Run defense on gas?

With natural gas revenues about to flow, Israel might consider the Chilean model for avoiding infighting over military spending.

A country rich only in brainpower, such as Israel, can perfectly well base a successful economy on technological innovation, and Israel has done so with great success, passing unscathed through the recent global economic and financial crisis.

Soon, however, the country will be adding energy riches, especially natural gas, but also oil, to its economic arsenal. The first new gas well has just come on stream, and development will be rapid. Supplying the domestic market will obviously be objective number one, but export of gas will soon become feasible.

Some commentators have said that Israel will have difficulty finding investors to develop the deposits. This seems highly unlikely to me, since there are any number of US and Canadian companies with the appropriate expertise and access to credit. A more serious danger is that, because of shale gas development worldwide, the price of natural gas is declining and may continue to do so. That will obviously cut Israel's earnings from that source, but since the cost of exploitation of the offshore deposits will be less than the cost of extracting shale gas, there should still be a sufficient margin to reward investors.

The Israeli government has already decided to establish a sovereign wealth fund for future earnings from oil and gas. This structure has worked very well in terms of diversifying investments as well as providing a cushion in times of economic distress, in places as diverset as Alaska, Norway and the Gulf states.

One of the most difficult decisions for any democratic government is deciding how much of the national budget to dedicate to defense and security, and that decision is particularly acute for Israel. Processes range from the highly centralized, such as in Israel, where the decision is made essentially by the finance ministry, subject only to the approval of the prime minister's office, to the nearly chaotic, as in the United States, where many departments and agencies of the federal government, state and local governments and a myriad private interests, lobby the Office of Management and Budget and the Congress, often making it impossible for a budget to be adopted on time, resulting in the temporary continuation of the previous budget, in what is called a "continuing resolution".

An unusual process in this regard is that of Chile, where the armed forces, including the national police, have the right by statute to a percentage of the export earnings from copper, thereby obviating much of the controversy and conflict endemic to other democracies. In times when copper prices are high, a fund is accumulated, to be used to smooth out the budget when copper prices are lower. Israel might consider some variant of the Chilean system, based on gas and oil exports in future.

Something to think about.

Norman A. Bailey, Ph.D., is Adjunct Professor of Economic Statecraft at The Institute of World Politics, Washington, DC, and a lecturer at The Israeli National Defense College (MABAL), 2011-2012 session.

Published by Globes [online], Israel business news - - on July 19, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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