Search Asia Times

Advanced Search

 
Global Economy

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.
  •  
    Apr 29, 2004



    Why oil prices will stay high
    (Apr 8, '04)

    Iraqi oil: Hanging in the balance
    (Apr 3, '04)

    US complicit in its own decline
    (Mar 31, '04)

    Africa: Oil, al-Qaeda and the US military
    (Mar 30, '04)

     



     

     
       
             
    No material from Asia Times Online may be republished in any form without written permission.
    Copyright 2003, Asia Times Online, 4305 Far East Finance Centre, 16 Harcourt Rd, Central, Hong Kong