Energy and U.S. Foreign Policy


AMBASSADOR DJEREJIAN: Good afternoon ladies and gentlemen. I'm Ed Djerejian, I'm the founding director of the Baker Institute, and thanks to Isabel Wilson I am a new member of the Texas Philosophical Society. I'm very happy to be here with you.
          My official title is Founding Director of the Baker Institute, but our illustrious honorary chair who you heard this morning, sometimes refers to me as the “Foundering Director” of the Baker Institute, so after my remarks I'll leave that judgment up to you.

I think we've had a terrific program. My excellent staff at the Baker Institute, the Energy Forum, Amy Jaffe and all her colleagues, and Steve Lewis and others you probably haven't seen, are really doing a terrific job in terms of making the Baker Institute's Energy Forum recognized as the best geopolitical energy studies program of any public policy institute in our country. I'm very grateful for their work.

What we're going to do this afternoon – and I'll introduce my other panelists sequentially after I conclude remarks – is to discuss energy and United States Foreign Policy. Steve Young will do "Oil and Terrorism" and then Steve Lewis will do "Competition for Energy Supplies and Growth in Asia," a very key factor.

Before I get started, I really want to recognize Senator Bill Bradley for being with us today. He is a great American and a great basketball star, we miss him in Washington.

Allow me to give you a broad overview of the basic situation in the very troubled Middle East and South Asia, and then make a few remarks connecting it to the energy issues that we've been discussing. After each one of our panelists have spoken, we'll open it up to a discussion with you, which I think will be very useful, to know what's on your mind, and try to answer your questions.

Well, it comes as no surprise to any of you that I've been involved in Middle East issues for many years. I was telling the Senator that our daughter graduated from Yale a couple of years ago and she asked me in one of those rare father-daughter conversations, "Dad, how long have you been involved in Middle Eastern affairs?" I said, "Well, sweetheart, over 32 years." And she paused, and looked at me and said, "You know, Dad, you really haven't done a good job." It is true we haven't done that good a job, but we've had some successes.

Let me do a broad brush survey of the situation. The region as you can see on this map is extremely troubled. Looking at the Levant, which is really Lebanon, Israel, Syria, Palestine and Jordan, you know that the conflicts in and between those countries are still very vivid and ongoing.

Lebanon is in an extremely fragile state. As of today they still have not been able to come to consensus on who the new president of Lebanon should be. That is a very critical issue because if the president of Lebanon is not a consensus candidate who really can bring together the Muslims and the Christians and the Druze and the political factions in that very complex, multi-confessional society, we may see another civil war in Lebanon, which at a time with all of the other problems we have, would be an absolutely destabilizing factor.

The Lebanese situation was exacerbated last summer, you'll remember, by the Israeli-Hezbollah war, which played out mostly in Lebanon. Hezbollah, which is the Shiite militia terrorist group in southern Lebanon, initiated some provocative acts and brought forth a very strong Israeli military reaction, which led to a war that was more protracted than anticipated. It ended badly for both sides. It ended badly for Israel because thousands and thousands of Israelis were displaced from northern Israel. When I was ambassador to Israel, I was often told by our Israeli friends that, “we have to live with terrorism, but we can live with terrorism because it's a lethal threat, it's not an existential threat.” But twhen you think about what happened last year, with all of this population dislocation, it's getting more and more difficult for Israelis to live with this violence.

Sheik Hassan Nasrallah, the very powerful leader of Hezbollah, has made quite a name for himself in the Muslim world because he has been preaching resistance, and not negotiations, with Israel. He told Yasser Arafat when Arafat was going to Camp David, "You're going down the wrong path. Look what we did. We resisted the Israelis in southern Lebanon, they invaded our country in 1982, and in 2000 they had to withdraw and withdraw unilaterally. Resistance is the path, Chairman Arafat, not negotiations. Don't go to Washington, don't go to Camp David. Don't negotiate. The path is the path of resistance."

Now, this oratory has caught quite a bit of fire in the Arab, and in a larger sense, the Muslim world. To the extent that efforts at making peace flag or fail, the advocates of resistance and violence and terrorism have a much better chance of prevailing. So the stakes are very, very high.

In any case, Lebanon is a flashpoint. There have been at least six political assassinations in that country in the last few years, including the very critical one in which the Lebanese prime minister, Rafik Hariri Kariri was assassinated in February 2005. So the situation there is troubled.

Then you look at the Israeli-Palestinian equation right next door, and we have seen elections in the Palestinian territories, and lo and behold, Hamas wins those elections. You talk about the principle of unintended consequences. The Administration has been promoting democracy, but let me leave you with one thought: we as Americans know too well that democracy is not just about elections. Elections are just one instrument of democracy. Democracy is the rule of law, the rights of minorities, the very important concept of the alternation of power. In other words, when you win an election and the votes go against you the next time, you leave, peacefully.

That is not a concept that is ingrained and embedded in the Middle East. You come to power; you hold onto it, by hook or crook. But Hamas' electoral victory was really a setback because it divided the Palestinians. Now you have the president of the Palestinian authority, and you have the Palestinian leader, Mahmud Abbas, in the West Bank, in Ramallah, representing the legitimate government; but at the same time you have the Hamas leadership mostly holed up in Gaza, who represent a very important constituency of the Palestinian people.

So eventually the Palestinians are going to have to reconcile between themselves, especially if current efforts toward Arab-Israeli peacemaking move forward. We are not going to be able to just bring one part of the Palestinian community forward to make peace with Israel. There's going to have to be some internal reconciliation.

Now, the good news on the Israeli-Palestinian front is the Administration has finally, late in its two mandates, engaged itself and brought the parties together in Annapolis as you saw just a few weeks ago. The Secretary of State, Condoleezza Rice, and the President are now leading the effort of the international community to get the Israelis and Palestinians to do two things: one, to improve the arrangements on the ground in terms of security, on the side of the Palestinians. They must get a grip on the security situation so they can stem violence and acts of terrorism, and build up their security apparatus so that they become a viable state that establish the rule of law and order in the Palestinian state. On the part of the Israelis, they really have to dismantle these outlawed settlements, outposts, and freeze settlement activity, and make other confidence-building measures that will show that they are intent on a final settlement.

Those are tough nuts to crack on both sides, but that's the first part of what Annapolis means. The second part of what Annapolis means is, negotiating the final status issues. And when I list them, you'll see how important, how terribly important, they are, but also how difficult they are: Jerusalem, the right of return and a just settlement to Palestinian refugees; the border, where will the Israeli settlements go; security measures; access to water. Now, as daunting as those final status issues sound, years of negotiation have narrowed these issues to a point where the general contours of a final settlement are pretty well known. The difficulty is actually getting there and negotiating the details.

We have a Baker Institute fellow this year, Sari Nusseibeh. He's our Arab fellow. We also have an Israeli who is the Rabin fellow. Nusseibeh comes from one of the oldest Palestinian families in Jerusalem. He's the president of Al-Quds University and he produced a very interesting report that you can find on our website on how to negotiate Jerusalem and the right of return in tandem and that compromises on both can bring the Israelis and the Palestinians together. We have given that study to the State Department; we think that there's something there.

Also at the Baker Institute, I'm chairing an Israeli-Palestinian workshop comprised of Israeli and Palestinian teams that are looking at the territorial and settlements issues. We're doing computational models of the settlements, and how they are categorized by both sides in terms of religious importance, political importance, security, economic, etc. We're going to be giving the negotiators in the early part of next year a consensus, hopefully, a consensus of Israeli-Palestinian analysis of the settlement issue, which is one of the final settlement issues. You can see that we are actively engaged at this Institute on these issues.

The other big unresolved issue is Syria and Israel. Kissinger always said, "There cannot be war, an Arab-Israeli war, without Egypt; there cannot be a comprehensive Arab-Israeli peace without Syria." And there's a lot of truth to that.

Israel occupied the Golan Heights, strategic piece of territory in 1967. The big game there is the exchange of land for peace. There have been many, many hours of negotiation between Israel and Syria. We have been very actively involved as the United States. Secretary of State Baker and I, when I was ambassador to Damascus, helped to bring the parties into direct negotiations and the issues between them have been narrowed a great deal.

He called those negotiations in Damascus “bladder diplomacy,” because when we negotiated for endless hours with the then-former president of Syria, Hafez Al-Assad, who would never, never get out of his chair. I warned Secretary Baker at one point. I said, “They're going to serve you sweet, hot tea and lemonade. Don't drink too much of it, because the call of nature will come, and he's not going to get up.” And he turned to me and he said, "I am the Secretary of State of the most powerful country in the world. If he doesn't get up, I'm not going to get up." That was a real Texas attitude.

Unfortunately, I didn't follow the advice I gave him, and at one meeting that lasted six hours and 45 minutes, I made believe I had to make a telephone call to my embassy. Of course, my purpose was otherwise, and Secretary Baker saw right through it, and while I left the room he told the president of Syria, "You know, my ambassador can't hold his water."

So that was really bladder diplomacy. It was endless, but we did narrow the issues, and actually, we had a U.S.-Syria dialog here at the Baker Institute a couple of years ago. It is an accepted fact that at least 80 percent of the issues land on either the return of the Golan border, the nature of peace and normalized relations between Israel and Syria, security arrangements (with a multinational force on the Golan Heights with an American military contingent if the parties request), and access to water. All of these issues have been discussed in quite some detail.

What is missing is the political courage and a political will of our leaders to bring this home. And it takes a lot of political courage to bring home Arab-Israeli peace. But that is one of the reasons we elect political leaders: to make the hard decisions for peace. And this is what, unfortunately, being candid with you, we have not seen. That political will and that courage to really lean on both sides, not pressure, but to create the diplomatic scenario that only the United States can, to bring the parties together. But this quest for peace can be brought home. If there's any hopeful message I want to leave with you, despite all of the difficulties and the mayhem we see in the Middle East, these issues can be resolved. A lot of work has been done.

Lebanon, if there's progress on these other tracks, Lebanon is easy. There are no territorial issues between Israel and Lebanon. There is Shaaba Farms, which is a myth. I won't bore you with the details on that. But Lebanon would come to a peace agreement in a wink with Israel, if Syria and Israel move forward and the Palestinians also. So there is some hope there.

Now, moving east in this troubled region to Iraq. I don't have to talk too much about Iraq because we all know about Iraq. But Iraq is in a very troubled state, despite the recent successes that we've had with General Petraeus and Ambassador Ryan Crocker. The Baker Institute was one of the organizational groups behind the Iraq Study Group, which Secretary Baker co-chaired with Lee Hamilton and I was a senior advisor, and they addressed the issue in a comprehensive manner.

We were very clear that three things had to happen. One, we had to change the mission of our U.S. combat forces to a very robust combat-embedded train and equip program to reorganize the Iraqi armed forces. One of the biggest mistakes the Administration made was to dismantle the Iraqi Army after the invasion of Iraq. I think that will go down as one of the biggest blunders in American foreign policy history. We did a joint Baker Institute –Council on Foreign Relations report in January 2003, two months before we went to war in Iraq, recommending that they "Do not dismantle the Iraqi armed forces. Do not fully de-Baathisize the civil service, because these are your technocrats. Get rid of all of the goons on the top, who have blood on their hands, who are close to Saddam Hussein. But don't send those soldiers home with guns and no salaries." Which we unfortunately did.

Another recommendation was “Do not go and purge the civil service of all Baathists." When I was ambassador to Syria I worked in another Araba-Baathist party country. It's like Tammany Hall. Most people joined the Bath party because you get a good job, your kids go to good schools and you get certain favors in the society. It's politics; it's largely local politics. But if you base your policy on an ideological outlook, you're going to make some really serious foreign policy blunders. And those were two that we made. And we've been reeling from that ever since in Iraq.

The Sunni insurgency largely came from the former Iraqi soldiers. The Shiites joined the Shiite militias. But a lot of the Sunni insurgency came from the ranks of the Iraqi army and you know, they had the keys to all of the arms depots? They knew where the weapons were.

So ever since that time, we have had to try to make the best of a very bad situation in Iraq. When the Iraq Study Group was actually organized, in our inner councils we felt that we had been brought together two years too late. We had to make our recommendations based on the situation on the ground. One, reorganize the Iraqi armed forces, not as a sectarian military unit, organization but as a truly national army. Train and equip them; get them out to do the work of protecting the Iraqi people. Two, national reconciliation. Governance, which means basic services, electricity, water, picking up the trash, will show the people that there's a government that they can have an allegiance to. Allow them to have ordinary lives. Three, security, obviously. The other aspect of our report that was very important was what we called the new diplomatic offensive. The new diplomatic offensive basically meant that the first thing we should do is create a permanent Iraqi support group with all of the countries around Iraq: Iran, Syria, Turkey, Saudi Arabia, Jordan, and then a larger arc of countries including Egypt and others. So that everything we were trying to do inside of Iraq, establish security, national reconciliation, governance, could be supported by the neighbors.

We advocated in the new diplomatic offensive a very staunch dialog by the United States with Iran. You heard Secretary Baker this morning. Diplomacy is about negotiating peace with your enemies, not with your friends. Talk is not surrender; talk is not appeasement, unless we are totally stupid about it, and we give up all of our cards we have. I don't think we're stupid. But we should open up a strategic dialog with Iran; we should open up a strategic dialog with Syria  too, those are two of the major countries around Iraq.

Now, you may ask, "Well, why in God's name should they help us?" It's not a charitable question; it's a question of their own national interests. Syria is a multi-confessional society of Muslims, Druze, Christians. It used to have a very important Jewish community, as did Iraq. Iran is a multi-confessional society. Only 52 percent of Iran's population is Persian. Almost one quarter, 24 percent of Iran's population are Azeri Turks. Nine percent are Kurds. There is an Arab population; et cetera. That is to say that if Iraq's multi-confessional society splits asunder, and you have an independent Kurdish state in the north, and a Shiite entity in the south, and something mixed in the middle with some sort of Sunni entity in the middle, it would be very messy.

That could start destabilization in the region as a whole. Because the Kurds would be encouraged to establish their own state, which would pose a very imminent threat to Turkey's national security and territorial integrity; to Syria's, which also has a large Kurdish population; and to Iran. So the idea of partitioning Iraq is a worst-case scenario. Senator Biden and Les Gelb, proposed the Biden-Gelb plan as a confederal system. They don't use the word, confederal. First it was, partition; then they went to federation. But that's what may happen if things really go bad. That would be a very destabilizing situation in the whole Middle East, and in a very important part of the Middle East and in the Gulf as I mentioned.

In terms of Iraq, I do think we have a chance. All of the options are not good; they're bad options. But I think we do still have a chance of stabilizing the country, and prevent it from going asunder. But we are going to have to really be there for a while longer, and don't ask me what that means, but we had a group of Sunni tribal chiefs from Al-Anbar province visit me at the Baker Institute. That province is the Sunni province in the west of Iraq, and they basically told me, "Don't leave before you leave behind an Iraqi armed force that is not purely sectarian and full of Shiites; once you leave, they'll come for us. We'll go for them, and there will be a major civil war in this country."

I think we have to leave Iraq with a semblance of some chance that the country will hang together, and that's the daunting challenge we have. And whoever becomes President in January 2009 is going to be facing this problem. And then you'll see the difference between the campaign rhetoric and when they're faced with the facts on the ground, and what decisions they're going to make.

Going further east in this wonderful resort area is Iran. Now, it's amazing Americans have learned to pronounce the name of the president of Iran, Ahmadinejad. The guy's really has a very successful PR campaign. But he doesn't represent the real power in Iran. He makes a lot of noise. I'm not saying he's unimportant. But the real power is in the hands of the Ayatollahs, the clerics, and especially Ayatollah Khameini.

Iran is a major regional power in the Middle East and in the Gulf. It cannot be ignored. It has a very rich history, going back thousands of years. The Iranians don't see themselves as bit players in the Middle East. They want to play their role. Now, defining that role is the challenge. They have been very bad actors. They have opposed Arab-Israeli peace. They have supported Hezbollah and Hamas and terrorist groups. They are in staunch opposition to our policies; they have been aiding and abetting the Shiite militia in Iraq.

But on the other hand, we've also had moments of real collaboration with them on Afghanistan, right after 9/11 when we went, rightfully so, militarily into Afghanistan, the Iranians collaborated with us very closely. The Taliban was also their enemy, and so there are instances of cooperation and collaboration with the Iranians.

This latest national intelligence estimate has really caused quite a bit of sensation about the nuclear issues. The important thing is that the Iranians did have a covert nuclear weapons program. They stopped it in 2003. They stopped it when we invaded Iraq. They stopped it because there were stricter international sanctions being imposed on them, and they also stopped it because they just felt that they could not predict what we were going to be doing next. But the good news is that they stopped it in 2003. The bad news is that they can regenerate that secret program at any time of their choosing.

But there's a moment of opportunity now. The program has stopped. We should engage with them, just like Secretary Baker said this morning, like Ronald Reagan did with the Soviet Union. You can both contain and engage a country at the same time. My own view is that the only way we're going to have a real chance of a settlement with Iran on the nuclear issue, is if we engage in a strategic dialog with them. If we take that off the table, our policy is regime change. No country is going to negotiate with us on a critical issue like the nuclear issue if our policy is regime change. Why in God's name should anyone negotiate with us if your policy, either stated or covert, is regime change? It doesn't make sense. Just doesn't make sense. Again, you negotiate peace with your enemies, not with your friends.

So going further east, is the incredibly important area of South Asia and Pakistan, Kashmir and India, and Afghanistan. This is a little arc of crisis; India and Pakistan are nuclear weapon states. They have a very serious dispute in Kashmir. Both sides claim it as its territory. And they have fought in three wars already with one another. And that is a serious crisis issue. I hope whoever becomes president in January 2009 will not neglect South Asia as almost every administration has, unless there's a crisis that erupts there. And then of course Afghanistan is slipping backwards. The Taliban are back, and we have to really re-engage there.

Now, what does this all have to do with oil? There's the political risk factor in the price of oil. Amy Jaffe and I talked about this. I cannot put a dollar sign on how much more dollars a barrel of oil costs because of what I just explained is happening in the region. But this is the world's largest area producing oil and gas. Forty percent of the world's oil comes through that Gulf. The Arabs call it the Arab Gulf; the Persians call it the Persian Gulf. And it goes through the Straits of Hormuz. Saudi Arabia is the largest single producer of excess capacity in the world.

The geopolitics of this region affect energy security and the price of energy in a major way. Any major disruption will send the price of oil higher than we've even seen recently. There could also be supply disruptions, which can cause havoc. Steve will be talking about Asia's increasing energy demands as we speak, especially China and India.

So there is a geopolitical price factored into the price of energy. Any prudent policy by our country and our Presidents should have this as one of the highest priorities, not just for oil, but for peace and stability, to really try to limit the forces of extremism in the Muslim world, that exploit all these issues for their own ends, but also to help stabilize the energy equation. Thank you very much.

It's now my pleasure to introduce Steve Young, who's a professor at the College of Criminal Justice in Sam Houston. I know Steve; he is an expert on counter-terrorism. He's served in the U.S. Department of State's counter-terrorism division, and he's been posted in the region, in Europe, the Middle East and South Asia. Join me in welcoming Steve Young to the podium.

• • •

          Good afternoon. I have a little film clip I want to play that might wake you up a bit, if we can work this thing right.

Sometimes the bad guys don't win. That was a homemade mortar out of Iraq. In case you don't know, you can download these things; they're all over the Internet. Terrorist websites are ubiquitous all over the Internet. In this particular clip, the guy was putting together a homemade mortar and it blew up on him. So that's one for us.

This afternoon I'd like to spend a few minutes talking about the issues of oil and terror. When considering this subject or subjects, one can think of these topics in several different aspects depending on your perspective. Osama bin Laden views oil as a commodity, believing that the United States and the West have long stolen oil wells. According to bin Laden, and I quote, "You steal our wealth and oil at paltry prices, because of your international influence and military threats. This theft is indeed the biggest theft ever witnessed by mankind in the history of the world.

Oil can also be a physical, and by extension, economic, target. Oil pipelines, for example, are vulnerable to sabotage by terrorists, thus exposing citizens to the psychological stress of perceived vulnerability, exacerbating an all-too-common supply situation these days.

          According to the FBI, plans exist for Al Qaeda to continue attacks against the global petroleum sector. Al Qaeda plans to weaken the petroleum industry by conducting additional sea-based attacks against large oil tankers. Such attacks may be part of more extensive operations against port facilities and other energy-related targets, including oil facilities and nuclear power plants.

Currently, in Iraq we've seen many instances of sabotage of Iraq's oil infrastructure, particularly up around Kirkut, where the northern oil fields are located. The potential for these attacks are also true anywhere in the United States you find oil pipelines. Prudhoe Bay, for example, extremely exposed pipeline, and also he numerous oil and gas pipelines that stretch like spider webs originating here in Houston, and also in the Midland-Odessa area.

A couple of other examples of oil being a target: February 2006 an attack through suicide bombers in Saudi Arabia on the largest oil refinery there, before they were stopped by Saudi security officers. And in October 2002, the French-flagged oil tanker Lindbergh was attacked by an explosives-laden dinghy in a manner very similar to the October 2000 attack on the U.S.S. Cole. The result was $45 million damage to the ship, and 90,000 barrels of oil leaking into the Gulf of Aden.

So besides being an economic target, we've come to realize that oil is a finite and, currently, a necessary resource. I think that was brought home very, very well in this morning's programs. This has resulted in high oil prices per barrel, reflected not only in high gas prices but in all phases of the U.S. consumer-based economy. For example, increased oil prices will impact the average consumer's budget in terms of the family grocery bill, as transportation costs increase. And a list of petroleum-based products such as plastics is extremely long, and increased oil prices are going to affect those also.

Therefore, as a country we are highly dependent on oil-producing nations to provide the energy and resources for our basic economic existence. If it were not for oil production and importation, our economy would simply grind to a halt. So this afternoon I plan to address another aspect of oil and terror, which I call enablers of terror based on an oil economy.

But first, let me tell you about the primary oil producers and consumers. According to 2006 data, of course Saudi Arabia is the largest oil producer in the world, at approximately 10 million barrels a day. But what's also interesting about Saudi Arabia is that it also constitutes 87 percent of its export income. Russia produces about nine million barrels a day, and Iran, four million barrels a day; United States, eight million barrels a day. By comparison, U.S. consumes approximately 20 million barrels a day. And we all heard about how China is going to start increasing its consumption. It currently only consumes seven million barrels a day and this is expected to increase fourfold by 2030. Japan, also, by comparison, consumption is at five million barrels a day, and India, at two and a half million barrels a day.

So where do we get our oil? Primarily, thank goodness, from Canada and then from Saudi Arabia, Mexico, then Nigeria and Venezuela. So from these data, as the U.S. continues to maintain its current reliance on oil, in order to maintain our current standard of living, we must import more than 12 million barrels a day.

Let's do the math. Fortunately, that's spread out amongst a number of countries, none more than about 10 percent of our current imports. Saudi Arabia almost totally relies on oil for its export income, and the U.S. imports a substantial portion of its oil from relatively unstable countries such as Saudi Arabia, Venezuela and Nigeria.

Because Saudi Arabia is the leading oil producer, and we're the world's foremost consumer, let's look at our relationship with Saudi Arabia for a few minutes. Since 1945, a succession of U.S. presidents has pledged to defend the royal Saudi family, so long as they kept the oil flowing to U.S. markets. Evidence of the effects of a shortage in the oil supply came first in 1973, and I know we can all relate to that shortage, when OPEC cut supply in response to our support of Israel during the Yom Kippur War.

The point is that, even as early as 1973, when oil was less than $4 a barrel, the West was shown to be dependent and vulnerable to reliable oil flow from the Middle East and OPEC. I myself in 1973 was a young Marine pilot, and a lot of our training missions were curtailed or eliminated, simply because of this oil glut, or oil curtailment by OPEC.

Regarding efforts to keep the oil flowing, the first Gulf War was perceived by many in the Middle East and elsewhere that the war was an effort by the United States to maintain a sufficient oil flow from the Middle East, not so much as an effort to free Kuwait. The same could be said for the current incursion into Iraq. Nevertheless, during the first Gulf War, we had over a half a million U.S. troops, and almost as many in the coalition, putting approximately one million troops into the Kingdom of Saudi Arabia. Now this is a country where there are no tourists; you can't get a tourist visa to go to Saudi Arabia, and only Muslims are allowed to visit Mecca and Medina. The number of infidel troops in the Kingdom was unacceptable to religious conservatives such as Osama bin Laden.

Ironically, it was about this time that bin Laden had returned from Africa. If you recall your history, the Afghan War lasted from '79 to '89, and the first Gulf War started shortly thereafter. Bin Laden had at that time at his disposal a number of fighters, very battled-hardened mujahideen that he could have called on to help drive Saddam Hussein out of Kuwait. And in fact, he did make this offer to the King of Saudi Arabia. The offer was obviously rejected in favor of U.S. troops, and this simply outraged bin Laden, and was the cause for some of his animosity towards the West today.

Looking at the top five oil-producing countries, we find that number one is Saudi Arabia and Iran is number four. We also take a look at those countries, and find that economic and political diversity is low, job creation is low, and the wealth gap between rich and poor is great. In both these countries, the wealth created by the oil windfall does not trickle down, and there is little evidence of a thriving middle class.

So how then does that oil-related income relate to terrorism? Well, both of these states have become fertile recruiting grounds. Moreover, the premise here is that oil-based or single-source economies can become terror enablers. First, take the case of Saudi Arabia. In the Muslim world, the tradition is to provide money for Islamic charities in the form of tithing, known as Zalcat. This amounts to approximately two and a half percent of a family's income, which in Saudi Arabia can be substantial.

Of course, there are many Islamic charities in the world doing very good work. But there are some that have been listed by the United States Office of Foreign Assets Control as having ties to or providing support for terrorist organizations. Money is simply skimmed off from a charity's assets and provided to various terrorist organizations, and that particular chapter's host country. Prominent among those charities with headquarters in Saudi Arabia is the Al-Haramain Foundation. Throughout the world, Al-Haramain was known as the builder of mosques and schools, primarily to promote though, the Saudi form of Islam, called Wahhabiism. It is also a worldwide charity whose assets in the United State were frozen in 2004 as a result of investigations of its connections to Al Qaeda. Many other Al-Haramain chapters in various countries from the Balkans to the Far East, have been shut down.

Another example is the International Islamic Relief Organization. This organization is headed by Saudi government officials and Jeddah, and their function is to build mosques and schools, or madrassas. Unfortunately, a lot of these madrassas espouse anti-Western theology. The United States and the United Nations in 2006 designated the Philippines and the Indonesian branches of the Islamic Relief Organization as financiers of terrorism. The Philippine branch also was once headed by Mohammed Jamal Khalifa, who is bin Laden's brother-in-law. Numerous reports have stated that individual Saudi citizens, through Zachat contributions, donated through charities helped fund Sunni insurgents in the current war in Iraq. This is not only used to fight against U.S. troops but also to provide a counterweight to the support that the Iranians are providing to the Shia community in Iraq.

So as the madrassas are funded, either individually by Saudi donors, or by Islamic charities, they are inevitably staffed by Imams preaching Wahhabiism. So what about Wahhabiism makes it different than other forms of Islam? Well, it's named after its founder, Mohammed Abdul Wahab, an Islamic reformer who lived in the 1700s. So it's a very, very old sect or set of beliefs. At that time, a local tribal chieftain, Mohammed Ibn Saud converted to Wahab's strict brand of Islam creating a political religious entity that was passed down through Sauod's bloodline. The founding of the modern Kingdom of Saudi Arabia was accomplished in 1932, and at that time, Wahhabiism was brought into the forefront as being the official, strict brand of Islam for the country.

So what is it about Wahhabiism that makes it different? Wahhabiism describes non-Muslims and Shias as infidels. Also, the modern concept of jihad as religious war and that paradise is promised to fallen jihadists. This strict brand of Sunni Islam has also been embraced by the Taliban in Afghanistan as being very influential in the development of their strict ideology.

Especially in Pakistan, these madrassas have been fertile recruiting grounds for any number of terrorist organizations. Therefore, in Saudi Arabia we have a country dependent on its oil for national export income also being the world's largest oil producer, involved in supporting the spread of a very strict and relatively intolerant form of Islam.

Now, let's take a look at Iran just for a few minutes. Iran, as the Ambassador has already described, predominantly a Shia nation, is in contrast to Saudi Arabia, which is predominantly of the Sunni sect. Also, it’s predominantly Persian, not Arab, with a very long cultural history and a very proud people, exporters of fine carpets and pistachio nuts. It's also the world's second-largest OPEC producer. Although Iran's economy is more diversified than Saudi Arabia's, without oil assets and the current revenue windfall, the regime would likely have been destabilized years ago. Iran has also been on the State Department's list of state sponsors of terror since 1984.

So where does this oil money go, in relation to terror? Iran has largely been responsible for providing arms and weapons in roadside bombing technology; IEDs, we've seen over the last three years, have increased on lethality and killing power, primarily through the development of technology provided by Iran. Iran has been involved in training insurgents and sending them over to Iraq to fight against the Americans. They also have political party representation in the Iraqi parliament. They are strong supporters of two parliamentary majority parties in Iraq right now.

They are also, famously or infamously, supporting terror all over the world in the form of founding and the constant funding of Hezbollah, as the Ambassador has referred to earlier. It was founded in 1982 by the Iranian Revolutionary Guard Corps in response to the Israeli invasion of Lebanon, in order to eliminate the Palestinian Liberation Organization. In the 1980s, Hezbollah was responsible for some of the deadliest attacks against the West and the United States, for example, the 1983 suicide truck bombing that killed 241 Marines and 58 paratroopers of the French in Beirut. The 1985 hijacking of TWA 847; I remember vividly seeing on the television the Hezbollah terrorist poking his head out of the window of TWA 847 with the pistol up against the temple of the captain of the aircraft. I believe his name is Testrake and he lives in Missouri still today.

The 1992 bombing of the Israeli embassy in Buenos Aires, and also the 1993 bombing of the Israeli Cultural Center in Buenos Aires are just some other examples of Hezbollah attacks. Also the consistent rocket attacks on the northern border from Israel into Lebanon, over the years, has just created havoc in northern Israel and the July 2006 border raid that captured two Israeli soldiers resulted in the latest 30-day war between Israel and Hezbollah. Sophistical arms were used by Hezbollah for the first time. And also for the first time, an Israeli gunboat was sunk by Hezbollah arms, more than likely provided by Iran. More recently, Iran has begun providing financial support to Hamas. Now presently controlling the political landscape in the Gaza Strip, and responsible for numerous daily rocket attacks into Israel, the situation with Iran's nuclear ambitions are already well documented and I'm not going to go into those today.

In Iran therefore we have predominantly a Shia country, with the potential for acquiring nuclear weapons, providing material and financial support to two of the Middle East's more prominent terror organizations, Hamas and Hezbollah, both of which are dedicated to Israel's destruction. The question then is, how supportive of this mischief would Iran be capable of, without its oil income? So for comparison purposes, let's take a quick look at some Muslim countries that are also top oil producers and see what they do with their oil money.

Although oil may dominate the economies of the UAE and Dubai, they are not exporters of terror. Dubai is home to the world's only seven-star hotel, and it is a regional service and merchandising business center. Take Libya for another example, they just removed from the U.S. list of state sponsors of terror in 2006, following payment of reparations to families of the Pan Am 103 bombing, the Lockerbie incident, you might know that one. After extensive negotiations, now even Libya is opening itself up to U.S. investments in its large oil industry. It has renounced its nuclear ambitions and is trying to rebuild its infrastructure via its oil money.

You take a look at some other Middle Eastern countries that don't have an oil-based economy, like Lebanon. This is an unfortunate situation. It's a country caught between Syria and Israel that has no oil; and was once known as the Paris of the Middle East, with outdoor cafés, modern shopping and a very diverse culture. It's unfortunate that this country is host also to Hezbollah, and up until a couple of years ago, 40,000 Syrian troops.

Jordan has a free trade agreement with the United States, and began de-regulating its economy and upgrading its education system in 1989, after Arab states cut its oil subsidies. Egypt's economy is based on agriculture, textiles, tourism. Being only one of two Arab states to sign a peace treaty with Israel, it remains a very strong political force in the area. Bahrain has allowed women to run for political office, it's working on labor reforms, and has also signed a trade agreement with the United States. Turkey recently elected an Islamist government but it still adheres to its relatively secular policies.

The key therefore in these last few countries is that these economies could not rely on oil. Whether it's tourism and manufacturing, and agriculture or whatever, these economies are diversified. We heard talk this morning about diversification of oil supply. Well, the same thing applies to your economy. Trade agreements with the U.S. have stimulated their economies, providing for a strong middle class, a broadened education structure and other reforms that permit a stable society, still within the context of Islam.

So in conclusion, how do we approach the problem of radical Islam and its use of petrodollars? Well, one way is obviously by attacking the Islamic charities. The Office of Foreign Assets or is already accomplishing that by freezing assets. This is occurring all over the world. But as the Ambassador and other people have already mentioned, diplomatic, political and economic pressure is a necessary tool to encourage Saudi Arabia, Iran and other states to proceed with democratic and economic reforms.

What I'm talking about here is really a multipronged counter-terrorism strategy. We cannot win the global war on terror with guns alone. What's needed is an aggressive attack against the root causes of radical Islam. For example, the development of more open political systems, greater economic opportunities, and encouragement of Muslim reform figures that would appeal to a broad section of the Muslim populace.

Now, I realize I covered a lot of territory in this very short time. I would like to thank the Philosophical Society of Texas and the Baker Institute for allowing me to make these points, and I'd be pleased to answer questions during the panel session. Thank you.

AMBASSADOR DJEREJIAN: It's now my pleasure to introduce Steve Lewis. Dr. Lewis is the Baker Institute's Fellow in Asian Studies, and Professor of the Practice of Humanities and Director of the Asian Studies Program at Rice University itself. Steve has been with us at the Baker Institute for many years, and he and some other faculty members here at Rice initiated his unique program on studying Chinese transnational culture, not only the mainland but in Taiwan and Hong Kong and Singapore and overseas Chinese communities. He is analyzing the emerging middle class in China through their consumer tastes and how they're going to impact on the democratization and the market capital development of China. So join me in welcoming Dr. Lewis.

• • •

          Thank you Ambassador and thank you to the Philosophical Society of Texas for this opportunity to come and meet with you, and to introduce you to Rice University and more specifically some of our research that we're doing here at the Baker Institute on energy policy, and as the Ambassador's mentioned, its ties to studies of the growing middle class in China and the Chinese diaspora and community around the world.

Part of my research is focused on cultural aspects in the way that Chinese media and Chinese films and literatures are circulating around the world, are becoming influential. China wants to become a cultural power in some way through its film industry and all of these. The other area that I look at, and drawing upon the work of my colleagues here at the Baker Institute, is looking at energy policy, and looking at Chinese energy companies in particular.

I thought I would tie in with what the Ambassador and Steve Young have been talking about by introducing a bit more of the research myself and my other colleagues here at the Baker Institute are working on; show you a little bit more about how China and the rest of Asia are playing more of a role in world energy markets. So I'll introduce some of the research that they have done, but also I'll come back to talk about some of the unique things that we are doing here, that look more at the role of these Chinese companies, as they're going overseas.

Let me ask a question that everybody is talking about now, “Is China becoming an energy rival to the United States?” I'm going to talk a little bit about China and India, because they're very much related as Asian powers in the sense that both of them are the future. The difference however, and that's why I'm going to focus mainly on China, is that India's role is largely unseen at this point. It still has a lot more to grow, in comparison with China, and it's also true that we have a lot more public visibility of the Chinese energy companies. I don't wish to ignore India but really just to point out that China is a little bit farther ahead.

To answer this question of China becoming an energy rival of the United States, let me show you a little bit of economic analysis and some nice figures which I think show the structure of growth and increased demand for all of these fossil fuels from Asia, and then also what role the Chinese government and the national oil companies play in this as they go about trying to obtain these stable, secure supplies. I'll talk about some of the potential areas of conflict and cooperation, because the short answer I can give you right now is that, there are some key issues where China is a competitor; it is a rival.

Because they also are, in some areas in China, an advanced industrial society to some degree, who is dependent upon fossil fuels from other countries, they are also very much open to the global economy, much as we are. There is actually a lot of potential for cooperation too. I don't want to walk away with the impression that I'm saying that China is some type of enemy when it comes to energy issues.

What do most Americans and Chinese think about each other? Next week there will be a new poll released in Washington, D.C. done by Zogby and the Committee of One Hundred, of American and Chinese survey research groups asking the question: "What do you think of the United States as a rival?" "Do you think of China as a rival?" Most Americans and most Chinese do think of each other as being rivals. And one of the areas they think about it is energy. So this is clearly something on the minds of Americans and Chinese and we have to take this very seriously.

What I'd like to show you here is projections for Asian countries and the United States for demand, from 1985 all the way over to 2025. We can see that the United States is at the top there, followed b China, India, Japan and South Korea. What it shows as we move forward in the future, we can see just what a very large role that China, India, Japan and South Korea are going to play in comparison with the United States. On average, over this period, China will be growing about 4 percent per year in increased demand; the United States about 1.8 percent, as with most other advanced industrial societies. If we look at what's driving this, it’s just the economies. Look at world GDP, and the regional shares in that. Who is producing what in the different parts of the world, starting off in 1975 and moving all the way across to 2030, we look at the red bars as being China, India, the rest of developing Asia. Then that big blue bar across the middle there, that shrinking part is the OECD countries, all the advanced industrial societies. And so what it really tells us is where manufacturing is going. That's why, of course, all of our clothes and our toys and everything is coming from China. This is showing the projections out through 2030.

You can see where the growth is going to be happening in Asia in particular. What's unique about China in contrast with some of the other developing countries in the past is that so much of it is invested in industry. Look industry from 1970 to 2004; it’s the very biggest part of their economic growth, their GDP. So you look at China, that red line at the top there, and you can see that over half of GDP comes from industry.

India you can see is growing, from 20 percent to about 30 percent by just 2004. But the OECD countries, following the purple line, show you what happens as countries begin to develop; more and more they move into services, and they move into these other industries.

But China's development path and also India's really is showing that industry is going to be the largest part of economic growth. Well, for industry you're going to need a lot of power, obviously. So if we look at the shares of China and India in the global coal, oil and power capacity growth, from over the next 25 years or so, China and India are going to represent much of the increased demand for coal; you can see about 80 percent in comparison to all these countries. Oil demand is still very significant. And power generation capacity as well; we will need more power and it's mainly going to be, again, for industry. Where does China get its fuel? The brown bars represent coal, and the very top one there is actually hydroelectric. But we're looking at 2004, 2015 and 2030.

And what this really shows us is that China is greatly increasing some of its renewable sources of energy, like hydro for example. And you can see even in 2030, the far right bar, it's a significant part. You may have heard about the Three Gorges Dam Project, this enormous dam project. Well, there are thousands and thousands of smaller dams spread throughout China's countryside; it's a very mountainous country. They're able to add a lot of these. So China is adding an awful lot there, but it's still going to require a lot more coal.

It's very much like the United States. Actually, about 70 percent of the fuel used in China, much like the United States, is coal. And they have huge coal supplies, just like we do, spread throughout the country. If we look at investment in the power sector up through the next 25 years comparing on the far left we have the other Asian countries and we have the European Union, the United States, China, India, other so-called transition economies, and Latin America. And the red sections represent the increase for demand, for power sector over the next 25 years. And those are in billions of dollars.

And what that says is that China is probably going to need about $3 trillion to develop all of that, which suggests that it's not just going to need to develop more coal but also need the technology. So if you're wondering why your General Electric stock is still staying fairly high, it's because they're selling all of those turbines in China, and everybody is moving to China to sell their technology.

It also represents the fact that China will be out there competing for investment dollars as well. That's going to mean major changes for individual investors and also institutional investors when they start looking at power in China; by the way I don't have it up here as much but Russia and the rest of East Asia will require them as well. There's going to be a lot more competition, to meet this demand for trillions of dollars of power capacity.

This is a nice chart, I think, which shows the United States and China in comparison on gasoline; what are we using our fuel for? The United States, the top graph, shows you from 1980 to 2005, millions of barrels per day. The United States has moved from just under 8 million in 1980 to currently more than 12 million barrels a day. Gasoline in China is the bottom graph there, and you can see that although it's much lower, it's rising very rapidly.

This shows us that one of the main drivers of that increased demand for oil is going to be cars. This actually shows vehicle ownership in 2004; the left side shows vehicles per 1,000 people and the bottom is GDP per capita. You can see the United States and Japan, off in the far upper right corner, the GDP per capita is around $40,000, and we have 800 or 900 cars per 1,000 people. If you look at China, down there in the lower left hand corner, you can see their GDP per capita is around $2,000, and ownership is about 20 cars per 1,000; much, much, much lower.

What this graph doesn't show you, however, and this is why all of the automakers are in China, is that there are parts of China which are actually way ahead. Beijing is 133 cars per 1,000; which explains why there are 4 million cars on the streets of Beijing. It’s the same for Shanghai and some of these large cities. And you say, "Well, that's just two cities, two or three cities out of a population of 1.3 billion people, that doesn't sound like very much.” But consider that Shanghai is 20 million people; Beijing is about 15 million people. That is the same population as a lot of countries, like Korea, Thailand, even Canada for that matter. It’s very hard to include in these economic analyses, because it is just so large and parts of it are significant players.

So where are they getting this oil to feed all the demand for cars? About 7 million barrels a day is what the Chinese economy currently needs and they get about half of that from domestic production, and half of it comes from overseas. The domestic production comes from three state-owned oil companies. China is a little bit like Russia, but not like most developing countries in the sense that it has three separate national oil companies, and they actually compete with each other. CNPC, or PetroChina, as many people know it here, was the one that was all in upstream, producing the oil. Then Sinopec, the second largest one, was the one that was all in downstream. And then CNOOC, or "C-Noc," which we do know here, mainly because they're the ones who tried to buy Unocal in 2005, they are the ones who just do offshore.

But in 1998, the Chinese central government decided that the best way to manage China's economy was to force the two largest companies to switch; they made them vertically integrated companies. They said, “All right, you take this oilfield, you take this refinery, and we're going to switch you around, and try and maintain control. That created two very large oil giants, CNPC-Sinopec and CNOOC. In this graph you can see that CNPC, from 2000 to 2005, produced about 2.2 million barrels of oil per day, Sinopec is a good bit smaller, only 783,000, CNOOC, the one that we know most in the United States, only about half a million barrels per day, from within China. In 2000 and 2005 they seem to be doing well; they're producing more, they've increased slightly, but the key point is that they're not keeping up with demand. That's why they have to import more and more.

Let me show you very quickly why Chinese policy makers and companies are so focused on going overseas, and in particular how they're doing it. You have to look at the individual companies, the different parts of these big oil giants. CNPC by the way has about 1.7 million employees. They're producing less than, Texaco and Exxon which have 30,000 to 40,000 employees. Sinopec has about 800,000 employees and CNOOC, that little one that tried to buy Unocal, only has about 40,000 employees. So they're more like an IOC, an independent oil company.

Historically these Chinese oil companies grew by developing very large fields. If you look at the top one there, Daqing, which most people in China know as the symbol of China's success; they always talk about it in agriculture studies, this commune call Da Jai, in industry study, Daqing. So it is China's most successful socialist enterprise. Daqing in 1998 produced 1.1 million barrels. In 2005 about 889,000. Liuhua is the second-largest one there, which represents about 20 percent of China's production, Daqing about 60 percent of domestic production; they've both fallen off dramatically. There are all these smaller fields, which are mainly in Western China, and out in the desert regions, and some of the more exploratory areas. They've been increasing, but they're also very small and relatively insignificant.

The same thing is true for Sinopec, the second largest company. They inherited the second-largest oil field, Shengli, which is fairly close to Beijing, and they've also had a fall-off. What this tells us is that most of the domestic production in China is concentrated in a few very large oil fields, that are decreasing. They've passed their capacity and they're shrinking. So it's requiring a lot more investment.

By the way, the heads of these individual oil fields in China have a ranking within the Chinese Communist Party, at the ministerial level within the government and as a party ranking, even higher in some cases.

So what do you do? Well, you still have to bring the oil in; you still have to refine it and serve your customers, which is largely the government. You also have experts who are specializing in technology, and drilling and exploration. What do you do? You send them overseas. So what's happened over the last 10 or 15 years is that the individual parts of these large oil companies who have a lot of autonomy have been going overseas. They've gone to Africa, Venezuela, and Peru. I just read in the newspaper today, they're going to Costa Rica. The individual oil fields are directing them to go overseas. And the central and local governments in very recent years have found ways to support that. China's so-called energy diplomacy over the last four or five years has been remarkably successful.

State government officials, usually in the Ministry of Foreign Affairs, support the Chinese national oil companies when they're going to Sudan or Nigeria or Angola, and offer them, special credits, special relationships; they work out package deals. The Chinese Ministry of Foreign Affairs has become much more, I would say, experienced and cohesive in working with the national oil companies over just the last three or four years.

Part of the goal of course is to create a more diverse supply because of the 3 million barrels a day that China is importing. About 40 percent of it comes from the Middle East, like the rest of Asia, Japan and Korea and these other countries, and that worries them because that means they're not only dependent upon the relationships in the Middle East that we've been talking about, but it means they are dependent upon the United States Navy for protection of the sea lanes. They worry most about a potential conflict over Taiwan, between the United States and China, and how that would disrupt the fuel supplies. The rest of East Asia is worried about that as well.

There are conflicting goals within the Chinese policy-making establishment. So the NOCs, the national oil companies, they're viewed as being instruments of foreign policy in China. The central government says, "Well, look. They're very successful, they're very large, and we need them anyway. Let's support them and use them for our foreign policy goals, our security goals." That said, because they are so incredibly resource-rich and oil in particular is something which is very much a cash revenue generator for the Chinese government, they're viewed as cash cows.

Our research is showing that as China begins to modernize, and as it's beginning to, it’s closing old manufacturing enterprises. China's northeast in particular is one of those areas. That also happens to be where these large oil fields are, and they are also decreasing in production. What do you do, if you're a local government in that area and you're responsible for paying for all of these people who've been laid off? You've got to have some new source of revenue.

Well, China's problem is that unlike most countries, there are no royalties that go to local government. But local government is responsible for all of the costs of privatization and globalization. They have to pay for laid-off workers; they have to support them in some way. So there's a conflict between local government, national oil companies and central government.

The other big issue which has not been talked about, there really needs to be a lot more discussion of this publicly, is who is going to pay for the environmental cleanup from all of these very, very dirty, Chinese oil companies and potential disasters? You may have heard about a benzene leak in a city in northeast China, along one of the rivers that flows towards the border with Russia, this last year. They had to shut down the water supply for a city about the size of Houston and bringing in water. It was all caused by a CNPC chemical factory upriver. It was interesting; there was no public discussion of this in China, about who was going to pay for this. In the end, it probably was the oil company that paid, but there was no public discussion because these national oil companies don't want to have any public discussion.

The central government is trying to force them now to buy environmental protection insurance to cover up the cost of potential disasters like this, but they are resisting. Now that's something that actually needs to be discussed. Why does the government think that these companies can pay for it? Well, actually CNPC on the books is the wealthiest company in the world. You may have heard that they went public on the Shanghai stock exchange last month. And according to that valuation, the total for CNPC is over $1 trillion. You would imagine that if there is another benzene leak in some other part of China, a company with $1 trillion dollars in so-called assets can afford to pay for it. It's going to be an issue, clearly, in the future.

Let me just finish by talking about some of the potential areas of competition and conflict between the United States and China. Clearly, there's going to be some conflict over specific oil and gas supplies. As the United States and China both try to diversify our energy supplies, there is potential for conflicts in places like Central Asia and Africa. There will also be conflict as it relates to regional security issues. Clearly the United States and China don't agree on relations with Russia, or in central Asia, definitely not in the Middle East.

I would also argue that the other real impact of China's national oil companies going overseas relates to what they have been taking from the Chinese investment banks and the export-import bank and the Chinese government. Coming up with these investment packets will not only help China's energy supply, but also builds really strong relations with those countries. As part of that, China is offering loans to governments in Africa that are much better terms than the World Bank can offer and a lot of the development banks and other governments can offer. We know there's just not as much transparency involved there.

The national oil companies play a role in that too, and it's also true that the Chinese national oil companies, even though they are somewhat owned by the public, and even by foreign investors to some degree, there's very little transparency. The contracts that they have in Sudan and these other countries, it's just not clear what is actually going on; what they're doing. It's a step backwards for corporate responsibility to have these Chinese national oil companies overseas playing such a very large role.

That said there are areas for potential cooperation and coordination. In the last few years, with the strategic economic dialogs, for example, between the United States and China and other countries, we see a lot more integration of energy policy. For example, next week in Beijing Secretary Paulson will be meeting with Chinese officials. What's happened over the last few years is that energy is being put on the table with trade, military issues, security issues and with counter-terrorism issues. Because they're all being wrapped together, you've actually seen some movement forward on North Korea. The question is, will this model translate over to Iran or other Asian countries in central Asia?

It's also true that China has been joining more and more international organizations so they can start sharing data. Just this year, the International Energy Agency hosted a conference in Beijing with over 180 statisticians from different parts of China to try and come up with a way to get them to integrate just their data, so they can understand what's going on within China's localities. Once you start exchanging the data, you can start doing analysis and you can start questioning whether we're using the same models and projections and growth. So that's very encouraging.

Next will be to try and bring India into that as well. I would also like to say that one area that I think there's a lot of potential for cooperation and coordination, we just haven't seen it yet, is to look at collective demand management at the local level. Because as you know, when it comes to energy conservation, or efficiency or environmental issues, it's very local in the United States. Could be the state level, could be the city level. And it's the same for China as well. Chinese localities are competing against American localities and cities under this global economy.

As part of that, there might be some potential for adopting shared practices, in conservation. For example, if we're building new green buildings according to certain standards, or we're adopting new standards for appliances in energy consumption, or alternative fuel vehicles, if you have Chinese cities and American cities and Indian cities all using the same standards, this will lower the cost for corporations who want to try and build whatever vehicles or whatever services that do that. Right now, Chinese localities are all going in different directions, and the same thing with American localities. There's a lot of potential for coordination and development. But I think I would argue mainly at the local level.

The key point I wanted to show with our research is that China and the rest of Asia to some degree, are going to be very large players in energy and in oil in particular in the future and there's a lot of potential for cooperation and clearly there is going to be some competition.

AMBASSADOR DJEREJIAN: Ladies and gentlemen, the floor is yours.


AUDIENCE: I'm a little unusual in the sense that I've been in the industry since before I was born. My mother and father were both geologists, and now at 83, I feel like I know something about the industry.

My father made a trip back in 1937 to the Middle East, on behalf of the old Standard of New Jersey. I remember one of the things he said when he came back: "The British made a terrible mistake in setting up Iraq. Iraq was going to be an unstable country, because it had three different religious sects, all Muslim, but they should have done a better job than they did. Jordan was successful; others were successful. That would have been the days when it was Mesopotamia, but it’s going to be a failure."

AMBASSADOR DJEREJIAN: Ah, yes. If only we'd read our history; the British colonial period in the Middle East, and the French colonial period. People come up to me and ask, "What's the one book you recommend that I should read to understand the Middle East?" And they're sort of confused at first by my answer: "You really have to read David Fromkin's book, A Peace to End All Peace. It's a history of the French and British colonial division of the Middle East between 1916 and 1922. David Fromkin, I guess he still is a New Yorker writer. He did excellent research, and you may think it's obsolete to read a book that's about 15 years old. But if you read that book, it's well written, you go through the decisions that two men made, Mr. Sykes and Mr. Picot.

Mr. Sykes was the British agent in the Middle East, and Mr. Picot was the French agent. And they carved up the Middle East. That very survey I gave you earlier of the Middle East, it all goes back to that period. After World War I the British and the French consolidated their empires, and they drew these lines in the sand throughout the Middle East. You mentioned Iraq; the British actually drew the line in Iraq. They made one country out of what the Ottoman Empire had separated into multiple vilayets: the vilayet of Mosul, which was really the Kurdish areas; the vilayet of Baghdad, the vilayet of the Sunni and the vilayet of Basra, the Shiite areas.

They ruled those as large provinces by might. And the British went and they drew a line around all of that and brought it together, again in 1916-1922, but they did one little new thing. They cut off a little country called Kuwait from historic Iraq. And Saddam Hussein when he invaded Kuwait, appealed to Iraqi nationalism as Kuwait as the 19th Province of Iraq. So you could trace even Desert Storm to Sykes-Picot.

I mentioned Lebanon. The French wanted to build Lebanon as a Christian Arab state, so they carved greater Lebanon out of greater Syria, a largely Muslim state. And Syria has never considered Lebanon to be an independent state. To this day, there is not a Syrian embassy in Beirut and there is not a Lebanese embassy in Damascus.

So all that traces back to the British and the French, and especially the French, Palestine, creation of the State of Israel. They drew the lines; they created the Balfour Declaration, and the whole Israeli-Palestinian equation dates back ‑‑ I mean, in contemporary terms dates back to that period. So what you're saying is absolutely true. By the way, it's very disheartening for me to say this; the British, when they left Iraq two years later had to go back in militarily. I hope we don't face a situation like that.

AUDIENCE: The United States and many, many other countries are in debt to China. How does that dynamic play into all this?

DR. LEWIS: I would say that it's really not clear just how much of our debt or actually anybody's debt is owned by China, and Chinese companies and entities. The Chinese government-owned banks and some of the larger corporations, when they buy something overseas, including debt, it can be fairly clear to see. However, as I was talking about when it comes to the whole strategy of going overseas, you have just within these national oil companies, the headquarters might be going overseas to do things like buy some type of foreign debt; but all of the individual subsidiaries are as well. And they've set up offices in many countries around the world.

I suspect that we don't have anywhere near an accurate estimate of just how much is actually owned, and I'm sure the Chinese government doesn't either. So that's part of the issue; the Chinese central government won't tell you that they don't know. And certainly the national oil companies won't tell anybody that they don't know, because they themselves don't even know what the subsidiaries are actually doing.

One of the strategies that they've had, the reason they've had for going overseas, is to try and move assets offshore, such that the employees can then begin to privatize them. It's related to the corruption in the enterprises; they're trying to move it beyond the tax regime of the government in Beijing. So they make a lot of investments overseas and then they can take them and they can sell them in some way and it benefits the employees, in many cases, very directly. They've been doing this for years; setting up offices in as many countries as possible, that's a very easy way to do it.

We might say that X amount of American debt is owned by China, but we can see that, for example, there might be some African countries which seem to own a lot of American debt; that could actually be Chinese. I suspect we really just don't know, and that's one of the large issues.

AUDIENCE: Could you confirm whether or not the Chinese have imposed more rigid environmental standards for the automobiles than us?

DR. YOUND: Well, it varies by locality. It’s true the central government does want to impose emission standards which are, I think, generally stricter than they are in the United States. However, it really is only enforceable by the local governments in China, and I can assure you that very few governments in China, municipal governments, are taking any really concrete steps. Beijing, Shanghai, the larger cities are. Shanghai seems to have a very low amount of cars per 1,000 people, they have about 50 per 1,000; Beijing has 130 per 1,000.

So you think, "Well, why is that? Shanghai's the wealthiest; why do they have so few cars?" It's because the Shanghai government has been very successful at controlling transportation, and they've said, "No, we're setting a quota on the number of cars." And just this year, they set up a system where you have to bid online to get a driver's license and a plate. That's why Shanghai doesn't have this huge demand for cars, because the government is saying, no. What that shows us is that some parts of China are very effective at doing it.

But what about other parts of China? Leaded gasoline is still very common in many of the cities in China in the interior. It's been banned in Beijing and in Shanghai, but safety standards are also quite different. I was recently in Xi'an in Western China, China's ancient capital, it's a major tourist destination. I'm sitting in a cab, and we're driving around. It's a tiny little cab, clearly a Chinese car, and I hear this sloshing noise behind me. And I look, and just behind the back seat, there's a large plastic tub of gasoline. That was the gas tank for the car, which was interesting, because our driver was smoking a cigarette. Asimple collision from the rear, the gasoline would have spewed all over the cab, and hit the cigarette and it would be a nice little crematorium. And that was a major city. But in western China, and that was legal. It's changing but very slowly.

AUDIENCE: Claudia Stewart from Amarillo. How much of a player does Dubai want to be in all of this?

AMBASSADOR DJEREJIAN: First of all, as we know, Dubai is part of the United Arab Emirates, and the key oil and gas player is Abu Dhabi. That's where the oil wealth is in the Arab Emirates. And the control over the very important UAE oil and gas resources is out of Abu Dhabi.

Dubai has caught the headlines because it's just doing this incredible re-invention of a tiny pearl-diving city into this mega-polis of tourism and financial center and all sorts of things are going on there. There was a lot of news made when the head of Halliburton decided that he was moving to Dubai to set up his offices in Dubai. That caught everybody's eye. I think actually what happened is that Halliburton won’t be leaving Houston, but the CEO's office is going, perhaps for a long period of time, and he'll spend any one given year in Dubai.

It has become a center for financial services; it's become a center for tourism; it's become a center for various companies that are relocating there, and using Dubai as a hub throughout the whole region, into Asia. But the real oil wealth is really in Abu Dhabi.

AUDIENCE: I wanted to respond to Steve Young's call for more diversification into Muslim countries. A significant problem is what in economics is called the resource curse. And what happens in the resource curse is that one country as a large part of its economy exports massive amounts of oil. And as a result, the exchange rate gets distorted. I'm not going to say it gets overvalued, but a lot of people would. And as a result, the number of dollars you have to pay for that currency goes up and up and up. As this occurs, other industries fall. They cannot export, because the currency is so distorted. You can also see the same thing in Venezuela, where 100 years ago, agriculture was the major source of Venezuelan exports to other countries. But as energy became more and more a part of the economy, agriculture just absolutely flopped as an export.

DR. YOUNG: No, I couldn't agree more. My point was about the fact that oil is so much a part of the export income and none of the income from that is getting down to the people who really need it; a complete lack of the middle class in the Middle East. What makes the United States such a great country is the very strong and vibrant middle class. You don't find that when you go to the Middle East, in most cases, especially where you have an oil-dominated economy.

AMBASSADOR DJEREJIAN: I would just like to underscore what Steve Young is saying there. We didn't have time to really go into it, but if you look at Saudi Arabia, there's real poverty in Saudi Arabia. There is an educational system that doesn't function well, that does not produce entrance into the marketplace; they don't study the social sciences, engineering, natural sciences, business or economics. I have nothing against the study of religion, but there are many, many young people who study religion because it's an easy way to get a degree.

As Steve said, the middle class is burgeoning, but when the middle class looks up, they see 6,000 to 7,000 royal princes, who have a lion's share of the pie. And the question is raised, “Why not us?” When you add on top of that, as Steve mentioned, this orthodox Wahhabism, I mean, you can't get more Islamic traditional than the Wahhabiis in Saudi Arabia; the King of Saudi Arabia is called the Custodian of the Two Holy Places: Mecca and Medina. So it's considered to be sacred territory, Saudi Arabia, the home of the Prophet, and Medina and Mecca. But yet this very orthodox regime has Islamic radical terrorists trying to overthrow it. Osama bin Laden was a Saudi, is a Saudi. I wish I could talk of him in the past tense but he is a Saudi.

So this is disturbing. Given its importance in the energy sector, what are we going to do if radical change comes out of Saudi Arabia, from within Saudi Arabia? Are we going to send in the Fifth Fleet? Are we going to occupy that country? What are we going to do; what are our options? That's why these policies are so challenging today; we need to really have a broad strategy as Secretary Baker said this morning, we have to use all of the instruments of power that we have; soft to hard power. But really concentrate on the soft power, to try to influence the forces of change in this part of the world.

AUDIENCE: Ambassador, Shrub Kempner from Galveston. I'm having trouble, and I just wonder if you are too, thinking that the initiative in the Middle East, the Israelis and the Palestinians, that at this point is anything more than a place holder, a sort of a last echo, at least for this Administration. And the reasons are the political weaknesses that you mentioned, obviously with the Palestinians and their inability to deliver Gaza, at least at this point, the Israelis with Olmert, and serious political difficulty at home, and a tentative coalition.

Our own Administration, on its last year, and with essentially not much clout to be able to put into any persuasion, just because the next Administration, whoever that might be, will feel differently. If you have some optimism about the process at this time, to overcome my skepticism, I'd be very interested to hear it.

AMBASSADOR DJEREJIAN: Well, I think the good news is that the President and our Secretary of State have finally gotten engaged in bringing the parties together, and starting a negotiating process along the lines I described. That is the good news.

You're absolutely right in your analysis that when you look at the three parties, we have a President who's at the end of his mandate, an Administration that is going to be leaving in January of 2009; and then we have an Israeli prime minister who is not the strongest prime minister we've seen in Israel, who's been wracked by internal scandals, the war in Lebanon, and has Ibn Netanyahu, the Israeli leader, really yapping at his heels waiting for him to falter so that he can make his bid for the prime ministership. And even within his own coalition, Ehud Ba-ak, the Minister of Defense and a labor leader, he would like to be prime minister again.

So Olmert's position is not the strongest in the world, but he's stepped up to the plate and he's engaged. Abu Mazon, the head of the Palestinian authority, has been terribly weakened by this split within the Palestinian political society and with Hamas challenging his authority. Even in the West Bank, Fatah doesn't have a monopoly on political control in the West Bank. So the Israelis are very nervous about any reconciliation between Fatah and Hamas, but watch that line. They're going to try to do that because at the end of the day, they cannot remain split.

The only hope is that if this peace initiative moves forward and the Palestinians and the Israelis start delivering their goods that I've mentioned, on both sides, the Israelis freeze their settlement activity; they release more prisoners; they lift crossing points; the Palestinians get a better grip on security, start acting like a state, a pre-state and then Abu Mazon can approach Hamas from a better position of strength. So if you're looking for points of optimism, those are the only ones. I hate to use the word, optimistic, but those are small positive points that could occur as we go down the line.

I was surprised they put down a deadline, I think the Palestinians wanted a deadline but I understand that the Israelis mentioned, "Let's try to get this done by the end of 2008," when they were at Annapolis. I don't know how accurate all of that is, but still, both sides agreed to a timeline. If they can do something by then, Godspeed. If not, at least leave something positive, or something ongoing for the next Administration to assume and ride forward on.

AUDIENCE: My name's Steve Stevens and this question is a two-part question for Steve Young. With all of the capabilities that our government has, both overt and covert, why have we not been able to take out Osama bin Laden? The follow-up question to that is, if we did, would it make a difference in the war on terror?

DR. YOUNG: Probably the short answer to the second part is, no. And there are very good reasons for that actually, because when we went into Afghanistan, as we rightly should have, we essentially cut off the head of the snake, but we weren't able to finish the job. So we've got a heck of a problem now with the Taliban resurgence and Al Qaeda remnants located now in the northwest frontier and all of the tribal agencies in that border area between Pakistan and Afghanistan.

Why haven't we ever been able to find him? I think we had a lot of chances, but politics usually plays a role in choosing whether to strike or not, and at the certain times when we had the chance, we didn't take advantage of it. We’re still looking for him, from what I understand. He is still probably located in the tribal areas, probably in northern, northwest frontier province. It's a very rugged, very mountainous and very unforgiving region. It's very, very difficult to find any one individual. It's not like we're looking for an entourage anymore.

We were very successful in Afghanistan because we were able to essentially dissolve the Al Qaeda leadership over a period of time. And that has resulted in the dissolution of Al Qaeda into a lot of different, smaller organizations. As far as Al Qaeda itself, it's almost a leaderless resistance right now; we see different or smaller cells swearing allegiance to Al Qaeda as a philosophical organization, more or less, than looking to it for leadership.

AUDIENCE: Nancy Scanlon from Austin, Texas. This may be an obvious question, but I've always wondered. I know that we ostensibly went into Iraq to eliminate the possibility of weapons of mass destruction. Many people suggested that there was a subtext that it was about the oil. What in fact did happen to the Iraqi oil? And number two, why didn't all of those smart people in Washington, knowing that Iraq was cobbled together by the British after World War I, was probably going to erupt into sectarian violence the minute that the strong man was eliminated?

AMBASSADOR DJEREJIAN: Well, they did not know their history and they were blinded by an ideological perception that the road to peace throughout the Middle East was to overthrow these dictators, if necessary by military force, and that democracy would begin to be promoted; at the end of the day it would be much easier to resolve the regional conflicts, especially the Israeli-Palestinian or the Arab-Israeli one, because then Israel would be negotiating peace with democratic neighbors.

I'm not exaggerating; that that was the precept. I have gotten myself in trouble publicly, but I don't care, I'm not longer with the government, by saying that the Arab-Israeli peace goes through Jerusalem. It does not go through Baghdad; it does not go to Teheran; it does not go through other capitals. Arab-Israeli peace should be pursued on its own merits, with the parties. But to think that we're going to democratize the Middle East and somehow parachute a Jeffersonian model of democracy into the sands of Arabia is foolish to say the least.

Now, what I believe we can do, and I believe where our country stands tall, is where we provide the example by what we do here, in our domestic and our foreign policies. We have the prejudice that we are the City on the Hill. But to use that example, we should really promote policies along the lines that Secretary Baker mentioned this morning, and also our domestic policies. You know, one of the biggest public diplomacy failures we've had in recent years is not so much in the Middle East, but Katrina. When I went to the Middle East after Katrina, there were many, many Arabs who told me, "God, we didn't know you were a Third World country like us." Okay, that hurts. But it showed the soft underbelly of the United States. And so when we don't live up to the example and the model that people expect of us in terms of our values and principles, our foreign policy is very, very much hindered.

On the oil question, I can say this: the Baker Institute Council on Foreign Relations in New York published a study two months before we went to war in Iraq in 2003. Secretary of State Colin Powell asked me, because of the Baker Institute Energy Forum, to do an addendum on Iraq's oil structure, so we had our good team here, put together some facts and figures.

You will remember that Paul Wolfowitz, the Deputy Secretary of Defense was saying that if we go to war in Iraq, the cost of reconstruction, the Senators agreeing with me, the cost of reconstruction will be taken care of by Iraq's oil revenues. We amateurs here did our analysis and we brought it to Washington. The Department of State came to the same conclusion, the Defense Department didn't, and the National Security Council didn't.

What we said very simply was that under the sanctions regime that we've had for years in Iraq, and by the way Saddam Hussein's regime was running the oil industry, that the infrastructure was so deteriorated and the capital investment was virtually nonexistent, that Iraq would not be able to produce pre-Gulf-War 1991 levels for at least three to five years, with billions of dollars of new investment. Juxtapose that with what some of our people in government were saying, "This is going to be virtually cost-free because the Iraqi oil will pay for the reconstruction."

Look how much money it's cost the American taxpayer to date. It is forced ignorance; it gets me angry. The reason it gets me angry is because we had the right information. It's not because our government did not have the right information.

AUDIENCE: I'm Bill Ryan from Abilene. It seems to me that the second elephant in the room is the old Soviet Union, Russia, and their attempt to intimidate Europe with their petroleum supplies or natural gas and so forth, and the operations that are taking place in the Caspian pipelines and so forth. How do you see that playing out in the immediate future?

AMBASSADOR DJEREJIAN: In other words, Russia's pipeline?

AUDIENCE: The whole of Russia.

AMBASSADOR DJEREJIAN: Right. Putin was here at the Baker Institute about five years ago and he knew that he was in the energy capital of the world. He's a good salesman, and he made a speech here where he said, "The United States and the West should look upon Russia as a much more reliable producer of energy than OPEC." It was a nice statement; got a round of applause. Then of course we saw what they were doing in cutting off gas to East Europeans and to central Europe, and using gas and oil as a political weapon.

My own take is that Putin is a very staunch Russian nationalist; he comes from a KGB background and he's steeped in the security of Holy Mother Russia. I served in Moscow during the Cold War, and during the Brezhnev years, and I see a lot of things I saw then in his attitude for Russia.

Russia, the Soviet Union was an empire, that was drawn down to size after the collapse of Communism, and all other former Soviet Union states are independent, and we know the story of that in East Europe. So I think what Putin's trying to do is to reinvigorate the Russian federation, which is huge, of course. It goes through eleven time zones in territorial terms. But he's trying to restore Russia as a major and a great power, but from a much more diminished position, so he's using oil and gas as a political tool, in a very assertive way. But they're smart enough to know that it's about economics and commerce, and they can take that only too far.

AUDIENCE: You talked about soft power, its importance. It's 2009 and you're advisor to the next President, what would be two or three examples of soft power that you would advise the new President to use during his or her first year?

AMBASSADOR DJEREJIAN: Very politically correct, his and her. Well, I think soft power really translates itself into the things we've been discussing already. It's one, diplomacy; America to lead multilateral coalitions, real coalitions. To use our leadership role in bringing people together, doing the hard work and rolling up our sleeves and getting the international community to be with us on the major issues. Jaw war, not war war, as Churchill said, as the first thing. Always using the military option to act unilaterally, we have to maintain that as an option, but only if everything else goes asunder.

Public diplomacy; the voice of America, if you will. I headed a bipartisan commission, Congressionally mandated in 2003, and we came out with a report, "Changing Minds, Winning Peace," which actually I must give this Administration credit, Karen Hughes and Condi Rice have put about 80 percent of our recommendations on how to reorganize the public diplomacy function. I give them credit for institutionally building up the public diplomacy function after we made a terribly wrong decision. I don't know if the Senator will agree with me on this, but I think in 1999 when we disbanded USIA, the U.S. Information Agency, that was a wrong decision. Madeline Albright and Jesse Helms came together and they made that decision. I think in retrospect it was the wrong decision. But it's interesting.

With the fall of Communism and the Soviet empire, we thought all of the ideological problems were over. We won; Communism lost. America and capitalism and democracy was ascendant. Fukuyama came out with his book, The End of History. What a misnomer. No end of history. We would all become social democratic, liberal democratic states and all that. Wrong. And then we unilaterally disarmed our instruments of persuasion, like the U.S. Information Agency, we cut down the Voice of America, et cetera, et cetera. Now we're trying to reinvent it. That's why our Commission was formed. We gave recommendations on how to reinvent it, and I recommend that report to your attention if this is a subject that's of interest to you.

So soft power is diplomacy; it's public diplomacy; it's the use of economic and social development, building up a new United States Assistance Program, building up our capabilities to help countries that become failed states. We don't have those capabilities. There's a whole array of things that we can do in terms of soft power.

DR. YOUNG: If I could just add, soft power is all about, what the Ambassador says, winning hearts and minds. VOA is something that has kind of gone by the wayside. Also empowering Muslim moderates. We hear a lot about getting the message out, about psy ops and everything like this, but you have to understand the people that you're trying to reach, and the messenger.

How is a Western message going to translate into a Middle Eastern mind-set? When you do broadcast, you've got to be very, very subtle because if Muslims perceive that as intruding on their culture, then you're just not doing any good at all. I saw something very recently about a young Muslim preacher who was actually in Cairo, and he now has his own television station, and he preaches a Muslim, tolerant towards the West message, and a lot of young Egyptians are buying into this. It's on a TV station or channel that is similar to our MTV production.

So you have some relation with the young people in Cairo. This is something that we really should empower and invest in also. But on the ground, things like the provincial reconstruction teams that are going on in Afghanistan. Of course, these things can't exist without security, but at the time, when I was in Afghanistan in '04, there was significant progress. It's essentially a military effort to build civil works: wells, schools. One of the more popular things that we could ever do when we were out and about in the boonies was passing out pads of paper and pencils to little kids, and soccer balls.

AMBASSADOR DJEREJIAN: I couldn't agree more, empowering the Muslim moderates is one of the biggest tasks of soft power that any, I hope the next Administration, whoever it is, that they will really take this forward. It’s the only way to win.

DR. LEWIS: I was just going to add one comment to that, and that is that I think China is a good example for understanding the long term influence of soft power, because oddly enough, if you do surveys of the Chinese people and you say, "Do you trust the United States,” when it comes to working with the Americans in the future, overall they say, "Yes." If you ask the Chinese, "Do you support globalization," and even the Washington consensus style of development, joining the WTO, they say, "Yes."

But if you ask them, "Do you agree with the American government?" they say, "No." They don't trust the American government, but they trust the American people. I think that's because we've had several decades and generations now of local level interaction; hundreds of thousands of Americans and Chinese going back and forth. It goes at all levels of Chinese society, such that in the '80s and '90s and even now, most of the Politburo members had children who studied in the United States. And they have children coming and going and working. Everybody knows somebody who has lived and worked in the United States. I think what that creates is a very basic level of sharing knowledge and information that is independent of governments. That's one of the strengths, I think, of the American-Chinese relationship in particular that we need to work on with other societies.

AMBASSADOR DJEREJIAN: That was one of the key findings in our Public Diplomacy Commission. Our mandate by Congress was for the Muslim and the Arab world, but it goes globally. What we found out was remarkable. It was that American values are considered to be shared values by many other societies. Life, liberty, the pursuit of happiness, science and technology, American higher education, these are admired in the Muslim world.

Frankly, with all my experience, I was surprised by the positive a reaction and we were talking with Islamists, and not the terrorist organizations, not the Islamic radicals, but we were talking with a lot of Islamist groups from Indonesia to Nigeria, and everything in between. One Iranian woman said, "For God's sake, who can be against life, liberty and the pursuit of happiness? Of course, it's your policies that we're against."

AUDIENCE: My name is Lloyd Lockridge, and this is fascinating, absolutely. Some years ago I read an article in The New Yorker magazine, and I'm trying to think of the name of the author, but he subsequently wrote The Looming Tower.

AMBASSADOR DJEREJIAN: Yes. Larry Wright. Terrific book.

AUDIENCE: Well, I think so. The message I got out of that article, and which is probably throughout The Looming Tower as well, is that the Muslim, radical Muslim attitude goes back a long way, back to the Crusades practically. They didn't like Christianity, they thought our whole way of life was wrong, and that attitude motivated the people who made the attack on New York on 9/11. It's a religious thing; that’s what makes these terrorists so fanatical. And I think you all may agree about that. Mr. Ambassador, I don’t mean to stir you up again, but what you say is troubling to me because I was not sure that this Administration had the benefit of a great deal of what I think was wise counsel as to what that Middle East is like.

I have heard an explanation for part of it, I don't think I've heard it said here, maybe a little bit, but the fall of the U.S.S.R. lead to everyone in our government pretty much just disbanded our foreign intelligence operations; they didn't think they were necessary any longer. So our intelligence about what was going on was very poor.

But was there good counsel? Could the Administration really have been expected to know that it was a hopeless mess? The Russians couldn't handle Afghanistan and they're pretty tough. The British apparently left those places, and they were pretty good at colonial work too.

          Why is it that our people thought we could manage that? That leads me to wonder about soft diplomacy and I really enjoyed what Secretary Baker said, and I think all of his ideas are excellent. But what is our hope, really, for doing anything in that part of the world? We've got a great stake in energy, which is why we're here, talking about it. And I'm looking for something that can be done about terrorism and about our future international relations, and I'm still troubled about it. But I certainly enjoyed your addresses, all of them. And I thank you for it.

AMBASSADOR DJEREJIAN: Well, thank you very much for your comment. You've asked a very big question that we could not answer in the remaining time, and it is, “What is the policy?”

I am writing a book. It will be published next year. And it may go beyond distribution to my family, but if you're interested, read it. It's about exactly this issue, the strategic challenge the United States faces in the Muslim world. We are facing a challenge within the Muslim world, a struggle of ideas within the Muslim world, between the forces of extremism and moderation. How the United States crafts its policies to influence this struggle, to marginalize the radicals, is one of the biggest challenges of our time. And God, I pray that the next President of the United States has the wisdom to really do the basic homework and get the facts and then make his or her policy decisions.

And on intelligence, I think you're right. Steve is much more expert in this, but we have really debased our human intelligence capabilities with the fall of the Soviet Union. You can do so much with satellites and technical intelligence, but at the end of the day you have to be trying to determine what the intentions and thinking of people are. And that's where I hope again the CIA will come back to a much more traditional role.

AUDIENCE: Tom Palaima from Austin, Texas. First off I wanted to thank all of the panelists for restoring my confidence that there is a sane vision of international relations somewhere in the United States. I have two questions. One is about something we've not discussed yet, the viability of nation states; whether nation states are going to be controlling the world in 20 or 30 years down the line as opposed to transnational corporations. Philip Bobbitt, in his well-acclaimed book, has pointed that this is a serious problem. Is the world any longer going to be able to operate under the old model of nation states? So, if you would care to comment on that.

And secondly, it seems that we are skirting around the issue of whether the United States is even 20 or 30 years out, given our tremendous national indebtedness, the overextension of our military power, the erosion of a lot of our cultural values because of these foreign policy decisions over the last eight years, our lack of credibility in our moral suasion internationally, whether we ourselves are going to be capable of being major role players 20 or 30 years out. How that will unsettle the whole picture of what we as people who are living in the United States can expect in terms of energy issues?

AMBASSADOR DJEREJIAN: Well, in terms of your first question, I think there will be nation states. This is just my own prejudice but I really do think that human beings and communities and countries are a bit tribal. We like to keep our tribes together, and we'll have nation states. We'll keep our country together as a certain identity and I think the nation state will remain. You know, the British Empire was a period of globalization, and the Roman Empire was a period of globalization. But you think local and you act global. You act global; you think local. I think the base stone will probably remain, for the foreseeable future, the nation state.

And the second question, we don't have a God-given right to remain a preeminent power in the world. We had to earn it. I think all of us here, with our experiences in life, would agree you have to earn whatever you're doing almost every day. I keep telling our children that. Don't think anyone owes you a favor, you know. You got to prove yourself virtually every day. I get sort of tired of it as I grow older, but I think it's a truth in life. Our country, we've got to earn this preeminent position. And if we continue bad policies, we can lose it. There's no question about it. It really is about maintaining our values and constructing the best possible policies. Then I think America will remain strong. Thank you very much.