Gold9472
03-11-2005, 07:40 PM
International Perspective: The Militarisation Of Oil
by Marshall Auerback
www.prudentbear.com
March 8, 2005
http://www.prudentbear.com/internationalperspective.asp
Oil prices spiked to record levels last week, propelled by a rally in petrol prices and a cold snap in the northern hemisphere, against the backdrop of a tight balance between supply and demand. Yes, that's right, basic "supply/demand," not "political turbulence in the Middle East."
If anything, this simplistic relationship between Middle Eastern political tension and rising/falling crude prices has broken down over the past few weeks. As the FT's Philip Stephens noted, "The Middle East is becoming a different place. The world's sole superpower is unwilling any longer to accept the status quo. That of itself is a powerful agent for change. Images beamed by Arab satellite television, first of the Palestinian and Iraqi elections and now of the public clamour for Syria's withdrawal from Lebanon, are shaking the authoritarian preconceptions of the old order. Behind the scenes, the world-weary cynicism about the prospects of an Israeli-Palestinian peace deal is giving way, if not to optimism, then at least to glimmers of hope."
It is very telling that the price spike came during a most propitious backdrop: a popular uprising in Beirut, the growing isolation of Syria and small stirrings of change in Egypt and Saudi Arabia. Analysts said hawkish comments from the Organization of Petroleum Exporting Countries have contributed to the rally. Ali Naimi, the Saudi oil minister, last week forecast that oil prices would stay between $40 and $50 a barrel for the rest of this year. The acting OPEC secretary general, Adnan Shihab-Eldin, also added fuel to the fire (so to speak) when he said oil prices could rise to $80 in the next two years in the event of a major oil supply disruption, similar to the war in Iraq. (It is also worth noting that crude's strength is no longer simply a weak dollar phenomenon: as market analyst James Turk has noted, oil is now becoming more expensive in terms of both euros and dollars, reflecting the growing breadth of this particular bull market.)
But talk, unlike oil, is cheap. OPEC could no more "talk up" the market than it could talk it down last year. Obscured against the perennial geopolitical conflict that tends to characterise the oil producing regions of the world, or the endless theorising about whether the oil cartel is "cheating" on its quotas, is the fact that exploration success in global oil has been in decline for decades and that the world has been living off of the major fields discovered literally decades ago. Recent exploration has gone in large part toward exploiting more effectively these major fields, but such exploration has not been characterised by huge new discoveries. Announced increases in "reserves" merely reflect changes in reporting requirements as mandated by the SEC, rather than major finds of new sources of oil. Likewise, most advances in technology simply enhance extraction, but have done little to augment existing supply. As a consequence, the rate of depletion of these fields has increased, implying looming supply problems ahead. Add to this the fact that the vast majority of new projects will produce less refinable heavy oil and it is clear that major supply shortfalls loom, cold weather or hot weather.
We have arrived at the summit of "Hubbert's Peak," the oil geologist who in 1956 correctly prophesized that U.S. petroleum production would peak in the early 1970s, then irreversibly decline. In 1974 he likewise predicted that world oil fields would achieve their maximum output in 2000; a figure later revised by some of his acolytes, such as Henry Groppe, Colin J. Campbell, and Matt Simmons, to anywhere between 2006-2010.
If high oil prices are here to stay, it clearly has epochal implications for the global economy. Indeed, even if the recent rise puts paid to the notion that Middle Eastern political risk premiums in and of themselves bear tangential relationship to underlying movements in the oil market, the very lack of new supply will almost invariably lead to an increasing militarization of global energy policy, although perhaps not in the Middle East-centric manner in which this has been occasionally manifested in the past.
For Iraq is hardly the only country where American troops are risking their lives on a daily basis to protect the flow of petroleum. In Colombia, Saudi Arabia, and the Republic of Georgia, U.S. personnel are also spending their days and nights protecting pipelines and refineries, or supervising the local forces assigned to this mission. American sailors are now on oil-protection patrol in the Persian Gulf, the Arabian Sea, the South China Sea, and along other sea routes that deliver oil to the United States and its allies. In fact, as Michael Klare has noted (Blood and Oil: The Dangers and Consequences of America's Growing Dependency on Imported Petroleum), the American military is increasingly being converted into a global oil-protection service:
"Ever since the Soviet Union broke apart in 1992, American oil companies and government officials have sought to gain access to the huge oil and natural gas reserves of the Caspian Sea basin -- especially in Azerbaijan, Iran, Kazakhstan, and Turkmenistan. Some experts believe that as many as 200 billion barrels of untapped oil lie ready to be discovered in the Caspian area, about seven times the amount left in the United States. But the Caspian itself is landlocked and so the only way to transport its oil to market in the West is by pipelines crossing the Caucasus region -- the area encompassing Armenia, Azerbaijan, Georgia, and the war-torn Russian republics of Chechnya, Dagestan, Ingushetia, and North Ossetia.
"American firms are now building a major pipeline through this volatile area. Stretching a perilous 1,000 miles from Baku in Azerbaijan through Tbilisi in Georgia to Ceyhan in Turkey, it is eventually slated to carry one million barrels of oil a day to the West; but will face the constant threat of sabotage by Islamic militants and ethnic separatists along its entire length. The United States has already assumed significant responsibility for its protection, providing millions of dollars in arms and equipment to the Georgian military and deploying military specialists in Tbilisi to train and advise the Georgian troops assigned to protect this vital conduit. This American presence is only likely to expand in 2005 or 2006 when the pipeline begins to transport oil and fighting in the area intensifies.
"Or take embattled Colombia, where U.S. forces are increasingly assuming responsibility for the protection of that country's vulnerable oil pipelines. These vital conduits carry crude petroleum from fields in the interior, where a guerrilla war boils, to ports on the Caribbean coast from which it can be shipped to buyers in the United States and elsewhere. For years, left-wing guerrillas have sabotaged the pipelines -- portraying them as concrete expressions of foreign exploitation and elitist rule in Bogota, the capital -- to deprive the Colombian government of desperately needed income. Seeking to prop up the government and enhance its capacity to fight the guerrillas, Washington is already spending hundreds of millions of dollars to enhance oil-infrastructure security, beginning with the Cano-Limon pipeline, the sole conduit connecting Occidental Petroleum's prolific fields in Arauca province with the Caribbean coast. As part of this effort, U.S. Army Special Forces personnel from Fort Bragg, North Carolina are now helping to train, equip, and guide a new contingent of Colombian forces whose sole mission will be to guard the pipeline and fight the guerrillas along its 480-mile route."
Other countries are responding in kind, notably China. More expensive oil will undercut China's energy-intensive boom. The country is already experiencing sporadic power shortages against a backdrop of growing car ownership and air travel across the country. Energy is becoming vital to strategically important and growing industries such as agriculture, construction, and steel and cement manufacturing. Consequently, pressure is already mounting on Beijing to access energy resources on the world stage. As a result, energy security has become an area of vital importance to China's stability and security. China is stepping up efforts to secure sea lanes and transport routes that are vital for oil shipments and diversifying beyond the volatile Middle East to find energy resources in other regions such as Africa, the Caspian, Russia, the Americas and the East and South China Sea region.
End Part I
by Marshall Auerback
www.prudentbear.com
March 8, 2005
http://www.prudentbear.com/internationalperspective.asp
Oil prices spiked to record levels last week, propelled by a rally in petrol prices and a cold snap in the northern hemisphere, against the backdrop of a tight balance between supply and demand. Yes, that's right, basic "supply/demand," not "political turbulence in the Middle East."
If anything, this simplistic relationship between Middle Eastern political tension and rising/falling crude prices has broken down over the past few weeks. As the FT's Philip Stephens noted, "The Middle East is becoming a different place. The world's sole superpower is unwilling any longer to accept the status quo. That of itself is a powerful agent for change. Images beamed by Arab satellite television, first of the Palestinian and Iraqi elections and now of the public clamour for Syria's withdrawal from Lebanon, are shaking the authoritarian preconceptions of the old order. Behind the scenes, the world-weary cynicism about the prospects of an Israeli-Palestinian peace deal is giving way, if not to optimism, then at least to glimmers of hope."
It is very telling that the price spike came during a most propitious backdrop: a popular uprising in Beirut, the growing isolation of Syria and small stirrings of change in Egypt and Saudi Arabia. Analysts said hawkish comments from the Organization of Petroleum Exporting Countries have contributed to the rally. Ali Naimi, the Saudi oil minister, last week forecast that oil prices would stay between $40 and $50 a barrel for the rest of this year. The acting OPEC secretary general, Adnan Shihab-Eldin, also added fuel to the fire (so to speak) when he said oil prices could rise to $80 in the next two years in the event of a major oil supply disruption, similar to the war in Iraq. (It is also worth noting that crude's strength is no longer simply a weak dollar phenomenon: as market analyst James Turk has noted, oil is now becoming more expensive in terms of both euros and dollars, reflecting the growing breadth of this particular bull market.)
But talk, unlike oil, is cheap. OPEC could no more "talk up" the market than it could talk it down last year. Obscured against the perennial geopolitical conflict that tends to characterise the oil producing regions of the world, or the endless theorising about whether the oil cartel is "cheating" on its quotas, is the fact that exploration success in global oil has been in decline for decades and that the world has been living off of the major fields discovered literally decades ago. Recent exploration has gone in large part toward exploiting more effectively these major fields, but such exploration has not been characterised by huge new discoveries. Announced increases in "reserves" merely reflect changes in reporting requirements as mandated by the SEC, rather than major finds of new sources of oil. Likewise, most advances in technology simply enhance extraction, but have done little to augment existing supply. As a consequence, the rate of depletion of these fields has increased, implying looming supply problems ahead. Add to this the fact that the vast majority of new projects will produce less refinable heavy oil and it is clear that major supply shortfalls loom, cold weather or hot weather.
We have arrived at the summit of "Hubbert's Peak," the oil geologist who in 1956 correctly prophesized that U.S. petroleum production would peak in the early 1970s, then irreversibly decline. In 1974 he likewise predicted that world oil fields would achieve their maximum output in 2000; a figure later revised by some of his acolytes, such as Henry Groppe, Colin J. Campbell, and Matt Simmons, to anywhere between 2006-2010.
If high oil prices are here to stay, it clearly has epochal implications for the global economy. Indeed, even if the recent rise puts paid to the notion that Middle Eastern political risk premiums in and of themselves bear tangential relationship to underlying movements in the oil market, the very lack of new supply will almost invariably lead to an increasing militarization of global energy policy, although perhaps not in the Middle East-centric manner in which this has been occasionally manifested in the past.
For Iraq is hardly the only country where American troops are risking their lives on a daily basis to protect the flow of petroleum. In Colombia, Saudi Arabia, and the Republic of Georgia, U.S. personnel are also spending their days and nights protecting pipelines and refineries, or supervising the local forces assigned to this mission. American sailors are now on oil-protection patrol in the Persian Gulf, the Arabian Sea, the South China Sea, and along other sea routes that deliver oil to the United States and its allies. In fact, as Michael Klare has noted (Blood and Oil: The Dangers and Consequences of America's Growing Dependency on Imported Petroleum), the American military is increasingly being converted into a global oil-protection service:
"Ever since the Soviet Union broke apart in 1992, American oil companies and government officials have sought to gain access to the huge oil and natural gas reserves of the Caspian Sea basin -- especially in Azerbaijan, Iran, Kazakhstan, and Turkmenistan. Some experts believe that as many as 200 billion barrels of untapped oil lie ready to be discovered in the Caspian area, about seven times the amount left in the United States. But the Caspian itself is landlocked and so the only way to transport its oil to market in the West is by pipelines crossing the Caucasus region -- the area encompassing Armenia, Azerbaijan, Georgia, and the war-torn Russian republics of Chechnya, Dagestan, Ingushetia, and North Ossetia.
"American firms are now building a major pipeline through this volatile area. Stretching a perilous 1,000 miles from Baku in Azerbaijan through Tbilisi in Georgia to Ceyhan in Turkey, it is eventually slated to carry one million barrels of oil a day to the West; but will face the constant threat of sabotage by Islamic militants and ethnic separatists along its entire length. The United States has already assumed significant responsibility for its protection, providing millions of dollars in arms and equipment to the Georgian military and deploying military specialists in Tbilisi to train and advise the Georgian troops assigned to protect this vital conduit. This American presence is only likely to expand in 2005 or 2006 when the pipeline begins to transport oil and fighting in the area intensifies.
"Or take embattled Colombia, where U.S. forces are increasingly assuming responsibility for the protection of that country's vulnerable oil pipelines. These vital conduits carry crude petroleum from fields in the interior, where a guerrilla war boils, to ports on the Caribbean coast from which it can be shipped to buyers in the United States and elsewhere. For years, left-wing guerrillas have sabotaged the pipelines -- portraying them as concrete expressions of foreign exploitation and elitist rule in Bogota, the capital -- to deprive the Colombian government of desperately needed income. Seeking to prop up the government and enhance its capacity to fight the guerrillas, Washington is already spending hundreds of millions of dollars to enhance oil-infrastructure security, beginning with the Cano-Limon pipeline, the sole conduit connecting Occidental Petroleum's prolific fields in Arauca province with the Caribbean coast. As part of this effort, U.S. Army Special Forces personnel from Fort Bragg, North Carolina are now helping to train, equip, and guide a new contingent of Colombian forces whose sole mission will be to guard the pipeline and fight the guerrillas along its 480-mile route."
Other countries are responding in kind, notably China. More expensive oil will undercut China's energy-intensive boom. The country is already experiencing sporadic power shortages against a backdrop of growing car ownership and air travel across the country. Energy is becoming vital to strategically important and growing industries such as agriculture, construction, and steel and cement manufacturing. Consequently, pressure is already mounting on Beijing to access energy resources on the world stage. As a result, energy security has become an area of vital importance to China's stability and security. China is stepping up efforts to secure sea lanes and transport routes that are vital for oil shipments and diversifying beyond the volatile Middle East to find energy resources in other regions such as Africa, the Caspian, Russia, the Americas and the East and South China Sea region.
End Part I