Petropolitics: The Consequences of the Oil Shortage

The world stands on the verge of a structural oil shortage. That has large consequences for prosperity, democracy and power relations. Part I in a series of two: the international consequences.

When the oil price jumped to 150 dollars per barrel last summer, truckers blocked highways and the American Congress hurriedly invited all kinds of oil experts, energy safety was international priority number one for a short while. But with the credit crisis and the relapse of the oil price, the worries disappeared as quickly as they had arisen. Wrongly so: the world stands on the verge of an oil shortage. And with the decline in the oil price, this will hit even harder. The consequences of that go further than pain at the gas station: some scientists measure the course of world history by it. In 1986, the oil price collapsed and stayed low for thirteen years thereafter. In that same period, the Soviet Union collapsed and the Iron Curtain fell, the number of wars and civil wars in the world decreased by a quarter and the number of states with a free society increased with more than half. Making a link sounds like a wild conspiracy theory, but a growing number of scientific studies connects the fall of the Soviet Union, the freedom and peace in states, the outbreak of wars and the progress or regress of democracy in the world with the price of raw materials. And especially with the most important raw material in the world, the Black Gold.

If only some of those ideas stand true, it implies not much good for the future. Figures that were published by the International Energy Agency (IEA) three weeks ago, show that the current oil wells produce seven percent less oil every year. “Even if the demand for oil would remain stable until 2030, four times the current production of Saudi Arabia would be needed to counter only the effect of drying oil fields,” the IEA writes. But that extra production will not come: because of the credit crisis, the temporary price decrease and large setbacks for oil companies, the necessary investments remain in the closet. The IEA therefore predicts an oil shortage as from 2010. And not a shortage of a few weeks: a structural shortage, possibly forever.

That has large consequences for the world: stronger authoritarian states, increased meddling of large countries in oil-rich regions and an increasing risk of raw material wars. “The interesting question,” researchers of Clingendael euphemistically state in a study from the past summer, “is whether countries that use or produce oil can work together to prevent the advancing oil shortage, or whether they will give in to a destroying competition to protect energy and their prosperity.”

As energy plays an important role in the world economy, the advancing oil shortage has caused a new strategic priority in the Western world and the large growing countries: energy safety. The majority of the oil is traded on what is called the “world market,” but no one who is strong or rich enough to set things to their benefit, relies on that. Large consumers try to insure the supply in all different kinds of means, before and behind the screens.

In that respect, the past is a little reassuring. Since oil was discovered a century ago in the Middle East, the region has been the focal point of foreign intrusion, with directed coups, weapon deals and manipulation. Some of the largest international problems of this moment can be traced back to it directly or indirectly, like the radical regime in Iran, the mess in Iraq and the threat of Al-Qaeda. “Remember that the biggest reason that our enemies occupy our country is the theft of our oil, so give everything you have to stop the largest oil theft in history,” Osama bin Laden said in 2004 in a video message to his supporters.

The hassle over the Middle East has reached a downward spiral. The big questions are the same as always: Iraq, Iran and Saudi Arabia, but Russia has let go of the competition around the Persian Gulf. As far as Saudi Arabia is concerned, the big questions are whether the oil reserves are as large as Riyadh claims and how long the uneasy marriage of reason with the United States will stand. As far as Iraq is concerned, the continuous fights over oil revenues, the lack of safety and the political instability make all future scenarios uncertain – along with the large oil deals the Iraqi government closed this summer with Western oil companies.

The big hassle in the Middle East takes place between Iran and the U.S. All kinds of issues cross each other, like Iran’s support to battle groups like Hezbollah, its nuclear programs and Iran’s large energy supplies. India, Pakistan and China would love to have direct pipelines to Iran, but Tehran has been in doubt for a long time already. The “exit” of Iran’s energy therefore has become a case of intense and openly geopolitical maneuvering between, among others, European countries, Russia, the U.S. and China. In December, President Bush called Beijing to convince the Chinese to isolate Iran economically because of its nuclear program. Three days later, China signed a contract for one hundred billion dollar for Iranian gas and oil.

In the last couple of years, much attention has been given to other regions. Western countries want to source their oil from as many regions as possible, so as not to be dependent of the unstable Middle East. This is especially important for the U.S., because they will have depleted their own oil reserve in about eight years. In the West, a special fascination for Central Asia has existed for more than a century, which was central in the first geopolitical theories and in which Great Britain and Russia played out the Great Game.

After the Cold War, the region came back onto the radar screen because of the suspicion of gigantic oil reserves by Western secret services and oil companies. In the entire region, the U.S. started to flatter rulers and military elites, to the annoyance of Russia.

‘The Carter doctrine from 1980 declared the oil of the Middle East to be a case of war and peace for the U.S. “President Clinton added the Caspian Sea-area to it,” says the American professor Michael Klare, author of the this years “Rising Powers, Shrinking Planet: The New Geopolitics of Energy,” in a phone interview. The special friendship between the U.S. and Georgia also originates in the Clinton years. Thrust forward by a wave of bribes, the Baku-Tbilisi-Ceyhan (BTC) oil pipeline was built from Azerbaijan through Georgia to Turkey. From a geographic perspective, the route was completely illogical: the area was mountainous and unsafe and with a fifteen-kilometer-long pipeline, Azerbaijan could have already exported its oil via Iran. From a political perspective, the BTC-pipeline was a master move. The oil of the Caspian Sea, until recently a Soviet inner water, slipped from the hold of both Tehran and Moscow. Russia would never forgive Georgia for it. That became apparent when Georgia started to have plans for a gas pipeline next to the BTC pipeline, after the turn of the century. Russia had reemerged in the meantime and did everything it could to prevent the pipeline. “There were various reasons for the Russian invasion of Georgia in August, but one of them for sure was to give off a strong warning to the entire region: no gas pipeline,” according to Klare. After the invasion, crucial Central Asian countries withdrew their support for the pipeline. With that, they handed over their gas to Russia, and were rewarded with generous contracts.

Around the time that the BTC pipeline became operational, in 2006, it was already clear that Central Asian oil had been a mirage. Much less oil was struck than was thought, and it even was difficult to get and was of low quality when able to do so. The focus therefore shifted elsewhere. To Africa, where a third of all new oil finds took place after the turn of the century.

In October, a new American military command center became operational: Africom. Tellingly enough, Africom was the first new command center after Centcom, which was established after the Carter doctrine to cover the Middle East. Strategic Insights, the magazine of the American navy university, mentioned the reasons for the foundation of Africom: “The spread of international terrorism, the larger American dependence of African oil and the enormous recent involvement of China with Africa.”

Those last two reasons overlap each other, because China is the largest force behind oil hunger of the coming years: 43 percent of the new demand will come from China, according to the IEA. “China will overcome the U.S. as the largest energy consumer around 2015, and will roam the world looking for new energy sources. It looks for energy everywhere the U.S. does. And that translates into a strategic battle,” says Michael Klare. Part of the battle are Chinese (weapon) deals with pariah states like Sudan and Zimbabwe; the continuous outbidding of Western companies at infrastructure projects in all of black Africa; intense competition by sometimes foul companies for Angola’s oil riches; test drills in notorious problem countries such as Uganda, and a true oil bonanza on the African West coast. Meanwhile, a fifth of all oil that is used in the U.S. comes from West Africa, almost as much as from the Middle East.

Also the North Pole draws attention: last year it was the stage of intense chest pounding, especially from Russia, for the possible excavation of raw materials now that the polar area is heating up – including oil. The wild estimations on oil reserves fall over one another and in the dark waters under the ice, British, American and Russian submarines shadow each other again.

The question is whether the battle for oil will boil over from diplomatic and power-political competition, as between the U.S., China and Africa, to straight war between states. “Considering raw material wars, people always speak about a hypothetical future. But we already had three pure oil wars,” the Austrian journalist and oil expert Thomas Seifert says, author of the previously released book in the Netherlands “The Black Gold: Oil as source of greed, war, power and money.”

“The war between Iran and Iraq was the first oil war,” Siefert says in a phone interview. “Saddam Hussein wanted only to conquer Iran’s oil-richest province, he really did not want to push towards Tehran. The second oil war was over Kuwait: it started with an oil conflict between Iraq and Kuwait, Saddam occupied the whole of Kuwait for its oil and the freeing of Kuwait evolved around that too. In the third war, the American occupation of Iraq, a number of reasons were at play. But of course oil was one of the most important, or the main reason: if there would have been only sand, more than a billion dollars and so much political capital would not have been spent on that war. Where the next oil war will take place is of course unknown, but that one will come, is certain.”

Whoever takes a look at the sums that are involved in the oil trade, can hardly doubt them. The constant stream of oil from the Middle East and other regions to buyers and the constant stream of dollars, yen and euros the other way, is the largest transfer of prosperity from history, according to some economic historians. It concerns 85 million barrels of oil per day. Ten years ago they cost about 10 dollars apiece, last year the price fluctuated between fifty and one hundred and fifty dollars per barrel. Per year, it is the transfer of $1500 hundred to $4500 billion, the last amount is as high as the economy of Japan, the second one in the world.

Money is not only something to fight over, it also changes the power structure in the international arena. Four years ago, semi-dictators like Hugo Chavez and Vladimir Putin started to have a strikingly big mouth against the U.S. Also the government of Iran, which kept itself very quiet since the invasion of its two neighbors, re-found its voice against the Great States. The first analysts then linked the “high” oil prices and the new assertiveness of authoritarian, oil-exporting states. Since then, the oil price has kept on increasing – now it’s almost twice as high as then and last summer it was four times as high – and this has made clear which direction international relations go under a high oil price.

The clearest signal was the Russian military punishment against Georgia a couple of months after NATO promised Georgia a future membership. Russia was bankrupt 10 years ago, plundered and powerless, now it has a “Stability fund” of $200 billion, it regularly announces new weaponry and missile placements, and it kept its troops for weeks on end in Georgia, accompanied by a harsh rhetoric towards the West and the acknowledgment of two Russian liege states on Georgian territory.

It is hard to predict where Russian power ambitions will stop, but so far, Russia has been surprisingly blunt and open about playing out its energy card in relations with Europe. “If you talk off the record with Russian officials, they bluntly state: ‘We have two means of power to play out, our army and our energy,”‘ Thomas Seifert says.

Iran, whose government budget leans on oil export for eighty percent, is a similar case. In 1997, when the oil price decreased towards 10 dollars, Iran called for a “dialogue between civilizations.” Since then, the Iranian government used the continuous stream of oil revenues to spread its influence on the Middle East, influence the situation in Iraq, regain control of its own country and protect itself from foreign pressure. “Even if they pass ten resolutions, it will not influence the Iranian economy and politics,” the Iranian president, Mahmoud Ahmadinejad, scoffed last year, after the UN Security Council announced sanctions because of Iran’s nuclear program.

The high oil price has made oil countries more powerful compared to Western oil companies, whose capital and expertise they need for oil production. Now, thanks to promises of huge profits, countries can hire companies like Halliburton, which can supply complete drilling platforms, including personnel, to protect them. Therefore, the future of the once almighty oil giants has become insecure. The best demonstrations of this are Shell and BP, which have been pushed out of very large energy projects by Russia.

Even more disturbing is that oil countries gain more power in the Western and world economy. When the credit crisis erupted, many people in the West suddenly realized that the last lifesaver might only come from the state funds in which many oil countries have parked the enormous money stream of the last few years. Those funds have been sale hunting in the life of Western companies since last summer. In Western capitals many people wonder whether the state funds will be used solely for profit, or also for strategic goals. But while countries like Germany and Great Britain work on legislation, the state funds keep on buying.

The only structural solution for all international problems caused by a high oil price, is reduce the Western addiction to oil. Pleading for alternatives has therefore long left the environment corner: think tanks and councils see it as the key to enlarge the economic and strategic safety of the West and guarantee the stability of the international system. The problem is that the alternative does not exist and not enough is being invested in searching for it – and with the reduction in the oil price, that will get as little investment for now as new oil wells. It will be a hard landing in 2010.