Marshall Auerback: The Militarisation Of Oil

Oil prices spiked to record levels last week, propelled by a rally in petrol prices and a cold snap in the northern hemisphere, against the backdrop of a tight balance between supply and demand. Yes, that's right, basic "supply/demand," not "political turbulence in the Middle East."

If anything, this simplistic relationship between Middle Eastern political tension and rising/falling crude prices has broken down over the past few weeks. As the FT's Philip Stephens noted, "The Middle East is becoming a different place. The world's sole superpower is unwilling any longer to accept the status quo. That of itself is a powerful agent for change. Images beamed by Arab satellite television, first of the Palestinian and Iraqi elections and now of the public clamour for Syria's withdrawal from Lebanon, are shaking the authoritarian preconceptions of the old order. Behind the scenes, the world-weary cynicism about the prospects of an Israeli-Palestinian peace deal is giving way, if not to optimism, then at least to glimmers of hope."

It is very telling that the price spike came during a most propitious backdrop: a popular uprising in Beirut, the growing isolation of Syria and small stirrings of change in Egypt and Saudi Arabia. Analysts said hawkish comments from the Organization of Petroleum Exporting Countries have contributed to the rally. Ali Naimi, the Saudi oil minister, last week forecast that oil prices would stay between $40 and $50 a barrel for the rest of this year. The acting OPEC secretary general, Adnan Shihab-Eldin, also added fuel to the fire (so to speak) when he said oil prices could rise to $80 in the next two years in the event of a major oil supply disruption, similar to the war in Iraq. (It is also worth noting that crude's strength is no longer simply a weak dollar phenomenon: as market analyst James Turk has noted, oil is now becoming more expensive in terms of both euros and dollars, reflecting the growing breadth of this particular bull market.)

But talk, unlike oil, is cheap. OPEC could no more "talk up" the market than it could talk it down last year. Obscured against the perennial geopolitical conflict that tends to characterise the oil producing regions of the world, or the endless theorising about whether the oil cartel is "cheating" on its quotas, is the fact that exploration success in global oil has been in decline for decades and that the world has been living off of the major fields discovered literally decades ago. Recent exploration has gone in large part toward exploiting more effectively these major fields, but such exploration has not been characterised by huge new discoveries. Announced increases in "reserves" merely reflect changes in reporting requirements as mandated by the SEC, rather than major finds of new sources of oil. Likewise, most advances in technology simply enhance extraction, but have done little to augment existing supply. As a consequence, the rate of depletion of these fields has increased, implying looming supply problems ahead. Add to this the fact that the vast majority of new projects will produce less refinable heavy oil and it is clear that major supply shortfalls loom, cold weather or hot weather.

We have arrived at the summit of "Hubbert's Peak," the oil geologist who in 1956 correctly prophesized that U.S. petroleum production would peak in the early 1970s, then irreversibly decline. In 1974 he likewise predicted that world oil fields would achieve their maximum output in 2000; a figure later revised by some of his acolytes, such as Henry Groppe, Colin J. Campbell, and Matt Simmons, to anywhere between 2006-2010.

If high oil prices are here to stay, it clearly has epochal implications for the global economy. Indeed, even if the recent rise puts paid to the notion that Middle Eastern political risk premiums in and of themselves bear tangential relationship to underlying movements in the oil market, the very lack of new supply will almost invariably lead to an increasing militarization of global energy policy, although perhaps not in the Middle East-centric manner in which this has been occasionally manifested in the past.

For Iraq is hardly the only country where American troops are risking their lives on a daily basis to protect the flow of petroleum. In Colombia, Saudi Arabia, and the Republic of Georgia, U.S. personnel are also spending their days and nights protecting pipelines and refineries, or supervising the local forces assigned to this mission. American sailors are now on oil-protection patrol in the Persian Gulf, the Arabian Sea, the South China Sea, and along other sea routes that deliver oil to the United States and its allies. In fact, as Michael Klare has noted (Blood and Oil: The Dangers and Consequences of America's Growing Dependency on Imported Petroleum), the American military is increasingly being converted into a global oil-protection service:

"Ever since the Soviet Union broke apart in 1992, American oil companies and government officials have sought to gain access to the huge oil and natural gas reserves of the Caspian Sea basin -- especially in Azerbaijan, Iran, Kazakhstan, and Turkmenistan. Some experts believe that as many as 200 billion barrels of untapped oil lie ready to be discovered in the Caspian area, about seven times the amount left in the United States. But the Caspian itself is landlocked and so the only way to transport its oil to market in the West is by pipelines crossing the Caucasus region -- the area encompassing Armenia, Azerbaijan, Georgia, and the war-torn Russian republics of Chechnya, Dagestan, Ingushetia, and North Ossetia.

"American firms are now building a major pipeline through this volatile area. Stretching a perilous 1,000 miles from Baku in Azerbaijan through Tbilisi in Georgia to Ceyhan in Turkey, it is eventually slated to carry one million barrels of oil a day to the West; but will face the constant threat of sabotage by Islamic militants and ethnic separatists along its entire length. The United States has already assumed significant responsibility for its protection, providing millions of dollars in arms and equipment to the Georgian military and deploying military specialists in Tbilisi to train and advise the Georgian troops assigned to protect this vital conduit. This American presence is only likely to expand in 2005 or 2006 when the pipeline begins to transport oil and fighting in the area intensifies.

"Or take embattled Colombia, where U.S. forces are increasingly assuming responsibility for the protection of that country's vulnerable oil pipelines. These vital conduits carry crude petroleum from fields in the interior, where a guerrilla war boils, to ports on the Caribbean coast from which it can be shipped to buyers in the United States and elsewhere. For years, left-wing guerrillas have sabotaged the pipelines -- portraying them as concrete expressions of foreign exploitation and elitist rule in Bogota, the capital -- to deprive the Colombian government of desperately needed income. Seeking to prop up the government and enhance its capacity to fight the guerrillas, Washington is already spending hundreds of millions of dollars to enhance oil-infrastructure security, beginning with the Cano-Limon pipeline, the sole conduit connecting Occidental Petroleum's prolific fields in Arauca province with the Caribbean coast. As part of this effort, U.S. Army Special Forces personnel from Fort Bragg, North Carolina are now helping to train, equip, and guide a new contingent of Colombian forces whose sole mission will be to guard the pipeline and fight the guerrillas along its 480-mile route."

Other countries are responding in kind, notably China. More expensive oil will undercut China's energy-intensive boom. The country is already experiencing sporadic power shortages against a backdrop of growing car ownership and air travel across the country. Energy is becoming vital to strategically important and growing industries such as agriculture, construction, and steel and cement manufacturing. Consequently, pressure is already mounting on Beijing to access energy resources on the world stage. As a result, energy security has become an area of vital importance to China's stability and security. China is stepping up efforts to secure sea lanes and transport routes that are vital for oil shipments and diversifying beyond the volatile Middle East to find energy resources in other regions such as Africa, the Caspian, Russia, the Americas and the East and South China Sea region.

To be sure, China's drive for energy security has nowhere come close to reaching the militarization of America's current energy policy. To the extent that it has engaged in competition, this has so far been limited to the economic sphere through state-owned oil and gas companies such as China Petroleum Chemical Corporation (Sinopec), China National Petroleum Corporation (C.N.P.C.), its subsidiary PetroChina and China National Offshore Oil Corporation (C.N.O.O.C.), all of which are actively seeking to accumulate overseas subsidiaries or offshore exploration rights. Sinopec, for example, has won the right to explore for natural gas in Saudi Arabia's al-Khali Basin and Saudi Arabia has agreed to build a refinery for natural gas in Fujian in exchange for Chinese investment in Saudi Arabia's bauxite and phosphate industry.

Chinese acquisitions are also extending closer to Washington's traditional sphere of influence in the Americas. China and Canada signed a joint statement on energy cooperation, which included accessing Canada's oil sands and uranium resources following Prime Minister Paul Martin's recent trip to the country. Moreover, while attending last November's annual Asia-Pacific Economic Cooperation (A.P.E.C.) summit in Chile, Chinese President Hu Jintao announced an energy deal with Brazil worth $10B supplementing a $1.3B deal between Sinopec and Petrobras for a 2000 km natural gas pipeline. China is also acquiring oil assets in Ecuador as well as investing in offshore petroleum projects in Argentina. During Venezuelan President Hugo Chavez's visit to Beijing in December and Chinese Vice President Zeng Qinghong's visit to Venezuela in January 2005, China also committed to develop Venezuela's energy infrastructure by investing $350M in 15 oil fields and $60M in a gas project in Venezuela.

However, as oil prices rise and China imports an increasing amount of its energy needs, the competition is beginning to spill over into the political and military spheres. The burgeoning energy trade with Saudi Arabia, for example, already complements a growing relationship in the military sphere as seen with China selling Saudi Arabia Silkworm missiles during the Iran-Iraq War in the 1980s,

There are also indications that Beijing's relations with Tokyo are taking on a more militaristic hue, particularly in relation to the issue of Taiwan. Although Taiwan has largely been viewed within the context of the so-called "One China" policy, analyzing the conflict through this narrow prism has obscured other important, energy-related facets underlying Beijing's hawkishness on the issue (and the corresponding response by both Tokyo and Washington). A territorial dispute between China and Japan in the East China Sea, which both sides claim as their Exclusive Economic Zone (E.E.Z.), is being further fueled by reports of vast supplies of oil and gas in the region. The disputed territory includes the Diaoyu or Senkaku islands and the Chunxiao gas field northeast of Taiwan, which according to a 1999 Japanese survey holds 200 billion cubic meters of gas. Japan regards the median line as its border while China claims jurisdiction over the entire continental shelf. In 2003, China began drilling in the area after the Japanese rejected a Chinese proposal to develop the field jointly. Although the Chunxiao gas field is on the Chinese side of the median line, Japan claims that China may be siphoning energy resources on the Japanese side.

The rising military tensions between the two countries manifested itself most recently in the form of a confrontation following the incursion of a Chinese nuclear-powered submarine into Japanese waters off the Okinawa islands on November 10, 2004. The intrusion was followed by a two-day chase across the East China Sea. Although China subsequently apologized, it was not an isolated occurrence: this was soon followed by the intrusion of a Chinese research vessel into Japanese waters near the island of Okinotori, which was believed to have been surveying the seabed for oil and gas drilling purposes. This was, according to a Power and Interest News Report by author Chietigj Bajpaee, the 34th such maritime research exercise by Chinese vessels within Japan's E.E.Z. in 2004, up from eight in 2003, with China not giving prior notification in 21 of the 34 cases.

Tokyo has responded in kind: Japan's most recent Strategic Defense Review named both North Korea and China as causes for security concern as it instigated an overhaul of defense priorities. The review is particularly notable for the inclusion of China as a country that needs "carefully watching" in the wake of the November 2004 submarine incident.

Adding to these tensions is Japan's shift from its post-war pacifist and defensive posture towards a more active military role in the region, as seen with the current deployment of its Self Defense Forces to Iraq. Last December, Prime Minister Koizumi extended by a year the deployment of 550 ground troops in Iraq, the biggest and most controversial dispatch since the Second World War. His government has also continued to push for a revision to the 57-year-old pacifist constitution that would enable more effective participation in such missions as a way of strengthening the U.S.-Japan alliance.

The Bush Administration has not remained a disinterested party in this rising dispute. After a temporary post Sept. 11-cessation of references to China as a "strategic competitor", the US has more recently again begun to express disquiet about the thrust of China's military policy, particularly in response to the proposed lifting of the European Union's arms embargo on China. A recent joint statement by the US and Japan last month named Taiwan as an issue of joint security concern for the first time. In response, China has noted that the US spends more on its defense than the next 18 countries combined, but this has not stopped Beijing from pushing to acquire a national fleet of Very Large Crude Carriers, or V.L.C.C.s, that could be employed in the case of supply disruptions brought on by a terrorist attack, the Malacca Straits (through which about 80 per cent of China's oil imports flow) or a U.S.-led blockade during a conflict over Taiwan.

Growing US-Chinese tensions (fuelled in large part by this ongoing competition for global energy resources) also help to explain China's less than enthusiastic support of US aims to discourage North Korea from developing its nuclear weapons program further. Indeed, in regard to the latter, the Chinese foreign minister, Li Zhaoxing, has recently expressed doubt about the quality of American intelligence on North Korea's nuclear program and said the United States would have to talk to North Korea one-on-one to resolve the standoff. Washington has repeatedly sounded the alarm about North Korea's nuclear efforts and has pressed China, North Korea's only significant ally, to be more active in seeking seek a solution. If the US insists on playing the "Taiwan card," Beijing seems equally happy to play the "North Korea card."

Oil, and the corresponding drive for energy security, therefore, is becoming an increasingly common, yet disruptive, thread driving policy in Washington, Beijing and Tokyo. The competition over energy resources is now becoming an additional area of contention over and above existing trade disputes between Washington and Beijing. China's growing presence on the international energy stage could ultimately bring it into confrontation with the world's largest energy consumer, the United States, where a growing number of American soldiers and sailors are being committed to the protection of overseas oil fields, pipeline, refineries, and tanker routes. Given the parlous state of America's national finances, it is clear why Tokyo, with its huge repository of savings, is being brought in effectively to help underwrite this policy (although why the Japanese have gone along so compliantly, other than a longstanding historic rivalry with China, is less clear). With these 3 global behemoths engaged in an increasingly fraught competition over an increasingly scarce resource, it is clear that the global economy will pay a higher price for oil, not only in dollar terms, but also in blood for every additional gallon of oil which we seek to consume. The great game has truly begun.

ENDS

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