The New Cold War

Energy war

Russia uses its vast oil and gas resources to trigger shifts in power equations, effectively eroding the West's post-Cold War gains.

By Vladimir Radyuhin

The year 2007 will see the confrontation between Russia and the West over the energy resources of the former Soviet Union gain new intensity. Throughout the past year the West watched with mounting alarm as Russia skilfully used its vast oil and gas resources to set a new energy agenda that is not only reshaping the domestic and international energy markets but triggering shifts in global power equations, effectively eroding the West's post-Cold War gains.

As Russia assumed the presidency of the Group of Eight (G-8) in 2006, President Vladimir Putin called for redefining the concept of energy security so that it involved not only the security of oil and gas supplies for the consumer, but also the security of sustained demand for the producer.

Under the current system, which Putin described as "energy egoism" benefiting "a small group of most developed countries", energy reserves across the world are open to, and controlled by, American corporations. In Putin's model, energy resources are controlled by state-owned companies, the "national champions" who would represent the country's interest in international commerce.

Putin's drive to regain government control over the country's energy assets, which had been sweepingly privatised under Russia's first post-Soviet President Boris Yeltsin, was marked with crowning success last year. Western energy giants suffered two major setbacks in their attempts to win a foothold in the Russian energy market.

In October, the state-owned natural gas monopoly, Gazprom, dropped plans to give a 49 per cent interest to Western firms in the Shtokman field in the Barents Sea and decided to retain full ownership of the world's biggest gas reserve holding 3.7 trillion cubic metres of natural gas and more than 31 million tonnes of gas condensate.

Sakhalin-2 Takeover

In December, Gazprom ousted Royal Dutch Shell from its leading position in Asia's biggest energy project, Sakhalin-2. Faced with multi-billion-dollar legal actions and licence recall over environmental damage, Royal Dutch Shell and its two partners, Mitsui and Mitsubishi, agreed to sell just over 50 per cent of their shares to Gazprom.

With the takeover of Sakhalin-2, the better part of the Russian oil and gas sector reverted to government control. The Kremlin's grip on energy exports was further consolidated last summer when the Russian parliament passed a Bill that gave Gazprom monopoly rights for the export of natural gas, both pipeline and liquefied natural gas (LNG). While the privately owned oil companies continue to produce the bulk of crude, they closely coordinate their corporate decisions and strategies with the Kremlin. Also, a state-owned company, Transneft, controls all oil export pipelines.

Putin's energy security model further threatens Western interests because it replaces the so-called "liberal, open global oil market order" dominated by American companies with a network of long-term agreements and joint ventures with other energy-producing and energy-consuming countries in the developing world, such as China and India.

Last year the Russian and Iranian Presidents agreed to coordinate their gas-marketing strategies in European and Asian markets. Gazprom signed a memorandum of understanding with the Algerian state company Sonatrach, the second biggest supplier of gas to Europe after Gazprom, to cooperate in upstream asset swaps, joint bidding for assets in third countries, and in the LNG business. In September the Gazprom chief paid the first visit to Qatar, another major gas producer, to discuss cooperation in the gas field.

Addressing the Shanghai Cooperation Organisation (SCO) summit in Shanghai last June, Putin called for the setting up of an SCO "energy club". In fact, Russia has come a long way towards forming such a club, having signed long-term oil and gas deals with China, and strategic pacts with Kazakhstan, Turkmenistan and Uzbekistan for the purchase and joint development of their hydrocarbons.

A confidential North Atlantic Treaty Organisation (NATO) report prepared in the run-up to its summit in Riga, Latvia, in November warned that Russia was out to set up a gas cartel stretching from Algeria to Iran and Central Asia, to use as a political weapon against Europe.

Wave of Nationalisation

Putin's natural resources nationalism has spurred a global wave of nationalisation and consolidation of state control over energy resources from Central Asia to West Asia, from Africa to Latin America. Russian supplies of weapons to energy-producing developing countries, such as Venezuela and Algeria, embolden them to challenge the dominance of the United States. Resources-rich countries today control over 70 per cent of global energy resources, while the share of Western energy giants has shrunk to less than 10 per cent. This has thrown the West into a state of panic.

"The mounting global energy leverage that is increasingly coming to reside in the hands of Russia and its strategic partners is an irresistible power literally unequalled in all human history, for it is the power to throttle, or even to credibly threaten to strangle, the highly industrialised economies of the West," warns W. Joseph Stroupe, a writer on energy geopolitics.
Where has all the hype about the West's victory in the Cold War gone?

Marshall Goldman, associate director of the Davis Center for Russian Studies at Harvard, U.S., claims that the U.S. is defenceless in the face of Russia's energy wealth which has made it more powerful now than at any time in its history. "In the Soviet era there was mutually assured destruction. They had nuclear weapons. We had nuclear weapons. We didn't use them, because we were worried they would and vice versa. Here you don't have that kind of restraint," he said.
What drives the West especially mad is that its companies can no longer walk into the Russian energy supermarket and pick up assets as they like. Moscow has made it clear that foreign companies will only get access to Russian energy resources if they offer their own assets and technologies in return, and if Russian companies find these assets worth swapping. Explaining Gazprom's decision to develop Shtokman alone, Putin said that foreign companies had failed "to offer adequate assets" in exchange for a stake in the vast Russian field.

To add insult to injury, Putin in October approved plans to promote Russia's own crude oil mix, REBCO (Russian Export Brand Crude Oil), which should eventually replace Brent as a pricing benchmark, and to set up the Russian Fuel and Energy Exchange where the new mix will be traded in roubles, rather than in dollars.

A month later, U.S. Senator Richard Lugar urged NATO to intervene to stop Russia from flexing its energy muscles. "The alliance must avow that defending against such attacks [using energy as a weapon] is an Article 5 commitment," the outgoing Chairman of the Senate Foreign Relations Committee said on the sidelines of the Riga summit, referring to the need to invoke the alliance's mutual defence clause. The "Comprehensive Political Guidance" document adopted at the summit identified "the disruption of the flow of vital resources" among "the main risks or challenges for the alliance" for the next 10 to 15 years.

While NATO refrained from pointing the finger at Moscow, the U.S. has vowed to take on Russia in 2007. National Intelligence Director John Negroponte predicted a further worsening of relations with Moscow in the New Year. He accused Russia of "attempting to exploit the leverage that high energy prices have afforded it, increasingly using strong-arm tactics against neighbouring countries".

"Russian assertiveness will continue to inject elements of rivalry and antagonism into U.S. dealings with Moscow, particularly our interactions in the former Soviet Union, and will dampen our ability to cooperate with Russia on issues ranging from counter-terrorism and non-proliferation to energy and democracy promotion in West Asia," the top U.S. intelligence official said in his annual review of global threats for the Senate Intelligence Committee on January 11.
The statement amounted to the declaration of a new Russia containment policy. U.S. media readily responded to the call.

"It's time we started thinking of Vladimir Putin's Russia as an enemy of the United States," The Wall Street Journal fumed. "... It is because the foreign policy of Russia has become openly, and often gratuitously, hostile to the U.S."

New Battleground

Energy will be the main battleground in a new Cold War the U.S. is going to wage on Russia; and the directions of attack have been already identified.

One is Georgia and Ukraine, key transit countries for oil and gas exports to Europe, which the U.S. will try to put under its control by getting them admitted to NATO. The Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which transports Caspian Sea oil to Turkey, runs across Georgia, while Ukraine is the main transit route for Russian natural gas bound for Europe.

Washington last year put Georgia on the fast track for admission to NATO together with several East European countries that have been waiting for their turn since 2002. The U.S. Senate also voiced readiness "to support efforts by Ukraine" to join the alliance even though Ukraine's Prime Minister said his country had no plans to apply.

Central Asia is emerging as another focal point of energy wars in 2007. The sudden death of Turkmenistan's long-time autocratic ruler Saparmurat Niyazov in December gave the U.S. and the European Union a new chance to push through their strategic plan to build the Nabucco Pipeline, which would run from Central Asia through the Southern Caucasus and Turkey to Europe, bypassing Russia.

The U.S. will also lobby for the creation of an "Energy NATO", as America's main European ally Poland christened a new Western energy alliance against Russia. The idea is to make Europe speak to Russia with one voice and force it to ratify the Energy Charter, which would give Western companies free access to Russian energy resources and pipelines. "Energy NATO" would stop European nations from striking bilateral energy deals with Russia and prevent Russian companies from buying into downstream energy projects in Europe.

Washington also seeks to block the construction of the Nord Stream gas pipeline, which would bring Russian gas directly to Germany across the Baltic Sea, and scuttle Gazprom's plan to expand the Blue Stream gas pipeline - the Russian alternative to the Nabucco project - running from Russia to Turkey across the Black Sea.

The unfolding energy war between Russia and the West has a direct bearing on India's interests. The U.S. sees its confrontation with Russia as part of a wider competition for access to limited energy resources with the powerhouse economies of the rising East, above all India and China.

In his January review of global threats to the U.S., Negroponte warned that access to energy is emerging as a source of greater vulnerability for the West as consumers compete more aggressively for resources. "We have entered a new era in which security has become an increasing priority not only for the U.S. and the West, but also rapidly developing economies such as China and India that are becoming major energy consumers," he said.

What the U.S. National Intelligence Director coated in diplomatic language, Senator Lugar put quite bluntly in his keynote address on the sidelines of the Riga summit:

"As large industrialising nations such as China and India seek new energy supplies, oil and natural gas may not be abundant and accessible enough to support continued economic growth in both the industrialised West and in large rapidly growing economies. In these conditions, energy supplies will become an even stronger magnet for conflict."

In the race for the Russian energy resources, Asian consumers have important advantages, from Moscow's point of view, over the U.S. and Europe. India and China have no problems with Putin's model of energy security based on Russian state control over resources and pipelines, and a system of long-term contracts and joint ventures with consumers.

India, China, Japan and South Korea are all looking to benefit from Russia's plans to diversify its energy export routes, which mostly go to Europe today. Moscow plans to increase exports of crude to Asia from 3 to 30 per cent and that of gas from 5 to 25 per cent by 2020. India, however, faces stiff competition from other major energy consumers in Asia and will have to work hard to win its share of the Russian energy pie.

This article was published in the January edition of Frontline, India’s national magazine from the publishers of The Hindu (Volume 24 - Issue 02).

Vulnerablities of an Oil Axis

Could Weak Oil Cost Venezuela, Iran Clout?

By David Luhnow, Bill Spindle, and Guy Chazan

Softening oil prices over the past few months have spurred hope in Washington that less revenue for oil-rich states could weaken the hand of governments the U.S. considers worrisome -- particularly those in Iran, Venezuela and Russia.

The three nations are potentially vulnerable: Oil-and-gas revenue accounts for between two-thirds and three-quarters of government income in both Venezuela and Iran, and only slightly less in Russia. So, a big drop in oil prices would slow economic growth and hit government finances, forcing them to cut back spending increases that have boosted the popularity of all three governments at home and emboldened them abroad.

But it is far too early to expect the changing economics of oil to have big political effects. For one thing, although the price of oil has fallen 28% since hitting an all-time high of $77.03 in July, it is still high by historical standards. The three nations, having weathered crises before, have all built up substantial currency reserves to cushion against a further fall in prices.

"Fifty-dollar oil doesn't put any of them in any grave danger," says Michelle Billig, director of political risk at PIRA Energy Group, a New York-based consultancy. "After all, it was only a few years ago that we were talking about an oil windfall for these places at $30 a barrel."

Equally important, it isn't clear that any of the trio would radically alter their policies even if squeezed harder economically. Under President Vladimir Putin, a former KGB spy, Russia has put a priority on reasserting its political might and reclaiming the global influence it wielded during the Soviet Union's heyday. Generations of leaders in Tehran have made the development of nuclear power a stated goal -- and asserted the country's hypothetical right to a nuclear weapon -- no matter the price of oil.

Venezuela might have the hardest time pursuing the assertive foreign policy of President Hugo Chávez, a populist and former army officer, if oil prices were to drop much more. Over the past few years, Mr. Chávez has used oil money to try to counter what he sees as harmful U.S. influence in Latin America. Caracas has helped finance some neighbors' debt, and it has handed out cut-rate oil to dozens of countries, including Fidel Castro's Cuba -- and even some U.S. communities through the state oil company's Citgo subsidiary.

Unlike Russia, and to a lesser extent Iran, Venezuela has been much more reckless in spending its oil windfall. Last year alone, public spending grew 43%, widening the gap between total government income and outlays to about 1.5% of the total economy, according to estimates by Morgan Stanley.

So far, falling oil prices haven't dented Mr. Chávez's spending habits. Just last week, he announced a program to send 100,000 poor Venezuelans each year to vacation in Cuba. He also recently offered the army's services to build a road in Nicaragua at a projected cost of $350 million.

While economists agree that Mr. Chávez's free-spending policies may eventually shipwreck the Venezuelan economy, they say that won't happen -- if it happens at all -- for at least another year. The main reason: Venezuela has accumulated more than $36 billion of reserves.

But there are signs Mr. Chávez could be headed for trouble, even without a much bigger drop in oil prices. He recently ordered an increase in gasoline prices -- which the government has long subsidized -- to raise federal revenue. And some economists view his recent nationalization of Venezuela's biggest telephone and electric companies as a sign his administration is eager to raise more money to keep up its spending.

A further drop in oil prices, then, might leave Mr. Chávez with some tough choices about where to trim the fat. High on the list would be his foreign aid. By far the chief beneficiary of Mr. Chávez's largesse is Cuba, which receives 103,000 barrels a day of refined petroleum products in exchange for the services of Cuban doctors and other specialists. Analysts believe aid to Cuba totals about $3 billion a year.

Cutting back on such aid would be a relief in Washington, which worries about the spread of Mr. Chávez's socialist message, and could also be welcome at home, where many Venezuelans resent Mr. Chávez's largesse toward others when Venezuela has seen little progress on issues such as reducing poverty. Indeed, a recent study by Claudio Loser, a former International Monetary Fund official, showed that Venezuela's real per-capita income has grown a cumulative 1% since 1998, the year Mr. Chávez took power.

Mr. Chávez also might be forced to cut back on the domestic front. Last year, Venezuela had Latin America's highest inflation rate, about 17% -- and it is expected to climb sharply this year.
"I think it will be a difficult year for the Venezuelan economy," says Francisco Rodriguez, who teaches Latin American economics at Wesleyan University in Middletown, Connecticut.

Russia is much less vulnerable to oil prices. Under Mr. Putin, the country has built up $300 billion of foreign-exchange reserves, an $89 billion rainy-day oil fund and runs big yearly budget surpluses. Mr. Putin is loosening the purse strings this year in the run-up to presidential elections in early 2008, with a 26% increase in spending from 2006. But the budget would still break even with oil as low as $38 to $40 per barrel. However, lower oil prices could hurt earnings at energy companies that form the backbone of Russia's economy.

Iran is more exposed to the vagaries of the oil market. As revenue has soared with oil prices, Iran's public-sector spending has expanded almost as fast. To pay for massive subsidies for most daily goods -- including gasoline, bread and heating fuel -- the government has borrowed in each of the past two years from a special rainy-day fund set up to retain some oil revenue for when prices fall again. But that spending has ignited inflation, now running around 15%.

Iranian President Mahmoud Ahmadinejad introduced a budget early last week that included a 20% increase in spending for the Iranian fiscal year that begins in March. He said the government, whose ultimate authority is held by a council of Islamic mullahs, would be able to add to its rainy-day fund if oil prices remain above $33 per barrel, the level the budget assumes for Iranian oil.

But some private economists doubt the budget calculations and predict Tehran would again fall back on those surplus funds to finance spending.

David Luhnow in Mexico City, Bill Spindle in Tehran, and Guy Chazan in Moscow are correspondents with The Wall Street Journal. Jose de Córdoba in Mexico City contributed to this article.

Where East Meets West

Turkey’s Energy Dependence and Independence Dilemma

By Ahmet Türker

From one side, Turkey is signing all sorts of pipeline contracts to diversify gas supplies. From the other side, the growing dependence on foreign energy sources is a concern. These two view points may be nurturing each other to cause the Turkey’s energy dependence-independence dilemma.

This week, Prime Minister Erdogan expressed his concerns for the cost of total energy imports. He said "Turkey's annual cost of total energy imports was $29 billion". The $16 billion of this amount was the cost for oil and oil products imported. The remaining $13 billion is paid for the natural gas imports.

The total energy imports is the two thirds of Turkey’s current account deficit which is around $48.8 billion. The account deficit has been jumped from around $26 billion in 2005 to $48.8 billion.

In 2006, 24 million tons of crude oil was imported. Only 2.2 millions of it was produced domestically. The crude oil exports and the corresponding costs are given as follows. Despite high prices the oil consumption is expected to be strong in the domestic market. Already high taxes on oil and cars, is diminishing the effect of rising oil prices. Whether the average price for oil this year is above last year does not make such a big difference, because the elasticity is expected to be very low in the short term.

Probably aware of this, Turkish policy makers are pushing more for nuclear energy while public seems more in favour of using national resources such as hydro power generation. As the numbers increase, the debate for using the national resources or nuclear is expected to increase. Yet none of them produced any viable answers to the PM’s concerns.

The Minister for Energy, Hilmi Guler has been against a rise in electricity prices for over 4 years. As a result, using electricity for heating homes has been much cheaper than using natural gas which has increased 60% last year. The public however seems like not being aware of it. This week also, to a question asked by a journalist about the possibility of electricity crises, Mr. Guler has given a political answer that “We are working hard to avoid it”.

Turkey has around 40000 MWs of power generation capacity and its peak consumption has been around 26500MW. With theoretically plenty of reserve margins, electricity shortages shouldn’t be such a concern for at least 3-4 years.

But the bells for a crises are ringing now. As electricity prices stayed same for such a long time and the big jump of gas prices during that time has pushed some natural gas power plants operated by auto producers to stop. Turkey is currently generating around 32% of its electricity from natural gas.

As shortages become more and more likely and as the policy to increase the inflow of foreign gas from different countries, Turkey is expected to use that gas for its own electricity production. Because two years is not enough to built enough hydro capacity (including licensing), the only viable future seems to be already readily available natural gas from pipelines.

More than that, while trying to be an energy hub, Turkey’s current contracts are not permitting re-exportation of the gas imported from foreign countries. One of the major agreements is with Russia in terms of take or pay. As a result of this agreement Turkey found itself highly addicted to “take” the Russian gas to avoid any “pays”.

The doubts about the unreliability of Iranian gas are another problem. This week on 24th January 2007, Vatan, Turkish daily newspaper, has reported that Iran is sending 16 million cubic meters less gas than expected. The newspaper claimed the source as an unnamed officer from Turkish pipeline company BOTAS. The problem has not panicked anyone thanks to mild weather around the country. To avoid any problems, Turkey is buying LNG to backup this capacity which is also adding to increasing extra cost of importing energy.

There is nothing wrong with importing from different sources. But if the contracts are not crafted correctly and if the countries exporting gas fail to fulfil the agreements, Turkey’s grand energy transit strategy may cost dearly to its tax payers and cause its economy to slowly stagnate. The concerns about growing cost of energy imports may not walk further from being a concern, if Turkish policy makers can not match their strategies with policies to increase incentives for the private entrepreneurs to invest in domestic sources.

Finally, Turkey acts slowly to use its domestic resources to built capacity, but the growing economy deficits the energy balance. Due to the energy corridor strategy, there is plenty of gas to produce electricity. As long as there is readily available gas around, the policy makers do not act accordingly and urgently to built capacity from domestic resources.

This commentary by Ahmet Türker is from USAK's Energy Review Newsletter

Major changes for the Majors?

Breaking up is increasingly hard to do in the oil business

By Tony Jackson

After last week's damning Baker report on BP's safety record, there have been predictable calls for the oil giant to be broken up. I have no special knowledge of how likely that is to happen. But the underlying issue goes well beyond the oil industry. In today's markets, what is the case for vertical integration?

The theoretical position was set out 70 years ago by the Nobel Prize-winning economist Ronald Coase. On the one hand, Coase said, firms will produce goods and services in-house whenever that is cheaper than buying them in. But the more they do that the more inefficient they become, eventually defeating the object.

In spite of that, vertical integration remained the norm until comparatively recently. Take the food and detergents manufacturer Unilever, which, as late as the 1970s, owned palm oil plantations, a shipping line, oil mills, packaging plants, truck fleets and supermarkets. Everything in the supply chain was controlled, from raw material to the final customer.

That kind of thing is long gone - except in the oil industry. The majors typically find oil, ship it and refine it. They have vast petrochemical operations. They are brand managers, both of petrol and motor oils. And they are retailers on a huge scale: Exxon, for instance, has 35,000 service stations worldwide.

Granted, the degree of integration varies. At one end of the spectrum is Exxon, which describes its intense integration as "a key differentiator versus the competition". More than 90 per cent of its petrochemical capacity, for instance, is directly linked to its own refineries or gas plants.

At the other end stands BP. In part, this is a matter of historical accident. In the second oil shock of the early 1980s, BP lost 40 per cent of its crude supply, mainly because of events in Iran, and therefore had to develop expertise in the spot markets in very short order.

The experience turned the company away from the integrationist philosophy, to the extent that in 2005 it sold its entire petrochemical operations - a feat that in Exxon's case would presumably be impossible. But BP is still bizarrely integrated by any standards other than the oil industry's. Like Unilever of old, it controls the entire process from the oil well to the final retail customer.

Hence the break-up argument. In the version proposed by JPMorgan Cazenove, this would involve an upstream and a downstream company. The first would comprise oil and gas production and pipelines, the second refining, shipping, marketing and retail.

The arguments for and against this are lengthy, and turn mainly on the short-term effects on the BP share price. But what concerns us here is the wider context. Is this the right time to be considering radical surgery of this kind?

Bear in mind that the disintegrationist philosophy has been dominant for almost two decades. From 1990 onwards, the demise of communism opened up vast new areas of cheap production, from China to Eastern Europe. Why make a thing yourself when the market price keeps falling?

In addition, the information revolution made the markets for goods and services more efficient and transparent. One of the main planks of vertical integration - the sheer difficulty of finding secure supplies at a good market price - fell away. And finally, the rise of shareholder power meant the gigantism favoured by managers went out of fashion. Break-ups became not only possible, but actively desirable.

Now, however, the pendulum may be swinging back. The China effect has been reversed. Rather than cheap goods, it now means dear commodities. In several industries, manufacturers are setting up strategic alliances to secure raw materials. And in the oil industry, companies are finding it much harder to wring supply from host governments on the old easy terms.

In such a world, creating a free-standing oil refining and marketing company might seem a dicey proposition. Such companies exist - Valero in the US, for instance, and Neste in Finland - and they have prospered greatly from recent shortages in refining capacity. But this is an acutely cyclical industry, and in time those shortages will go away.

So even if BP does decide to split itself up, I doubt if it will create a precedent for its rivals, as the UK chemicals group ICI did when it de-merged 14 years ago. Apart from anything else, one company that would certainly not follow BP's example is Exxon. And, sadly, these days it is Exxon, not BP, that commands the respect of its oil industry peers.

Tony Jackson is a writer for The Financial Times.

The Difference Between Politics and Reality

'Energy Independence'

By Daniel Yergin

A cry is being heard across the nation, and loudly so in Washington. It is the call for "energy independence," and it will be at the center of the national energy debate over the next several months, providing the rationale for new policies and expansion of existing ones. Indeed, one might even anticipate a "declaration of energy independence" this July 4.

But what does "energy independence" mean for a $13 trillion economy that uses the equivalent of 50 million barrels of oil every day? Is it realistic and achievable? Or is it rhetorical overreach that will lead, as in the past, to disappointment and cynicism, the kind that drives the cycles of inconsistency in energy policy and leaves the U.S. no less vulnerable?

The latter is more likely -- at least without a realistic appraisal of the U.S. position and the country's possibilities. But "energy independence" can provide a constructive framework for policy if it is properly thought through and the realities are recognized.

With geopolitical turmoil, volatile prices and continuing reminders of the international political power of oil, the concept of energy independence is compelling and deeply appealing. In fact, it has been appealing for quite some time. The idea was introduced by Richard Nixon in November 1973, three weeks after the Arab oil embargo, when he introduced "Project Independence" and pledged that the U.S. would, within seven years, "meet our own energy needs without depending on any foreign energy source." It was a bold assertion but one that puzzled his own advisers. "

I cut the reference to 'independence' three times from the drafts, but it kept being put back," recalled Richard Fairbanks, a drafter of the speech. "Finally, I called over, and was told that it came from the Old Man himself." Nixon knew that energy independence was something that Americans would crave after the 1973 oil shock: He deliberately modeled his Project Independence on John F. Kennedy's Apollo goal of getting a man on the moon within a decade.

Back then, the goal may have seemed only somewhat unlikely. After all, when Nixon began his political career after World War II, the country already had a long history of energy independence -- and then some. For it had actually been the world's No. 1 oil exporter; indeed, out of seven billion barrels of oil used by the Allies in World War II, six billion were produced in the U.S. By the late 1940s, the U.S. had become a net importer of oil, although the real surge in imports did not begin until the 1970s.

It proved much easier to get a man on the moon than to make a nation energy independent. In the three and a half decades since Nixon, the U.S. has gone from importing a third of its oil to importing 60%, and that share is set to continue rising. The country is on a similar path for natural gas (which is about 25% of our total energy usage). North American supply has flattened out. Yet large amounts of new natural-gas-fired electric power generation have been added over the last decade, which means that demand will increase. Natural gas is also used in the making of ethanol, adding to the demand growth. This means growing imports of liquefied natural gas -- LNG -- rising from 3% of our current demand to more than 25% by 2020.

All of which suggests that thought needs to be given both to what energy independence means and what can be achieved. For, right now, the U.S. is moving at some speed in the opposite direction, toward greater integration into the global energy markets.

How dependent is the U.S.? If we look at total energy -- including coal, nuclear and a small but growing share from renewables -- the country is over 70% self-sufficient. Oil -- refined into liquid fuels for transportation -- is where most of the current dependence comes from. The risks do not owe to direct imports from the Middle East, contrary to the widespread belief. Some 81% of oil imports do not come from that region. Thus, only 19% of imports -- and 12% of total petroleum consumption -- originates in the Middle East.

Our largest source of oil imports is Canada. It's also the source of most of our current natural gas imports, via pipelines. One can hardly say that either Canada or energy imports from Canada constitute a major threat to national security. The energy trade is part of a normal trading relationship with the country with which we're conjoined economically and which just happens to be our biggest trading partner. Our second largest source is Mexico, with which we are also in a dense relationship. Mexico depends upon oil for about a third of total government revenues.

The picture becomes more complex when one turns to our third largest source of oil imports, Venezuela. The once much-discussed "hemispheric energy solidarity" loses much of its resonance when balanced against the "21stcentury socialism" of Venezuela's Hugo Chávez. After all, President Chávez is currently nationalizing the private sector, has on occasion threatened to embargo oil shipments to the U.S., and is putting much effort into fashioning an anti-U.S. alliance, the latest manifestation being the visit of Iranian President Ahmadinejad to Caracas. These are not the actions one normally associates with a good friend or a reliable trading partner.

Yet the source of imports is significant only up to a point. Energy security is a global issue.

Although oil around the world varies greatly in terms of physical qualities and transportation costs, there is only one world oil market. So disruptions and loss of supply in one place radiate throughout the global market -- and global politics -- affecting consumers everywhere. Even if the U.S. did not import a drop of oil, it would still be vulnerable to turmoil involving oil outside its borders.

What are the prospects for "energy independence" in the way that Richard Nixon defined it 34 years ago -- that is, 1930s-style "autarky" and total self-sufficiency? Based on where we are today, very small, at least for a couple of decades. In terms of vehicles, as pointed out in our new study on "Gasoline and the American People," only about 8% of the auto fleet turns over every year. So the lead times are long for more efficient vehicles to enter the fleet.

Ethanol, derived from corn, is on track to grow to about 10% of our total gasoline pool in a few years. This is certainly not inconsequential; it represents diversification and is equivalent to creating a new Indonesia-level oil-producing country in America's Midwest. But signs are already evident of an upper bound on corn-based ethanol, as the fuel-versus-food trade-off pushes up corn prices, setting off vocal protests from livestock growers and dairy farmers and, in due course, from those who buy breakfast cereals and soft drinks made with high fructose corn syrup.

What about technological advances that provide new answers? There is a "great bubbling" all along the innovation frontier of energy, ranging from conventional energy and efficiency to, especially, renewables, alternatives and "clean tech." Activity this wide-ranging has never been witnessed before. The impact could well be considerable, or even transformative. One would be very hard-pressed today, however, to say when and what form this impact will take.

In the end, if energy independence is presented as self-sufficiency, it will likely fall flat. And, as prices run through their cycles, disappointment will undermine the longer-term commitments that are required for a sound energy future. Today, quite simply, cutting ourselves off from global energy markets is not realistic.

But, if the goal of energy independence is understood differently, to mean energy security -- resilience, robustness, reduced vulnerability -- then it is much more useful.

This kind of definition recognizes that trade, in itself, is not bad. At the same time, it emphasizes the central goal of diversification -- encouraging investment and higher levels of research and development in both alternative and conventional energy sources. It means a new push for energy conservation, higher energy efficiency, lower energy intensity -- a theme that German Chancellor Angela Merkel will make the centerpiece of her agenda as chairman of the G-8 countries later this year. It certainly requires a consistent commitment to pushing the innovation frontier in ways that, eventually, lead to economically competitive alternatives and new technologies.

And it requires an understanding that this kind of energy independence -- as measured in energy security -- actually requires interdependence with other nations, both consumers and producers of energy. Indeed, how we manage our relations with other countries and other regions is a very essential ingredient for our own energy well-being.

Mr. Yergin, chairman of Cambridge Energy Research Associates, is writing a book on energy and geopolitics.

Struggle Between Neighbors in the Middle East

Are Saudis waging an oil-price war on Iran?
Falling fuel costs probably not a coincidence, oil traders say

By Robert Windrem

Oil traders and others believe that the Saudi decision to let the price of oil tumble has more to do with Iran than economics.

Their belief has been reinforced in recent days as the Saudi oil minister has steadfastly refused calls for a special meeting of OPEC and announced that the nation is going to increase its production, which Saudi Oil Minister Ibrahim al-Naimi even said during a recent trip to India that oil prices are headed in the "right direction."

Moreover, the traders believe the Saudis are not doing this alone, that the other Sunni-dominated oil producing countries and the U.S. are working together, believing it will hurt majority-Shiite Iran economically and create a domestic crisis for Iranian President Mahmoud Ahmadinejad, whose popularity at home is on the wane. The traders also believe (with good reason) that the U.S. is trying to tighten the screws on Iran financially at the same time the Saudis are reducing the Islamic Republic’s oil revenues.

For the Saudis, who fear Iran’s religious, geopolitical and nuclear aspirations, the decision to lower the price of oil has a number of benefits, the biggest being to deprive Iran of hard currency. It also may create unrest in a country that is its rival on a number of levels and permits the Saudis to show the U.S. that military action may not be necessary.

The Saudis firmly and publicly deny this, saying it’s all about economics. Not everyone believes them. “If under normal circumstances, the price of oil was falling this dramatically [17% in the last few months], Saudi Arabia would have already called for a special OPEC meeting,” says one oil trader. “It’s got to be something else and that something else has to be Iran.”

Costs higher in Iran

The trader notes that Iran, OPEC’s second largest producer, is “in trouble” both in the short and long term. Iran’s oil reserves, he notes, are declining more rapidly than Saudi Arabia’s and are more difficult to extract. While a barrel of oil costs the Saudis $2-3 to get out of the ground and to market, that same barrel costs Iran as much as $15-18.

“Iran does have some oil that costs them $8-10 but most of it is in that upper range,” he said. Moreover, Iran has a large domestic market for oil, particularly fuel oil, which Saudi Arabia, with its smaller population and milder climate, does not.

Perhaps more important, because Iran has limited refining capability, it must import more than 40 percent its gasoline, making it the second largest importer of gasoline in the world after the United States, according to the Department of Energy’s Energy Information Agency.

And since Iran sells gasoline at a rate comparable to the rest of the Gulf states — around 33 cents a gallon — it must subsidize the price on a massive scale. In fact, say traders, Iran is paying about $1.50 per gallon to subsidize domestic gasoline consumption — the world market price of gasoline minus the tiny price per gallon — a practice that is costing Iran billions of dollars annually and eating up most of the state-run oil company’s discretionary funds.

Iran has other problems that make it vulnerable. Inflation is officially running at 17 percent, the highest since the revolution, and unemployment is at 11 percent. U.S. intelligence, though, believes the real figures are much higher, with inflation as high as 50 percent and joblessness much higher among the country's restless youth).

In addition, capital outflow is estimated at $50 billion annually and budget deficits are a chronic problem, leading to overseas borrowing. And none of this takes into account the possibility that the United Nations will impose harsher sanctions if Iran continues its work on nuclear weapons technology.

Political fallout

There are domestic political consequences to such a convergence, note traders and officials in both the U.S. and Iran. Ahmadinejad was elected on campaign promises that he would end corruption and better distribute the nation’s oil wealth. He has been unable to do either; now, with declining oil revenues, his job will be even more difficult.

One sign of this is the street demonstrations he has faced each time his administration has so much as floated the suggestion of a small increase in the price of gasoline. To counter his inability to fulfill his domestic promises, Ahmadinejad has played the nationalism/nuclear card, accusing the West of trying to stifle Iran’s legitimate energy needs.

How long and how successfully he can play these cards is debatable. Municipal elections last month unveiled a lot of dissatisfaction as opposition parties swept through municipal majlises throughout the country.

His rival in the 2005 presidential election, Akbar Hashemi-Rafsanjani, has criticized him publicly for the first time, as have others close to Supreme Leader Ayatollah Khamenei. Student demonstrations and local newspapers are becoming increasingly critical of the “dictator.”

Robert Windrem is an Investigative Producer for NBC News.

Middle Kingdom Takes Center Stage

China’s Energy Policy: Strategic Implications

By Gawdat Bahgat

Following the establishment of the People’s Republic of China (PRC) in 1949, the nation was largely self-sufficient in energy. The largest oil field, Daqing, was discovered in 1959 and played a significant role in meeting China’s petroleum demand. Thus, the first two “oil shocks” (1973-74 and 1979-80) had little impact on the Chinese economy and energy sector. Indeed, China exported crude oil to several of its Asian neighbors during this period.

Since the early 1980s, China’s economy has grown by an impressive rate. This skyrocketing and sustained economic growth, in conjunction with a population of more than 1bn people, demanded more energy supplies. The country’s domestic production had failed to keep path with its growing energy demand. In 1993 China became a net importer of oil and in 2006 Beijing was the world’s third-largest net importer of oil behind the United States and Japan.

This current large gap between stagnant energy production and fast-growing consumption is projected to expand further in the next two decades. According to the Energy Information Administration (EIA) China’s oil consumption is projected to rise from 5.6mn b/d in 2003 to 15.0mn b/d by 2030 (3.8% average annual change – the highest in the world).

Similarly, natural gas consumption will jump from 1.2 trillion cubic feet (tcf) to 7.0 tcf during the same period (6.8% average annual change – again the highest in the world). China’s limited oil and natural gas proven reserves further complicate its energy outlook. In 2006 proven oil reserves were approximately 16bn barrels (1.3% of the world’s total) and gas reserves 83 tcf (also 1.3% of the world’s total).

This combination of limited indigenous energy resources and rising demand has prompted Chinese leaders to adopt a multi-faced energy strategy. Three elements of this strategy can be identified: (a) reform the energy sector to maximize domestic production and attract foreign investment; (b) diversify the energy mix to reduce the nation’s dependency on fossil fuels and contain pollution; and (c) diversify energy sources to restrain over-dependence on one or few producing regions.

Reform Of Energy Sector

Chinese leaders agree that a viable and aggressive energy policy is essential to maintain and further expand the high economic growth of the last two decades. However, unlike many other countries, Beijing lacks a national energy agency to draw and implement it. Since the founding of the PRC several national agencies have been established and dissolved. The Ministry of Fuel Industries was abolished in 1955, when separate ministries for coal, electricity and oil were established.

In 1970, a new Ministry of Fuel and Chemical Industries combined the functions of those three ministries, but it was dissolved five years later. In 1988, a Ministry of Energy was launched to oversee coal, oil, nuclear and hydroelectric development, but it was dissolved in 1993. In the early 2000s the central government created the Energy Bureau under the National Development and Reform Commission (NDRC) as an integrated central authority responsible for developing long-term energy strategies. This Bureau was replaced by the State Energy Office in May 2005 – with a mission to safeguard energy security. These continuing changes suggest that China lacks a strong national mechanism to oversee its energy sector.

This institutional instability aside, the oil and gas resources are controlled by three state firms: China National Petroleum Corporation (CNPC), China Petroleum and Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC) – the government holds a majority stake in all of them. CNPC and Sinopec operate almost all of China’s oil refineries and the domestic pipeline network, while CNOOC has the most expertise with international transactions.

In addition to these state-controlled firms, the country’s first private sector company, the Great Wall Petroleum Group, was founded in 2005. These corporations seek to enhance China’s energy security by investing in domestic exploration and development operations and securing foreign supplies. In addition, Beijing seeks to neutralize threats to oil and gas shipments and to build a strategic petroleum reserves (SPR) as a safeguard against any interruption in oil and gas supplies.

Vulnerability To Attacks

China’s growing dependence on foreign oil supplies has heightened the country’s vulnerability to attacks by terrorists or pirates. Almost all of China’s imported crude oil and refined products are shipped by tankers. However, according to official data, Chinese-owned ships carried only 9% of imported products in 2005. Commercial interests and concern for safe transport of oil shipments have prompted Beijing to develop plans to build a national tanker fleet. By 2010, China intends to transport 40-50% of its oil imports in government-owned tankers, and by 2020 to carry 60-70%.

In addition, it has been building up its naval capacity to secure oil shipments, particularly through the Strait of Malacca, linking the Indian and Pacific Oceans. It is the shortest sea route between India, China, and Indonesia and therefore considered the key choke point in Asia. With Chinese oil imports from the Middle East increasing steadily, the Strait of Malacca is likely to grow in strategic importance in the foreseeable future.

Unlike other major oil consuming countries, China has only recently started to build a strategic petroleum reserve (SPR – MEES, 25 December 2006). The idea of building one has been considered since the late 1990s. The Chinese authorities have chosen four sites to store crude stocks: Dalian, Huangdao, Zhenhai, and Zhoushan. Chinese officials assert that eventually the SPR will hold oil stockpiles covering about 90 days supply.

Diversification Of Energy Mix

China’s energy consumption is overwhelmingly dominated by fossil fuels, particularly coal. This energy mix has caused serious environmental pollution and threatens the sustainable energy supply. Indeed, many of China’s cities are among the most polluted in the world.

For a long time production form the country’s largest oil field, Daqing, met a substantial proportion of its demand; but it peaked in the 1970s, and production has been reduced since 2004. In an effort to offset this decline, the Chinese authorities have sought assistance from international oil companies to boost oil recovery and extend the life of producing fields.

Furthermore, heavy investments were made in the exploration and development of new fields, particularly offshore. Since the early 1990s, domestic production has failed to keep pace with growing demand, and the gap between output and consumption has been increasingly filled by imported oil. This trend is certain to endure.

Figures show two important trends: (a) Natural gas represents a small proportion of China’s energy mix; (b) Natural gas consumption is growing faster than that of coal and oil. Several new discoveries have been made in recent years, but most of China’s current natural gas fields are located in the western and north-central part, away from population and industrial centers in the east and south-east.

In order to offset this imbalance, the West-East gas pipeline has been built. Other pipeline projects from Kazakhstan and Russia are under consideration. In addition, two LNG import terminals, one in Guangdong and the other in Fujian, have been built and several others have been proposed. In short, China’s natural gas development is still in its infancy, hence it has great potential. Future consumption growth will come from: higher domestic gas production, emerging LNG import terminals, and international pipeline projects.

China’s heavy dependence on coal is projected to decline slightly in the near future. This dominance of coal underscores the fact that China is the world’s largest consumer and producer of coal. In recent years, the Chinese authorities have sought foreign investment to expand coal liquefaction projects. The goal is to reduce the country’s dependence on oil and to increase energy efficiency and environmental benefits.

Finally, in order to improve environmental conditions and reduce dependence on fossil fuels, the authorities have shown strong interest in other sources of energy, particularly renewable and nuclear power. But despite these plans to diversify its energy mix, the country’s dependence on foreign energy supplies is certain to grow in the foreseeable future. Simply stated, indigenous energy resources are not sufficient to maintain high economic growth rate.

Going Abroad or ‘Zou Chu Qu’

China’s growing dependence on foreign oil supplies has prompted its oil companies to acquire interests in exploration and production abroad. Indeed, securing future energy supplies has become a key aim of China’s energy and foreign policies. Beijing officially joined the World Trade Organization in December 2001. Around this time, then Premier Zhu Rongji, and Hu Jintao, General Secretary of the Communist Party, called on Chinese companies to pursue a “going-out” or “Zou Chu Qu” policy – part of a broader policy of global economic engagement.

Three major characteristics of this policy can be identified. First, Chinese oil companies have only a short history of merger and acquisition activities abroad. The policy was launched and gained momentum only in the last few years. In the mid-1990s most of China’s oil deals were mainly with Indonesia, Oman, and Yemen.

A decade later, Chinese companies are actively pursuing oil deals in North and South America, Africa, Asia, and the Middle East. Second, Chinese companies have sought to establish a presence mostly in countries where US and European companies are absent or have withdrawn. These targeted countries, like Iran, Sudan, Uzbekistan and Venezuela, have adopted domestic and foreign policies that are largely in contrast with the interests of Western powers.

Furthermore, the absence of American and European companies means the Chinese companies do not need to compete with their more experienced and technologically advanced Western counterparts. Third, despite conscious efforts to diversify import sources, China’s oil suppliers are heavily concentrated in the Middle East and Africa. These two regions are likely to continue providing the bulk of China’s oil needs.

Conclusions

Several conclusions can be drawn from this discussion of China’s energy outlook. First, China’s demand for oil will continue to grow in order to satisfy its high economic growth and the needs of its large population. Given the country’s stagnant domestic production, China’s dependence on imported oil will further deepen.

Second, like other major energy consumers (ie, the EU and the US), China has sought to diversify its oil sources. Supplies from Russia, Central Asia, Latin America, and Canada are likely to contribute to Beijing’s energy security. However, Africa and the Middle East are likely to continue to be the main suppliers.

Third, a key challenge to China’s energy security is how to control and regulate the rising demand for energy and create the appropriate governing mechanism to achieve this goal.

Fourth, China’s energy security is increasingly an international concern. The nation’s rising demand is pushing prices higher and is raising serious concerns regarding global pollution and other environmental issues.

Fifth, securing energy supplies has become a major aim of China’s foreign policy. China is likely to play a stabilizing role in international policy to ensure the non-interruption of oil supplies. Finally, Beijing’s rising demand for energy should not be seen at the expense of the US or other major consumers. Today’s energy markets are well-integrated. The source of energy matters less than its availability.

Gawdat Bahgat is Director of the Center for Middle Eastern Studies, Department of Political Science, Indiana University of Pennsylvania (GBAHGAT@IUP.EDU). This commentary was originally published by first publish by Middle East Economic Survey (MEES), on January 15, 2007(VOL. XLIX, No 3 ).

Petroleum Power vs Ideology

Politics bedevils Russia's march to energy superpower status

By Sebastian Smith

Russia controls the world's biggest energy reserves and Europe and Asia have almost insatiable demands. But this month's Belarus oil transit crisis highlights crucial flaws in what could be a supply-demand match, analysts said.

Industry experts say the main problem bedevilling Russia -- the number two oil exporter after Saudi Arabia and unrivalled top natural gas producer -- is Moscow's prickly relationship with ex-Soviet neighbours controlling transit routes to the European Union.

"The problem is that Ukraine is the dominant country for gas export transit and Belarus for transit of oil," MDM bank analyst Andrei Gromadin said. "What's missing is infrastructure to bypass these problem states."

That meant that an otherwise minor New Year's trade dispute between Russia and Belarus rapidly flared into an international crisis, since the tiny ex-Soviet republic controls the pipeline for a third of Russia's oil exports, amounting to 12.5 percent of total EU consumption.

Another purely bilateral tussle over gas prices between Russia and Ukraine one year ago likewise led to shortfalls of natural gas throughout Europe. About 80 percent of Russia's gas exports to Europe run via Ukraine.

Russian politicians now talk up the need to bypass transit countries, while alarmed EU leaders are renewing calls to lessen dependency on Russia, which provides about a quarter of both gas and oil supplies to the 27-nation bloc.

But UFG bank analyst Stephen O'Sullivan said both sides would learn to live with current realities. "Russia has again reminded people in the EU that there is a risk to their oil and gas supply. But does this matter? No. I'm sceptical the European Union will respond in any coordinated manner, since they all have such disparate interests," he said.

Likewise, expensive and geographically complex bypass routes are never going fully to replace existing pipelines, he said, meaning that Russia and the European Union are locked in an unbreakable, if uncomfortable embrace.

"The EU seems to be terribly worried over its dependency, but if you look at Russia's dependency on the European market -- it's total. There is no other market like that for Russian oil and gas. So there is mutual dependency."

And although many in Russia look to Asian markets, particularly China, as a way of getting away from this dependency on Europe, work has only just begun on creating the necessary infrastructure in eastern Russia.

Masha Lipman, an analyst at the Mosow Carnegie Centre, said that regardless of technical issues, economic relations will always be held hostage to Russia's turbulent internal politics.

Separately to the incidents in Belarus and Ukraine, the Kremlin had already jangled Western investors' nerves with the controversial dismantlement of private oil giant Yukos and the more recent takeover of the foreign-run Sakhalin 2 gas and oil project by Gazprom.

In each of these cases, "the Russian side decided that any fallout, such as a drop in Western confidence, was worth it," Lipman said. "This means that internal priorities are currently more important to the Kremlin and this is going to continue.

"MDM's Gromadin noted that Western countries did business with the Soviet energy industry. Oil and gas can trump ideology. "Whatever kind of government you have in the Kremlin, they're always going to be a big energy exporter," he said.

Sebastian Smith is a writer with Agence France Presse based in Moscow.

For All The Right and Wrong Reasons

Why Balochistan is so crucial

By Chiranjib Haldar

Balochistan seems to be in the news for all the right or wrong reasons. Is it because it straddles Pakistan, Iran and Afghanistan borders the Arabian Sea and is a vast and sparsely populated province occupying 43 per cent of Pak territory?

A large part of United States military operations in Afghanistan are launched from the Pasni and Dalbandin bases situated on Baloch territory. For the Taliban, Balochistan is a fertile landmass and sanctuary.

The logic is simple. If the pressure on Western forces in Afghanistan were to become intolerable, Washington and its allies could always use the Baloch nationalists, who fiercely oppose the clerics and Taliban, to exert diplomatic pressure on Islamabad and Tehran. In addition, three fundamental issues are fueling this Baloch crisis: expropriation, marginalisation and dispossession.

Although Balochistan houses only 4 per cent of the Pakistan populace, it is economically and strategically important for India too. It is a potential transit zone for a pipeline transporting natural gas from Iran-Turkmenistan to India. Two of Pakistan's three naval bases, Ormara and Gwadar are situated on the Baloch coast.

Located close to the Strait of Hormuz, at the entrance to the Persian Gulf, Gwadar is expected to provide landlocked Afghanistan and Central Asian countries outlet to the sea. The Gwadar complex would substantially diminish India's ability to blockade Pakistan in wartime. It would also substantially increase Chinese supply lines to Pakistan by sea and land during a conflict.

Hence Balochistan would also diminish India's ability to isolate Pakistan from external support in any maritime conflict.

Some even consider Gwadar in the southwest of Pakistan to be a Chinese naval outpost on the Indian Ocean designed to protect Beijing's oil supply lines from the Middle East and to counter the growing US presence in Central Asia. Islamabad has always cried hoarse from rooftops that the Indian secret services were maintaining terrorist camps all over Baloch territory.

Since India, a traditional enemy, reopened its consulates in Jalalabad and Kandahar, it has been suspected of wanting to forge an alliance with Afghanistan against Pakistan. India may want to exert pressure on Pakistan's western border to force it to give up once and for all its terrorist activities in Kashmir and bring the 'composite dialogue' to an end on terms favourable to India.

Recent editorials in the Pakistani and West Asian press have continued to refer to India, but they also have expressed suspicion about Iranian and American involvement.

India considers the Sino-Pak entente cordiale in Balochistan, a quid pro quo to Beijing's surveillance post on Myanmar's Coco Islands to keep a watch on India's maritime activities and its missile tests in Orissa.

The Indian Navy has expressed fears that ties forged by the Chinese navy with India's neighbours might endanger India's vital sea links to the Persian Gulf. Iran and Pakistan have a common interest in exporting Iranian gas to India and any insurrection in Balochistan would only harm their chances of building a gas pipeline through the province.

Many Pakistani analysts feel Washington might use Balochistan as a rear base for an attack on Iran and would also like to get China out of the region. That is also disastrous for India.

The American position is equally perplexing. Are they opposing the Baloch nationalists because they are supported by Iran or are they supporting them because they are hostile to the Chinese? Or is it a continuation of the 'Great power game' being played in Central Asia since the Soviet breakup? Proponents of this view believe that the United States, in competition with China and Iran, would like to control the oil supply lines from the Middle East and Central Asia.

If Balochistan were to become independent, would Pakistan be able to withstand another dismemberment, thirty-four years since the secession of Bangladesh and what effect would that have on regional stability? Pakistan would lose a major part of its natural resources and would become more dependent on the Middle East for its energy supplies.

India may be tempted to look at the further partition of Pakistan as an opportunity for forging a new anti-Pak alliance. An insurgency in Balochistan might force Islamabad to resolve the Indo-Pak imbroglio over Kashmir. But a redrawing of regional boundaries could revive fears of irredentism in Kashmir and in the Northeast that a resentful Pakistan would be only too eager to exploit.

Despite the secular nature of Baloch nationalism, the United States is apprehensive about the likelihood of a war for independence complicating the US fight against Islamic terrorism in the region. If the United States were to embark on a military action against Iran, it could also utilise Pakistani Balochistan for conducting subversive acts in Iranian Balochistan.

For the United States to accomplish this, the Pakistani province would have to remain tranquil and not pose a peril to the well being of Washington's allies.

Chiranjib Haldar is content manager for Tata interactive systems and can be contacted at chiranjibh@tatainteractive.com.

Report from New Delhi

Oil diplomacy in focus

By Deepak Joshi

External Affairs Minister Pranab Mukherjee on Tuesday underlined the need for 'oil diplomacy' to balance and harmonise the interests of global producers and consumers, while energy security must remain a prime objective of policies and all-round efforts.

His remarks came as oil prices dipped below $53 a barrel in global markets -- 13 per cent fall in the new year -- on doubts over plans of the Organisation of Petroleum Exporting Countries (OPEC) to cut production.

Nigerian Minister Edmund Daukoru, speaking at the global industry conference Petrotech 2007 in the capital, said the organisation must watch a planned 500,000 barrels a day cut from February before deciding the future course.

Inaugurating Petrotech, Mukherjee said, " Oil diplomacy must remain harnessed with a view to balancing and harmonising various interests, occasionally somewhat or seemingly contradictory, such as those between producers and consumers. I say seemingly, for there is in reality a natural alliance between the producers and consumers, both being two sides of the same coin, in a relationship of mutual dependence and cooperation."

Referring to the government's efforts at energy security, the minister said, "We are moving towards this through intensification of indigenous exploration, bringing in more equity oil from overseas, improving the recovery by leveraging advances in technologies and professional management, and tapping emerging areas like coal gasification."

Mukherjee said the robust price escalation was matter of concern for India as it is rapidly increasing oil imports to meet its growing requirements.

"Wider and more intensive exploration for new finds, more efficient and effective recovery, a more rational and optimally balanced global price regime-- as against the rather wide upward fluctuations of recent times, and a spirit of equitable common benefit in global energy cooperation, are major instruments in a strategy towards this objective," he stressed.

He said with hydrocarbons sector emerging as a high-tech industry, there was a need for affordable availability of new technologies. Besides spurring economic development more universally, a collaborative and inclusive approach will benefit all partners, he said.

Deepak Joshi is a writer for Hindustan Times reporting from the Petrotech 2007 conference in New Delh. He can be contacted at djoshi@hindustantimes.com.

Blunder of the Muddled Mullahs

Iran actually is short of oil
Muddled mullahs

By Roger Stern

Iran has ensnared itself in a petroleum crisis that could drive its oil exports to zero by 2015. While Iran has the third- largest oil reserves in the world, its exports may be shrinking by 10 to 12 percent per year. How can this be happening?

Heavy industry infrastructure must be maintained to remain productive. This is especially so for oil, because each oil well's output declines slightly every year. If new wells are not drilled to offset natural decline, production will fall. This is what is happening in Iran, which has failed to reinvest in new production.

Why? For the mullahs, the short-run political return on investment in oil production is zero. They are reluctant to wait the 4 to 6 years it takes for a drilling investment to yield revenue. So rather than reinvest to refresh production, the Islamic Republic starves its petroleum sector, diverting oil profits to a vast, inefficient welfare state.

Employment in the loss-making state-supported firms of this welfare state is essential to the regime's political survival. Another threat to exports is the growth in domestic demand. Iranian oil demand is not just growing, it's exploding, driven by a subsidized gasoline price of about 9 cents a liter. This has created a 6 percent growth in demand, the highest in the world.

So Iran burns its candle at both ends, producing less and less while consuming more and more.
Absent some change in Iranian policy, a rapid decline in exports seems likely. Policy gridlock and a Soviet-style command economy make practical problem-solving almost impossible.

The regime could help itself by making it easier for foreign firms to invest in new production. Remarkably, it has not done this even though the decline in exports, which provide more than 70 percent of state revenue, directly threatens its survival.

While signs of a petroleum crisis in Iran, are numerous, neither the Bush administration nor its critics have recognized them. Even Iran's nuclear power program, dismissed by the U.S. administration as a foil for weapons development, is a symptom of petro-collapse.

The U.S. administration claims that a state as petroleum-rich as Iran cannot need nuclear power to meet its energy needs. Yet while Iran is guilty of deception about its nuclear program, it should not be inferred that all Iranian claims are false. Iran may need nuclear power as badly as it claims.

Most Iranian electric power generation is by oil or gas. Cheaper power from Iran's new Russian reactor will leave more oil for export. Rebuilding Iran's aging gas-powered generators may not be much cheaper than building a new nuclear reactor. But Russia sells reactors to Iran on the cheap in an indirect subsidy to the regime.

Investment in Iran has become so unattractive that even energy-desperate states have quit trying. Japan's Inpex, for example, just abandoned a seven- year negotiation for the Azadegan field. Had Iran been a better negotiating partner, Azadegan oil would be flowing today.

Refinery leakage exemplifies all that is wrong with the Iranian petroleum sector. According to the state-run Iran Daily, leaks account for 6 percent of total production, yet go unattended. This colossal revenue loss persists due to the Soviet-style logic of Iran's state-planned economy. Subsidized energy prices force the state oil firm to sell at a loss to the domestic market.

Therefore, while Iran could gain billions by fixing the leaks, the state oil firm would be worse off because the maintenance would generate no new revenue. Thus oil and money simply seep into the ground.

For a world rattled by President Mahmoud Ahmadinejad's bellicosity, Iran's petroleum problems sound like good news. The UN Security Council's newfound willingness to confront Iran over weapons development also seems a welcome sign.

Yet the economic damage Iran inflicts on itself is far worse than anything the meaningless UN sanctions could accomplish. Sanctions might actually worsen the position of Iran's adversaries if Tehran were to succeed in portraying them as the cause of its economic woes.

The mullahs are doing a good job of destroying Iran's economy. They should be left alone to complete their work. Attacking Iran would allow the regime to escape responsibility for the economic disaster it created. Worse, an attack could unite Iran behind the clerical terror-sponsors whose grasp on power may be slipping. For these reasons, the best policy towards Iran may be to do nothing at all.

Roger Stern is an economic geographer and national security analyst in the Department of Geography and Environmental Engineering at Johns Hopkins University. This column is adapted from his recent article, "The Iranian petroleum crisis and United States national security," published in the Proceedings of the National Academy of Sciences.

Looking for the Silver Bullet

US foreign policy must consider changing energy world

By Nick Snow

US foreign policy needs to better recognize the impacts of a changing energy world, experts told the US Senate Energy and Natural Resources Committee on January 10.

"We're fighting in a post-9/11 environment with a pre-9/11 energy policy that's not sufficient to deal with disruptions," said Robert Hormats, vice-chairman of Goldman Sachs (International). "Look at what's happening in Nigeria, where there are kidnappings; in Russia, which is trying to exercise more direct influence on oil and gas, and in Iran and Iraq, where political prospects are uncertain."

Hormats was one of five witnesses discussing the geopolitics of oil in the committee's first hearing of the 110th Congress. The others were Fatih Birol, chief economist at the International Energy Agency; Linda Stuntz, a former deputy US energy secretary and current partner in the law firm Stuntz, Davis & Staffier; retired US Air Force Gen. Charles Wald, who is active with the Energy Leadership Council, and Flynt Leverett, director of the geopolitics initiative at the New America Foundation.

While technically not yet the committee chairman because the Senate had not held its elections, Jeff Bingaman (D-NM) ran the hearing, which he intended to help establish a context for subsequent deliberations. "The idea is to begin the year with an overview of the geopolitics of oil. I hope that it's useful," he said.

Other committee members sought information about potential benefits of developing alternative fuels more aggressively or sharing technology with other countries. Witnesses essentially responded that there's no single solution and every option needs to be pursued to reduce US dependence on crude imports from politically unstable foreign suppliers.

Supply, demand trends

Birol suggested that world oil markets are going through a profound change as demand becomes more widespread and supplies become more concentrated. "In the next 10 years, much of the world's production will come to a peak and then decline. New production will need to come primarily from three countries—Saudi Arabia, Iran and Iraq—which have substantial reserves and can bring oil to market fairly easily," he said.

US policymakers also should acknowledge the growing influence of national oil companies, others said. "The reality today is that [NOCs] control some three quarters of the world's proven reserves. ExxonMobil ranks 14th among the world's reserves holders," said Stuntz.

She said while publicly traded oil companies are returning to areas still open to them, such as the Gulf of Mexico and the North Sea, because operating terms in many producing nations are turning unfavorable, an increasing amount of new exploration and development will involve NOCs.

"It concerns me that more people in this country don't know about this. [NOCs] like Aramco have been around for years. They don't need western capital as they did before. There's also a myth that they won't have access to technology if they don't get it from the United States. But they are capable of making alliances with other countries," Stuntz said.

Few people in the US also recognize the extent to which their country's military forces protect critical oil trading routes, according to Wald. "There should be partners in this mission. The free flow of oil is crucial to many parts of the world. That is one reason why the US military is working with Caspian region governments in developing partnerships," he said.

Leverett said resource nationalism is growing in countries such as Venezuela and Russia as resource mercantilism increases in consuming countries such as China and India. "In my view, during the next quarter century, the most profound challenges to America's global leadership will flow from structural shifts in the global oil market," he said.

Leverett suggested an alliance between China and Russia has been successfully rolling back US efforts to influence oil in new areas of the Middle East following the Sept. 11, 2001, terrorist attacks. "Russia and Iran control almost half of the world's natural gas reserves. If they cooperate, they could be almost as influential with natural gas as Saudi Arabia is with oil," he said.

Contradictory signals

Leverett said some NOCs have begun to act independently of their governments, which US policymakers should encourage. Noting the response by some US politicians to Chinese National Offshore Oil Corp.'s interest in buying Unocal Corp. a few years ago, he noted, "We encourage the Chinese to pursue market solutions on one hand and discourage their initiative on the other."

Many witnesses and committee members agreed that US development of transportation fuel alternatives is vital. "I believe in the free market. But if it becomes a national security issue, I'm prepared to consider spending money to develop alternatives which would reduce our dependence on oil from countries whose interests are different from ours," said Sen. Jeff Sessions (R-Ala.).

Hormats said incentives to develop alternatives need to last long enough to complete projects, particularly the tax credit for investing in renewable resources. "Certain kinds of institutional and other investors can't put money into the business because the time spans aren't long enough. We have the technological ability on the supply side, with this country's entrepreneurial traditions and vitality, to use new sources as well as conventional sources," he said.

Witnesses generally agreed that every option should be pursued. "None of these things are silver bullets. We have to do all of them. But if we were to do everything that was mentioned today before this panel, it would still take us 10-15 years during which we would still be vulnerable," said Wald.

Nick Snow is the Washington Correspondent for the Oil & Gas Journal (contact him at
nsnow@cox.net).

Balancing Act in the Middle East

Saudis Adjust Long-Term Oil Strategy

by Ian Talley

Saudi Arabia's growing fear of Iranian hegemony in the Middle East may be driving the world's largest crude oil exporter to prepare a more aggressive long-term political oil strategy that could subvert an Iranian ascendancy, insiders and analysts say.

Under a new, accelerated production program, the kingdom could increase its spare oil drilling capacity to at least 3 million barrels a day by 2011, up from around 2 million now. Intelligence experts estimate Iran might have the capability to develop nuclear weapons by then. Additional spare capacity could give the Saudis greater leverage as a political tool.

Iran's alleged aim to develop nuclear weapons and its interference in Iraqi and Lebanese politics and conflicts are feeding fears among the Sunni states in the region, particularly Saudi Arabia, that Iranian ascendancy might tip the balance of power towards a Shi'ite domination of the Middle East.

"Fear of an emerging Shi'a crescent has been reflected in speeches by Egypt's President (Hosni) Mubarak, Saudi princes and clergy, and other Sunni Arab heads of states," says Mordechai Abir, a senior Middle East analyst for Burnham Securities.

That anxiety, along with concerns for domestic security, has spurred Saudi Arabia to boost its defense spending to between $50 billion and $60 billion in the next several years for a major upgrade of its entire military.

Beyond A Military Revamp

Saudi Arabia has repeatedly said it won't use oil as a political tool and most experts agree that the kingdom's power to influence oil prices is currently limited by a tight global market and subsequently thin spare capacity. But recent developments in Saudi Arabia's plans to boost production, and briefings by a former consultant to the Saudi ambassador to the U.S. have raised questions about whether the country is considering new strategic oil options to counter Iranian influence in the region.

Some analysts say Saudi Arabia is preparing its massive crude oil reserves as its own "nuclear" weapon to undercut Iranian power.

In an opinion piece published in the Washington Post in late November, Nawaf Obaid, previously an advisor to the Saudi government, said the Saudis may consider not only officially funding the anti-Shi'te militias in Iraq, it also might consider strangling Iranian funding of the militias through oil policy. Obaid was fired by the Saudi government for airing his frank insights in the op-ed piece.

In the weeks prior to the op-ed, Obaid had briefed the U.S. State Department, the National Security Council and the Department of Energy on "New Strategic Initiatives" emerging in Saudi Arabia in his position as the head of the Saudi National Security Assessment Project.

If the Saudis were to flood the market with increased oil production, it could halve the price of oil, Obaid wrote, in the op-ed. Although the kingdom would be able to continue spending at current levels, with tens of billions of dollars in cash reserves, "it would devastate Iran, which is facing economic difficulties even with today's high prices," Obaid wrote.

The Saudi government vehemently denied statements Obaid made in his opinion article. Most analysts believe the Saudis are highly unlikely to use such a measure except as a last resort, nor would they currently be able to flood the market with crude oil given the tight margin between demand and supply. Still, analysts say Obaid's article reveals what some people in Saudi Arabia's policy ranks are thinking about longer-term oil strategy.

Accelerating Production

Saudi Arabia is already accelerating its near and long-term production expansion plans. The country's previous plans called for maintaining its spare production capacity - the prime metric that drives crude price levels - at around 2 million barrels a day.

After visiting the country, Guy Caruso, head of the U.S. Energy Information Administration, said last month he believes Saudi Arabia is about six months ahead of schedule and its spare capacity could hit 3 million barrels a day by 2011.

The first phase, increasing production to 12.5 million barrels a day from current capacity of 11.3 million barrels a day, has been placed on an accelerated timeline. The second phase - to grow capacity as high as 13.5 million barrels a day by 2011 - is in the planning stage.

With that kind of capacity, the country could be in a better position to influence prices. In December, the board of Saudi Arabian Oil Co., or Aramco, approved an "aggressive" operating plan for 2007, including the largest spending program in the company's history. The plan includes a goal of 121 drilling rigs, up from the country's previous target of 110.

Saad Rahim, a top energy analyst and Country Strategies Manager at PFC Energy, said "there's certainly a risk" of the Saudis using oil politically because of growing fears of Iranian power. Especially if U.S. President George Bush moves ahead with proposals to withdraw most U.S. troops by 2008, which the Saudis appear to adamantly oppose, he said.

"They feel that a withdrawal would leave the job unfinished, and leave not only a collapsing country to their north, but would embolden Iran even further," Rahim said. He added that although worries about a "Shi'ite crescent are overblown to a degree...the Saudis are very wary of what might be coming down the pike next year."

Holding Off

Rahim believes the Saudis will hold off on using the oil card and aren't likely to leverage their power as the de facto leader of the Organization of Petroleum Exporting Countries. "In fact, the longer they wait, the better positioned they are to undertake such a move," said. "They will have built up the capacity to really flood the market and they will have built up enough foreign reserves to feel comfortable doing so for an extended period of time."

"However, we basically refer to this move as 'the nuclear option' for Saudi, and really only to be undertaken as a last resort," Rahim added.

The Saudi National Security Assessment Project said the increased capacity would also give the kingdom the ability to offset Iranian exports should they enact an oil embargo, which some Iranian officials have threatened should the U.S. try to destroy its nuclear program.

By the middle of the year, Rahim said, Saudis' spare capacity will be able to compensate for a complete loss of Iranian exports of around 2.5 million barrels a day. "But that essentially soaks up global excess capacity," he said. "So any other disruptions (such as from Nigeria or Venezuela) would really stretch the system."

Shibley Telhami, a senior fellow with Washington think tank the Brookings Institute, said the Saudis are unlikely to use their capacity as a weapon unless they have ruled out all other diplomatic means. "The Saudis want Iran contained, there's no doubt," said Telhami, "But they're also very worried about war with Iran," not least because it might prompt an uprising from their own Shi'a population.

Political use of oil would be seen as a declaration of war against Iran, Telhami said, even if it were an economic attack. Instead, the Saudis are plying a more careful approach, he suggested. "When you play for the long term, you want to be cautious, you want to have containment policy, you want to weaken," said Telhami, "But you don't want to go into an all-out confrontation that becomes a historical struggle."

Nevertheless, Telhami said, the Saudis remain pivotal for the global oil market. "Obviously, the more excess capacity they have, they more influence they have," he said.

Ian Talley reports for Dow Jones Newswires, which published this article on Wednesday, January 10, 2007.

EU Energy Review Reviewed

'Beware the Russian bear'

By Michael Harrison

"Beware the Russian bear" is the motto Europe must adopt as it reviews its energy future .

Today sees the publication of the European Commission's review of energy - a subject which has climbed remorselessly up the political agenda in recent years to the point where it has now assumed the same kind of importance to world well-being and security as international terrorism or global warming.

The focus of Brussels' deliberations, however, is likely to be inward-looking, concentrating on the steps the European Union needs to take to reshape its own markets and, in particular, to unbundle those national monopolies on the Continent which have served to stymie competition and the free flow of energy.

If that is the case, it will be a lost opportunity because the biggest threat to the energy security of the EU is external and it can be summed up in one word - Russia. That the launch of the review by the EU's Competition Commissioner, Neelie Kroes, should take place against the backdrop of another piece of economic imperialism on the part of Moscow - the closure of its gas pipeline to Europe through Belarus - merely serves to underscore the point.

Coming exactly a year after a carbon-copy dispute between Russia and Ukraine, it demonstrates that lightning can and does strike twice in the same place and is likely to continue to do so as Russia's importance to the West as an energy supplier grows.

The point has not been lost on Angela Merkel, the Chancellor of Germany, a country which relies on Russia for a third of its gas. She has wasted no time in highlighting the Belarus episode as another reason why it is imperative not to be overly dependent on one supplier. She has called for the rapid construction of liquid gas terminals to act as a bulwark against Russia's use of its energy resources as a political weapon. She has even ventured that Germany may wish to slow or reverse its phasing out of nuclear power - a suggestion that would once have been anathema to any Germany politician.

It is true that Germany has more to fear than most due to its high dependence on Russian gas. But other EU members such as Britain cannot afford to be complacent: it is quite conceivable that a decade from now a fifth of our gas will be of Russian origin.

Robert Amsterdam, the Kremlin critic and defence counsel to the jailed oligarch Mikhail Khodorkovsky, has some trenchant views on the danger the EU runs if this unequal relationship with its near neighbour is not addressed. He catalogues how the state-owned Russian gas monopoly Gazprom, which harbours ambitions of swallowing up our own Centrica, uses its market power to divide and rule, cultivating certain countries such as Germany along with their political leaders, banks and utility companies and penalising others by withholding supplies - as it did with Lithuania as punishment for selling an oil refinery to Poland.

When cajoling and threats do not work, Gazprom simply uses its sheer might - as it did in Armenia where it pretty much bought up the local energy infrastructure to prevent Iran competing as a gas supplier to Europe.

Europe does have some cards of its own to play because the Russians are desperate for two things. One is access to and, if possible, ownership of Western distribution and supply networks - Gazprom is reliant on export markets in the West to help to subsidise the loss-making business of supplying domestic Russian customers. The second is Western expertise to help develop its huge indigenous supplies of oil and gas.

If Russia and Gazprom want more access to Europe, then they too must be prepared to reciprocate through market liberalisation of their own and parallel access to Russia for European energy companies. That may be a tall order given that Europe, as Ms Kroes will illustrate today, still has a long way to go to reform its own energy sector.

But today's publication of the EU energy review is as good a place as any to start. If Europe does not grasp the opportunity, it may come to regret the consequences.

Michael Harrison is a commentator with The Independent (UK).

Winter Chill from Russia - Again

Belarus-Russia oil dispute highlights Europe's vulnerability

By Judy Dempey

The dispute between Russia and Belarus over oil is the latest reminder that Europeans must start diversifying to reduce their dependence on Russian oil and natural gas if they want secure sources of energy, analysts said.

"It is clear that these problems Russia is having with its neighbors are not going to go away," said Claudia Kemfert, director of the energy division at the German Institute for Economic Research, on Monday.

"It is not as if we did not receive enough warnings about how Russia has been using its energy wealth as a source of political power," she said. "With Germany now at the helm of the EU and G-8 presidencies, I hope Chancellor Merkel will take some action."

But with the exception of Poland, the European Union's initial response was muted compared with the outcry a year ago, when Russia cut gas deliveries to Ukraine.

Then, the EU sharply criticized President Vladimir Putin of Russia, accusing him of using energy as a political weapon against Ukraine as its president, Viktor Yushchenko, started shifting the country's foreign policy away from Russia toward NATO and the EU. This time, EU countries have not rallied to the defense of the president of Belarus, Aleksandr Lukashenko.

Some analysts say that is because of Lukashenko's authoritarian policies. He has curtailed press freedom and intimidated his small political opposition, even imprisoning some of its members. He has also forged close ties with Iran, Syria and Venezuela, further isolating himself from Europe.

Last year, the EU imposed a travel ban on Lukashenko and the top leadership of Belarus. Other analysts say that because only a fifth of Russian oil and gas passes through Belarus, the country is less important.

"In any event, what it shows is inconsistency on the part of the EU over how Russia uses its energy muscle," said Agata Loskot-Strachota, director of the energy policy program at the Center for Eastern Studies in Warsaw.

The German government of Chancellor Angela Merkel, which has close relations with the Kremlin, said Monday that it was concerned about the way in which energy supplies could be so easily shut off. Michael Glos, the German economics minister, said stopping oil deliveries was 'very worrying.' "I expect deliveries through the pipeline to be resumed as quickly as possible," Glos said.

Germany imports a fifth of its oil and 35 percent of its natural gas from Russia, a dependence that is being questioned by some politicians. The German foreign minister, Frank-Walter Steinmeier, said over the weekend that Germany should avoid relying too heavily on Russia for energy supplies.

At the same time, Germany is forging a closer link with Russian oil via a new North European pipeline that is being jointly built under the Baltic Sea, a venture that Kurt Beck, the leader of the Social Democrats, has argued is more important than ever to make Germany independent of disputes within transit countries. The North European pipeline would allow Russia to bypass countries like Belarus and Ukraine and send gas directly to Central and Western Europe.

But transit countries like Poland and the Baltic states say the pipeline would make them more vulnerable, since they would lose out on transit fees and would not be served by the new project, meaning it could cut them off from Russian supplies.

While Germany and Russia see the North European pipeline as an attempt to diversify their energy routes — even though it will make Germany even more dependent on Russian energy — much of Western Europe has been slow to find alternatives.

"The countries cannot agree in which direction they should diversify," said Loskot-Strachota at the Center for Eastern Studies. "The EU too is not united over insisting that Russia ratify the European energy charter, which is important for Europe, since it would allow foreign companies access to Russia's pipelines to transport their gas."

Not waiting for the EU to speak with one voice, a number of East and Central European countries — including Poland, the Czech Republic and Germany — have started to diversify. In December, the Baltic states — Lithuania, Latvia and Estonia — which depend on Russia for oil and natural gas, were finally linked to the continental European electricity network after an interconnector was constructed between Poland and Lithuania. Finland and the Baltic states were linked by an underwater cable.

Andris Piebalgs, the EU energy commissioner, said these developments "were a big step for the integration of the Baltic republics to the European Union."

The Polish energy company Orlen, supported by the government in Warsaw, recently acquired the Mazeikiu Nafta oil refinery in Lithuania in a move to give the company more access to oil capacity. This purchase was a setback for the Kremlin, which for months tried to acquire Mazeikiu Nafta to control the oil refinery market in the Baltics.

The Czech Republic has contracts to buy gas from Norway to reduce its dependence on Russia. Poland is constructing a liquefied natural gas terminal to diversify its energy supplies.

Judy Dempey is a writer for the International Herald Tribune; this article appeared in today's edition, January 9, 2007.

The Changing Balance of Power

The misnomer of multipolarity

By W Joseph Stroupe

The term "multipolarity" has increasingly been trumpeted by Russia, China, India and many others since the mid-1990s as the most desirable and equitable configuration for the world order. Multipolarity is seen across much of the globe as the most attractive replacement for US-dominated unipolarity.

Does it really matter? Are unipolarity and the US-centric world order really at risk?

Indeed, yes. The fundamental configuration of the world order is rapidly undergoing transformation as US power and influence continue their progressive dilution in all spheres and those of rival centers or poles such as Russia and China are becoming ever more concentrated, thanks in no small measure to their advancing control over global strategic energy resources.

Control over strategic resources has become the primary lever to increased global influence for those powers either rich in such resources or closely allied with those who are. Hence, in the insidious and perceptible rebalancing of global power, moving from inordinate concentration in one pole (the US) to distribution among rival poles (Russia, China and others) we are witnessing the progressive rising of a new world order.

However, what will its true configuration turn out to be? Fundamentally, multipolarity simply means multiple poles, or centers of power, distributed widely and more equitably across the globe, with no single pole inordinately dominating the others. However, does the term multipolarity accurately describe the configuration of the new world order that is now arising? Or is its real configuration developing into something quite different than mere generic "multipolarity"?

The concept of multipolarity does not properly take into consideration a recent and ongoing development of fundamentally enormous significance - the redivision of most of the world order into two camps, "East" and West, with control over strategic energy resources as the primary dividing line between the two camps. Even the Non-Aligned Movement (NAM) consisting of 116 developing nations, encompassing most of the world's authoritarian governments and two-thirds of the United Nations membership, generally takes stances independent of, or even against, the US pole, thus most often in de facto alliance with the rising "East" rather than West.

Notably, NAM has come down on Iran's side in the ongoing nuclear dispute, reaffirming Iran's right to domestic enrichment activities, to the pointed chagrin of the US. Significantly, a large portion of the member nations of NAM possess great deposits of strategic energy and mineral resources of very high value. Thus, simple "multipolarity" allows for the fundamentally erroneous assumption that all the poles or centers of power are genuinely discrete, that each pole is virtually insulated from the gravitational effects of other poles.

In the real world such is certainly not the case. Any pole or center of power that achieves a noteworthy degree of power and influence tends to pull or attract other centers of power toward itself - especially those in proximity to it, geographically, economically or geopolitically.

Furthermore, that rising pole tends to draw additional power from the poles that begin to lean inward, as it were, toward it, thus fueling an accelerated rise of the more prominent pole. The result is a new center of power that is complex in nature, with many lesser poles arrayed around one or two greater poles in the nucleus of the newly arising center of power.

A prime example of the phenomenon noted above is the Russia-China axis that is rapidly attracting around itself an array of many lesser but significant poles. As noted above, the two poles (Russia-China and America-Britain) each possess a gravitational pull that no others on the globe can lay claim to, and the main dividing line between the two poles has become control over strategic energy resources. Consequently, the new configuration of the arising world order is fundamentally reverting to a bipolar nature. Just two primary rival poles increasingly dictate, by their gravitational influence, developments across the globe.

Stated another way, major global developments increasingly fit into the framework of the competition and rivalry between the two primary poles. Even the notably important emerging power India, for example, is extremely unlikely to develop into a genuinely discrete center of power that will make the global distribution of power a three-way equation between West, East and South/Southeast.

Rather, India will lean significantly inward either toward alignment with the US or with Russia-China. The fundamental evidence proves India is aligning with Russia-China, notwithstanding the "face" of its pragmatic policy of concluding certain cooperation agreements with the US for access to crucial advanced technologies to accelerate its rise as an emerging power, agreements India insists must be concluded mostly on its own terms.

The recent visit of China's President Hu Jintao to India resulted in the signing of a number of key agreements and documents deepening the strategic ties between the two great powers in the key spheres of economic and security relations, deepening trilateral relations between the two powers and Russia, and international energy security. Their joint statement declared their intent to work with Russia to create a new international energy order that is fair and equitable. That directly insinuates the current US-led global energy order is not the one to be strengthened nor adhered to. Generic multipolarity ultimately fails to describe properly these real-world phenomena, those of a global reversion to bipolarity along with the inherent complexity (multifarious makeup) found especially within the new pole arising in the "East".

But that is not all with respect to the failings of the multipolar model in describing accurately where the world order is really heading. "Multipolarity" insinuates that no single pole is inordinately dominant over the others. But contrary to that insinuation, the bipolar configuration that is even now arising will definitely facilitate a meaningful degree of control by one pole, the one now arising in the "East". Yet, the configuration that is now arising will still correctly be described as bipolar (not unipolar) because the pole in the West, though it is even now moving into a situation where a significant measure of control by the "East" is inevitable, will not be absolutely dominated in all spheres, nor will it be made to collapse as did the Soviet Union, nor will it cease to exist as a superpower.

How will the West fall under the significant control of the East? By means of the consolidation of its control over global energy and its mounting economic wealth and strength the East will take a significant measure of political, economic and even military independence away from the West, including the US itself. The US has become hopelessly dependent on foreign sources of energy, minerals and financing. In fact, the process of Eastern consolidation over global energy resources and the resultant Western loss of independent power is already underway and it is accelerating.

The Russia-China axis, increasingly winning the alignment and cooperation of India as well, is busily constructing a global complex of oil, gas and economic ties and alliances that includes most of the vital exporting states around the globe and the bulk of the rising powerhouse economies of the East. Russia, China and India are spreading their wings (or tentacles as the case may be) far and wide to encompass key oil and gas exporting states.

This is ushering the world's important producers into cooperative agreements that extend far beyond energy-related matters to include the military sphere as well. Wide-ranging agreements concluded with Venezuela, Algeria and Saudi Arabia for joint ventures in the production of oil and gas and for weapons and military technology sales are only three recent examples. A clear global strategy is evident, one that is compelling and brilliant. It is also virtually unstoppable by the West.

In the military, economic and energy spheres, the uniting of Russia's technical expertise and strategic resources with the enormous financing and manpower capabilities of China and the mounting technology and manpower capabilities of India, and the extension world-wide of their joint influence to gather into orbit about themselves the key global exporters of minerals, oil and gas, is a development of enormous consequence for the current unipolar world order. That de facto global complex, when soon completed, will incorporate a global energy monopoly whose strings are virtually pulled from Moscow and Beijing. Increasingly, key members of the complex speak about dispensing with the US dollar in their international energy transactions.

The eventual consolidation of the new global energy complex will result in loss to the West in various important ways, and in a grand reversal, will place the multifarious East in ascendancy over West. Russia and China, the foremost promoters of what they have called the multipolar world order, insist that such is not aimed at any single power such as the US. However, that is mere indirection on their part as they work smart and energetically to construct the foundation, namely global control of strategic resources, that facilitates the rise of their new world order, an order aimed directly at undermining the US global position.

Additionally, they now know full well that what is arising will not be merely "multipolar" in nature, that is, an even distribution of power centers across the globe. Instead, they fully realize their potential to achieve energy-based ascendancy over the West by means of the complex of global energy ties and alliances they are now constructing. Consequently, the move toward global equilibrium (from unipolar to so-called "multipolar") will overshoot the mark of equilibrium and hand energy-based ascendancy to the now rising multifarious pole of the "East".

Along the path toward this eventuality there will undoubtedly be more oil wars such as the one waged in Iraq in 2003, and ideological "wars" such as the "Orange Revolution" in Ukraine of 2004, but the West cannot prevent the eventuality described here being realized very soon judging by the rapidity with which global events are moving in that very direction. Hence, the bipolar world order that is even now arising will not, in fact, be balanced or symmetrical, with both poles roughly canceling each other out in a zero-sum game.

Instead, it will be asymmetrical, with the "East" in ascendancy over the West. In view of the foregoing, the term "multipolar" may adequately describe the complex, multifarious composition of the rising pole of the East itself, but that term is entirely inappropriate to describe the essentially (uneven) bipolar global configuration that is impending for the world order. From the preceding fundamental analysis of the geopolitical system we could now attempt to construct a new and more accurate term to describe where the world order is actually heading: Asymmetrical bipolar complexity refers to the uneven bipolar world order that is impending, one in which especially the East pole is complex (multifarious) in nature, consisting of many lesser poles in array around the nucleus that consists of the Russia-China axis.

To coin a new term, the phrase could be shortened to Asymm-Plexity by dropping the "bipolar" portion for the reason that in its most fundamental sense the word "asymmetrical" already strongly insinuates just two main parts (bipolar), but of unequal size or power. "Multipolarity" is a misnomer because it fails to meet the requirement of accurately describing where the world order is actually heading. Asymm-Plexity (asymmetrical bipolar complexity) more accurately describes the uneven bipolarity that is impending.

W Joseph Stroupe is author of the new book entitled Russian Rubicon: Impending Checkmate of the West, and editor of Global Events Magazine online at www.GeoStrategyMap.com.