American Exceptionalism: Why So Few Diesel Cars?

It routinely surprises insular Yanks who dare venture abroad that the rest of us are quite fond of diesel cars. In this day and age of dear fuel, improved mileage has it attractions. Americans would beg to differ: They shake! They stink! That's what trucks run on! are among the things you hear them say. Such stereotypes hold only for older generations (up to, say, Eighties vintage) of passenger vehicles. By the Nineties, consumers elsewhere embraced advances in diesel technology that have made them the fuel of choice not only on fuel saving grounds but also performance given the wider torque spread of cars running diesel. Nowadays, of course, the poshest of brands--Audi, BMW, Mercedes-Benz, etc--feature model ranges replete with diesel models. They certainly don't shake, stink, or run like trucks anymore...from Auntie:

A 1.6-litre turbodiesel delivers the torque surge of a much larger gasoline engine, yet with the fuel efficiency of a much smaller one. In the UK, diesel sales account for more than half of all cars sold, and even with a stat like that, Britain lags the rest of Europe, which has long preferred diesel to gas.

So why would more Americans not drive diesels? From the European perspective, it would suit the driving style of the States perfectly, with lots of relaxed muscle available at low rpms to cruise vast interstate networks that are the envy of the world. Better mileage means fewer fill-ups, and the on-paper improvements in fuel economy would, overnight, take the US fleet one massive step toward President Obama’s targeted 54.5 mpg national average by 2025. Simply stated, diesel should “work” in the US.

EPA rules on mileage will probably "force" US consumers to adopt diesels alike Europeans have. OTOH, you can argue that the US market is more primitive in this respect, resembling a pre-enlightened Europe:

In the UK of the 1980s, diesel drivers were outcasts. They were required to fill up around the back of the station, over by the truckers, to be looked upon by gasoline burners with a mixture of pity and smugness. And that presumed diesel drivers could even find somewhere to fill up, as not every filling station bothered to stock their fuel.

This sheer lack of availability led to great variability in pricing. As the only filling-station proprietor in 25 miles to stock diesel, Mr. Smith could subsequently charge more or less whatever he wanted. A survey of diesel prices in the US illustrates a similarly maddening snapshot of how scarcity can produce wide price fluctuations, with pump prices varying by up to 50 cents a gallon. But with more diesel purchasers, the laws of the marketplace would kick in, bringing prices into greater alignment.

Given the need for low-sulphur refining, diesel would not necessarily become cheaper than premium in the US. It is pricier on the other side of the Pond, too, but although Europeans gripe about it, they still know the savings add up. Diesel generally returns 30% better mileage than gas, and in the dominion of $8 gallons, this is no small advantage.

So the Yanks are a bunch of eco-primitives; tell me something new about these folks who still debate about whether climate change exists when the rest of the world has moved on to doing something about it. 

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Japan 'Defeating' Deflation? Not Quite, My Friend

There is much debate in Japan as to whether the Bank of Japan's efforts to pull the country out of a deflationary spiral are bearing fruit. True, Japan's consumer prince index is actually showing a positive trend, but this may be largely down to temporary factors and not to any structural change. What happens when the central bank spigots close? The questions facing the developed world are  similar in certain respects. Moreover, Japan's shuttering of nuclear reactors in the wake of the Fukushima incident has caused price rises that may soon be undone as more plants come back online:

Japan’s core consumer price index, excluding volatile fresh food prices, rose 0.8% in August from the same month a year earlier. That prompted private economists to raise their forecasts closer to the central bank’s 0.6% rise on average for the current fiscal year ending March.

People familiar with the central bank’s thinking say it sees the index going as high as 1.0% by the end of this year. But private analysts still see any such a rise — driven largely by higher imported energy costs — as unsustainable.

Strip out the energy component of CPI and the news is much less headline-worthy. You guessed it--Japan remains in deflation territory:

Japan’s inflation accelerated to the fastest pace since 2008 in August on higher energy costs, underscoring pressure on Prime Minister Shinzo Abe to drive wage increases as he seeks to end 15 years of deflation.

Consumer prices excluding fresh food increased 0.8 percent from a year earlier, the statistics bureau said today in Tokyo. The median forecast of 30 economists surveyed by Bloomberg News was for a gain of 0.7 percent. Stripping out energy and perishables, prices fell 0.1 percent. 

This is non-news in the war against deflation. Can this artifice continue, though? While global energy prices are unpredictable, some commentators argue that restarting more nuclear reactors is tied to the success or failure of Abenomics. Pessimistically and perversely, then, it is possible that souring consumer sentiment caused by greater dependence on foreign energy may instead forestall the reactivation of Japanese nuclear plants:

In all likelihood, the success of Abe’s nuclear agenda will rest upon the success of his economic agenda. If the public and his party remain confident in the direction of Abe’s economic policies, he will likely be able to sell nuclear energy as an integral part of his vision.

What can I say? Japanese political economy is weird even by Asian standards and cannot be directly interpreted from Western example.

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Japan's Trade Deficits & Halting Nuclear Power

Deficit-running Japanese are about as unnatural as surplus-running Americans, but we now have to reconsider this conventional wisdom. (Things change, my dear.) Recent years have witnessed an unwelcome turnaround in Japan's trade balance as it has swung from surplus to deficit in a fairly big way. While recent easy money "Abenomics" have lifted the general economic outlook there, there is a good reason why most analysts are less sanguine about the prospects for fixing the trade balance.

A contributing factor to this degradation in the external balance has, of course, been Japan's rising import bill from energy imports in the wake of the Fukushima nuclear power plant incident. With practically all of its nuclear powers shut, the nation's energy needs have been met largely by imports because Japan has few energy resources of its own. Not only do rising energy costs dent the spending power of Japanese consumers then as their electricity bills rise, but they also dent Japan's supposedly "mercantilist," export-oriented orientation:

So far, power companies have applied to restart about a dozen of Japan's 50 reactors. Prime Minister Shinzo Abe wants to see the reactors back on line, as they are a vital part of his plan to turn the economy around. Since the Fukushima disaster, Japan has been forced to import huge amounts of coal, liquid natural gas and other fuels.

Mr Abe's government blames these imports for the huge trade deficits posted by Japan since 2011. The average household electricity bill has risen by 30% since Fukushima, denting the government's attempts to boost consumer spending.

One of the Abe government's campaign promises was to bring these nuclear power plants back online. (His Liberal Democratic Party has long been supported by the energy industry for better or worse.) However, even if all fifty existing reactors were to come back in operation as they likely will in a few years' time, the interesting thing is that it is estimated that Japan would still run an external deficit:

After the 1979-1980 oil shock, Japan bounced back smartly, exporting millions of its cheap, durable and fuel-efficient cars and iconic electronic gadgets such as Sony Corp's Walkman. Today, however, there is no turnaround in sight.

Even though increased fuel imports since the March 2011 Fukushima disaster have been a major drag on trade, restarting all of Japan's nuclear reactors would not bring it back into the black, estimates suggest.

The only one of Japan's 50 reactors in operation was shut for planned maintenance on Sunday, with no firm date for bringing back an energy source that had covered about a third of the country's electricity needs.

The "real" culprit may be Japan offshoring production to nearby countries over the years to cope with rising production costs at home due to yen strength. This trend has only accelerated in recent times, causing a diminution of recorded Japanese export output:

That is because of the "hollowing out" of Japanese manufacturing as firms shift production and procurement overseas. Years of yen strength contributed to that shift, but the currency's retreat failed to reverse the trend as the desire to move closer to faster growing markets, tariffs, lower taxes and labor costs all played a role.

A Cabinet Office survey of manufacturers showed the share of overseas production of Japanese companies rose to 17.7 percent last year from just over 13 percent a decade ago and is seen reaching 21.3 percent in five years.

Japan temporarily shutting down its nuclear reactors that account for a third of its energy needs will likely be remembered as a short-lived, awkward moment in its postwar history. However, its shift to running trade deficits is probably becoming more structurally ingrained. As Don Henley once sang--here with admittedly unlikely regard to huge Japanese trade surpluses--those days are gone forever; it should just let them go.

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Third World Solidarity? Petronas Ditches PDVSA

Just when you thought things could not get worse for Venezuela's economic situation, they do. In recent times, Venezuela has sought to partner with other developing countries for exploiting its energy reserves in the likely belief that they would be more understanding of its political-economic situation. Having offended American oil giants through forced nationalization, it arguably had little choice but to look East.

Today's case in point is Malaysia. Just as Venezuela uses its control over a state-owned oil firm to further national objectives, so does Malaysia. Alike that of Venezuela, Malaysian leadership has also been accused of despotic tendencies--especially its perennial party in power UMNO. Allegations of electoral irregularities? Check that too. Despite similarly relaxed attitudes towards Western-style platitudes about good governance, however, it appears Malaysia has its limits and is now fed up with Venezuela. As a result, Malaysia's state-owned oil firm Petronas wants to sell its stake in a partnership with Venezuela's counterpart PDVSA:

Malaysian oil company Petronas said it is exiting one of the biggest petroleum projects in Venezuela's Orinoco belt, after what sources close to the venture and within the firm said were disagreements with Venezuelan authorities and state-run PDVSA. The flagship project, called Petrocarabobo, has planned investments of about $20 billion over 25 years and calls for building a 200,000 barrel per day upgrader to convert heavy crude into light crude oil.

When the venture was formed in 2010, Venezuela touted it as a sign that oil companies were willing to put up with demanding fiscal conditions in exchange for access to the world's largest oil reserves. Petroleos de Venezuela (PDVSA) has 60 percent of the project. Petronas belongs to a consortium that holds 40 percent. Its other partners are Spain's Repsol, India's ONGC and two smaller Indian firms, Oil India and Indian Oil Corp. Petronas holds an 11 percent stake. Sources close to ONGC and Oil India said on Wednesday they were unlikely to buy the stake being shed by Petronas. 

I wonder why there are no takers. To begin with, Venezuelan crude in the Orinoco is heavy and sour, which makes it difficult to refine unlike light, sweet crude oil. On top of this challenge, you have the Venezuelans constantly changing revenue-sharing arrangements adding to the confusion:

"This should not come as a surprise. We have not been excited about this project for the past two years because of the dealings with the government," said the source, who requested not to be identified as he was not authorized to speak to media [...]

One source close to the project told Reuters that frequent changes in the fiscal framework, disagreements with the government of Chavez's successor - Nicolas Maduro - about the business terms, and long delays led to the decision to withdraw. 

So much for third world solidarity since even Malaysians are no longer willing to put up with the arbitrariness of Chavez's successor Maduro. If even the Chinese withdraw next given their unconcern over Western conceits alike transparency and good governance, who will be left to provide the technical capabilities to extract this heavy and sour crude? 

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China: #1 in Shale Gas Reserves, Paltry Production

Much has been made of the United States growing energy independence as it taps shale gas reserves at home. A salutary effect has been reducing the trade imbalance America is legendary for. However, the US is far from the only country with a lot of shale gas reserves. China purportedly has the most, but it has been quite slow in tapping these reserves. The numbers tell the story of China's backwardness:

Beijing has struggled to find a way to emulate the frenetic exploration and production activity of the shale gas boom in the United States, and the latest setback makes reaching even a modest 2015 output target of 6.5 billion cubic metres (bcm) unlikely. This is only a fraction of the 224 bcm of shale gas the United States produced in 2011, and would amount to just 6 percent of China’s total current output of natural gas.

Why this sloth? There are environmental concerns over fracking in places such as Europe, but let's just say they are outweighed in China's case by the more immediate cause of energy security. Others would even argue that shale gas is less polluting than burning coal. So China lags behind despite its even larger dependence on imported energy. It's a combination of various things, with less readily accessible reserves and uncertain land ownership featuring large:

When [Shell] began a multibillion-dollar effort to tap China shale gas a few years ago, it seemed like a can't-miss wager. China has the world's most extensive shale gas reserves, biggest energy market, and a government pushing for expanded gas production.But for Shell and its state-controlled partner, China National Petroleum Corp. the reality on the ground makes its bet look riskier.

The region's rough terrain, poor infrastructure and deeply buried gas formations present tough technical challenges. The area is so densely populated and intensely farmed that drilling sites are being built within 360 feet of homes in villages like Maoba—upsetting residents who complain of noise, dust and environmental concerns. To ease the way, Shell and its partners are compensating local residents and local government officials for using their land and roads and other inconveniences.

You would have thought that in an authoritarian regime alike China, it's easier to excavate since the state owns more land and can evict people if it is deemed necessary, but no: it's proven easier to pay US (private) landowners for mining for shale gas. By contrast, in China you have militant residents who do not want to deal with the mess of fracking since they will not benefit directly from state-owned resources. I argue that a lot of their environmental complaints would be mitigated otherwise. Such difficulties are compounded by rudimentary infrastructure in parts of China with lots of shale and an unclear regulatory framework:

Some shale-rich countries, including China, are short on developed roads, water and drilling contractors trained in modern safety standards. Others like France and Bulgaria have put up legal barriers to the hydraulic fracturing needed to extract shale gas. And unlike in the U.S., where landowners generally own rights to gas beneath their property, minerals in many countries are owned by the state, giving residents little financial incentive to support drilling near their homes [...]

Regulatory concerns also heighten China risks. The country hasn't finalized fracking regulations. And to fight inflation, the government controls prices at which gas may be sold, which could weigh on profits.

So there are still areas China is falling behind the United States. Good governance champions will highlight that the unclear regulatory framework for this industry in China is harming prospects for mining shale reserves.

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Why Venezuela Has Egypt-Like Forex Reserves

Unlike many (left-leaning) colleagues, I remain profoundly unimpressed by the "post-capitalist" stylings of countries alike Argentina and Venezuela. When it comes to the geopolitics of the world economy, I am generally unconcerned about whether countries style themselves as "pro-American" or "anti-American" since it's largely beside the point. The point being, of course, that perceived friendliness to the world's largest economy has little to do with sound economic management.

Today we have an excellent case in point: How the heck can Latin America's second largest oil exporter after Brazil have Egypt-like foreign exchange reserves? With sustained high oil prices for years and years, it's hard to imagine but it's true in the case of [surprise!] Venezuela. Nor did it help that Hugo Chavez stashed a lot of foreign exchange in state-owned enterprises, which are now likely to be recalled to help repay the debts of this financial basket case:

Venezuela can more than double its reported reserves, which fell to a nine-year low of $22.9 billion on Aug. 5, if it chooses to take control of all the dollars held by state enterprises as of March 31. Increasing its foreign-currency holdings would bolster Venezuela’s ability to repay $40.5 billion in obligations at a time when its borrowing costs, at 11.59 percent [!!!-such confidence in this socialist paradise], are almost double the developing-nation average, according to Bank of America Corp. in New York. 

Alike many gold bugs, Venezuela (wrongly) bet on ever-rising prices of gold, in which it has kept much of its forex reserves. So, when gold prices headed south, you know what happened to its reserves:

Venezuela’s liquid cash reserves fell 31 percent in the first half of the year to $3.1 billion, the central bank said yesterday. The bank had 11.8 million troy ounces of gold as of June 30, which it valued at $18 billion, down from $20 billion as of Dec. 31...

The 23 percent decline in reserves this year is mostly due to a 43 percent plunge in the price of gold, which accounts for 72 percent of holdings [my emphasis], Rodriguez said. Because the central bank values its gold holdings using a six-month moving average, reported reserves may fall by $1.1 billion more if gold remains at current prices, Rodriguez said in an Aug. 8 report.

“The fact that Maduro has given control of these funds to the central bank is definitely a credit positive move,” Bianca Taylor, senior sovereign analyst at Loomis Sayles & Co. in Boston, said yesterday in an e-mailed response to questions. “However, it is not a panacea. Venezuela’s problems are deeply structural.”

In other words, Venezuela has precious little cold, hard cash. ($3.1 billion? What's that, 1.25 seconds'  worth of US deficits?) Moreover, there is some doubt as to whether much dollars--currency of el diablo--are actually stashed away in SOEs. At any rate, I am still gobsmacked at the level of financial mismanagement here. You must be radically incompetent to turn Latin America's second largest oil exporter into a holder of Egypt-like forex reserves. Hoarding gold? Puhleeze.  

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Belo Monte, Brazil's "Ethical Megadam"

 Here at the IPE Zone, we are true aficionados of oxymoronic terms, many of them wrought by those famously tongue-twisted Yanquis. For starters, try "financial stability," "Internet freedom," and my current favourite, "American savings." Today, though, we have some other (Latin) Americans engaging in these entertaining if oftentimes hypocritical exercises in linguistic flights of fancy. Still, it's perhaps a worthwhile attempt to reduce the rest of the world's gaping Orwellian doublespeak deficit with the United States.

With the cessation of large development lenders funding them (at least until recently), we are supposedly in the post-megadam age. Having courted endless controversy with them, the likes of the World Bank and various regional lenders funding these projects had become negligible. The list of no-no's is familiar and almost endless: forced relocation of indigenous communities, flooding of culturally important low-lying areas, disruption of wildlife migration patterns, destruction of natural ecosystems, etc.

It was thus with some interest that I read Brazil has not weaned itself off the megadam habit. In terms of power generation, it supposedly has 2 out of 5 of the world's largest--Itiapu and Tucurui. So awed was American composer Philip Glass by Itaipu--then the world's largest before being overtaken by China's Three Gorges Dam--that he was even inspired to compose a symphony about it. Now that development lenders have been cowed by activists, Brazil is following China's example in putting up its dam by itself (and dam[n] what the critics say).

On second thought, let me take that back. For, Brazil is styling Belo Monte, which is expected to be the world's third largest dam upon completion after Three Gorges and Itaipu, as an "ethical megadam." But first, a little about its controversial history:

Belo Monte has had a long, turbulent history of clashes between national interest and local concerns. When dam plans were first made public in 1987, they met strong public backlash and were eventually shelved. When the government revived the project in 2002, high-profile protestors such as James Cameron led the international community to halt what the opposition considered an environmentally destructive and inefficient project. Despite their efforts, today Belo Monte is becoming a reality. Opposing groups hold that Belo Monte is being constructed illegally. Local indigenous populations claim that they were never properly consulted about Belo Monte, a violation of the Brazilian constitution.

The legality of granting an installation license was also called into question when two biannual inspections by IBAMA, Brazil’s equivalent of the Environmental Protection Agency, found that Norte Energia had fulfilled only five of the 40 installation conditions. This included things such as proper disposal of felled forest, installation of basic infrastructure in impacted communities, and compensation of people facing displacement. Currently, over 50 lawsuits at all levels of court charge Belo Monte’s planners and builders with environmental and human rights violations. 

Ooh, James Cameron...celebrity protesters! Hence Brazil's efforts to promote the proverbial "inclusion"--with a boatload of cash to buy acquiescence besides:

The scale of protests has created more public input on regional development, for example. A presidential decree in 2010 established a 30-member steering committee to control Norte Energia’s $233 million investment in the region. The 30 officers represent every walk of life affected by the dam, including fishermen, indigenous tribes, rural farmers, labor unions, entrepreneurs, and environmentalists, as well as every branch of government – federal, state, and municipal. Every month the committee meets for two days, hashing out the best plans for developing the Xingu. The public is encouraged to participate, making for a dynamic democratic process. “This [space] has a life of its own,” says Peter Klein, a PhD candidate in sociology at Brown University who has spent time in the communities around the dam. The conversation taking place "is constantly changing and constantly being created … it’s one of a kind," he says.

This type of community inclusion and oversight has never been attempted at a dam site in Brazil before. Environmental concerns are also being addressed in new ways. In response to environmental and indigenous outcry, Belo Monte was redesigned as a run-of-the-river dam, an emerging hydropower alternative that uses the flow of the river to generate power, eschewing large reservoirs. Scaled down from a six-dam reservoir complex, Belo Monte will now only flood 516 square km of rainforest instead of the original 1,225 square km. As a result, the dam will emit less greenhouse gases and avoid construction on indigenous lands.

Somehow I am not entirely convinced. You have to admit though that $233 million is a lot of moolah to try and buy off the protesters with--even if it's less than the forthcoming revenues from "Avatar 2" or suchlike. They must be thankful the stakeholders in question aren't A-list Hollywood directors.

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Come to Where the Energy Is: Myanmar Country

With apologies to the Philip Morris Co.'s iconic figure, let's draw some analogies here: Both Marlboro and Myanmar are not exactly the most politically correct of figures, one representing the hazards of cigarette smoking and the other decades of political oppression. That said, both are irresistible draws in certain, undeniable respects. Marlboro is instantly recognizable worldwide for its cowboy, go-it-alone romantic imagery of the "American West." Myanmar, meanwhile, epitomizes the exoticism of the "Far East" to many Westerners. Despite their less-than-perfect reputations, they remain top-drawer economic attractions. Marlboro remains a Top 20 global brand, while Mynamar's considerable natural resources will always have its takers. [Photo c/o Process Design Engineering blog.]

So it is with the recent normalization of Myanmar's relations with the rest of the world (best illustrated by it hosting a World Economic Forum event) that it's sought energy sector investment from MNCs whose countries previously barred them from doing business with the military junta. It's like a land grab out there as its "frozen in time" oil and gas fields are going to be up for auction soon. And, unlike the oil and gas fields of Southeast Asian neighbours the Philippines and Vietnam, China is not disputing ownership over them. (Call it an accident of geography since China has this habit of claiming everything within, alas, striking distance.) Indeed, prior to the recent wave of liberalization, China was next to the only foreign investor of note in Myanmar after India. But anyway, back to the story...

[Australia's] Roc, [France's] Total SA (FP), [Italy's] Eni SpA (ENI) and [India's] Oil & Natural Gas Corp. are among 59 companies that qualified earlier this year to bid for onshore fields in Myanmar, according to the nation’s energy ministry. Myanmar is also offering 30 offshore blocks. Myanmar’s potential gas resources are estimated at as much as 45 trillion cubic feet, Roc said in February, citing a U.S. Geological Survey report. Myanmar has 7.8 trillion cubic feet of proven gas reserves, according to BP Plc data.“That’s quite a significant prize, and clearly the industry feels that as well given the appetite,” Eliet said. 

Due to having fewer geopolitical tussles with China alone, Myanmar's prospects for energy recovery may be said to be better than those of the Philippines and Vietnam irrespective of their reserves. It's certainly indicative of the lure of the "resource curse" that a country such as Myanmar stands to fill its coffers so much just by practicing rudimentary improvements in governance, but I guess that shows you how fierce competition is worldwide for fossil fuels even at this time when energy costs have receded somewhat.

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Globalization's Victims: Filipino Workers in Algeria

The Philippines is famously a country of migration with an estimated one-tenth of its population of ninety million working overseas. I am of the belief that there is nothing wrong with that. After all, the UN Declaration of Human Rights Article 13 (2) states: "Everyone has the right to leave any country, including his own, and to return to his country." On the other hand, it is also true that Filipinos overseas often engage in archetypal "3-D" jobs that are difficult, dangerous or dirty. As it turns out, Filipino workers plying their trades in the Middle East are plentiful. Observe the regularity with which Filipino seafarers are held hostage when ship hijackings occur off the coast of Somalia.

For a long time, Filipino gas field workers were thought to have among the cushier jobs in the Middle East. Working in these fields run and maintained by major local and international firms, they had access to many amenities unavailable in local communities including much-appreciated 24-hour air-conditioning in desert climates. However, the recent attack in Algeria punctured the notion of these oil fields being gated communities of the world economy. Perhaps inevitably given their ubiquity in the region, eight Filipino workers died in the assault by Islamic militants:

The Department of Foreign Affairs said that another Filipino has been confirmed killed in last week’s siege by Islamic militants of a remote natural gas plant in Algeria, bringing to eight the total number of Filipino fatalities...

The Philippine government has said 12 other Filipino workers survived the 72-hour hostage drama in the north African desert. Dozens of foreigners were killed during a four-day standoff that ended in a bloody showdown with Algerian commandos on Saturday, with reports of summary executions. 

The question for the Philippine government is what responsibility it has towards its migrants as an active promoter of overseas employment. That is, while Filipinos are certainly free to work overseas at their own discretion, the government's responsibility may be heightened by implication through its active involvement in the process. Unfortunately, its reactions are thus more reactive than proactive given obvious limitations:

Thirty-four Filipinos working at the Algerian gas field where dozens of foreigners are feared dead in a hostage incident have been flown out of the country, a Philippine government spokesman said yesterday...

Manila is still trying to determine how many Filipinos were in the gas plant, a task that was complicated by the many foreign companies and contractors operating in the area, [Foreign Undersecretary Raul Hernandez] said. He estimated that there were about 3,400 Filipinos working in Algeria.

Make no mistake: ideological conflicts between Western powers and their fundamentalist Islamic opponents waged all over the world often result in "collateral damage" among migrant workers.

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Nuke to Thrill: Rekindling Japan's Fission Passion

The taste of love is sweet 
When hearts like ours meet 
I fell for you like a child 
Oh, but the fire went wild...

[The chart above is from Nuclear Tourist.] The return to the status quo ante of Liberal Democratic Party (LDP) leadership in Japan unsurprisingly means the comeback of any number of policies the nation has become accustomed to: healthy agricultural subsidies to key rural constituencies; budgetary and monetary largesse; and, for today's topic, a return to nuclear power. While the incidences at Fukushima power plant illustrated the hazards of operating nuclear plants in the earthquake-prone Pacific Ring of Fire to the rest of the world, bear in mind that there were no direct casualties as a result despite various projections of future fatalities due to radiation exposure. Still, the previous Democratic Party of Japan (DPJ) leadership bowed to public pressure in closing down any number of reactors in the wake of Fukushima. Alike several industrialized economies, Japan had taken to nuclear power in the aftermath of the 1973 and 1979 oil crises, and it took something drastic to shake its belief.

Speaking of a return to old habits that die hard, however, Japanese movers and shakers have experienced discomfort over the implications of doing away with fission. After a string of monthly trade deficits in the wake of the devastating Tohoku earthquake, mercantilist sentiment naturally awoke. What's more, the economic implications of a deficit-running Japan already overburdened with massive debt were difficult to contemplate. It was only natural that the traditionalists would return to what "worked" before once the LDP gained electoral victory. Here is commentary immediately after they won:

Japan's plans to phase out nuclear power and boost reliance on renewable energy are likely to be reversed with the victory of the Liberal Democratic Party (LDP) in parliamentary elections. In voting on Sunday, LDP captured control of the legislature's lower, more powerful house from the Democratic Party of Japan. The Democratic Party, in office since 2009, had set a goal of phasing out nuclear power during the 2030s as part of a new energy policy developed in response to the March 2011 Fukushima Daiichi Nuclear Power Plant disaster. All but two of Japan's 50 nuclear reactors are now idled because of public worries about seismic resistance.

More recently, we too note that the LDP is set to pull off the ol' bait and switch of promising to curb its enthusiasm for nukes. You will not be surprised to note that the LDP is also quite close to the nuclear industry...

In its statement outlining its election pledges, the LDP conceded that its pro-nuclear energy policy had been flawed and apologised for causing the Fukushima nuclear accident. The LDP, which had talked in the past about raising Japan’s dependence on nuclear energy from nearly 30 per cent to as much as 50 per cent, pledged during the elections “to establish a social and economic structure that does not need to depend on nuclear power...”

But “since the Abe administration was formed, their rhetoric on nuclear power has changed quite rapidly”, says Koichi Nakano, professor of political science at Sophia University in Tokyo. “It now looks like the LDP feels it is their duty to promote nuclear energy,” Mr Nakano says...

Given the LDP’s close ties to the nuclear industry and its history of promoting nuclear power, the Abe administration cannot afford to have the public realise that Japan can get along just fine without nuclear power, Mr Nakano says. “I think that is what they are most afraid of,” he adds.

Opinion polls indicate that a majority of the public have a negative opinion of nuclear power. Smart money says the LDP will not champion nuclear power so overtly, but that it will nonetheless roll back the DPJ's ambitions to wean the nation off fission. On the menu, then, are the construction of newer and purportedly safer designs. Not only do they assuage public discomfort to an extent, but they also generate new infrastructure spending that obviously will benefit traditional nuclear industry allies:

Shinzo Abe, who took over as prime minister last month, has given a clear indication that the government is looking to build new nuclear power plants...“The new nuclear power plants we will build will be completely different from the Fukushima Daiichi nuclear power plant which caused the accident, and those that were built 40 years ago,” Mr Abe said in a television appearance this week.

“We are likely to build new nuclear power plants on winning the public’s understanding,” he said. Mr Abe’s comments came after Toshimitsu Motegi, his economy, trade and industry minister, said he would re-evaluate the previous administration’s ban on building new nuclear reactors.

Don't be surprised either if they begin reactivating nuclear plants if they can get away with causing a public uproar. Time, after all, is on the LDP's side: public opposition tends to wane after the triggering event--Fukushima--recedes further and further into the past.

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Philippines & China: Joint Exploration, Not War

The Philippines' industrialist du jour, Manny V. Pangilinan--he goes by his initials "MVP"--has long sought to partner with Chinese energy firms in exploring contested areas in the South China Sea. Say what you will about Pangilinan, but his move shows astuteness about the political sensitivities surrounding energy exploration there. If you will recall, the Philippine president was sufficiently annoyed by recent run-ins with the Chinese in the South China Sea as to officially rename the part of it claimed by Manila the "West Philippine Sea."

While China always issues fine words such as those spoken at the recently-concluded ASEAN summit about the matter, alike that other would-be regional domineer its actions do speak louder--and are often belligerent in the eyes of many Filipinos. Witness their abysmal public opinion of China. So, while Pangilinan does have his critics, his idea for the energy exploration unit of his vast group to partner with Chinese oil giant CNOOC makes business and political sense. As with any number of foreigners, Pangilinan is banking on leadership changes in the Communist Party to spur a joint exploration deal. I am somewhat doubtful, but one always hopes that the liberal idea of commercial opportunities trumping narrow national objectives holds even here:

Philex Petroleum Corp. is looking to start a fresh round of talks with China National Offshore Oil Corp. (CNOOC) for the development of the potentially resource-rich Recto Bank in Northwest Palawan. The listed upstream oil firm will wait for the response of its Chinese counterpart considering the recent leadership shakeup in the world’s second largest economy.

“Hopefully we can get some response from them with the change of leadership,” Philex Petroleum chairman Manuel V. Pangilinan said. In April, officials of Philex Petroleum conducted a meeting with government-owned CNOOC in Beijing.

That said, the mooted deal is best characterized as prospective in nature:

Pangilinan said there is no timeframe yet on the new round of talks considering the political transition in China. “I think you have to allow a bit of time because these are new leaders of China so it may take a bit of time to put their feet under the table so to speak,” Pangilinan said.

At best, it's killing two birds with one stone: the Philippines gains energy exploration expertise it does not necessarily have, while it also mitigates security risks emanating from this territorial conflict. Then again, joint exploration brings with it the connotation that the Philippines has a right to these areas China has long denied, so it's certainly a mixed prospect for all involved.

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Is Canada Less Racist-Protectionist Than the US?

It appears so. Recently, I posted on China's government-owned energy firm CNOOC attempting to buy Canada's Nexen and the political sensitivities that go with it. CNOOC is the same firm American lawmakers effectively discouraged from buying relatively pipsqueak American producer Unocal back in 2005 over dubious "national security" grounds. Just as you would expect, our Canadian friends appear to be more welcoming of the spirit of free trade in allowing the Chinese to buy Nexen.

Undoubtedly, there have been delays over largely the same objections, but the Canadians appear to be less racist-protectionist overall. However the latest word from the ever-popular "sources" is that the acquisition will be allowed to go through with the qualification that Canadian management and board representation remain substantial:

Negotiators for the Canadian government adopted many of the conditions requested by Alberta Premier Alison Redford last month, which include guarantees that at least 50 percent of Nexen’s board and management positions be held by Canadians, the two people said on condition they not be identified because negotiations are confidential...

Recent statements from Harper and federal cabinet ministers provide “favorable indications” Cnooc’s takeover of Nexen will soon be approved, as well as the separate bid the government is reviewing by Malaysia’s state-owned energy company for Calgary- based Progress Energy Resources Corp. (PRQ), said Kyle Preston, an oil and gas analyst at National Bank Financial Group in Calgary.

“I think we’re close,” [energy analyst Kyle] Preston said in a phone interview yesterday. “The government is looking at both the Cnooc-Nexen and the Progress-Petronas deals, which I think gives the appearance they’d like to make a decision on both at the same time and outline what the new framework is going to be for this net benefit test.”

The "net benefit test" simply holds that acquisition of  a Canadian firm will result in more benefits to the country than if foreign investment is shunned. I believe it's a fair criteria--and certainly one you would subscribe to if you believe in classic liberal principles about the benefits of trade and investment. Further, unlike certain racist-protectionist-isolationists, the Canadians have made it a priority to attract more foreign investment in the energy sector:

The Canadian government is reviewing the sale of Nexen under the country’s foreign-takeover law, which specifies transactions need to have a “net benefit” to the country in order to win approval. Canada extended its review of the deal for a second time on Nov. 2, setting the deadline to Dec. 10.

While Prime Minister Stephen Harper has called it a national priority to sell more of his country’s energy resources to Asia, he has said the Nexen sale raises “difficult policy questions” and the government will release a new policy framework on foreign investment when it completes the review of the Nexen takeover.

Why can't America be more like Canada--a progressive and prosperous place? The world would be so much better off if such were the case instead of having all these American hypocrites running the show. Be warned though: the archetypal racist-protectionist-isolationist Chuck Schumer (D-NY/Hades) says he will butt into this deal since Nexen also has US-based production facilities.

Americans sticking their noses into other people's business knows no bounds.

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Proletarianizing F1: Hugo Chavez's Pilot Wins Race

Face it: there are certain sports which have an uppity image. Golf. Equestrian sports alike polo and dressage. Rugby even. And, of course, there's F1 which tries to build an image of glamour with various Eurotrash and wannabe Eurotrash sporting perma-tans, big Rolexes, big yachts and attractive young women in tight-fitting clothing (but not much of it). This marketing ploy has done wonders given the rude health of F1 despite the automobile industry having seen better times.

A few months ago I talked about Hugo Chavez's sponsorship of the venerable F1 team Williams. Despite its illustrious history, it's fallen on hard times as of late. Whether their coffers were empty because few want to be associated with a has-been or the other way around because they were not able to build a competitive car for want of cash, Williams' glory days appeared behind it. In this narrative, Williams only gave the Venezuelan Pastor Maldonaldo a race seat since he brought millions in sponsorship money via the state-owned oil firm PDVSA. Not that he's hiding the fact he's a "state-sponsored driver."

Or that's how the story went at least until yesterday. In a made-for-Hollywood script (cue the Rocky theme right about now), Pastor Maldonaldo who before yesterday managed to score championship points only on one occasion by finishing in the top 10 suddenly managed to beat two-time Spanish world champion Fernando Alonso at the Barcelona Grand Prix for a race victory. Hugo Chavez was naturally chuffed, exclaiming "I said so: Our Pastor Maldonado won, making history. Bravo Pastor! Congratulations to you and all your fighting team! We shall overcome!" on Twitter.

It's obvious that Williams remains a struggling outfit. While the other podium finishers Fernando Alonso of Ferrari and Kimi Raikkonen of Lotus sported bespoke race suits, Pastor Maldonaldo sported one that looked homemade with obviously stitched-on sponsorship logos. The other two guys' cars were covered from nose to tail in corporate logos as well while the Williams had many stretches of paint save for lots of PDVSA decals and a few other sponsors.

Given the uppity nature of the sport, consider the implications of the Maldonaldo victory which is, in a larger sense, also a victory for Hugo Chavez and PDVSA:

1. These Venezuelans take a huge swipe at other energy concerns who Hugo Chavez has tangled with in the past over populist measures. Expropriated ExxonMobil through McLaren-Mercedes was well and truly beaten. Whiny Shell through Ferrari was also put in its (second) place. F1 has traditionally been the preserve of massive global conglomerates like these that Hugo Chavez loves to hate, so I'm sure this fact is not lost on him. (Also consider the plight of that other Williams at Hugo's hands even if it isn't an F1 sponsor.)
2. It goes a long way towards addressing the "paid driver" image that many including yours truly have of Maldonaldo. On a good day with competitive equipment, he's demonstrated that he can do as well as anyone else.
3. And speaking of redemption, it validates Sir Frank Williams' decision to hire the controversial Mike Coughlan who was ousted from McLaren over spying on Ferrari. If there's anyone in the F1 paddock they will be looking to spy on this time around, it will be on Williams who've apparently done small miracles with a budget nowhere close to that of the big teams.
4. Given Hugo Chavez's penchant for conspiracy theories alike blaming incidences of cancer among leftist Latin leaders including himself on the West, I am surprised that he hasn't tweeted about how gringo powers-that-be set the Williams garage on fire to warn against further Pastor Maldonaldo victories.

At any rate it's a huge change for F1 to have so many contenders each race weekend that makes it fun to watch--even if they include faux socialists. In the meantime, racers of the world unite!

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Strange Tales of Delta Air Buying an Oil Refinery

With airlines being almost universally unprofitable these days--even Thai Airways is reportedly going to have an unprofitable 2012 or only its second unprofitable year in 51 years of operation--saying that costly aviation fuel is having negative effects on the airline industry is an understatement. From the Land of Smiles' flag carrier, let's turn our attention to the Land of Fats' largest carrier, Delta. A few weeks ago, I noticed an interesting feature about this perennial money loser considering the purchase of a refinery to deal with sky-high fuel costs. Now it's almost a fact: Delta nears completion of a deal to buy a refinery that ConocoPhillips is offloading:

 Delta Air Lines Inc. (DAL) is bringing some jet-fuel production in house, breaking with U.S. carriers’ reliance on outside providers, by acquiring a refinery that Phillips 66 had targeted for shutdown. The world’s second-biggest airline will pay $180 million for the complex in suburban Philadelphia, according to a statement yesterday. Pennsylvania’s state government is putting up $30 million in assistance to defray the expense.

An airline-owned refinery is an experiment in the U.S. industry, said Ray Neidl, an airline analyst at Maxim Group LLC in New York. Atlanta-based Delta estimated the accord will save $300 million on its annual fuel bill, which was $11.8 billion last year, or about $32 million a day. “Nothing ventured, nothing gained,” said Neidl, who has a buy rating on Delta shares. “Delta likes to try new things and I’m sure they studied this for months and ran the calculations. Nobody has done something quite like this before.”

Well that's one optimistic take on the Delta purchase. However, more analysts are skeptical about the costs savings available here, instead focusing on Delta's expansion of non-core functions and its implications for its flight operations. It goes back to time-tested debates about supply chain management and when the vertical integration or "make" decision outweighs the "buy" decision. To be sure, what we have here is a supremely commodified product, so there's no novelty factor involved which usually points in the direction of a "make" decision. Delta's counterargument though would be that these are extraordinary times during which it's better to make certain things in-house. At Bloomberg, Virginia Postrel outlines the sensible case against Delta's plan:

“If markets work well, you’re always better off using the market. Let somebody specialize in what they do and trade with them,” says Richard N. Langlois, an economist at the University of Connecticut whose work on what he calls the “vanishing hand” looks at why corporations have become less vertically integrated in recent decades. “If there are markets that are well functioning for your inputs and there aren’t high transaction costs or other problems, you’re generally better off buying things in markets than owning them yourself.” The vertical integration that Alfred Chandler chronicled in his influential 1977 book “The Visible Hand,” Langlois argues, was “an adaptation to particular historical circumstances” -- specifically, underdeveloped input markets...

In Delta’s case, that means flying airplanes, not refining oil. Delta doesn’t need its own refinery to obtain jet fuel, which is traded in a thick worldwide market, any more than it needs to own a peanut farm to supply in-air snacks. And it seems unlikely that Delta would be noticeably better at running a refinery than any other potential buyer--or, for that matter, ConocoPhillips, which plans to close down the refinery if it can’t make a deal.

The proposed purchase “doesn’t make a huge amount of economic sense -- in fact quite the opposite,” says Craig Pirrong, a finance professor and director of the Global Energy Management Institute at the University of Houston’s Bauer College of Business. You might think that owning a refinery would at least protect the airline from price fluctuations. But, Pirrong notes, crude oil prices affect the profits of airlines and oil refineries exactly the same way. When oil prices go up, their profits go down. Owning a refinery would simply magnify the effect. “If anything,” he says, “it increases the risk exposure that has bedeviled the airline industry for years.” 

I believe these arguments make sense: it's the price of crude oil, not refining it, that is primarily behind costly aviation fuel. Moreover, if a dedicated energy concern alike ConocoPhillips couldn't make ends meet, what better chance does an energy industry neophyte like Delta? Still, you can't deny Delta's chutzpah. For its next act, I'd like to see it buy an inflatable woman doll maker to produce floatation devices. Delta may be losing lots of money, but it might as well have fun doing so.

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IMF's (Shocking?) Endorsement of Procyclicality

I needn't recycle criticisms you're most familiar with concerning how the IMF exacerbates difficulties by deterring poor countries from using countercyclical policies to cope with downturns--either indirectly via policy suggestions during Article IV consultations or via conditionalities when they encounter balance of payments crises. Review the Joseph Stiglitz (countercyclical) versus Kenneth Rogoff (balanced budget) debate over Washington Consensus-style policies.

Recently, I received an invitation to attend the rollout of the IMF's flagship publication, the World Economic Outlook, which is published biannually. Apparently, various IMF research team members go on an international roadshow to launch this publication since it's yet another I've attended in...another part of the world. While the WEO admittedly contains a lot of useful information about general macroeconomic trends, I've found the economic forecasts more of a mixed bag. Hence, I did not expect to find anything startlingly new in the current April 2012 report.

Boy, was I wrong. Dead wrong, in fact. While its (rather randy, dontcha agree?) previous Managing Director Dominique Strauss-Kahn famously declared the Washington Consensus-era IMF a goner, limited transference has been seen in policy suggestions given to poor countries. Unfairly perhaps as some suggest, industrialized countries have been given a free pass in "pump priming"--but not LDCs. During the presentation, though, I was astounded to see as graphical an illustration of new thinking as you'd hope to find. Since this issue's theme is commodities, one of the things the authors studied was the impact of fiscal policy when exporters encounter a global supply shock. Quite apropos for the times, methinks. Modelling these conditions for a "small, open oil exporter" (read: LDC), they came up with this chart taken from p. 19 of chapter 4 concerning Commodity Price Swings and Commodity Exporters:

Shock! Horror! Panel 1 is obvious: the volume produced by a "small, open oil exporter" has a negligible effect on global energy prices. However, panel 2 is as blunt a mercy killing of the "Washington Consensus" as you're likely to get from these folks and their econometric models. Your eyes don't deceive you: According to IMF research, an LDC commodity exporter would be far better off running a countercyclical policy in the run-up to and in the aftermath of such a shock. Sure they may not reap the full rewards of steep price rises in the immediate aftermath, but they're better positioned in the longer run to reap continued benefits instead of succumbing to a typical boom-bust pattern.

And in case you're wondering, the wording of these scenarios indicates I'm not making this stuff up. First you have the balanced budget (AKA Washington Consensus) scenario:

A balanced budget rule: Under such a rule, the government budget is balanced in every period, so all exceptional commodity royalties and tax revenues are redistributed immediately to households through lower tax rates. This rule is procyclical by design but maintains fiscal balance and net debt at long-term targets.

Meanwhile, the countercyclical scenario is as follows:

A countercyclical rule: Under this rule, the fiscal authority not only saves exceptionally high commodity royalties and tax revenues, but also increases taxes to dampen the stimulus to aggregate demand from higher oil revenue accruing to the private sector. In the case of exceptionally low royalties and tax revenues, taxes are lowered temporarily. This rule implies larger changes in budget surpluses and government debt in response to oil price changes. However, it acts countercyclically, increasing (reducing) the structural balance
during periods of strong (weak) oil prices and/or economic activity.

Yes, there are many contextual qualifiers offered here. It pertains to a small oil exporter that does not habitually run substantial fiscal deficits (i.e., one that actually has savings to spend during downturns) etc. But, to depict matters so starkly in favour of something the IMF would have once objected to vehemently not so long ago illustrates the evolution in IMF thinking.

That said, I'm not entirely convinced that this sort of thinking filters down to policy prescriptions IMF staffers make. Sure it sounds nice to read about the kinder, gentler IMF that gives a thumbs-up to pump priming. But, do the visiting IMF country teams now dispense the same sort of policy advice--especially when poor countries alike commodity exporters run into trouble? I believe that important questions remains to be answered.

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Did Global Financial Crisis Curb Carbon Emissions?

In a rather disappointing word, no. Intuitively, you may have expected worldwide carbon emissions to drop given a slowdown in global economic activity. However, it is a tale of two different worlds--the Global North (developed nations) and the Global South (the developing nations). While the likes of North America and Europe did experience fairly significant slowdowns in both economic activity and corresponding carbon emissions, that pattern did not hold in the developing world.

While searching for material on global environmental governance for my IPE class--I am the very model of a modern IPE instructor--I came across a very informative piece from Science Daily regarding recession and carbon emissions. The gist of it is as I mentioned above was nary a blip in LDCs' emissions, powered especially by major emerging economies:

The sharp decrease in global carbon dioxide emissions attributed to the worldwide financial crisis in 2009 quickly rebounded in 2010, according to research supported by the Carbon Dioxide Information Analysis Center at the Department of Energy's Oak Ridge National Laboratory. In 2010, emissions reached an all-time high of 9.1 billion tons of carbon, compared with 8.6 billion tons in 2009. The downturn was also followed by milestone carbon dioxide emissions from the developing world's emerging economies. In developing countries, consumption-based emissions, or those emissions associated with the consumption of goods and services, increased 6.1 percent over 2009 and 2010.

As a result, 2009 marked the first time that developing countries had higher consumption-based emissions than developed countries. "Previously, developed countries released more carbon dioxide, but that's no longer true due to emerging economies in developing countries, such as China and India," said Tom Boden of ORNL's CDIAC. "This trend will likely continue in the future based on current developments." 

The news release further argues that the increasing energy intensity of the world economy (more energy inputs needed per GDP of output) accounts for this unpromising pattern. The accompanying graph tells the story. Note that it separates these emissions into production and consumption:

The problem is one of historical fairness in curbing carbon emissions: how can developed nations tell developing ones with a straight face that they should drastically cut emissions now that they are now responsible for the lion's share of them? After all, developed nations are responsible for more of them when viewed in a historical perspective. As one of my students pointed out, it's a rehash of Friedrich List's "kicking away the ladder" criticism, but instead involving carbon-intensive means of development instead of tools of industrial policy. Having developed through the use of carbon-intensive industries, are these industrialized nations now "kicking away the ladder" to development they themselves once used?

It puts me in a bind. While perhaps unfair to LDCs, the honest truth is that Mother Earth could not care less if these emissions emanate from rich or poor nations.

NOTE: The US Energy Information Administration has specific emissions figures for countries such as superpolluters China and the United States that mirror the findings above. Indeed, the current slowdown in manufacturing activity in China--five straight monthly declines--may bode better for the environment than the global financial crisis did.

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Hugo Away: Chavez Ignores World Bank on Exxon

File this under: pre-emptive strike. It appears that the indefatigable Hugo Chavez is back on the warpath against all things American. A few days ago he publicly suspected the United States of unleashing cancer on fellow left-leaning Latin American leaders. In less improbable news, however, we now understand that his Venezuela will not abide by subsequent rulings that find the country liable for nationalizing ExxonMobil oil fields in the Orinoco Belt. At the end of last year, forum shopping ExxonMobil received a favourable $746.9 million verdict against state oil company PDVSA at the International Chamber of Commerce (ICC) Court of Arbitration over the expropriation. While a victory nonetheless, ExxonMobil believes that this sum amounts to less than a tenth of its original investment.

Now, as most of you know, the International Court for the Settlement of Investment Disputes (ICSID) is a World Bank body that does what it says on the label. That is, it addresses legal conflicts over the handling of international investment--most often cases of expropriation alike what Venezuela is said to have done to ExxonMobil. ICSID is currently set to pass judgement on ExxonMobil's investment in Venezuela alike many others who've similarly complained about expropriation at Chavez's hands.

Anticipating a more negative ruling, Chavez is already signalling that Venezuela will not honour the decision of the Washington-based institution:

Venezuela won’t accept any verdict from the World Bank’s International Centre for Settlement of Investment Disputes, including Exxon Mobil Corp.’s claim for its nationalized Cerro Negro project, President Hugo Chavez said. The Washington-based court is considering Exxon’s claim in one of about 20 suits filed there against the Venezuelan government. Chavez, a self-professed socialist revolutionary, has taken over assets in the energy, metals, cement and telecommunications industries.

“We won’t recognize any decisions from the ICSID,” Chavez said on state television yesterday during his first Sunday program since announcing he had cancer last year. The company is “seeking the impossible, that we pay what we will never pay.” Exxon, the world’s largest oil company by market value, was the first to abandon Venezuela after Chavez expropriated industry assets in the Orinoco heavy crude belt in 2007. The president forced foreign oil producers into joint ventures as minority partners that year and is also in arbitration with ConocoPhillips, which rejected the terms...

Despite being a buffoon in many respects, Chavez logically assumes that the World Bank's ICSID and its usual American influences will result in a less favourable outcome. Here's a thought for you, though: What if the ICSID awards ExxonMobil an even smaller amount than the ICC's International Court of Arbitration or even finds in favour of PDVSA? The willingness of PDVSA to compensate ExxonMobil for what the ICC adjudged means it believes that it's as good as it gets:

In a separate case, the New York-based International Chamber of Commerce, an arbitration court, ruled last month that state oil company Petroleos de Venezuela SA must pay a net $746.9 million for the nationalization. Venezuela will compensate Exxon for the Cerro Negro project as ordered by that court, Chavez said yesterday.

“If Exxon gets an award in the ICSID, the enforcement mechanisms are strong,” Michael Nolan, a partner in the Washington office of Milbank, Tweed, Hadley & McCloy who has represented clients in arbitration with Venezuela, said in a telephone interview last week. “There’s a treaty.” Exxon in 2010 reduced its claim to $7 billion from $12 billion, according to PDVSA, as the Caracas-based company is known. The Venezuelan company said Jan. 2 that it would pay $255 million in cash for the International Chamber of Commerce judgment, after accounting for about $300 million in a frozen New York bank account and $191 million of Exxon debt that it will cancel.

Perhaps unsurprisingly, ExxonMobil is again forum shopping for the best result. Having been disappointed by the ICC ruling, it now awaits that of the ICSID which is supposedly considering a more strictly enforceable bilateral investment treaty (BIT) as evidence as opposed to a contract between just ExxonMobil and Venezuela. On the other hand, PDVSA is also looking for the best deal to get ExxonMobil off its back for now which it believes can be done by promptly (or at least by Venezuelan standards) paying at least part of the $746.9 million. I leave you to (enjoy?) more Hugo-isms:

“It’s insane!” Chávez said. “It’s such an insane position taken by this company than the decision [of the court] recognizes less than 10 percent of what they were asking for. How much must these companies have robbed in the last hundred years? They stole from us; they had to pay us back for damages made in the last hundred years; the capital they have wouldn’t be enough,” Chávez said.

Even Hugo knows a good deal when he sees one (perhaps). Still, I would be gobsmacked if the average Venezuelan knows what the ICSID is when most persons don't. Moreover, permanently blowing off those with the actual know-how to extract extra-heavy sour crude may not be the best course of action insofar as PDVSA does not necessarily have this expertise on its own.

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