Libya

The New York Times reports this morning that “calls have been growing in Congress for the Obama administration to consider tapping into the nation’s strategic petroleum reserve”. That understandable instinct is premature. Strategic petroleum reserves technically exist to alleviate physical oil supply disruptions. No one is arguing, though, that the United States is facing such a situation. The case being made by more sophisticated proponents of tapping the reserves is that we may be experiencing one indirectly. In particular, Senator Bingaman appears to be arguing that Europe is experiencing a physical disruption of supplies from Libya, and that the disruption is being transferred to the United States through competition for high quality oil. This does not qualify as a physical disruption of U.S. supplies. Markets appear working properly. The disruption is being felt through higher prices, not shortages. (The high/low quality meme is being overplayed a bit too.) That said, I do not subscribe to the orthodoxy that says that strategic reserves should only be used in cases of direct physical disruption, and never in situations where broader market turmoil merely leads to dangerously high prices. If prices are sharply and temporarily elevated, and if an SPR release can address that, it should be strongly considered, as I argued in the FT last week. But those conditions are not yet met. First, the current oil price rise is not fundamentally threatening to the economy. It is simply not big enough. Take a look at the stock market if you don’t believe me. Second, it is not clear that an SPR release would do much, if anything, about the current price situation. The current high prices appear to be more about fears of contagion in the Middle East than about actual supply disruptions in Libya (which appear to have been largely balanced by increased production from Saudi Arabia). If the immediate problem was a physical disruption, and U.S. strategic reserves could (and were needed to) compensate for that, then there would be an argument for using them. But strategic reserves don’t directly compensate for fear. There is no good reason to believe that a release would calm peoples’ nerves. Indeed policymakers should be concerned that it would do precisely the opposite. Tapping the reserves right now could validate fears in the market – after all, it would signal that the United States government was worried. That could simply induce more precautionary buying, thus buoying prices, rather than depressing them. Such an outcome would be doubly dangerous, since, since it would undermine the psychological value of the reserves. Observers might come to fear that another SPR release under far more stressful circumstances would be similarly ineffective. That would tend to exacerbate the present stress. There may yet be a time to call on the SPR. And I understand that policymakers want to do something about the situation. But we’re not there yet.

The jump in oil prices over the past month or so has clearly been driven by what’s going on in the Middle East and North Africa. That’s why most analysts assume that when things (presumably) calm down, oil prices will drop back to previous levels too. And so long as oil prices don’t stay high for a prolonged period, the economic impact should be relatively small. But what if the geopolitical stress abates, yet oil prices remain relatively high? The standard answer is that this isn’t possible. If supply returns to previous levels, the market clearing price should too. That seems reasonable, but I’d throw out a caution, because oil prices are funny things. Producers with substantial market power (think Saudi Arabia and maybe OPEC as a collective) target certain prices (currently believed to be between $60 and $80 a barrel) based on, among other things, their judgment as to what the global economy can tolerate. (If high oil prices tank the economy, oil demand collapses, prices follow, and producers’ revenues dry up.) They aren’t always successful, but they do try, and it often works. Producers are deterred from pushing prices too high in part because of fear of the unknown. But if a freak set of events, like we’re seeing now, push prices past previous thresholds, and if the global economy seems to handle things ok, pivotal producers might decide that targeting higher prices makes sense. They would thus cut back on supplies in order to realize the new target. The temporary price hike would become self-reinforcing. This tendency could be compounded by a sense among producers that inflation, whether already realized or still on the way, was undercutting existing OPEC price targets – after all, that was part of the rationale for the original OPEC price hikes back in the early 1970s. To the extent cash poor (and hence price-hawkish) Iran has made relative gains in regional politics over the past month, that could also weigh on decision-making. This is all, of course, quite speculative. But stranger things have happened. Part of the recent price hike could thus stick.

The Qaddafi government’s violence has resulted in at least 300 civilian deaths and the attempted flight of Libyans and migrant workers, says Human Rights Watch’s Tom Malinowski. The U.S. and NATO should consider preparing military options against the regime and ensure delivery of relief aid, he says.

Saudi Arabia appears to have boosted its oil production and is in talks to increase deliveries to Europe. Dan Drezner is puzzled: “Why are the Saudis being so cooperative at this point? There might be sound strategic reasons – preventing a double-dip recession, assuaging longstanding allies, etc.  It could be that the Saudi leadership is feeling secure enough to plan for long-term price stability. Still, based on the recent reportage, I’m a little surprised that the Saudis aren’t exploiting the current uncertainty to ensure the security of the current regime going forward. If I was a Saudi prince right now, I’d be making it very clear to my buyers just how important stability is in my neck of the woods.” Dan asks: “Am I missing anything?” Let me take a stab. First, the strategic incentives that Dan cites for Saudi Arabia to intervene – particularly the risk of a double-dip recession – are pretty significant. Oil prices could fall precipitously if the world reentered recession. That said, the Saudis could have waited a couple weeks to respond without running particularly high global economic risks, if they wanted to spook people. Direct economic interests can’t explain everything. What I suspect matters more is that Saudi Arabia derives much of its influence from its perceived role as the central bank of oil. If it monkeys around too much by letting prices rise considerably higher, others will start to rely on it less, which will weaken its long term influence and bargaining power. Moreover, if Saudi Arabia doesn’t take action, and a strategic stockpile release by the United States and others calms the markets, Riyadh will be shown to be less strategically important than previously believed. It has a lot of incentive to not let things come to that. I’m also not sure precisely what Saudi Arabia would be able to extract by letting things get uglier. Oil markets are behaving badly precisely because people are worried about Saudi stability. If unrest actually migrated to the desert kingdom (a development that I still think is extremely unlikely), I think you’d start to see Saudi take very different steps with its oil. At that point, Riyadh would probably impress on the world that it needed support if they didn’t want to see prices get out of control. That would be a credible threat, and could result in a very concrete set of responses. Short of a similarly acute situation, though, Saudi Arabia would seem to strengthen its influence by responding quickly, rather than by letting things get worse.

Oil has crossed the $100 threshold a couple times in the last day or so, but there’s still a lot of confusion over what that means. To be sure, predicting the economic consequences of a spike is tough. Nonetheless, a few guidelines are worth keeping in mind. For the most part, a price increase needs to be sustained to be badly damaging. Cliff Krauss describes a basic rule of thumb in a good article in today’s Times: “As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of the gross domestic product by half a percentage point within two years.” That sounds roughly right. The U.S. imports about 10 million barrels of oil each day; ten dollars per barrel sustained over two years adds up to about $70 billion. That’s about half a percent of GDP (or about a quarter of a percentage point drag each year). But if a price spike isn’t sustained, it doesn’t add up to as much. If, say, oil hits $100 rather than $80 for a month, the impact (using the same rule of thumb) would be cut by a factor of ten, adding up, perhaps, to a 0.05% hit to growth this year. Even a monthlong spike to $180 would still, by this crude estimate, only slice about 0.2% off annual growth. Oil price spikes, though, don’t just affect output directly. Historically, monetary policy has been central: if higher oil prices lead to higher inflation, that can prompt rate hikes from the Fed and lead to slower growth. But a spike generally needs to be sustained before it can affect broader prices, and until that happens, it won’t influence policymakers. (The Fed doesn’t include oil prices in the measure of inflation that it watches as it decides rates.) In addition, given the amount of slack still in the economy, it could take a lot to send inflation way up. There’s one big caveat to all this: There’s decent research that suggests that it’s consumer confidence, not oil prices per se, that affect consumer demand, and hence economic output. By this accounting, even a big oil price spike need not have a huge economic impact, so long as consumers aren’t shaken. Conversely, though, even a superficially modest spike can have big consequences if consumer psychology is deeply affected. This dynamic, rather than any of the other more mechanical ones, may be the most important to watch.

In an essay in tomorrow’s FT, I argue that ongoing oil market turmoil ought to remind us that energy policy shouldn’t just be about long-term strategy; short-term dynamics matter too. Most advocates have responded to the current situation with predictable calls to expand supply, curb demand, or develop alternatives, but none of these will do much in the next decade. The world also needs serious crisis management plans. The essay focuses on three elements: strategic reserve strategy; coordination of emergency measures with emerging markets (particularly China); and, more speculatively, possible curbs on market speculation during times of extraordinary geopolitical stress. As with any op-ed, one must leave many things out. (Also, lest you be deceived by the headline, the piece isn’t only about Saudi.) Here are a few thoughts that didn’t make it in. First, the standard line on when strategic reserves should be used confuses at least as much as it illuminates. Here’s the IEA’s David Fyfe: “Our view is this [strategic reserves] is not something that should be used in terms of price management”. But what is the line between price management and emergency response in a highly liquid global market? If distributed supply shutdowns cause prices to spike severely, but no one consumer is physically cut off, that should probably still be occasion to use the SPR. Second, my three policy examples are only a subset of the issues that we’re neglecting through our singular obsession on the long term. Take Gulf of Mexico oil production. Those who say that GoM production is insignificant vis-à-vis long term oil prices are correct. But if the mess in the Middle East takes out a few million barrels a day of production, we may wish we’d been a bit more aggressive in finding ways to safely avoid curbing short-term production. Third, the comments in my essay regarding controls on speculation are highly, um, speculative. We do not have the necessary research to properly understand how speculators would affect market response to a severe geopolitical disruption, nor do we have even a rudimentary understanding of the policy tools that might be available to respond. It behooves us, though, to think seriously about what might constitute wise policy under extreme circumstances. Finally, op-eds don’t allow one to reference other (usually deeper) analyses of appropriate policy.  If you’re interested in strategic reserve policy in particular, take a look at David Victor and Sarah Eskreis-Winkler in Foreign Affairs, Michelle Billig and David Goldwyn in a very useful edited volume (alas, full text not available online), and this primer from CRS.

It’s unclear whether Muammar Qaddafi’s regime will survive after a failed, but brutal, crackdown on protesters in Libya. But if Qaddafi goes, CFR’s Robert Danin says Libya lacks the elements needed for a smooth and peaceful transition of power.

Libya, for years a thorn in the side of U.S. policymakers, has boosted its profile in recent years, renouncing terrorism and abandoning its WMD. In response, the U.S. State Department has removed Libya from its list of state sponsors of terrorism and plans to resume normal diplomatic relations.

The first Libyan envoy to Washington in a quarter century praises U.S.-Libyan relations. But the ambassador also faults U.S. policy on Iraq, Darfur, and Iran, saying Washington is permitting a nuclear double standard in the Middle East.

This publication is now archived. Does Libya sponsor terrorism?Despite Libya’s December 2003 announcement that it would eliminate its weapons of mass destruction program, it still remains on the State Department’s list of state sponsors of terrorism. Libya spent more than two decades supporting anti-Western terrorist groups, and for Americans, Libyan leader Muammar Qaddafi became the public face of terrorism in the 1980s. The United States and the United Nations imposed sanctions on Libya for its role in terrorist attacks, including the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland. But experts say Libya, strained by the sanctions, has distanced itself from terrorism. Nevertheless, the North African country remains on the State Department’s list of countries that sponsor terrorism because of its refusal to own up to its role in the Lockerbie bombing—an atrocity that still dominates U.S.-Libyan relations. What changes have been made since Libya agreed to dismantle its weapons program?The United States, the United Kingdom, and other international agencies are working with Libya to eliminate these weapons in a “transparent and verifiable manner.” Following the announcement, the United States and Libya began the process of improving diplomatic relations; sanctions were lifted and travel toLibyais now permitted.  In 2004, Libya authorized a second payment of $4 million per family to the families of the 270 victims of the Pan Am bombing and also agreed to pay $170 million to the non-U.S. families of the victims of the 1989 bombing of the French UTA passenger aircraft. Libyan officials were also instrumental in the handover of Amar Saifi, the number two figure in the Salafist Group for Call and Combat. Saifi is responsible for kidnapping thirty-two western tourists in Algeria in 2003. What past terrorist incidents have been linked to Libya?Among the attacks Libya has been implicated in are the following: The 1986 bombing of a West Berlin discotheque popular among American soldiers. The attack killed three people, including two U.S. servicemen; U.S. officials hold Libya responsible. The 1988 murder of 270 people on Pan Am Flight 103. In 2001, a Scottish court convened in the Netherlands convicted Libyan intelligence agent Abdul Basset al-Megrahi of murder for his role in the bombing. A second Libyan suspect was found not guilty.The 1989 bombing of a French airliner over Niger; in 1999, a French court convicted six Libyans for their roles in the attack.Libyan agents are also thought to have assassinated Libyan opposition politicians living in Britain in the 1980s and 1990s. And experts say Libya has backed plots to assassinate the presidents of Chad, Egypt, Sudan, Tunisia, and Zaire. What kinds of terrorists has Libya supported?Qaddafi has provided training, weapons, funding, safe haven, or other support to several Palestinian terrorist organizations and to the Irish Republican Army, the Basque separatist group ETA, and Sierra Leone’s Revolutionary United Front, experts say. In 1999, Libya helped negotiate the release of a group of international hostages held by the Abu Sayyaf Group, a Philippine terrorist group with ties to Osama bin Laden’s al-Qaeda network. Libya said it was being helpful, but the State Department warned that letting Abu Sayyaf receive ransom for hostages “served only to encourage further terrorism.” How did Libya respond to September 11?That same day, Qaddafi called the attacks “horrifying” and urged Muslim charitable agencies to provide aid to the United States. Libya has reportedly shared intelligence with U.S. officials about Libyan Islamist militants tied to al-Qaeda. Does Libya have ties to al-Qaeda?No. Almost all Libyans are Muslims, and the country’s legal system is based on the Koran, but Libya does not subscribe to a fundamentalist interpretation of Islamic law. Qaddafi faces opposition from militant Islamist groups. A 1998 attempt by the Libyan Islamic Fighting Group to assassinate Qaddafi led Libya to crack down on Islamist opposition and reportedly issue an arrest warrant for bin Laden. (The State Department placed the Libyan Islamic Fighting Group, which has been linked to al-Qaeda, on its terrorist exclusion list in December 2001; its members are to be denied U.S. visas.)

Lisa Anderson, a leading specialist on Libya, says that the surprise announcement on December 19 that Libya would renounce its weapons of mass destruction (WMD) program was “a deliberate gift,” to President Bush. “The quid pro quo is that the United States lift [economic] sanctions [on Libya]. That’s what they really want.” Anderson, dean of the School of International and Public Affairs at Columbia University, says the gesture is consistent with recent behavior by Col. Muammar el-Qaddafi. Libya’s leader, she says, seems desperate to have the country rejoin the family of “civilized nations.” Anderson was interviewed by Bernard Gwertzman, consulting editor for cfr.org, on December 22, 2003. Other Interviews President Bush announced December 19 that Qaddafi would end efforts to build unconventional weapons and dismantle his country’s WMD program. Is this a major development? Yes. It’s consistent with a whole set of things the Libyans have been doing for the last couple of years, all of them intended to bring Libya back into the family of what we call “civilized nations.” It’s another significant step along that road. At one time of course, Libya was a leading renegade state, and after the destruction of Pan Am Flight 103 over Lockerbie, Scotland, in 1988, it was more or less isolated. What’s caused this recent change? One of the things you have to realize is that starting in the mid-1980s, Qaddafi began to face some significant organized opposition at home. And what nobody was paying any attention to, except Qaddafi himself, was the fact that this organized opposition was what we would later come to call an early “Qaeda-type network.” In other words, he began to face opposition from people who were motivated by the international Islamist sentiment, who felt he was too eccentric, too un-Islamic—and if you know anything about his domestic policies, he is certainly eccentric and un-Islamic in that regard. And therefore, he was regarded by the al-Qaeda types as no better than the Saudi government, no better than any of these other governments that they hate. He found himself, ironically, on the same side as all of these governments that he had excoriated for a decade at least. Over the course of the succeeding 10 to 15 years, he seemed to everyone else in the world to be leading a rogue state, on the wrong side of everything, but he himself was finding that his purposes were increasingly served by aligning with the establishment, with the status-quo regimes, and with his former enemies. All of that crystallized on the morrow of the September 11 attack. He had already begun to try and get himself back in the good graces of everyone by turning over Lockerbie suspects and living with the verdict. So this was not an overnight conversion. But September 11 really represented the moment where he saw an opportunity, because he heard loud and clear President Bush saying, “If you’re not with us, you’re with the terrorists.” He said to himself, “This is my chance to say, ’I’m with you.’” So, literally on the 12th of September, the head of Libyan intelligence, Musa Kusa, who has also been involved in negotiating on the WMD issues, was meeting in Europe with people from the CIA, saying, “This is our list of suspects. These are the terrorists that we know that are connected to al Qaeda, who are operating out of Europe,” and so forth and so on. Was this actually on September 12? Well, maybe it was the 13th. But literally within a couple of days of the September 11 attacks. At that time, the Americans did not realize how serious the Libyans were about getting back in. So the Libyans provided their lists and started cooperating in very serious ways. The irony, of course, was that the Bush administration was publicly castigating various countries, but it was getting some of its best intelligence from one of them. There was a very odd kind of tension in trying to figure out what to do about Libya and how serious to take [its overtures.] Was this intelligence really as good as it seemed to be? Was this an indication of a serious change of heart by the Libyans or was it one more eccentric thing that Qaddafi might back out of? Very few people knew about this? Yes. Only a very few people knew about it. But interestingly, if you go back to the fall of 2001, there were reports emanating from the Libyan side, because they wanted everyone to know that they were cooperating and were “good guys.” They wanted to stay off what became the “axis of evil” list and they succeeded in that. It was a subtle thing. The Libyans leaked to the press that they were cooperating, which is pretty funny when you think about it. The Americans were less happy to announce that because Libya was still a regime they felt they could not trust, for various reasons. But there was a continuing conversation. The Libyans agreed to the compensation for the Lockerbie families, which led to the lifting of United Nations sanctions, with the Libyans saying, “Okay, we’ll pay whatever it takes to get the Lockerbie families off the American political agenda.” They’ve been doing almost anything that anyone has asked them to do to get back into this new division of the world between “the good guys” and “the bad guys.” They are now absolutely core, as far as their own interests are concerned, on the “good guys” side. Did most people know that the Libyans were dabbling in chemical, biological, and nuclear arms programs? Pretty much everyone knew it. What nobody could tell, and which is not clear even now, was how far along they had gotten, how good they were, and whether any of this stuff was real. A lot of the WMD activity, as far as I could tell, was amateurish. But, in a sense, it does not matter. Even if they never got to a point at which they were producing very much [unconventional weaponry] or could deliver it anywhere, you would still want them to stop. I think it is also true that they never got very sophisticated at it, in part because if you look at the economy of a place like Libya, there is not much sophistication in it. When the United States bombed Libya in 1986, didn’t the United States also bomb a chemical factory? Actually, at that time we did not. But we did subsequently bomb what we believed was a chemical weapons facility. I’ve always associated Qaddafi with pan-Arabism. There are different layers of “pan-ism” in that neck of the woods. Qaddafi came to power as a pan-Arabist on the model of Egypt’s Gamal Abdel Nasser, who was his hero. He thought that the solution to all the problems in the region was to have one single Arab country and he was willing, as long as Nasser was alive, to say that Nasser could be the head of that country. Once Nasser died in 1970 and Qaddafi started to realize that many of the other regimes were much more ordinary, run-of-the-mill regimes, and not revolutionary, he was very much alienated from Arab nationalism. So it has been a long time since anyone accorded him much credibility as an Arab nationalist. But he was also the leader of the first Islamist regime, and this is why he has gotten into so much trouble in terms of the shifting sands of the region. He came to power in 1969, 10 years before the Iranian revolution, and in those 10 years he was the first to talk about Islam in power. When the Iranian revolution occurred, he was outflanked quite dramatically in terms of Islamic power. Partly as the result of that, Qaddafi’s pronouncements on Islam became so eccentric as to become heretical. [In response] an Islamist opposition arose in Libya that was quite orthodox. By the mid-1980s, Qaddafi was facing a very significant Islamist opposition but, again, most people did not notice that because they thought of him still as either so eccentric as to have no perspective or as still in a desperate and serious competition with the Saudis for influence in the Muslim world. Through much of the late 1970s and through the 1980s, the Saudis and the Libyans were in this almost laughable competition building mosques all over Africa to export their own versions of Islam. But the Libyans ducked out of that competition. They had abandoned both pan-Arabism and their pan-Islamist position. Qaddafi for the last decade at least, has thought of himself more as an African leader than an Arab or Islamist leader. That’s partly a reflection of his disenchantment with Arab nationalism and pan-Islamist politics. Al Qaeda is no friend of Libya, obviously. Certainly. They think Qaddafi is as much of a problem as the Algerian regime, or the Saudi regime, or any of these other regimes. As much as these regimes hate each other now, and there has been little love lost among the Algerians and Libyans and Saudis in the last 25 years, all know they face a common enemy, al Qaeda. They all want to be on the same side. I’m still trying to understand why Libya was so radical in the 1980s. It bombed a discotheque in Berlin, killing two U.S. soldiers. That precipitated the bombing of Libya ordered by President Reagan in 1986. That, it seems, led to retaliation in the form of the Lockerbie disaster. I think, as with Lockerbie, when our grandchildren write the history of this period, it will not be clear that it is going to be best explained in terms of state politics. We have no better way of saying who was responsible for Lockerbie than to trace it back to some state. In this case, Libya. But in fact, there was probably a much more amorphous set of actors in all this who were trying to see if they could lift a corner on the dominance of the West and needle everybody. We see it as Libyan, but I think there was a piece of Syria involved in that. There were others involved also. In any event, partly because of the way we look at the world, partly because of Qaddafi’s willingness to be out front, we saw him as the leader of all [the anti-Western movement]. Will Libyan-U.S. relations be normalized? That’s certainly what the Libyans want. The real question is how comfortable the Bush administration is going to be in saying that it believes the Libyans have turned over a new leaf and that somebody who had been excoriated for decades could turn out to be somebody we can deal with on a normal basis. It’s worth keeping in mind—and this is one of the little known facts that explains a fair amount—that the prime minister of Libya right now, Shukri Ghanem, is a graduate of an American professional school, 25 years ago, and spent most of the intervening period as Libya’s representative to the Organization of Petroleum Exporting Countries and living in Europe. He and I went to school together at the Fletcher School at Tufts [University]. Qaddafi is appointing the people who are going to be the most plausible, most sophisticated kinds of people to renew this relationship. He’s giving this everything he has. Is he trying to leave a legacy? I think he is trying to avoid leaving a legacy of complete chaos. At this point, if he were overthrown, Libya would be in just awful shape. And if he were overthrown, the only plausible organizer of a successor regime would be probably a very underground and disorganized Islamist opposition. A peaceful transition, á la Syria or something like that, is not in the cards, unless Qaddafi opens up the country and gets more help from Europeans and even the United States in getting that economy, if not necessarily going, at least righted. And the Libyans know they have given President Bush a gift, a deliberate gift [by abandoning WMD]. The quid pro quo is that the United States lift sanctions. That’s what they really want. What’s holding up the lifting of sanctions? What does the United States want to see happen? There were a number of things that had to happen. One was that the Lockerbie families had to be satisfied. They had been one of the most vocal and active lobbying groups against any kind of normalization. Now, that appears to be removed as an obstacle. There may be two or three families not satisfied, but basically the families have agreed that they will accept compensation, some $10 million a family. The only other big thing was the WMD. And that’s coming off the table. The administration wants to “wait and see,” but basically all the obstacles have now been removed by the Libyan regime. Something has to happen as a face-saving gesture so that even though we have been saying for the past 25 years that we will never have good relations with this country so long as this person is in power, we are now willing to change our minds. That’s hard. That’s a PR problem. The United States might well decide to deal more directly with the technocrats like Shukri Ghanem, and say, “We are really dealing with the prime minister, that Qaddafi is the titular head of state, but there is a regular government, and that’s whom we are dealing with.”