A V Rajwade: The politics and economics of oil

One corollary of the high price of oil is the way the Middle Eastern countries have accumulated external assets of a trillion dollars.

There have been three major drivers of western geopolitics in the 20th century. Much of the first half was dominated by Germany's aggressive expansionism, which resulted in two world wars. The second half was a struggle between capitalism and socialism. In the event, Germany lost both the wars, and the cold war ended after the Soviet Union imploded in the late 1980s. Throughout the century, however, there was one other powerful objective of western geopolitics: control over the major oil producers in the Middle East, by financial inducements and military support, sometimes by coups and regime changes. This was the story in Iran, Iraq, Saudi Arabia, Kuwait and the rest. In the first half of the century, imperial Britain was the hegemonic power, a role taken over by the imperious United States after the Second World War. The struggle for control of Middle Eastern oil has continued in the 21st century also, escalating into antagonism between the west and Islam. The economics and politics of oil, the world's most traded commodity, will likely dominate the world economy and strategic objectives of the major players for several decades. The struggle is on in three distinct geographical areas""the Middle East, Central Asia and Latin America.

Politics: Middle East and North Africa
If Libya has abandoned its confrontationist stance, most major producers in the area other than the UAE seem to be facing significant political and indeed social problems. Iraq is slowly, but surely, sinking into a civil war, with oil production already about 60 per cent of capacity. Recently, the US backed down in the face of an intransigent Iran and its nuclear ambitions: it has offered direct negotiations, which, earlier, it was opposed to. Iran has refused to suspend whatever it is doing, and has threatened that oil supplies not only from Iran but from the whole Gulf will be drastically cut down, should the US attempt any military adventure. And, Iran is capable of shutting sea transport through the straits of Hormuz, through which much of the Middle Eastern oil passes. Saudi Arabia, the world's largest producer, also begs questions about its stability""an aging, geriatric monarch ruling over an increasingly young population, with much of the oil wealth going to the royal family, its thousands of descendants and hangers on. One manifestation of the disillusionment of Saudis with the existing order is that so many of the terrorists involved in the 9/11 attacks on New York and Washington were Saudi nationals. Mr Bush has taken a huge gamble in his policy in Iraq and the confrontation with Iran: he may well lose it, and if one major producer's output is affected further, we could see a price of $100 a barrel.

Politics: Central Asia
If much of the current output depends on what happens in the Middle East, in the future, Central Asia and the region to the west of the Caspian Sea are going to become increasingly important. Kazakhstan, Azerbaijan and Turkmenistan have huge deposits of oil and gas. The US is out to wean the countries away from the traditional ally, namely Russia. At present, much of the supplies flow through pipelines which Russia can control. The effort is to put in place alternative pipelines not subject to Russian control. Tensions are brewing between Russia and the United States over influence in Central Asia, even as the Shanghai Co-operation Organisation, of which China, Russia and some of the Central Asian countries are members, holds a Summit Meeting next week. China is as anxious as the United States to secure the supplies needed by a huge population. Central Asia has become a battle for influence between the US, on the one hand, and China and Russia, on the other.

Politics: Latin America
The politics of oil is also manifest in Latin America, traditionally a region under US dominance, but now increasingly moving away from the US-centric capitalistic model. The leader is Venezuela, the world's fifth-largest exporter of oil. The Venezuelan President is a leftist and, given the country's oil riches, is busy buying influence in the region. Several countries in Latin America have recently elected leftist governments, and Bolivia, Ecuador, and Peru have nationalised foreign oil companies.

The economics of oil
While it is fashionable in the west to blame the increase in Chinese and Indian demand for the rise in oil prices, the fact is that social unrest in Iraq, Nigeria, and Venezuela has led to sharp drops in output. And, this is as much a reason for the current price as the rising demand. Given the unstable and volatile conditions in several producing countries, supplies could get affected further, taking the price to three digits. (Incidentally, when, in 2004, an Indian economist working for Goldman Sachs predicted a price of $100 per barrel, hardly anybody believed him.)

There are few prospects of production going up significantly in the near term""the low-lying fruit has already been plucked. With growing consumption, the price will remain high. On the other hand, the unwillingness of many governments to allow the price to the consumer to increase means that conservation and oil substitutes remain on the back burner. It is somewhat strange that we in India are not moving aggressively to promote bio-fuels like ethanol, though we are the world's largest sugar-cane producer. If our energetic oil ministers place as much emphasis on finding oil substitutes as on ambitious international pipelines, that would probably do much more for our energy security. Meanwhile, Reliance seems to have caught on to the potential for ethanol, and has announced large projects in Maharashtra.

One corollary of the high price of oil is the way the Middle Eastern countries have accumulated external assets of a trillion dollars. And, despite the American influence in the area, they seem to be diversifying official reserves out of the dollar and into other currencies far more aggressively than Asian countries like China and Japan. This makes both economic and political sense. Economically, because they do not want to put too much money in the currency of a country well on the road to bankruptcy by its fiscal and consumption excesses; politically too it makes sense, given the impasse over Palestine and with America as Israel's unquestioning backer.

avrco@vsnl.com