/MMBTu--in terms of BTUs per barrel of crude oil that roughly translates to $37.87/b.

"The gas being supplied to Israel goes to Israel Electric Corp., which has estimated that 20% of the electricity produced in Israel over the next decade will be from Egyptian gas."

Organizations upset with Israel's approach to Palestine orginally brought the case to the CAC.

4. Robert Kagan has an op ed in the Washington Post which argues that we must do more than counsel India to restrain their response to the Mumbai terror attacks. He suggests that we ought to

"Have the international community declare that parts of Pakistan have become ungovernable and a menace to international security. Establish an international force to work with the Pakistanis to root out terrorist camps in Kashmir as well as in the tribal areas."

Kagan suggests that whether or not Islamabad is happy with the idea, we need to show the people of India that we take attacks on them as we do on ourselves. Although it is clearly for emotional effect, one might point out that no one expects anyone to take attacks on other nations as seriously as they do on their own. After all, the main promise of states is security, and slightly beyond that rules-based security. If states fail to provide it, their legitimacy comes into question. That aside, Kagan closes with:

"Either way, it would be useful for the United States, Europe and other nations to begin establishing the principle that Pakistan and other states that harbor terrorists should not take their sovereignty for granted. In the 21st century, sovereign rights need to be earned."

Why would it be useful for the US and Europe to establish the principle that harboring terrorists is legal grounds for military intervention? Does Kagan not realize that there are plenty of organizations in the United States that some, even in Europe, regard as terrorist organizations? One does not even have to go as far afield as, say, Alpha 66 in Miami--there have been rumblings that a European court might order the detention of President George W. Bush on allegations of war crimes should he leave the US. No one takes that seriously just now, but just what is it that compels Kagan to believe that the rest of the world will accept American definitions of terror indefinitely?

The primary--and extremely troubling--irony here is that nationalist extremists in New Delhi are already plying, ingenuously even, the neocon arguments put forth by Kaplan and others for war on Iraq in their peculiar pursuit of power--and probably, ultimately, revenge. (And that revenge is brutal as BJP pogroms in the past indicate.) Is Kaplan suggesting a "coalition of the willing" or that India seriously pursue UN sanction? It seems clear from his op ed that he does not think it likely New Delhi would get the go ahead from the Security Council. Is Kaplan seriously counseling New Delhi to pursue a red herring?

In the meantime, Robert F. Worth and Graham Bowley at the New York Times report that the Indian police today said all of the Mumbai terror attackers came by ship from the Pakistani port of Karachi. Candace Rondeaux at the Washington Post writes that Pakistani Foreign Minister Shah Mahmood Qureshi in a television broadcast offered to set up a joint inquiry into the attacks. New Delhi has demanded that Islamabad hand over 20 individuals suspected to be linked to terrorist acts in India since 1993. The two countries do not have an extradition treaty.

5. David Osler at Lloyd's List reports that ship owners are mulling over switching from flags of convenience to flags of nations with meaningful naval power assets in the wake of the ongoing Somali piracy situation. Sadly, I do not have a link to an open source for this article. However, the summary is all you really need to know. The cost of private security might well prove more expensive than that of taxes, in the final analysis. Quelle surprise!

6. Liz McCarthy at Lloyd's List reports that the indices for Capesize and Panamax rates have reached the lowest level ever recorded. The Baltic Dry Index, widely considered a general barometer of shipping activity, has fallen to 684 points.

"'It’s difficult to see how much lower it can go. This is desperate stuff,' said a Baltic Exchange freight market representative. ... If the rates continue to plummet the index may approach its lowest recorded level of 554, in early August 1986."

7. Thomas Fuller and Seth Mydans at the New York Times reported yesterday that the Thai Constitutional Court banned the Prime Minister and several top government officials from politics for five years and ordered the largest political party in Parliament dissolved. The party--the People Power Party--has announced they will form a new party, to be known as Pua Thai, and will call for the election of a new Prime Minister on December 8.

8. Blaine Harden at the Washington Post reports that North Korea has made good on its threat to sharply limit South Korea's access to the joint industrial complex in the border city of Kaesong. On November 24 Pyongyang shut down the rail line between the two countries and said it would begin expelling South Koreans from the industrial complex beginning December 1. (Daily Sources 11/24 #10) Harden writes that for the most part North Korea is upset about two developments. A) The government of President Lee Myung-bak, who was inaugurated in February, has reversed the "sunshine policy" of the last 10 years which tended to give considerable aid without many strings attached. B) Apparently, Kim Jong Il was offended by the clinical descriptions of his alleged illness in recent months. Koh Yu-hwan, a professor of political science at Dongguk University in Seoul, told Harden, "Discussions of the health and private life of Kim bring into doubt the survival of his regime -- and of the survival of everyone in his inner circle."

Harden has another article today on another source of the dispute--anti-Kim Jong Il propoganda leaflets being sent into North Korea via balloons by private South Korean activists. The activists clashed with proponents of detente today, nearly sparking a riot. Both are very interesting reads, although some language is duplicated.

9. Shai Oster at the Wall Street Journal reports that Beijing is becoming increasingly worried about the 130 million migrant workers in China, many of whom have been laid off by factories and are returning to the farms they had leased to farming companies. 130 million people is 10% of China's population of 1.32 billion. The leases on farm land pay about 1/7th of what skilled factory and construction labor paid and many of the laborers have no farming experience. If a substantial portion of laborers chose to farm as opposed to lease, there might be problems with food supply. If they simply lease, they will likely need some other means to make ends meet--and many will likely find themselves idle. Well worth reading in full.

10. Aresu Eqbali at Platts reports that Iran and Malaysia signed a number of oil and gas cooperation deals today. Malaysia's Petrofield will be responsible for 100% of the cost of construction of a 10 million mt/year LNG plant to

"process gas from Iran's offshore Golshan field in the Persian Gulf off southern Bushehr province. ... A shipping company, under 50:50 ownership, will be set up in order to transport the LNG."

After 25 years of operation, NIOC will assume control of the plant. The new deal will replace one signed last year to develop natural gas from the neighboring Ferdows field. In the meantime, the gas from Ferdows proved unsuitable for LNG production. "Golshan has estimated gas reserves of about 30 Tcf." Iranian Oil Minister Gholamhossein Nozari was quoted as saying the deal also covers "exports of 250,000 b/d of Iran's ultra heavy and heavy crude oil to Malaysia's Kedah refinery and the sale of 120,000 b/d of condensates."

11. Alexander Ragir at Bloomberg reports that, in a client note, Banco Santander analysts said that Petrobras Osmond Coelho, the manager of the pre-salt region, told them that oil prices would not affect the timing of the development of the offshore fields. The analysts believe, after a meeting with Coelho, that the company will be able to profitably produce oil from the salt fields at $50/b.

12. Greg Quinn and Theophilos Argitis at Bloomberg report that the leaders of Canadian opposition parties the Liberal Party, New Democratic Party and Bloc Quebecois signed an accord yesterday to form a coalition government, which would effectively take power from the Conservative Party.

"The Liberals won 26 percent of the popular vote in October’s election, their worst showing. They have 77 seats in the 308-member legislature, while the New Democrats hold 37. The separatist Bloc Quebecois party has 49 seats. The three parties combined would hold a majority in the House of Commons."

The Liberal Party will, as part of the accord, get the right to appoint 18 of the 24 Cabinet posts. Bloc Quebecois, separatist in the past, might have held out for posts key to further autonomy, though the article does not give any details. This would be the first coalition government to lead Canada since World War I and it appears to have been a decision by left-leaning politicians that it was key to the economic security of Canada to control the fiscal response to the global financial crisis.

"Liberal Leader Stephane Dion, 52, would become interim prime minister and offer 'stimulus' programs including increased spending on infrastructure and aid to automakers and forestry companies."

Proposals so far are for tens of billions in government spending. Worth reading in full.

13. Natasha Brereton at Real Time Economics reports that consumer price inflation expectations for 12 months ahead in the UK to 3.3%, down from 4.7%, per a survey by Barclays Capital.

14. Tina Seeley at Bloomberg reports that the US Energy Department will resume filling the Strategic Petroleum Reserve (SPR) in January. Congress in May--in great part due to the advice of Philip Verleger--passed legislation suspending additions to the SPR in an attempt to put a lid on prices. Although the fall in prices is the subject of much debate, and I doubt the kibosh on SPR additions are the real culprit, who, given the incredibly opaque state of the oil markets, can gainsay him? The reserve is to add 2 million barrels in January (or about 64.5kb/d.)

15. Maurice R. Greenberg has an op ed in the Wall Street Journal where he asks the US to reconsider the terms of the AIG bail out. Greenberg was formerly the legendary Chairman and CEO of AIG--forced out by the board in 2005 under the shadow of allegations of fraudulent business practices, among other things, by New York Attorney General Eliot Spitzer. Spitzer, you will remember, resigned as Governor of New York this Summer after an investigation was leaked that found that he partook of high-priced prostitutes. Greenberg suggests that the terms proffered to Citigroup make more sense and that the terms AIG faces are punitive. I'm not sure how persuasive the piece is, but you gotta like the title given the current zeitgeist--"AIG Needs a New Deal." Worth reading in full.

16. Joe Carroll at Bloomberg reports that Chevron's Vice President of Strategy and Development, John Watson, told an industry conference today that the company planned to sell some refineries. He would not elaborate as to which or how many refineries Chevron intended to sell. I suspect it would be difficult to get a good price at just this moment, however. "Chevron operates or owns stakes in 18 plants that can process 2.94 million barrels of crude a day."

17. Richard Rubin at Platts reports that Kinder Morgan today started moving commercial ethanol on the Central Florida Pipeline between Tampa and Orlando--the first US shipment of ethanol via a gasoline pipeline from one market to another. The company also today announced it had successfully shipped blended B-5 biodiesel via the Plantation Pipeline between Collins, Mississippi and Spartanburg, South Carolina.