Seeing The Elephant Part 3

Russia After teetering financially on the brink of collapse in the late 1990s, energy has transformed Russia into one of the world's major power brokers. Only a decade after its historic default, the world's number two oil exporter has ama.s.sed the third-largest gold and hard currency reserves worth about $600 billion in mid-2008.37 By the time Vladimir Putin ended his second term as president, soaring oil prices helped Russia's federal budget balloon tenfold since 1999. This resulted in a 6 percent budget surplus with GDP growth of 7 percent and a drop in poverty from 30 percent in 1990 to 10 percent in 2006. This comes as no surprise considering oil and gas represents around 20 percent of Russia's GDP, generates more than 64 percent of its export revenues, and attracts 30 percent of all foreign direct investment. By the time Vladimir Putin ended his second term as president, soaring oil prices helped Russia's federal budget balloon tenfold since 1999. This resulted in a 6 percent budget surplus with GDP growth of 7 percent and a drop in poverty from 30 percent in 1990 to 10 percent in 2006. This comes as no surprise considering oil and gas represents around 20 percent of Russia's GDP, generates more than 64 percent of its export revenues, and attracts 30 percent of all foreign direct investment.38 Internationally, concerns remain that Russia may be using its energy clout to peddle influence. All of Russia's gas is managed by one of the world's most valuable state-controlled companies, Gazprom. At present, Europe relies on Russia for over a quarter of its energy needs, with Germany importing some 40 percent of its gas from Gazprom. Several states from Eastern Europe are even more dependent on Russia for electricity. And these trends are projected to intensify significantly during the coming decades. Some a.n.a.lysts expect that by 2020, Europe will depend on Russia for close to 70 percent of its gas supply.39 Putin has made it clear that he sees his nation's vast energy resources as a political tool to recover some of his country's international influence that was lost after the Soviet Union's dissolution. The key to his strategy is Gazprom and the immense leverage it can exert on its Western European electricity clientele. Russian pipeline routes encircle the EU from the north and south. As we witnessed in the winter of 2006, Russia can turn its gas spigot off anytime it wants to "influence" its neighbors.When Russia stopped supplying gas to the Ukraine in the beginning of 2006, it prompted immediate gas shortages in European countries because Ukrainian pipelines transport 80 percent of all gas from Russia to Europe.40 In countries as far west as France, gas supplies dropped 30 percent to 40 percent. In countries as far west as France, gas supplies dropped 30 percent to 40 percent.41 Fearful of spending the winter without light, heat, and cooking appliances, the Ukrainian government soon reached a deal with Russia to end the supply disruption with a fourfold increase in price. Fearful of spending the winter without light, heat, and cooking appliances, the Ukrainian government soon reached a deal with Russia to end the supply disruption with a fourfold increase in price.42 Russia similarly employed its influence with Georgia, Belarus, Azerbaijan, Armenia, and Lithuania. Further pipeline developments, currently under construction, are even more alarming. In the future, they will allow Russia to turn off gas supplies to Ukraine, Poland, and Belarus without affecting "more important" European customers. Russia similarly employed its influence with Georgia, Belarus, Azerbaijan, Armenia, and Lithuania. Further pipeline developments, currently under construction, are even more alarming. In the future, they will allow Russia to turn off gas supplies to Ukraine, Poland, and Belarus without affecting "more important" European customers.43 Reinforcing the importance of energy in Russia's global master plan, upon his retirement as the country's president in May 2008, Putin was named the new chairman of Gazprom as well as the country's prime minister, putting an immense amount of Russian power (literally!) in his hands. In the same spirit, the Kremlin has flatly ruled out ratifying the EU's energy-charter treaty, which would require it to open up its gas pipelines to other countries and other suppliers. Just two days after the negotiations, Putin enshrined into law Gazprom's monopoly position as the sole exporter of gas. Even more unnerving to the Europeans is the prospect of an equivalent to the OPEC oil-exporters' cartel, which Putin has recently advanced with several gas players such as Qatar.

Africa In Africa, oil-exporting countries Nigeria, Sudan, and Chad have ma.s.sively profited from high oil prices, in some cases freeing these countries from G7 influence. Sudan's capital, Khartoum, is booming, with new skysc.r.a.pers and luxury hotels on the rise, offsetting sanctions aimed at pressuring the country to halt attacks against minorities in Darfur. Likewise, Chad has used its oil money to buy weapons rather than to develop its economy.

Nigeria is the continent's key energy country, with the largest proven reserves in Africa.44 Unfortunately, Nigeria has suffered domestic unrest that has hurt its energy output. Frequent insurgencies and labor strikes clipped production by 475,000 to 675,000 barrels a day in 2007, almost 25 percent from peak daily output. Unfortunately, Nigeria has suffered domestic unrest that has hurt its energy output. Frequent insurgencies and labor strikes clipped production by 475,000 to 675,000 barrels a day in 2007, almost 25 percent from peak daily output.45 Government corruption, while lessening, has also hampered full development of this sector. James Ibori, the former governor of Delta state, one of the key oil-producing regions, has been charged with 129 counts of money laundering and other financial crimes. Ibori was also linked financially to Nigerian President Umaru Yar'Adua. Government corruption, while lessening, has also hampered full development of this sector. James Ibori, the former governor of Delta state, one of the key oil-producing regions, has been charged with 129 counts of money laundering and other financial crimes. Ibori was also linked financially to Nigerian President Umaru Yar'Adua.46 When China turned to the African continent as a source of oil, the United States and its allies found out that tying trade with Africa to human rights and democracy measures would no longer work. Chinese government firms have invested billions of dollars in foreign exchange, no strings attached, and have used Chinese engineering and construction resources on infrastructure for developing oil, gas, mineral, and other natural resources in dozens of African countries, including Algeria, Angola, Gabon, Nigeria, Sudan, and Zimbabwe.47 During the 1990s, Sino-African trade grew by 700 percent, and by 2006 reached $32.17 billion. During the 1990s, Sino-African trade grew by 700 percent, and by 2006 reached $32.17 billion.48 This makes China Africa's third most important trading partner, behind the United States and France, and ahead of Britain. This makes China Africa's third most important trading partner, behind the United States and France, and ahead of Britain.

Latin America In Latin America, Mexico and Brazil continue to be friendly and steady world suppliers, although without further new finds, Mexican oil reserves may run out in a couple of decades, and Hurricane Katrina damaged much of its infrastructure in 2005. Brazil may prove to be the region's bright spot; a recently discovered deep-water exploration area off its coast could contain as much as 33 billion barrels of oil, making it the world's third-largest known oil reserve.49 While this may take years to fully develop, it adds further to Brazil's acceleration to a world power. While this may take years to fully develop, it adds further to Brazil's acceleration to a world power.

Outside these two reliable countries, Latin America's energy map is littered with political problem spots, starting with the largest oil producer, Venezuela. Without oil, Hugo Chavez's bravado would be nothing but bl.u.s.ter. But with an eightfold increase in oil prices since the late 1990s, the Venezuelan president has used this oil wealth to dispense patronage around South America, offering below-market crude to win friends and inflammatory rhetoric to anyone who will listen. Driven by his anti-Americanism and anticapitalism rhetoric, Chavez has made it a centerpiece of his policies to consolidate the continent's energy network including a 2005 deal to build a 5,000-mile intracontinental pipeline connecting Brazil and Argentina.50 His recent legal battles with Exxon Mobil, prompted by his 2007 decision to nationalize Venezuela's oil fields, led to a new low in U.S.-Venezuelan relations. The court order allowing Exxon Mobil to freeze up to $12 billion of PDVSA (the Venezuelan national oil company) a.s.sets overseas, prompted Chavez to threaten cutting energy supplies to the United States. His recent legal battles with Exxon Mobil, prompted by his 2007 decision to nationalize Venezuela's oil fields, led to a new low in U.S.-Venezuelan relations. The court order allowing Exxon Mobil to freeze up to $12 billion of PDVSA (the Venezuelan national oil company) a.s.sets overseas, prompted Chavez to threaten cutting energy supplies to the United States.51 In spite of having the region's second largest natural gas reserves after Venezuela, Bolivia is among Latin America's poorest nations. The land-locked country has also been marked by political instability, with recent presidents barely able to stay in office for a year. One of them, Gonzalo "Goni" Sanchez de Lozad, was forced to resign in 2003 after protests against plans to export Bolivian gas turned violent. In 2007, a decree stated that foreign companies-including both Spanish and Brazilian companies, which had already invested almost $4 billion since Bolivia opened up its energy sector in the late 1990s-must hand majority control over to state-owned Yacimientos Petroliferos Fiscales Bolivianos (YPFB). Firms had 180 days to renegotiate energy contracts with the Bolivian state, which experts say will likely lead to price increases.52 Similar consolidations have occurred in Ecuador, the second largest source of U.S. oil imports in the region. In May 2006, the government took over the operations of the U.S. oil giant Occidental Petroleum,53 and President Rafael Correra has since been renegotiating foreign oil contracts with the aim to more than quadruple the share of crude volume received by the state. and President Rafael Correra has since been renegotiating foreign oil contracts with the aim to more than quadruple the share of crude volume received by the state.54 Concentration and Instability Given that most energy exporters are state-owned ent.i.ties, the fate of the global economy rests in the hands of a small group of national governments. Whether energy profits go into sovereign wealth funds or government budgets, what results is a potentially unfriendly, murky mix of politics and business that makes markets nervous. In the past, production difficulties in Venezuela and Mexico, concerns over Iran and Iraq, and violence in Nigeria have contributed to a political risk premium on oil prices that has been estimated at $25 to $50 a barrel.55 The concentration of two-thirds of the world's known oil reserves in the Gulf States magnifies potential political risks of the region. Instability in the Middle East has caused major oil price hikes and contributed to every U.S. and global recession of the last 35 years. Indeed, oil prices' latest five-year upward trend has already significantly lowered U.S. consumer savings rates, added to U.S. inflation, worsened the U.S. trade deficit, undermined the dollar, and shaved GDP growth. The concentration of two-thirds of the world's known oil reserves in the Gulf States magnifies potential political risks of the region. Instability in the Middle East has caused major oil price hikes and contributed to every U.S. and global recession of the last 35 years. Indeed, oil prices' latest five-year upward trend has already significantly lowered U.S. consumer savings rates, added to U.S. inflation, worsened the U.S. trade deficit, undermined the dollar, and shaved GDP growth.

The insecurity of the world's energy supply also raises concerns about longer term economic development and poverty reduction. In past centuries, geography, access to water and trade routes, and climate might have determined the economic well-being of a country. Today, the availability of energy is equally important. As China began to modernize and grow its economy, energy consumption tripled between 1980 and 2001. During this period, the share of people living in extreme poverty (on $1 a day or less) dropped from 53 to 8 percent.56 China and other emerging countries managed to reduce their poverty rates through the application of mechanical processes dependent on electricity. It follows that the lack of electricity exacerbates poverty by precluding most industrial activities and the jobs they create. It is no coincidence that the majority of people who currently lack electricity live on less than $2 per day. China and other emerging countries managed to reduce their poverty rates through the application of mechanical processes dependent on electricity. It follows that the lack of electricity exacerbates poverty by precluding most industrial activities and the jobs they create. It is no coincidence that the majority of people who currently lack electricity live on less than $2 per day.57 Even today more than a quarter of the world-1.6 billion people-have no access to electricity, while two-fifths still rely mainly on traditional bioma.s.s for their basic energy needs. Even today more than a quarter of the world-1.6 billion people-have no access to electricity, while two-fifths still rely mainly on traditional bioma.s.s for their basic energy needs.58 Of these, more than 80 percent live in South Asia and Sub-Saharan Africa. With nearly one billion people, Africa, the poorest continent, accounts for over a sixth of the world's population, but generates only 4 percent of global electricity. Of these, more than 80 percent live in South Asia and Sub-Saharan Africa. With nearly one billion people, Africa, the poorest continent, accounts for over a sixth of the world's population, but generates only 4 percent of global electricity.59 As Africa has recently experienced healthy economic growth, the significance of a reliable energy supply has come to the forefront. In late 2007 and early 2008, South Africa, which is generally seen as the strongest of the African economies, witnessed what it meant to run out of power. Because of insufficient energy supplies, it had to suspend the production in its biggest gold and platinum mines and is now fearing that power cuts could similarly hit the country when it hosts the soccer World Cup in 2010. As Africa has recently experienced healthy economic growth, the significance of a reliable energy supply has come to the forefront. In late 2007 and early 2008, South Africa, which is generally seen as the strongest of the African economies, witnessed what it meant to run out of power. Because of insufficient energy supplies, it had to suspend the production in its biggest gold and platinum mines and is now fearing that power cuts could similarly hit the country when it hosts the soccer World Cup in 2010.60 Although the number of people without electricity will drop in the coming decades, a projected 1.4 billion people will still be without electricity in 2030.61 To extend electricity supplies to the energy poor could spread the capitalist peace, but it will require domestic as well as international efforts. To extend electricity supplies to the energy poor could spread the capitalist peace, but it will require domestic as well as international efforts.

We must also consider our current trajectory's environmental risks: As coal, oil, and gas are burned, carbon dioxide is emitted and contributes to global warming. With mean temperature increases of 1.4F over the past century, sea levels are up by nearly 20 centimeters (7.8 inches), and the Arctic has decreased by 7 to 15 percent, depending on the season.62 The number of category four and five hurricanes has almost doubled in the last 30 years. Hurricane Katrina, floods in Europe, and the recent forest fires in California are further glimpses of what may come-not to mention greater rates of cancer, asthma, and other disease-if we maintain our current energy usage patterns. The number of category four and five hurricanes has almost doubled in the last 30 years. Hurricane Katrina, floods in Europe, and the recent forest fires in California are further glimpses of what may come-not to mention greater rates of cancer, asthma, and other disease-if we maintain our current energy usage patterns.

While rich nations are currently still the main polluters, with 23 percent of all greenhouse gases being emitted by the United States alone, the IEA estimates that between 2004 and 2030, developing countries will account for over three-quarters of the increase in global CO2 emissions.This increase is faster than their share in energy demand, because their incremental energy use is more carbon-intensive than that of older industrialized economies. Developing countries typically use more coal and less gas. For instance, China is projected to surpa.s.s the United States as the world's biggest CO emissions.This increase is faster than their share in energy demand, because their incremental energy use is more carbon-intensive than that of older industrialized economies. Developing countries typically use more coal and less gas. For instance, China is projected to surpa.s.s the United States as the world's biggest CO2 emitter by 2010. emitter by 2010.63 While many noted economists have attempted to circ.u.mscribe the potential costs of environmental degradation, the bottom line is that fossil energy usage is a root cause that needs to considered amid planned global expansion. While many noted economists have attempted to circ.u.mscribe the potential costs of environmental degradation, the bottom line is that fossil energy usage is a root cause that needs to considered amid planned global expansion.

Moreover, oil access can provoke conventional military conflict, and nuclear energy's potential as a weapon is another plausible and frightening possibility. Other risks abound as well such as creeping geopolitical influence being ama.s.sed quietly in the form of capital reserves and financial dependency. Historians have suggested that much of World War II aggression was petroleum-linked, including Germany's 1941 attack of the Soviet Union to grab the Caspian Sea oilfields, and the j.a.panese attack on the United States was partially the result of the United States' oil embargo of j.a.pan. The first Gulf War in the 1990s was driven by G7 concerns that oil from Kuwait (and the rest of the Gulf region) could end up in the hands of an unfriendly Iraq. Many critics believe the second Iraqi invasion began in 2003 was motivated by a U.S. plan to free Iraq's oil from antagonistic interests. It is likely that new demand will increase cross-border hostilities, shortages, imbalances, price volatility, and military undertakings.

Nuclear power is seen as a possible panacea to energy challenges; it is cheap, efficient, and theoretically emits little CO2. Yet, as new nuclear power plants mushroom around the globe, especially in countries with lower safety standards, potential dangers are simmering. The reactor accidents at Harrisburg in 1979 and Chern.o.byl in 1986 should remind us of the ma.s.sive costs when nuclear power goes awry. Moreover, nuclear waste storage creates long-term risks that need to be managed. And, most important, as discussed earlier, the easy convertibility of nuclear energy to weaponry also poses a challenge. Both North Korea and Iran claimed to be developing nuclear power for civilian purposes. However, as it turns out, at least the former had different ambitions with its program. And consider the need to protect energy facilities against terrorist attacks.

According to estimates, the world would need to triple the current stock of nuclear power plants if we wanted to achieve a real impact on CO2 emissions and better energy independence. emissions and better energy independence.64 A 2008 study by the IEA suggests the world would need to invest $45 A 2008 study by the IEA suggests the world would need to invest $45 trillion trillion to build 1,400 nuclear power plants to meet Intergovernmental Panel on Climate Change goals. to build 1,400 nuclear power plants to meet Intergovernmental Panel on Climate Change goals.65 But this would also triple the risk of nuclear proliferation and Chern.o.byl-type accidents. Before resorting to this unbelievably expensive strategy, aren't there other safer mechanisms to achieve reliable energy supplies and better environmental protection? But this would also triple the risk of nuclear proliferation and Chern.o.byl-type accidents. Before resorting to this unbelievably expensive strategy, aren't there other safer mechanisms to achieve reliable energy supplies and better environmental protection?

The Big s.h.i.+ft: From Hydrocarbons to Renewables Not everyone agrees on which Macro Quantum energy-induced crisis is worse-creating financial and energy dependencies, empowering questionable national leaders, or choking the environment. Who cares? Whatever theory you choose, whatever ideological perspective you represent, the common solution is to liberate ourselves from our fossil fuel addiction with a new energy paradigm, one that would tackle several global challenges at once. It would reduce the importing countries' dependency on relatively few sources; it would seek to be environmentally friendly; and it would promote a diversified portfolio of energy sources to reduce the chance of price volatility and shortages, and help as many of the world's poor as possible-all in a comprehensive plan to promote rising living standards and the capitalist peace.

Renewable energy sources should be the centerpiece of a new global energy policy. Today, renewables form a very small part of U.S. energy consumption (see Figure 3.5 Figure 3.5). Being the largest power user, and one of the least energy efficient among wealthy countries, U.S. leaders.h.i.+p in this area would go a long way toward restoring The United States' global reputation. Few countries could argue with policies that developed greater levels of self-sufficiency and renewable sources.

Figure 3.5 The Role of Renewable Energy Consumption in the U.S. Energy Supply (2006) The Role of Renewable Energy Consumption in the U.S. Energy Supply (2006) SOURCE: EIA, Renewable Energy Consumption.

The concept of using public policy to change lifestyle patterns for the greater good is not new. On the contrary, this is arguably one of government's central roles. Take a look at the U.S. interstate highway system. When President Dwight D. Eisenhower signed the Federal Aid Highway Act on June 29, 1956, he drastically altered the lifestyle patterns and economic destiny not only of U.S. citizens, but also of all of today's 6.7 billion people worldwide. With personal transportation came the freedom to live and work where one chooses. No longer constrained to the remote farm or crowded urban center where he worked, your average American had the choice to live in an idyllic suburban town amid amenities once reserved only for the extremely wealthy: swimming pools, tree-lined streets, climate control, as well as all sorts of gizmos and gadgets that made life a little easier. With the advent of the highway system, a family vacation to the Grand Canyon or Disneyland was just a short drive away; and delicacies like Maine lobster or Georgia peaches could be s.h.i.+pped freshly and quickly via truck to your local supermarket. Indeed, driving a convertible down an open road is a potent image of freedom, choice, leisure-parts of the American lifestyle that remain immensely alluring today not just here but around the world. But given the problems surrounding fossil fuel dependency, isn't it time to have an American-now global-s.h.i.+ft in thinking? This does not mean giving up pools or Disneyland or Maine lobster, but simply making our choices in a way that ensures the world's children have the same abundance and freedom we have enjoyed.

Contrary to popular belief, in the long run, renewable energy sources might be cheaper than traditional sources. The watershed 2006 study by Sir Nicholas Stern, the head of the United Kingdom's Government Economics Service, compared the costs of preventing climate change to the likely economic consequences of a warming planet if we keep our present energy usage patterns. The Stern report concludes that the status quo is likely to lead to a loss of 5 to 10 percent of global economic growth. In contrast, an investment in alternative energies and environmentally friendly technologies to offset these changes would lower GDP growth by only 1 percent.66 While the Stern report has raised methodological questions, While the Stern report has raised methodological questions,67 it is hardly alone in its conclusion that poor energy policy hurts our economy. it is hardly alone in its conclusion that poor energy policy hurts our economy.

Moreover, a cleaner, greener energy may actually boost our economy. A study by the California Public Interest Research Group found that renewable energy generates four times the number of jobs per megawatt as does natural gas. Similarly, renewables create 40 percent more jobs per dollar of investment than coal plants.68 The two energy sources have very different economic equations. While fossil fuel costs are mainly driven by the extraction of oil, gas, and coal, the costs of alternative energies mainly depend on capital investment and skilled labor, The two energy sources have very different economic equations. While fossil fuel costs are mainly driven by the extraction of oil, gas, and coal, the costs of alternative energies mainly depend on capital investment and skilled labor, something we have an abundance of in the United States something we have an abundance of in the United States. The economic potential of alternative energies is further ill.u.s.trated by a study by the University of Tennessee that discovered that if the production of alternative energy comprised 25 percent (up from its current 7 percent today) of all U.S. energy, $700 billion of economic activity would be generated and five million new jobs created, all while reducing carbon emissions by one million tons.69 Several countries are already benefiting from sustainable technologies and could share their experiences. Brazil, for example, began its ethanol-based fuel program in the mid-1970s. In 2003, the Brazilian ethanol program provided nearly 700,000 jobs, and oil imports were cut by $50 billion during the period from 1975 to 2002. Today, Brazil gets almost 40 percent of its automobile fuels from sugar cane-based ethanol. Due to improved technologies, Brazil has managed to offer hydrous ethanol at a lower price per gallon (before tax) than gasoline. The United States could abolish trade barriers-implemented to protect U.S. sugar growers-that currently prevent Brazilian ethanol from entering the U.S. market. A technology sharing agreement signed by President Bush and Brazil's President Lula da Silva in March 2007 is a promising step in this direction.70 Similar developments are occurring with other renewables. Hydropower has been spearheaded by a developing country: China. Hubei, China, is home to the Three Gorges Dam, which-upon completion in 2009-will be the largest hydroelectric project in the world.71 While dams are sometimes criticized for their ecological impacts, improvements in free-standing turbines and other hydroelectric technologies are making offsh.o.r.e tidal power into a viable option. In one of the first deals of its kind, Pacific Gas & Electric, a U.S. utility, agreed to buy electricity from a wave farm being built off the coast of California and due to open in 2012. While dams are sometimes criticized for their ecological impacts, improvements in free-standing turbines and other hydroelectric technologies are making offsh.o.r.e tidal power into a viable option. In one of the first deals of its kind, Pacific Gas & Electric, a U.S. utility, agreed to buy electricity from a wave farm being built off the coast of California and due to open in 2012.72 When it comes to wind power, Denmark is prominent in the manufacturing and use of wind turbines. Currently, Denmark generates more than 20 percent of its electricity with wind turbines, the highest percentage of any country and is fifth in the world in total wind power generation.73 It also manufactures more than 30 percent of wind turbines sold globally, contributing mightily to its GDP. These and other technologies, such as solar power, bioma.s.s, tidal power, and geothermal power are areas with huge potential.With sufficient research and development (R&D), technology sharing, and trade, these sources might become the power generators of the future. Using projections from the Department of Energy, the group estimated that 4.5 percent of CO It also manufactures more than 30 percent of wind turbines sold globally, contributing mightily to its GDP. These and other technologies, such as solar power, bioma.s.s, tidal power, and geothermal power are areas with huge potential.With sufficient research and development (R&D), technology sharing, and trade, these sources might become the power generators of the future. Using projections from the Department of Energy, the group estimated that 4.5 percent of CO2 emissions could be offset with wind power by 2020, a fraction of the potential in the United States given vast wind "reserves" with the United States' coastlines and gusty prairies. emissions could be offset with wind power by 2020, a fraction of the potential in the United States given vast wind "reserves" with the United States' coastlines and gusty prairies.74 The U.S. federal budget for energy is just a paltry $3-odd billion. Comparing this to the $111 billion the United States paid for energy imports from OPEC countries alone75 or to the current regular military budget of more than $500 billion, or to the current regular military budget of more than $500 billion,76 this sum demonstrates a clear lack of government commitment. In 2006, the government spent $6 billion alone on the development of a fighter plane! this sum demonstrates a clear lack of government commitment. In 2006, the government spent $6 billion alone on the development of a fighter plane!77 In the past three years, U.S. private investments into renewable energy technologies have doubled, and acc.u.mulated investment over the past 10 years amounted to $180 billion.78 But this is peanuts in the big picture.With the right government incentives to support R&D, think what could be mobilized. By directing and harnessing the United States' greatest strength-nonstate actors like scientists, corporations, venture capital, and Wall Street-an enormous economic boom could help the United States become a new technological leader in so many renewable energy areas. But this is peanuts in the big picture.With the right government incentives to support R&D, think what could be mobilized. By directing and harnessing the United States' greatest strength-nonstate actors like scientists, corporations, venture capital, and Wall Street-an enormous economic boom could help the United States become a new technological leader in so many renewable energy areas.

Waste Not, Want Not While alternative energy sources require time and money to develop, the quickest, cheapest, and least contested means to reduce our dependency on fossil fuels is to just use less energy. It is amazing what a difference can be made by simply becoming more energy efficient. McKinsey studies cite economically viable ways of cutting power demand growth from a forecasted 2.2 percent annually to a mere 1 percent. These would also bring the United States halfway to the emissions cap of 450 to 550 parts per million, which has been set by the Kyoto Protocol to control global warming.79 However, market forces alone won't suffice. However, market forces alone won't suffice.

While energy efficiency does not contribute a positive addition to our power supply, it lowers our use of other fuels-and is sometimes referred to as the "fifth fuel," after oil, gas, coal, and nuclear. Why hasn't government been promoting this fifth fuel? A new national energy strategy should aim to reduce fossil fuel usage, which is largely a matter of legislation within our current technological capabilities. While improving, the United States is extremely inefficient relative to other countries in Europe or j.a.pan, so seeking out greater efficiency shouldn't be hard. And it has been done before: Consider that in the four years between 1979 and 1983, following the last spike in gas prices, the United States weaned itself off of 3.3 million barrels a day, a drop of nearly 20 percent. Not until 1997 did the United States get back to the same level of oil consumption it had in 1979.80 And when oil prices peaked in 2008, oil consumption in the United States fell by 800,000 barrels a day, the biggest decrease since 1982. And when oil prices peaked in 2008, oil consumption in the United States fell by 800,000 barrels a day, the biggest decrease since 1982.

Taking up the largest share of end-use energy consumption at 25 percent, the U.S. residential sector is ripe for energy savings. The technologies are ready and available: By installing high-insulation building sh.e.l.ls, compact fluorescent lighting, and high-efficiency water heating, the sector's energy per annum growth rate would shrink by more than half from 2.4 percent to only 1 percent.81 Oddly enough, the main obstacle to the introduction of these technologies has not been the price of those investments-in fact, these technologies would save the average consumer a lot of money over the years-but ignorance about these opportunities and the costs a.s.sociated with everyday energy use. Oddly enough, the main obstacle to the introduction of these technologies has not been the price of those investments-in fact, these technologies would save the average consumer a lot of money over the years-but ignorance about these opportunities and the costs a.s.sociated with everyday energy use.

The U.S. government could help by implementing limits on standby power-saving technologies, as California successfully did with refrigerators (see Figure 3.6 Figure 3.6). Electrical devices that are plugged in 24 hours a day use between two and 20 watts of "standby," or "vampire," power-even when the device is fully charged or off. Standby power accounts for 10 percent of U.S. residential electricity consumption or more than $6 billion annually. Manufacturers could easily build power supplies for electronic devices that draw as little as 0.25 watts for little additional cost. Also, utility companies could aid in the efficiency quest by billing with better breakdowns that allow the consumers to see the actual cost of individual appliances. People are more likely to save energy (and money) when they know what's being consumed.82 Figure 3.6 U.S. Refrigerator Energy Use U.S. Refrigerator Energy Use SOURCE: David Goldstein, Natural Resources Defense Council.

In the transportation sector, increasing fuel economy standards globally would help curb oil usage and cut down on emissions. Raising average fuel standards by approximately one mile per gallon saves nearly one million barrels of oil imports every day. In this respect, the recent congressional approval to boost U.S. corporate average fuel economy (CAFE) from roughly 25 miles per gallon today to 35 miles per gallon in 2020-the first meaningful increase in the CAFE standards since 1984-will make a difference. The Union of Concerned Scientists estimates the higher standard will eliminate greenhouse gas emissions equivalent to taking 28 million of today's cars and trucks off the road and save consumers at least $30 billion per year (if gasoline at the pump stays above $3.25 per gallon).83 You wonder why the United States waited 24 years for such new legislation. If we pushed toward fuel standards that have been adopted in other countries, it is very easy to see how four to five million barrels of oil imports could be reduced from our current 12 to 13 million barrels. Moreover, by mandating the 55-mile-per-hour speed limit, an additional two million barrels a day could be saved (see You wonder why the United States waited 24 years for such new legislation. If we pushed toward fuel standards that have been adopted in other countries, it is very easy to see how four to five million barrels of oil imports could be reduced from our current 12 to 13 million barrels. Moreover, by mandating the 55-mile-per-hour speed limit, an additional two million barrels a day could be saved (see Figure 3.7 Figure 3.7).

Figure 3.7 U.S. Gasoline Use (Million Barrel's Per Day) U.S. Gasoline Use (Million Barrel's Per Day) SOURCE: Energy Information Administration.

Industry has less room for improvement than the residential sector, which represents 5 percent of United States' energy usage. In the industrialized world, industrial energy efficiency has been pursued vigorously since the oil crises in the 1970s and is reflected by the lower levels of energy intensity in most countries that are members of the Organization of Economic Cooperation and Development (OECD). As GDP in these countries grows their use of energy becomes more efficient. In fact, since 1970 the costs for producing every dollar of national income have shrunk by 49 percent in the United States.84 Yet there are still technologies available to save energy in the industrial sector, and the government could support industry in its energy savings efforts by undertaking demonstration projects and energy audits. Yet there are still technologies available to save energy in the industrial sector, and the government could support industry in its energy savings efforts by undertaking demonstration projects and energy audits.

Although energy intensity in emerging market countries is slowly decreasing, those countries still have a long way to go before achieving the standards of the industrialized world (see Figure 3.8 Figure 3.8). Considering the stakes for the entire world if energy demand goes out of control, wealthy countries have a real interest in helping their less developed neighbors to increase their energy efficiency. Technology and knowledge sharing, a reduction of tariff barriers for energy-effective technologies, and high domestic taxes for inefficient technologies coming out of the developing world can produce the right incentives to accelerate a less energy consuming pattern in the developing world. You might find it surprising that countries still subsidize energy (especially fossil fuel), but they do. McKinsey estimates that average fuel efficiency in countries with fuel subsidies are half of what they are in countries without subsidies. Cut them out, and the world theoretically can save three million barrels of oil a day.85 Figure 3.8 Energy Intensity by Region, 1980-2030 Energy Intensity by Region, 1980-2030 SOURCE: Energy Information Administration.

The Really Bright Idea: Here Comes the Sun The greatest potential for redefining energy use in the United States-and eventually throughout the world-comes from solar energy. The eternal pipe dream of hippies, granola-crunchers, and lately a growing bet for venture capitalists and progressive politicians, sunlight should be thought of as an abundant global resource that could potentially help many poor countries that are wholly dependent on foreign sources for energy needs. Given the United States' impressive technology/ venture capital machine, one could see solar technology spur the next big wave of U.S. economic growth and wealth creation, similar to the way the computing and communications boom has in the recent past.

The amount of energy that 40 minutes of sunlight on Earth produces is more than the world's annual total energy consumption. Even better, the United States, given its large, temperate land ma.s.s, has huge sunlight "reserves." In parts of Nevada, Arizona, New Mexico, and California alone there are 250,000 square miles of desert land suitable for constructing solar power plants.86 A patch of land like that receives more than 4,500 quadrillion Btu of solar radiation a year. Converting a small fraction-say 2.5 percent-of that sunlight into electricity would match the United States' total energy consumption in 2006. Two-thirds of U.S. electricity and one-third of total energy (which includes transportation) could conceivably come from solar power by 2050. Moreover, with proper scaling, this energy could be sold to consumers at rates equivalent to today's rates for conventional power sources, about five cents per kilowatt hour. A patch of land like that receives more than 4,500 quadrillion Btu of solar radiation a year. Converting a small fraction-say 2.5 percent-of that sunlight into electricity would match the United States' total energy consumption in 2006. Two-thirds of U.S. electricity and one-third of total energy (which includes transportation) could conceivably come from solar power by 2050. Moreover, with proper scaling, this energy could be sold to consumers at rates equivalent to today's rates for conventional power sources, about five cents per kilowatt hour.87 With recent advances, including solar energy storage systems, the United States may already be technologically capable. Of course, a plan to build this greener, safer, less energy-dependent U.S. economy is neither cheap nor easy. U.S. public policy would need to change dramatically. Currently, j.a.pan spends six times more to promote solar technology than the United States even though the U.S. economy is more than three times the size of j.a.pan's.To usher the United States from hydrocarbons to a renewable future, experts suggest huge tracts of land-perhaps 30,000 square miles-would have to be covered with photovoltaic (PV) panels and solar transmission equipment. Although this area may sound enormous, the land required for each gigawatt hour of solar energy produced is less less than that needed for a coal-powered plant when factoring in land for mining. than that needed for a coal-powered plant when factoring in land for mining.88 Studies by the U.S. Department of Energy's National Renewable Energy Laboratory show that more than enough land in the Southwest is available without touching environmentally sensitive areas, population centers, or difficult terrain. Studies by the U.S. Department of Energy's National Renewable Energy Laboratory show that more than enough land in the Southwest is available without touching environmentally sensitive areas, population centers, or difficult terrain.89 In addition to PV farms to capture solar energy, a direct-current (DC) transmission backbone would also have to be erected to send that energy efficiently across the nation. In addition to PV farms to capture solar energy, a direct-current (DC) transmission backbone would also have to be erected to send that energy efficiently across the nation.

Skeptics say solar has issues. The efficiency of photovoltaic cells (currently the world record set by a University of Delaware-led consortium is 42.8 percent) falls just shy of the 50 percent efficiency goal set by the Defense Advanced Research Projects Agency (DARPA) to make solar cost effective.90 While production costs have dropped and efficiency levels have risen significantly in recent years, more progress is needed for solar energy to become the backbone of the U.S. energy supply. But this is not impossible. Why is this not a stated national goal, today's equivalent of sending a man to the moon? Imagine a new Silicon Valley for energy-a "Solar Valley." An entrepreneurial technology cl.u.s.ter that works together, along with venture capital and Wall Street money, to bring a new industry to life led by the equivalent of Bill Gates or Henry Ford could bring about a whole new way to live and work. If the computer and other telecommunication advances have revolutionized life in the last two decades, isn't there even greater potential in a new energy paradigm? While production costs have dropped and efficiency levels have risen significantly in recent years, more progress is needed for solar energy to become the backbone of the U.S. energy supply. But this is not impossible. Why is this not a stated national goal, today's equivalent of sending a man to the moon? Imagine a new Silicon Valley for energy-a "Solar Valley." An entrepreneurial technology cl.u.s.ter that works together, along with venture capital and Wall Street money, to bring a new industry to life led by the equivalent of Bill Gates or Henry Ford could bring about a whole new way to live and work. If the computer and other telecommunication advances have revolutionized life in the last two decades, isn't there even greater potential in a new energy paradigm?

Why not also create a "Wind Valley," an "Alternative Fuel Valley," and a "Hydrogen Valley"? The major car companies including Ford, General Motors, Toyota, and BMW all see hybrids and hydrogen fuels as the auto technology of the future.91 If hydrogen technology is fully developed, the United States alone could save 28 percent of all the energy we consume today. If hydrogen technology is fully developed, the United States alone could save 28 percent of all the energy we consume today.92 The picture becomes clear: If bioma.s.s, geothermal, hydrogen, tidal, and wind sources were also developed, renewable energy theoretically could provide all of the nation's electricity and 90 percent of its energy by 2100. The picture becomes clear: If bioma.s.s, geothermal, hydrogen, tidal, and wind sources were also developed, renewable energy theoretically could provide all of the nation's electricity and 90 percent of its energy by 2100.93 Like Eisenhower's national highway legislation, a master energy plan to build a renewable energy economy won't happen without government support. Depending on the final plan, most energy experts estimate the U.S. government would have to invest $500 billion to $1 trillion over the next 10 years to complete this kind of paradigm s.h.i.+ft. Couple that with a comparable investment from private funds and industry, and a major revolution could be under way. According to his election web site, President Obama planned to earmark an extra $50 billion for alternative energy research and development-chump change compared to the costs of the Iraq War or routine defense spending. And unlike the war, the payoff for the U.S. economy and the world would be enormous. For example, solar plants consume little or no fuel (like wind farms and some other renewables), saving billions of dollars year after year. The Southwest solar infrastructure described previously-just one of many viable plans floating around-would displace hundreds of large coal-fired and natural gas power plants. Such a long-term plan could effectively eliminate all imported oil in roughly a generation, fundamentally cutting U.S. trade deficits and easing political tensions globally. Because solar technologies and other renewables are almost pollution-free, the plan would also reduce greenhouse gas emissions from power plants by 1.7 billion tons a year, far in excess of recommended cuts under the Kyoto Protocol. With some s.h.i.+fts in automobile design, such as plug-in electric hybrid engines, another two billion tons from gasoline vehicles would be displaced by plug-in hybrids refueled by the new solar power grid. In 2050, U.S. carbon dioxide emissions would be roughly two-thirds less than 2005 levels, putting a major brake on global warming.94 The price tag for the overhaul of the nation's energy infrastructure could be met through a carbon tax. A carbon tax of half a cent per kilowatt hour-about 10 percent more than today-will be required to induce electric companies to adopt solar capture and storage systems to replace coal and gas power plants. This might start as a sliding scale increasing over time to give producers and consumers time to adapt. It may also be added to gasoline prices-say 50 cents a gallon-which isn't much compared to places like Europe where taxes are routinely $2 to $4 a gallon. One of the most interesting developments during oil's rise from $25 per barrel to $147 was how the United States-and the global economy-have adjusted relatively well compared to the oil shocks of the 1970s and 1980s. Establis.h.i.+ng a multiyear phase in of one or several carbon taxes would provide a decent amount time for the U.S. energy community to digest this cost, causing no worse of a shock than the recent oil price spike. Although $500 billion is substantial, it is also less than a third of the $1.7 trillion in subsidies U.S. agriculture has received in the last 35 years. Imagine if government had forward bias versus a Micro Domestic perspective when farm subsidies began in the early 1970s-the same time as the first oil crisis. Most important, these subsidies will kick-start the United States' freedom from policy and budget issues driven by international energy conflicts, perhaps allowing new perspectives to emerge in managing many global relations.h.i.+ps and insuring the capitalist peace in the Macro Quantum world.

To Lead or Lag Energy remains the greatest link to most twenty-first century crossborder issues we've been discussing. Potential shortages and resulting imbalances, along with climate change, can easily thwart the capitalist peace in the more crowded, wealthier world of the future. The task now is to face the facts, harmonize public policy with private sector innovation, and shape consumer patterns in progressive ways.While the United States' global position may be slowly weakening, there is no reason why poor energy choices should be part of that equation. On the contrary, the United States may be able to rea.s.sert its legitimacy and voice in global affairs with a bold new plan. Dozens of energy-starved countries may be the beneficiaries of U.S. innovation, as well as dozens of countries saved from unforeseen environmental havoc. A new energy paradigm set by the government could allow U.S. industry and labor to revitalize itself with renewable energy technologies on the brink of phenomenal growth. Financially, we can reduce trade deficits while easing pressure on the dollar and keeping interest rates down. We just may be at the cusp of the next great technological revolution like those spurred by railroads, electricity, and the computer. It is an historic opportunity too important to take lightly.

Car TalkSince the mid-nineteenth century invention of fossil fuel-powered combustion engines, the automobile has become a fixture of modernity, not just as a personal form of transportation but also as a symbol of status and individual style. Why, given all the oil crises, hasn't some new type of engine surfaced? Why do cars, and even airplanes, only run on oil? Imagine if the automobile ran on, say, salt water. While we can't readily convert salt water to energy, the point is, with some creative thinking, we may not need to throw in the towel on automobiles.Cars offer unparalleled flexibility in transportation: the ability to move one to eight people (and their stuff) at once to and from very specific land-based locations.Trains can't do it, planes can't do it, boats can't do it. And while those single-person-moving Segways look cool, they're not much better than an old bicycle. These days, tree huggers regard cars as yester-tech; symbols of excess, contributors of noise, pollution, traffic, and greenhouse gases. But they're missing something.An efficient interstate road system has great advantages to an economy, as the United States' postwar history showed. With cheap oil, cars, and trucks, the interstate roadways helped crystallize the American dream: The road system created access to our vast country, putting houses, picket fences, and garages within reach of all who could afford a mortgage and car payment. Keep in mind, many developing nations, too, are on the path to their own similar dreams of urbanization and suburbanization.But cars are not carbon efficient. A car that averages 20 miles per gallon with two pa.s.sengers, for example, gets 40 people miles per gallon (PMPG). By comparison, filled pa.s.senger jets average something like 65 to 100 PMPG, while trains-as Europeans like to remind us-can approach some 300 to 400 PMPG if fully loaded. But trains are rarely fully loaded and neither are planes. And the big problem is neither are cars neither are cars. Imagine if a minivan or SUV averages 17 miles per gallon but always carried five people. That would dramatically improve PMPG to the same levels as aircraft. Public policy should encourage carpooling such as by creating high-occupancy vehicle (HOV) lanes to boost average carloads. Moreover, legislation reducing U.S. highway speeds back to 55 could dramatically reduce oil imports and carbon emissions. (It has been shown that most cars are at their peak fuel efficiency at this speed.)Furthermore, imagine using existing technologies-not experimental stuff-such as turbo diesel engines and hybrids to boost combustion engine mileage to 30 to 35 miles per gallon, that combined with policies to encourage large carloads, would help even more so. Or we can simply use smaller cars, something most countries around the world have done for decades. While the United States has been buying larger SUVs, sedans, pickups, and minivans (happily supplied by U.S., European, and j.a.panese auto manufacturers), the rest of the world drives smaller cars with better fuel economy. In j.a.pan and Europe, average miles per gallon is 50 percent higher than in the United States. With $4 a gallon gas, electric-hybrid and fully electric-powered cars like Toyota's Prius and the new Chevy Volt may beat 80 miles per gallon. Even larger SUV hybrids like Ford's Escape show very respectable miles per gallon ratings in the high 20s, about 10 miles better than the oil-burning version. All the major car companies have been aggressive in offering more hybrids and E85 ethanol mix cars in the last few years, and hydrogen may be coming sooner than we think.Electric-only cars are also gaining speed. For those of you who think that these are nothing more tricked-out golf carts, guess again. Upstart Tesla Motors, founded by PayPal entrepreneur Elon Musk, has launched a s.e.xy two-pa.s.senger electric sports car than can accelerate faster than a Corvette and travel about 165 miles per charge. A recharge takes 3 hours for about $7 worth of electricity, or roughly 4.2 cents a gallon. With $3 a gallon gas, a normal car would need to get 65 MPG to match Tesla's cost. With plans to develop a four-pa.s.senger model, Tesla should be hailed as a model for what can be done in a short period of time with the right entrepreneurial spirit. At $100,000, Tesla is very exclusive, but at $13,000, the Indian-made electric REVA is a bargain. The REVA uses nine units of electricity for a single full charge that gives up to 50 miles in city driving conditions, or about 3 cents per mile-roughly a third the cost of gasoline.Policies need to be crafted to support the development and sales of electric vehicles, particularly in places where single drivers are common. For example, a United States census report found that from 2000 to 2005, the percentage of people driving alone to work increased slightly to 77 percent.g In Europe and j.a.pan, electric car use is promoted by a variety of government tax benefits including being exempt from parking fees, congestion taxes, and sales and road tax.The Israeli government has taken this to an even more ambitious level: They aim to install the world's first electric car network by 2011, which may eventually consist of 500,000 charging points and up to 200 battery-exchange stations. The initiative was aimed at addressing the country's dependence on foreign oil from unfriendly regimes and the negative health and environmental effects of gas-burning vehicles. In Europe and j.a.pan, electric car use is promoted by a variety of government tax benefits including being exempt from parking fees, congestion taxes, and sales and road tax.The Israeli government has taken this to an even more ambitious level: They aim to install the world's first electric car network by 2011, which may eventually consist of 500,000 charging points and up to 200 battery-exchange stations. The initiative was aimed at addressing the country's dependence on foreign oil from unfriendly regimes and the negative health and environmental effects of gas-burning vehicles.h One can see how this, coupled with a plan for more renewable forms of electricity, could foster a very different driving situation in the United States. One can see how this, coupled with a plan for more renewable forms of electricity, could foster a very different driving situation in the United States.Automobiles don't necessarily have to be seen as villains in the energy-economy-environment yell-fest. A push for new technologies, incentives, and fresh government policies to support better driving habits could dramatically cut down on greenhouse emissions while providing the mobility and freedom dreamt of by billions.

Chapter 4.

Defense and Security Preventing the Next War, Not Fighting the Last That commerce and industry of a people no longer depend upon the expansion of its political frontiers; that a nation's political and economic frontiers do not now necessarily coincide; that military power is socially and economically futile, and can have no relation to the prosperity of the people exercising it; that it is impossible for one nation to seize by force the wealth or trade of another-to enrich itself by subjugating, or imposing its will by force on another; that in short, war, even when victorious, can no longer achieve those aims for which people strive.

-NORMAN ANGELLI

Poor Norman Angell. In 1913, he published The Grand Illusion, The Grand Illusion, outlining one of the first modern capitalist peace theories. History, in the words of the n.o.bel Peace Prize winner, had evolved beyond war between states for territorial aggrandizement; land grabs in an age of industrialization and trade made little sense. outlining one of the first modern capitalist peace theories. History, in the words of the n.o.bel Peace Prize winner, had evolved beyond war between states for territorial aggrandizement; land grabs in an age of industrialization and trade made little sense.

Alas, timing is everything. About one year after The Grand Illusion The Grand Illusion was published, World War I began-one of the bloodiest territorial conflicts to ever take place. But was Angell completely wrong in his prediction of a new era, one in which cross-border war would be less prevalent? Nearly a century later, is it practical to attack and occupy a country to control its wealth? Today, what would a conqueror do, for example, with tiny but rich Singapore? Chain every factory worker to their electronics a.s.sembly lines so that they could fill orders for Apple and Sony? was published, World War I began-one of the bloodiest territorial conflicts to ever take place. But was Angell completely wrong in his prediction of a new era, one in which cross-border war would be less prevalent? Nearly a century later, is it practical to attack and occupy a country to control its wealth? Today, what would a conqueror do, for example, with tiny but rich Singapore? Chain every factory worker to their electronics a.s.sembly lines so that they could fill orders for Apple and Sony?

Tom Friedman certainly agrees with Angell. His "Dell Theory of Conflict Prevention" posits that "no two countries that are both part of a major global supply chain" for multinational companies like Dell Computer fight wars against each other.2 While tongue-in-cheek, Friedman notes how nations in today's globalized economy bear huge financial costs attacking other nations with which they have strong economic ties. While tongue-in-cheek, Friedman notes how nations in today's globalized economy bear huge financial costs attacking other nations with which they have strong economic ties.

Countries still compete with one another and have different national interests; however, the changes in cross-border economic compet.i.tion have also altered the ideas of security and power. From about 1500 to 1900, nations that possessed valuable land and key natural resources also held power. A country could increase power by seizing weaker nations and exploiting their physical resources. But then the terms of global compet.i.tion s.h.i.+fted from territory to trade. By the period following World War II, a nation's power was not tied to the resources it conquered but to its productive workforce and state-of-the-art factories. For example, Germany and j.a.pan-which both lost so much in WWII-grew stronger globally through cultivating skilled labor and compet.i.tive products, not remilitarizing.

Economic power has continued to grow in importance relative to military power. Today, natural resources remain incredibly useful and armed forces have their place, but true Macro Quantum power is measured in factories and workforces that produce goods, offices and studios that cultivate creative brainpower and services, and money for mobile investment. The historic evolution from violent compet.i.tion of nation-states to a world where complex financial and trade interconnections have nearly eliminated cla.s.sic cross-border warfare (see Figure 4.1 Figure 4.1) is the defining feature of our era.

But if cross-border trade encourages peace, you may wonder why the two world wars occurred after this evolution began-and if a world war could happen today. Trade alone is not enough to discourage war. Complex interdependence (interdependence in economics, security, energy, and other policy areas), cemented by international inst.i.tutions, is also necessary.Without these binding elements, trade can stop abruptly. Historian Niall Ferguson showed that just before WWI, trade flows actually began to ebb and protectionist policies were rampant. With no forum to dispel growing anxieties, Europe began an unhealthy arms race.3 Increased militarization bred suspicion, insecurity, and hostility around the world, leading to the formation of alliances and blocs. With no United Nations or multilateral forums to diffuse the cycle of fear, it is easy to see how war erupted then, and how, if we don't play our cards right, it might again in the future. Increased militarization bred suspicion, insecurity, and hostility around the world, leading to the formation of alliances and blocs. With no United Nations or multilateral forums to diffuse the cycle of fear, it is easy to see how war erupted then, and how, if we don't play our cards right, it might again in the future.

Figure 4.1 Number of State-Based Armed Conflicts by Type, 1946-2005 Number of State-Based Armed Conflicts by Type, 1946-2005 SOURCE: UCDP/PRIO.

WWI showed us that economic webs need to be strengthened by rules-based international forums that can diffuse suspicions and hostilities before they spin out of control. While we live in a relatively tranquil era by historical standards, we shouldn't get too comfy. There are still many looming threats-some old and some new-that can destabilize the world. That is why stagnation at the World Trade Organization and Kyoto and reforms at the UN and World Bank demand serious attention. Unfortunately, generals and their armies are notorious for their tendency to "fight the last war"-to use past successful strategies and tactics to achieve victory in the present. But today, fighting the last war may be a losing proposition: A twentieth century Micro Domestic security posture cannot completely address twenty-first century Macro Quantum risks.

Old World, Old Approaches The security environment we face today has a vastly different look and feel than that of the postwar period. In many ways, we are better off than during the Cold War. While some egghead theorists bemoan the loss of "certainty" and "predictability" of the bipolar world, no one should wax nostalgically for the days when two nations with the power to destroy our planet pursued antagonistic and shortsighted security agendas. But there are new things to worry about.

For the first time since the Peace of Westphalia, the major source of cross-border security challenges is not other sovereign states, but "virtual states" or "nonstates" like al-Qaeda. These ent.i.ties function in ways similar to landed sovereigns: They have intellige