PESD has just released an 87-page case study of Petróleos Mexicanos (Pemex), Mexico's national oil company. In "The Void of Governance: An Assessment of Pemex's Performance and Strategy," researcher Ognen Stojanovski examines how the state-owned company functions and details some of the profound challenges faced by reformers.

Mexico's Petróleos Mexicanos, or Pemex, is the world's third-ranked company by oil production. Almost 40% of the Mexican government budget is derived from Pemex revenues, leaving the country highly exposed to a drop in oil prices and the company itself strapped for cash to support much-needed investment. At the same time, the company has been progressively de-skilled over the decades by an exclusive focus on financial returns for the government, constitutional restrictions on foreign participation in the oil sector, and suffocating interference by diverse government agencies and the powerful workers' union.

Earlier this month Chinese revelers welcomed the new lunar year with a few more candles than usual. The country was gripped by a crisis in electric power production that caused California-style blackouts across the central and southern parts of the country. Power plants could not keep up with demand, especially because they didn't have enough coal on hand to burn.

The immediate causes of China's power crisis are straightforward. Snow storms disrupted the railroads that carry most coal to power plants. Record low temperatures also boosted demand for electricity and coal. But there was a deeper cause at work. China's free-market policies—the same ones that led to China's extraordinary growth in the past decade—have eroded the government's ability to control its economy. Economic activity, by design, is shifting away from state-owned enterprises and central planning. But Beijing doesn't have structures in place to control those aspects of the economy it doesn't own outright. Market reforms are making Beijing less and less relevant to what's really going on in the economy, threatening to turn China into a "weak state." And it's not just China—India, too, is having trouble regulating its industry and economy. The phenomenon is a dark cloud on the Asian century.

If this all sounds abstract, consider that China's blackouts were mainly a byproduct of the government's struggle to manage the planned and market-based parts of the economy side-by-side. Today, the Chinese leadership is worrying about inflation, but they have few useful tools to slow the rise in prices. A few years ago, Beijing might have dampened industrial growth by closing the spigot of finance from state-owned banks. But many newly deregulated state enterprises, as well as new privately owned companies, have found other sources of capital, including caches of massive profits accumulated over the years. One of the few industries Beijing still controls is power—it owns nearly every aspect of the grid, from generators to distributors. So Beijing decided to try and quell inflation by lowering electricity prices.

The energy industry, however, is bigger than just power generation and distribution. It includes the coal industry, which has been the object of market reforms. Starting two years ago the country largely abandoned the traditional planning system for allocating and pricing coal, the main fuel for power generators and one of the power companies' largest costs. Suppliers and buyers were allowed to negotiate on their own terms. With demand for electricity skyrocketing, suppliers had the upper hand, and coal prices rose. With Beijing keeping prices artificially low, power plants could not pass these costs to the consumer. They responded by cutting back on coal orders. As coal inventories dwindled, power generators cut back on capacity, and the lights went out.

Beijing's lack of practical control over large swaths of industry explains an increasing number of China's woes. The environment is a case in point. The government has an elaborate apparatus for environmental regulation, with strict laws on the books, but it is unwilling to enforce the measures for fear of stepping on the toes of local authorities, who usually push industrial development at the expense of greenery. Changing that power structure will require politically dangerous rewiring of the ruling Communist Party's power base. To be sure, Beijing is still powerful in some areas such as Internet regulation. And its recent success in imposing safety standards to close dangerous small coal mines, another area where Beijing is flexing its muscle, probably inadvertently contributed to the current coal crisis. Overall, however, what's most striking is Beijing's inability to impose needed regulation nor to predict what will happen when it does regulate. For example, a keystone in the government's effort to avoid future energy crises is an aggressive plan to improve energy efficiency about 4 percent per year over the current decade. The actual effect of Beijing's efficiency policies is barely one third that level.

These are not passing problems. They reveal a deep weakness in China's administration because the government has been unable to replace its Soviet-style planning system with an alternative scheme that is better suited to a market economy. Like an American film on the Wild West, much of the economy is governed by central strictures that don't really have much impact.

India is also plagued by administrative weakness—and the problems are getting worse as the Indian economy takes off and government struggles to address the byproducts of rapid economic growth. Large pockets of the Indian power grid are unreliable because Indian policymakers tinker with electricity prices in an effort to deliver political favors. (Electricity supplied to most Indian farms costs almost nothing and in some parts of the country is actually free. India has many farmers and they vote; politicians court them with stunts like free power. Poor accounting systems allow others who steal power to blame the farmers.) That tinkering has put most Indian power utilities into bankruptcy. The problems would be even worse if most of the power sector were not actually owned by the central and state governments in India, which shuffle money around to keep the companies afloat. Unable to get reliable power that is essential to industrial production, most large power users build their own power supplies. By some estimates, one third of the country's power plants are of this "captive" variety—by design, disconnected from the government-controlled grid so they are more reliable and also immune from political meddling.

The rise of weak states on the world stage will affect every aspect of international relations. It could send globalization astray. It will be hard to realize the full benefits of trade, for example, if essential countries are unable to enforce safety standards and trade laws. Fixing these problems may require a new style of international diplomacy that relies less heavily on deals such as treaties with central governments. Instead, specific contracts might be written directly with the segments of society that are best administered and most able to change their behavior. Taming the volcanic growth in Chinese emissions of greenhouse gases, for example, may depend less on whatever deal is crafted with Beijing and more on specific commitments that the West can work out with bosses in the Chinese power sector. How can China be a "responsible stakeholder" in the world economy if it can't actually follow through with commitments it makes in the international arena?

As the pundits gaze at the coming Asian century, they have wondered how Asia's new powers will reshape the world. But the big challenge in the coming Asian century may not be these new countries' burgeoning strength but their weakness.

Democrats voting in Ohio and Texas may well decide the shape of the U.S. presidential election. Regardless of who they choose to run against Sen. John McCain, the all but certain Republican candidate, it is likely that energy issues will figure more prominently in the election than at any time in the last generation. High prices are sapping economic growth, the No. 1 concern across most of the country. Gasoline is now approaching $4 a gallon; natural gas and electricity are also more costly than a few years ago. Global warming has become a bipartisan worry, and solving that problem will require radical new energy technologies as well. All this is good news in the rest of the world, which is hoping that a new regime in Washington will put the United States on a more sustainable energy path.

It may be a vain hope. It is extremely unlikely that Washington will ever supply a coherent energy policy, regardless of who takes the White House in November. That's because serious policies to change energy patterns require a broad effort across many disconnected government agencies and political groups. Higher energy efficiency for buildings and appliances, a major energy use area, requires new federal and state standards. Higher efficiency for vehicles requires federal mandates that always meet stiff opposition in Detroit. A more aggressive program to replace oil with biofuels requires policy decisions that affect farmers and crop patterns-yet another part of Washington's policymaking apparatus, with its own political geometry. New power plants that generate electricity without high emissions of warming gases require reliable subsidies from both federal and state governments, because such plants are much more costly than conventional power sources. Approvals for these new plants require favorable decisions by state regulators, most of whom are not yet focused on the task. Expanded use of nuclear power requires support from still another constellation of administrators and political interests. And so on.

Whenever the public seizes on energy issues, the cabal of Washington energy experts imagines that these problems can be solved with a new comprehensive energy strategy, backed by a grand new political coalition. Security hawks would welcome reduced dependence on volatile oil suppliers, especially in the Persian Gulf. Greens would favor a lighter tread on the planet, and labor would seize on the possibility for "green-collar" jobs in the new energy industries. Farmers would win because they could serve the energy markets. The energy experts dream of a coalition so powerful that it could rewire government and align policy incentives.

This coalition, alas, never lasts long enough to accomplish much. For an energy policy to be effective, it must send credible signals to encourage investment in new equipment not just for the few months needed to craft legislation but for at least two decades-enough time for industry to build and install a new generation of cars, appliances and power plants, and make back the investment. The coalition, though, is politically too diverse to survive the kumbaya moment.

Just two weeks ago the feds canceled "FutureGen," a government-industry project to develop technologies for burning coal without emitting copious greenhouse gases, demonstrating that the government is incapable of making a credible promise to help industry develop these badly needed technologies over the long haul. (The project had severe design flaws, but what matters most is that the federal government was able to pretend to support the venture for as long as it did and then abruptly back off.) Similarly, legislation late last year to increase the fuel economy of U.S. automobiles will have such a small effect on the vehicle fleet that it will barely change the country's dependence on imported oil and will have almost no impact on carbon emissions. Democrats and Republicans alike claim they want to end the country's dependence on foreign oil, but neither party actually does much about it.

The only policies that survive in this political vacuum are those that target narrower political interests with more staying power. Thus America has a highly credible policy to promote corn-based ethanol, because that policy really has nothing to do with energy; it is a chameleon that takes on whatever colors are needed to survive. It is a farm program that masquerades as energy policy; at times, it has been a farm program that masquerades as rural development. As an energy policy it is a very costly and ineffective way to cut dependence on oil. As a global warming policy it is even less cost effective, since large-scale ethanol doesn't help much in cutting CO₂ and other warming gases. Similarly, the United States has a stiff subsidy for renewable electricity-mainly wind and solar plants-because environmentalists are well organized in their support for it. The coal industry periodically gets money for its favored technologies, as in FutureGen, but even that powerful lobby has a hard time getting the government to stay the course.

Europe is in danger of contracting the same affliction. To be sure, most European countries long ago started taxing energy as a convenient way to raise revenues, which fortuitously also makes energy more costly and creates a strong incentive for efficiency. That approach did not originate as an energy policy, but it has emerged as a keystone of Europe's more successful efforts to tame energy consumption. And Europe is in the midst of shifting policymaking from the individual countries to Brussels, which may create a more coherent approach. But despite these advantages, Europe is notable for its inability to be strategic. For example, Brussels is touting a new pipeline called Nabucco that would help Europe cut its dependence on Russia for its natural gas. So far, Brussels is good at talking about the Nabucco dream but can't agree on a route, financing, or even on where to get the gas that would replace Russia's.

The rising powers in Asia are also finding that they, like America, have a hard time developing and applying strategic energy policies. China develops energy policy through its economic planning system, with mixed results. The country doesn't even have an energy ministry, and efforts to create one are being stymied by the bureaucracy and companies that fear they will lose influence. India has four energy ministries and no real central strategy. Like America, India is very good at declaring visions for strategic energy policy but dreadful at putting them into practice. The Japanese public is just as fickle, but the government bureaucracy is entrenched and far-sighted enough to keep its focus long after public interest has waned.

All this means that the underlying forces that are causing high demand for energy (and high prices) and emitting greenhouse gases will be hard to alter. The effort to solve global warming might change this pessimistic iron rule of energy policy, because the environmental community that is the core of the coalition in support of global warming policy is becoming much stronger and has shown staying power. For the moment, however, that is a hypothesis to be proved.