Siberia placed to be the new Middle
East By Yong Kwon
More
than 100 years ago, oil began to revolutionize
production and manufacturing, irreversibly
changing the global market. Since then, no
resource has come close to replacing petroleum as
the world's most valuable commodity; public
opinion on nuclear energy deter further expansion
and the restrictions on uranium enrichment hamper
proliferation of the technology. [1]
At
the same time, green technology has yet to reach a
level of efficiency that would warrant greater
reliance. At the end of the day, the world will
continue to depend upon petroleum for all its
needs. This much is well known.
What is
only vaguely recognized in the public sphere is
how this dependency yielded another problem. So
much of today's crude
originates from a
volatile region with a lion's share of the supply
passing through narrow waterways that could easily
be sealed off to tankers. More than any other
market factors, it is country risk , the threat
emanating from political events in one country or
the region, that pose the greatest threat to the
stability of the oil market.
Due to the
vital importance of oil in the global economy and
the way the resource is purchased in the
international market, a sudden drop in production
or obstruction in the delivery of the fuel from
any one of the countries in the Middle East could
seriously damage the industrial capacity of whole
regions.
The consequence of US-led
sanctions against Iran on the export market in
Northeast Asia is representative of this case (See
article US
faces sanctions dilemma in East Asia, July 21,
2012).
A century ago, international oil
companies faced a similar problem. Although the
key industries were not yet heavily dependent on
oil, petroleum and its byproducts had already
become indispensable commodities on the global
market. Facing the monopoly of the Standard Oil
Company with its wells in the United States, Royal
Dutch Petroleum Company, Rothschilds, and the
Nobel brothers took advantage of Russia's
liberalization of its market in 1872 and exploited
the oil fields in the Caucasus with Shell
Transport and Trading Company shipping the
extracted goods to the burgeoning markets in the
far east.
Innovations such as the Caspian
oil tankers and projects such as railroads linking
Baku to Batum soon pushed US imports out of
Russia. Before long, shipments of Russian oil
passed through the Suez Canal and began supplying
the global demand. [2] By 1904, one-third of the
world's oil was produced in Russia.
While
the oil fields around Baku proved lucrative, the
oil companies exploiting this resource rich region
had to contend with increasing social unrest and
political instability. The Russian Empire's poor
performance in the Russo-Japanese War (1904-05)
led to nationwide strikes that included workers in
Russian oil fields. A period of political
liberalization followed, but proved short lived
and the state's repressions prompted more popular
unrest. The foundations of what would eventually
turn into the February and October revolutions of
1917 were in the making.
Eventually, World
War I and the subsequent Communist Revolution
effectively pulled Russian oil out of the world
market, but the conflagration that had engulfed
the area for four years also left the victorious
powers with new oil-producing territories such as
Iraq. Further softening the blow, Royal Dutch
company had successfully developed the Sumatran
oil fields and British exploitation of Persian oil
fields proved invaluable. By the 1920s and '30s,
oil production had been diversified among several
different regions in the world, ensuring a steady
supply as demand rose to accommodate the
proliferation of automobiles and other gasoline
powered vehicles.
This example provides a
valuable lesson in today's economy that is facing
prohibitively high prices for crude. With the
smallest signs of tensions in the Straits of
Hormuz hiking barrel prices and the Middle East
continuously locked in perpetual political
violence, the world needs to prioritize on
developing other sources that would relieve the
market of uncertainty and country risk.
There are ample candidates; the new oil
fields off the coast of Brazil and Canada's
projects may stabilize market conditions. However,
the biggest opportunity may lie in the Russian Far
East. Much like how the Russian Empire
prompted development in 1872 by loosening its
monopoly laws, the Russian Federation also needs
to take the first step by allowing greater market
involvement and private investment in the
development of Eastern Siberia (see Putin
returns to the Wild East, May 15, 2012). At
the same time, international players, both
enterprises and states, should be doing more to
cooperate with Moscow and Russian companies.
There is a huge reluctance on the part of
the global community to carry out this vital task.
Moscow has not been helpful in building a more
favorable business climate as it often forces
foreign companies to accept deals that favor
Russian state enterprises. [3]
As a
result, the popular perception is that investing
in Russia is far too difficult due to its business
climate and state oversight; however, country risk
in the Russian Far East is undoubtedly lower than
in the Middle East. Above all, its geographic
location facilitates supply to Northeast Asia, the
largest consumers of energy and a key driver of
the world's economic growth.
In the
long-term, overcoming difficulties of working in
Russia will yield dividends. For one, maintaining
closer business relations will help better
regulate and standardize business practices -
Russia's deeper entrenchment in the Northeast Asia
market will ultimately convince Moscow that
cooperation with foreign ventures is far too
valuable to squander.
Meanwhile, demand
for oil can only increase at this stage. Recent
events such as the meltdown of the reactors at
Fukushima prompted some countries including
Germany to begin reducing reliance on nuclear
energy.
On top of the world's industrial
needs, petroleum has taken an increasingly
important role in the food market as fertilizer
production and distribution of foodstuffs heavily
rely on energy production. North Korea's food
crisis in the 1990s exemplifies the devastating
effects to a nation's agriculture when fuel is cut
off. In particular, as inflation of food prices in
recent years poses a serious social, political,
economic, and pathological challenge, this is a
global imperative.
Thus it is high time
that enterprises re-examine the cost benefit
analysis of working in Russia and see the value of
freeing the global oil market from the ravages of
uncertainty.
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