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SPEAKING
FREELY
Black gold is king
By
W Joseph Stroupe
Speaking Freely is an
Asia Times Online feature that allows guest writers to
have their say. Please click here if you
are interested in contributing.
Until
two or three years ago we were still hearing
conventional "wisdom", loudly and widely proclaimed,
that confidently asserted that the industrialized world
in general and the United States in particular were
nowhere near as dependent upon crude oil as in the past.
Hence the influence of "black gold" in the economic,
diplomatic, geopolitical and military spheres was
greatly discounted. And quite a number of much-respected
sources of financial and geopolitical analysis and
forecasting were led to make fools of themselves by
trumpeting such unfounded speculation, palming it off as
"intelligent commentary" and "strategic analysis".
The truth is, we have already entered an
entirely new geopolitical era in which black gold
already rules as king in all those spheres (economic,
diplomatic, geopolitical, military).
The new era
also is one in which the heretofore unquestioned global
dominance of the United States in the diplomatic,
geopolitical, military and economic spheres is no longer
taken for granted by the world at large, and is no
longer assured. It is the opening phase of the
transition from the unipolar world order of the last
superpower to the multipolar world order, in which other
centers of power gain strength at the expense of US
power and dominance. And black gold is rapidly becoming
the central focus, as all the industrialized players on
the geopolitical chessboard decide how to position
themselves to preserve, and enhance, their power.
So rather than seeing the influence of black
gold wane, we are witnessing the tremendous increase of
its influence, to an extent unforeseen by all but a
relatively few careful observers of geopolitics and
global economics. The dramatic increase in the global
power of black gold is already having enormous
implications and repercussions throughout the world, and
these will rapidly increase in weight and number. It is
therefore vital to understand those implications and
repercussions. It is the intent of this analysis to
provide the fundamental understanding that is required.
The lifeblood of an industrialized
world
Without a doubt, black gold is still the
very lifeblood of our modern industrialized world.
Without black gold, readily available in tremendous
amounts, everything, even in a massive economy like that
of the US, would quickly screech to a halt.
The
industrialized world has a tremendous thirst for crude
oil. Currently, demand is running at more than 80
million barrels per day, and with a US economic recovery
under way and sharply rising demand in China and India,
demand will only continue to rise significantly above
that forecast for this year by the International Energy
Agency (IEA). After all, the current demand is already
at or above what the IEA originally forecast for the end
of 2004.
With demand like this, it would
literally take at least a decade or more for the US and
others to wean themselves off of black gold - and a
serious start to that process hasn't even begun yet.
There are a number of factors that have, for the first
time in history, converged to place black gold in the
position of undisputed king over the affairs of the
industrialized world.
As noted above, general
crude-oil demand is rising at a feverish pace, and US
demand for crude-oil imports continues to rise sharply,
with no letup in sight. But the global rate of discovery
of significant new deposits of oil has already been
tapering off for some time and it not nearly keeping
pace with rising demand. This means that as current
wells tire out, there won't be enough new finds to fully
replace the dwindling output from the old wells.
In addition, the efficiency of oil
infrastructure and technology in the Middle East and
elsewhere is not up to meeting the requirements placed
upon it by sharply rising demand. The ability of that
infrastructure to produce more oil in less time from
existing wells is falling behind. There is also a
significant shortage of oil tankers, many of which are
getting very old and becoming unsafe.
In Iraq,
more than a decade of sanctions on the country has
allowed its oil infrastructure to crumble. Combined with
alarming instability caused by the growing post-war
insurgency, Iraq won't be able to help significantly
with global oil-supply shortfalls for perhaps a decade.
And black gold in its crude form is useless - refineries
must produce usable forms. But refining capacity at
present is barely able to keep pace with demand, and new
refineries are not being built nearly fast enough. This
is especially true for the United States.
Reserve size is shaken
Aside from
these factors, oil-producing states and oil companies
have recently been "caught" overstating and even
falsifying data related to the size of reserves still in
the ground. Confidence in the assertions of the size of
those reserves has been severely shaken, throwing a
spotlight on the fact that data and formulas used to
calculate the size of reserves are very suspect. Experts
who calculate and forecast the point at which production
will actually begin to permanently fall behind demand
say that the "peak oil" point will be reached much
sooner than once thought - perhaps as soon as 2010. Some
experts even say the point of peak oil may already have
been reached. The tremendous psychological impact of
these facts and the trends in capitals around the
industrialized world cannot be overstated.
The
Organization of Petroleum Exporting Countries (OPEC),
which used to be mostly characterized by disarray, has
recently found the wherewithal to act with much more
unity, carefully avoiding a global oil glut for nearly
five years in a row. Now OPEC is demonstrating both the
will and the ability to keep prices above even its upper
target level of US$28 per barrel.
Russia,
meanwhile, has steadily consolidated its monopoly on oil
and gas throughout Europe and Asia, and has recently
entered into a cooperation agreement with Saudi Arabia,
which has de facto control of the rest of OPEC.
Cooperating together, the planet's two largest producers
of black gold are manipulating global prices by
controlling global production. In essence, with the
combination of all these factors occurring at the same
time, the world is currently entering a very serious oil
"pinch". Any noticeable loss of production or refining
capacity will have a very potent spike effect on prices.
But even without such occurrences, it is clear
that the price of black gold will be mostly upward from
now on, as demand rises sharply, production struggles to
keep up and oil producers are increasingly able to avoid
even temporary overproduction, resulting in price drops.
As such, access to black gold is already determining, or
governing, the economic, diplomatic and military
decisions in capitals around the globe.
Black
gold rules
Black gold is ruling, dominating
geopolitics and global economics on a fundamental basis
(both psychologically and in reality) - throughout the
international system - for the first time in history.
And its dominance is growing very rapidly. Its iron-like
grip on the international system will not be overcome
any time soon - that is the harsh reality. Those who
have an abundance of it - primarily Russia and OPEC -
will also, by means of it, gain greater wealth and
rapidly increasing leverage, and even power, over those
who must import it. Thus, the economies of the
industrialized world are completely beholden to black
gold and to those who export it.
And the extreme
difficulty of using the military option to secure for
oneself unfettered access to oil is being demonstrated
in Iraq. Yet as the very lifeblood of the industrialized
economy increasingly is at stake, we can expect the more
powerful nations to resort more often to the military
option in an effort to achieve strategic energy
security. The new geopolitical era we have already
entered is very dangerous, and will become more so,
sooner rather than later.
As pointed out by
Financial Intelligence Report (FIR) in its April issue
titled "Oil: The Critical Key to the World Economy", the
specter of rising inflation, directly as a result of
sustained high crude-oil prices, hangs over the US and
other economies. In the United States, artificial and
unsustainable short-term measures are currently being
employed to stave off that specter of inflation. The
Federal Reserve has lowered interest rates to record low
levels, and kept them very low, in an effort to combat
any rise in inflation caused by high oil prices and to
try to minimize the tremendous negative effects of the
huge deficits the US has been running. But the powerful
upward force of sustained high oil prices will soon
break through any such artificial short-term measures,
and inflation will break loose, prompting the Fed to
raise interest rates. When that happens, the deeper and
more strategic ill effects of both the short-term
measures that have been undertaken and the huge deficits
will settle in within the US economy. Inflation will
further weaken the already weak US dollar, and the rate
of decline of the dollar will accelerate. And it will be
the sustained high prices for black gold that will be
the trigger.
FIR also notes that US government
reporting on inflation has been "dishonest" for some
time. Commodities such as crude oil are not factored
into calculations for the current rate of inflation. So
its actual rate is already much higher than what we are
being told. The US economy is fundamentally in real
trouble, in spite of the "recovery" currently being
trumpeted loudly. The sustained high prices for black
gold are the primary catalyst that will soon bring to a
head the day of reckoning for the US economy.
By
all the evidence, and in the face of the sustained
decline of the US dollar, OPEC and Russia have already
established a de facto peg to the euro for black gold,
and they are keeping upward pressure on the price of
crude oil so as to maintain their profits in the face of
a declining dollar, which they are paid for their
product. This is becoming fairly widely known. When the
dollar decline gets even steeper with the rise of
inflation, the abandonment of petro-dollars in favor of
petro-euros will be a "natural" step for oil producers.
Such abandonment of the US dollar in the international
transactions for black gold, when it finally comes, will
deal a terrific blow to the already weak dollar, as well
as to the US economy.
But there is another
important exit from the US dollar in the works. Japan,
China, India and others, who have been buying huge
amounts of US debt, and thereby financing the US
deficit, are becoming concerned that their holdings of
such debt are putting their enormous reserves at risk.
They are sending signals that an exit strategy from the
dollar is in the making.
In actuality, it is not
likely the two exit strategies from the dollar noted
above will really be executed unless a significant
event, or set of events, finally forces the hand of
OPEC, Russia, and the big Asian economies. This is
because all those players also are likely to be harmed
in significant ways in any exit from the US dollar. But
what we now have, in the new era the international
system has already entered, is a set of diplomatic,
geopolitical and global economic events and trends that
are exercising powerful influence over those players,
causing them to consider and to plan for such exits from
the dollar in the event that it becomes necessary.
The foundation, both psychological and
logistical, for the exit from the dollar is currently
being laid. And US foreign policy and domestic economic
policy together have, since September 11, 2001,
seriously undermined the traditional international
respect and goodwill toward the United States, and the
traditional international confidence in the US economy
and its currency. This has created the fertile soil in
which the seeds of significant independence from the US,
in all spheres, are taking root and bearing fruit. This
is enormously important.
Terrorism could
spell harm for US dollar
What event, or what set
of events, could force into play the exit strategies
from the dollar on a global basis? The most probable is
a single terrorist attack of significant proportions on
US soil, or a series of much smaller attacks that target
the fragile infrastructure of the country. Undoubtedly,
groups have been carefully studying the United States in
the aftermath of the attacks on September 11, analyzing
US strengths and weaknesses, and attack opportunities,
in an effort to determine what it will actually take to
bring real and lasting harm to the US economy.
Terrorist organizations have shown a surprising
level of political sophistication, along with great
resourcefulness, in crafting asymmetric attacks against
enemies much more powerful than they are. The Madrid
bombings demonstrated that level of sophistication.
Notably, the desired effect was accomplished without the
use of ultra-powerful or ultra-sophisticated weaponry -
neither "dirty" nukes nor "hot" nukes were necessary,
for example, to accomplish their aims. Rather, the
groups focused on precise timing, both from a political
standpoint and from the standpoint of maximum kill, and
upon vulnerabilities, in that the commuter train system
was mostly unprotected. It is very unwise to
underestimate the resourcefulness and abilities of such
groups.
As more and more such incidents occur
around the world, there arises an ever-more pronounced
"value added" effect, based upon fear and negative
expectation, that greatly enhances the effectiveness of
the terrorists' efforts. For example, in the US, a
September 11-size attack would probably not actually be
required to achieve the aims of the terrorists. If much
smaller attacks occurred, targeting crucial
infrastructure, such as the power grid and parts of the
transportation system and the mail system, and if some
of these attacks employed deadly chemicals and/or
biological agents, then fear and negative expectation
would quickly begin to carry the effectiveness of such
attacks to new heights. People would fear that more
attacks were on the way and that the government was
mostly helpless to stop them. Especially if a series of
smaller but effective attacks occurred, the US economy
would likely be significantly harmed by such fear and
uncertainty.
The current domestic security,
political, diplomatic, economic and military environment
in which the US finds itself - and which include
significant and growing international isolation; a
military bogged down in Iraq and Afghanistan; the
approach of an enormously important presidential
election; and burdened with massive debt, high energy
prices, a very weak dollar, and major economic powers
seriously considering an exit strategy from the dollar -
all combine to make for very noteworthy susceptibility
and vulnerability to terrorist attacks. The US is
rapidly becoming a very "desirable" target because its
weaknesses and vulnerabilities are reaching a peak. Such
groups know that the prime time to strike is quickly
arriving, near the election this fall (either shortly
before or shortly after), when such attacks are likely
to have a profound and damaging effect on the economy
and seriously influence the domestic politics of the
superpower.
Additionally, the administration of
President George W Bush is seen by key leaders around
the world as very undesirable, threatening stability and
world order by its aggressive policies. We simply cannot
dismiss the distinct possibility that certain actions
(such as maintaining high crude-oil prices, for example)
will be undertaken in an effort to weaken Bush
politically ahead of the election this fall. It does not
take much of a genius to figure out that the autumn of
2004 will most certainly be a time of greatly increased
vulnerability for the United States, both at home and in
the world at large.
Black versus yellow
gold
Finally, with respect to the link between
black gold and yellow gold, the factors of sustained
high energy prices and the beginnings of a US economic
recovery are already placing enormous upward pressure on
inflation and interest rates. Both will soon have to
break out of their restraints. Added to this is the
growing fear and uncertainty brought about by an array
of very negative geopolitical developments regarding the
US in Iraq and elsewhere, and deep concerns about
skyrocketing US debt and fundamental dollar weakness.
While there certainly are positives, such as the
definite beginning of economic recovery in the US, the
negatives, which are deep, structural and strategic,
will continue to rule events and trends.
As the
negatives more fully manifest themselves in the approach
to the US election this fall, investors in general will
increasingly be forced to place more importance on
security and safe refuge than on higher profit
opportunities, which also pose increasing risks. Yellow
gold will become increasingly attractive, therefore, as
uncertainty progressively dominates during this new era
of fundamental and massive geopolitical transition.
Black gold will lead yellow gold to record highs.
References and recommended
reading:
Financial Intelligence Report (FIR), April 2004
Issue, titled "Oil: The Critical Key to the World
Economy". A publication of NewsMax Media, Inc, and
NewsMax.com. Publisher Christopher Ruddy.
"Financial Reckoning Day" by William Bonner with
Addison Wiggin. Publisher John Wiley & Sons.
MSN Money articles by Nick Louth, dated January 15
and January 22, 2004: "Oil: Running on Empty?" and
"Finding Solutions to the Emerging Oil Crisis".
Newsweek Web exclusive (at MSNBC.COM), dated
February 17, 2004: "Crude Awakening".
W
Joseph Stroupe is editor-in-chief of GeoStrategyMap.com, an online
geopolitical magazine specializing in strategic analysis
and forecasting. He can be reached by e-mail at editor_in_chief@geostrategymap.com.
(Copyright 2004 W Joseph Stroupe. All rights
reserved.)
Speaking Freely is an Asia
Times Online feature that allows guest writers to have
their say. Please click here if you
are interested in contributing.
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