Wednesday, January 12, 2005

Auerback - A Rude Awakening

What Could Go Wrong In 2005?

...And then there is the problem of crude: The one thing Mr Bush has never mentioned in Iraq is oil, but as former Secretary of State James Baker presciently indicated years ago in a Council on Foreign Relations study of world energy problems, oil can never lurk far from the forefront of American policy objectives:

“Strong economic growth across the globe and new global demands for more energy, have meant the end of sustained surplus capacity in hydrocarbon fuels and the beginning of capacity limitations. In fact, the world is currently precariously close to utilizing all of its available global oil production capacity, raising the chances of an oil supply crisis with more substantial consequences than seen in three decades. These choices will affect other US policy objectives: US policy toward the Middle East; US policy toward the former Soviet Union and China; the fight against international terrorism.”

The CFR report made clear another salient point: “Oil price spikes since the 1940s have always been followed by recession.” In its current debt-riddled condition, this could bring on something far worse than a garden-variety economic downturn for the US.

The most recent spike in the price of oil was not simply a reflection of rising political uncertainty in the Middle East. There are reasons to expect higher levels over the next two to three decades than over the past two: strong demand from emerging economies, notably China and India, being the most important.

The parallel drive for energy security on the part of both the US and China has makings of a major war over oil being precipitated at some point in the future. Yukon Huang, a senior advisor at the World Bank recently noted that China's reliance on oil imports, plus problems with environmental protection, including serious water shortages, pose significant threats to the country's economic development over the next three to five years. The World Bank official said sustainability issues were a much greater threat to China's development than political or economic risks, such as the massive quantity of bad loans held by the nation's state-owned banks or a potential conflict over Taiwan.

China’s response to this challenge is likely to bring them increasingly into conflict with the US. Venezuelan President Hugo Chavez has recently returned from a Christmas trip to China where he apparently sold America's historic oil supply to the Chinese together with prospecting rights. Even Canada (in the words of President Bush, “our most important neighbors to the north”) is negotiating to sell up to 1/3 of its oil reserves to China. CNOOC, China’s third largest oil and gas group, is actually considering a bid of more that $13bn for its American rival, Unocal. The real significance of the deal (which, given the size, could not have been contemplated in the absence of Chinese state support) is that it illustrates an emerging competition between China and the US for global influence – and resources.

The drive for resources is occurring within the context of a world in which alliances are being formed amongst major oil producing and consuming nations (outside the US) as a kind of post-Cold War global lineup against perceived American hegemony: Brazil, China, India, Iran, Russia and Venezuela. Russian President Putin’s riposte to the US strategy of increasing its military presence in some of the nations of the old Soviet Union (and thereby ensure that they cut all links with Moscow) has been to ally the Russian and Iranian oil industries, and open up the shortest, cheapest and most lucrative oil route of all, southwards out of the Caspian to Iran. Russia and China have recently announced large joint military exercises and the EU is negotiating to drop its ban on arms shipments to China (much to the publicly expressed chagrin of the Pentagon). Russia has also offered a stake in nationalized Yukos to China.

This is pretty brazen behavior by all concerned, but is symptomatic of the growing perception of the US as a declining giant, albeit one with the capacity to strike out lethally when wounded. American military and economic dominance may still be the central fact of world affairs today, but the limits of this primacy (which dates back to the fall of the Berlin Wall) are becoming increasingly evident, just as dollar’s fall reflects this in economic terms. It all makes for a very challenging backdrop in 2005. This could therefore be the year when longstanding problems for the US finally do matter. Do not expect Washington to accept the dispersal of its economic and military power lightly... What Could Go Wrong In 2005? - Link

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