Geopolitical Energy Competition

One hundred years ago, oil supplies were a non-issue. There was limited demand for oil, and hence limited supply. Today, oil is the most important factor shaping the geopolitical landscape. Global demand for oil is estimated to be 84.6 million barrels per day (OPEC, 2009). OPEC produces 24.845 million barrels per day, and non-OPEC nations produce a further 50.7 million barrels per day for a total production of 75.545 bpd (OPEC, 2008). Many observers believe that the world has already passed “peak oil,” that is to say the point at which the majority of the world’s oil reserves have been discovered and production maximized (Deffeyes, 2003). Demand in the United States is presently estimated to be 20.7 million barrels per day, some 68% of that going to meet transportation needs (Energy Information Administration, 2007). However, demand from emerging economies such as those in India and China are rapidly increasing the level of global demand, to an estimated 177 barrels per day by 2030 (Klare, 2008).

Geopolitical Implications

These figures hint at an impending shortage. At present, the shortfall between daily consumption and daily production is an artificial construct of OPEC designed to raise the price above $50 per barrel. But the long-term trend is clear — current production levels will need to increase dramatically in order to meet future need. However, if we are past peak oil, then the world will simply run out of oil.

At present, this eventuality is unthinkable. Our economies are driven by oil. Efficient, low-cost transportation has facilitated the emergence of the modern economic system. Goods can be transported around the world in a matter of days as a result of oil. Developing countries need oil to fuel their growing economies. Developed countries are already dependent on oil. In the United States, for example, oil dependence has reached the point where an increase in the price of crude is considered to be tantamount to a new consumer tax. Indeed, the price elasticity of demand is just -0.034 (Hughes et al., 2006), meaning that an increase in fuel price of one increment reduces demand by just 3.4% of the change in the fuel price. U.S. demand was at 20.7 million barrels per day in 2007 and has dropped since then (EIA, 2007). In other words, when fuel prices rise, there is barely any change in consumption. Additionally, it is estimated that every $5 increase in the price of a barrel of oil reduces the U.S. GDP by 0.2%, or $17 billion (IMF, 2000).

If these patterns are to be extrapolated over the long-term, we can see that demand will not decrease with price increases. Instead what we will see is that supply will disappear faster than previously anticipated. This will lead to shortage, and result in increasing levels of international conflict.

War

Since the outset of the 20th century, oil has played a significant role in several conflicts. Both the first and second world wars were won when Allied forces cut the Germans off from Caspian oil. In the First World War, the Germans had attempted to secure a supply of oil from Baku via treaty, and briefly had their friends the Turks hold the fields. When the British took them back, Germany was left without fuel for its war machine. Hitler also had his eyes on Caspian oil and wrote about it in his early days when he laid out a roadmap for world domination. When the Russians held Stalingrad, the Germany was again cut off from Caspian oil, hobbling the war machine and facilitating the post-D Day success that the Allies enjoyed (Kleveman, 2004).

The difference, then, in both world wars was that the Allies had secure supplies of oil whereas the Germans did not. Without fuel, the Germany economy was essentially neutered — unable to run their equipment to full capacity and therefore exposed to aggression from the Allied forces.

In the invasion of Iraq we have seen a similar bold move with respect to oil. In both world wars, the objective of the Russians/Soviets was not so much to deny Hitler his oil, but to secure of the use of it for the Russians’ own needs. With Iraq, we saw a move akin to that of Germany — a bold move to seize control of a piece of land whose only value derives from the oil that sits underneath of it.

National Security Issue

The cited cause for the invasion of Iraq of course was not to steal Iraqi oil. The issue was framed as one of national security. The security of America’s oil supply and national security were again linked by both candidates during the 2008 election campaign. There are two main reasons why oil supply is a national security issue. One is obvious — the less the U.S. needs to purchase from an enemy like Saudi Arabia, the less dependent the country becomes on oil from such unfriendly foreign sources. The other reason oil is a national security issue harkens back to the world wars — without oil, America’s war machine and therefore its capacity to defend itself would be in dire straits.

The national security argument affects U.S. possible on a range of different levels. The first is with respect to the need to secure a consistent supply of oil. The United States is a net energy importer. For one, this means that an increase in the price of oil (generally caused by a constriction in supply) causes inflation and other economic damage. The resulting economic instability weakens America’s ability to defend itself. Energy security is essential to maintaining the current quality of life, living standards, and security levels.

Simultaneously, radical Islamic groups are in large part financed by oil revenues (Cohen, 2007). This creates a situation where the United States is essentially financing its enemies. This situation creates a new and complicating layer in the geopolitical oil supply game. Not only does the United States need to secure its energy future, but ideally it would need to do so with oil from friendly governments. To some extent, this does occur, as Mexico and Canada remain strong sources of energy in addition to domestic supply. However, most oil supplying countries do not qualify as friendly and some are outright hostile (Venezuela, for example).

Managing Energy Supply

In today’s environment, there are a variety of means by which nations can secure their energy supply. One method is to develop different solutions in house, for example natural gas or wind energy. There are two major obstacles to this tactic, however. One is the long lead times required to get a commercially viable alternative energy to market. The second obstacle is that transportation accounts for 68% of all oil consumed in the United States. An estimated 99% or more of U.S. transportation requires oil in one form or another. The nation’s auto-centric infrastructure and poor diffusion of alternative automotive power technologies means that there is little chance of the U.S. reducing its dependence on oil-based transportation in the near future.

Another common tactic is that of trade agreements. While international trade agreements have been successfully implemented with respect to most products, trade in oil is still heavily regulated. The prices for crude are set on the global commodities market. A major contributor to crude oil price is the supply set by OPEC, which accounts for around 30% of global production. As a result, trade agreements are not especially effective in securing oil security for the nation.

War is another option on the table with respect to securing oil supply. U.S. interest in Iraq pertains largely to the huge oil reserves there. Likewise, Russia’s interest in Chechnya is driven primarily by that republic’s proximity to the Caspian Sea’s oil fields. Around the world, territorial disputes over minor unoccupied islands are driven by the undersea oil rights that would come from ownership of the rock in question.

Pipelines

The main geopolitical area of interest with respect to energy supply, however, is that of pipelines. The pipeline issue is most potent with respect to the Caspian. The breakup of the Soviet Union left Caspian oil in the hands of several countries. Iran and Russia have substantial reserves, but so does Azerbaijan and so does Turkmenistan, and Kazakhstan as well. As mentioned, the Russian interest in Chechnya and more recently in Georgia directly relates to their need to keep the Caucasus region within its sphere of influence. This strategy involves the simultaneous reduction in American influence in the region. At present, the U.S. has little influence over the dictatorships in Iran and Turkmenistan, which puts the Caucasian states at the heart of the battle for influence.

Further complicating the issue of Central Asian influence is the region’s neighbor the east, the one with the insatiable appetite for oil. China has begun to extend itself into Central Asia. The Chinese influence has pulled the battle for influence eastward, to the Silk Road crossroads lands of Uzbekistan and Kyrgyzstan. The reason for all of the influence-peddling is that pipelines are needed to get Caspian oil to the main markets in China, India and Europe. Given the geography of the area, this typically means going through territory that is hostile to U.S. interests. Central Asia in general, being former Soviet colonies, is sympathetic to Russian interests. This is especially true in Kazakhstan, with its 30% Russian population. Turkic-speaking Uzbekistan has leaned towards the west as it attempts to leverage its historical connection to Turkey to fuel economic growth.

Nations have traditionally been wary of building their energy infrastructure in dangerous places. For example, Aruba and Trinidad have strong refining industries because Venezuela is not deemed stable enough for multi-billion dollar infrastructure investment, in spite of the fact that they produce most of the Caribbean’s oil. Likewise, a pipeline is a massive undertaking. In addition to the billions of dollars and many years of up-front investment, the pipeline will have a useful life stretching into the decades. The choice of a route, therefore, is not taken lightly. Moreover, the oil-producing nations must consider with whom they want to trade. Turkmenistan, for example, can send oil through Central Asia into China; south through Iran to India or across the Caspian destined for Europe. This is why the sphere of influence is so important for oil-importing nations.

Each of these nations is critical because any pipeline to developed markets would need to go through one or more of these countries. One proposed pipeline would go from the Caspian into Russia via Turkmenistan and Uzbekistan (Eurasianet, 2008). Other potential pipeline routes go via Iran and Pakistan into India; via the Caucasus nations and Russia into Europe and via Azerbaijan and Turkey into Europe. The types of multinational agreements and transnational influence-building make pipeline politics a critical subset of oil geopolitics.

New Frontiers

The math is clear. Oil consumption is rising rapidly; oil production is not. The world’s oil producers are not producing at maximum capacity, but there is little reason to believe that they will be able to match the demand increases with new supply. We do not know how much oil remains to be discovered, but many feel we have already found the most significant reserves. With India and China — two oil importers — increasing consumption rapidly, the world’s nations may soon find themselves in a position of having to compete for this valuable resource.

At first this competition may be economic in nature. Oil prices will rise in line with tightening supply. However, the economic impact of higher oil prices is severe. In a country like the United States, where demand will not fall as prices increase, the impact will be catastrophic economic loss. This will in turn compromise national security, and weaken the country’s standing in the world.

As a result, the global competition for energy resources will only intensify over the coming decades. There are many means at our disposal to remedy the problems associated with the impending shortfall. However, until these remedies — new technologies, reduced consumption — are ready, the geopolitics of oil will characterize international relations in the 21st century.

Already this century we have seen that nations are willing to invade other nations in search of oil. The United States took over Iraq; Russia invaded Georgia to flex its muscles in the strategic Caucasus region. That so much of the world’s oil supply is in dangerous, unstable or unfriendly areas only increases the risks to the U.S. economy and security. In response to this risk, we will likely see more action with respect to the nation’s energy future. While the issue of oil dependence will be addressed on all fronts, there can be little doubt that either through diplomacy or through muscle, the United States will work hard to secure its energy needs. So too will Russia, and so too will China. This will bring the world’s largest and most powerful nations to a head.

The most likely frontier for this conflict will be the Caspian Sea, the Caucasus Mountains and Central Asia. This region sits at the crossroads of Europe and Asia, and is home to tremendous oil wealth. It is likely that all three aforementioned nations will expend much of the 21st century in a revival of the classic Great Game, the battle for supremacy and influence in Central Asia that was played out in the 19th century by Russia and Great Britain. This time, however, the stakes are energy security and, by extension, national security and economic security. With stakes this high nothing, including war, can be ruled out as a potential outcome of the 21st century’s oil-related geopolitical machinations.

Works Cited

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Deffeyes, Kenneth S. (2003). Hubbert’s Peak. Retrieved April 15, 2009 from http://books.google.com/books?id=fgDBgqhR_lsC&dq=peak+oil&printsec=frontcover&source=bl&ots=Xp3iQQ8M6m&sig=BuO97Gq_zTX4h4gxnz8pqxOwPeo&hl=en&ei=kHvmSb_8Bc_gtgf7rYieBg&sa=X&oi=book_result&ct=result&resnum=2#PPA1,M1

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Klare, M.T. (2008, May 14). Carnegie Council. “Rising Powers, Shrinking Planet: The New Geopolitics of Energy.” Retrieved March 27, 2009, from Carnegie Council for Ethics in International Affairs: http://www.cceia.org/resources/audio/data/000198

Hughes, Jonathan E.; Knittel, Christopher R.; Sperling, Daniel (2006). Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand SSRN. Retrieved April 15, 2009 from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=930730

No author. (2000). The Impact of Higher Oil Prices on the Global Economy. International Monetary Fund. Retrieved April 15, 2009 from http://www.imf.org/external/pubs/ft/oil/2000/index.htm#III_A

Kleveman, Lutz. (2004). The New Great Game. Retrieved April 16, 2009 from http://books.google.com/books?id=3pCz4OmRW-0C&printsec=frontcover

Cohen, Ariel. (2007). The National Security Consequences of Oil Dependency. The Heritage Foundation. Retrieved April 17, 2009 from http://www.heritage.org/Research/NationalSecurity/hl1021.cfm

No author. (2008). Central Asia: Russia and United States Intensify Energy Competition. Eurasianet.org. Retrieved April 17, 2009 from http://www.eurasianet.org/departments/insight/articles/eav090508a.shtml