Saturday :: Dec 9, 2006

Russia, Energy, and the Decline of the US

by soccerdad

In order to understand this administrations thinking on Iraq, including why it invaded and why it won’t leave, its important to try and understand the role of energy, especially the underlying geopolitics. Recently, James Stroupe had a two part essay in Asia Times, here and here that examined the current geopolitics of oil and how Russia is attacking the “Achilles heel” of the United States

Following the oil embargo of 1973-1974 the US and Britain helped change the way the oil markets were run. Instead of long term contracts, a new system, the “spot market” and oil futures were established. The idea was to increase the liquidity of oil, i.e. instead of being tied to a single supplier, the spot market allowed other sources to easily replace decreases in supply from a source. The idea was to reduce the likelihood of being held hostage by a single country again. By the mid- to late 1980s, the new oil-market arrangements in New York (and later in London) had been firmly established and were enjoying phenomenal success. While some exporters refused to drop entirely the traditional rigid bilateral long-term supply contracts in favor of the spot markets, up until today most oil is marketed on the exchanges. Oil-futures contracts are freely bought and sold on the exchanges and oil for physical delivery is bought comparatively "at the last hour" on the spot market, where delivery to the importing nation is then arranged.

In effect, the new exchanges facilitated the creation of one virtual global pool of oil denominated in US dollars into which nearly all exporters sell their oil and out of which nearly all importers purchase oil, all on a daily basis.
Importantly, the US and Britain accomplished two goals of profound importance and value with the creation of their new liberalized global oil-market order. First, they prevented the enacting of any targeted oil embargo, and they greatly enhanced the leverage of the West's oil majors, their de facto state sponsors and the West's financial institutions in the new market arrangement while simultaneously fundamentally undermining the leverage of producers, thus powerfully bolstering the strategic energy security of the West.

Second, they consolidated and powerfully solidified the role of the US dollar as the unquestioned international currency, since the one virtual global pool of oil created and maintained by the new liberalized market order is denominated in US dollars alone.

Now however, this neo-liberal order is under siege by Russia, China, and other countries in the East. The energy-hungry east is starting to go back to the use of long term contracts between suppliers and user countries. Since delivery of this oil is now committed to those countries it has been removed from the spot market. This means that the possibility of rising prices and interrupted supplies increase for those countries like the US who buy their oil, in large part, from the “spot market”. Secondly, new exchanges meant to challenge those in the US and Britain are being established in the East.

These new exchanges have two very prominent and significant features. First, they are bringing together primarily the globe's producers and the rising economies in the East to facilitate new Asia-centric (rather than US-centric) energy pricing and security arrangements. Second, they are denominated in currencies other than US dollars or are being structured with the autonomy and sophistication to switch from dollars to other currencies.
Russia plays a major role in this new transition. Putin has brought the energy sector under firm Kremlin control. The size of Russia’s energy reserves provides Putin with a great deal of geo-political leverage. Putin has insisted on long term contracts and has assailed the West for being more concerned about their security at the epense of that of the suppliers.

Goldwyn is senior fellow at the Center for Strategic and International Studies, a prestigious Washington, DC, think-tank, and president of Goldwyn International Strategies, a leading provider of political and business intelligence, energy-sector analysis and Washington strategy advice to Fortune 100 companies and investment advisers.

Goldwyn stated: "The United States is more energy-insecure today than it has been in nearly 30 years. We are insecure because the global oil market is more fragile, more competitive and more volatile than it has been in decades."

Goldwyn referred to the fact that "the growing [energy] dependence of rising powers such as China and India is rapidly eroding US global power and influence around the world" as those rising powers increasingly enter bilateral long-term contracts with suppliers, ever greater numbers of which do not allow free market access by the West's oil majors to production and exploration acreage and which are creating a strategically tight market for the rest of the world.

Lets look at some number to get a sense of the magnitude of the issue.
China's three main state-owned oil companies (National Petroleum Corp, China Petroleum and Chemical Corp and China National Offshore Oil Corp) alone, by the latest data and estimates available more than a year ago, "have managed to establish control over about 300 mb/d [million barrels a day] of crude production, which could reach up to 600 mb/d by 2008".

It should also be noted that Western majors such as Shell and Exxon/Mobil control only 8-9% of the worlds reserves. The idea that Russia Gazprom could make a bid for Shell is not that far fetched.
Meanwhile Russia may have started turning the screws.
Decisions of state-owned or state-controlled oil and gas companies such as that made known on October 9 respecting Russia's Gazprom, which has decided to exclude all foreign (notably Western) energy majors from its giant Shtokman gas project, or the recent decisions to threaten to revoke permanently the operating licenses of Western oil majors in the Sakhalin-1 and Sakhalin-2 projects, are representative of the wave of consolidation of control of global resources by state-owned and state-controlled energy companies around the world.

The establishment of other oil exchanges dealing in currencies other than the US dollar could have serious effect on the US economy and its dominance that it has maintained for the last 20 years by being the standard for oil and gas purchases. The new Shanghai Petroleum Exchange settles transactions in the Chinese currency, the yuan. Russia's new St Petersburg exchange, slated to come online next year, will settle transactions in the ruble at which time Russian products will leave the NY exchange. Qatar’s new exchange will open using dollars but will have the capability to deal in different currencies. This will be a major blow to the US and the strength of its economy.
This may have prompted some of the remarks by Cheney back in May.
Vice President Dick Cheney delivered the Bush administration's strongest rebuke of Russia to date on Thursday, saying the Russian government "unfairly and improperly restricted" people's rights and suggesting that it sought to undermine its neighbors and to use the country's vast resources of oil and gas as "tools of intimidation or blackmail."


It seems that instead of attacking Iraq, the interests of the United States people, but probably not the neo-liberal economic structure, would have been better served by the US adapting to the changing situation and trying to lock up oil contracts like the Chinese have.

The relevance of the US in the world order decreases by the minute. What do we have that the rest of the world can not live without? We have become a bully trying to maintain their dominance by force, having nothing to offer but threats. We are becoming beggars, needing foreign countries to prop up our lifestyle by financing our debt. But with the rising economies of the East, our last reason to be taken seriously, i.e. we buy more crap than anyone else on the planet, no longer holds as much influence as larger consumer populations start to exert their influence.

The fall from the top will be long, hard and painful. Maybe things would have been different if we had tried to be part of the world order instead of trying to control the world. Other than our nuclear arsenal, what leverage do we really have?

soccerdad :: 6:01 PM :: Comments (20) :: Digg It!