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    Central Asia
     Sep 25, 2012


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.

Notes:
1. Future of South Korea's Energy Market on the Crossroads. Motley Fool, September 14, 2012.
2. For further information on the exploration of the oil fields in Azerbaijan, see podcast The Black City" from A History of Oil.
3. A good example of this case is in 2006 when Moscow cited environmental measures to impeded foreign oil companies. See In Russian Far East, concern for environment, New York Times, October 5, 2006.

Yong Kwon is a Washington-based analyst of international affairs.

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)





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