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The Military/Market Nexus

August 16, 2006


As Tom Barnett and I meet with government, non-government, and commercial groups, we often talk about the importance of the military/market nexus. The military-market nexus includes the relationship between security and commerce, the seam between war and peace, and the link between conflict and the “everything else” that is globalization. According to Tom, “The nexus describes the underlying reality that the warrior culture of the military both supports and is supported by the merchant culture of the business world. Understanding the military-market nexus link is not just good business, it is good national security strategy.” An interesting op-ed piece in the Washington Post about oil dependence highlights the military/market nexus, including the connection between its two authors, Frederick W. Smith (Founder, Chairman, President & CEO of FedEx) and P.X. Kelley (former Commandant of the Marine Corps) [“Are We Ready for the Next Oil Shock?” 11 August 2006]. Smith and Kelley begin their piece by considering a horizontal scenario created by rising oil prices:

Could a mere 4 percent shortfall in daily oil supply propel the price of a barrel to more than $120 in a matter of days? That’s what some oil market experts are saying, and if they’re correct, we face the very real possibility of an oil shock wave that could send our economy reeling. Such a rapid rise in fuel costs would have profound effects that could severely threaten the foundation of America’s economic prosperity.

They continue with their horizontal thinking by noting that the current debate about oil dependency is far too narrow in its scope.

Unfortunately energy debates in this country often suggest a profound misunderstanding of these international economic dynamics. Calls for “energy independence” notwithstanding, oil is a fungible global commodity, which means that events affecting supply or demand anywhere will affect oil consumers everywhere. A country’s exposure to world price shocks is thus a function of the amount of oil it consumes and is not significantly affected by the ratio of domestic to imported petroleum.

Smith and Kelley go on to explain how oil dependency effects the military/market nexus and, more importantly, why strategies to reduce consumption are more important than strategies to protect supplies.

Considering the potentially devastating impact of an oil crisis, the time has come for new voices, especially those of business leaders and retired national security officials, to join the call for meaningful government action to reduce projected U.S. oil consumption. Our respective personal experiences — running a global transportation and logistics company and spearheading the establishment of an independent U.S. Central Command in the Middle East — convince us that America’s extreme dependence on oil is an unacceptable threat to national security and prosperity.

I’m not sure whether it was BP’s shutdown of some of their Alaskan pipelines or the fact that over the coming months, the authors will co-chair an Energy Security Leadership Council that prompted them to write the op-ed piece. I suspect it was the latter. This Council, according to the authors is “a new and intensive effort by business executives and retired military officers to advance a national energy strategy for reducing U.S. oil dependence.” They conclude their article by advancing some principles they believe should guide a national energy policy:

  • The most substantial, rapid and cost-effective gains are almost certain to be achieved by making our transportation system more fuel-efficient. To be sure, the search for increased oil, natural gas and alternative energy supplies merits support, as do strategies for controlling industrial demand. But the transportation sector relies on oil for 97 percent of its energy needs and accounts for 68 percent of total U.S. oil consumption. With the right incentives, America’s engineers and businesses could soon provide better vehicle technologies, a more efficient movement of goods and many other smart solutions. Substantially reducing demand in the transportation sector would help ensure availability of affordable supplies for critical industrial, commercial and consumer needs.
  • Pure market economics will never solve this problem. Markets do not account for the hidden and indirect costs of oil dependence. Businesses focused on the highest return on investment are not always in a position to implement new solutions, many of which depend on technologies and fuels that cannot currently compete with the marginal cost of producing a barrel of oil. Most important of all, the marketplace alone will not act preemptively to mitigate the enormous damage that would be inflicted by a sudden, serious and sustained price increase.
  • Government leadership is absolutely necessary. Many of the most promising solutions on both the demand and supply sides will require decades to mature. Government proposals should align the interests of businesses and individuals with society’s goals; for example, tax credits and similar incentives must allow businesses to recover investments and engage in essential long-range planning, and they must account for the high implicit discount rates that consumers apply to future savings. While recent legislation has pointed us in the right direction, bolder action must be taken.

I believe that much more analysis needs to be conducted in an area they point out in their second bullet, namely, “Markets do not account for the hidden and indirect costs of oil dependence.” This is exactly the kind of horizontal thinking that will help make the country more resilient. I also agree with their third point that leadership is desperately required; but I suspect other points they make in the third bullet will be met with some skepticism.

The recent BP pipeline shutdown demonstrates why. When the president of BP America was interviewed 10 August 2006 by Matt Lauer on the NBC’s Today Show. Lauer noted the enormous profits that the oil companies are making (and how the shutdown is going to force gas prices [hence profits] even higher) and he rhetorically asked why those profits hadn’t been invested in maintaining the pipelines. The BP official skirted that question insisting that investment was being made at the right level, but the method that had been used to reduce corrosion was found to be deficient. Lauer then asked whether the costs of repairs would come out of company profits or passed on to consumers. The BP America sat uncomfortably silent before saying that decision had yet to be made. Giving oil companies more incentives in the current political climate may be unpalatable for many taxpayers. Companies must prove themselves to be good corporate citizens before they can expect taxpaying citizens to be very sympathetic to incentives — even if that may be cutting off their nose to spite their face. Let’s hope the Council stirs some real debate and results in some significant actions being taken to make the country and world more resilient to energy needs.

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