March 2, 2015

A weak America in a dangerous world: A recipe for disaster

The world seems to be falling to pieces these days. Russia has annexed Crimea, is methodically dismembering Ukraine, methodically probing the defenses of Northern Europe, and is once again casting a covetous eye on the Baltic and South Caucasus states. Vladimir Putin has expertly judged the hobbled condition of Europe and is exploiting not only its dependence on Russia’s energy resources and markets but also its anemic military condition to the fullest extent, getting all he can while the getting is good and easy.

The Islamic State, homicidally focused on dragging the world back to the seventh century, has carved a caliphate out of the dysfunctional states of Syria and Iraq, fomenting instability across the region through its surrogates and franchises and other like-minded violent Islamists in Yemen, Jordan, Lebanon, Egypt, Libya, Tunisia, and Nigeria.

In a similar fashion, Iran is leveraging a rare strategic opportunity—the absence of a “Great Power” that cares to be involved in the region—to culminate its pursuit of a nuclear weapons capability, betting on the desperation of the U.S. to secure a “deal” that would preclude it from taking action to prevent such an occurrence, much like Russia is leveraging the similar desperation of Germany and France over the Ukraine disaster. Further, Iran recognizes the window of opportunity that exists to secure its influence over Iraq, thanks to the U.S. withdrawal, for generations to come and to extend its hand against Israel via its surrogate force in Hezbollah.

And to the far east, China is methodically entrenching itself in disputed waters, fortifying atolls, muscling away the fishing and commercial fleets of competitor claimants, and contesting international airspace all the while exploiting vulnerabilities in America’s cyber shields to steal intellectual property worth billions of dollars and millions of man-hours, penetrate government and financial sector systems, and conduct deep cyber reconnaissance of America’s national critical infrastructure.

In times past, the United States would have risen to such challenges to its security interests and to the existing global order, as it did when the Soviet Union or China sought to export their brands of Communism. America’s confident strength steadied friends and allies and pushed back against belligerent opportunism. But those days appear to be receding. The U.S. has elevated other interests to higher priority, a condition most readily seen in the allocation of funds within the federal budget, the mounting obligations (and massive debt) driven by social spending, and the rapid decline of the U.S. military in its ability to protect America’s global interests.

In fact, the U.S. military now finds itself in a state where it would be unable to successfully handle two major conflicts in different parts of the world, a long-held objective of national security policy. America’s Navy, at 285 ships, is approaching pre-World War One levels; its Air Force flies planes more than a quarter-of-a-century old (some more than a half-century); the Army is approaching half the size deemed necessary just a few years ago; and the Marines, with demand for their shrinking force at record highs, have committed indefinitely to near-continuous rotational deployments of their operating forces.

This problem did not suddenly emerge. It has slowly, but relentlessly evolved as funding for the base-budget has declined in constant dollars over the past years and the cost for manpower, equipment, and weapons has steadily risen. Extended production timelines for expensive, high-end platforms, sustained use of the force for the past decade or more, and lack of funding to acquire as many replacement items as are retired or lost in combat have combined to result in a force that is old, small, worn out, and unable to maintained appropriate levels of readiness.

This is but one finding derived from the research conducted to produce The Heritage Foundation’s inaugural Index of U.S. Military Strength, an annual publication that assesses the condition of America’s military forces and their ability to meet national security requirements.

The Index also assesses the condition of key allies and their regions as they factor into the ability of U.S. forces to conduct operations abroad, and the status of states and non-state actors who pose direct, high-level challenges to U.S. national security interests.

Per the Index, America’s allies, though reasonably stable and steadfast, are less capable due to their own neglect of their military forces. Consequently, America’s planning assumptions that include reliance on the contributions of critical friends and allies are flawed, leading to previously unrecognized and unacknowledged risk to U.S. security interests. Further, competitors that pose serious challenges to America are heavily investing in military capabilities carefully matched to their own circumstances and objectives, increasing all the more the challenge U.S. forces would face if called upon.

The situation is worrisome and the trends are ominous, not least because it is far easier to decline still further than to make rapid improvements that take substantial time, money, and attention...all of which seem to be in short supply.

America’s allies see this condition and reassess their own foreign policy objectives, as we have seen in Europe vis-à-vis Russian aggression or in Asia where the Philippines, Vietnam, and others protest China’s expansionism but do little to openly contest it. America’s enemies see this condition too and act accordingly, exploiting an America distracted, financially strapped, and military weakened.

The 2015 Index of U.S. Military Strength succinctly describes these trends, noting the contributing factors and providing a wealth of reference material for policymakers, analysts, and the American public who must take a greater interest in the current and future security of their country.

February 26, 2015

The 2015 Index of U.S. Military Strength

We enjoyed a very successful roll-out of our new project this week. Video of the event can be seen here. The Index is fully available here at a great website has been built for it; I hope you take the time to check it out.

One of the best commentaries I've read so far concerning the worrisome state of affairs of our security posture comes from Dan Goure, who wrote:
It is incontrovertible that U.S. military power and presence in the world is declining. The armed forces themselves are worn out, inadequately resourced and badly in need of modernization. Nor can there be any argument that threats to our security and that of our friends and allies are multiplying and growing bolder and even stronger. At the same time, according to blunt statements by senior defense officials, this nation is losing its military-technological edge. Yet, there has not been a diminution in the demands on U.S. military power.
The point to our Index is this: This U.S. is a global power but can only remain such if it acts accordingly, disciplines its spending habits, truly champions things it thinks are vitally important to its long-term interests, and prioritizes the use of its resources accordingly. It cannot remain fiscally viable as a spendthrift nation. It cannot maintain a strong, growing economy if it overly burdens it with excessive debt, suffocates innovation with government-imposed strictures, or loses access to materials and markets. But above all, it cannot remain a global power--the preeminent power--if it is militarily weak or even perceived as such. Military power isn't about dominating other countries by force. It is about deterring domination by others and stopping or overturning their domination if they are not deterred. Countries seek alliances with other countries whom they perceive to be powerful and they run from or exploit those they perceive to be weak. Little wonder Roosevelt cited an old African proverb about "big sticks" being necessary for diplomacy to work or that Reagan made "peace through strength" a central theme of his foreign policy. 

Gen James Mattis recently sounded a number of alarms in testimony before the Senate Armed Services Committee, adapted in an essay posted here. He prefaced his discussion of the importance of military capabilities and readiness with this:
The world is awash in change. The international order, so painstakingly put together by the greatest generation coming home from mankind’s bloodiest conflict, is under increasing stress. It was created with elements we take for granted: the United Nations, NATO, the Marshall Plan, Bretton Woods and more. The constructed order reflected the wisdom of those who recognized no nation lived as an island and we needed new ways to deal with challenges that for better or worse impacted all nations. Like it or not, today we are part of this larger world and must carry out our part. We cannot wait for problems to arrive here or it will be too late; rather we must remain strongly engaged in this complex world…The international order built on the state system is not self-sustaining. It demands tending by an America that leads wisely, standing unapologetically for the freedoms each of us in this room have enjoyed…While we recognize that we owe future generations the same freedoms we enjoy, the challenge lies in how to carry out our responsibility.
As it now stands, our military forces are shrinking in size, losing the capacity necessary to be in many places at once or in sufficient numbers in any one place to protect America's interests. They are also aging, meaning the people and platforms that compose our military are being used more frequently, for longer periods, and without replacement in the near future. Simply put, our military is being worn out, a condition worsened by the impact of sequestration which is forcing the military Services to shed personnel--thus placing a greater burden on those that remain--to defer maintenance on equipment that increasingly needs it, and to delay the acquisition of new equipment intended to replace items being used up in current operations.

Unless things change in the very near future, unless our country reconsiders its priorities, disciplines itself, and determines to once again "carry out our responsibility" to lead and ensure the continuation of an international order that has benefited more people in more ways than at any other time in history, we will soon find that no one else can do so and will suffer the consequences for a very long time. It's that important.

February 23, 2015

Upcoming Release of the 2015 Index of U.S. Military Strength

This is the project that has kept me preoccupied for many months. Will update with a link to the Index website when it is active tomorrow morning.

The 2015 Index of U.S. Military Strength is a path-breaking, comprehensive research project, to be published annually, which assesses the ability of the United States Armed Forces to provide for the common defense. Taking its place as a flagship publication alongside Heritage’s Index of Economic Freedom and Index of Culture and Opportunity, the Military Strength Index analyzes the U.S. military’s status in capacity, capability, and readiness against an enduring strategic benchmark: the ability to fight and win two major regional contingency operations simultaneously. The publication further looks at how evolving threats and opportunities around the globe contribute to and influence this ability. Finally, the 2015 Index of U.S. Military Strength provides individual analysis of overarching security themes such as how to think about National Security, the implications of prioritized national security policies like the Asia-Pacific pivot, and the critical roles played by strategic enablers such as the United States’ nuclear weapons capability and Special Operations Forces. Join us as for a special discussion of The Heritage Foundation’s new Index of U.S. Military Strength.

February 19, 2015

The Unalienable Rights of Man

Too good not to share as is.

The Unalienable Rights of Man

A Brief Civics Lesson for Liberals on the Fundamentals of Liberty

By Mark Alexander · Feb. 18, 2015
“God who gave us life gave us Liberty. Can the liberties of a nation be secure when we have removed a conviction that these liberties are the gift of God? Indeed I tremble for my country when I reflect that God is just, that His justice cannot sleep forever.” –Thomas Jefferson (1774)
Just in time for the faux celebration of “Presidents' Day” this week, faux CNN celebrity “journalist” Chris Cuomo, brother of New York Gov. Andrew Cuomo (both heirs to the Mario Cuomo Demo Dynasty), managed to dispense with the Declaration of Independence and its 239 year enshrinement of American Liberty – in a mere 10 seconds.

In Cuomo’s interview with a real Patriot, Alabama Supreme Court Chief Justice Roy Moore, on a Tenth Amendment (States' Rights) issue, Judge Moore stated that the “Rights contained in the Bill of Rights do not come from the Constitution, they come from God.”

Cuomo, endeavoring to redefine the origin of Rights, rebutted, “Our rights do not come from God, your honor, and you know that. They come from man. … That’s your faith, that’s my faith, but that’s not our country. Our laws come from collective agreement and compromise.”

I am quite sure that Judge Moore, a West Point graduate, Army captain and Vietnam veteran who later earned his JD and embarked on a law career, wanted to grab Cuomo, who has spent his entire adult life as a media talkinghead, and slap some sense into him.

Instead, Judge Moore responded thoughtfully and respectfully, paraphrasing our Declaration’s foundational assertion, which reads, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator [not man] with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these Rights, Governments are instituted among [not over] Men, deriving their just powers from the consent of the governed [not the government].”

Cuomo’s knowledge of history and law is unduly limited by his Ivy League education, and unduly revisionist by his Democratic Party indoctrination. He might have a genuine perspective on history had he followed Mark Twain’s maxim: “I have never let my schooling interfere with my education.”

Allow me to offer Cuomo and his Left-elitists, an elementary civics lesson in order to answer the question, “Who endows the Rights of Man, God (as ordained in natural law) or government (as ordained by man)?”

First, Cuomo asserts, “Our rights do not come from God. … That’s your faith, that’s my faith…”

Wrong, wrong and wrong.

The first paragraph of our Declaration references “the separate and equal station to which the Laws of Nature and of Nature’s God entitle them,” which informs the words “endowed by their Creator” in the second paragraph.

To better understand what is meant by “the Laws of Nature and of Nature’s God,” recall that our Declaration’s signers were not of one mind on matters of theology and doctrine. They were Christians, Deists and Agnostics, but they did, however, uniformly declare that the Rights of all people were, are and forever will be innate and unalienable, as established by “the Laws of Nature and of Nature’s God.”

This is not an article of “faith” as Cuomo assumes. It is the assertion that the right to “Life, Liberty and the pursuit of Happiness,” while enshrined in our Declaration, is inherent and applicable to all humans of every nation, religion, race and ethnicity, for all time.

It makes no difference what your concept of “Nature’s God” or our “Creator” is, or whether you even subscribe to any such conceptualization. You, and all people, are entitled to Liberty and all the rights it embodies. Those Rights not the gift of man or the declarations and constitutions written by men. As Founder Alexander Hamilton wrote, “The sacred Rights of mankind are not to be rummaged for among parchments and musty records. They are written, as with a sunbeam, in the whole volume of human nature, by the Hand of Divinity itself, and can never be erased or obscured by mortal power.” Indeed, the Declaration and Constitution were designed to protect those Rights, not award them.

Next, Cuomo insisted, “That’s not our country. Our laws come from collective agreement and compromise.”

Now that is an absurdly malleable heap of horse pucky. Cuomo has discounted the universal guidance of the Declaration, as if our Founders intended the Constitution as a substitute for it. Of course, it did no such thing, nor was that the intent of our Constitution’s delegation or ratification.

In that regard, I note that on the occasion of the Declaration’s 50th anniversary, James Madison (our Constitution’s principle author) wrote to Thomas Jefferson (our Declaration’s principle author), that the Constitution was subordinate to the Rights enshrined in our Declaration. Madison noted, “On the distinctive principles of the Government … of the U. States, the best guides are to be found in … The Declaration of Independence, as the fundamental Act of Union of these States.”

In other words, although the Articles of Confederation and its successor, the U.S. Constitution, were the contractual agreements binding the several states into one union – E Pluribus Unum – the innate Rights of Man identified in the Declaration are the overarching act of that union, and would never be negotiable by way of “collective agreement and compromise.”

Nor are those Rights negotiable today or tomorrow.

However, Cuomo’s conflation of Rights and laws asserts that the Rights of Man are, at any time, subject to the whims of agreement and compromise. Again, one wonders what part of “they are endowed by their Creator with certain unalienable Rights” Cuomo doesn’t understand. Perhaps it’s the “unalienable” part, which means “unable to be taken away or transferred.”

Not only do Cuomo and his leftist ilk refuse to acknowledge that the Rights of Man are non-negotiable, but they subscribe to the errant notion of a “living constitution” – one which is subject to executive and legislative encroachment, and particularly judicial amendment by diktat, instead of its prescribed method of amendment in Article V. This enables them to undermine our Constitution’s fundamental protections of Human Rights.

Though they take solemn oaths to “to Support and Defend” our Constitution, most politicians on the Left and too many on the Right ignore that obligation, and have trampled Constitutional Rule of Law with reckless abandon. The implications for Liberty are dire.

The debate between Judge Moore and Cuomo characterizes all fundamental historical debates regarding Liberty and tyranny, between conservatives and liberals, or in contemporary political parlance, between Right and Left. Again, the core question being debated: Who endows the Rights of Man, God (as ordained in natural law) or government (as ordained by man)?

The Left’s position has been made plainly evident by Barack Hussein Obama, who has a history of deliberately and repeatedly omitting the words “endowed by their Creator” when citing in open constituent forums the Declaration’s reference to “Rights.”

Obama and other contemporary leftist protagonists seek to substitute Liberty as ensured under Rule of Law with the rule of men. They do so because the former is predicated on the principle that Liberty is innately “endowed by our Creator,” while the latter asserts that government is the sole arbiter and grantor of Liberty.

Ignorance of the true and eternal source of the Rights of Man is fertile ground for the Left’s assertion that government endows such Rights. It is also perilous ground, soaked with the blood of generations of American Patriots defending Liberty at home and around the world. Indeed, as Jefferson wrote, “The tree of Liberty must be refreshed from time to time with the blood of patriots and tyrants.”

Our Founders concluded our Declaration with this pledge to each other, and all who would follow: “With a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.”

Millions of fellow Patriots honor that pledge today, and stand ready to extend Liberty to the next generation.

Here endeth the lesson.

December 3, 2014

The Dangerous Allure of Advanced Technology

The Dangerous Allure of Advanced Technology
“Offset strategies” is a topic currently being discussed in defense circles, the premise being that the U.S. has adopted various approaches to offset an advantage held by an opponent. According to this argument, the U.S. has pursued two previous offset strategies since World War II. The first emerged in the 1950s centered on nuclear weapons and associated operational concepts (like AirLand Battle in the 1980s) to offset the Soviet Union’s numerical advantage in conventional forces. The second focused on highly networked forces leveraging guided weapons such that U.S. forces, exploiting modern information-sharing technologies, would be far more effective than any enemy in coordinated, precision attacks—see the enemy first at great range, orient the force more rapidly to gain positional advantage, strike from long range with great precision, and win before the enemy really ever had a chance to get his act together. Operation Desert Storm is the textbook example. This second offset strategy arose in the mid-1990s as network-centric warfare and has evolved in various ways since then. Current discussions debate what a third offset strategy might be, with most focusing on cyber; next-generation precision weapons; directed energy (e.g., lasers); stealth (reducing the detectable signature of platforms/forces); and unmanned systems.

Ben FitzGerald, director of the Technology and National Security Program at the Center for a New American Security, has published a short essay titled “When Superiority Goes Wrong: Science Fiction and Offset Strategies,” raising justifiable concerns about this approach to the next offset strategy. (The Arthur C. Clarke story mentioned by FitzGerald can be found here. It is quite short, well worth the time to read, and all the more amazing in that Clarke wrote it in 1951!) Underscoring FitzGerald’s concern is the troubling pattern seen in the approach taken by the military services to field new weapon systems: leap-ahead/revolutionary/game-changing capabilities are sought, system/platform complexity increases, technology challenges arise, costs increase, and delays extend…all leading to fewer numbers fielded and much later than initially planned.

The result is a technologically advanced force that is quite small in size, thus having difficulty massing in sufficient numbers in more than one place at a time. A quick review of major defense programs from the past few decades illustrates the problem—B-2 bombers: 132 planned, 21 fielded; F-22 fighters: 650 planned, 183 fielded; DDG-1000 cruisers: 32 planned, 3 fielded; Littoral Combat Ship (LCS): 55 planned, the objective has dropped to 32 and is likely to be far fewer; Expeditionary Fighting Vehicle (EFV): 1013 planned, 0 fielded. A similar list was recently compiled by Stephen Rodriguez in his article “Top 10 Failed Defense Programs of the RMA Era.”

One could argue (and many do) that the answer to this lies in defense acquisition reform, but this has proven to be just as alluring and problematic as obtaining a magically advanced force. As documented by J. Ronald Fox in Defense Acquisition Reform, 1960–2009: An Elusive Goal:
From 1960 through 2009, more than twenty-seven major studies of defense acquisition were commissioned by presidents, Congress, secretaries of defense, government agencies, studies and analyses organizations, and universities…[arriving] at most of the same findings [and] recommendations…. [Major] defense programs still require more than fifteen years to deliver less capability than planned, often at two to three times the initial cost.
While Fox catalogs numerous reasons for this, arguably the most central is the military’s fixation on advanced technology as the solution to America’s security problems. Is technology important? Of course it is. But advanced capabilities should not be pursued to the detriment of fielding a force of sufficient capacity to serve U.S. national security interests—yet that is the path our defense community habitually travels.

Secretary of Defense Chuck Hagel has proposed to continue this approach in searching for a third offset strategy, as outlined here and here. A concern is that the U.S. defense establishment will remain fixated on early commitment to unproven technologies at the expense of readiness and capacity for operations. As we have noted previously here and here, the defense budget is in disarray and this Administration’s approach to security affairs is dangerously detached from America’s security interests.

In an era of problematic budgets, a better strategy would be to invest scarce resources in maintaining a force that is ready and large enough to serve U.S. security interests while delaying commitment to new technologies until they have been proven to be low risk and affordable enough to field in sufficient numbers. A third offset strategy should focus more on experimentation, new operational concepts, and education and training of the force and less so on premature commitment to unproven, extraordinarily expensive systems. As FitzGerald observes,
The United States relies on technical superiority to maintain its military advantage. But this technical superiority requires humans to generate the right strategies, design and build the right technologies, devise concepts of operations, and train forces to operate the technology to achieve strategic and tactical objectives.… However, we cannot ever let the hubris evident in Superiority lead us to defeat due to, as the narrator assesses, “…the inferior science of our enemies.”

December 2, 2014

On the Firing of Chuck Hagel

Thought you might find the below opinion piece from Jed Babbin of interest. Like Babbin, I think discussion of who succeeds Chuck Hagel is of academic interest, at best, because there is no indication that any of the conditions leading to Hagel’s departure will change. Thus, any replacement will experience the same frustrations and have as little impact on foreign policy, national security, national defense matters as did Hagel. 
I had a hand in drafting this piece last week following the announcement of Hagel’s resignation (firing), in which we provided our own perspective on the topic and made some suggestions about things the Administration can do to improve its ability to handle national security matters. Among the material left on the cutting-room floor during the editing process was this:
“As noted by former Secretary Bob Gates, the National Security Council Staff was composed of approximately 50 people when he worked for President George H. W. Bush; under President Barack Obama, the NSC has exploded to over 350. Former Secretaries Gates and Leon Panetta have both commented on the stifling level of micromanagement exerted by the White House over the execution of actions necessary to implement defense policies and to achieve security objectives aboard. Their frustration was compounded by their inability to penetrate the small, inner-circle of advisers that dominate policy formulation in the White House, an obstacle that confounded President Obama’s first National Security Adviser, General James L. Jones, and reportedly has plagued Secretary Hagel, too…

Cabinet officers are appointed by the President to lead and manage their respective departments, advise the President on policies pertaining to their area of responsibility then implement those policies as directed. If Secretary Hagel was being fired for incompetence in doing this, it would be warranted. But he isn’t. In fact, Hagel was actually successful in implementing the President’s policy to manage the decline of America’s military to levels of capacity and readiness not seen since prior to World War II. In doing so, however, he discovered first-hand the repercussions of such mismanagement when, in consultation with his senior military advisers, he was unable to provide effective options to accomplish the President’s stated objective of destroying ISIS. The President wanted a Secretary who would carry out policies that he had little influence in formulating; sought to manage the Secretary’s implementation of those policies with a staff operating outside of the Secretary’s control; then fired him when impossible-to-achieve results never materialized.”
As has been noted by many commentators over the past week, to include the NY Times (though see this interesting comment here), Washington Post, and other left-leaning/usually pro-Obama outlets, the Administration’s policy formulation, implementation, and management practices are at the heart of the problem…not any particular Secretary of Defense. When it comes to finding a replacement, this problematic process/management issue and the nature of the Obama presidency will preclude appointment of an ‘effective’ SECDEF. Any competent candidate acceptable to a Democratic administration will decline in order to remain viable for a prospective Hillary Clinton administration. Any candidate who might actually want to have an impact will decline knowing full well the insular nature and micromanagement style of the President’s inner-circle that they won’t be able to penetrate. No Republican-affiliated individual would be asked to serve since Obama has already had two Secretaries write tell-all books and the third was increasingly at public odds with the Administration’s defense/security policies; accordingly, priority will be placed on loyalty to the Administration over competence as a SECDEF. Given the delay in gaining Senate confirmation, any new Secretary would have little more than 18 months to accomplish anything and I believe it is usually the case that a waning Administration becomes more tired, more insular, and less likely to change habits…thus any new Secretary will have less chance of making any meaningful changes.

In short, anyone nominated for the position will be selected for loyalty, low-risk to embarrass or argue with the Administration, willing to operate under the thumb of Obama’s inner-circle of advisers and an intrusive national security council staff, and no prospect for future employment in a follow-on Administration.

The American Spectator


Mediocrity by design is how the White House wants it.

By Jed Babbin – 12.1.14

You will hear a lot between now and when Congress convenes in January about how urgent it is that Defense Secretary Chuck Hagel’s replacement be confirmed by the Senate. The president will nominate someone and then shrug his shoulders at the wars in Afghanistan and Iraq, noting that things aren’t going well, and asking, “What do you expect? The Republicans are to blame because they haven’t confirmed the new defense secretary.”

It will all be baloney, of course, because we know that the secretary of defense’s job has been neutered by Obama’s White House team and it will remain so as long as he’s president.

Unintended Consequences of Cheap Oil

A concise story about the dependence of some countries on high oil prices. In general, we are quite happy when the price of energy drops. It is usually good for the average consumer since everything we buy is affected by the price of energy to produce things and move them to market. The higher the price of energy, the less disposable income the average person has with which to buy groceries, pay for housing, get to and from work, and all the rest. That said, some people and the economies of some entire countries are dependent on the revenue generated from the sale of oil.  When things go bad for them, trouble usually results.

While reading the article, I was reminded of a couple of related graphics I’d seen a few weeks ago, pasted below. As is usually the case, pictures help make sense of statistics provided in text. 

The countries mentioned have sought to appease their populations with substantial subsidies made possible by petro-wealth. If that pool of money dries up, their populations will become restive and troublesome…or so goes the argument.  While hydraulic fracturing (fracking) of U.S. oil shale has dramatically shifted America’s energy position to our favor, it has other potential consequences that could be quite destabilizing in other regions. No, it's not our responsibility to keep single-commodity countries afloat; just something to think about especially as it highlights the inter-dependencies of a global economy and why we tend to get sucked-into regions when things go bad.

Oil at $40 Possible as Market Transforms Caracas to Iran 

By Gregory Viscusi, Tara Patel and Simon Kennedy Dec 1, 2014 4:53 AM ET
Oil’s decline is proving to be the worst since the collapse of the financial system in 2008 and threatening to have the same global impact of falling prices three decades ago that led to the Mexican debt crisis and the end of the Soviet Union.
Russia, the world’s largest producer, can no longer rely on the same oil revenues to rescue an economy suffering from European and U.S. sanctions. Iran, also reeling from similar sanctions, will need to reduce subsidies that have partly insulated its growing population. Nigeria, fighting an Islamic insurgency, and Venezuela, crippled by failing political and economic policies, also rank among the biggest losers from the decision by the Organization of Petroleum Exporting Countries last week to let the force of the market determine what some experts say will be the first free-fall in decades.
“This is a big shock in Caracas, it’s a shock in Tehran, it’s a shock in Abuja,” Daniel Yergin, vice chairman of Englewood, Colorado-based consultant IHS Inc. and author of a Pulitzer Prize-winning history of oil, told Bloomberg Radio. “There’s a change in psychology. There’s going to be a higher degree of uncertainty.”
A world already unsettled by Russian-inspired insurrection in Ukraine to the onslaught of Islamic State in the Middle East is about be roiled further as crude prices plunge. Global energy markets have been upended by an unprecedented North American oil boom brought on by hydraulic fracturing, the process of blasting shale rocks to release oil and gas. 

Cheap Gasoline 

Few expected the extent or speed of the U.S. oil resurgence. As wildcatters unlocked new energy supplies, some oil exporters abroad failed to invest in diversifying their economies. Coddled by years of $100 crude, governments instead spent that windfall subsidizing everything from 5 cents-per-gallon gasoline to cheap housing that kept a growing population of underemployed citizens content.
Those handouts are now at risk. 
“If the governments aren’t able to spend to keep the kids off the streets they will go back to the streets, and we could start to see political disruption and upheaval,” said Paul Stevens, distinguished fellow for energy, environment and resources at Chatham House in London, a U.K. policy group. “The majority of members of OPEC need well over $100 a barrel to balance their budgets. If they start cutting expenditure, this is likely to cause problems.”

Costs as Benchmark 

Oil has dropped 38 percent this year and, in theory, production can continue to flow until prices fall below the day-to-day costs at existing wells. Stevens said some U.S. shale producers may break even at $40 a barrel or less. The International Energy Agency estimates most drilling in the Bakken formation -- the shale producers that OPEC seeks to drive out of business -- return cash at $42 a barrel.
Canadian Natural Resources Ltd. Chairman Murray Edwards said crude may sink as low as $30 a barrel before rebounding to stabilize at $70 to $75 a barrel, the Financial Post reported.
“Right now we’re seeing a price shock coming out of the meeting and it will be a couple of weeks until we see where the price really falls,” said Yergin. Officials “have to figure out where the new price range is, and that’s the drama that’s going to play out in the weeks ahead.”
Brent crude was down $1.40 at $68.75 as of 9:14 a.m. in London, while New York oil lost $1.47 to $64.68. Brent is now at its lowest since the financial crisis -- when it bottomed around $36.

Not All Suffer 

To be sure, not all oil producers are suffering. The International Monetary Fund in October assessed the oil price different governments needed to balance their budgets. At one end were Kuwait, Qatar and the United Arab Emirates, which can break even with oil at about $70 a barrel. At the other extreme: Iran needs $136, and Venezuela and Nigeria $120. Russia can manage at $101 a barrel, the IMF said.
“Saudi Arabia, U.A.E. and Qatar can live with relatively lower oil prices for a while, but this isn’t the case for Iran, Iraq, Nigeria, Venezuela, Algeria and Angola,” said Marie-Claire Aoun, director of the energy center at the French Institute for International Relations in Paris. “Strong demographic pressure is feeding their energy and budgetary requirements. The price of crude is paramount for their economies because they have failed to diversify.”
Brent crude is poised for the biggest annual decline since 2008 after OPEC last week rejected calls for production cuts that would address a global glut.
Like this year’s decline, oil’s crash in the 1980s was brought on by a Saudi-led decision to defend its market share, sending crude to about $12 a barrel.

Russia Vulnerable 

“Russia in particular seems vulnerable,” said Allan von Mehren, chief analyst at Danske Banke A/S in Copenhagen. “A big decline in the oil price in 1997-98 was one factor causing pressure that eventually led to Russian default in August 1998.”
VTB Group, Russia’s second-largest bank, OAO Gazprombank, its third-largest lender, and Russian Agricultural Bank are already seeking government aid to replenish capital after sanctions cut them off from international financial markets. Now with sputtering economic growth, they also face a rise in bad loans.
Oil and gas provide 68 percent of Russia’s exports and 50 percent of its federal budget. Russia has already lost almost $90 billion of its currency reserves this year, equal to 4.5 percent of its economy, as it tried to prevent the ruble from tumbling after Western countries imposed sanctions to punish Russian meddling in Ukraine. The ruble is down 35 percent against the dollar since June.

This Will Pass 

While the country’s economy minister and some oil executives have warned of tough times ahead, President Vladimir Putin is sanguine, suggesting falling oil won’t force him to meet Western demands that he curb his country’s interference in Ukraine.
“Winter is coming and I am sure the market will come into balance again in the first quarter or toward the middle of next year,” he said Nov. 28 in Sochi.
Even before the price tumble, Iran’s oil exports were already crumbling because of sanctions imposed over its nuclear program. Production is at a 20-year low, exports have fallen by half since early 2012 to 1 million barrels a day, and the rial has plummeted 80 percent on the black market, says the IMF. 
Lower oil may increase the pain on Iran’s population, though it may be insufficient to push its leaders to accept an end to the nuclear program, which they insist is peaceful.

‘Already Losing’ 

“The oil price decline is not a game changer for Iran,” said Suzanne Maloney, senior fellow at the Brookings Institution, a Washington-based research organization, who specializes on Iran. “The Iranians were already losing so many billions of dollars because of the sanctions that the oil price decline is just icing on the cake.” 
While oil’s decline wrenches oil-rich nations that squandered the profits from recent high prices, the world economy overall may benefit. The Organization for Economic Cooperation and Development estimates a $20 drop in price adds 0.4 percentage point to growth of its members after two years. By knocking down inflation by 0.5 point over the same period, cheaper oil could also persuade central banks to either keep interest rates low or even add stimulus.
Energy accounts for 10 percent to 12 percent of consumer spending in European countries such as France and Germany, HSBC Holdings Plc said.

Nigerian Woes 

As developed oil-importing nations benefit, some of the world’s poorest suffer. Nigeria’s authorities, which rely on oil for 75 percent of government revenue, have tightened monetary policy, devalued the naira and plan to cut public spending by 6 percent next year. Oil and gas account for 35 percent of Nigeria’s economic output and 90 percent of its exports, according to OPEC.
“The current drop in oil prices poses stark challenges for Nigeria’s external and fiscal accounts and puts heavy pressure on the exchange rate,” Oliver Masetti, an economist at Deutsche Bank AG, said in a report this month. “If oil prices remain at their current lows, Nigeria will face tough choices.”
Even before oil’s rout, Venezuela was teetering. 
The nation is running a budget deficit of 16 percent of gross domestic product, partly because much of its declining oil production is sold domestically at subsidized prices. Oil is 95 percent of exports and 25 percent of GDP, OPEC says.
“Venezuela already qualifies for fiscal chaos,” Yergin said. 

Venezuelan Rioting 

The country was paralyzed by deadly riots earlier this year after police repressed protests about spiraling inflation, shortages of consumer goods and worsening crime.
“The dire state of the economy is likely to trigger renewed social unrest, while it seems that the government is running out of hard currency,” Capital Economics, a London research firm, wrote in a Nov. 28 report.
Declining oil may force the government to take steps to avoid a default including devaluing the currency, cutting imports, raising domestic energy prices and cutting subsidies shipments to poorer countries in the region, according to Francisco Rodriguez, an economist at Bank of America Merrill Lynch.
“Though all these entail difficult choices, default is not an appealing alternative,” he said. “Were Venezuela to default, bondholders would almost surely move to attach the country’s refineries and oil shipments abroad.”
China Bailout? 
In an address on state television Nov. 28, President Nicolas Maduro said Venezuela would maintain social spending while pledging to form a commission to identify unnecessary spending to cut. He also said he was sending the economy minister to China to discuss development projects.
Mexico shows how an oil nation can build new industries and avoid relying on one commodity. Falling crude demand and prices in the early 1980s helped send the nation into a debt crisis.
Oil’s share of Mexico’s exports fell to 13 percent in 2013 from 38 percent in 1990, even as total exports more than quadrupled. Electronics and cars now account for a greater share of the country’s shipments. Though oil still accounts for 32 percent of government revenue, the Mexican government has based its 2015 budget on an average price of $79 a barrel.