Even though people the world over instinctively recoiled as reports came in of Gadhafi's violent retaliation against Libyan protests on February 21, 2011, the official reaction from the US Government was muted at best. The refusal to act on an intuitive response to immediately remove the Libyan dictator's ability to wantonly kill people resisting his right to rule may have come from concerns that the mounting tumult of a change of government in a major oil-producing region of North Africa could cause even just a disruption in the supply of crude. Indeed, even the mere possibility was prompting a spike in the price of oil (and gas)--what one might call a risk premium. Even the prospect of an ensuing nasty electoral backlash from consumers having to face a possible increase in their largely non-discretionary gas expense was not lost on their elected representative in chief at the White House. Even five days later, after some serious press on the rising price of gasoline hitting American consumers, the most the president would do is proffer a verbal "demand" from afar that Gadhafi leave Libya. "When a leader's only means of staying in power is to use mass violence against his own people, he has lost the legitimacy to rule and needs to do what is right for his country by leaving now," the White House said in a statement. The dictator must have been shaking in his boots. In actuality, Gadhafi had lost his legitmacy to rule five days earlier, and by the day of the statement the American administration could have been actively involved with willing EU states in stopping him inside Libya. Given the progress of the protesters-turned rebels and the behavior of Brent crude that week, the interests of the American consumer (and Western oil companies, as well as the business sector over all) were by then firmly in line with an enforced regime change in Libya. Oddly, the old dogma of an absolute governmental sovereignty was colluding with an inherently excessive risk-averse corporate political risk methodology to hold America back from acting as midwife to a new political awareness breaking out in the Middle East.
On the day of Gadhafi's self-vaunted shooting spree, Brent crude benchmark vaulted past $108 a barrel (settling at $105.74, a two-year high). On the following day, it rose to $111.25. On the first day of March, the Dow Jones Industrial Average dropped 168.32 points, or 1.38%, to finish at 12058.02, its third triple-digit decline in the past week. Oil futures on the New York Mercantile Exchange, already up 6% this year, jumped 2.7% to settle at $99.63 a barrel. Brent Crude in London hit $115.42 a barrel, the highest settlement since Aug. 27, 2008.The graph shows the change in oil, though the change looks astounding in part simply because the graph only goes to 15%; were it to go to 100%, the picture might seem less dramatic.The Wall Street Journal had reported already on February 21st that the rise was "driven by increasing unrest in the Middle East." Specifically, worries that the turmoil in Libya was curtailing output of that country's oil were said to be driving the price climb. However, USA Today cites Darin Newsome, an energy analyst at DTN, as pointing to the role of speculators around the world as propelling the price of oil. "The flow of money plays an enormous role in the direction, speed and volatility of these markets." In fact, the market mechanism itself may be flawed because speculators could push commodity prices out of sync with the underlying supply of the respective commodities. Turmoil in Libya cannot be blamed for the ensuing “creation” of artificial value (such an increase, by the way, had fueled the housing bubble in the US that came in for a hard landing in 2008). In fact, the rise in world oil prices began before the final third of 2010—before the prospect of widespread popular protest in the Middle East was realized. Indeed, the climb during the last third of 2010 looks a lot like that which took place in the first third of 2009 (during a recession). It was not until well into February, 2011, that the turmoil in the Middle East appeared, according to MSNBC, “to pose limited risk to global oil supplies. Neither Tunisia nor Egypt produce oil or gas.” Such “limited risk,” besides being mitigated, cannot very well be projected back well into 2010 to explain the rise in the price of gas.
Incidentally, another interesting feature of this graph is the sustained drop in 2008, before the financial crisis in September (and the U.S. Presidential election in November!). The “V” pattern at the end of 2008 is classic “electoral.” It suggests that the price of gas may be very attuned to the electoral interests of those in power, and therefore to government policy. My contention in this essay is that this dynamic was alive and well in Washington when Gadhafi was turning on his own people.
In any event, The Wall Street Journal observed on the day after the massacre that rising oil prices "could have big implications for the U.S. economy." Although perhaps overreacting from the day's news, it is true that the price of oil has a big impact on a consumer-driven economy. Energy expenses, like food, are nondiscretionary, Howard Ward of GAMCO Growth Fund told MSNBC. “And they’re now poised to take a bigger share of wages than we’ve seen in several years. That will have a dampening impact on discretionary spending. We still have an economy that is 70 percent consumer spending.” In such an economy, how could politicians turn a blind eye to domestic consumer interests, even at the expense of defending human rights abroad? Arjun Murti, an oil analyst at Goldman Sachs, told The Wall Street Journal that even as people "put so much emphasis on the U.S., . . . what is going on in the rest of the world matters as much if not more." However, elected representatives are inclined by their desire to stay in power to put world news through the prism of their constituents' pocket-books, and thus to frame foreign policy to protect their consumers. In other words, an elected representative is apt to be more finely attuned to the grievances of his or her electorate than to stopping human rights violations abroad. Perhaps it is such politics that keeps heads of democratic governments from agreeing on an intergovernmental or international military mechanism that would act to stop a regime once it has violently turned on its own people.
Besides the political implications from consumers being even potentially shell-shocked by higher gas prices, the business sector can be expected to be averse to political instability in a region of the world in which so much oil is produced. This aversion is, in my view, overly risk averse. As MSNBC points out, it is unlikely that any new regime in an oil-producing country would withhold supply as a matter of policy because “any new government would badly need those oil revenues.” Libya produces only 2% of global supply of crude, and the Saudi-controlled OPEC cartel would make up for any loss. “OPEC is ready to meet any shortage in supply when it happens,” the Saudi oil minister, Ali al-Naimi, said at a news conference after an OPEC meeting, according to The New York Times on February 23rd. “There is concern and fear, but there is no shortage.” In my view, the minister’s statement reflects the excessive risk aversion in corporate political risk departments, for while fear is perfectly understandable for a protester who is being gunned down in the streets, the emotion represents or points to an over-reaction among managers assessing the political risk in financial terms from the vantage point of their carpeted offices in the steel fortresses of the modern cities.
In another piece in The New York Times on February 23rd, Clifford Krauss put forth the argument that the relative quality of Libya’s reserves magnified its importance in the price spike. Saudi Arabia has more than 4 million barrels in spare capacity, but it includes “heavier grades of crude that are higher in sulfur content and more expensive to refine.” Larry Goldstein, a director of the Energy Policy Research Foundation, an organization partly financed by the oil industry, argues that “Quality matters more than quantity.” Furthermore, should Europe need to buy sweet crude from Algeria and Nigeria, that could push prices higher. “Nigeria and Algeria are already producing flat out so they can’t come up with another million barrels a day,” Michael Lynch of the Strategic Energy and Economic Research consultancy firm, said. “That means there will be a scramble for lighter crude supplies.” The last time there had been a shortage of sweet crude (in 2007 and early 2008), oil prices soared to more than $140 a barrel, although the cause then was spiraling demand. Moreover, placing quality before quantity seems questionable to me in looking at supply as it interacts with demand. Furthermore, the analysts are discounting the impact of the Saudis and OPEC to counter for any increase in costs by increasing supply. The New York Times reported on February 23rd that “Tom Kloza, the chief oil analyst at the Oil Price Information Service, estimated that the Saudis could pump an additional 1 million to 1.5 million barrels in a matter of days.” Additionally, OPEC has “a reserve capacity to deliver an additional four million to five million barrels to the world markets after several weeks of preparation. That is more than twice the oil that world markets would lose if production were halted completely by unrest in Libya.” In other words, in the wake of Gadhafi’s massacre as Brent crude hit $110, the business analysts should have realized that the Saudis would have to virtually agree or otherwise go along with any cost-induced spikes. Or course, the political risk analysts have also argued that the Saudi royal family could fall, given the spread of protests throughout the region. To be sure, that is a possibility, but not necessarily as the analysts play it out or with a cut off in Saudi oil.
On March 2nd, The Wall Street Journal ascribed the previous day's market jidders to fears of unrest intensifying in Saudi Arabia as authorities there arrested a prominent Shiite cleric who had been calling for political reforms. "If there are problems in Saudia Arabia, we will feel it and that's causing concern, obviously," said Marc Pado, a U.S. market strategist at Cantor Fitzgerald. Also, Iran reported clashes between protestors and security forces in Tehran. Concerning Saudi Arabia, which seems to have been the epicenter for the worry, analysts believed at the time that the political instability in Bahrain meant that Saudi Arabia itself could be at risk. Indeed, the political risk argument may have come down to this contingency. Kloza points out that unless the unrest were to spread to the streets of Jeddah and Riyadh, “I think it’s a very manageable situation and prices are closer to cresting than they are to exploding higher.” Even he could be overstating the risk, for besides discounting the financial appetite that a republic in Arabia would have in selling oil, his analysis projects too much based on a kinship between Saudi Arabia and Bahrain. The New York Times article also points to oil experts who argued at the time that the “island nation has a majority Shiite population with cultural and religious ties to the Saudi Shiite minority that lives close to some of the richest Saudi oil fields.” However, there are a number of “ifs” that must first be satisfied before this fuse could have gone off. For one thing, Saudi oil fields are well defended. Also, that a majority population might do something does not mean that as a minority population it would do likewise (and in a different and much larger country). Were the unrest sweeping the Middle East to hit Saudi Arabia and turn it too into a republic, it would be a part of the broader sweep. In other words, I think the analysts overstate the significance of Bahrain and, moreover, miss the bigger picture (i.e., the transformation of the Middle East into democracies from autocracies). Such a historical transformation of the entire region could well be happening. but that doesn't necessarily mean that a significant sustained cut-off in the supply of oil would result. Indeed, such a conclusion ignores a basic fixture in human nature: greed. It is ironic that political risk analysts in business would miss that element. In short, they are over-reacting via over-projecting.
Going overboard in making projections is one indication of an excessive aversion to risk in a personality. I suspect that this bias in corporate political risk analysis comes not only from like personalities, but also from corporate culture, which eschews controversy of any sort. In the rarified corporate office, conflicting values are willowed away in favor of the hegemony of efficiency and the associated business technique. This cultural aversion to uncertainty impacts business practice, including political risk analysis. A well-run corporation would have someone in that department saying, in effect, “hey, loosen up, guys.” When it really is bad, such as it was in September, 2008 when the financial system almost collapsed, business is typically caught off guard just like the rest of us. In terms of the protests in the Middle East, we can take it to the bank that business was on the side of political stability, and thus, the extant regimes.
The price of oil affects so many industries that virtually any industry can be expected to lobby for foreign policies that give priority to the stability in the status quo (rather than to revolution). That is, both consumer and business interests could be expected to have pressured elected representatives in the U.S. Government to resist giving too much support to the protesters in the Middle East. For example, President Obama’s policy was that Mubarak should stay in power through the transition even as events in Egypt were rapidly forcing him out of office. Whereas strategic interests such as the Suez canal might have been foremost in Obama’s calculation regarding Egypt, oil, and thus American consumers and business, might have been primary in his muted statements in the wake of Gadhafi’s retaliation. This sets up an interesting dilemma. While the immediate reaction of most people worldwide who were recoiled in horror at the atrocities in Libya on February 21st was for something to be done right away to stop Gadahfi even if it meant more chaos in the short-run, business political risk analysis proffered an alternative course--that of reducing the turmoil immediately even if that meant retaining Gadhafi in power. Whereas proponents of democracy and human rights viewed the protests in Libya as a good thing, such people would be surprised to find the activity portrayed from the business standpoint in negative terms even in our midst. For example, USA Today reported Peter Beutel, of Cameron Hanover, as saying, "We have all the wrong things working together at the right time: an economic recovery, (stocks) making new highs, a lower dollar, strong seasonal demand and unrest in the heart of oil production" (italics added). Libyans putting their lives on the line is also unrest in the heart of oil production. It is the starkness in the vector of valuation (i.e., very good vs. very bad) that is striking here. That a person in one house could have been viewing the spreading protests in the Middle East as instantiating a much overdue development in government while a person next door was disdainful of all the unrest attests to how differently the same event can be viewed.
From the standpoint of the environment of international business, standing on human rights is not as much of a priority as an observer might want. In other words, what is good for GM is not necessarily good for the world. The theory that increasing international business (e.g., trade and foreign direct investment) leads to or guarantees peace suddenly looks insufficient as a sufficient philosophy of international business. An implication is that if corporate lobbyists have real sway over governments, the latter can be expected to shy away from policies and actions that would increase short-term political instability even where such turmoil were a good thing from the standpoint of democracy and human rights. Politicians who allow themselves to be controlled by corporate executives can be expected to overstate stability and shortchange leadership (and real change). It may be that even the very existence of large corporations in a republic could thus be problematic from this standpoint. Corporations, and even ironically elected representatives, may be predisposed to advocate policies that are at odds with expanding democracy in the world.
In general terms, I contend that both toady politicians and the timid business executives who do not want to rock the boat for financial reasons are short-sighted even by their own rather narrow criteria. In the case of Libya, were an overwhelming multinational military force to have descended on Libya as Gadhafi's men were ravaging Libyans on the streets rather than waiting for the U.N. Security Council to act, Gadhafi could have been stopped in his tracks in short order and thus order and civilians preserved (i.e., oil supplies undisturbed and a slaughter averted). Of course, as with any military action, things can go wrong. To be sure, military action is always risky. For example, Gadhafi could sabotage the Libyan oil wells as Saddam did in Iraq in the first Gulf War (1992). However, the failure of the world to take first initiative could have given Gadhafi time to set up explosives ready at the touch of a finger in Tripoli. Indeed, there were reports on the day following the massacre of Gadhafi intending to blow up the oil wells anyway. So the destruction of Libyan oil production could have come either from the world acting or failing to act in the wake of Gadafhi's violence against the protesters. Given the ambiguity of such risk, corporate political risk analysis would probably still come down in favor of retaining Gadhafi because the status quo is typically presumed to proffer the most stability. This I would call the fallacy of the status quo, which I believe dominates bureaucratic and state department thinking.
Instead of placing corporate political risk analysis on center stage, I submit that business is not the focal point of society (or politics). At the societal level, the hub and spokes stakeholder framework must be replaced by a web-structure wherein there is no central entity. Corporate political risk analysis from this broader perspective should be consulted without being allowed to become dominate. Therefore, governments around the world ought to overcome the presssure from their respective corporate political risk analyses in favor of human rights to place real limits on governmental sovereignty backed up by an international or multinational force on permanent stand-by, with a mechanism for activation agreed to before any occasion. Such a leap would of course take principled leadership. Such leadership could be partially reconciled with more immediate strategic political interests by making the mechanism go into effect after the present term of office. While not optimal, this method would indeed deliver (eventually).
Hence, even after five days of carnage in Libya and worsening volitility and price spiking of oil, as well as gasoline and jet fuel, at the expense of the American consumer and business firm, the Obama administration--the regime of real change--could only muster a statement and a freezing of assets. "When a leader's only means of staying in power is to use mass violence against his own people, he has lost the legitimacy to rule and needs to do what is right for his country by leaving now." It would be almost a month after Gadahfi had turned on his protesting people that the U.N.'s Security Council brought itself to act in authorizing all necessary means for member countries who want to step in to protect civilians in Libya. By that time, the protesters had become armed rebels and Gadafhi's military had been on the roll, killing rebels and civilians alike. A clean cut would have been better than a period of indecision.
Sources:
Jerry DiColo and Brian Baskin, "A Stealth Comeback for $100 Crude Oil," The Wall Street Journal, February 22, 2011, pp. C1, C3.
http://online.wsj.com/article/SB10001424052748704506004576173961240139414.html?mod=ITP_moneyandinvesting_0
Gary Strauss, "If Unrest Spreads, Gas May hit $5", USA Today, February 22, 2011, p. AI.
http://www.msnbc.msn.com/id/41739499/ns/business-personal_finance/
http://www.nytimes.com/2011/02/24/business/energy-environment/24oil.html?_r=1&hp
http://www.nytimes.com/2011/02/23/business/global/23oil.html?ref=todayspaper
http://www.msnbc.msn.com/id/41785849/ns/world_news-mideastn_africa/
http://www.nytimes.com/2011/03/18/world/africa/18nations.html?hp
