Geopolitical Consequences of the Candidates

Given the upcoming--and ongoing--elections for President of the United States of America, I thought it might be interesting to take a look at the potential geopolitical effect each of the candidates could have on our standing in the world.

Elections are not believed to be decided on foreign affairs issues. As the Honorable Tip O'Neill famously pointed out, "All politics is local." We are, however, in the midst of a seven year war on two separate fronts, and it may be that some votes will be decided in 2008 on the basis of our foreign policy options and which candidate is most likely to perform well internationally. I am aware of no data on how many voters rate it their top concern, however.

One thing is pretty clear: the world's opinion of the United States has dropped significantly since the war in Iraq began. According to the Pew Global Attitudes Project, in the nation with which we enjoy a "special relationship"(1)--Britain--favorable public opinion of the United States has dropped 19% since 2003--from 70 to 51. In Germany, the drop was 15%--from 45 to 30. In Italy we lost 7% from 60 to 53; in Spain we lost 4% from 38 to 34; and in that old bugbear France we lost 3%, from 42 to 39.(2)

For the rest of the world, there are mixed results since 2003, but the trend from 9/11 is clear. In Canada, by far our largest trading partner(3) and an important source of hydrocarbons, favorable opinion has dropped from 71% in 2000 to 55% in 2007. In Mexico, favorable opinion has dropped from 68% in 2000 to 56% in 2007. For the same period, favorable opinion has dropped by 34% in Argentina, 33% in Venezuela, 24% in Bolivia, 13% in Peru, and 12% in Brazil--mostly from strong majorities.(4)

In Eastern Europe, most states have registered double digit drops in favorable opinions of the US since 2000. (However, this is from strong highs, with several states reporting majority favorable opinions and no states reporting less than 41%.) The very notable--and rather inexplicable to me--exception is Russia, which has seen a 4% rise since 2000, from 37 to 41%. In Turkey, perhaps our most important Muslim ally worldwide and a geostrategical skeleton key to the Middle East, the Mediterranean, and the Black Sea, favorable opinion has dropped from 52% in 2000 to 9% in 2007.(5)

Pew doesn't have data for 2000 for most of the Middle East, but numbers in 2007 are mostly quite low, with Egypt reporting a favorable opinion of 21%, Jordan 20%, and the Palestinian Territories 13%. Kuwait, which we liberated from Saddam in the first Gulf War, reports a favorable opinion of 46%, down 17% from 2003. Lebanon, where the United States was the primary foreign sponsor of removing Syrian influence on that country, has seen a 20% rise since 2003 to a favorable rating of 47%.(6)

Like the Middle East, Pew does not have numbers dating back to 2000 for all the countries it covers in Asia , but the story remains mostly the same. In China, the most significant rising economic and political power in the world, favorable opinions of America have dropped from 42% in 2005 to 34% in 2007. In India, easily the second most significant rising economic and political power worldwide, favorable opinion has dropped from 66% in 2002 to 59% in 2007. (This is despite the nuclear deal of 2006(7), and the determination of the US to create a strong alliance with India.) In Indonesia, which has the largest population of Muslims in the world, membership in OPEC, and sits right on some of the most important shipping lanes in the world, favorable opinion of the US has dropped from 75% in 2000 to 29% in 2007. (This is up, however, from the low of 15% seen in 2003.)(8)

Japan, the third largest economy in the world and our most important ally in Asia, has registered a drop in favorable opinion of 15% from 77% in 2000 to 61% in 2007. South Korea remains steady at 58%. 15% of Pakistanis had a favorable opinion of the US in 2007, worrying given their importance to our efforts versus Al Qaeda and in Afghanistan. 27% of Malaysians have a favorable view of the US. Bangladesh has bucked the trend with 53% seeing the US in a positive light in 2007, up from 45% in 2002.(9)

The good news is Africa, where most nations reported strong majorities having positive views of the US. In Nigeria, the largest oil exporter to the US in Africa and a country with a large Muslims population, our numbers have actually gone up with 70% reporting a positive view of the US in 2007, as opposed to 46% in 2000.(10)

While these numbers are not as bad as some scare-mongers and headlines suggest, the trend is clear and--outside of sub-Saharan Africa--it is not good for American interests. The numbers for several key geopolitical flash points--Turkey, Indonesia, China, Pakistan, and the Middle East--are not good or frankly awful. The numbers for key allies like Japan, the UK, Canada, France, Germany, and Mexico are down.

Given that the above is a fair assessment of the situation, what is the likely effect of our Presidential candidates if elected?

BRIEF ASSESSMENT OF OVERALL US POSITION

SOFT POWER(11):
It seems fairly plain that it would be hard to do worse than our current Administration insofar as our cultural and ideological influence around the world goes.

This is, after all, the Administration that OK'd the use of torture, engaged in rendition in order to have others do our dirty work for us, established a prison which seems to have no due process of law in Cuba, no less, and manufactured evidence in front of the entire world in order to prosecute a war against an old enemy.(12)

All the old standbys regarding our principles and what America stands for--due process of the law, fair-mindedness, honesty, work ethic, personal responsibility, democracy, human rights--appear to have been compromised or nearly completely discredited by the current Administration.

This is a tremendous shame because it squandered the overwhelming sympathy the world felt for us after 9/11, and means that we are less able to pursue, and put an end to, those who were responsible. It seems to me that all of the presidential candidates would represent a considerable advantage over the current administration in terms of soft power, though some have more distinct advantages than others, which I will explore below.

HARD POWER(13):
American hard power--which is used to refer to the military, economic, and geographic resources that a country may use as carrots and sticks to influence other nations--has been compromised by the current Administration in many ways, though ultimately the country remains undeniably extremely strong.

We are in the middle of a two-front war that has lasted about seven years, with little end in sight. It appears that our military is very stretched at the moment, unable to find enough new recruits to fulfill its current obligations. Should new significant hostilities arise elsewhere, it is not clear that we would have enough material and men available to address it.

Although this may encourage other state actors to behave adventuristically--see, for example, Chavez's recent support for the FARC in Colombia(14)--I suspect there are few that are willing to seriously try the patience of any incoming administration and even fewer that have good reasons, given their interests, to do so. The United States still has the most sophisticated and one of the largest militaries in the world, and by far the largest military budget in the world.(15)

Also, despite the recent downturn, the United States is still the largest economy in the world. This is likely to change somewhat as China and India grow, but whomever we choose to be President will have little effect upon that evolution. Either way, the President will still have considerable resources to bear in any negotiation that the United States might find itself in. Nonetheless, some candidates will have more experience with using these tools than others, which I will discuss below.

THE CANDIDATES:

BARACK OBAMA

SOFT POWER:
I think it is plain that Senator Obama would have a tremendous effect on the world were he elected to the Presidency. To state the obvious, his skin is black, and there are many around the world--and even here in the US--who believe that a black man could never be elected President of the United States. There are many in the world who see us as an evil hegemon and who argue that our elections are a sham and that the powers that be would never allow a black man to become President. What would these people say were Senator Obama elected? If the one is true, how could the other have taken place? The credibility of our elections would be in many ways restored, especially after Vice President Al Gore's loss in Florida to the Supreme Court of the United States. There will be some who cannot be convinced no matter what, but the public relations value of his Presidency would be enormous.

Since it is at least popularly perceived that Obama opposed the war in Iraq from the start, the Senator will also not be tied to the current policy in quite the way that the other candidates are. His assertions that the United States will put an end to the use of torture, put an end to Guantanamo, and negotiate directly with those with which the US has strained relations would likely be received as more credible than with the other candidates. This, I believe, would restore much of the credibility of the United States throughout the world and represents a great opportunity.

Moreover, the fact that Obama spent some of his childhood in Indonesia is likely to make some there feel that he would have an understanding of their point of view, an important asset. Indonesia is an important geopolitical flash point where the percentage of folks with a favorable view of the United States dropped to 29% in 2007. His father is from Kenya, and I suspect that the peoples of sub-Saharan Africa, and even in Somalia, would greet his election with something akin to wonder at the universal potential of the United States.

However, to state the obvious, Senator Obama is a black man, and much of the world is racist, sad to say. Some leaders might see him as less than equal to their own skills and test our limits for that very reason. However, I think that this would have a small effect, and I suspect that Senator Obama would handle any such challenges handily.

So, as to the potential positive value of his presidency in terms of soft power, I give the Senator an 8 out of 10 (on my completely random scale.)

HARD POWER:
It is hard to rate how a candidate might fare in terms of hard power because so much is out of his hands. It seems to me that the primary factor is experience, how energetic they are, and their common sense, all difficult things to assess from reports in the press.

The notion that Senator Obama is the least experienced of the three candidates is nonsense in my opinion. He has the second longest career as an elected official, though his time in the US Senate is the shortest. His early political career was spent in Chicago, famous for hard ball politics. However, his foreign affairs experience is necessarily limited by the relative shortness of his stay in the Senate.

Ultimately, part of the President's job, however, is to listen to his advisors in a way that demonstrates common sense. The Senator's advisory team is very distinguished and not filled with idealists, but rather their opposite. His most famous advisor, Secretary Brzezinsky, is an old cold warrior with about as cold an eye when it comes to American interests as they come.

In all, on a hard power scale then, I believe that Senator Obama would rate about a 5 out of 10.

HILLARY CLINTON

SOFT POWER:
One might think that Senator Clinton's sex would send a positive sign to the rest of the world, about 50% of it in fact. However, I think that it would not be as powerful a signal as Senator Obama's for the simple reason that the United States is already regarded as the place where women have the most opportunities--with the possible exception of Scandinavia.

I think her value from a public relations perspective would come mostly from her being attached to her husband, who is extremely well-regarded in the world. Much of Europe, for example, would breathe a sigh of relief that sanity and amity had returned to America's foreign policy drivers.

On the other hand, Senator Clinton did vote for the war in Iraq, and her opposition to some of the other, more egregious, violations of American principles such as due process and the prohibition of cruel or unusual punishment are not well known. I don't think that her election would make the world that much more ready to take American negotiators at face value--many, perhaps a majority, would consider her a business-as-usual candidate, though one much more predictable and, thus, reasonable, than her predecessor.

Also, just as much of the world is racist, it is sexist, too, and there is some likelihood despite Senator Clinton's obvious no-nonsense approach to foreign affairs, that her limits would be tried by some were she President. Still, I believe that the Senator would be able to handle such challenges readily.

I thus give Senator a 5 out of 10 in terms of soft power advantage over the Bush Administration.

HARD POWER:
As I stated above, I believe that Senator Clinton is the least experienced elected states person on offer. However, she will, just as Senator Obama, bring many very experienced foreign policy advisors with her, none of which are known for being fabulists when it comes to the rest of the world.

Moreover, her time in the White House, even if unelected, must of given her tremendous insight into how the levers of power inside Washington, DC, actually operate. The years in the White House and after have also brought the Senator into contact with nearly all the leaders of the world, and a real familiarity with the way that diplomacy operates.

I therefore give Senator Clinton a 6 out of 10 in hard power advantage over the current Administration on my completely arbitrary scale.

JOHN MCCAIN

SOFT POWER:
Senator John McCain is a genuine war hero, with decades of experience in the Senate, who has opposed the use of torture and the denial of due process in Guantanamo from the beginning. He has firsthand experience of being a prisoner of war and I believe means every word when he says he means to put an end to those practices. He is an honorable man with years of experience in the military and I believe that he would be seen as a breath of fresh air by the world in this respect.

However, the Senator has stated that we will stay in Iraq for 10,000 years if necessary.(16) I don't think the Senator meant that in quite the way it has been repeated, he said at the time on Face the Nation that what he believes Americans are concerned about is having our troops face the brunt of the conflict. However, the world is not likely to give the Senator much slack in terms of these sorts of statements, and I believe they will think that he is in many ways the business-as-usual candidate. Perhaps the one most likely to spread conflict in destabilizing ways.

Although the Senator is getting on in years, much of the world respects the elderly much more than we do in the United States, sad to say. I think his age would be a net plus, especially in Asia, though it is given short shrift domestically. He is unlikely to be tried by foreign adversaries, who likely remember that President Reagan was fairly elderly as well.

Therefore, in terms of his advantage over the Bush Administration in soft power, Senator McCain is decidedly mixed, and I give him a 3 out of 10. Anyone would be a welcome relief from the current Administration, but to a large extent he will be seen as business-as-usual.

HARD POWER:
The breadth of Senator McCain's experience is undeniable, though he has never served in an executive branch. He has knowledge of the world, and nearly 30 years in Washington, DC, must have imparted a deep understanding of how the levers of power operate.

I therefore give him a 8 out of 10 on a hard power scale.

RELATIVE ADVANTAGES OF SOFT VS. HARD POWER

Everyone has to make their own determinations about the relative advantages of soft vs hard power, though I do believe that in the final estimation of competing nations hard power is the decider.

However, I do not think that Presidents have much effect upon hard power outside of their decisions on how to wield it. Economies do not run on a timetable keyed to Presidential elections. Our military will be the most powerful in the world for the foreseeable future, no matter our current strategic position.

The primary consideration, in terms of geopolitical effect, of our Presidential candidates, then, is soft power, and Senator Obama is the clear winner in that category. If it seemed that he was not energetic or did not have enough common sense to use our hard power wisely, then he would not be the best on offer. But, solely in terms of foreign affairs, I believe he would have the best effect in terms of our national interests.

Finally, I believe that all the candidates would make great presidents and am not sure that foreign affairs should be the deciding factor in choosing one or the other. But were it so, I believe that Senator Obama would be the most rational choice.

(1) For a decent discussion of the US-UK "special relationship," see the Wikipedia article on the same.
(2) 47-Nation Pew Global Attitudes Survey, The Pew Global Attitudes Project, 27 June 2007, Table: "Favorable Views of the U.S.", page 17
(3) Hoover Institution: FACTS ON POLICY: Top Trading Partners
(4) 47-Nation Pew Global Attitudes Survey, The Pew Global Attitudes Project, 27 June 2007, Table: "Favorable Views of the U.S.", page 17
(5) 47-Nation Pew Global Attitudes Survey, The Pew Global Attitudes Project, 27 June 2007, Table: "Favorable Views of the U.S.", page 17
(6) 47-Nation Pew Global Attitudes Survey, The Pew Global Attitudes Project, 27 June 2007, Table: "Favorable Views of the U.S.", page 17
(7) For a decent discussion of the United States-India Peaceful Atomic Energy Act, see the Wikipedia article of the same name.
(8) 47-Nation Pew Global Attitudes Survey, The Pew Global Attitudes Project, 27 June 2007, Table: "Favorable Views of the U.S.", page 17
(9) 47-Nation Pew Global Attitudes Survey, The Pew Global Attitudes Project, 27 June 2007, Table: "Favorable Views of the U.S.", page 17
(10) 47-Nation Pew Global Attitudes Survey, The Pew Global Attitudes Project, 27 June 2007, Table: "Favorable Views of the U.S.", page 17 Plainly our efforts to combat the spread of HIV/AIDS in sub-Saharan Africa have won us friends there and, it seems to me, this is one of the few lasting--and very important--foreign policy successes of the Bush Administration, for which Colin Powell also deserves much credit. President Bush should be rightly proud of this particular initiative.
(11) For a short dicussion of the meaning of "soft power" and the term's provenance and evolution, see the Wikipedia article of the same name.
(12) McClatchy Newspapers: "Exhaustive review finds no link between Saddam and al Qaida", by Warren P. Strobel, March 10, 2008
(13) A short discussion of "hard power" is available on Wikipedia.
(14) For a little background on the recent conflagoration between Venezuela, Ecuador and Columbia, see: Time Magazine, "Colombia: Chavez Funds FARC", by Toby Muse, March 4, 2008, and Time Magazine, "War Drums in Latin America," by Tim Padgett, March 3, 2008.
(15) Article on the Military budget of the United States in Wikipedia.
(16) Youtube video of clips from Face the Nation and Meet the Press where Senator McCain states that he would keep troops there for 10,000 years if necessary. The Boston Globe, "McCain fights back in '10,000 years war", February 13, 2008

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Venezuela vs ExxonMobil

Over the course of the last year or so, President Hugo Chavez has moved to gain majority control of most of the large oil and gas projects in Venezuela. Given the size of their exposure in the country and the vast reserves at stake, most corporations have decided to agree to the new terms proferred by Venezuela. ExxonMobil--and Conoco, though less confrontationally--have decided to fight back against what are, after all, expropriations. My bet is that in the long run, ExxonMobil has the winning hand in this dispute.

THE VIEW FROM CARACAS

The current dispute between ExxonMobil and Chavez's government in Venezuela is over part of a nationalization process that began in 2001. The 2001 Hydrocarbons Law stated that the government must own a majority stake in all significant hydrocarbon assets in Venezuela, while allowing for some private participation. In 2007, Venezuela informed ExxonMobil that its stake in the Cerro Negro project--which processes bitumen into heavy oil--would have to be reduced so the PdVSA, the national oil company of Venezuela, could acquire a majority share.

From the Venezuelan perspective, I think the key factoid here is that oil export revenues represent more than 50% of the government's budget.(1) People all over the world are deeply suspicious of the intentions of the oil industry--however unwarranted that may be--and this holds true in Venezuela just as much as anywhere.

But even oil industry analysts are extremely suspicious of the figures that various stakeholders give about their production numbers. (See, for example, Matthew Simmon's recent book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.) This is especially true of the national oil companies in producing countries like Venezuela. In fact, there is currently a disagreement between most independent analysts and the government of Venezuela about how much it actually produced and exported in 2006.(2)

I imagine that for Chavez control over these various projects represented a way to be sure of the numbers coming into his exchequer as well as a possible slush fund, given that he could best muddy the waters to his own advantage once he was sure of how much was actually coming in.

And it appears that from a political perspective, Chavez's decision to nationalize strategic industries like oil have been very compelling. In what has become known as "the oil curse," Venezuela, despite fabulous oil wealth, is a relatively poor country, with about 38% of the population under the poverty line.(3) He has used a good portion of the public purse to establish programs to help the poor in that country, all the while appealing to the nationalism of Venezuela and throughout South America by twitting the US, whose involvement in the region is widely considered to be malicious. Despite these efforts, it has been reported that the percentage of the population that earns less than $2 a day had grown from 43 to 53% under Chavez's rule, as of the spring of 2006.(4)

Perhaps all of Chavez's bluster has begun to backfire, as he lost a referendum in December 2007 which would have expanded his powers even further. But it's hard to argue that his anti-American, and frankly socialist, rhetoric has been unpopular in Venezuela: it is the only referendum that he has lost since rising to power 10 years ago.

But Chavez's anti-Americanism disguises some cold facts that Venezuela must face when dealing with Washington, DC. 1.41 million b/d of Venezuela's oil exports go directly to the United States.(5) If you accept Caracas' numbers on total exports (3 million b/d), that represents 47% of their total export numbers, or a little less than a quarter of their yearly budget. If you go with the Energy Information Agency's figures (2.2 million b/d in exports) 1.41 million b/d represents about 64% of total exports, or about a third of Venezuela's yearly budget.

But, in reality, the numbers are probably much worse for Chavez.

PdVSA has a 50% share in a refinery on the US Virgin Islands; the other half is owned by Amerada Hess, an American oil trading company. The refinery--known as the Hovensa Refinery--has a capacity of 495 kb/d, and PdVSA sends it about 300 kb/d of crude. PdVSA also leases a refinery on Curacao, of the Dutch Antilles, with a capacity of about 320 kb/d. The bulk of the products of both of these refineries are exported to the US.(6)

So, if we estimate conservatively that half of the exports of these two refineries are sent to the US, we would get 150 kb/d of the crude sent to Hovensa and another 150 kb/d or so from Curacao, or 300 kb/d. That would bring total Venezeulan oil exports to the US up to 1.71 million b/d. Using Venezuelan figures, that represents 56% of total exports, or more than a quarter of their yearly budget. Using EIA numbers, that represents about 77% of their total exports, or nearly 40% of Caracas' yearly budget.

I'm guessing that having such a large percentage of his budget coming from the US doesn't make Chavez all that comfortable. After all, reportedly Chavez believes that a military confrontation with the United States is inevitable.(7) Given his distrust of the US, his moves on the oil diplomacy front seem, at least on the surface, to be an effort to find new buyers for Venezuelan crude.

But the fact of the matter is that there is little he can do about it right away. Venezuela's most promising new customer, perhaps, is China. China's oil industry is, of course, national in nature; the government there has at least a history of similar ideology; and oil demand there is growing by leaps and bounds.(8) In 2006, Chavez promised to increase Venezuelan exports to China to 500 kb/d by 2009, and a million b/d by 2012.(9) But, as of 2006, Venezuelan exports to China were 80 kb/d, and the fact of the matter is that there are not many refineries in China that can run Venezuelan crudes--though it was an impressive jump of 105% from the exports of 2005.(10) Also, China regulates the price of products companies can sell domestically, which is likely to put some brakes on how much it will pay for crudes until this changes, especially difficult ones, like the ones Venezuela has to offer. Finally, China is about as hard to ship oil to from Venezuela as it gets. The shortest route, of course, is through the Panama Canal.(11)

In part of a program that combines his ideology with finding other places to send Venezuelan crude, Chavez has struck deals with Cuba and Jamaica, where he provides 92 kb/d and 21 kb/d, respectively, at below-market prices and under favorable financing deals.(12) Although both countries may be able to take more oil over time, they are not likely to be able to pay market rates for what they purchase, and are not really growth markets.

Venezuela also sells some oil to South America, but the largest growing economy is Brazil, which became a net oil exporter in 2006(13) and just recently discovered a huge field offshore which may hold between five and eight billion barrels of recoverable oil.(14) And while South and Central America are emerging economies, for fully 10 Central American and Caribbean nations (outside of Cuba and Jamaica) Venezuela--and Mexico--have below market sales and financing deals in place.(15)

Europe is a potential growth market for Venezuela as it has refineries sophisticated enough to run the crudes and the money to pay for them. But again, there are many producers closer to, or as close to, Europe which produce a variety of crudes, so they would likely pay less than the Americans would. India is another huge growth market, but it appears that it has tied its energy security policy to the US,(16) and is basically right next to the largest producing region in the world--the Middle East.

Japan is a huge oil consumer, and has many complicated refineries, but it's demand growth is basically flat,(17) and it is an important ally of Chavez's bugbear, the US. (It has been suggested to me in a private conversation that Japan might do well to get involved in Venezuelan upstream projects as a way to diversify their difficult supply situation--about 90% of Japan's oil imports are sourced from the Middle East.(18) Japan wants to grow its imports from overseas concessions it has majority stakes in from 15% now, to about 40% by 2030,(19) but their interest in ownership is likely to be offputting to the Chavista notion of sovereign control of natural resources.)

South Korea is also a major importer and possesses many sophisticated refineries a quarter of whose products are mostly exported to countries nearby. However, it is a key ally of the United States and its own oil consumption has basically been flat since 2000.(20) Probably just as singificant, Saudi Aramco has a hand in about 20%, of South Korea's refining capacity--through a 35% stake in S-Oil. Once S-Oil's new refinery in Sosan is completed, Saudi Aramco will have equity in about a third of South Korea's refining. Saudi Aramco is likely to see these refineries, at least, as destinations for their own oil. Still, upstream is controlled by Korea's national oil company, and with 75% of their imports sourced from the Persian Gulf, the government is very interested in diversifying.(21)

Singapore is also a major petroleum hub that produces no oil on its own. Assuming that its full refining capacity was used in 2005 or about 1,336 kb/d, excluding refinery creep(22), and subtracting consumption of 779 kb/d(23), it exported about 557 kb/d of products that year. Most of these products are exported to regional consumers. Several of their refineries are sophisticated enough to handle Venezuelan crudes, but Singapore is also a key ally of the United States, its oil industry is mostly controlled by the private sector, and it is hardly ideologically similar to the Chavistas.

Chavez has been busily working his oil diplomacy in different directions, with the exception of China. A quick look at PdVSA's November 2006 newsletter yields energy cooperation agreements with Argentina, Belarus, Russia, Iran, Syria, Mali, Angola, Malaysia, China and Vietnam.(24) Of these, Russia, Iran, Syria, Malaysia, Angola, and Vietnam are producing countries--essentially competitors with Venezuela for market share. Mali, being inland and basically neighbors with Nigeria, is not a likely destination for Venezuelan products. Belarus, an inland neighbor of Russia with a foreign policy tied closely to Russian Federation, is also not a likely destination for Venezuelan products.

Chavez's strategy doesn't appear to have much to do with the commercial considerations of where his oil will go if he manages to extract Venezuela from the position of having a considerable portion of his government revenues derived from US purchases, but something along the lines of expanding the ties between producing nations beyond OPEC.

Chavez has threatened to cut off sales to the US(25) and sell Venezuela's refining assets here(26), though he hasn't followed through. In 2002, during the PdVSA strike in Venezuela, the great majority of their exports to the US stopped. Although this did have an effect on US supplies, the missing Venezuelan crudes were mostly replaced by crudes from Mexico, Brazil, Angola, Iraq, and the UK.(27) The supply situation today, however, is tighter than it was in 2002, and corporations in the US would likely have a harder time replacing the lost volumes.

Given these considerations, I believe that Chavez's strategy is based on his belief in an upcoming military confrontation with the United States. He is creating as many relationships as possible with countries which he believes will be sympathetic to Venezuela's position, should such a conflict take place. With those countries that are significant importers, the main targets are China and France.(28) (France's TOTAL is one of the companies which took a share in the Cerro Negro project that ExxonMobil vacated.) If these importers over time take more and more volumes from Venezuela, their economies would be threatened by any halt in Venezuelan production. (After all, if Venezuela ever became embroiled in a military conflict with the US, it would only be able to export oil if the US Navy let it happen.) His joint ventures with producing nations in and out of OPEC represent an effort to strengthen ties with those nations, so some, at least, might be inclined to support Venezuela via oil embargoes or other pressure in case of a showdown. Chavez wants to increase the percentage of his oil that goes to countries that might be sympathetic, but he is not really interested in a situation any time in the medium-term where the US is not a significant importer of Venezuelan crudes. He wants it to remain large enough to represent a sword of Damocles hanging over the US economy and probably wants to keep the customer which will pay the most in his stable.

THE VIEW FROM IRVING, TX

Although for Chavez ExxonMobil may serve as a proxy for Washington, DC, it is primarily a commercial entity and its strategic considerations are not identical to those of the United States. Better informed of the situation stated above than I am, ExxonMobil has several cards of its own.

Of the three CITGO--that is, Venezuelan--refineries in the US, ExxonMobil has a 50% stake in one of them in Chalmette, Louisiana, which has a capacity of about 185 kb/d.(29) Ironically, CITGO aquired this stake as part of their price for giving ExxonMobil (Mobil at that time) operatorship of the Cerro Negro project in the first place.(30)

Of the potential importers outlined above, ExxonMobil has a significant presence in many of them:

In China, ExxonMobil is a member of the first foreign joint venture in refining and distribution that country has ever agreed to. Each of the partners--ExxonMobil, Saudi Aramco, Fujian Province, and Sinopec--have a 25% stake in the project which includes upgrading an existing refinery to a capacity of 240 kb/d as well as retail distribution outlets. The refinery will run sour Saudi crudes.(31) This is not a large percentage of Chinese refining capacity, but it does represent good relations with the Chinese government, and a share of their more sophisticated refining capacity.

In South Korea, ExxonMobil supplies about half of their LNG consumption.(32) Moreover, ExxonMobil has good relations with Saudi Armaco, including a joint venture in Saudi Arabia itself, the refinery at Jambu.(33) In addition, the Sakhalin-1 Project, which produces oil and gas mostly destined for South Korea, is operated by a subsidiary of ExxonMobil.(34)

In Singapore, ExxonMobil owns an integrated refinery that runs about 605 kb/d of crude.(35) That represents fully 45% of Singapore's total refining capacity of 1,336 kb/d.(36)

ExxonMobil also has an important presence in all the jurisdictions of the courts being asked to freeze Venezuelan assets:

It is, of course, an American company. (Interestingly, the Chalmette refinery half-owned by ExxonMobil and PdVSA appears to be exempt from Venezuela's embargo on sales to ExxonMobil.)(37)

In the Netherlands, ExxonMobil operates no less than eight refineries and other processing plants.(38) Curacao, which hosts the refinery that PdVSA leases, is in the Dutch Antilles. (Remember that the other important re-export refinery is located in the US Virgin Islands.)

The Fawley refinery on Southhampton Water is the largest in the UK and one of the most complex in Europe.(39)

Given this--and the important fact that the expropriation of alien property without compensation is contrary to international law(40)--it is not surprising that Venezuela lost its case before the courts, which froze $12 billion in Venezuelan assets and, I imagine, is making it difficult to do business worldwide. (Venezuela is party to an agreement relating to investment guarantees which was signed in 1962.(41) I do not have access to that treaty, but a similar, more recent, treaty with Uruguay explicitly forbids expropriations except those done for a public purpose, in a non-discriminatory manner, and where prompt and adequate compensation is made at market value.(42) I would be surprised if the 1962 treaty with Caracas didn't have some similar language. It also appears that several bonds the Venezuelan government issued on the US and UK financial markets expressly waived their rights to sovereign immunity in their prospectuses and explicity gave jurisdiction over potential disputes to the courts of both countries.)(43)

I do not think that Venezuela will win its appeals.

Arbitration would reportedly take a long time, and my suspicion is that ExxonMobil is not likely to take a soft line in negotiations with Venezuela to put an end to the conflict. I imagine they want PdVSA out of the Chalmette refinery which was part of the original Cerro Negro deal. But they may well have their eyes on more of the CITGO properties than that.

As a comparison, in 2006, the Lyondell Chemical Company paid $2.1 billion for CITGO's minority stake in a 270 kb/d refinery they jointly owned in Houston.(44) I really have no idea what the market value of CITGO's 50% stake in the Chalmette refinery would be, but I am guessing it is considerably less than $12 billion.

If, in order to raise cash, Venezuela is forced to liquidate one or more of its stakes in its US operations, I imagine it would be a fire sale, more or less. In short, ExxonMobil may be able to pick up some or all of these refineries on the cheap. In other words, it would almost be expropriation in reverse--giving Venezuela a taste of its own medicine.

If that were to happen, ExxonMobil will find itself in a much stronger position vis-a-vis Venezuela than it had as the operator of Cerro Negro. The central fact of Venezuelan crude production is that the average API(45) of its four major sedimentary basins is 20 degrees.(46) That means that these are heavy oils, which require expensive and sophisticated refineries to produce. Most of the crudes that are produced in the Orinoco Basin are syncrudes, even heavier (around 15 degrees API), and which require sophisticated refineries which need to be specifically tooled to that syncrude. In oil industry parlance, this means that the oil is not especially fungible, because only a limited number of refineries around the world can even process the oil.

If, due to this conflict, ExxonMobil managed to pick up some or all of CITGO's properties in the US, it would become the owner of a large percentage of the refineries capable, tooled to, and familiar with Venezuelan crudes. Venezuela would find itself in a position where out of a limited number of potential buyers, ExxonMobil was the most significant purchaser--the one with which it had the worst possible relationship. I imagine executives at ExxonMobil would savor the irony.

(1) CIA's World Factbook article on Venezuela
(2) Most industry analysts and the Energy Information Agency of the US Department of Energy estimate that Venezuela produced about 2.8 million b/d in 2006. Others have claimed that Venezuela exported as much as 3 million b/d in 2006, that would be on top of the 600,000 b/d or so that Venezuela consumes domestically. Energy Information Agency Country Report on Venezuela
(3) CIA's World Factbook article on Venezuela
(4) The Atlantic Monthly, "The Talented Mr. Chavez" by Franklin Foer, May 2006
(5) Energy Information Agency Country Report on Venezuela
(6) Energy Information Agency Country Report on Venezuela
(7) The Atlantic Monthly, "The Talented Mr. Chavez" by Franklin Foer, May 2006
(8) The EIA estimates that China consumed 7.4 million b/d in 2006, a 500 kb/d or 7.2% increase in demand over 2005. Energy Information Agency Country Report on China
(9) World Socialist Web Site, "China's Oil Diplomacy: Hugo Chavez Makes High-Profile Visit to China" by John Chan, September 6, 2006
(10) Energy Information Agency Country Report on Venezuela and Energy Information Agency Country Report on China
(11) The maximum size of oil tankers that can physically pass through the Panama Canal are known as "Panamax" tankers. Their maximum volume by weight is 80,000 dead weight tons, or about 650,000 barrels of crude. An Analyst Panel Discussion on the Tanker Sector: Market Wire Business News, February 5, 2008. Larger tankers have to either pass through the Strait of Magellan, if possible, or all the way around Tierra del Fuego--either that or east to the Suez Canal or past Cape of Good Hope.
(12) Energy Information Agency Country Report on Venezuela
(13) Reuters, "Brazil oil output gushes, exports hinge on economy" by Andrei Khalip, July 27, 2007
(14) Worldnetdaily.com, "Brazil reports massive oil discovery" by Jerome R. Corsi, November 14, 2007
(15) Energy Information Agency Country Report on Venezuela
(16) The Washington Post, "U.S., India Reach Deal On Nuclear Cooperation; With Fuel Imports Allowed, Arms Program Could Grow" by Jim VandeHei and Dafna Linzer, March 3, 2006
(17) Energy Information Agency Country Report on Japan
(18) Japanese Agency for Natural Resources and Energy, Ministry of Economy Trade and Industry, "Energy in Japan 2006", page 21
(19) Energy Information Agency Country Report on Japan
(20) Energy Information Agency Country Report on South Korea
(21) Energy Information Agency Country Report on South Korea
(22) "Refinery creep" is an industry term for the fact that due to additives and other processes, the volume of products refined from crude oil is slightly more than the volume of oil input.
(23) Energy Information Agency Country Report on Singapore
(24) Contact with the new PDVSA: A Newsletter about Venezuela's National Oil Industry, "Europe, Asia, the Middle East and Africa sign energy projects with Venezuela", pages 8-9
(25) Associated Press, "Chavez Threatens US Oil Cutoff", by Sandra Sierra, February 10, 2008
(26) USA Today, "Has Citgo become a political tool for Hugo Chávez?", by David J. Lynch, January 13, 2006
(27) Energy Information Agency, "Impacts of the Venezuelan Crude Oil Production Loss", by Joanne Shore and John Hackworth, March 2003
(28) Chavez's party at the time he first became President of Venezuela was known as "the Fifth Republic Movement Party" (Movimiento V [Quinta] República)--an allusion to France's Fifth Republic which, under Charles de Gaulle, strengthened the President's powers. In many ways, Venezuela owes its independence in 1811 (July 5th) to the French Revolution and the rise of Napoleon, whose invasion of Spain weakened that country's hold on its colonies in South America sufficiently for them to break free. Even under Sarkozy, the French remain suspicious of what many regards as America's "hyper-puissance" and Chavez repeatedly makes reference to the French intellectuals which justified the French Revolution. Wikipedia article "France"
(29) Entrepreneur.com, "Downstream Parts Of Orinoco Heavy Oil Ventures", originally published by APS Review Downstream Trends, November 26, 2007
(30) APS Review Gas Market Trends, "VENEZUELA - Cerro Negro", November 10, 2003
(31) China CSR, "ExxonMobil Launches First Foreign Refining Joint Venture In China", February 26, 2007
(32) ExxonMobil webpage on South Korea
(33) Kingdom of Saudi Arabia's Ministry of Petroleum and Mineral Resources
(34) Sakhalin-1 Project Website
(35) ExxonMobil webpage on their Singapore Refinery
(36) Energy Information Agency Country Report on Singapore
(37) Bloomberg, "Venezuelan State Company Stops Sales of Oil to Exxon (Update3)", by Steven Bodzin, February 12, 2008
(38) ExxonMobil webpage on its Rotterdam Refinery
(39) ExxonMobil webpage on its Fawley Refinery
(40) Ian Brownlie, "Principles of Public International Law," Oxford University Press, 2003, pp. 509-12
(41) US Department of State, Treaties in Force, 2007
(42) US Government Printing Office, Investment Treaty with Uruguay, Article 6 Expropriation and Compensation, paragraph 1, page 7, April 4, 2006
(43) "Exxon v PDVSA? Hugo Chavez v Venezuela actually," by Miguel Octavio, February 20, 2008
(44) New York Times, "Houston Refinery Sold", reprint of a Reuters piece, August 17, 2006
(45) API Gravity is the standard adopted by the American Petroleum Institute to measure the density of a liquid, expressed in degrees. OTS Heavy Oil Science Centre: Glossary The lower the API number, the heavier the liquid. Water = 10 degrees API. The value of a crude closely follows its API, though there are many other factors involved such as how much sulfur is in the oil (a little makes for a "sweet" crude, a lot makes for a "sour" crude) and the quantity of various metals it contains. A light crude has a high API and a heavy crude a low API--some are even heavier than water. Heavy crudes are more difficult to refine, even more so if they happen to be sour and contain many other "impurities."
(46) APS Review Oil Market Trends, "VENEZUELA - Part 2 - The Upstream Sector & Operators." November 21, 2007

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