Musk Bulks Up Tesla Batteries in Leap Beyond Cars to Grid
Billionaire Elon Musk thinks he can pave the way to a better energy future by turning the mattress-shaped batteries in Tesla’s electric car into upright pillars so they can be used to power homes, businesses and even utilities.
Musk will lift the veil Thursday on a new generation of batteries designed to store growing volumes of solar and wind energy. If he gets it right, Tesla Motors Inc. will have spun a significant second business off the technology originally designed for its electric vehicles — and will gain a toehold in a business projected to generate tens of billions of dollars in a decade.
Nobody in the power industry has yet been able to come up with a cost-effective way to store large volumes of energy for later distribution. Tesla is making a bet that its huge $5 billion “gigafactory” currently under construction near Reno, Nevada, will enable the mass production needed to drive down the cost of batteries and make them competitive for a broad range of customers, including traditional suppliers of electricity.
Tesla has scheduled an event Thursday at its design studio in Hawthorne, California, to announce both a Tesla home battery and what it called last week in a note to investors “a very large utility scale battery.”
“Whatever Tesla announces on Thursday is just the beginning,” said Peter Rosegg, spokesman for Hawaiian Electric Co., where 12 percent of the utility’s customers have rooftop solar panels. “Tesla doesn’t have to go after the market — the market will come to them. We’re very eager to see what they have to say.”
Tesla, based in Palo Alto, California, has its eye on a business that’s poised for tremendous growth. As homes, businesses and utilities use more renewable energy generated by sun and wind, the need to provide for reliable power grows. Batteries can be used to store electricity during peak production times, and then dispense it later when the sun isn’t shining or the wind isn’t blowing.
Musk tweeted a teaser about their Thursday announcement: “For the future to be good, we need electric transport, solar power and (of course) … the missing piece,” he posted on Twitter Tuesday. Tesla fell 0.8 percent to $228.63 at 10:58 a.m. in New York.
A January report from Navigant Research estimates that worldwide revenue from grid-scale energy storage could total more than $68 billion by 2024 as renewable resources multiply and electricity grid operators seek ways to balance their mix of generation assets.
Tesla is already supplying batteries to homes and commercial businesses such as Wal-Mart Stores Inc. through pilot projects and a supply agreement with SolarCity Corp., a relationship that generated $2.7 million in revenue for Tesla in 2014, according to a recent regulatory filing. That’s less than 1/10 of 1 percent of the automaker’s total for last year.
But Tesla is thinking much bigger, saying in job postings that its energy-storage business will soon grow to billions in sales. Musk plans to combine the strengths of the company’s patented lithium-ion batteries, which currently can run a car for about 265 miles (426 kilometers) per charge, with its expertise in power management software.
Musk’s green power ambitions involve three inter-connected enterprises: SolarCity, where he serves as chairman, the battery factory in Nevada, and the Tesla car business. With the move into energy storage, Tesla can help green the grid that fuels its cars while offering solar customers a way to store any excess electricity in batteries for use during hours of less sunlight and greater demand.
An even larger potential market will be utilities that have traditionally generated power with coal and natural gas.
“Tesla isn’t just going to sell batteries to SolarCity,” said Ben Kallo, an analyst with R.W. Baird & Co. “They are going to sell to project developers, wind and solar developers, and directly to utilities. The residential product isn’t going to be a huge needle mover in the near term, but the numbers are very big on the utility side.”
Tesla will face competition from other battery makers such as Korea’s LG Chem Ltd. and legacy U.S. power providers such as AES Corp. and startups such as JLM Energy Inc. It will have to navigate regulatory hurdles in a state-by-state market with varying degrees of subsidies and incentives for the technology.
Utilities, more cautious by nature, have been slow to adopt storage on their own.
“Storage doesn’t neatly fit into transmission, distribution or generation categories so it can be tough for utilities to justify investing in storage projects,” said Brian Warshay, an analyst for Bloomberg New Energy Finance. “Some utilities, like the California investor-owned companies, are getting into storage because their regulator basically told them they have to.”
In Tesla’s home state, a groundbreaking energy-storage mandate requires PG&E Corp., Edison International’s Southern California Edison and Sempra Energy’s San Diego Gas & Electric to collectively buy 1.3 gigawatts of energy storage capacity by the end of 2020. New York is also pushing utilities to use storage to relieve congestion on transmission lines and plans for the retirement of the Indian Point nuclear power plant.
All these companies are potential customers for Tesla. The automaker has been in talks to provide its batteries to Oncor Electric Delivery Co., the largest power-line owner in Texas.
“Batteries really are kind of a panacea for the grid,” said Don Clevenger, senior vice president of strategic planning for Oncor. “They provide better reliability.”
Saudi Arabia’s Plan to Extend the Age of Oil
The biggest exporter has let prices plummet—delaying the day when climate concerns, efficiency, and fuel switching break the world’s dependence on crude.
Last fall, as oil prices crashed, Ali al-Naimi, Saudi Arabia’s petroleum minister and the world’s de facto energy czar, went mum. He still popped up, as is his habit, at industry conferences on three continents. Yet from mid-September to the middle of November, while benchmark crude prices plunged 21 percent to a four-year low, Naimi didn’t utter a word in public.
For 20 years, Bloomberg Markets reports in its May 2015 issue, the world’s $2 trillion oil market has parsed Naimi’s every syllable for signs of where supply and prices are heading. Twice during previous routs—amid the Asian financial crisis in 1998 and again when the global economy melted down 10 years later—Naimi reversed oil’s free fall by orchestrating production cutbacks among members of OPEC. This time, he went to ground.
At the cartel’s semiannual meeting on Nov. 27 in Vienna, Naimi shot down proposed output reductions supported by a majority of the 12 members in favor of a more daring strategy: keep pumping and wait for lower prices to force high-cost suppliers out of the market. Oil prices fell a further 10 percent by the end of the next day and kept going. Having averaged $110 a barrel from 2011 through the middle of 2014, Brent crude, the global benchmark, dipped below $50 in January.
“What they did was historic,” Daniel Yergin, the pre-eminent historian of the oil industry, told Bloomberg in February. “They said: ‘We resign. We quit. We’re no longer going to be the manager of the market. Let the market manage the market.’ That’s when you got this sort of shocked reaction that took prices down to those levels we saw.”
Naimi, 79, dominated the debate at the November meeting, according to officials briefed on the closed-door proceedings. He told his OPEC counterparts they should maintain output to protect market share from rising supplies of U.S. shale oil, which costs more to get out of the ground and thus becomes less viable as prices fall. In December, he said much the same thing in a press interview, arguing that it was “crooked logic” for low-cost producers such as Saudi Arabia to pump less to balance the market.
Supply was only half the calculus, though. While the new Saudi stance was being trumpeted as a war on shale, Naimi’s not-so-invisible hand pushing prices lower also addressed an even deeper Saudi fear: flagging long-term demand.
Naimi and other Saudi leaders have worried for years that climate change and high crude prices will boost energy efficiency, encourage renewables, and accelerate a switch to alternative fuels such as natural gas, especially in the emerging markets that they count on for growth. They see how demand for the commodity that’s created the kingdom’s enormous wealth—and is still abundant beneath the desert sands—may be nearing its peak. This isn’t something the petroleum minister discusses in depth in public, given global concern about carbon emissions and efforts to reduce reliance on fossil fuels. But Naimi acknowledges the trend. “Demand will peak way ahead of supply,” he told reporters in Qatar three years ago. If growth in oil consumption flattens out too soon, the transition could be wrenching for Saudi Arabia, which gets almost half its gross domestic product from oil exports.
Last week, in a speech in Riyadh, Naimi said Saudi Arabia would stand “firmly and resolutely” with others who oppose any attempt to marginalize oil consumption. “There are those who are trying to reach international agreements to limit the use of fossil fuel, and that will damage the interests of oil producers in the long-term,” he said.
U.S. State Department cables released by WikiLeaks show that the Saudis’ interest in prolonging the world’s dependence on oil dates back at least a decade. In conversations with colleagues and U.S. diplomats, Naimi responded to the American fixation on “security of supply” with the Saudi need for “security of demand,” according to a 2006 embassy dispatch. “Saudi officials are very concerned that a climate change treaty would significantly reduce their income,” James Smith, the U.S. ambassador to Riyadh, wrote in a 2010 memo to U.S. Energy Secretary Steven Chu. “Effectively, peak oil arguments have been replaced by peak demand.”
The Saudis, to be sure, never thought much of peak oil. That’s the theory that global crude supplies, on an upward trajectory for a century and a half, were about to stop rising and could no longer keep up with demand. A faction of geologists and environmentalists made this argument part of the policy debate in the early years of this century. In 2005, when a book by oil analyst Matthew Simmons predicted a drop-off in Saudi output would signal that global supplies were beginning an irreversible decline, Naimi belittled the claims and promised higher production capacity. He won the argument. The Saudis pump more today than a decade ago. Saudi oil fields boast state-of-the-art technology, and at least two of them, in the middle of the desert, have gourmet restaurants. U.S. output has had a stunning rise as well, to more than 9 million barrels a day at the end of 2014 from less than 6 million five years ago. The peak that has the Saudis more worried is peak demand.
Before oil prices tanked last year, Saudi officials were bracing for global demand to level off as soon as 2025, says Mohammed al-Sabban, a senior economic adviser to the Saudi petroleum minister from 1988 to 2013. By letting prices fall, they may have bought themselves some time. At $60 to $70 a barrel, peak demand gets pushed back at least five more years, according to Bank of America Merrill Lynch commodities researchers. Such a delay would be bad news for renewable energy companies and for anyone hoping to bend the demand curve lower—slowing or stopping the relentless rise of global oil consumption that has transformed the planet since the first commercial deposit was developed in Pennsylvania in the early 1860s.
Crude prices above $100 a barrel had been bringing a demand peak closer. “The past four years were a disaster for oil producers in terms of energy market share,” says Sabban, who was also Saudi Arabia’s chief international climate negotiator. “Emerging economies are getting more efficient and diversifying their energy sources. That has definitely impacted oil consumption.”
Saudi officials were in a state of “near panic” last summer, when they recognized how quickly demand growth in China was leveling off, in part because of persistently high crude prices, says Ed Morse, Citigroup’s head of commodities research. “Naimi saw the era of frantic fixed-asset investments in China was over,” says Morse, a former deputy assistant secretary of state for international energy policy, who still communicates regularly with Gulf Arab officials. “That translates to the end of rapid urbanization, the end of doing things in unbelievably energy-intensive ways.”
Substitution of lower-cost fuels is also taking a toll. Chinese diesel demand, after rising an average of 8 percent a year for a decade, actually fell in 2013 and 2014. The International Energy Agency attributes this partly to the country’s rapidly expanding fleet of natural gas vehicles. Chinese demand for oil this year is expected to rise to 10.6 million barrels a day, an increase of 2.6 percent, or half the average annual growth of the past decade and one-sixth the rate in 2004. China’s oil use is still climbing twice as fast as global consumption, but the IEA has in the past year shaved 500,000 barrels from its 2019 China demand forecast. More efficient autos and factories reduced the overall oil intensity of China’s economy—oil burned per unit of GDP—by 18 percent from 2008 to 2014. “If I were in Naimi’s shoes, I’d do exactly what he’s doing,” Morse says.
Naimi, who for the past five years has been telling friends he’s ready to retire, faces big risks as he sees through one more dramatic market realignment. His refusal to put Saudi Arabia and OPEC once again in the swing producer role, cutting supply to balance the market, hurts economically troubled member states that most need a price rebound. In Venezuela, where the economy is teetering and foreign-exchange reserves are depleted, oil’s collapse blows a bigger hole in the government budget and deepens the crisis. Iran, which needs high prices to help offset the effect of sanctions that have choked off its exports, has had harsh words for the Saudi-led policy. Persian Gulf producers should try to halt the decline in prices, a deputy foreign minister said on state-run television in January, and Foreign Minister Mohammad Javad Zarif delayed a meeting with his Saudi counterpart due to the discord. Regional tensions were highlighted in late March, when Saudi Arabia led airstrikes against Yemen’s Houthi rebels, seeking to counter Iranian influence there.
Even Saudi Arabia, with more than $700 billion in reserves, could suffer financial strain if oil prices stay low for several years. The kingdom, with a population of about 30 million, spends lavishly on domestic programs and foreign aid. When King Salman ascended to the throne in January, after the death of King Abdullah, he promised in his first speech to improve education and expand health care. The Saudi budget was in deficit in 2014, despite strong oil prices for most of the year. The government forecasts a 2015 budget gap of 145 billion riyals ($39 billion), and it will be wider if oil prices don’t rebound.
Still, Naimi has said several times since the November meeting that he doesn’t know how low prices might go or when they will recover—and that the Saudis are willing to wait and see. Naimi’s concerns for Saudi Arabia are further in the future.
“Our ultimate aim is to diversify away from our overreliance on oil revenues,” the petroleum minister said at a 2013 seminar in Washington. The centerpiece of that effort is the establishment of the King Abdullah University of Science and Technology on the Red Sea, north of Jeddah. Naimi, who was CEO of state oil producer Saudi Aramco before becoming petroleum minister, recounted how, at a council of ministers meeting in 2006, the monarch took his hand and asked if he could build a university. “I said: ‘Your Majesty, we have built—I mean, Saudi Aramco has built—a lot of refineries, gas plants, pipelines, some housing. But universities? No. But we can, if you want.’ And we did.”
The school’s mission, as Naimi articulates it, is nothing less than to lead Saudi Arabia into the post-hydrocarbon age. The campus, built for 220 professors and 2,000 graduate students, is a bastion of tolerance and religious liberty in a country often criticized for having neither. Heavily armed guards on land and at sea protect the facility, where unveiled women study and work side by side with men, undisturbed by the religious police who patrol Saudi cities. Research there is aimed at scientific and commercial breakthroughs using those things Saudi Arabia has in abundance, such as sun, sand, and saltwater. When he discusses retirement, Naimi says it’s to devote more time to the institution.
While the university is key to Saudi Arabia’s diversification effort, there are other initiatives for the nearer term. The kingdom already is exploiting its huge deposits of phosphates to export fertilizer and is mining bauxite to smelt and roll aluminum. Eventually, Naimi says, Saudi Arabia wants to manufacture finished goods such as car parts. “We are generating job opportunities for our young people, encouraging enterprise, and providing the right environment for innovation and progress,” Naimi said at the Washington seminar. “It’s not easy, and it will not happen overnight. But it is happening.”
How much time Saudi Arabia has to prepare for the eventual decline of the oil era may depend, in part, on how alternatives fare during this period of cheap oil. Will sales of wind turbines and solar panels stay strong? Or will they enter a tailspin like they did during the Great Recession, when project financing dried up? And will sales of electric vehicles continue to climb even as gasoline prices slump?
Adam Sieminski, head of the U.S. Energy Information Administration, said at a Washington forum in late January that lower crude prices wouldn’t slow development of wind and solar power because there’s little direct competition with oil in electricity generation. Electric vehicles, he said, are helped by tax incentives and government policies and perhaps also by the cachet of green technology.
“The Saudis may be once again trying to prolong the age of oil,” says Bill McKibben, the author and environmental activist who has helped lead the campaign to block the Keystone XL pipeline, which would bring oil from Canada’s tar sands to the U.S. market. “But it feels like the steady, relentless fall in costs for renewables may make this different from other cycles.”
Naimi, who carefully manages his public comments the way a central banker or top diplomat might, hasn’t said how close he thinks the world may be to a peak in oil demand. He didn’t respond to requests to be interviewed for this story. But he has articulated his view that the crude market can no longer be understood without considering the effects alternative energy sources are having. “One has to be realistic,” Naimi told the Middle East Economic Survey in an interviewpublished in December. “There are many things in the energy market—not the oil market—that will determine prices in the future. A lot of effort is being exerted worldwide, whether in research or boosting efficiency or using nonfossil fuels.”
Ali bin Ibrahim al-Naimi has lived the post-World War II history of oil—and done much to shape it. Born in 1935 in Saudi Arabia’s oil-rich Eastern Province, he spent his early childhood as a desert nomad, moving from spring to spring with his extended family and their livestock. When Naimi was 8, his Bedouin mother sent him to live with his father in the provincial capital of Dammam. He attended a school operated by Arabian American Oil Co., known as Aramco. The petroleum producer was founded by Standard Oil of California in the 1930s and became Saudi Aramco after its nationalization in the 1970s.
At 12, Naimi became a mail boy at Aramco, taking over for his brother after his sudden death, and he quickly shined as a star typist. One day at the Aramco offices, the American CEO stopped Naimi in the hallway and asked the teenager what he wanted to do with his life, says Peter van de Kamp, who became friends with Naimi at Lehigh University, recounting a story Naimi told their classmates in the early 1960s. “Well, sir, someday I would like to have your job,” Naimi answered. “If that’s the case,” the American said, “you’ll need an education.”
Aramco sent Naimi to school in Beirut and then to Lehigh in Pennsylvania and Stanford University in California, where he earned a master’s degree in geology. At Lehigh, the chair of the geology department assigned the 6-foot-5-inch Van de Kamp to watch out for Naimi, who’s around 5 feet tall. The transfer student from a Mideast country few students had heard of was a good companion, Van de Kamp says, respectful of Christians and Jews, comfortable socializing with women. He was eager to chop firewood and “get his hands dirty” doing chores at the Van de Kamps’ New Jersey home on holidays, he says. Proud of his Bedouin roots, Naimi told stories about tending sheep and goats in a forbidding desert with scarce food or water. He did his senior research project in 1962 on the commercial mining potential of New Jersey’s beach sand. “Ali was a comer; we all could see it,” says Van de Kamp, who’s now a geologist in Oregon.
After returning to Saudi Arabia, Naimi zoomed through a series of oil production and executive positions at Aramco, culminating in his 1984 appointment as the company’s first Saudi president and, four years later, its CEO. At the time, U.S. and European consumption was in decline, due in part to sluggish economic growth and conservation measures adopted after the oil shocks of the 1970s. In response, Petroleum Minister Ahmed Zaki Yamani slashed Saudi oil output from 10 million barrels a day in 1981 to just 3.5 million in 1986. Prices kept falling, briefly getting to around $10 a barrel, as non-OPEC producers and cartel members cheating on their quotas filled the gap. In 1986, King Fahd fired Yamani, and the Saudis flooded the world with cheap oil to seize back market share—and induce Americans to resume their gas-guzzling habits. (The era of big SUVs was just beginning.)
Aramco’s new president saw firsthand what happened when the Saudis cut output and others didn’t, a lesson he cites today. “We will not make the same mistake again,” he said in Berlin in March.
Promoted to petroleum minister in 1995, Naimi spends weekdays working in Riyadh and weekends at his family’s villa or at a small farm near Dharan. He arrives early each day at the ministry, a set of nine-story stone and black-glass blocks. His seventh-floor offices aren’t grand, the decor little changed in 20 years. He leaves in a black Mercedes by 2 p.m., Saudi government quitting time, and works the rest of the day at home.
Naimi’s tenure got off to a rough start. With demand rising in China, he persuaded OPEC to expand production in November 1997, just as the Asian financial crisis was deepening. During the next two years, oil prices fell 50 percent.
He also mishandled Saudi Arabia’s overture to Western energy companies to help develop the kingdom’s natural gas reserves. By 1998, then-Crown Prince Abdullah was trying to lure back foreign firms to tap Saudi gas for industrial projects such as electricity generation, water desalinization, and petrochemical manufacturing. Naimi, however, kept the best gas fields for Aramco while offering Exxon Mobil and dozens of other companies blocks that some Saudi geologists doubted contained much commercial gas, according to Sadad al-Husseini, who led Aramco’s exploration and production operations from 1985 to 2003.
The Exxon Mobil negotiations blew up in 2003, at the home of Saudi Foreign Minister Saud al-Faisal in Beverly Hills, California, according to journalist Steve Coll’s book Private Empire: ExxonMobil and American Power, published in 2012. Exxon Mobil’s then-CEO Lee Raymond informed Faisal and Naimi that the Saudi field on offer didn’t have enough gas to warrant his investment, Coll wrote. Naimi responded that Exxon Mobil’s experts were playing down the block’s potential to get a better deal. At that point, Raymond exploded at Naimi for questioning his people’s integrity, and the deal soon fell apart, Coll wrote. “I was very unhappy,” Raymond says in an interview. “The reality was that there was never access to the potential reserves you would need to support the project.”
Over time, Naimi earned a reputation as a straight talker and a shrewd manager of the global market. Despite the Saudis’ dire warnings to President George W. Bush not to invade Iraq in 2003, Naimi kept markets stable by promising to pump more oil during the war. In 2008, as prices soared to a record $147 a barrel, he resisted intense U.S. pressure to raise output again. Judging shrewdly that market conditions were very different than they were five years earlier, he argued in several contentious meetings with American officials that supply was adequate and that financial speculators were driving up prices. “The line was clear and consistent, even if it wasn’t a message the American administration wanted to hear,” says Ford Fraker, the U.S. ambassador to Riyadh from 2007 to 2009 and president of the Middle East Policy Council.
During the Libyan uprising in May 2011, U.S. officials flew into Saudi Arabia to seek Naimi’s help replacing lost Libyan production. Naimi asked OPEC to expand its output ceiling at the cartel’s meeting that June, but the ministers stormed out of the Vienna secretariat without an agreement. The rebel members, led by Iran, didn’t want to agree to a higher target because they had little excess capacity that could be brought on line. They objected that the only countries with spare oil to sell were the cartel’s richest—Saudi Arabia, Qatar, Kuwait, and the United Arab Emirates.
Afterward, Naimi summoned the press to vent. He’d never seen such unreasonable obstinacy, said the minister, seated in a plush chair in his hotel suite. He’d tried to persuade the others that demand for OPEC’s crude had long since surpassed the recession levels that prevailed when the target was last set in 2008. They wouldn’t listen.
After some dogged diplomacy, OPEC raised the quota at its next meeting. Oil prices spiked early in the Arab Spring, and then they declined through the rest of 2011.
“He’s a man of few words but none wasted,” says Daniel Poneman, the U.S. deputy secretary of energy from 2009 to 2014. “He really came through.”
Naimi was a study in inscrutability when the OPEC ministers gathered this past November in Vienna. That morning, he slipped out the back door of his hotel on the city’s Ringstrasse, trailed by a gaggle of reporters through the medieval backstreets. This brisk morning walk had become known as a moment when Naimi would share his thoughts, but he wasn’t talking. A little later, back at OPEC headquarters, impatient with a television crew’s badgering questions, Naimi lost his legendary cool. “Get the hell out,” he snapped.
Inside the closed-door session, the OPEC ministers sat in alphabetical order around a large rectangular table. Naimi, silver-haired and dressed in a dark suit, blue-purple tie, and matching breast-pocket handkerchief, was seated between Gulf Arab allies Qatar and the U.A.E. Across the table, Venezuela’s Rafael Ramirez opened the proceedings with a proposal for a production cut to be jointly implemented by OPEC, Russia, and Mexico, according to the officials briefed on the proceedings.
Naimi scoffed. He told the ministers that after 60 years in the industry, he knew from experience that Russia wasn’t reliable. In 2008, the Russians pledged to join OPEC’s supply cut during the financial crash, but they never did. And just two days earlier in Vienna, Naimi had attended an awkward meeting at which Vladimir Putin ally Igor Sechin, CEO of oil giant Rosneft, said Russia would agree to cuts, only to be overruled at the same meeting by Russian Energy Minister Alexander Novak.
Naimi next shot down an Algerian proposal, supported by seven member states, for a 5 percent output reduction levied only on OPEC producers. That might boost prices today, Naimi said, but wouldn’t solve OPEC’s longer-term problem with shale producers and declining demand growth. His reasoning prevailed, as usual.
Demand anxiety, always lurking in the Saudi psyche, had surged after U.S. President Barack Obama took office. At first, in 2009, Naimi told American diplomats he wasn’t worried that alternative energy sources would reduce oil use because global consumption was soaring, especially in China and India, according to U.S. diplomatic cables. But six months later, in Ambassador Smith’s 2010 memo to Energy Secretary Chu, the envoy said Saudi leaders “were caught off guard by the strength of the Administration’s initial statements about its desire to move to a post-hydrocarbon economy and end dependence on imported oil.”
Alarm was heightened, the ambassador reported, because the Saudis were just finishing a $100 billion expansion of their production capacity to 12.5 million barrels a day. “Saudi leaders are concerned that this oil may never be needed,” Smith wrote. “They are less concerned about price forecasts than our expectations of the scope and pace of changes globally.”
Other classified cables released by WikiLeaks described the Saudis as “obstructionist” and “schizophrenic” on curbing climate change—launching solar and carbon-sequestration projects at home while impeding multilateral talks abroad. “Part of the explanation for this schizophrenic position is that the Saudi Government has not yet thought through all the implications of a climate change agreement, in part because it may not fully understand the various demand scenarios,” Smith wrote after the 2009 U.N. climate change conference in Copenhagen.
While Copenhagen didn’t lead to any binding agreement, governments have tightened carbon emission limits and other environmental rules in the years since. Efficiency improvements have kept coming. And the Saudi government has been thinking through the implications.
Naimi had put off retirement because King Abdullah asked him to stay. After Abdullah’s death on Jan. 23, King Salman kept Naimi as petroleum minister to signal consistency in Saudi policy during the transition. Still, Naimi is likely to soon have more time to devote to his university and the industrial and technological transformation he envisions for his country. As an Aramco executive and then as a globe-trotting oil diplomat, Naimi has shown great talent for bridging the divide between Westerners and the kingdom’s traditional leaders. And he’s overseen a Saudi industry that is an engine of science and progress.
In 2010, Naimi escorted Chu to visit King Abdullah at his palace in the desert oasis of Rawdhat Khuraim. The elderly monarch was in a philosophical mood and took the opportunity to pose a few questions to the Nobel laureate physicist, says Smith, who went along for the visit.
“Tell me how the universe was formed,” the king asked, in Smith’s recounting. Chu patiently laid out the story of the Big Bang theory. “What does that mean for God?” the monarch said. Chu and Smith conferred for a moment on an appropriate, diplomatic response. “There are some things we know, and for other things, we have God,” Chu replied.
“And tell me, how did we get all this oil?” King Abdullah asked. As Chu described how organisms decomposed over millions of years, Naimi whispered in Smith’s ear, “I’ve told him this a hundred times.”
This story appears in the May 2015 issue of Bloomberg Markets. With assistance from Grant Smith in London.
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Get Ready for $10 Oil
Rising oil production and falling demand will combine to drive oil prices lower.
By A. Gary Shilling – Feb 16, 2015, 6:00:02 PM
Black, yes. Gold, not so much.
At about $50 a barrel, crude oil prices are down by more than half from their June 2014 peak of $107. They may fall more, perhaps even as low as $10 to $20. Here’s why.
U.S. economic growth has averaged 2.3 percent a year since the recovery started in mid-2009. That’s about half the rate you might expect in a rebound from the deepest recession since the 1930s. Meanwhile, growth in China is slowing, is minimal in the euro zone and is negative in Japan. Throw in the large increase in U.S. vehicle gas mileage and other conservation measures and it’s clear why global oil demand is weak and might even decline.
At the same time, output is climbing, thanks in large part to increased U.S. production from hydraulic fracking and horizontal drilling. U.S. output rose by 15 percent in the 12 months through November from a year earlier, based on the latest data, while imports declined 4 percent.
Something else figures in the mix: The eroding power of the OPEC cartel. Like all cartels, the Organization of Petroleum Exporting Countries is designed to ensure stable and above-market crude prices. But those high prices encourage cheating, as cartel members exceed their quotas. For the cartel to function, its leader — in this case, Saudi Arabia — must accommodate the cheaters by cutting its own output to keep prices from falling. But the Saudis have seen their past cutbacks result in market-share losses.
So the Saudis, backed by other Persian Gulf oil producers with sizable financial resources — Kuwait, Qatar and the United Arab Emirates — embarked on a game of chicken with the cheaters. On Nov. 27, OPEC said that it wouldn’t cut output, sending oil prices off a cliff. The Saudis figure they can withstand low prices for longer than their financially weaker competitors, who will have to cut production first as pumping becomes uneconomical.
What is the price at which major producers chicken out and slash output? Whatever that price is, it is much lower than the $125 a barrel Venezuela needs to support its mismanaged economy. The same goes for Ecuador, Algeria, Nigeria, Iraq, Iran and Angola.
Saudi Arabia requires a price of more than $90 to fund its budget. But it has $726 billion in foreign currency reserves and is betting it can survive for two years with prices of less than $40 a barrel.
Furthermore, the price when producers chicken out isn’t necessarily the average cost of production, which for 80 percent of new U.S. shale oil production this year will be $50 to $69 a barrel, according to Daniel Yergin of energy consultant IHS Cambridge Energy Research Associates. Instead, the chicken-out point is the marginal cost of production, or the additional costs after the wells are drilled and the pipes are laid. Another way to think of it: It’s the price at which cash flow for an additional barrel falls to zero.
Last month, Wood Mackenzie, an energy research organization, found that of 2,222 oil fields surveyed worldwide, only 1.6 percent would have negative cash flow at $40 a barrel. That suggests there won’t be a lot of chickening out at $40. Keep in mind that the marginal cost for efficient U.S. shale-oil producers is about $10 to $20 a barrel in the Permian Basin in Texas and about the same for oil produced in the Persian Gulf.
Also consider the conundrum financially troubled countries such as Russia and Venezuela find themselves in: They desperately need the revenue from oil exports to service foreign debts and fund imports. Yet, the lower the price, the more oil they need to produce and export to earn the same number of dollars, the currency used to price and trade oil.
With new discoveries, stability in parts of the Middle East and increasing drilling efficiency, global oil output will no doubt rise in the next several years, adding to pressure on prices. U.S. crude oil production is forecast to rise by 300,000 barrels a day during the next year from 9.1 million now. Sure, the drilling rig count is falling, but it’s the inefficient rigs that are being idled, not the horizontal rigs that are the backbone of the fracking industry. Consider also Iraq’s recent deal with the Kurds, meaning that another 550,000 barrels a day will enter the market.
While supply climbs, demand is weakening. OPEC forecasts demand for its oil at a 14-year low of 28.2 million barrels a day in 2017, 600,000 less than its forecast a year ago and down from current output of 30.7 million. It also cut its 2015 demand forecast to a 12-year low of 29.12 million barrels.
Meanwhile, the International Energy Agency reduced its 2015 global demand forecast for the fourth time in 12 months by 230,000 barrels a day to 93.3 million and sees supply exceeding demand this year by 400,000 barrels a day.
Although the 40 percent decline in U.S. gasoline prices since April 2014 has led consumers to buy more gas-guzzling SUVs and pick-up trucks, consumers during the past few years have bought the most efficient blend of cars and trucks ever. At the same time, slowing growth in China and the shift away from energy-intensive manufactured exports and infrastructure to consumer services is depressing oil demand. China accounted for two-thirds of the growth in demand for oil in the past decade.
So look for more big declines in crude oil and related energy prices. My next column will cover the winners and losers from low oil prices.
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Five Ways That Apple Is Already Positioned to Be a Car Company
By Tim Higgins – Feb 14, 2015, 8:02:51 PM
Bloomberg Photo Service ‘Best of the Week’: Tim Cook, chief executive officer of Apple Inc., center, arrives to speak with Gary Cohn, president and chief operating officer of Goldman Sachs Group Inc., right, at the Goldman Sachs Technology And Internet Conference in San Francisco, California, U.S., on Tuesday, Feb. 10, 2015. Apple Inc., which began flirting with a record valuation of $700 billion during midday trading in November, ended the day at $710.7 billion, marking the first time a U.S. company has reached that milestone. Shares rose 1.9 percent to $122.02 at the close in New York. Photographer: David Paul Morris/Bloomberg *** Local Caption *** Tim Cook; Gary Cohn
Apple Inc. may already be positioned to evolve into a global automaker in many ways that other Silicon Valley companies aren’t.
The Cupertino, California-based tech company has put a few hundred employees to work on a secretive project to develop an electric automobile, a person familiar with the matter has said. While Apple often tests ideas that don’t get released, the work underscores the company’s long-held desire to play a greater role in the automotive space, which is ripe for more of a merging with users’ digital lives.
“It makes a ton of sense,” Gene Munster, an analyst with Piper Jaffray Cos., said Saturday in an interview. “If you would’ve said 10 years ago, ‘Apple is going to be in the car business,’ I think people would’ve said you’re crazy — because it would’ve been crazy — and today it’s a much different company that’s able to tackle these massive addressable markets.”
Apple, with a market capitalization that’s more than $700 billion, needs to continue growing sales in iPhones, its largest revenue generator, while also expanding into new markets, such as automobiles, if it’s to reach a $1 trillion valuation, Munster said. He added that he doesn’t think Apple would bring out a car in the next five years.
Nonetheless, Apple boasts some advantages versus other Silicon Valley companies with car ambitions. Tesla Motors Inc., which delivers less than 10,000 vehicles a quarter, surprised investors last month when Chief Executive Officer Elon Musk said the company wouldn’t be profitable until 2020.
Apple’s strengths as a potential automaker include:
1. $178 Billion
The automotive industry churns through cash at an astonishing pace. Apple, as it turns out, has a cash hoard of almost $180 billion. As Musk said last week, Apple is “just running out of ways to spend money. They spend money like it’s water over there and they still can’t spend enough of it.”
While the old rule of thumb was that it cost about $1 billion to develop a new car, those costs are now being spread over more vehicles as traditional automakers work to use vehicle platforms for more models, said Dave Sullivan, an automotive industry analyst with AutoPacific. That would be one challenge for Apple, as would a lack of experience building cars, though Thilo Koslowski, vice president and automotive practice leader at Gartner, said they could acquire those manufacturing skills.
“It’s well understood because it has been around for 100 years,” he said of building cars. “What isn’t that well understood are the pieces that Apple would potentially bring to the table.”
2. The Ultimate Mobile Device
Apple has built its fortune on creating products that are compellingly designed and that integrate software in such a fashion that immerses users’ lives deeper into the Apple world, further hooking them for future upgrades. And it already has car-suited technology — mapping software, for instance — ready to go.
“The car is one of the most important and critical pieces of the puzzle that you need to master if you want to interact with customers wherever they are,” Koslowski said. “It’s pretty important to have a phone that’s connected, and can show you your calendar and do all kinds of other things, but now extending it to this other device that happens to have four wheels.”
3. Car Guys?
The car business seems simple to outsiders, tempting some to think they can do better than Detroit, which spent a generation sliding toward bankruptcy reorganizations before re-emerging to new profits.
But the modern automotive industry has a mixed record on how outsiders perform. For every Alan Mulally, who jumped from Boeing Co. to oversee Ford Motor Co.’s renaissance, there’s a Bob Nardelli, the former General Electric Co. executive and Home Depot Inc. CEO, who was at the helm of Chrysler during its bankruptcy. Tesla has so far succeeded while Fisker Automotive, another high-profile electric car company, had its assets sold off in bankruptcy.
Apple, meanwhile, has a unique mix of executives with tech and auto experience. The company has long hired engineers from the automotive space, often with experience in supply chain management, battery technology and user-interface experience.
Luca Maestri, Apple’s chief financial officer, spent 20 years at General Motors in areas of finance and operations. Eddy Cue, the influential senior vice president of Internet software, is a car enthusiast and on the board of Ferrari. Steve Zadesky, vice president of iPhone product design, who is leading Apple’s car effort, spent time working at Ford earlier in his career. Marc Newson, a well-regarded industrial designer who joined Apple’s secretive design team last year, did a high-profile concept car for Ford in 1999.
4. Retail Network
One of the strengths — and weaknesses — of traditional automakers has been their dealer networks. It’s hard to open up store fronts around the world fast enough to get the scale needed to sell cars. In the U.S., there are added complexities such as state franchise laws that often prohibit manufacturers from selling cars directly to customers.
That’s something Tesla has sought to upend. Rather than selling through franchised dealers, the Palo Alto, California-based automaker operates its own showrooms — which were created by a former Apple executive — and takes orders over the Internet. The approach has drawn the ire of franchise dealers and the automaker has butted heads with dealer groups last year in Georgia, Missouri, New Jersey, New York, Ohio and Pennsylvania before reaching compromises.
Apple, of course, already has a giant retail network through its hundreds of Apple Stores worldwide, from Brazil to Sweden to Turkey.
5. Apple Does Global
The automotive business has a global complexity like few other industries, with regulatory, marketing and logistics issues that can trip up the capital-intense business on any given day.
Apple, which designs its products in California but depends upon contractors to assemble them mostly in Asia, is used to managing an on-time supply chain around the world — something Google Inc. doesn’t do in its day-to-day Internet search business — and handling the complexities of currency swings throughout global markets. CEO Tim Cook built his reputation at Apple for his ability to navigate those global operations.
“That would be a huge plus should they decide to manufacture cars,” Tim Bajarin, president of Creative Strategies, said.
He said he remains skeptical that Apple wants to get into the actual business of selling cars, rather than just moving deeper into creating operating systems for automakers.
“Doing cars is not in Apple’s wheelhouse,” Bajarin said. “It’s more likely they are trying to create a richer, more immersive electronics experience tied to iOS where not only the audio system but the information and possibly new levels of security through sensors and cameras would be part of what they would offer to other carmakers.”
Apple could be creating concepts, or reference designs, to integrate technology to demonstrate to automakers, he said.
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THE pens were on the table in Minsk, Belarus’s capital, for the leaders of France, Germany, Russia and Ukraine to sign a deal to end a year-long war fuelled by Russia and fought by its proxies.
But on February 12th, after all-night talks, they were put away. “No good news,” said Petro Poroshenko, Ukraine’s president. Instead there will be a ceasefire from February 15th. A tentative agreement has been reached to withdraw heavy weaponry.
But Russia looks sure to be able to keep open its border with Ukraine and sustain the flow of arms and people. The siege of Debaltseve, a strategic transport hub held by Ukrainian forces, continues. Russia is holding military exercises on its side of the border. Crimea was not even mentioned.
Meanwhile the IMF has said it will lend Ukraine $17.5 billion to prop up its economy. But Mr Putin seems to be relying on a familiar Russian tactic of exhausting his negotiating counterparts and taking two steps forward, one step back. He is counting on time and endurance to bring the collapse and division of Ukraine and a revision of the post-cold war world order.
Nearly a quarter-century after the collapse of the Soviet Union, the West faces a greater threat from the East than at any point during the cold war. Even during the Cuban missile crisis of 1962, Soviet leaders were constrained by the Politburo and memories of the second world war.
Now, according to Russia’s chief propagandist, Dmitry Kiselev, even a decision about the use of nuclear arms “will be taken personally by Mr Putin, who has the undoubted support of the Russian people”. Bluff or not, this reflects the Russian elite’s perception of the West as a threat to the very existence of the Russian state.
In this view Russia did not start the war in Ukraine, but responded to Western aggression. The Maidan uprising and ousting of Viktor Yanukovych as Ukraine’s president were engineered by American special services to move NATO closer to Russia’s borders.
Once Mr Yanukovych had gone, American envoys offered Ukraine’s interim government $25 billion to place missile defences on the Russian border, in order to shift the balance of nuclear power towards America. Russia had no choice but to act.
Even without Ukraine, Mr Putin has said, America would have found some other excuse to contain Russia.
Ukraine, therefore, was not the cause of Russia’s conflict with the West, but its consequence. Mr Putin’s purpose is not to rebuild the Soviet empire–he knows this is impossible–but to protect Russia’s sovereignty.
By this he means its values, the most important of which is a monopoly on state power.
Behind Russia’s confrontation with the West lies a clash of ideas. On one side are human rights, an accountable bureaucracy and democratic elections; on the other an unconstrained state that can sacrifice its citizens’ interests to further its destiny or satisfy its rulers’ greed. Both under communism and before it, the Russian state acquired religious attributes. It is this sacred state which is under threat.
Mr Putin sits at its apex. “No Putin–no Russia,” a deputy chief of staff said recently. His former KGB colleagues–the Committee of State Security–are its guardians, servants and priests, and entitled to its riches. Theirs is not a job, but an elite and hereditary calling. Expropriating a private firm’s assets to benefit a state firm is therefore not an act of corruption.
When thousands of Ukrainians took to the streets demanding a Western-European way of life, the Kremlin saw this as a threat to its model of governance. Alexander Prokhanov, a nationalist writer who backs Russia’s war in Ukraine, compares European civilisation to a magnet attracting Ukraine and Russia. Destabilising Ukraine is not enough to counter that force: the magnet itself must be neutralised.
Russia feels threatened not by any individual European state, but by the European Union and NATO, which it regards as expansionist. It sees them as “occupied” by America, which seeks to exploit Western values to gain influence over the rest of the world.
America “wants to freeze the order established after the Soviet collapse and remain an absolute leader, thinking it can do whatever it likes, while others can do only what is in that leader’s interests,” Mr Putin said recently. “Maybe some want to live in a semi-occupied state, but we do not.”
Russia has taken to arguing that it is not fighting Ukraine, but America in Ukraine. The Ukrainian army is just a foreign legion of NATO, and American soldiers are killing Russian proxies in the Donbas. Anti-Americanism is not only the reason for war and the main pillar of state power, but also an ideology that Russia is trying to export to Europe, as it once exported communism.
Anti-Westernism has been dressed not in communist clothes, but in imperial and even clerical ones (see page 77). “We see how many Euro-Atlantic countries are in effect turning away from their roots, including their Christian values,” said Mr Putin in 2013.
Russia, by contrast, “has always been a state civilisation held together by the Russian people, the Russian language, Russian culture and the Russian Orthodox church.” The Donbas rebels are fighting not only the Ukrainian army, but against a corrupt Western way of life in order to defend Russia’s distinct world.
Many in the West equate the end of communism with the end of the cold war. In fact, by the time the Soviet Union fell apart, Marxism-Leninism was long dead. Stalin replaced the ideals of internationalism, equality and social justice that the Bolsheviks had proclaimed in 1917 with imperialism and state dominance over all spheres of life. Mikhail Gorbachev’s revolution consisted not in damping down Marxism but in proclaiming the supremacy of universal human values over the state, opening up Russia to the West.
Nationalists, Stalinists, communists and monarchists united against Mr Gorbachev. Anti-Americanism had brought Stalinists and nationalists within the Communist Party closer together. When communism collapsed they united against Boris Yeltsin and his attempts to make Russia “normal”, by which he meant a Western-style free-market democracy.
By 1993, when members of this coalition were ejected by pro-Yeltsin forces from the parliament building they had occupied in Moscow, they seemed defeated. Yet nationalism has resurfaced. Those who fought Yeltsin and his ideas were active in the annexation of Crimea and are involved in the war in south-east Ukraine.
Alexander Borodai, the first “prime minister” of the self-proclaimed Donetsk People’s Republic, who fought with anti-Yeltsin forces, hails Mr Putin as the leader of the nationalist movement in Russia today.
Yet for a few years after Mr Putin came to power he built close relations with NATO. In his first two presidential terms, rising living standards helped buy acceptance of his monopoly on state power and reliance on ex-KGB men; now that the economy is shrinking, the threat of war is needed to legitimise his rule.
He forged his alliance with Orthodox nationalists only during mass street protests by Westernised liberals in 2012, when he returned to the Kremlin. Instead of tear gas, he has used nationalist, imperialist ideas, culminating in the annexation of Crimea and the slow subjugation of south-east Ukraine.
Hard power and soft
Mr Putin’s preferred method is “hybrid warfare”: a blend of hard and soft power. A combination of instruments, some military and some non-military, choreographed to surprise, confuse and wear down an opponent, hybrid warfare is ambiguous in both source and intent, making it hard for multinational bodies such as NATO and the EU to craft a response.
But without the ability to apply hard power, Russia’s version of soft power would achieve little. Russia “has invested heavily in defence,” says NATO’s new secretary-general, a former Norwegian prime minister, Jens Stoltenberg. “It has shown it can deploy forces at very short notice…above all, it has shown a willingness to use force.”
Putin drew two lessons from his brief war in Georgia in 2008. The first was that Russia could deploy hard power in countries that had been in the Soviet Union and were outside NATO with little risk of the West responding with force.
The second, after a slapdash campaign, was that Russia’s armed forces needed to be reformed. Military modernisation became a personal mission to redress “humiliations” visited by an “overweening” West on Russia since the cold war ended.
According to IHS Jane’s, a defence consultancy, by next year Russia’s defence spending will have tripled in nominal terms since 2007, and it will be halfway through a ten-year, 20 trillion rouble ($300 billion) programme to modernise its weapons.
New types of missiles, bombers and submarines are being readied for deployment over the next few years. Spending on defence and security is expected to climb by 30% this year and swallow a more than a third of the federal budget.
As well as money for combat aircraft, helicopters, armoured vehicles and air-defence systems, about a third of the budget has been earmarked to overhaul Russia’s nuclear forces. A revised military doctrine signed by Mr Putin in December identified “reinforcement of NATO’s offensive capacities directly on Russia’s borders, and measures taken to deploy a global anti-missile defence system” in central Europe as the greatest threats Russia faces.
In itself, that may not be cause for alarm in the West. Russian nuclear doctrine has changed little since 2010, when the bar for first use was slightly raised to situations in which “the very existence of the state is under threat”. That may reflect growing confidence in Russia’s conventional forces.
But Mr Putin is fond of saying that nobody should try to shove Russia around when it has one of the world’s biggest nuclear arsenals. Mr Kiselev puts it even more bluntly: “During the years of romanticism [ie, detente], the Soviet Union undertook not to use nuclear weapons first. Modern Russian doctrine does not. The illusions are gone.”
Mr Putin still appears wedded to a strategy he conceived in 2000: threatening a limited nuclear strike to force an opponent (ie, America and its NATO allies) to withdraw from a conflict in which Russia has an important stake, such as in Georgia or Ukraine. Nearly all its large-scale military exercises in the past decade have featured simulations of limited nuclear strikes, including one on Warsaw.
Mr Putin has also been streamlining his armed forces, with the army recruiting 60,000 contract soldiers each year. Professionals now make up 30% of the force. Conscripts may bulk up the numbers, but for the kind of complex, limited wars Mr Putin wants to be able to win, they are pretty useless.
Ordinary contract soldiers are also still a long way behind special forces such as the GRU Spetsnaz (the “little green men” who went into Crimea without military insignia) and the elite airborne VDV troops, but they are catching up.
Boots on the ground
South-east Ukraine shows the new model army at work. Spetsnaz units first trained the Kremlin-backed separatist rebels in tactics and the handling of sophisticated Russian weapons. But when the Ukrainian government began to make headway in early summer, Russia had regular forces near the border to provide a calibrated (and still relatively covert) response.
It is hard to tell how many Russian troops have seen action in Ukraine, as their vehicles and uniforms carry no identifiers. But around 4,000 were sent to relieve Luhansk and Donetsk while threatening the coastal city of Mariupol–enough to convince Mr Poroshenko to draw his troops back.
Since November a new build-up of Russian forces has been under way. Ukrainian military intelligence reckons there may be 9,000 in their country (NATO has given no estimate). Another 50,000 are on the Russian side of the border.
Despite Mr Putin’s claim last year that he could “take Kiev in two weeks” if he wanted, a full-scale invasion and subsequent occupation is beyond Russia. But a Russian-controlled mini-state, Novorossiya, similar to Abkhazia and Transdniestria, could be more or less economically sustainable.
And it would end Ukraine’s hopes of ever regaining sovereignty over its territory other than on Russian terms, which would undoubtedly include staying out of the EU and NATO. Not a bad outcome for Mr Putin, and within reach with the hard power he controls.
The big fear for NATO is that Mr Putin turns his hybrid warfare against a member country. Particularly at risk are the Baltic states–Latvia, Estonia and Lithuania–two of which have large Russian-speaking minorities.
In January Anders Fogh Rasmussen, NATO’s previous secretary-general, said there was a “high probability” that Mr Putin would test NATO’s Article 5, which regards an attack on any member as an attack on all–though “he will be defeated” if he does so.
A pattern of provocation has been established that includes a big increase in the number of close encounters involving Russian aircraft and naval vessels, and snap exercises by Russian forces close to NATO’s northern and eastern borders. Last year NATO planes carried out more than 400 intercepts of Russian aircraft.
More than 150 were by the alliance’s beefed-up Baltic air-policing mission–four times as many as in 2013. In the first nine months of the year, 68 “hot” identifications and interdictions occurred along the Lithuanian border alone. Latvia recorded more than 150 incidents of Russian planes entering its airspace.
There have also been at least two near-misses between Russian military aircraft and Swedish airliners. This is dangerous stuff: Russian pilots do not file flight plans. They fly with transponders switched off, which makes them invisible to civil radar. On January 28th two Russian, possibly nuclear-armed, strategic bombers flew down the English Channel, causing havoc to commercial aviation. Such behaviour is intended to test Western air defences, and was last seen in the cold war. Mr Stoltenberg calls it “risky and unjustified”.
Since 2013, when Russia restarted large-scale snap military exercises, at least eight have been held. In December the Kremlin ordered one in Kaliningrad, an exclave that borders Lithuania and Poland, both NATO members. It mobilised 9,000 soldiers, more than 55 navy ships and every type of military aircraft. “This pattern of behaviour can be used to hide intent,” says General Philip Breedlove, NATO’s most senior commander. “What is it masking? What is it conditioning us for?”
A huge problem for NATO is that most of what Russia might attempt will be below the radar of traditional collective defence. According to Mr Stoltenberg, deciding whether an Article 5 attack has taken place means both recognising what is going on and knowing who is behind it.
“We need more intelligence and better situational awareness,” he says; but adds that NATO allies accept that if the arrival of little green men can be attributed “to an aggressor nation, it is an Article 5 action and then all the assets of NATO come to bear.”
For all the rhetoric of the cold war, the Soviet Union and America had been allies and winners in the second world war and felt a certain respect for each other. The Politburo suffered from no feelings of inferiority. In contrast, Mr Putin and his KGB men came out of the cold war as losers.
What troubles Mr Stoltenberg greatly about Mr Putin’s new, angry Russia is that it is harder to deal with than the old Soviet Union. As a Norwegian, used to sharing an Arctic border with Russia, he says that “even during the coldest period of the cold war we were able to have a pragmatic conversation with them on many security issues”. Russia had “an interest in stability” then, “but not now”.
Meddling and perverting
Destabilisation is also being achieved in less military ways. Wielding power or gaining influence abroad–through antiestablishment political parties, disgruntled minority groups, media outlets, environmental activists, supporters in business, propagandist “think-tanks”, and others–has become part of the Kremlin’s hybrid-war strategy. This perversion of “soft power” is seen by Moscow as a vital complement to military engagement.
Certainly Russia is not alone in abusing soft power. The American government’s aid agency, USAID, has planted tweets in Cuba and the Middle East to foster dissent. And Mr Putin has hinted that Russia needs to fight this way because America and others are already doing so, through “pseudo-NGOs”, CNN and human-rights groups.
At home Russian media, which are mostly state-controlled, churn out lies and conspiracy theories. Abroad, the main conduit for the Kremlin’s world view is RT, a TV channel set up in 2005 to promote a positive view of Russia that now focuses on making the West look bad.
It uses Western voices: far-left anti-globalists, far-right nationalists and disillusioned individuals. It broadcasts in English, Arabic and Spanish and is planning German- and French-language channels.
It claims to reach 700m people worldwide and 2.7m hotel rooms. Though it is not a complete farce, it has broadcast a string of false stories, such as one speculating that America was behind the Ebola epidemic in west Africa.
The Kremlin is also a sophisticated user of the internet and social media. It employs hundreds of “trolls” to garrison the comment sections and Twitter feeds of the West. The point is not so much to promote the Kremlin’s views, but to denigrate opposition figures, and foreign governments and institutions, and to sow fear and confusion.
Vast sums have been thrown at public-relations and lobbying firms to improve Russia’s image abroad–among them Ketchum, based in New York, which helped place an op-ed by Mr Putin in the New York Times. And it can rely on some of its corporate partners to lobby against policies that would hurt Russian business.
The West’s willingness to shelter Russian money, some of it gained corruptly, demoralises the Russian opposition while making the West more dependent on the Kremlin. Russian money has had a poisonous effect closer to home, too. Russia wields soft power in the Baltics partly through its “compatriots policy”, which entails financial support for Russian-speaking minorities abroad.
econ 2The Economist
Mr Putin’s most devious strategy, however, is to destabilise the EU through fringe political parties (see box).
Russia’s approach to ideology is fluid: it supports both far-left and far-right groups. As Peter Pomerantsev and Michael Weiss put it in “The menace of unreality”, a paper on Russian soft power: “The aim is to exacerbate divides [in the West] and create an echo-chamber of Kremlin support.”
Far-right groups are seduced by the idea of Moscow as a counterweight to the EU, and by its law-and-order policies. Its stance on homosexuality and promotion of “traditional” moral values appeal to religious conservatives. The far left likes the talk of fighting American hegemony.
Russia’s most surprising allies, however, are probably Europe’s Greens. They are opposed to shale-gas fracking and nuclear power–as is Moscow, because both promise to lessen Europe’s dependence on Russian fossil fuels. Mr Rasmussen has accused Russia of “sophisticated” manipulation of information to hobble fracking in Europe, though without producing concrete evidence.
There is circumstantial evidence in Bulgaria, which in 2012 cancelled a permit for Chevron to explore for shale gas after anti-fracking protests. Some saw Russia’s hand in these, possibly to punish the pro-European government of the time, which sought to reduce its reliance on Russian energy (Gazprom, Russia’s state-controlled gas giant, supplies 90% of Bulgaria’s gas).
Previously, Bulgaria had been expected to transport Russian oil through its planned South Stream pipeline, and its parliament had approved a bill that would have exempted the project from awkward EU rules. Much of it had been written by Gazprom, and the construction contract was to go to a firm owned by Gennady Timchenko, an oligarch now under Western sanctions.
Gazprom offered to finance the pipeline and to sponsor a Bulgarian football team. The energy minister at the time later claimed he had been offered bribes by a Russian envoy to smooth the project’s passage. Though European opposition means it has now been scrapped, the episode shows the methods Moscow uses to protect its economic interests.
In all this Mr Putin is evidently acting not only for Russia’s sake, but for his own. Mr Borodai, the rebel ideologue in Donetsk, says that if necessary the Russian volunteers who are fighting today in Donbas will tomorrow defend their president on the streets of Moscow.
Yet, although Mr Putin may believe he is using nationalists, the nationalists believe they are using him to consolidate their power. What they aspire to, with or without Mr Putin, is that Russians rally behind the nationalist state and their leader to take on Western liberalism. This is not a conflict that could have been resolved in Minsk.
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