Two recently posted papers by Brookings colleagues purport to show that “even a large increase in the top marginal rate would barely reduce inequality.”[1]  This conclusion, based on one commonly used measure of inequality, is an incomplete and misleading answer to the question posed: would a stand-alone increase in the top income tax bracket materially reduce inequality?  More importantly, it is the wrong question to pose, as a stand-alone increase in the top bracket rate would be bad tax policy that would exacerbate tax avoidance incentives.  Sensible tax policy would package that change with at least one other tax modification, and such a package would have an even more striking effect on income inequality.  In brief:

• A stand-alone increase in the top tax bracket would be bad tax policy, but it would meaningfully increase the degree to which the tax system reduces economic inequality.  It would have this effect even though it would fall on just ½ of 1 percent of all taxpayers and barely half of their income.
• Tax policy significantly reduces inequality.  But transfer payments and other spending reduce it far more.  In combination, taxes and public spending materially offset the inequality generated by market income.
• The revenue from a well-crafted increase in taxes on upper-income Americans, dedicated to a prudent expansions of public spending, would go far to counter the powerful forces that have made income inequality more extreme in the United States than in any other major developed economy.

---

Downloads

• Download the paper

The American people deserve to have a federal government that is both responsive and effective. That simply isn’t the case for more than 1 million people who are awaiting the adjudication of their applications for disability benefits from the Social Security Administration.

Washington can and must do better. This gridlock harms applicants either by depriving them of much-needed support or effectively barring them from work while their cases are resolved because having any significant earnings would immediately render them ineligible. This is unacceptable.

Within the next month, the Government Accountability Office, the nonpartisan congressional watchdog, will launch a study on the issue. More policymakers should follow GAO’s lead. A solution to this problem is long overdue. Here’s how the government can do it.

Congress does not need to look far for an example of how to reduce the SSA backlog. In 2013, the Veterans Administration cut its 600,000-case backlog by 84 percent and reduced waiting times by nearly two-thirds, all within two years. It’s an impressive result.

Why have federal officials dealt aggressively and effectively with that backlog, but not the one at SSA? One obvious answer is that the American people and their representatives recognize a debt to those who served in the armed forces. Allowing veterans to languish while a sluggish bureaucracy dithers is unconscionable. Public and congressional outrage helped light a fire under the bureaucracy. Administrators improved services the old-fashioned way — more staff time. VA employees had to work at least 20 hours overtime per month.

Things are a bit more complicated at SSA, unfortunately. Roughly three quarters of applicants for disability benefits have their cases decided within about nine months and, if denied, decide not to appeal. But those whose applications are denied are legally entitled to ask for a hearing before an administrative law judge — and that is where the real bottleneck begins.

There are too few ALJs to hear the cases. Even in the best of times, maintaining an adequate cadre of ALJs is difficult because normal attrition means that SSA has to hire at least 100 ALJs a year to stay even. When unemployment increases, however, so does the number of applications for disability benefits. After exhausting unemployment benefits, people who believe they are impaired often turn to the disability programs. So, when the Great Recession hit, SSA knew it had to hire many more ALJs. It tried to do so, but SSA cannot act without the help of the Office of Personnel Management, which must provide lists of qualified candidates before agencies can hire them. SSA employs 85 percent of all ALJs and for several years has paid OPM approximately $2 million annually to administer the requisite tests and interviews to establish a register of qualified candidates. Nonetheless, OPM has persistently refused to employ legally trained people to vet ALJ candidates or to update registers. And when SSA sought to ramp up ALJ hiring to cope with the recession challenge, OPM was slow to respond.

In 2009, for example, OPM promised to supply a new register containing names of ALJ candidates. Five years passed before it actually delivered the new list of names. For a time, the number of ALJs deciding cases actually fell. The situation got so bad that the president’s January 2015 budget created a work group headed by the Office of Management and Budget and the Administrative Conference of the United States to try to break the logjam. OPM promised a list for 2015, but insisted it could not change procedures. Not trusting OPM to mend its ways, Congress in October 2015 enacted legislation that explicitly required OPM to administer a new round of tests within the succeeding six months.

These stopgap measures are inadequate to the challenge. Both applicants and taxpayers deserve prompt adjudication of the merits of claims. The million-person backlog and the two-year average waits are bad enough. Many applicants wait far longer. Meanwhile, they are strongly discouraged from working, as anything more than minimal earnings will cause their applications automatically to be denied. Throughout this waiting period, applicants have no means of self-support. Any skills applicants retain atrophy.

The shortage of ALJs is not the only problem. The quality and consistency of adjudication by some ALJs has been called into question. For example, differences in approval rates are so large that differences among applicants cannot plausibly explain them. Some ALJs have processed so many cases that they could not possibly have applied proper standards. In recognition of both problems, SSA has increased oversight and beefed up training. The numbers have improved. But large and troubling variations in workloads and approval rates persist.

For now, political polarization blocks agreement on whether and how to modify eligibility rules and improve incentives to encourage work by those able to work. But there is bipartisan agreement that dragging out the application process benefits no one. While completely eliminating hearing delays is impossible, adequate administrative funding and more, better trained hearing officers would help reduce them. Even if OPM’s past record were better than it is, OPM is now a beleaguered agency, struggling to cope with the fallout from a security breach that jeopardizes the security of the nation and the privacy of millions of current and past federal employees and federal contractors. Mending this breach and establishing new procedures will — and should — be OPM’s top priority.

That’s why, for the sake of everyone concerned, responsibility for screening candidates for administrative law judge positions should be moved, at least temporarily, to another agency, such as the Administrative Conference of the United States. Shortening the period that applicants for disability benefits now spend waiting for a final answer is an achievable goal that can and should be addressed. Our nation’s disabled and its taxpayers deserve better.

Editor's note: This piece originally appeared in Politico.

Health reform (aka Obamacare) is entering a new stage. The recent announcement by United Health Care that it will stop selling insurance to individuals and families through most health insurance exchanges marks the transition. In the next stage, federal and state policy makers must decide how to use broad regulatory powers they have under the Affordable Care Act (ACA) to stabilize, expand, and diversify risk pools, improve local market competition, encourage insurers to compete on product quality rather than premium alone, and promote effective risk management. In addition, insurance companies must master rate setting, plan design, and network management and effectively manage the health risk of their enrollees in order to stay profitable, and consumers must learn how to choose and use the best plan for their circumstances.

Six months ago, United Health Care (UHC) announced that it was thinking about pulling out of the ACA exchanges. Now, they are pulling out of all but a “handful” of marketplaces. UHC is the largest private vendor of health insurance in the nation. Nonetheless, the impact on people who buy insurance through the ACA exchanges will be modest, according to careful analyses from the Kaiser Family Foundation and the Urban Institute. The effect is modest for three reasons. One is that in some states UHC focuses on group insurance, not on insurance sold to individuals, where they are not always a major presence. Secondly, premiums of UHC products in individual markets are relatively high. Third, in most states and counties ACA purchasers will still have a choice of two or more other options. In addition, UHC’s departure may coincide with or actually cause the entry of other insurers, as seems to be happening in Iowa.

The announcement by UHC is noteworthy, however. It signals the beginning for ACA exchanges of a new stage in their development, with challenges and opportunities different from and in many ways more important than those they faced during the first three years of operation, when the challenge was just to get up and running. From the time when HealthCare.Gov and the various state exchanges opened their doors until now, administrators grappled non-stop with administrative challenges—how to enroll people, helping them make an informed choice among insurance offerings, computing the right amount of assistance each individual or family should receive, modifying plans when income or family circumstances change, and performing various ‘back office’ tasks such as transferring data to and from insurance companies. The chaotic first weeks after the exchanges opened on October 1, 2013 have been well documented, not least by critics of the ACA. Less well known are the countless behind-the-scenes crises, patches, and work-arounds that harried exchange administrators used for years afterwards to keep the exchanges open and functioning.

The ACA forced not just exchange administrators but also insurers to cope with a new system and with new enrollees. Many new exchange customers were uninsured prior to signing up for marketplace coverage. Insurers had little or no information on what their use of health care would be. That meant that insurers could not be sure where to set premiums or how aggressively to try to control costs, for example by limiting networks of physicians and hospitals enrollees could use. Some did the job well or got lucky. Some didn’t. United seems to have fallen in the second category. United could have stayed in the 30 or so state markets they are leaving and tried to figure out ways to compete more effectively, but since their marketplace premiums were often not competitive and most of their business was with large groups, management decided to focus on that highly profitable segment of the insurance market. Some insurers, are seeking sizeable premium increases for insurance year 2017, in part because of unexpectedly high usage of health care by new exchange enrollees.

United is not alone in having a rough time in the exchanges. So did most of the cooperative plans that were set up under the ACA. Of the 23 cooperative plans that were established, more than half have gone out of business and more may follow. These developments do not signal the end of the ACA or even indicate a crisis. They do mark the end of an initial period when exchanges were learning how best to cope with clerical challenges posed by a quite complicated law and when insurance companies were breaking into new markets. In the next phase of ACA implementation, federal and state policy makers will face different challenges: how to stabilize, expand, and diversify marketplace risk pools, promote local market competition, and encourage insurers to compete on product quality rather than premium alone. Insurance company executives will have to figure out how to master rate setting, plan design, and network management and manage risk for customers with different characteristics than those to which they have become accustomed.

Achieving these goals will require state and federal authorities to go beyond the core implementation decisions that have absorbed most of their attention to date and exercise powers the ACA gives them. For example, section 1332 of the ACA authorizes states to apply for waivers starting in 2017 under which they can seek to achieve the goals of the 2010 law in ways different from those specified in the original legislation. Along quite different lines, efforts are already underway in many state-based marketplaces, such as the District of Columbia, to expand and diversify the individual market risk pool by expanding marketing efforts to enroll new consumers, especially young adults. Minnesota’s Health Care Task Force recently recommended options to stabilize marketplace premiums, including reinsurance, maximum limits on the excess capital reserves or surpluses of health plans, and the merger of individual and small group markets, as Massachusetts and Vermont have done.

In normal markets, prices must cover costs, and while some companies prosper, some do not. In that respect, ACA markets are quite normal. Some regional and national insurers, along with a number of new entrants, have experienced losses in their marketplace business in 2016. One reason seems to be that insurers priced their plans aggressively in 2014 and 2015 to gain customers and then held steady in 2016. Now, many are proposing significant premium hikes for 2017.

Others, like United, are withdrawing from some states. ACA exchange administrators and state insurance officials must now take steps to encourage continued or new insurer participation, including by new entrants such as Medicaid managed care organizations (MCOs). For example, in New Mexico, where in 2016 Blue Cross Blue Shield withdrew from the state exchange, state officials now need to work with that insurer to ensure a smooth transition as it re-enters the New Mexico marketplace and to encourage other insurers to join it. In addition, state insurance regulators can use their rate review authority to benefit enrollees by promoting fair and competitive pricing among marketplace insurers. During the rate review process, which sometimes evolves into a bargaining process, insurance regulators often have the ability to put downward pressure on rates, although they must be careful to avoid the risk of underpricing of marketplace plans which could compromise the financial viability of insurers and cause them to withdraw from the market. Exchanges have an important role in the affordability of marketplace plans too. For example ACA marketplace officials in the District of Columbia and Connecticut work closely with state regulators during the rate review process in an effort to keep rates affordable and adequate to assure insurers a fair rate of return.

Several studies now indicate that in selecting among health insurance plans people tend to give disproportionate weight to premium price, and insufficient attention to other cost provisions—deductibles and cost sharing—and to quality of service and care. A core objective of the ACA is to encourage insurance customers to evaluate plans comprehensively. This objective will be hard to achieve, as health insurance is perhaps the most complicated product most people buy. But it will be next to impossible unless customers have tools that help them take account of the cost implications of all plan features and report accurately and understandably on plan quality and service. HealthCare.gov and state-based marketplaces, to varying degrees, are already offering consumers access to a number of decision support tools, such as total cost calculators, integrated provider directories, and formulary look-ups, along with tools that indicate provider network size. These should be refined over time. In addition, efforts are now underway at the federal and state level to provide more data to consumers so that they can make quality-driven plan choices. In 2018, the marketplaces will be required to display federally developed quality ratings and enrollee satisfaction information. The District of Columbia is examining the possibility of adding additional measures. California has proposed that starting in 2018 plans may only contract with providers and hospitals that have met state-specified metrics of quality care and promote safety of enrollees at a reasonable price. Such efforts will proliferate, even if not all succeed.

Beyond regulatory efforts noted above, insurance companies themselves have a critical role to play in contributing to the continued success of the ACA. As insurers come to understand the risk profiles of marketplace enrollees, they will be better able to set rates, design plans, and manage networks and thereby stay profitable. In addition, insurers are best positioned to maintain the stability of their individual market risk pools by developing and financing marketing plans to increase the volume and diversity of their exchange enrollments. It is important, in addition, that insurers, such as UHC, stop creaming off good risks from the ACA marketplaces by marketing limited coverage insurance products, such as dread disease policies and short term plans. If they do not do so voluntarily, state insurance regulators and the exchanges should join in stopping them from doing so.

Most of the attention paid to the ACA to date has focused on efforts to extend health coverage to the previously uninsured and to the administrative stumbles associated with that effort. While insurance coverage will broaden further, the period of rapid growth in coverage is at an end. And while administrative challenges remain, the basics are now in place. Now, the exchanges face the hard work of promoting vigorous and sustainable competition among insurers and of providing their customers with information so that insurers compete on what matters: cost, service, and quality of health care.

Editor's note: This piece originally appeared in Real Clear Markets. Kevin Lucia and Justin Giovannelli contributed to this article with generous support from The Commonwealth Fund.

Executive Summary

Two-thirds of Americans have broadband Internet access in their homes.[1] But because of poor infrastructure or high prices, the remaining third of Americans do not. In some areas, broadband Internet is plainly unavailable because of inadequate infrastructure: More than 14 million Americans – approximately 5 percent of the total population – live in areas where terrestrial (as opposed to mobile) fixed broadband connectivity is unavailable.[2] The effects of insufficient infrastructure development have contributed to racial and cultural disparities in broadband access; for example, terrestrial broadband is available to only 10 percent of residents on tribal lands.[3]

Even where terrestrial broadband connectivity is available, however, the high price of broadband service can be prohibitive, especially to lower income Americans. While 93 percent of adults earning more than $75,000 per year are wired for broadband at home, the terrestrial broadband adoption rate is only 40 percent among adults earning less than $20,000 annually.[4] These costs also contribute to racial disparities; almost 70 percent of whites have adopted terrestrial broadband at home,   but only 59 percent of blacks and 49 percent of Hispanics have done the same.[5]

America's wireless infrastructure is better developed, but many Americans still lack wireless broadband coverage. According to a recent study, 3G wireless networks cover a good portion of the country, including 98 percent of the United States population,[6] but certain states have dramatically lower coverage rates than others. For example, only 71 percent of West Virginia's population is covered by a 3G network.[7] Wireless providers will likely use existing 3G infrastructure to enable the impending transition to 4G networks.[8] Unless wireless infrastructure expands quickly, those Americans that remain unconnected may be left behind.

Though America is responsible for the invention and development of Internet technology, the United States has fallen behind competing nations on a variety of important indicators, including broadband adoption rate and price. According to the Organization for Economic Cooperation and Development's survey of 31 developed nations, the United States is ranked fourteenth in broadband penetration rate (i.e. the number of subscribers per 100 inhabitants); only 27.1 percent of Americans have adopted wired broadband subscriptions, compared to 37.8 percent of residents of the Netherlands.[9]

America also trails in ensuring the affordability of broadband service. The average price for a medium-speed (2.5Mbps-10Mbps) Internet plan in America is the seventeenth lowest among its competitor nations. For a medium-speed plan, the average American must pay $38 per month, while an average subscriber in Japan (ranked first) pays only $22 for a connection of the same quality.[10]

The National Broadband Plan (NBP), drafted by the Federal Communication Commission and released in 2010, seeks to provide all Americans with affordable broadband Internet access.[11] Doing so will not be cheap; analysts project that developing the infrastructure necessary for full broadband penetration will require $24 billion in subsidies and spending.[12] President Obama’s stimulus package has already set aside $4.9 billion to develop broadband infrastructure,[13] and some small ongoing federal programs receive an annual appropriation to promote broadband penetration.[14] However, these funding streams will only account for one-third of the $24 billion necessary to achieve the FCC's goal of full broadband penetration.[15] Moreover, developing infrastructure alone is not enough; many low-income Americans are unable to afford Internet access, even if it is offered in their locality.

To close this funding gap and to make broadband more accessible, the National Broadband Plan proposes to transform the Universal Service Fund – a subsidy program that spends $8.7 billion every year to develop infrastructure and improve affordability for telephone service – into a program that would do the same for broadband Internet.

Downloads

• Download the Full Paper

Change is a complicated thing in Cuba. On the one hand, many Cubans remain frustrated with limits on economic and political opportunity, and millennials are emigrating in ever rising numbers. On the other, there is more space for entrepreneurship, and Havana is full of energy and promise today.

The island’s emerging private sector is growing—and along with it, start-up investment costs. Three years ago, Yamina Vicente opened her events planning firm, Decorazón, with a mere $500 in cash. Today she estimates she would need $5,000 to compete. New upscale restaurants are opening: Mery Cabrera returned from Ecuador to invest her savings in Café Presidente, a sleek bistro located on the busy Avenue of the Presidents. And lively bars at establishments like 304 O’Reilly feature bright mixologists doing brisk business.

Photo credit: Richard Feinberg.

Havana’s hotels are fully booked through the current high season. The overflow of tourists is welcome news for the thousands of bed-and-breakfasts flowering throughout the city (many of which are now networked through AirBnB). While most bed-and-breakfasts used to be one or two rooms rented out of people’s homes, Cubans today are renovating entire buildings to rent out. These are the green shoots of what will become boutique hotels, and Cubans are quitting their low-paying jobs in the public sector to become managers of their family’s rental offerings.

Another new sign: real estate agencies! Most Cubans own their own homes—really own them, mortgage-free. But only recently did President Raúl Castro authorize the sales of homes, suddenly giving Cubans a valuable financial asset. Many sell them to get cash to open a new business. Others, to immigrate to Miami.

WiFi hot spots are also growing in number. Rejecting an offer from Google to provide Internet access to the entire island, the Cuban government instead set up some 700 public access locations. This includes 65 WiFi hot spots in parks, hotels, or major thoroughfares, where mostly young Cubans gather to message friends or chat with relatives overseas.

Economic swings

2015 was a good year for the Cuban economy, relatively speaking. Growth rose from the disappointing 2 percent in recent years to (by official measures) 4 percent. The Brazilian joint venture cigarette company, Brascuba, reported a 17 percent jump in sales, and announced a new $120 million investment in the Mariel Economic Development Zone. Shoppers crowded state-run malls over the holiday season, too. 

Photo credit: Richard Feinberg.

Consumers still report chronic shortages in many commodities, ranging from beer to soap, and complain of inflation in food prices. Alarmed by the chronic crisis of low productivity in agriculture, the government announced tax breaks for farmers in 2016. The government is already forecasting a slower growth rate for 2016, attributed to lower commodity prices and a faltering Venezuelan economy. It’s likely to fall back to the average 2 percent rate that has characterized the past decade.

Pick up the pace

Cuban officials are looking forward to the 7th Conference of the Cuban Communist Party (CCP) in mid-April. There is little public discussion of the agenda, however. Potential initiatives include a new electoral law permitting direct election of members of the national assembly (who are currently chosen indirectly by regional assemblies or by CCP-related mass organizations); a timetable for unification of the currency (Cubans today must deal with two forms of money); some measures to empower provincial governments; and the development of a more coherent, forward-looking economic development strategy.

[T]here are now two brain drains: an internal brain drain, as government officials abandon the public sector for higher incomes in the growing private sector; and emigration overseas.

But for many younger Cubans, the pace of change is way too slow. The talk of the town remains the exit option. Converse with any well-educated millennial and they’ll tell you that half or more of their classmates are now living abroad. Indeed, there are now two brain drains: an internal brain drain, as government officials abandon the public sector for higher incomes in the growing private sector; and emigration overseas to the United States, but also to Spain, Canada, Mexico.

The challenge for the governing CCP is to give young people hope in the future. The White House has signaled that President Obama may visit Cuba this year. Such a visit by Obama—who is immensely popular on the island—could help. But the main task is essentially a Cuban one.

Richard Feinberg’s forthcoming book, “Open for Business: Building the New Cuban Economy,” will be published by Brookings Press later this year.

On Tuesday, October 28, 2014, tens of thousands of citizens of Burkina Faso gathered in its capital city, Ouagadougou, and its second biggest city, Bobo Dioulasso, to protest proposed changes to its constitution regarding term limits. A vote was planned for Thursday, on whether to extend the current limit of two terms to three. This vote is extremely controversial:  Current President Blaise Compaoré, who came to power in a coup in 1987, has ruled the country for 27 years. Allowing him to run for election in November 2015 could extend his reign for another five years. In Ouagadougou on Wednesday, citizens angry over the possibility that parliament might make it possible for Campaoré to stay in power indefinitely set fire to the parliament and forced legislators to postpone the vote that had been set for Thursday, October 30, 2014 to decide the constitutional issue.

The West African country has been plagued by dictators, autocracies and coups in the past. At independence on August 5, 1960, Maurice Yaméogo, leader of the Voltaic Democratic Union (Union démocratique voltaïque), became the country’s first president. Shortly after assuming power, Yaméogo banned all political opposition, forcing mass riots and demonstrations that only came to an end after the military intervened in 1966. Lt. Col. Sangoulé Lamizana and a collection of military elites took control of the government and subsequently dissolved the National Assembly as well as suspended the constitution. Lamizana stayed in power until November 1980 when the military overthrew the government and installed Col. Saye Zerbo as the new president. Two years later, Col. Zerbo’s government was overthrown by Maj. Dr. Jean-Baptiste Ouédraogo and the Council of Popular Salvation (CSP—Conseil du salut du peuple). Although it promised to transition the country to civilian rule and provide a new constitution, the Ouédraogo regime banned all political organizations, including opposition parties. There soon arose a political struggle within the CSP. The radicals, led by Captain Thomas Sankara, eventually overthrew the government in August 1983, and Capt. Sankara emerged as the country’s new leader. In 1984, the Sankara government changed the country’s name from Upper Volta to Burkina Faso and introduced many institutional reforms that effectively aligned the country with Marxist ideals.

On October 15, 1987, Capt. Blaise Compaoré, a former colleague of Sankara’s, killed Sankara and several of his confidants in a successful coup d’état. In 1991, Campaoré was elected president in an election in which only 25 percent of the electorate participated because of a boycott movement organized and carried out by opposition parties. In 1998, he won reelection for another seven-year term. As president, Campaoré reversed all the progressive policies that Sankara had implemented.

In 2000, the country’s post-Cold War 1991 constitution was amended to impose a limit of two five-year consecutive terms on the presidency. However, Campaoré’s supporters argued that because he was in office when the amendments went into effect, they did not apply to him and, hence, he was qualified to run for re-election in 2005. Despite the fact that the opposition fielded several candidates, Campoaré won 80.35 percent of the votes cast in the 2005 presidential election. And, in the presidential elections held in November 2010, he captured 80.2 percent of votes.

Over more than a quarter century in power, Campaoré has used an unusual formula to achieve relative stability in Burkina Faso—authoritarianism mixed with traces of democracy. The complex governance system has relied primarily on Campaoré’s dominant and charismatic political power and has failed to build sustainable institutions—specifically, those capable of maintaining the rule of law and enhancing peaceful coexistence in his absence.

Constitutionally mandated presidential term limits strengthen the rule of law and provide a significant level of stability and predictability to the country’s governance institutions. In response to the efforts by Burkinabé members of parliament to change the constitution to enable Compaoré to secure another term in office, U.S. government officials have recently stated that “democratic institutions are strengthened when established rules are adhered to with consistency.” On his part, Campaoré has proclaimed that his main and immediate concern “is not to build a future for myself—but to see how the future of this country will take shape.” If this is indeed true, then he should exit gracefully from the Burkinabé political scene and henceforth serve as an elder statesman, providing his country’s new leadership with the advice and support that they need to deepen and institutionalize democracy, as well as enhance economic, social, political and human development.

Insisting, as President Campoaré has done, that the constitution be changed so that he can seek an additional term in power not only destroys the country’s fragile stability but also sends the wrong message to citizens about the rule of law—while citizens must be law-abiding, the president does not have to abide by the country’s settled law; if the law stands in the way of the president’s personal ambitions, he can simply change the law to provide him with the wherewithal to achieve those objectives. Such behavior from the country’s chief executive does not augur well for deepening the country’s democracy, an objective that is dear to many Burkinabé. The question to ask President Campoaré is: How do you want history to remember you? As a self-serving political opportunist who used his public position to accumulate personal power and wealth, at the expense of fellow citizens, or as a public servant who led and directed his country’s transformation into a peaceful, safe and productive society?

A 2010 publication of the U.S. Geological Survey caused major excitement in Cyprus, an island that at the time was suffering from the economic collapse of its neighbor and major trading partner, Greece. According to the publication, the seabed of the Eastern Mediterranean could contain up to 120 trillion cubic feet (tcf) of natural gas.3 Three years later, the Cypriot administration has high hopes that natural gas exports may get Cyprus—the third smallest European Union member state—back on its feet, after its own financial collapse in 2012. Unfortunately for the Cypriots, the reality on the ground is sobering, and it is currently unclear whether Cyprus will become a producer, or an exporter, of natural gas. Around Cyprus, other countries hope to benefit from the energy potential as well, including Israel, Lebanon and the Palestinian Authority. In the Israeli Exclusive Economic Zone (EEZ), in particular, substantial reserves of natural gas have been found, though the verdict is out whether these will in fact all be produced.

Exploration of Cyprus’s offshore concessions is at an early stage. Energy majors such as ENI and Total are among the first to explore possible gas (and oil) reserves and they expect results not before 2015. To date, only two test wells have been drilled by Houston-based Noble Energy. Proven reserves have been downgraded since and are currently estimated to be between 3 and 5 tcf. At this level of reserves, investing in a natural gas liquefaction terminal, which the Cypriot administration has supported, is not economically viable. A better alternative would be to construct a pipeline to Turkey, which has a large and rapidly growing market for natural gas.

Download the full piece »

Downloads

• Politics Trump Economics in the Complex Game of Eastern Mediterranean Hydrocarbons