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Black gold and Arabian geopolitics

Hitler invaded Russia to grab the oil of the Caucasus for the gas guzzling Wehrmacht and sent Rommel’s Afrika Korps to the Libyan desert to seize the Suez Canal for the Third Reich. Hideki Tojo, the ultimate samurai Jack and Admiral Yamamato planned Pearl Harbour to break out from the noose of a US oil embargo imposed after Imperial Japan’s invasion of Manchuria and expel the Dutch from oil rich Indonesia.

Oil has shaped the geopolitical constellation of the Middle East to its very core. In 1953, when nationalist Persian leader Mohammed Mossadegh nationalised BP’s assets in Iran, the CIA and British intelligence engineered a coup d’ etat to overthrow the regime and restore the Shah to the Peacock Throne. The bitter memory of Western intervention in Iranian politics stripped the Pahlavi regime of any legitimacy, led to the Islamic revolution of 1979 and resonates in Iran’s determination to enrich uranium in Bushire.

Oil has been the curse of Iraqi politics because it enabled successive Sunni minority regimes in Baghdad — the Hashemite kings, the military juntas of Kassem and Aref, the Baathist regime of Bakr and, above all, Saddam Hussein and his Tikriti henchmen — to use their petrodollar billions to spawn monstrous dictatorships that oppressed the Shia and the Kurds, that destroyed the traditional merchant elites of Baghdad and Mosul and, after 1980, unleashed a generation of war in Iran and Kuwait.

Oil lubricated the US-Saudi ‘special relationship’, the most critical diplomatic equation in Arab politics, ever since the moment FDR met Ibn Saud on a warship in the Red Sea in 1945 and a gusher well in a Dammam salt dome changed the course of Arabian history. The United States protected the House of Saud from its sworn enemies and rivals — Nasserite Egypt in the 1950s, Baathist Iraq and Syria in the1960s, Marxist Leninist South Yemen in the 1970s ,the Ayatullah Khoemini regime in the 1980s, against subversion from the Kremlin and insurrection from homegrown terrorists and tribal revolts. In exchange, Saudi Arabia acted as the classic Opec dove, the proverbial ‘central bank of oil’, pumping black gold when Ayatullah Khomeni toppled the Shah, when Scud missiles streaked across the Shatt-al-Arab, when the battle tanks of the Hammurabi Division of the Republican Guards rolled into Kuwait.

Even King Faisal lifted the post Yom Kippur War embargo on oil shipments against the West as soon as Nixon shuttled Kissinger between Cairo and Tel Aviv to arrange the Sinai ceasefire that ultimately led to the Camp David peace accords. Naturally, Saudi national interests are not at all served by chaos in the world oil market or recession in the West. With 260 billion barrels in proven reserves and the lowest production cost in the world, the kingdom has no interest in escalating prices that only stimulate demand for Russian or Mexican oil, shale and solar energy and cause Saudi Aramco market share losses in its critical Far East downstream petrochemical markets.

It is significant that King Abdullah’s first State visit outside the Arab world was to China, the fastest growing oil market on earth. A new Saudi-Chinese relationship, cemented by new storage depots in Hanian Province, refineries in Shanghai and Chinese companies drilling for natural gas in the Rab-al Khaali, is the next big thing in Arabian geopolitics. Yet the Middle Kingdom has hedged its bets across the Gulf all too well. China is a major supplier of ballistic missiles and tanks to the revolutionary regime in Iran and has signed a colossal $70 billion contract to buy Iranian natural gas that includes equity stakes in the elephantine South Pars gas fields. What BP was in Iran in the age of Mossadegh and Exxon Mobil in the age of the Shah, CNOOC and Petro-China could well emerge in the age of Ahmedinejad.

The correlation between geopolitical trauma in the Middle East and oil panics in the Rotterdam spot tanker market has existed since the Suez crisis of 1956 and the subsequent bubble in tanker rates that turned Greek shipowners who leased their fleets in the Red Sea or the Gulf loading terminals, Hellenic adventurers like Aristotle Onassis, Stavros Niarchos and Captain John Latsis into billionaires, the richest men on earth. Regime changes in the Middle East-Iran 1979, Libya 1969, Iraq 2003-have all resulted in lower, not higher output and supply shocks in the futures pits of London and Manhattan, the digital nervous system of the international crude oil market. With the virtual disappearance of global excess production capacity since 2002, even minor fluctuations in the supply-demand equation are amplified into wild, frenzied swings in oil prices.How else to explain the leveraged tsunami the took crude oil on a rollercoaster from $10 in 1998 to $70 on the eve of Hurricane Katrina?

As Ali Al Naimi’s Freudian slip in New Delhi last week proved, the Saudis do not control the price of oil, nor do the chairmen of Big Oil, the defanged Seven Sisters who once ruled the energy kingdoms of the planet in the Stone Ages before the birth of Opec. Something is dangerously wrong in a world when a handful of billionaire hedge fund speculators, bankrolled by credit lines from the biggest money centre banks in Wall Street, the City of London and the Bahnhofstrasse, inject a $15 fear premium into the biggest traded commodity on the planet whenever a Shell geologist is assassinated in the Niger Delta or Comrade Hugo Chavez has a Fidelista bad hair day in Caracas.

While the genius jocko Chancellor of the Exchequer who sold Her Majesty’s gold reserves at $299 an ounce will be the next master of 10 Downing Street, Wall Street banks are busy luring pension fund money into North Sea Brent and Henry Hub natural gas with surreal, manic predictions of energy Armageddon, $105 crude oil superspikes, twilight in the desert. The capital market believes in illusion, in the existence of an Opec-put option that ensures escalating prices even as inventories rise, Chinese demand softens, the seasonals turn negative and the crude oil futures market is firmly in contango, not backwardation.

Geopolitics determines the scale and pace of new drilling, the location of pipelines and loading terminals, the order delivery cycle in LNG tanker fleets, the merger and acquisitions cycles in Houston and Moscow Big oil boardrooms, the diplomatic kabuki dances between Japan and the most odious petro-dictators of Africa, the geopolitical calculations of the world’s most powerful chancelleries. This is the new Great Game of empire and conquest, the hottest currency of power, the epic quest for the greatest geological prize of all time, the fragile nexus between black gold and Arabian geopolitics.

Matein Khalid is a Dubai based investment banker