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The new geopolitics of crude oil

Matein Khalid (At Home)
Filed on March 12, 2008

GEOPOLITICS has haunted the international oil and gas market since the birth of the hydrocarbon age. The British Empire created the Hashemite kingdom of Iraq and sent combat troops to the Suez Canal after Winston Churchill converted the Royal Navy’s warships from coal to oil during World War One.

The British helped Reza Khan Pahlavi seize the Peacock Throne from the Qajars to protect BP’s oil interests in Iran, just as BP helped his imperial son plot a countercoup against Mossadegh a generation later. The Japanese reacted to Roosevelt’s oil embargo with Hideki Tojo’s preemptive attack on Pearl Harbour and the subsequent invasion of Shell’s oilfields in the Dutch East Indies, modern Indonesia. Hitler’s Wehrmacht besieged Stalingrad because the Third Reich was determined to control the oilfields of the Caucasus and Azerbaijan, where the modern oil age was inaugurated by the Rothschild banking clan in Baku.

Last week was a defining moment in international relations. West Texas and North Sea Brent crude oil, the world’s light sweet crude benchmarks, soared to $105, above its inflation adjusted 1979 price of $92, when the Shah was overthrown in the Iranian Revolution and a buyer’s panic traumatised the Rotterdam market for spot tanker cargoes. While the immediate cause of the oil surge was an unexpected fall in US inventories and Opec’s failure to heed Bush’s call to boost production, black gold has become a hedge against the dollar, a new global currency of wealth and power, as the exponential increase in the numbers of Russians in the Forbes Global Billionaire list suggests.

Geopolitical supply shocks have added a risk premium to crude oil prices ever since the fall of the Saddam Hussein regime in Iraq. Terrorist attacks against pipelines and oil storage depots in Basra and the Saudi oil export terminals of Yanbu and Dhahran, secessionist sabotage in the Niger Delta, Venezuelan intransigence in Latin America, Israel’s wars with Hezbollah in Lebanon and Hamas in Gaza, Russia’s gas conflict with Ukraine and the Turkish army’s strikes against in the PKK in Iraqi Kurdistan show that all is not well in the provinces of black gold. The US sanctions against the Ayatollah regime have gutted the energy potential of an Iran that once pumped six million barrels of crude oil in the twilight of the Pahlavi dynasty.

Opec has blamed speculators for the parabolic rise in crude oil prices with good reasons. The New York Mercantile Exchange sets the global price of light sweet crude, not the princes of Riyadh, the Kremlin or the demagogues in Caracas and Teheran. If oil has surged to historic highs, so have gold, silver, platinum, wheat, coffee and iron ore. Inflation rates have surged worldwide, not least in the Arabian Gulf states and China, where power consumption has skyrocketed. However, oil shipment data to the Far East suggests that Saudi Arabia is pumping at least 300,000 barrels above its Opec quota of 8.9 million barrels. In essence, if Chinese austerity and US demand weaken or if the Group of Seven central banks intervene in the foreign exchange markets to buy dollars against the Euro and the Japanese Yen, then crude oil prices could easily plunge to $80. However, the Wall Street credit meltdown has scared the Bernanke Fed and the Chairman’s helicopters are dropping billions of new liquidity in the money markets, meaning US interest rates have plunged 200 basis points since September. The last thing Saudi Arabia, the UAE and Kuwait need is $125 crude oil in November, with their largest customer and security underwriter in deep financial distress. Saudi Arabia has been hypersensitive to its image in the US, since the kingdom was demonised in the media, Congress and the court of public opinion after 9/11. If oil prices do not fall, Opec and Saudi Arabia could well become the focal point of the presidential election in the US. The bitterness of the Bush White House’s reaction to the last Opec conclave in Vienna is a premonition of autumn follies.

The volatility in oil prices also derives from the internal factions and rivalries in Opec. As non Opec supply growth declines in Mexico, the North Sea and Southeast Asia declines, its decision making processes become critical in oil prices. Moreover, a world obsessed by Chindia’s oil demand has not noticed the domestic demand growth in Iran and the GCC, where gas shortages will curb oil export growth. The air conditioners in Riyadh and power plants in Jebel Ali guzzle energy just as the American motorists hit the highways.

Iran, Venezuela, Libya and Algeria are the price hawks in Opec and have opposed production increases by Gulf exporters with spare capacity, outvoting Saudi Arabia’s 1 million barrel a day production increase. The data suggests Saudi Aramco tankers have loaded sour crude for refineries in China.

It is impossible to predict crude oil prices without a sophisticated understanding of the current geopolitical zeitgeist. A decade ago, Iraq and Venezuela produced almost seven million barrels a day, 2.5 mbd above current levels. A generation ago, the Shah’s Iran produced double the oil it pumps in 2008. The politics of gas pipelines in the Gulf will also impact crude oil prices. The GCC needs to divert oil exports to power generation and the requisite natural gas infrastructure will only constrain oil export capacity in the future.

The US Congress has held hearings on speculative oil traders who manipulate the energy markets. State owned oil and gas companies like Gazprom, Rosneft and Sonatrach could well replace sovereign wealth funds as the new protectionist bete noirs in Washington. The Seven Sisters, the Western multinationals supermajors who once ruled the energy markets, now have no access to nine tenth of the world’s oil and gas reserves. Politics has restrained capacity expansion in Mexico, Iraq, Venezuela, Russia, Kuwait, Nigeria, and Iran. From the mangrove creeks of the Niger Delta to the ancient hills of Iraqi Kurdistan, from the desert vastness of Saudi Arabia’s Sea of Emptiness to the Siberian permafrost in Russia, politics will define the future of the kingdoms of black gold.

Matein Khalid is a Dubai-based investment banker and economic analyst





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