http://www.gnn.tv/articles/2330/Energy_Geopolitics_2006 Energy Geopolitics 2006 By Richard Heinberg Welcome to the 21 Century. A world for which none of us is prepared. News reports flitting across computer screens these days seem increasingly to be related to the subject of energy. But what do they signify? The modern world affairs analyst is in little better position to discern the patterns and portents than was his or her ancient Roman counterpart, the reader of entrails. What is one to make of items like these? In January, Russia’s Gazprom (the state-owned natural gas company) temporarily cut supplies to Ukraine in order to obtain higher prices. While Russian president Vladimir Putin re-established gas shipments as soon as Western countries complained (they did so because they were running short, due to Ukraine’s skimming off of gas being trans-shipped to Europe through its territory), Western officials saw this as Russia unsheathing its “gas weapon.” In April, China’s president Hu Jintao visited the U.S., where president Bush effectively humiliated him at the White House by “mistakenly” playing the Taiwanese national hymn upon Hu’s arrival, rather than the hymn of the People’s Republic, and by allowing a Taiwanese “journalist,” a Falun Gong member, to rant uninterruptedly for more than three minutes about Chinese human rights violations during a filmed White House press conference, with Hu in attendance. Hu, himself displaying no bad manners, left Washington for Saudi Arabia, where he signed a series of accords involving Chinese access to future Saudi oil production in exchange for the transfer of sophisticated weapons and other technologies. Also in April, Bolivia’s new president Evo Morales met with Hugo Chavez of Venezuela and Fidel Castro of Cuba, then announced the nationalization of his country’s oil and gas fields. As a result of Washington’s rejection of NAFTA decisions favoring Canada, the two countries’ relations have soured. Canada may shift some of its oil trade away from the U.S.: Ottawa’s minister of natural resources has said that within a few years one quarter of the oil Canada now sells to the U.S. may instead go to China. On May 9, CNN Money reported that Cuba has invited oil companies from China and India to drill in its Gulf waters. U.S. firms had also been invited, but were prevented from participating by the longstanding American embargo on trade with Cuba. Russia’s Gazprom has hired former German Chancellor Gerhard Schröder as a consultant and has taken a majority holding in the Northern European Gas Pipeline. Gazprom also has Britain’s flagship utility, Centrica, in its sights for takeover; Tony Blair initially objected, then acquiesced to the deal. On a visit to Vilnius on May 4, U.S. vice president Dick Cheney accused Russian president Vladimir Putin of using energy resources as a weapon to brandish against other Eurasian countries. “No legitimate interest is served when oil and gas become tools of intimidation or blackmail, either by supply manipulation or attempts to monopolize transportation,” he said. The next day, Cheney visited Kazakhstan to promote oil and gas export routes bypassing Russia. In his May 10 state-of-the-nation address, Putin responded by referring to America indirectly using the metaphor of a voracious wolf, mentioning the U.S .by name only in the context of peripheral comments about Africa and South America. Oil-and gas-exporting Iran, defying Washington’s demands that it halt uranium enrichment, is being hauled before the UN Security Council, where the U.S. is insisting on sanctions while Russia and China appear ready to block them. The evolution of the rhetoric on Washington’s part is frighteningly reminiscent of that which accompanied the run-up to the 2003 invasion of Iraq. Meanwhile, oil prices have hit historic highs of over $75 per barrel while global production has been stalled at about 85 million barrels per day for the past year. While the specific meanings of—and connections between—these occurrences are often difficult to discern, their overall drift is becoming plainer with every passing day: The world is plunging into an energy crisis unlike any before, while geopolitical alliances are shifting quickly and to a degree not seen since the end of the Soviet era, and perhaps not since the end of World War II. Global oil production is peaking—for all practical purposes, now. In the past weeks, the New York Times, Bill Clinton, and the executive vice president of Ford Motor Company (among many others) have stated that world oil flow is at peak. We have even seen one of the major oil companies (Chevron) place ads in multiple magazines and newspapers in order—gently, perhaps, but insistently and conspicuously—to break the news to the American people that the era of cheap oil, and cheap energy in general, is finished, over, done, dead, and gone. And that era just happens to be the only one that Americans alive today have ever known. Oil is not the only problem; natural gas is turning out to be just as big a worry in North America and many European countries, and just as big a geopolitical prize to those who have and covet it. Gas prices have grown unusually volatile in the US, lurching from the long-time norm of $2 per thousand cubic feet up to $15 and back to $7 or less in six years. Globally, there are enormous natural gas deposits in Russia and Iran, but getting that gas to market in the growing quantities at which importers would like to use it will likely prove difficult, expensive, and perhaps even impossible given the geopolitical and economic context as well as the practical difficulties involved. This is very bad news for North Americans, who will have to rely increasingly on liquefied natural gas imported from far away by tanker—and will have to get used to paying the geopolitical costs that far-flung supply networks entail. Welcome to the twenty-first century. And welcome to a world for which none of us is prepared. Take a good look around: things are changing quickly everywhere, and the omens are . . . well, ominous. Russia: The Dealer Wins When Washington succeeded in engineering the economic and political collapse of the USSR at the end of the 1980s, some heralded this as the “end of history”—a judgment that proved premature at best. After a decade of turmoil, during which foreign (mostly American) companies plundered Russia’s treasures, that nation elected as president Vladimir Putin, an ex-KGB officer who, as a career move, had recently spent a stint at the St. Petersburg Mining Institute writing a dissertation titled “Toward a Russian Transnational Energy Company.” His thesis: Russia should use its vast energy reserves for geostrategic advantage. After entering office in 2000, Putin moved to reconsolidate state control over the country’s oil and gas industries. Now, with that task almost fully accomplished, he appears to be making his dissertation a reality. Putin has paid off much of Russia’s foreign debt, the nation has accumulated impressive financial reserves, and Gazprom recently overtook BP to become the world’s second-largest energy company. Putin is sewing up an increasing portion of the European gas and oil market (Russia supplies about a quarter of Europe’s oil and a third of its gas), and that of Japan as well. He knows his country will need enormous capital investments in order to keep pumping the hydrocarbons; Europe and Japan need those hydrocarbons and have cash to invest. Putin’s goal seems to be a kind of natural-gas version of OPEC, a cartel with supply networks throughout Central Asia and with pipelines supplying Europe and China. Russia’s relations with China have warmed in recent years. The Shanghai Cooperation Organization (SCO) was born on June 15, 2001, with Russia, China, and four former USSR Central Asian republics (Kazakhstan, Kyrgystan, Tajikistan, and Uzbekistan) as charter members. While there is little discussion of the SCO in U.S. media, that organization has been patiently expanding its capacity to act as a geopolitical counterweight to Washington. The U.S. may have won the Cold War, but Russia will not be so easily bested in the energy war. Currently Russia is nearly tied with US ally Saudi Arabia in oil production (though the Saudis export more because Russia uses a larger proportion domestically). While Russia’s rate of production is likely to stall in the next year or two and then begin its inevitable and terminal decline, much the same can likely be said for Saudi Arabia’s. Meanwhile, Russia is unequaled globally in natural gas reserves. The matter is not simple, though. Russian gas output is currently in decline and this, combined with a severe Russian and European winter, may have forced Russia to reduce its gas exports. Also its own populace pays very little for gas, so indigenous demand is enormous. This is one reason why Gazprom is reputedly short of cash for such matters as large-scale Arctic gas development. East Asia: Crouching Tiger, Hidden Peril China, flush with cash from its enormous trade accounts surplus, appears to be successfully competing with the U.S. for future oil supplies not only in Asia but in Africa, South America, and Canada as well. However, behind this new geopolitical strength, and beneath the spectacular recent growth rates of the Chinese economy, lurks long-term vulnerability. Given its huge population and an inherent demographic conflict between its industrialized coastal cities and the impoverished agricultural interior, China is actually acting out of desperation. Internal political upheaval will erupt if growth cannot be sustained, and growth will sputter without endlessly expanding energy supplies. China’s burgeoning appetite for energy implies problems for Japan and South Korea, which also need hydrocarbons. For the past half-century these nations were cornerstones of America’s global sphere of influence. But America’s ability to assure future energy supplies is now questionable compared with that of Russia, and Korea and Japan will have to jostle with China to maintain their share of what is available. Currently, Japan and China are at odds over territorial rights (and access to drilling opportunities) in the East China Sea. Would the US be able to come to Japan’s aid if competition turns to conflict? Significantly, a vigorous debate is breaking out in Japan as to whether it should start building a real defense capacity of its own. Japan has also for many years been the primary holder of US foreign debt, banking on the ongoing stability of the dollar while enabling Washington to run up enormous deficits. However, the dollar’s soundness is increasingly in question. If the U.S. can supply Japan with neither energy resources, nor reliable military protection, nor financial security, why should Tokyo continue to support America diplomatically? And why should it continue to prop up the dollar by buying yet more U.S. debt instruments—except to protect its existing dollar holdings? Central Asia: Betwixt East and West In Central Asia Washington has followed an old and familiar imperial playbook, supporting corrupt, autocratic regimes that offer sweetheart energy deals and that host US military bases, while undermining governments that refuse to play along. The playbook was on display in early May when Mr. Bush hosted Azerbaijan’s president Ilham Aliyev at the White House, stressing in his welcoming words the importance of their nations’ security and energy ties. But Washington is half a world away from Baku, while America’s rivals (Russia and China) are relatively close by. The Caspian basin was of key interest to American strategists even before the oil and gas discoveries of 1999-2000 in Kazakhstan. Thus last year’s announcement by Uzbekistan that it would no longer permit US military bases on its soil was an alarm bell for American geostrategists overseeing the region. The Bush administration wants to curb Moscow’s influence in Central Asia and to weaken Gazprom’s growing control of energy supplies to Europe and the Caucasus, promoting new oil and gas shipment routes bypassing Russia and Iran in favor of its loyal ally Turkey. On May 15, Kazakhstan’s prime minister announced that his nation—with current oil production of about 1.3 million barrels a day expected to grow to 3Mb/d by 2015—will begin next month to pump its oil through BP’s US-backed Baku-Tbilisi-Ceyhan (Azerbaijan to Georgia to Turkey) pipeline. Score one for Washington. However, Russia and Iran have the lion’s share of the needed resources, and these nations are geographically placed to deliver hydrocarbons to developing markets. Washington, in contrast, is itself an oil and gas importer whose ability to back up threats by projecting military force is now questionable as a result of events in Iraq. Washington’s nightmare scenario would consist of a Russian-Iranian alliance to dominate Central Asian oil and gas production and trans-shipment routes. Such an alliance is counter-intuitive in that Russia and Iran are competitors for export markets. But the Bush administration’s belligerence toward both nations could well persuade them to overcome their mutual wariness. India: Whose Ally? During the past year president Bush has gone out of his way to woo India as a geopolitical counterweight to China, sharing nuclear technology with Delhi—while bashing Iran for developing its own nuclear program (the irony may be lost on Americans, but not on others). However, India’s long-term interests are more naturally aligned with those of the rest of Asia than with those of the distant US. India has rejected U.S. pressures to withdraw from an oil pipeline deal with Iran, though that deal has yet to be concluded due to security considerations regarding Pakistan (through which the pipeline must pass). For its part, Pakistan has announced its intention to build the pipeline regardless of India’s decision. The Financial Times reports that Washington “warned India that Delhi’s own nuclear deal with the U.S. could be ditched if the Indian government did not vote to refer Tehran to the United Nations Security Council.” Delhi voted accordingly, but may have second thoughts if Iran threatens to scuttle the $20 billion Indian gas pipeline deal just mentioned. India uses only the gas it extracts from indigenous sources at the moment, but would use more if it were available. India’s main ties to the U.S. are based on trade and security. If, as the U.S. dollar tumbles and the Iraq quagmire deepens, America proves unable to ensure these benefits, then Delhi may have no choice but to add its considerable weight to the SCO Asian bloc. The deputy editor of The Hindu recently observed that “if the 21st century is to be an ‘Asian century,’ Asia’s passivity in the energy sector has to end.” While hosting “the world’s largest producers and fastest growing consumers of energy,” he wrote, Asia currently relies on “institutions, trading frameworks and armed forces from outside the region in order to trade with itself.” It seems unlikely to continue doing so for much longer. Meanwhile, India’s industrial growth depends on energy supply, and with oil prices high and coal shortages looming, the country’s long-term growth prospects are questionable.