THE NEW
WORLD OIL ORDER, Part 1 Russia
attacks the West's Achilles' heel By W Joseph Stroupe
Russia has found
the Achilles' heel of the US colossus. In concert
with its oil-producing partners and the rising
powerhouse economies of the East, Russia is
altering the foundations of the current US-led
liberal global oil-market order, insidiously
working to undermine its US-centric nature and
slanting it toward serving first and foremost the
energy-security needs and the geopolitical
aspirations of the
rising East.
All this is at the impending
incalculable expense of the West. What is
increasingly at stake is secure US access to
global energy resources - strategic US energy
security - because the West's traditional control
respecting those global resources is seriously
faltering in the face of the compelling strategies
undertaken by Russia and its global partners.
The US giant is increasingly at risk as it
faces what is gradually but now more widely being
recognized as Russia's clever exploitation of US
foreign energy dependency and the hemorrhaging of
its all-important economic-geopolitical capital:
its traditional global energy leadership and
dominance via its onetime virtually all-pervasive
oil majors.
US Senator Richard Lugar, who
recently labeled Russia an "adversarial regime"
that increasingly uses its growing energy
dominance as a powerful geopolitical weapon, has
warned of economic "catastrophe" for the United
States, notwithstanding its status as a
superpower. Consequently, informed and reasoned
leaders such as Lugar increasingly see the US in
energy-based jeopardy.
Such leaders
clearly do not put blind trust in the conventional
wisdom that keeps insisting the US giant has no
Achilles' heel and is virtually immune to the
efforts on the part of comparatively smaller
powers such as Russia and its partners to
undermine the current US global position of
supremacy.
Backing up the mounting
concerns of such leaders as Lugar, as reported on
October 1 by The Guardian Unlimited, widely
respected energy economist Professor Peter Odell,
who was an adviser to Tony Benn, the British
energy minister in the late 1970s, and who has
since worked for a host of different foreign
governments, said he was not being alarmist or
controversial when he recently warned that the
West was at imminent risk of losing access to
global energy resources as a result of Russia's
global oil grab.
Odell warned that at any
time Russian and Chinese state-owned oil
companies, backed by certain rich members of the
Organization of Petroleum Exporting Countries who
are closely aligned with the two, could make
hostile takeover bids for key Western oil majors
such as BP-Shell, ExxonMobil and/or Chevron,
thereby gutting what little remains of the Western
oil majors' control over the global markets and
thereby further threatening US access to strategic
resources.
Odell warned that the Western
oil majors were already losing their leadership of
the global oil system, had now been reduced to
controlling a mere 9% or 10% of the world's
reserves, and were unable to win new production
rights or even hold on to those granted by current
PSAs (production-sharing agreements). Recent
developments regarding Russia's Sakhalin-1 and
Sakhalin-2 projects, in which the position of the
Western oil majors is being threatened, illustrate
the ominous trend that is accelerating worldwide.
To rock the US colossus forcefully out of
its position of global dominance and credibly
threaten to inflict economic and geopolitical
"catastrophe" on the West, Russia and its
strategic partners need not exceed, nor
individually even remotely match, US economic,
political or military strength in a conventional
head-to-head contest of might.
Instead,
they need only to exert effectively their mounting
energy-based strengths against US vulnerabilities
in that same sphere, not in a conventional head-on
confrontation but instead by going after the
Achilles' heel by employing a clever asymmetrical
end-run strategy around the US. This targets the
foundations of the current US-dominated liberal
global oil-market order, a strategy that leaves
the US giant with significantly reduced secure
access to, and control over, global strategic
resources.
Once that goal is accomplished,
without ever a conventional confrontation with the
US giant, then the US economy can be effectively
and powerfully held hostage to the political and
economic aspirations of Russia and the rising
East.
Conventional wisdom holds that
neither the West in general nor the US in
particular can be effectively targeted with the
energy weapon any time soon. This is because the
structure of the global oil market prevents
targeted oil embargoes from being effective. Once
oil is sold on the global market, no producer can
control where it does or does not go, the argument
says. Additionally, the argument continues,
producers attempting an embargo cannot afford to
withhold their products for long enough to damage
the targeted economy lest their own economies,
which are inordinately dependent on oil and gas
exports, themselves collapse.
The clear
insinuation is that any talk of an energy-based
economic checkmate of the West is merely hyperbole
and sensationalism.
But these arguments
are already in the process of collapsing under
their own weight in the face of an entirely new
array of mounting trends and developments that
constitute an impending and grave threat to the
strategic energy security of the West.
In
its recent report "National Security Consequences
of US Oil Dependency", the US Council on Foreign
Relations disagrees with such reassuring
conventional wisdom and the myths and assumptions
associated with it. It warns that the US faces
increasingly potent, negative political, economic
and geopolitical consequences arising from its
dependence on foreign energy resources. The report
laments that the US is "insufficiently aware of
its vulnerability" because its leaders and people
have come to rely on reassuring myths and
assumptions that do not square with the facts.
To understand why the conventional wisdom
on this issue has become severely faulted and how
Russia and its partners are already ominously
succeeding in altering the fundamentals of the
current US-dominated global oil-market order, it
is first necessary to understand how the current
oil markets work and how they have evolved over
the past three decades since the Arab oil embargo
of 1973-74.
Changing the world's oil
markets In the era leading up to the
embargo of 1973-74, crude-oil pricing and delivery
were handled quite differently than now. That era
featured the rigid, bilateral long-term supply
contract resulting in considerably less global
oil-market supply liquidity than now. It was an
era when exporting states tended to conclude
agreements individually with consumer states
(usually through their national and multinational
oil companies) over the price and delivery of
crude oil.
Such contracts could be
concluded for terms of one or two decades or even
more. In that era of rigid bilateral oil
contracts, the oil market was much less open and
dynamic, and far less able to adjust to supply
disruptions, than it is now. Oil tended to be
"locked up" within the long-term supply contracts,
thus significantly limiting supply liquidity, or
fungibility, of oil.
The structure of the
global oil market was neither designed nor
implemented with a focus on the key requirement of
high liquidity because, prior to the 1973-74 Arab
embargo, no one envisaged the now-obvious key
requirement for the market to adjust rapidly and
naturally to a cutoff of oil to one or more
importing nations resulting from a targeted
embargo or a supply disruption.
Naturally,
in that era it was in the interest of any
individual exporting state to conclude a
sufficient number of rigid bilateral long-term
contracts with importing states so as to have most
or all of its exportable oil accounted for and
sold virtually at the time it was pumped out of
the ground.
That being the usual case, if
an exporting state or group of states for some
reason either failed or refused to honor their
commitment of deliveries to a particular consumer
state, then that embargoed state found it
necessary to meet the emergency by trying to
acquire replacement crude-oil supplies from
elsewhere, usually from third-party traders and/or
by arranging with other buyers for their tankers
to be diverted from their original destinations.
That ad hoc process involved many
additional, intolerable risks, time delays, and
much more complicated logistics and higher costs,
all of which were entirely unacceptable over a
period of anything more than the very short term.
The old oil-market order did not naturally
facilitate a compensating for such a supply
disruption, and the effort to make it compensate
was cumbersome and its risks were unacceptable.
Additionally, the psychological effects of
an embargo greatly magnified its literal effects,
leading to panic buying by consumers, resulting
shortages, higher prices and ripple effects
throughout the economy. That helps explain why the
US could be effectively targeted in 1973-74 by the
Arabs. Though that targeting was not nearly
perfect, it was sufficient to inflict much of the
intended pain. As the months wore on, the US
could not afford to continue to rely on the
intolerable and significantly less secure ad hoc
logistics it was forced to resort to in its effort
to replace the oil that the Arab nations were
refusing to ship. Recently declassified British
government documents from that time reveal that
both the US and Britain were actively planning for
a seizure of Middle East oilfields, illustrating
how intolerable the combined physical and
psychological effects of the embargo were.
Of note is the ominous fact that at that
time the US imported only about 36% of its oil,
whereas now it imports nearly 60%, making it far
more vulnerable to the energy weapon if Russia and
its partners only partially succeed in changing
the current liberal global oil order so as to
revive even a partial level of effectiveness of a
targeted embargo.
US and Britain create
a liberalized market In the aftermath of
the 1973-74 crisis, events and the markets
themselves gradually evolved to alter radically
the nature of the global oil market, thereby
dramatically increasing crude oil's former
comparatively low degree of fungibility.
This means that as long as the current
US-backed liberal oil market is globally adhered
to, if a group of exporting nations attempts
another targeted embargo, oil from other exporters
could be rapidly and naturally exchanged or
substituted to replace the lost oil. The global
market has evolved from rigidity to dynamism, and
from low to very high liquidity.
Over
time, the US had come up with an ingenious idea
that impacted directly on the issue. Through
deregulation and the creation of oil-futures
contracts and spot oil markets in New York and
London, the old foundations and the market
dominance of the rigid, bilateral long-term supply
contracts was undermined in favor of much
shorter-term contracts.
Extremely liquid
oil-futures contracts ("paper oil") that looked
forward only a few months to a few years at most
and that could be freely and openly bought and
sold on a daily basis on the new exchanges
replaced the traditional, rigid, discrete
long-term supply contracts negotiated directly
between exporting and importing states. The global
oil-market order was becoming tremendously
liberalized, open and highly liquid under US
leadership and control.
The new oil
exchanges created in the early 1980s provided a
way for speculators to profit from the buying and
selling of "paper oil" as well as for exporters
and importers to sell, buy and arrange for
physical delivery of oil. The spot exchanges also
facilitated the factoring in of a much wider range
of market forces in real time in determining the
daily global price of oil. Oil-export startups,
those attempting to establish themselves as oil
exporters, favored the spot markets as opposed to
the rigid long-term supply contracts because, with
their limited track record and credibility, they
had a hard time successfully negotiating long-term
contracts.
However, they could sell on the
spot markets by undercutting the price of the more
established exporters and get a foothold. Thus the
new arrangement encouraged a flourishing of new
exporters and a global supply that very
comfortably outpaced global demand.
By the
mid- to late 1980s, the new oil-market
arrangements in New York (and later in London) had
been firmly established and were enjoying
phenomenal success. While some exporters refused
to drop entirely the traditional rigid bilateral
long-term supply contracts in favor of the spot
markets, up until today most oil is marketed on
the exchanges. Oil-futures contracts are freely
bought and sold on the exchanges and oil for
physical delivery is bought comparatively "at the
last hour" on the spot market, where delivery to
the importing nation is then arranged.
Global effects of the new order Under the new market arrangement, nearly all
oil became highly visible and instantly accessible
because the traditional long-term supply contracts
became the minor factor while the spot markets and
highly liquid oil-futures contracts became the
major factors.
In effect, this radically
raised the visibility, accessibility and
fungibility of global oil supplies to unheard-of
heights and made it possible for oil lost for some
reason in one part of the market to be easily,
naturally and almost instantly replaced by oil
from another part of the market.
In
effect, the new exchanges facilitated the creation
of one virtual global pool of oil denominated in
US dollars into which nearly all exporters sell
their oil and out of which nearly all importers
purchase oil, all on a daily basis.
A
discrete global pool of oil does not physically
exist anywhere on the planet, of course. But it
does exist in a virtual sense, powerfully
mimicking a literal global pool of oil, because
the structure and presence of the new exchanges
and the global adherence and devotion to them
ensures that oil is bought, sold and delivered
largely as if such a pool literally exists. And
the global dominance of the West's oil majors,
whose task it has been to capture global oil
supplies for full incorporation into the new
US-led liberal global oil-market order, has been
the key factor perpetuating the global dominance
of that order.
As long as the Western oil
majors hold global sway and the US-backed liberal
order is globally adhered to, therefore, any
attempt to target the US with an oil embargo, as
by the efforts of an exporter or group of
exporters refusing to sell to the US, would fail
miserably because the US would merely draw oil
elsewhere from the global pool to suffice its
needs.
Importantly, the US and Britain
accomplished two goals of profound importance and
value with the creation of their new liberalized
global oil-market order. First, they prevented the
enacting of any targeted oil embargo, and they
greatly enhanced the leverage of the West's oil
majors, their de facto state sponsors and the
West's financial institutions in the new market
arrangement while simultaneously fundamentally
undermining the leverage of producers, thus
powerfully bolstering the strategic energy
security of the West.
Second, they
consolidated and powerfully solidified the role of
the US dollar as the unquestioned international
currency, since the one virtual global pool of oil
created and maintained by the new liberalized
market order is denominated in US dollars alone.
But it is crucial to understand that the
West's immunity from a targeted embargo is assured
only as long as the current liberal, highly liquid
US-led global oil market is unwaveringly adhered
to. Once the movers and shakers (now Russia and
its producing and consuming partners) begin again
to revert to the rigid bilateral long-term supply
contracts conducted privately between producers
and consumers, thereby incrementally altering the
foundations of the global oil-market order by
decreasing its level of liquidity, then the real
potential for a revoking of a significant measure
of oil's fungibility exists.
This means
that the ability to enact an effective targeted
embargo is once again incrementally revived. A
meaningful loss of fungibility of oil would spell
potential economic-geopolitical doom for the West.
This is the Achilles' heel of the West.
As
we shall see, it is that very Achilles' heel
Russia and its partners have found and are already
energetically exploiting in a bid to shift the US
colossus out of its current position of global
dominance.
Swiftly mounting anxiety on the
part of increasing numbers of the globe's key
energy-hungry economies in the East as respects
energy security is already fueling incremental
abandonment and circumvention of the US-dominated
liberal global oil market.
This is in
favor of a proliferation of private,
state-to-state long-term supply contracts and
agreements awarding equity stakes in production
acreage to the consumer states. As a consequence,
the US-led order is already beginning to suffer a
wavering of international adherence and support.
Russia continues to lead the global race to
establish a new energy order that fundamentally
threatens the current US-led one.
The same
factor of mounting anxiety over energy security is
also fueling the accelerating global trend toward
the establishment of new oil and gas exchanges in
the Middle East and the East as de facto rivals to
the New York and London exchanges.
These
new exchanges have two very prominent and
significant features. First, they are bringing
together primarily the globe's producers and the
rising economies in the East to facilitate new
Asia-centric (rather than US-centric) energy
pricing and security arrangements. Second, they
are denominated in currencies other than US
dollars or are being structured with the autonomy
and sophistication to switch from dollars to other
currencies.
The reign of the US-backed
current oil market has been a frighteningly short
one, barely two decades. It could turn out to be
more of a stint than a reign as its fundamentals
could be altered to revive the possibility of an
effective targeted embargo. And it is already
being altered along those lines.
Part 2: Russia fueling a new oil
order
W Joseph Stroupe is author of
the new book Russian Rubicon: Impending
Checkmate of the West and editor of Global
Events Magazine, online at
www.GeoStrategyMap.com.
