For the first several decades of its existence, the state of Israel was the butt of the old Jewish joke about Moses leading the Jews to the one place in the Middle East without natural resources. But after the discovery of vast natural gas fields off its coast (as well as shale oil on land), the jest no longer made sense. As Arthur Herman wrote in a feature in the March 2014 issue of COMMENTARY, the potential bounty from the Tamar field that has already begun producing natural gas and the far bigger Leviathan site on which development has not yet begun had the potential to make Israel the world’s next energy superpower. The prospect of not only energy independence but also of a large export business that would not only enrich the Jewish state but enable economic ties that would create new relationships and alliances that would make it far more secure.
The only worry about all this was not whether the gas could be brought out or whether it would play a part in transforming Israel’s economy. The only problem was whether Israel’s fractious political system and over-regulated economy and a judiciary and bureaucracy that seem most comfortable when stifling innovation and growth rather than enabling it would find a way to gum up the works and stop the gas fields from being exploited. Unfortunately, we now have the answer to that question.
Yesterday’s ruling by Israel’s High Court of Justice struck down a deal that Prime Minister Netanyahu had brokered between the government and Texas-based Noble Energy – which has taken the lead in developing Israel’s big energy project —and an Israeli firm that would have allowed work on Leviathan to begin.
This decision is the culmination of years of maneuvering that pitted Netanyahu’s government against a coalition of left-wing opponents determined to stop the project.
Some Israelis objected to Nobel making too much money from Leviathan or that it would constitute a monopoly. Given that without the company’s foresight and investment, Israel’s energy revolution might never have taken place this was not as reasonable a complaint as it sounded. Nevertheless, Netanyahu and his government labored to come up with a compromise that was announced last June that brought the Delek company into the mix and limited Nobel’s control. The prime minister had to employ the power of the country’s Security Cabinet to override the decision of an anti-trust commissioner to spike the project. But his use of a national security rationale was justified since so much of Israel’s economic future rested on a common sense approach to the problem that would enable the project to start and allow the country to make deals with nations like Turkey for future export via pipelines.
The one catch in the agreement that Nobel needed was certainty. Netanyahu negotiated a “stability clause” that would ensure the producers that future governments would not try to swoop in and change the rules of the game. This was, again, a reasonable provision since Nobel would have already spent vast sums on developing the field and it would not be fair to it or its investors for Israel’s next government to demand a greater share of the profits or otherwise alter the arrangement. Without “stability” there is no way Nobel or any such developer would be willing to risk its financial life on doing business with Israel. But it is precisely this clause that the court struck down.
Israel has a well-earned reputation as the Start Up Nation where its brainpower and expertise have allowed it to become a new Silicon Valley of high-tech innovation and development. But that aspect of Israel’s economic culture has always competed with the socialist ethos that dominated its origins. The Labor Zionist movement worked wonders in helping to build the state of Israel, but it saddled the country with an economic model that might best be described as reminiscent of East Germany. The “start up” aspects of Israel’s economy grew up in industries that were not dominated by the Histadrut (an important institution that can best be understood as the moral equivalent of the AFL-CIO if the labor conglomerate also owned much of the nations’ leading companies). The deadening hand of regulation and state monopolies was largely freed up in the 1990s, but its spirit lives on.
Under Netanyahu, Israel’s economy has thrived, but the struggles of the middle class and other issues that are related to the transition from socialism, as well as the endemic problem of a small nation that is forced to support a relatively large army and security apparatus, continue to plague it. Combined with an environmental movement that exploits largely unreasonable worries about the impact of the gas fields on the coastline, there is a considerable constituency for slowing if not halting the project.
Add in a High Court that recognizes no limits on its power to intervene wherever it likes without a shred of authority that is actually rooted in law, and you have a perfect storm of factors that could doom Leviathan and expectations about Israel’s energy future.
For the moment, that is exactly what has happened. Unless Netanyahu’s government can think up some new stratagem that will enable it to circumvent the court, as the prime minister said, “the gas is liable to remain in the depths of the sea and that hundreds of billions of shekels will not reach the citizens of Israel.” He’s right about that. Unless the deal with Noble is saved, the Leviathan field will remain unexploited.
The battle over the natural gas fields was always whether people of vision and courage — like those involved in the development of the gas fields and a government that had the wisdom to back them — had the political power to ensure that naysayers could not prevail. As it turns out, that may not be the case. Without a political system that is ready to let those who invest in innovation profit from it, development of natural resources is always doomed along with a nation’s economic freedom and prosperity. With respect to what is probably the single most important battle to be fought for Israel’s economic future, the “Start Up Nation” appears to have beaten down by fear and envy. Though many Israelis — especially those who constitute Netanyahu’s socialist and populist critics — may cheer the prospect of Nobel being denied profits, they may be forfeiting a golden opportunity to ensure their nation’s future.