Petro-hysteria grips a
superpower By Peter Kiernan
High oil prices, political instability in
oil-producing states, the rise of energy-hungry
China, jihadist terrorism and the return of
"resource nationalism" are factors constantly
cited in Washington these days as evidence that
national security is being undermined by
unrestrained consumption of oil. Petroleum, once
seen as the energy source that fueled the
"American century", has more recently been
interpreted by some legislators, policymakers and
pundits as the Achilles' heel of global dominance.
Daily op-ed pieces, many in fact written
by neo-conservatives, state that US dependence on
imported oil strengthens assertive petro-states
that work against America's interests, bankrolls
jihadist terrorism, and allows producers to
leverage their market
power now that prices are
high. Others warn of Chinese energy "mercantilism"
sowing the seeds of conflict between the United
States and China.
This year President
George W Bush said in his State of the Union
address that "America is addicted to oil, which is
often imported from unstable parts of the world".
He then pledged to make US dependence on the
Middle East a "thing of the past" by promoting
alternative fuels - to rapturous bipartisan
applause. Not since the 1973-74 Arab oil embargo
and price hike has US oil consumption generated
such concern.
Indeed, the current
high-price environment (now about US$73 per
barrel) and assertiveness by energy producers,
especially Russia, Iran and Venezuela, have
accelerated fears in Washington that the US is
strategically vulnerable. It's frequently claimed
that Presidents Vladimir Putin, Mahmud Ahmadinejad
and Hugo Chavez wouldn't be so defiant of the US
if oil prices weren't so high and if their nations
didn't have substantial energy reserves.
Recently the Financial Times reported on a
study by the US military's Southern Command. It
noted that the trend toward greater state control
over energy assets in Latin America "will hamper
efforts to increase long-term supplies" and that
"long-term energy production in Venezuela, Ecuador
and Mexico are currently at risk".
Some
Republican and Democratic legislators have
expressed fear about the geopolitical impact of
the current dynamics of the oil market. As a
result they have drafted bills that aim to curb
consumption by improving fuel efficiency of
vehicles, encouraging use of alternative sources
of transport fuel such as ethanol, facilitating
investment in technologies to develop hybrid and
electric cars, and improving diplomatic channels
with other major energy consumers.
Yet
what is the likely success of efforts to wean the
US off dependence on imported oil, and will it
have the desired effect on the market and the
actions of oil-producing states? There has been
much rhetoric and hyperbole about these issues,
and some of the arguments made in the current
debate range from reasonable to alarmist.
Per capita oil consumption in the United
States is higher than in the rest of the
industrialized world, and US import dependence is
steadily rising. It's therefore long overdue to
look at measures that can reduce consumption that
will have environmental, economic and geopolitical
benefits. But it's also important to be realistic
about the size of the task required to reverse the
trend of rising oil demand, as well as about the
accuracy of alleged dangers to energy security
constantly highlighted today.
In 2005 the
world consumed about 83.7 million barrels per day,
with 25%, or about 20.8mbpd, consumed in the US
alone. Of this demand the US Energy Information
Administration (EIA) says that 58% was supplied by
imports, a figure forecast to increase to 70% by
2025, when imports will nearly equal total
consumption today. While the EIA forecasts oil
demand growth in Europe and Japan to be flat from
now until 2030, US oil demand is expected to grow
by 37% over the same period.
It will
therefore take a huge amount of US political
willpower to mandate the kinds of actions
necessary to reduce substantially the level of oil
imports over the next 20 years. Some tough
measures, including, for example, higher gasoline
taxes and more stringent fuel-economy standards
for vehicles, would be politically costly for both
Congress and the White House.
Proposals so
far to promote the use of ethanol, expand the
fleet of hybrid cars, or even increase domestic
supplies by opening up new areas for exploration
and production will have a modest impact at best
on reducing import dependence. The EIA recently
noted that government-mandated actions to curb
consumption normally have a limited volumetric
impact within five to 10 years, even if a greater
impact can be seen in the longer term.
Oil
is also a fungible commodity. Therefore the only
way to eliminate imports from a foreign source,
such as the Middle East, is to eliminate the
market for imports overall by making domestic
supply equal local demand. But US oil production
is flat while demand keeps rising. As long as the
US imports oil - and it will for some time to come
- some of that will originate from the Middle
East. US refiners cannot buy crude oil from Iran
because of US law, but the Islamic Republic
readily supplies the markets of China, Japan,
India, the rest of Asia, and Europe.
Even
if "energy independence" in the US were to be
achieved, it would not be insulated from tensions
in oil-producing countries or the actions of
hostile states, especially in the Middle East. The
US is actually less dependent on Persian Gulf oil
than Europe and Japan, but the tankers that sail
through the Strait of Hormuz are the lifeblood of
the global economy, and would be even if the US
didn't import any oil. This fact has been the key
motive for the US maintaining its dominant
security role in the Persian Gulf.
Furthermore, growing demand in Asia,
especially China and India, will provide lucrative
alternative markets to Persian Gulf producers that
possess about two-thirds of the world's oil
reserves. The EIA forecasts that 43% of the growth
in demand between 2003 and 2030 will come from
Asian nations. Over the same period the
organization also forecasts that the OPEC
(Organization of Petroleum Exporting Countries)
Persian Gulf producers of Iran, Iraq, Kuwait,
Qatar, Saudi Arabia and the United Arab Emirates
will supply 31% of the forecast increase in world
production capacity.
There needs to be
greater understanding of what is required to
reduce US dependence on imported oil dramatically,
as well as better awareness of what the
limitations are in measures taken to help achieve
energy security. Similarly, high prices and tight
market fundamentals have led to an exaggeration in
the op-ed-page world of the perception of the
threat posed by oil producers. It has been argued
that (1) high prices automatically make producers
radical, less democratic, and antagonistic toward
consuming nations; (2) resource nationalism is
actually something new; and (3) the US and China
are inexorably heading toward war over resources.
While high prices have encouraged some
petroleum exporters - Russia, Iran and Venezuela -
to throw around some geopolitical weight, or at
least threaten to do so, for many others there has
been little, if any, change in their geopolitical
outlook. Some have eroded the political rights of
their citizens, while others have not, or continue
to stumble in the opposite direction.
If
high prices were the sole determinant of a
producer's actions, then Libya would not have
sought an exit from international isolation at a
time when prices had reached record levels. Nor
would Saudi Arabia and Kuwait - and many others -
have ignored Hugo Chavez' call for OPEC to cut
production in June. Iran's approach to its nuclear
program is at least determined by its perception
that the US has been weakened by its military
presence in Iraq as it might be by the price of
oil.
Conversely, when prices were low
during most of the 1980s, the Islamic Republic was
hardly viewed in the West as a less radical
entity, nor did Saudi Arabia attempt to become
more democratic at that time for fear of the House
of Saud losing popular support.
There has
been a wealth of academic literature that explains
the poor record of rentier states reforming
their political systems for reasons that are far
too lengthy to discuss here. Yet there are plenty
of variables to look at in assessing what
motivates an producer's actions, and to relate it
solely to the price of crude oil is a little too
anecdotal.
Similarly, the term "resource
nationalism" has been raised as a reflection of
the current market power imbalance in favor of
energy producers against consumers. While resource
nationalism is not a new phenomenon, high prices
have exacerbated anxiety about it. Russia,
Venezuela, Bolivia and Ecuador are cited as
countries displaying nationalism, whereby energy
assets have been either nationalized or where the
state has demanded higher royalty payments.
Producing countries whose reserves are
owned by national oil companies might feel less
inclined to open up to foreign investment while
prices are high, preferring instead to reap the
benefits of greater revenue than increase output.
This may in turn lead to a protracted period of
higher prices if markets remain tight. Current
estimates are that international companies can
invest in about 17% of the world's petroleum
reserves, either independently or as part of joint
ventures with national oil companies, with the
rest being the sole preserve of state-owned
companies. According to The Economist, the top
five companies in terms of reserves are the
national oil companies of Saudi Arabia, Iran,
Iraq, Kuwait and Venezuela.
It is not news
that producers want a bigger piece of the pie when
prices are high, but neither is the fact that,
particularly in the Middle East, the bulk of oil
reserves around the world are state-owned. That
region, which has two-thirds of the world's oil
reserves, went through its wave of nationalization
during the 1970s. Not all recent examples of
resource nationalism involve significant oil
producers. Bolivia nationalized natural-gas
assets. Ecuador is a substantial producer
regionally, but it produces less than 1% of global
supply. Developments in Russia and Venezuela will
be watched more closely.
Finally, the role
of China in the global oil market has been another
issue generating anxiety. China is now the
second-largest oil market in the world, edging
past Japan in recent years. It consumed 6.6mbpd of
oil in 2005. Similarly to the US, Chinese oil
production is flat, while demand is steadily
rising. In response, Chinese state-owned oil
companies have been acquiring energy assets in the
Middle East, Central Asia, Africa and Latin
America, prompting speculation that China is
embarking on a resources grab to fuel its rise to
superpower status.
Inevitably, the
argument goes, China is on a collision course with
the United States, as it will cultivate close ties
with oil producers inimical to US interests,
namely Iran. It has also been stated that China
may even challenge the United States' role as the
security guarantor of the Middle East as well.
US-China relations are mixed, but both
powers have a common interest in the stability of
oil supplies as significant consumers who are also
increasingly dependent on imports. This can be
used as a source of cooperation with the right
policy mix by both states, and does necessarily
imply an automatic degeneration into conflict.
China's energy acquisitions may not always
be economic, but ultimately if this is the case it
will be China that pays the price. Furthermore,
its development of oilfields leads to a greater
level of global oil supply, rather than resulting
in a situation where one more barrel of oil for
China means one fewer barrel for everyone else.
Overall, China's energy policy is more defensive
in nature, and it does not seek direct
confrontation with the US over energy supplies.
Treating China as if it does, however, may
eventually lead to the realization of a
self-fulfilling prophecy.
The debate over
the linkage between oil dependence and national
security is a valid one, but needs to be tempered
with a realistic assessment of what the problem
actually is, and a clear understanding of what's
required to be done about it. Prices are high and
markets are tight, but there's no reason to run
for the hills just yet.
Peter
Kiernan is a Middle East and energy analyst in
the Washington, DC, area.
(Copyright
2006 Asia Times Online Ltd. All rights reserved.
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