Interview with Larry Kudlow of Kudlow & Company on CNBC

SECRETARY RICE: Good to be with you.

QUESTION: All right. Madame Secretary, there's a couple of front page story news items this morning that are worth tracking down. One of them -- I mean, we're a financial network. Qatar -- the oil minister of Qatar is saying that oil should go to a hundred bucks a barrel. He's saying if you look at the inflation trends over recent decades and the drop in the U.S. dollar, in order for them to keep their purchasing power, he'd like to see oil at a hundred bucks. I can't think of anything worse for our economy. You have a thought on this?

SECRETARY RICE: Well, you know that we favor letting the market work here and I don't think that political statements are particularly helpful. The issue here is that, as the President said, we are too reliant on oil, we're too reliant on foreign sources of oil. It's why he has an energy plan that would help to reduce our dependence on foreign oil, that would help to give us alternative sources of energy. But we know that it's going to be a while and therefore, the important issue is to get as many alternatives for supply and as many alternatives for supply routes as possible. But this is going to be a market driven issue, I would hope not a politically driven issue.

QUESTION: While all the new energy planning and development goes on -- could take quite a while, as you know -- are you or your ambassadors in touch with people like this who come out with statements?

SECRETARY RICE: Well, certainly, we have a very active diplomacy, diplomacy of energy, I would call it, in which we try and relate to people, try and impress upon them the importance of the international -- the health of the international economy to their interest, that if the international economy is not healthy, then there is not going to be the demand for the resources -- the energy resources that is there. And so of course, we're in constant contact and statements of that kind are simply not helpful.

QUESTION: Do you ever jawbone them or say, look, we're allies, we're protecting you in the Middle East, we wish you could give us a break on oil prices?

SECRETARY RICE: Look, all of this is known, but our view has been that this is a market issue, it is an issue of the health of the international economy, it is an issue of reliable supply, it is an issue of always keeping in mind the health of the international economy and trying, therefore, to increase production and increase the possibility of supply so that the international economy remains healthy. And this is a point that we make to all of our friends who are major energy suppliers.

QUESTION: Another front page story that the New York Sun is reporting and I see the Washington Post picked it up -- apparently, some bungling -- we had penetrated al-Qaida's internet communications system, but some American official released the Usama bin Laden tape of September 11th prematurely, al-Qaida saw it, and they've gone dark now. They've shut down and it looks like the penetration is lost. It's a huge story. What can you tell us about this?

SECRETARY RICE: Well, I can't comment on that story. I don't know the details of that story. I assume that the person will be in touch with those that are responsible for such, if it indeed happened. But look, we're on a worldwide mission against al-Qaida. The use of information against al-Qaida is something that is very closely followed. What we have to do is to make certain that the world knows what al-Qaida is and what al-Qaida stands for.

And what we're seeing around the world, Larry, is that as people get more and more familiar with what al-Qaida really means, what their political philosophy is, if you will, they're being rejected. That's why they've been rejected in the Iraqi province of Anbar, because people got a look at them up close and personal and nobody wants to live under that kind of brutal, backward-looking philosophy. So that's what we're focused on, but I really can't comment on that specific question.

QUESTION: Just more generically -- I appreciate you can't comment on some of this, but when the Usama tape came out, what is it, about a month ago now, some people -- some spokespersons in the White House kind of distanced -- said, look, he's not important, he's just in a cave and we shouldn't worry. But in fact, isn't it al-Qaida internet communications, cyberspace system -- isn't this really their biggest weapon? Isn't this their biggest organizing tool that still makes them a threat?

SECRETARY RICE: Well, there's no doubt that they do use the internet and frankly, they sometimes use it quite effectively to recruit, to spread lies and propaganda. And so one of the issues that we've had and one of the tasks that we've had is to make certain that somebody is countering that propaganda. We've been very active here at the State Department and starting to use more effectively the internet and internet communications. We try to be very rapid in answering their propaganda claims, but of course, they use the modern technologies like everyone uses them.

And we all know that modern technology can be used for both good and for ill, but in general, the internet has also been an extremely important tool for democratization. I would note that in the recent crisis in Burma, one of the things that the Burmese junta tried to do was to shut down any access to that kind of communication because they knew that the story was getting out via internet, via camera phone because people were taking pictures, unauthorized pictures of what was going on and sending them out across the internet.

So yes, the al-Qaida and their ilk use these technologies, but so, frankly, do the forces of democracy. Our goal has to be to counter their hostile and -- their hostile propaganda and to make sure that it's answered.

QUESTION: Another story this morning -- it's an AP story that -- excuse me, the Maliki government in Iraq wants to oust all of the Blackwater private security forces. Can you comment on that?

SECRETARY RICE: Well, again, I don't want to comment on a news story. We're talking frequently with the Iraqi Government. The Iraqi Government and the United States have formed a joint commission to look at the issue of private security contractors in Iraq. We want to be respectful of Iraqi sovereignty. We want to be respectful of their laws. And certainly, we want to see innocent Iraqis in a position in which there aren't incidents of this kind.

But we also need to be able to protect our diplomats. They need to be able to get out and around to help this young Iraqi democracy develop, whether it is going to the Ministry of Finance to help them with a budget system or going to help a local council develop procedures for governing at the local level. We have to be able to get out and around. And so we're working very hard. I have asked that there be several reviews of the way that we use private security contractors. We are going to look at the recommendations of an independent group, including General George Joulwan, a retired four-star general, and Stapleton Roy, a retired ambassador. They will get back to me with recommendations. But I think we shouldn't jump to any conclusions until we see the final picture.

QUESTION: You know, some observers say when you look at all these private security forces -- I guess we have Blackwater, DynCorp, Triple Canopy, that there's about 10,000 of them in Iraq. Yes, they serve a very useful purpose, but some folks say, look, this really isn't the optimal security way. Optimally, we ought to be doing this under the umbrella of the U.S. military forces. Your thought on that?

SECRETARY RICE: Well, I don't really think you want to have American military forces tied down trying to protect convoys of the many, many diplomats that we have to move around the country. We do have, for instance, in some places the Provincial Reconstruction Teams are actually embedded with combat brigade teams, and in that case the security is provided by the military. And we have to have a mix of security. Sometimes the security is provided by our own Diplomatic Security, but the private security contractors do play an important role. We just want to make sure in the reviews that we're doing that the role is appropriate, that the authorities are adequate and that there is adequate oversight of those activities. But private security contractors are going to have to play a role in the multiple means that we use to secure our people.

QUESTION: How do you respond on this to critics who say that the use of private contractors really shows that our military forces are essentially under-manned, under-funded and probably under-equipped? How do you respond to that?

SECRETARY RICE: Well, I just think it's a jump in logic. You have to use a -- different kinds of security and different means of securing our people. As I said, we do sometimes embed with the military. Sometimes we use our own substantial Diplomatic Security force. But on other occasions, when there are large-scale activities in a place like Iraq or Afghanistan, private security contractors play a role. So I don't think that we should jump from that to the conclusion that, oh, if we just used the military we could do without private security contractors. I simply don't think that that is true. There are many other things that the military needs to be involved in, and we're going to look at the appropriate role, the appropriate mix, of private security contractors, of Diplomatic Security people, who are now, by the way, in a new posture of accompanying these private security contractors so that we can make sure that we've got the right mix of assets to secure our people so that they can do their jobs.

QUESTION: Over the weekend, General Petraeus, speaking in Iraq, kind of outed the Iranian Ambassador to Baghdad as a member of the Qud terrorist group, part of the Iranian Revolutionary Guard forces. Why do you think General Petraeus did that?

SECRETARY RICE: Well, I'll let General Petraeus speak for himself. But he's not the first to speak to the active and indeed malign role that Iran plays these days in Iraq, the fact that they have allowed people to come across that border, indeed that weaponry and technologies are coming across that border that not only endanger our forces but endanger innocent Iraqis. We've always said that the Quds Force plays a very destructive role in Iraq and, in fact, we've been very active in picking up their people. General -- Ryan Crocker, when he talked with the Iranians told them that their people weren't going to be safe in Iraq as long as they were engaged in activities that endangered the lives of our soldiers or endangered innocent Iraqis. So there's nothing new in this, and General Petraeus and his people are working very hard to disrupt these Iranian-inspired activities and to make sure that when we find their activists involved in these kinds of activities that they're picked up and detained.

QUESTION: I mean, everybody agrees, I think, at this point, that the Iranians, whichever group of terrorist forces under their command, they're helping to kill American soldiers; they're arming our opponents and insurrectionists and so forth. I guess the question is Madame Secretary, are we making Iran pay for this? Are there serious costs and consequences for Iran?

SECRETARY RICE: Well, certainly the Iranians are seeing that their operatives are going to be pursued and pursued very actively in Iraq. Any number of them, including some high-ranking people, have been picked up and have been detained and have been questioned, and of course then give a lot of information about how other Iranian activities can be stopped. And so they are paying that price in the loss of some of their operatives there.

And in terms of the region as a whole, the United States has reinforced its position in the region. We are actively pursuing the -- better security cooperation with some of our longtime allies in the region. We have arms packages that are going to give our allies better security capability in the region. And of course, the United States has signaled its enduring interest and its continued interest in the region by the activities of our carrier strike groups that have been active there.

So I think the Iranians get the message that there is not going to be any free activity here; they're going to pay a price for it.

QUESTION: You know, CNBC has done a lot of homework, a lot of reporting, a lot of phone calling on this business of divestment and financial sanctions on any companies, any countries, doing business with Iran. And frankly, the results seem to be disappointing; it's just too much intermingling, intertwined. The global economy is very integrated, as you well know. Do you believe really that the financial sanctions will stop Iran or is it going to be necessary to take stiffer action?

SECRETARY RICE: Well, I consider the financial sanctions a part of the diplomatic process. In fact, I think if you look at what has happened to Iran in terms of its access to the international financial system, it is declining. Banks are leaving. People are refusing to do asset transactions for the Iranians. People are refusing to monetize their transactions in dollars. I think you will see even greater activity as we sanction more of their entities, because as we sanction their entities it makes it impossible for major banks to deal with those entities lest they risk their American business.

So we're just at the beginning of this, not at the end of it. And I'm quite certain that we can bring a lot of pressure on Iran in terms of financial network and its financial assets to make it very difficult for it to continue to pursue these policies that defy the international community. And they're not just measures that we take within the UN Security Council, although those are important, too. These are measures that are largely aimed at Iran. And in part, Larry, you know very well how sensitive financial institutions are to reputational and investment risk, and we're seeing that those risks are being taken into account as people make decisions about their business ventures with Iran.

QUESTION: What do you say to a supporter, an Administration supporter like Senator Joe Lieberman of Connecticut? I've interviewed him several times. He said it's necessary to stop this Iranian arming and equipping and killing of American soldiers and so forth by just military actions across the Iraqi border into Iran, go after these Quds training camps; those are the sources of the disturbance. How do you respond to Mr. Lieberman?

SECRETARY RICE: Well, the military has told the President that they are doing what they need to do to cut off these activities, and I'm quite certain that we're not going to permit Iran to use that border to continue to send in technologies that injure our soldiers. As I said, we've been very active against their operatives, very active against their supply lines. And I suspect that as we go forward, the President is going to be determined, as he has been, to listen to his commanders and to do what is necessary to prevent Iran from carrying on these nefarious activities.

QUESTION: Secretary of State Rice, we thank you very much for your time.

SECRETARY RICE: Thank you very much.

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