The Crude Geopolitics of Oil

Only 5 years ago oil's price was $30. The main focus after 9/11 until today has been the increasing complexity of the U.S.- led war on terror. This phase had superseded the one started after the fall of the Berlin wall, which was characterized by the economic development and integration of Eastern Europe and the growth of Asia as a regional economic superpower.

At the time, energy security and protection of energy infrastructure were concepts not so known to the public. It was only understood at the time that there was an interest in securing access to natural resources, but this has always been true.

Today, the situations in Iraq and Afghanistan can no longer be considered an urgent crisis. The international system has accommodated itself to the conflict, although success in Afghanistan in the long term is seen as critical for the political credibility of the coalition.

As oil prices went up dramatically, energy issues have become a priority for the international system. The rise in the price of oil above $100, if permanent, can trigger significant shifts in economic power that in turn can have impacts also on the political-military side of the international order. Importers of oil are the disadvantaged under these conditions. Exporters are in the best position, obviously. Even better are those countries who are able to generate cash in excess of their domestic needs, such as Saudi Arabia and Russia.

Heavily manufacturing-oriented countries are the most hurt. East Asia and China can be very much damaged by this situation should it continue. They will suffer from a slowdown in US consumption and at the same time, are being hit by high energy prices. In China high inflation will rapidly diminuish profit margins in a condition where internal stability of a highly unbalanced system might become an issue. They are doomed to grow. There are already indications that their exports are becoming more expensive. The rush to access natural resources in Africa is strategically critical for them and Africa will be the scenario where economic confrontation willl occur in the next ten years. The rise of food prices is also increasing issues in Asia.

Russia's re-emergence as a global power is occurring thanks to the huge profits and cash reserves it is accumulating. European countries have become dependent on Russian exports and extremely vulnerable to energy disruption. However, Russia has structural internal issues that will not allow them to go back and play a political-military-economic global role relying only on energy. Demographics and the industrial-political system should evolve dramatically.

In the Arabian Peninsula, the huge cash reserves can be used to increase influence of certain countries such as Saudi Arabia and to try and stabilize the area. Oil could help stabilize Iraq. The Gulf countries, Iran, Iraq and the Middle East in general become more and more strategic in this regard. The diversification of oil imports at this point is vital for countries such as the US. Again, Africa will play its role in the next decade in this effort. But also the development of alternative sources of energy has its technological and economic implications. The debate over ethanol and food price increases is an example of this. At the same time, a future where alternative energy can significantly substitute petroleum is not that close yet. It may accelerate if high energy prices remain a reality for long enough.

Other players may emerge as research and development of oil reserves becomes convenient at these prices. As an example, Brazil, with the discovery of two huge offshore oil fields, might become a very strong regional energy player. But they could also help to reduce dependance from Arab oil, allowing diversification of sources. This could influence the balance of power in South America.

Climate change in high north latitudes and the melting of ice will open new sea lines of communications but also allow the underwater development of gas and oil infrastructure. There are significant technology and security issues in this context. Some say that 25% of the world reserves are in the Arctic. It is in this week's news that Russia, the US, Norway, Denmark and Canada have signed an agreement to abide by the 1982 Law of the Sea, which determines territorial claims according to coastlines and undersea continental shelves. Note that other countries such as Iceland, Finland and Sweden, were excluded. The implications of these developments are important.

Comments

[Edward Janeck:]

If there is a attack on Iran oil will be $200 a barrel overnight. Right now it is cheap, I will tell you why @ theinvestingspeculator...

2008 Jun 22 09:07 AM

[Greg Pinelli:]

Certainly one of the more astute observations is that China is "doomed" to row. They are now on a very erratically constructed treadmill and the slightest slip and its 1920 all over again. As for Europe..they are not at Russias mercy..they have been busily arranging for alternate sources of gas supply and constructing new pipeline routes as well as LNG facilities.
Beyond that, nothing new or insightful.
As for speculator! On the website he shills for above..he states its "reasonable to think we will have $400 a barrel oil and $15 a gallon gasoline in ten years." Really!? Only if one thinks or "speculates" in straight line, ruler like fashion. Demand destruction isn't dead..in fact it may have to be changed to "economy destruction" if $200 oil hits..because India and China will be largely out of the game. In fact, it's just as likely that $200 oil triggers deflation as it is to bring further inflation. And wow! What a history lesson speculator gives us! He thinks the 1930's Great Depression was the worst in 700 years (of capitalism no less!!)...ever heard of the Black Death spec?? Didn't think so.....

2008 Jun 22 10:36 AM

[CLH:]

Georealist---You are right about speculator. He is totally wrong. Its impossible to determine turning points in the market. Trends are easy. All we can say is that oil is overpriced and ready to turn. Buying oil now is like buying techs in Jan. 2000 or a house in 2006.

2008 Jun 23 06:35 AM

[Paul Killinger:]

Quite insightful article!

Maybe all you guys are right. Oil prices may have gotten ahead of themselves, but they're not yet at absurd levels when adjusted for inflation.

But it's tough to call a top in any market. Previous crashes in chips (eg...200X earnings with no earnings), housing (eg...with prices increasing at 2% a month) and tulips et al were more predictable.

Energy is also different from past so-called bubbles in one major respect. No one's going to run their economy, produce jobs, feed people, or ensure their security without it!

It will be fascinating to see how all this plays out. Good luck to all of you, we may need it.

2008 Jun 23 10:25 AM

[Paul Killinger:]

By way of example, look at the countries in the world whose economies are doing well right now. With the exceptions of China, India and Eastern Europe, which are all benefiting from huge, low cost labor inputs, they are all net energy exporters.

Conversely, the economies of those nations who are large energy importers, such as the U.S., are struggling. Even an idiot can figure this out, but for some reason it's lost on our Congress.

2008 Jun 23 10:44 AM

[nakedjaybird:]

nakedjaybirdJun 23 02:07 PMWhere have some of you folks been? In "school" maybe???

In the early 1970's we concluded it was going to take hybrid electric vehicles for anything beyond the basic 40-50 mile daily commuter using fully electric cars, when and if he was ready to switch from huge gas guzzlers (we knew this because we built and tested electric vehicles! And, there is a market for both types of vehicles). The shackles have been off for the private sector for 40 years.

We were also growing silicon ribbon and producing solar volataic panels in the 70's. The shackles have been off for the private sector for 40 years.

We have used windmills for long before many of you folks existed. Seems like we know how to make and use all of the components. The shackles have been off the private sector for a long time.

One of the major problems is the selfish consumer. His shackles have been off - he's had some free choices.

Another major problems is we have permitted our Government give our tax dollars to big oil thru tax breaks (research, investestment credits, depleption allowances, and on and on).

WE HAVE NOT DONE THE RIGHT THINGS;

NOT EVEN THE THINGS WE WERE/ARE CAPABLE OF DOING. BUT........... THAT ..........

Didn't stop France from going 80% nuclear.

Didn't stop Germany from going 40% solar.

Didn't stop Brazil from going 60% biofuel.

Didn't stop Switzerland (and many other European countries) from going electrified rails for people and goods, and even electric ferries (they put rubber tired hiway diesel busses on electrified rail cars for certain legs of their journeys).

Didn't stop Europe from building and using small economical cars, nor electric delivery vehicles, etc.

So where has the US been??

I guarantee you, without LEADERSHIP, we will not get there....................

We have had the techonologies; we've had the money; we've had the resoures; we've had our heads somewhere, like where the sun doesn't shine.

AND FOR THAT, THERE IS JUST TOO MUCH EVIDENCE!!!!!!!!!!!!!!...

2008 Jun 23 02:19 PM