The Oil-Crash Diplomatic Mirage

Official Washington’s latest “group think” is that the drop in oil prices will bring Russia and Iran to their knees ready to do whatever the U.S. demands. But this analysis is a miscalculation that could cause President Obama to miss diplomatic opportunities to resolve disputes, says ex-CIA analyst Paul R. Pillar.

By Paul R. Pillar

The steep drop in the price of oil during the latter half of 2014 has generated much comment about how this development has weakened major oil-producing countries and supposedly made their governments more pliable on issues that separate them from other countries. Such commentary flows partly from the tendency of media and the commentariat to over-analyze any major development and to identify winners and losers.

In the current instance it also reflects how people have happily noticed that several of the significant producers whose revenues have been most adversely affected by the price decline are countries commonly identified as adversaries of the United States, including Venezuela, Russia, and Iran. Edward Luttwak remarks that the price decline “is knocking down America’s principal opponents without us even trying.”

U.S. Secretary of State John Kerry meets with Russian Foreign Minister Sergey Lavrov at the U.S. Ambassador's residence in Rome, Italy, on Dec. 14, 2014. (State Department photo)

U.S. Secretary of State John Kerry meets with Russian Foreign Minister Sergey Lavrov at the U.S. Ambassador’s residence in Rome, Italy, on Dec. 14, 2014. (State Department photo)

The commentary reflects in addition a belief that is in evidence whenever similar hopes are placed on the consequences of someone else’s economic pain when that pain is imposed not by the market but instead by sanctions. The belief is that there is a reliable and positive correlation between the other country’s economic discomfort and the willingness of its government to make diplomatic concessions.

That belief is mistaken, regardless of whether it is markets or sanctions that have caused the economic and fiscal damage. It is mistaken because the presumed connection between a country’s economic discomfort and its regime’s diplomatic flexibility considers only one half of the regime’s calculations.

The other half concerns whether, and how much, that regime believes it can improve its economic situation by making concessions to its adversaries. If it sees no prospect for improvement, it has no incentive to concede. The point becomes all the clearer when, as with the recent drop in petroleum prices, it is a market that is causing the economic pain. Markets have no mechanism for pain reduction when someone changes a negotiating position or diplomatic posture.

If lower oil prices really are making the leadership of Russia more willing to make concessions regarding the conflict in eastern Ukraine, what is supposed to happen regarding the prices and the pain if such concessions are made? That car-owners in the West will be so happy about this development that they will start driving more, thus burning more fuel, sending crude oil prices back up, and repairing the damage to Russian finances?

The further, usually implicit, assumption underlying false beliefs about market-induced economic discomfort leading to diplomatic flexibility in cases such as Russia or Iran is that the cumulative effect of both sanctions and lower prices will push a regime past some breaking point beyond which it ceases to resist.

The notion of a breaking point has underlain other American foreign policy thinking, which has involved not only economic discomfort but also the infliction of physical pain through kinetic means. The notion was the basis for Operation Rolling Thunder, the Lyndon Johnson administration’s prolonged and escalating bombardment of North Vietnam in the 1960s. The notion is somewhat akin to the gambler’s fallacy that by persisting and playing a little longer one’s results will change for the better.

The Vietnam War example illustrates another part of the logic pertinent to such situations that is essential but commonly overlooked when people place hopes on the consequences of someone else’s pain. That part concerns the importance the other side places on the issues that are at stake.

Regimes and nations will endure a great deal of pain on behalf of causes that are very important to them. Moreover, in such bargaining relationships the logic works both ways, and the relative importance to us and to the other guy of the issues at stake is critical, too. If it makes sense for us to think about the other side having a breaking point, then it would make just as much sense for the other side to think about our breaking point, even if that point is to be expressed not in intensity of pain at any one moment but instead in impatience and the duration of stalemate.

Even if the idea of a breaking point were valid, we Americans are poorly equipped to identify any such point as it applies to others, including the adversaries most at issue today. Russian Foreign Minister Sergei Lavrov, referring to the oil price drop, said, “We have been in much worse situations in our history, and every time we were getting out of these fixes much stronger. This will happen this time.”

He’s right about Russian history, which included among other ordeals the incredibly costly fight against the Nazis in World War II. The Iranians also have had their ordeals, with the most salient and costly one for current Iranian leaders being the eight-year war that Saddam Hussein’s Iraq launched against their country.

The false hope being placed on lower oil prices and their presumed effect in softening the positions of adversaries may itself have the damaging effect of discouraging the flexibility that will be needed on the part of the United States to resolve important unresolved issues. Such flexibility, and not just contrition and concession from Vladimir Putin, will be required for even a partial resolution of the prolonged crisis in Ukraine.

An even greater potential for damage concerns the nuclear negotiations with Iran. The hope for a more pained and supposedly more pliable Tehran as a result of reduced oil revenue probably is entrenching further the notion that Iran must make all remaining concessions to reach a deal. That notion, if it persists, is likely to mean the failure of the negotiations and the loss of a golden opportunity to resolve the issue and assure that Iran’s nuclear program stays peaceful.

Paul R. Pillar, in his 28 years at the Central Intelligence Agency, rose to be one of the agency’s top analysts. He is now a visiting professor at Georgetown University for security studies. (This article first appeared as a blog post at The National Interest’s Web site. Reprinted with author’s permission.)

image_pdfimage_print

15 comments for “The Oil-Crash Diplomatic Mirage

  1. Piotr Berman
    January 3, 2015 at 11:06

    It is perhaps even simpler. In the world of our policy makers, to force other countries to do what they want, USA has to show “credibility, resolve etc”. However, the world does not work that way, the other party will do or refrain from doing something if it finds it in its interests, perhaps as an exchange for something that it wants more. However painful the drop in oil prices is for Russia or Venezuela, it is not like US government will promise them to raise the price if they will be “sufficiently nice”.

    The other “hope” is that due to an economic crisis the government will change for the one we will like more. That may happen, but it is really a very long shot. One has to observe that this is not the first period in recent history with a very deep decline of oil prices, and both Russia and Iran went through it before.

    Thus we are back to square one: do our policy makers have in mind any coherent list of “wishes” and, most important, concessions that would induce Russia and Iran to agree? I still do not understand what the hell our policy makers want from Venezuela.

    One idea of our establishment is to impose sanctions. That COULD make sense if there was any mechanism of dropping sanctions in an exchange for something. But the way our establishment works is that sanctions are for “general dislike”, and there is really no way to use them in a smart diplomatic way. In the meantime, China is severely annoyed by “sanction weapon”, so it will not cooperate without a stream of fresh concessions toward China, and even then, not too much. We may induce EU to do something stupid, but not China. Sanctions to a degree “work better” if the oil prices are low, but that that is not relevant because they do not do anything constructive.

  2. Sam
    January 2, 2015 at 08:43

    The US reliance upon economic sanctions mirrors the buy-out of US mass media and elections by economic concentrations, who clearly recognize that economic power has superceded direct force as the principal power over persons and governments, and is unregulated by government. The Constitution, written long before the rise of economic concentrations, needs amendments to prohibit holding or spending funds for mass media or elections beyond limited individual contributions, but the people cannot even debate the issue because their mass media and elections are already controlled. The US has descended into a jungle of economic coercion and gangsterism. The lowest gangsters rise to the top, and it is not surprising that they try economic sanctions, nor that their declared enemies are social democracies friendly to the US people, or governments hostile to the zionist thieves. The US oligarchy are the worst of traitors wrapped in the flag, as are all of their politicians and mass media, and must be opposed by all means by all good citizens.

  3. Joe
    January 2, 2015 at 08:38

    The US reliance upon economic sanctions mirrors the buy-out of US mass media and elections by economic concentrations, who clearly recognize that economic power has superceded direct force as the principal power over persons and governments, and is unregulated by government. The Constitution, written long before the rise of economic concentrations, needs amendments to prohibit holding or spending funds for mass media or elections beyond limited individual contributions, but the people cannot even debate the issue because their mass media and elections are already controlled. The US has descended into a jungle of economic coercion and gangsterism. The lowest gangsters rise to the top, and it is not surprising that they try economic sanctions, nor that their declared enemies are social democracies friendly to the US people, or hostile to the zionists. The US oligarchy are traitors wrapped in the flag, and must be opposed by all means by all good citizens.

  4. Peter Loeb
    January 2, 2015 at 06:53

    THE OIL-CRASH DIPLOMATIC MIRAGE

    Paul Pillar’s perceptive article on the assumed supremacy of the West is required
    reading. Evidently the US and its ([possibly “bribed”) collaborators (eg NATO etc.)
    have learned precious little from history.

    The US economy is far from the proverbial “strong” which is claimed for it by
    politicos. The rich get richer and others try to feed their families after the
    20th of the month when a benefit program concerning food invariably
    runs out.

    Pillar brings up so many pertinent points they do not need reply. Only attentive
    re-reading.

    If Putin falls to the joy of some in Washington, who and what will follow? And
    what would be the significance for the US economy?

    Pillar raises so many of the correct questions.

    —-Peter Loeb, Boston, MA USA

    • January 2, 2015 at 13:37

      2014 marked the beginning of the end of the status quo of the 20th century.
      Some important things have been bent, many of them broken. It makes the damage done to Robert Frost’s birches look like a few bent twigs.
      China & Russia are clearly moving on.
      Money in ultra-large amounts, and the empowerment which it engenders, goes a long way in sports, and politics. It can make bedfellows of total strangers!
      Adios America!

      • elmerfudzie
        January 2, 2015 at 21:47

        Debbie Menon,
        Let’s examine this Russia-China alliance a bit more closely and logically. Pipeline? Pipelines are fraught with cost overruns, political retaliations, acts of terror and interdependency! China will eventually draw just under one fifth of it’s needed oil from Russia and this fact is contingent on price declines from worldwide oil gluts coupled with grand scale economic downturns. In the final analysis, Russia is selling out it’s future by permitting raw material export to be it’s financial mainstay. Meanwhile
        China will be suffering from
        a hyper-inflationary future again, combined with a world economic depression. (this condition is soon to come) That pipeline will end up being five inches wide and under constant surveillance. In the Christmas spirit of things let me close with a good Ho HO HO!

        • January 3, 2015 at 00:37

          @Elmerfudzie
          True.
          America does have huge reserves, which it preserves.
          But, read Mike Whitney’s Defending the Dollar Imperialism.
          If there was a way the United States could achieve its long-term strategic objectives and, at the same time, avoid a war with Russia, it would do so. Unfortunately, that is not an option, which is why there’s going to be a clash between the two nuclear-armed adversaries sometime in the near future.
          http://www.veteransnewsnow.com/2015/01/02/513761defending-dollar-imperialism/
          Also,a great piece by roving Asia geopolitical analyst Pepe last week. Panoramic and hopeful of a new world order based on sanity and genuine human development.
          Negotiating around the destructive US will be dicey but doable.​
          http://www.veteransnewsnow.com/2014/12/16/eurasian-integration-vs-the-empire-of-chaos/

  5. Zachary Smith
    January 1, 2015 at 20:01

    Regimes and nations will endure a great deal of pain on behalf of causes that are very important to them.

    In all likelihood the targeted nations have deduced that their very survival is at stake. So the amount of pain they’ll endure will be related to that fact.

    I don’t understand this new aggressiveness of the Empire. Either we’re doing real harm to the Targets or we’re not. If it’s the latter case, they’ll just hunker down and adapt. If they see themselves really going down, they’ll strike back. Not with nukes, but with some of the conventional weapons at their disposal.

    I wonder if our Elites have gone crazy, or could they have some kind of plan which will actually work. My concern is that it’s the former case, and things are going to get ugly.

    • F. G. Sanford
      January 1, 2015 at 21:13

      I think the Mike Whitney article, “Irreversible Decline?” at Counterpunch sums it up reasonably well. Mind you, he spoofs those who would ridicule “conspiracy theories”, noting: “Got that? Now find me one person who doesn’t think the world is run by a small group of rich, powerful people who operate in their own best interests?” We have a debt of $18 trillion, and something like $63 trillion in toxic derivatives liabilities if the Petrodollar collapses. A recent legislative coup insured that the FDIC would foist that burden onto the tax payers. But in a total meltdown, we’d never be able to cover it. As I understand it, the banks would get all our liquid assets first as a bail-in; we’d get whatever is left after they get their $63 trillion. Things really went south before 9/11 – remember that $2.3 trillion the Pentagon couldn’t account for? Then there’s the $400 billion in bullion rumored to have disappeared from the basement of the WTC and the foreign bullion in the gold repository they keep refusing to repatriate. They won’t even permit an inventory. All the wars are in areas rich in gas and oil, or territory suitable for pipelines. There is no longer a viable manufacturing sector, so when the Dow Industrial Average hits 18,000, you have to wonder just what could possibly be the underlying asset? The bottom line is, we need to keep control over Europe’s economy to maintain the charade of our own economy. To do that, we need to “keep NATO in, keep Russia out, and keep Germany down”. The best way to accomplish all of that is to start a proxy war with Russia in Ukraine. Otherwise, the wheels come off the buggy. This is the end-game for the U.S. economy.

    • Zachary Smith
      January 1, 2015 at 22:45

      Now find me one person who doesn’t think the world is run by a small group of rich, powerful people who operate in their own best interests?”

      Perhaps it’s not just Human People. A number of news stories are talking about the FBI’s investigation of corporations doing illegal hacking. Example:

      http://www.businessinsider.com/fbi-investigates-us-bank-hacks-2014-12

      A billionaire can hire any kind of “help” he pleases, but so can a huge company. In the name of “libertarianism” they’ve nearly elbowed the governments out of the picture. The residual & reduced government functions are absorbed as tools for their enterprises. So a POS like that Singer fellow can cripple a nation-state – Argentina. All he needed was a pile of money and a string of favorable court decisions. But back to the corporations, I’d be extremely surprised if many of them don’t have their own private nukes. Or the ability to acquire them in a hurry.

      As you say, time is running out on the pile of cards the super-rich have constructed. They need some new conquests, and to eliminate the last vestiges of resistance. So Russia and China must be taken under control.

      What worries me is that they don’t seem to care about the consequences. If they win, fine. If they don’t, it doesn’t matter to them that everything we know could be destroyed.

      xxxx://www.stempeldrang.nl/uploads/4/8/5/5/4855530/psychopath.pdf

      That’s about corporate psychopaths, but the same concerns must be felt for individual nuts who happen to have a few billion dollars. And religious crazies – some of the billionaires pretend to be ‘Christian’. Don’t forget that the US Air Force is infested with Good Christians whose core beliefs involve the world ending with a bang.

  6. Anonymous
    January 1, 2015 at 19:04

    We know it’s all over for the U.S. as ‘the’ world power (and for its citizens) when we see that our rulers and most citizens have come to actually believe our own hype/propaganda.
    ‘Diplomacy’ for the U.S. has come to mean the following: first, we usually place a crippling list of preconditions that must be met. Then, we present a list of draconian non-negotiable demands. When the other side inevitably balks at this, we declare war, either directly and physically, or ‘by other means’, such as sanctions (economic war). In either case, our targets are the entire population of the recalcitrant country, not just the leaders. Most other countries call this by its rightful name, terrorism. It doesn’t matter what we dress it up as, that is what it really is. So in actual fact, the U.S. (and Israel) are the world’s most dangerous states, the primary terrorists, the source and the main cause of most of the world’s violence. Neither is any longer interested in, or capable of, classic diplomacy to solve problems. This path is incredibly costly, in both moral and financial terms; unfortunately, we will never recover what we have so carelessly lost in our hubris.

  7. F. G. Sanford
    January 1, 2015 at 18:57

    I wonder how long it will take Americans to make the conceptual leap from Libor rate rigging or gold price rigging or interest rate rigging or mortgage rate rigging to petroleum price rigging? How long will it take them to figure out that, if oil can be cut by 50% in a matter of weeks…that means they’ve actually been paying double for years? I wonder if Americans realize that, if the price of oil drops by 50%, then the rest of the world needs 50% less petrodollars? And, what happens as a consequence to all those treasuries? I wonder how long it will take Germany to realize that a Hindustan, a Daihatsu or a Mitsubishi runs just as good as a Mercedes? I wonder if Americans realize the rate at which Russia, China and India have been buying up all that cheap gold, and that there is currently a lot of mystery surrounding just how much is actually left in the FRBNY? Since all European nations are locked into the Euro, none of them can improve their trade deficits by unilaterally devaluing their own currency. And, Europeans have more Fiats and Citroens than they know what to do with. The inventory of unsold new automobiles is building up on abandoned airfields and port facilities all over Europe. European farmers are dumping tons of rotten produce in front of agriculture ministries in protest. Their effete, pompous, delusional and perversely wealthy political classes are only dimly aware of the resurgent fascist elements among their populations. The doss houses of the 1930’s no longer exist, but in France, they place cages over park benches so the homeless have nowhere to sleep. In America, people are arrested for feeding the homeless, and municipal ordinances prohibit them from sleeping in parks under blankets. History recalls the assembly of a 400,000 strong private militia willing to serve in return for a cot, a blanket, a brotchen and a bratwurst. Sometimes, effete politicians only learn the hard way. Meanwhile, in Russia, the only truly autarkical economy in Europe, our President imagines that Mr. Putin is trembling. Greece is likely to elect Syriza in January, which portends the first mass exodus from the IMF slumlords. All it will take is one major European bank failure, and the entire Wall Street house of cards comes fluttering down. A debt moratorium on the Ruble would accomplish the same thing, not to mention shutting down Northstream. Russia is agriculture and industry independent. America’s manufacturing sector now resides almost entirely in China. Russia, China and Iran have become allies of convenience. Social unrest, currency wars, trade wars and bank failures are not unimaginable. Poor Mr. Putin. If only he were as smart as he thinks he is…

    • rosemerry
      January 2, 2015 at 16:39

      Great comment as usual from mr sanford.
      One thing which really grates on me is the complete lack of any moral aspect to US policy at any stage. Ruining other nations economically because they are designated enemies for spurious reasons; invading and occupying others on any pretext; disregard of any care for the future as global warming is encouraged. These are the “good guys”??

    • markbasham@bigpond.com
      January 3, 2015 at 03:07

      Does he really need to be smart? He is locked into a position of someone elses making. You have answered all the other questions and the bric will succeed from the petro-dollar and than the US gravy train will be a wreck. Australians all let us rejoice but not in helping the yanks stuff up our society for greed. They have overplayed their hand.

  8. onno
    January 1, 2015 at 17:31

    A famous dictum is that History repeats itself but apparently Washington believes it can change history. We saw that before in Vietnam when French troops lost at Dien Bien Phu Washington entered this war and lost badly including 55.000 GI’s. Then came Iraq and now Syria it appears that Washington doesn’t realize or doesn’t want to realize that the American Empire is gone like before the Austrian, British empires collapsed. The present war actions in Iraq/Syria and Ukraine are the last convulsions of a lost economic power that is now being isolated by the growth economies of this World China/Russia/India and other BRICS nations. Washington doesn’t understand that this development cannot be stopped by aggression, invasions and plain wars like we see in the Middle East and Ukraine.
    With sanctions USA and psychological war fare and anti-Russia propaganda you cannot stop the will of people for independence. Except for Europe that has been sucked in too deep dependence of USA the rest of the world realizes what it means to depend on a war hungry nation like USA. The Transatlantic Trade and Investment Partnership is a desperate attempt by 2 losing trading blocks to salvage their economic problems without ANY chance for success.
    Washington’s initiative on the downward oil price spiral in the hope to get Iran and Russia to its knees is resulting in severe economic side effects such as BP announcing $ 1 billion savings and lay-off of thousands of workers. Also the US shale gas industry sees their hope for the future slump and with lay-offs and reducing its investments. We also shouldn’t forget that international -that includes Russian and Iran oil/gas contracts – are still in Dollars NOT Rubles so the suffering for Russia and Iran is limited.
    US foreign policy with people like Kerry and Nuland without any understanding of cultures and people they have become the new image of the Ugly American which has caused so many coup’s, invasions and open wars in the past. However, the Russian President Putin has warned the West on many occasions that Russia has to be respected has a full grown power that cannot be ignored in international politics.

    The Russians defeated Napoleon and the Nazi’s at Stalingrad causing the end of Hitler’s Third Reich and the USA will face a similar defeat like in Vietnam. Besides, China already has already sided with Russia and so will many other nations. So to Washington keep your aggression at home and solve your domestic racial problems instead of policing the world, you don’t have the money for this geopolitical power game anymore. Besides burn the old Monroe Doctrine of 1823 and respect the world as it is today.

Comments are closed.