Energy Geopolitics...... the U.S. getting worried

Although the current crisis has in large part been due to speculators moving out of the sub-prime crisis and into commodities there are however a number of Geopolitical factors and trends and we should be aware of that will shape the global situation. The age of oil, produced its own technology, its balance of power, its own economy and its pattern of society. The future of energy security will play a key role on the global balance of power.

These factors are four:

1. The Eastern threat - The Middle East is gradually shifting from being a unipolar region in which the US enjoys uncontested hegemony to a multipolar region. The US will face more competition from China and India over access to Middle East oil. Soaring global demand for oil is being led by China’s continuing economic boom and, to a lesser extent, by India’s rapid economic expansion. Both are now increasingly competing with the US, the European Union and Japan for the lion’s share of global oil production.

This additional demand comes at a time of continuing production problems in a number of oil-producing nations. Production is down in Nigeria after continues attacks on pipelines by anti-government militants, while Iraqi exports through the north of the country have been hit by renewed cross-border raids by Turkish forces against Kurdish insurgents.

Economists warn that continuing high oil prices will impact on the global economy, hitting growth and fuelling inflation. More importantly it will impact America’s ability to fuel its own economic growth and in turn become more reliant on China for cheap goods. The American economy used to be the world’s powerhouse, but today it is being left behind by emerging economies. To compound its problems, The demand for greater oil is affecting America’s ability to pull itself out of its downturn and is creating inflation across the Western world. If China at any time in the future should develop its political will and ambition, it is in a relatively strong economic position to substantially weaken America.

2. The Russian threat - Russia, the leading producer of natural gas and one of the leading oil producers, is the global winner. The relationship between the European Union and Russia is now dominated by Russia and will in the future make Europe dependent on Russian oil and gas. The oil shocks of the 1970s had different effects on different European countries. Britain had some North Sea oil and the prospect of more, as did Norway. Germany and France had little or no oil of their own. Differential shocks in the coming period of oil shortage will make it harder to maintain the Euro-zone.

Vladimir Putin has already used oil and gas as a diplomatic weapon against the European states, which have had to fall into line in June 2007 after making grandiose demands against Russia. Russia even made veiled threats against Britain during the famous spy poisoning case. Russia has also in the last year stopped supplying energy to its neighbours to quell dissent and ensure political allegiances.

Unlike China and India, Russia has a history of political strength and maturity, and the evidence over the last two years is that Russia has begun re-inventing itself as a regional power, after winning back Kazakhstan and Uzbekistan from the American grip and managing the stop the influence of the three revolutions in that region. America is becoming increasingly worried about the growing economic and political influence of Russia.

3. Oil and Petrodollars. One of the achievements of the US in the 1970’s was to peg the price of oil to dollars. This meant that oil transactions are carried out in dollars only. This has allowed the US to maintain the dollar as the world premier currency and the currency of choice for foreign reserves.

However one of the key factors behind the rise in the price of oil is the devaluing of the dollar. Now trading countries want more dollars for oil simply because the dollar is worth less - this would have increased the price of oil regardless of the increasing demand for it.

Today the European Union led by Britain and Germany are increasingly calling for pegging oil to the Euro; thereby stabilising the price of oil, and giving a stable revenue to oil producing countries. However, this severely impacts the dollar as a currency and if this was to happen would perpetuate America’s economic crisis as the dollar would devalue even more.

Although this is not yet an impending threat, if America cannot bring itself out of its severe downturn, this threat may become more real - particularly if China was to add to this growing call.

4. The importance of the Middle East. Despite current supply shortages of oil around the world and the future restrictions, the importance of the Middle East, will not lessen. In fact it will become the most crucial area in the world.

This is because 66% of the world’s oil reserves are in the Middle East. “Proved” oil reserves are those quantities of oil that geological information indicates can be with reasonable certainty recovered in the future from known reservoirs. Of the trillion barrels currently estimated, 6% are in North America, 9% in Central and Latin America, 2% in Europe, 4% in Asia Pacific, 7% in Africa, 6% in the Former Soviet Union. Today, 66% of global oil reserves are in the hands of Middle Eastern regimes: Saudi Arabia (25%), Iraq (11%), Iran (8%), UAE (9%), Kuwait (9%), and Libya (2%).

Currently of the 11 million barrels per day (mbd) the US imports 3 million barrels per day from the Middle East. But in the years to come dependence on the Middle East is projected to increase by leaps and bounds. The reason is that reserves outside of the Middle East are being depleted at a much faster rate than those in the region. The overall reserves-to-production ratio — an indicator of how long proven reserves would last at current production rates – outside of the Middle East is about 15 years comparing to roughly 80 years in the Middle East. It is for this reason that George Bush said last April, U.S. dependence on overseas oil is a “foreign tax on the American people.”

This is on of the most volatile region in the world; and its importance will only grow stronger. The US is currently very worried about political developments in this region.