What has created high-paying blue-collar jobs, reduced America's trade deficit and greenhouse gas emissions, and cut Americans' energy bills (also further boosting the economy)? FRACKING!

Many of you will have read the title to this post and thought "sacrilege!" Fracking is an emotional topic just about anywhere that it is performed or contemplated. Countries like France and Bulgaria have at least temporarily banned the practice, while Luxembourg has failed to vote to allow it. Even in countries where it is not illegal, like Britain, it is distrusted and moves ahead only slowly.

There is certainly reason to be concerned. Companies that frack can rightly claim that there is no evidence of fracking ever contaminating a drinking water well, but they rely on a few tricks to make that assertion. The first trick is semantic: Contamination from oil or gas extraction can occur in many ways. The hydraulic fracturing (fracking) that cracks open the shale formations to release gas and oil is just one small part of the process and it is true that there is no evidence that this, by itself, has ever caused contamination (nor, as geologists point out, is it likely to). But who cares? The process of bringing it to the surface through supposedly hermetically sealed pipes that run through levels of rock that contain drinking water is an obvious concern. If contamination occurred at that stage, it wouldn't technically be due to fracking, but again... who cares? Finally, there have been confirmed cases of contamination from the ponds used to store waste water from the fracking process until it can be disposed of. Those ponds are often open and can overflow in a rain storm, causing toxic substances to leach into the soil and groundwater. Regulation of the ponds, the seals, and the chemicals used in fracking varies widely and is not based on solid study, all of which should be deeply disturbing to anyone interested in the safety of drinking water and the preservation of the environment or even just their crop fields.

That said, the other side of the debate is also guilty of twisting the facts to suit their own ideological desires. Many environmentalists point to the massive use of water (up to 7 million gallons for a single well) to frack wells. That sounds mind-boggling, but put it into context: "Of the [9,500 million] gallons of water used daily in Pennsylvania, natural gas development consumes 1.9 million gallons a day (mgd); livestock use 62 mgd; mining, 96 mgd; and industry, 770 mgd."¹ In other words, fracking uses just 3% of the water used by agriculture in that state and just 0.2% of the water used by other industries. Granted, in a place plagued by drought (like Texas), this can still make a huge difference, but it is often blown out of proportion. Conventional oil fields also often require water to be pumped into them to maintain pressure and push oil out, so this is not something entirely new to fracking. Another claim is about contamination of drinking water. As noted above, some contamination has occurred from the above-ground pools used to store drilling waste. What's more, it seems gas has occasionally leaked upwards along improperly sealed pipes and into groundwater. The problem is, drinking water wells have more often been contaminated due to naturally-occurring gas deposits than from natural gas drilling. One study found levels of methane in groundwater in fracking areas to be close to background levels published previously by the US Geological Survey (i.e. the methane was there already). Another study notes levels were higher near fracking wells--but I'd point out that you'd also likely drill wells where you'd have more gas to find, so there may be a chicken-and-egg problem here. It should also be pointed out that fracking is not actually new, it's been done since the 1950s with little opposition.

After all that back-and-forth, your conclusion ought to be "mixed bag," and you might thus say "better safe than sorry." I agree with that to a point, but since fracking has been done safely for ages, many of the claims of the dangers are unfounded or confirmed only rarely, and because cases in which contamination occurred have seemingly always resulted from lax safety regimes, on balance I'd say: tighten up the rules, enforce them strictly, and move forward with fracking. Why? Because there's more to this debate than whether groundwater has been contaminated or not (or whether air pollution from it is dangerous, etc. etc.).

As my title suggests, there are massive benefits! By 2020, it is estimated that the American fracking boom will have generated 1.7 million jobs--"far more than the car industry provides." And these are the types of jobs that have been disappearing since the 1960s: They don't require a lot of skill or education, but they can lift those doing them solidly into the middle class. It's a force against the "hollowing out" of the American economy, whereby those in the middle class are either having to find some way to move up the income ladder--or accept sliding down it. Another benefit is to America's trade balance. America has run a trade deficit (importing more than it exports) since the 1970s (with just one exception). If you spend more money than you earn, you have to borrow the difference. The US has done just that for all that time. Its government is in hock to China and Japan, but the private sector has also seen foreign banks lending domestic banks money, which eventually has to be repaid. Many mortgages are held by banks in Germany, for example. This cannot continue forever (and was one big factor in the 2008-9 financial crisis). America either needs to import less or export more. Shale gas and oil found domestically mean the US can import less of both and export more, so the US could even start paying down its debts without having to spend less on other things (it's like a get-out-of-jail-free card).² We should not underestimate this benefit. It could potentially mean lower borrowing costs (cheaper loans to homeowners, businesses, students) coupled with lower energy prices (saving people money) and more (and higher paying) jobs. It's a big deal.

Next, there are the environmental benefits. If fracking can be done safely, its ecological ledger could be on the positive side. Natural gas is cleaner than coal, both in terms of CO² emissions and in terms of other forms of air pollution from coal (like particulates and sulfur oxides). US greenhouse gas emissions have already fallen by 300 million tons since 2000 (without even really trying--we didn't sign up to Kyoto, after all), and the pace looks to be quickening. Some of that is due to the recession, but some is due to natural gas replacing coal for electricity generation. Coupled with the benefits of lower energy bills, less foreign borrowing, more high-paying blue-collar jobs, and less American money going to unsavory regimes throughout the world in exchange for their oil (a point I haven't really made here but one that is highly significant if you're interested in how American foreign policy shapes the world), and fracking, carefully regulated, can be a very, very good thing.

1. McGraw, Seamus. “Is Fracking Safe? The Top 10 Myths About Natural Gas Drilling.” Popular Mechanics, February 2, 2012. http://www.popularmechanics.com/science/energy/coal-oil-gas/top-10-myths-about-natural-gas-drilling-6386593#slide-2.
2. I should note here that Americans might continue to borrow just as much abroad because they feel richer and foreigners continue to like investing (lending) in America. It's a complicated equation and is not only under Americans' control.

Libyan Democracy: The Islamists Aren't the Greatest Threat

The war in Libya has been, as wars go, a great success. A horrendous dictator has been overthrown by his own people, with a bit of help from an international coalition that, for once, has gotten together to do the right thing (though perhaps not entirely for the right reasons, see my earlier post on this). The big question on many people's minds now is: will democracy emerge, or will Islamists take over and refuse to allow any further elections? This may be an oversimplification of the fears, but it's not a gross one, nor is it entirely unjustified. Still, the Islamists are not the greatest threat to Libya's fledgling democracy.

The number one threat is oil. Oil and other natural resources are always a threat to unstable democracies. The reason is that they can generate loads of cash and push up the value of the currency, killing other exports and making the economy lopsided towards oil. This concentrated source of cash means that politicians control (often by government ownership of the oil company, but not necessarily) much of the money the entire country relies on. Even more importantly, it is a source of cash completely "divorced" from the people the government is meant to serve, to borrow a term from Jason Pack and Shashank Joshi's recent article in The World Today. We might all complain about taxes, but at least they create a link between taxpayers and politicians. With natural resources as the main money spinner, citizens become the recipients of whatever politicians in their infinite wisdom decide to give them. This is a recipe for complacency, dependence, and corruption on the highest level. Politicians should be dependent on voters, not the other way around.

Look around the world at any place that has discovered natural resources (especially oil) first before developing a stable, democratic government. See any democracies? I don't. Discovering such resources can be a boon to a country like Norway or Australia, whose state institutions were already solidly in place upon discovery. They are a disaster for places like Nigeria or, I fear, emerging Libya.

There is a second danger as well that functions along similar lines: foreign assistance. As Libyans try to build institutions for the first time (Gaddafi intentionally built none so that no one could compete with his final say in things), international assistance will be a necessity. It's also very dangerous for the same reason that oil is dangerous: it supplies the rulers of a country with a cash supply independent of the country's citizenry (again, I must credit Jason Pack and Shashank Joshi for bringing this so acutely into focus).

It is important to note the other implications of this, too. The citizens of a country generate tax revenue by working in the economy. It's therefore essential to have a working and growing economy to fuel tax revenues. If a government does not require taxes to have cash flow, it has no incentive to power the economy. In addition, if citizens get handouts they have little incentive to push the economy onwards, either. Not only will the political elites be independent of citizens/voters, those voters won't have much in the way of economic clout anyway, unless they become part of the machine themselves. The result is economic stagnation and rampant corruption.

This problem is incredibly hard to solve. In fact, it is hard to see when it has been overcome. Even when outside aid focuses on assisting a local government and tries hard not to be patronizing and not to take the reigns itself, its very presence can push a country away from the very democracy it is trying to promote. Looking at the Balkans, though, we can conclude that this can still be overcome slowly, with vigilance and patience. The "resource curse," as it is known, is harder to surmount.

So what is the solution? If I knew that, I'd be pretty stellar. What I can say is that it is better to tax oil companies than for a government to own them outright. Believe it or not, having foreign-owned oil companies would be a blessing in disguise (still, they can be expropriated at any time -- just look at Venezuela for a recent example).

In the end, the only thing that can protect Libyans from the resource curse is the Libyans themselves. They must be sure that there are laws and institutions in place that can stop elites from enriching themselves with oil money. No easy task. How do you ensure that the courts and institutions that are supposed to make sure everything is done by the book aren't bribed by loads of oil money? One way is to see that they are well paid. Another is to have a free and competitive press to keep the bright light of the public eye shining on shady dealings. The final thing, of course, is that the Libyan people themselves remain vigilant against this threat. They have shown what can happen if they stand up together. They must make sure future governments never think for a second that they are "divorced" from the Libyan people in any way.

Libyan Oil, Cynicism, and Anti-Americanism

"We can't be holier than the pope!"
Here we go, I thought to myself.
"America doesn't march into a country to rescue people being abused by their own government. If this were in Saudi Arabia it would never happen. The Americans are good friends with the Saudi rulers and wouldn't do a thing to help the people there."
Next came the inevitable: Libya has oil, so clearly that's what America wants because Americans all drive big cars, which leads them to march into every corner of the world and take every drop of oil they can get.

This diatribe was, unfortunately, from an Austrian acquaintance of mine, but it's easy enough to imagine an American arguing along similar lines. In fact, the nationality of the speaker is pretty irrelevant, because the theme is the same: America is not a force for peace, it is just interested in itself and, above all, getting more oil.

Now, I'm a realist and that makes me lean towards cynicism myself much of the time, but this goes above and beyond cynicism. The arguments are muddled and don't really make sense (I'll get to this below), which leads me to think the argument itself is secondary; it is the point that America is doing the wrong thing (again) that matters. When arguments are left out and the conclusion is the same regardless of the facts, we call this prejudice. It comes in many forms: racism, anti-Semitism, homophobia, Islamophobia, and, in this case, anti-Americanism.

The anti-American argument in this case, as is usual, uses some good points. Does America put its own interests first? Sure, most of the time it does. Just as any other country, when it comes down to it, does. Is America addicted to oil? You betcha. Is that addiction a bad thing? Sure is. Would America attack Saudi Arabia? It would surely be extremely reluctant to do so, but the full answer to this is more subtle. As I answered at the time "it would depend on who had the upper hand." This is precisely what happened in Libya. (Read on!) Let's address the argument piece by piece.

First is the oil issue. There are a number of reasons why this argument makes no sense. First off: the world was receiving oil from Libya with Gaddafi in charge. If that's all the West had been interested in, surely it would have supported Gaddafi from the outset, rather than rebel protests that looked to destabilize a regime that had become quite friendly to the West. Second, Libya has a lot of reserves, but the shortfall of around 1.4 million b/d of oil from there can be made up for elsewhere. Saudi Arabia, Kuwait, Nigeria, and the UAE were set to pump an additional 1 million b/d to make up for most of the Libyan short fall on their own.

As an oil producer, Libya ranks behind the traditional oil producers Saudia Arabia, Kuwait, and Russia, but also behind the United States, the EU, and Norway. Has the unrest and supply cut-off in Libya driven oil prices up? Sure, but so has the unrest in the Arab world in general and, more recently, fears that Japan's nuclear disaster will cause a move towards petroleum as a substitute energy source. It is simply not worth getting involved in yet another foreign military mission over 400,000 b/d of oil. Anyone who tells you that this is what America is doing is missing something.

The next point is about America's leadership role in all this. America has actually been keen to give up the leadership of the mission and have NATO take it on. The biggest advocate of action has been France's President Nicolas Sarkozy, not Barack Obama. It was France that first afforded diplomatic recognition to Libya's Interim Government, long before it had become clear that it had effective control over most of the territory and its citizens. (This is a custom in international relations/international law, albeit one that's been broken several times: Croatia and Kosovo spring to mind.) So why was this guy blaming America (again)? Is there a good reason for the no-fly zone and all the fuss?

As I've pointed out, my acquaintance was right that America does not always get involved when a government is mistreating its people. Two things, though. For one, this is not absolute. America's involvement against the genocide occurring in the Balkans was because Bill Clinton believed it was the right thing to do (and was pressured/guilt tripped into doing something). American involvement in Somalia was also meant to keep peace and rebuild the state. The "CNN syndrome" struck in Somalia, however: images went around the world of dead American soldiers being dragged through the streets behind a pickup truck in Somalia. The American public was clear: if those people want to kill each other, then let them -- get our boys out of there. We did.

America will not usually react to human rights violations with force unless there are additional reasons (like national security) to do so or it is under heavy pressure. This may sound selfish, but the other half of the calculation involves whether or not a change is even reasonably achievable. We cannot topple every dictator, and even when we do, we may have a mess afterwards (as Iraq and Afghanistan have clearly shown). Last but certainly not least: American leaders must consider the costs to their own country, both in blood and treasure. America does well to choose its battles wisely.

So why Libya? It's not national security and, as I hope I've shown, it's not oil. So what is it? The Libyan situation is a simple case of having painted oneself into a corner. The US is acting because it feels heavy pressure to do so, from its allies in Europe, but also due to its, and its allies', actions. When it appeared the rebels were going to topple Gaddafi, supporting them was easy. Kind words were almost all that was required. An embargo was put in place. Gaddafi's accounts in America and (embarrassingly not until later) Europe were frozen. Then the tide turned in favor of Gaddafi.

The US, France, and Britain realized there was wet paint on the floor all around them and that the door behind them had just been closed. They had burned their bridges by making an enemy out of Gaddafi and declaring their support for the rebels. Now the rebels might lose. They basically had no choice but to step up their aid to the rebels. This would have occurred even in Saudi Arabia: If it long appeared the House of Saud was doomed to failure, the West would probably support rebels there. This is because that would be the most likely way to bring about longer-term stability and a quick, and therefore cheap, end to hostilities. They could, of course, fall into the same trap in that case if the tide turned there, too. Such are the problems that accompany marriages of convenience!

It helps in this case that the West is acting under the approval not only of the UN Security Council (in which Russia and China surprisingly decided to abstain rather than veto the no-fly-zone resolution), but also of the Arab League (though the latter is now more ambivalent since actual bombings have begun)! The operation has a level of international approval, and therefore legitimacy, not seen since perhaps Operation Desert Storm under Bush Senior.

So to recap: the US has reluctantly stepped in and taken up a (temporary, it hopes) leadership role in implementing a no-fly-zone with air strikes over Libya. It is doing so in support of rebels against a dictator, but probably would not be if it had not painted itself in a corner. It is acting with a great deal of international support and a UN mandate. It is not about oil.

All in all, while room for cynicism remains about the US and the West's final decision to act, the reasons for this mission are pretty darn good. Whether its a good mission in the sense of the likelihood to succeed, whether it will drag on forever, and how bloody it will get, is another discussion entirely. To imply that this is just another optional war waged by America to slake its oil thirst (or perhaps its alleged thirst for violence) is simply wrong and speaks of ignorance -- or just plain old anti-Americanism.

Saudi Arabia: The Elefant in the Room

The protests in Egypt, which now seem to be dying down, leaving the regime still in place, have sparked a lot of talk about what other countries in the Arab world might have their autocratic regimes toppled by protesters. Jordan and Yemen, having experienced protests already, are obvious candidates. Absent from most discussions, though, is Saudi Arabia. This is presumably because most view it to be rock-solid. Or is it because the idea of a revolution or civil war breaking out in Saudi Arabia is too frightening to contemplate?

Robert Baer famously argued in an article in the Atlantic Monthly back in 2003 that Saudi Arabia was not nearly as stable as many presumed/wished. Aside from concerns about Saudi money funding Islamist outfits all over the globe (read the article, it's an eye-opener), the assertions of the frailty of the regime, as well as of the importance of stability in Saudi Arabia for world political and economic security, are unnerving:

• "Saudi Arabia controls the largest share of the world's oil and serves as the market regulator for the global petroleum industry.
• If the Saudi oil spigot is shut off, by terrorism or by political revolution, the effect on the global economy... will be devastating.
• Saudi oil is controlled by an increasingly bankrupt, criminal, dysfunctional, and out-of-touch royal family that is hated by the people it rules and by the nations that surround its kingdom."

What's more, Saudi Arabia's oil infrastructure is very vulnerable to attack. Shutting down just one or two major processing centers and pipelines could essentially stop the oil flow out of the kingdom. This could happen as a side-effect of a revolution (e.g. through neglect and a collapse in the support infrastructure between governments). Gasoline prices of $4 per gallon would then seem Utopian. The weak recoveries in the rich world could end with high inflation and higher interest rates. Unemployment would rise further.

Then there are the political consequences. Right now, US-backed Saudi Arabia can be counted on to act as a counterweight to Iran in the region and to ensure the free flow of oil and other goods off both of its coasts. Indeed, one theory about the reasoning behind the Iraq War was that some US policymakers feared the eventual collapse of Saudi Arabia and wanted to create an American ally (Iraq) to counterbalance Iran's influences in the region. If Egypt were ruled even by a moderate grouping including the Muslim Brotherhood, it could nonetheless be expected to take a decidedly less pro-Western stance. Now imagine losing Saudi Arabia as an ally, too, which has generally been willing to boost oil output when the US was in need and to provide a moderating political influence in the Middle East (at least through its official diplomacy, if not through the Islamist ventures it funds abroad!).

If Egypt and Saudi Arabia became real democracies (and this is a big "if," especially in the case of the latter), this would be something to celebrate, even as we learned to deal with the political and economic consequences as best we could. There is a whole range of possible scenarios. Some of them, though, border on the apocalyptic. Baer believes it's only a matter of time before Saudi Arabia collapses. It could be a turbulent and, at times, scary new world.

Fixing America, Part III

Point three on our list is energy dependence. This can and must be addressed on multiple levels and from multiple angles. Much of this is related to one particular type of so-called market failure, a situation in which markets do not provide optimal results. Even staunch believers in markets (like the writers of this blog) know these exist. The type in question here are called externalities. These are costs of doing something that are not paid by the person doing it. Pollution is the prime example. It is much cheaper for a factory to dump its waste into a nearby river than to pay to dispose of it properly. This does not mean that dumping waste in the river has no cost. On the contrary, the costs are extreme. The pollution may kill fish and poison water supplies downstream, killing people and making them sick. When the overall cost of dumping waste into a river is seen, one notices that the costs to everyone in total of properly disposing of the waste are actually very small by comparison. If the factory owner had to pay the costs in both situations, he or she would choose to properly dispose of the waste, as it is much cheaper.

In the above situation, the best method is probably regulation. Dumping is forbidden, the river is tested for pollution, anyone caught dumping waste is punished with severe fines or jail time. This works well when there are only a few polluters who are easy to monitor. In the absence of any regulation, non-polluting companies would go out of business because they would have to spend more to dispose of their waste, putting them an a disadvantage. This is the reason regulation in necessary. Calls for "morality" are pointless: without government help (e.g. via regulation or externality charges), the "moral" business owners are put out of business. Competition then selects the "immoral" ones for survival. This, by the way, is the same reason politicians lie: the ones who tell is like it is are never elected. Voters don't want to hear the truth, they vote for liars and then are shocked when lied to. My point is: analyze incentives. Do politicians have an incentive to lie? Do businesses have the incentive to cheat and pollute? If the answer is yes, you can rest assured that all these things are happening. Furthermore, you should think about how to change the incentives. Regulation and enforcement are often the answer for industry, a free press is the best solution for government (and certainly also helps for industry).

But why are we talking about pollution when we should be discussing energy dependence? Well, the two are linked. Much of the imported oil used in the US goes to transportation. Driving a car has a number of negative externalities, among them: pollution, noise, congestion, and increased danger of accidents. All of these things become worse the more people are driving on a given road. Charging for these externalities would increase efficiency (this is also discussed in Harford's book). Charging for congestion in areas where it is a problem would increase the costs to the drivers directly, who might then decide that public transport, biking, carpooling, etc. would be a better option. The money collected could be used to improve roads, rails, and public transit. This would reduce travel times to work for those willing to pay the congestion fees, it would reduce transit times for deliveries, etc. This, along with charges for other externalities like CO2, a fee for SUV drivers, whose large cars endanger other drivers, etc., would also reduce fuel consumption. An increased carbon price (via auctioned cap and trade credits, not given away, as currently planned) would encourage industries to cut carbon in whatever way is sensible for them, or to buy additional credits if that makes no sense for them. This allows each individual to decide what makes the most sense for her, and ensures that those who cause problems also pay for them. This would reduce oil imports and promote energy independence. Not only that, it would reduce waste from cars in traffic jams, cut delivery times, and generally increase efficiency in congested cities. It would also serve to increase the commercial viability of public transit (even if it is not subsidized, which would still make sense).

Why should we subsidize mass transit? Because we already subsidize private transit. Who pays for the roads everyone uses? Taxpayers! Yes, some of this comes from fuel and automobile taxes, meaning the people who use the roads pay for them, but much of it also comes from general taxes. This is a form of subsidy for car drivers.

Who pays for the rails and train cars? In most cases, only those who use them. This is obviously an unfair disadvantage.

All of this would make America a more efficient place, not to mention making driving there less frustrating. However, it would alsp admittedly make driving more expensive in previously congested areas. This sounds unfair for the poor, right? Yet another reason the funds should flow into improving public transit. Don't forget that no one is forced to use the roads as long as there is an alternative. If public transit gets better as a result, people who decide they cannot afford to drive to work will have much better alternative ways to get there.

OK, this is all well and good, but what does it have to do with energy dependency? Obviously this would serve to reduce fuel consumption or at least slow its growth. But we sense intuitively that this cannot be enough. After all, the US imports more than half its oil.

Here's part II: we expect electric cars to start arriving in the coming decades. If this does happen, America will probably need more electrical generation capacity, or a huge increase in the efficiency with which our current supplies are used. Either way, one huge part of this solution is a better power transmission network, capable of transport power around the country from where it is abundant to where it is not with little loss of energy. Could the private sector take care of this? It would be nice, but the answer is no. Here's why: there are 50 states, all with different regulations and processes for building new transmission lines. This bureaucratic red tape insures that federal assistance, oversight, and legislative harmonization are needed to give the project and chance of working. The second reason is that there are a number of regional providers. Who should pay for the network? True, they could form a consortium to build it together, but all of them would have an incentive to cut corners and free ride. Fights would ensue as soon as a project started to cost more than it was supposed to. The project is best managed centrally by an authority that has the power to change laws as necessary to move things forward. That means the federal government. Sorry.

How would this network help? Different parts of the country, across 4 time zones in the Lower 48 alone have different energy needs at different times and seasons. If power plants are not interconnected, each has to have enough capacity to cover an area's maximum energy needs. If they are connected, power can be re-routed to where its needed.

This all would be useful as things are, but it gets really beneficial if more renewables are used. Solar power could be generated very efficiently in the American Southwest. In fact, the majority of the land in Arizona is owned by the state government and could be leased for sold for energy production. With a good direct-current transmission network, this energy could then be shipped around the country. At the same time, the Midwest is a great place for windfarms. This energy, too, could be sent to where it is needed. Chances are, most of the time that it's cloudy in the Southwest or quiet in the Midwest, generation in another place can make up for the loss. Otherwise, natural gas or even coal plants (less polluting because they are only used as backup) could be used to make up the difference. All this is only possible with a transmission network. (See link to Scientific American article on the subject).

All these things combined would reduce our dependency on foreign energy sources, cut CO2 emissions, and even make America a more economically-efficient place. How about off-shore drilling? I'm concerned about the environment, but I'm even more concerned about dependency. Maybe it's time to take a closer look at drilling on US territory...

Venezuela: Going Nowhere -- Fast

It has recently become clear that Hugo Chavez, Venezuela's president, is going about setting up a coalition with one goal in mind: bringing about the fall of "The Empire," i.e.: the United States. He plans to do this by forming alliances with every unsavory country in the world, from North Korea and Russia, to Syria and Iran. He recently announced a deal with Iran to cooperate on nuclear work. France reminded him that Iran was prohibited from exporting its nuclear technology. In return for nuclear aid, Chavez has promised Iran shipments of oil, even though Venezuela can hardly refine enough to supply itself.

Is this something the United States needs to worry about? The short answer is yes. All the U.S. needs is for Iran to be additionally strengthened and for an anti-American alliance to form with a powerful country like Russia involved. The long answer first requires answering another question: will this help Venezuela or Hugo Chavez?

It's hard to see how this could help Venezuela or its people. By forging an alliance that includes Iran and North Korea, Venezuela is headed on a path to international isolation. Perhaps Chavez thinks that if he makes deals with Russia (arms) and China (oil), this will prevent isolation. On the latter half of this bet, at least, he may actually be right. China is hungering for natural resources like oil. It is not improbable that China might protect Venezuela with its Security Council veto, but only if things don't get too dicey.

But even so, this would not prevent political isolation and isolation in other economic areas. True, oil is an important export, and Venezuela has a lot of it, but it requires foreign investment in order to develop the oil fields, some of them off shore. This investment could be blocked. Besides, making Venezuela even more reliant on oil exports, and therefore the whims of the global oil price, is not something Chavez should wish for. The current crisis saw a large drop in the oil price, bringing trouble for Venezuela's budget. If Venezuela can no longer receive foreign investment, its current fields will dry up (Venezuela's oil production capacity has steadily dropped since Chavez came to power. One would think that a man who increases his country's dependency on one export would ensure the viability of that export's future).

The country is already fighting inflation, as the government has kept fiscal and monetary policy looser than it ought to. This has caused the black-market trade in bolivares to soar. This market indicates that the bolivar is worth a fraction of what the Venezuelan government maintains it is worth. Strict capital controls are in place to prevent a massive slide and the emptying of the central bank's foreign exchange reserves. Domestic industries are already complaining that the strict limits on conversion to the dollar are making it all but impossible to do business by cutting off imports to the country (which has in turn spurred inflation as imports become much more expensive). Chavez is also consolidating the economy under the control of his clan, which of course receives generous exceptions from the dollar-limit regime and import restrictions. High inflation, blocked imports, and extremely restricted access to industry for everyone not associated with the Chavez clan hardly sounds like a good recipe for economic success. Far from the modern socialist revolution Chavez claims to be bringing about, his revolution sounds like many sad stories we have heard before.

This brings us back to our longer answer to the first question: should the U.S. worry about this? In the long run, these policies will ruin Venezuela, which is certainly nothing to hope for on account of the innocent lives that will be ruined along with it. A nuclear Venezuela, or even just a more heavily armed one, is cause for worry about stability in the region. The real concern is that this could spark a South American arms race. Arms races tend to lead to fear mongering and radicalism. It is therefore much more the future of South America that is at stake than that of the United States's alleged "empire." Venezuela will hardly be able to pose a military threat to the United States, even if it becomes nuclear (see my article on North Korea and compare), and the U.S. relies economically very little on Venezuela, Russia, Iran, and North Korea, et al. The political and economic isolation that will be wrought upon Venezuela if it continues, including in South America (Mr. Chavez is not admired everywhere there, particularly in Colombia) will only serve to weaken Venezuela.

But weak states can become even more radicalized and dangerous. For this reason Venezuela, unlike North Korea, is not something the U.S. should write off. Its approach, however, must be multilateral. Unilateralism would play into Chavez's hands, who claims to be battling the evil that is the United States. Better would be to work to convince Chavez's potential allies that the U.S. is not the bad guy, but that Chavez, indeed, is. This can be done via a higher degree of cooperation and other incentives (free trade agreements, etc.). This would do nothing to convince Russia and China, of course, but I posit that they need little convincing anyway. Venezuela is being used by both. China and Russia (and all other countries) will act in their own interests, and these are unlikely to align with Chavez's that often. The point, then, is for the U.S. to make sure that other countries, who can be more effected by U.S. incentives, are convinced that it is not in their best interests to side with Chavez. Given Chavez's poor policies and overt hotheadedness, this should not even be particularly hard, particularly if the U.S. works to cultivate as broad an international consensus as possible. Venezuela is on a road to nowhere, that doesn't mean we all have to go along for the ride.

A tale of two countries: Brazil must decide if it would like to be Norway or the Netherlands -- or Venezuela

Brazil recently unveiled plans for its government to scoop up a large share of future oil profits from undersea drilling off its coast, where there are alleged to be up to 50 billion barrels of oil (The Economist). Is this good news or bad news for Brazil?

Oil and other valuable and tradeable natural resources have always been a mixed blessing. In well-governed countries that manage the resources properly and invest the resulting profits wisely, they can lead the country to greater prosperity. In poorly run countries or in countries where the resources and their profits, for whatever reason, are invested poorly, they can lead to political corruption and economic ruin.

An example with less of the former and more of the latter is the Netherlands. The discovery of oil proved not to be much of a blessing for the Netherlands. The sudden increase in export values caused a current account surplus, which in turn caused the Dutch currency to revalue to the point where other exporters in the Netherlands had difficulty competing in foreign markets and domestic producers had difficulty competing at home against cheaper, foreign rivals. The result was dubbed the "Dutch disease." This is one possibility for Brazil, but given Brazil's size, this is probably unlikely.

A further possibility is that things will work out in a way similar to Norway. There, the currency was not permitted to rise too far. Instead, money was siphoned off the top and exported, balancing the current account surplus with a capital account deficit. This has allowed Norway's exporters to continue to export (although they must be competitive, as Norway's currency is still quite expensive), and Norway's domestic producers to continue to be able to compete against outsiders. The cost: high taxes and a large sovereign wealth fund. The money in the fund will then later be used to fund Norway's transition from an oil-based economy to something else, and to slow the slide of the currency once the oil dries up. All in all a well-managed, prudent system.

These two cases show the impact oil can have on even wealthy countries with good governance. Either they take action to prevent the Dutch disease, or they succumb to it. But Brazil is vastly larger than either Norway or the Netherlands. Although it is better managed, it may be closer to compare Brazil with Mexico or Venezuela. These are two countries whose governments are heavily involved in the day-to-day procedures of oil drilling. Both governments also rely heavily on the oil for revenues. And in both countries, revenues are dwindling as oil fields dry up due to a lack of investment in, and technology for, new ones. Much of this is the result of taking too much of the profits and failing to reinvest them in discovering or accessing new fields. Another significant factor is a lack of private investment due to heavy restrictions placed on foreign firms, firms that have the necessary capital, expertise, and technology to get the stuff out of the ground in fields that are almost invariably getting more difficult to utilize (requiring a greater investment in capital and technology, as well as higher risk).

What should Brazil do? Taxation is the simplest method. Doesn't it make more sense for private companies to do the work finding and drilling fields? Isn't it better for private money to be invested to get the oil? And wouldn't everyone be more comfortable if private firms' money were being risked on fields that might not be viable, rather than public funds from citizens' taxes? Having the government run these operations, even if only partly, doesn't make a whole lot of sense. Furthermore, beyond economics, having a government-run organization is an invitation to cronyism and corruption, and may become a political liability. The argument that a government organization would be required to ensure equity and provide for social programs doesn't make any sense at all, either. Those aims can be achieved most easily and efficiently with sensible legislation, regulation, and taxes. No matter how you look at it, Brazil is probably going down the wrong track with its plans for big government in big oil. Let's hope they take a closer look at some other oil producers (Russia has similar problems to Mexico and Venezuela) before making their choice.