Oil is by its very nature a finite commodity. The question has always been not whether it would run out, but when it would. The doomsday scenarios that some predict –mass blackouts and the imminent demise of suburbia — may be far-fetched, but the era of “peak oil” is here.
The world’s supply of readily accessible hydrocarbon resources is rapidly declining, simply because more oil is being extracted per year than is being discovered to replace the depleted reserves. New technology may extend the life of heavily tapped reservoirs or gain access to reservoirs presently hard to tap, hence staving off the decline in supply, but the demand side of the equation tempers even that bleak hope. In two critical markets, the United States and China, demand is structurally greater than ever before. Another populous nation with a growing economy, India, looms on the horizon as a third source of burgeoning demand in the future.
In a world heading toward “peak oil,” oil-producing countries, especially Middle Eastern countries but also the countries of the former Soviet Union, find themselves in an enviable position of strength. Many analysts expected other producers — Venezuela, the North Sea countries or West African nations—to provide a needed boost to stagnant world supply. Instead, the world will now come to depend even more heavily on the volatile and “politics first” regions of the Middle East and the former Soviet Union, particularly Russia. Given the energy security concerns of China and India on the one hand, and the dearth of resources outside the Middle Eastern and Russian oil patches, a “strategic triangle” is evolving that will have profound implications for geopolitics and energy markets in the coming decade. The US and the European Union, currently ranked one and two in the global pecking order, are watching the development of this “strategic triangle” — the emerging Asian economies, Russia and the petroleum-rich Middle East — as they formulate strategies to retain their rankings in the future.
If oil supply is peaking, demand is not. During the 1990s, American began to move farther and farther away from city centers, aided by low-cost credit for housing and new highways, and to consume more and more gasoline in daily commutes. Other trends have exacerbated the demand for gasoline. The average number of people residing in one house has declined from almost four people per household to just above two. Roughly half the new cars sold each year are gasguzzling sport utility vehicles. The rhetoric of politicians notwithstanding, all projections show that US demand for oil will continue to rise and that the US will seek more of its oil from the Middle East.
Across the Pacific Ocean, China’s economy is undergoing a prolonged and rapid industrialization and its energy needs are increasing at a phenomenal rate. In 2004, China accounted for 40 percent of worldwide energy demand growth, with its own demand growing by 10 percent per annum. While this prodigious rate of increase has already begun to slow down, the fact remains that Chinese demand will be the dominant story in energy markets for at least the next decade. The true scope of the problem will only become apparent when average annual incomes in China rise to the $3,000 mark, allowing for widespread automobile purchases. China currently has only about 10 cars per 1,000 people, compared to roughly 500 per 1,000 in Europe and 750 per 1,000 in the US. But when incomes rise, China will be adding millions of cars to the market per year, bumping up global demand once more. China requires vast and growing amounts of energy to continue fueling its rapid economic growth. In turn, a real growth rate in excess of 7 percent is required in order to handle annual labor force additions. Therefore, secure access to adequate energy resources is a vital issue for China. Yet despite all of its efforts to diversify from the Middle East, because China views the region as both volatile and US-controlled, the fact remains that the world’s second-largest and fastest-growing energy market will require the resources of the world’s largest hydrocarbon holders. Even if Chinese energy demand were to grow at only 3 percent per year, the country would require 11 million barrels per day of crude oil by 2020, more than the combined output of Kuwait, Iran and Libya, and an increase of over 7 million from today.
India is often mentioned as another emerging Asian country that may some day begin rapidly to add to global demand. India is far away from reaching China’s level, however, in terms of either overall demand or demand growth. Even into the middle of next decade, it is unlikely that Indian demand will significantly tilt the energy balance. Nonetheless, India is very cognizant of its growing energy needs, and has heeded the lessons offered by China’s rapid growth and its resulting need for energy. India has concluded that it would prefer to avoid China’s predicament, namely that of scrambling to find adequate energy supplies to avoid a calamitous economic slowdown. As a result, India has already begun actively to seek hydrocarbon deals with major producers in the Middle East, specifically Iran, Qatar and Saudi Arabia.
Legs of the Strategic Triangle
After many years of alternating between ignoring the Middle East and supporting “revolutionary-minded” groups in the region, China has finally come to terms with the possible benefits of strategic alliances with non-revolutionary oil producers. In the wake of the September 11, 2001 attacks in the United States, certain producers, namely Iran and Saudi Arabia, have begun to consider China as they seek a strategic counterweight to the US. With Iran, Saudi Arabia and Sudan, as with Saddam Hussein’s Iraq, China’s calling card has been the willingness to overlook human rights crises or ideological constraints that have limited US and Western involvement in the energy sector. China has supplied weaponry to various states in the region, including sophisticated missile and guidance systems to both Iran and Saudi Arabia, and has concluded a series of economic agreements with both countries as well. For example, Saudi Arabia will establish a multi-million dollar trade city near Jidda for Chinese firms. Additionally, the natural synergies on the energy front are enormous, and are beginning to be jointly exploited. The Saudi Aramco project to establish a refinery and petrochemical complex in Fujian is one such example, with Saudi Arabian crude being sold to a joint venture between Saudi Aramco, Sinopec and ExxonMobil for sale into the China market. Sinopec was, perhaps as reciprocation, awarded the rights to develop certain gas blocks in Saudi Arabia, despite having no previous experience in producing gas.
The Indian-Middle Eastern relationship has a long history, but has only recently returned to high-level prominence on both sides. For years, the main component of relations between the two sides was the issue of expatriate laborers in the Gulf, given the vast numbers of Indian workers who had come to the region to work in various capacities. In recent months, however, India has feared being left out of the Middle East’s energy dealings, and has stepped up its efforts to be seen as a viable energy partner. India, like China, has focused its efforts on two major producers: Saudi Arabia and Iran. India has yet to sign any major deals with Saudi Arabia, but both sides have expressed their interest in setting up refineries in India and petrochemical plants in Saudi Arabia to supply the Indian market. New Delhi has entered into a number of deals with Iran, mostly on the gas side. In January, India announced a $40 billion deal with Iran for gas supplies over a 25-year period; in addition, ONGC Videsh will get a 20 percent share in Yadavaran, Iran’s largest oilfield. India and Iran are also in talks regarding a gas pipeline from Iran to India through Pakistan, although these seem to have stalled for the time being. New Delhi has also cultivated a relationship with Qatar, with Petronet LNG of India signing a deal whereby Qatar will provide 7.6 million tons of gas per year.
Russia, as the third leg of the strategic triangle, is a fairly new and somewhat peripheral entrant. Russia is engaged in highlevel talks with OPEC, specifically Saudi Arabia, to coordinate production levels in order to keep oil prices near their historic highs. Russia has also been working very closely with Iran on its nuclear projects, providing the technology and materials the latter needs in its quest for nuclear power — and perhaps a nuclear weapon. Russia and India cooperated significantly during the Cold War, with the Soviet Union supporting India to counter-balance the traditional US backing for Pakistan. To date, energy cooperation between the two has been limited to the point of being non-existent, but this will likely change. In fact, India has already begun the process, putting in a bid for up to 20 percent of Yuganskneftegaz, the major producing asset of the now disgraced Yukos, which was formerly Russia’s largest producer. Russia and China, on the other hand, have been strategic rivals since the 1960s. Historical animosities may prove difficult to overcome in the long run, but in the meantime China is almost frantically trying to gain access to either Russian or Kazakh resources. Its eventual success or failure has important implications. The failure to secure an exclusive crude oil pipeline from Russia has irked and worried China, especially since a deal has been mooted which may involve Japan instead. China also fears that Russia will exercise its influence over Kazakhstan and force Kazakhstan to abandon its proposed pipeline projects intended for China. China now appears to be trying other methods, including an attempt to bid for a share of the Yukos assets, but these endeavors also appear in doubt.
The most intriguing component of the evolving strategic triangle may be the relationship between the two components of one of the legs — China and India. Most analysts predicted this relationship would either never come about, due to a lack of complementary interests, or would become a highly competitive one, as each tried to assert strategic control over Asia. While the latter scenario may yet come to pass, the two sides currently appear not only to be cooperating, but actively promoting a mutual strategic understanding. This closer relationship has almost been forced upon them as a fait accompli, given that trade between the two countries has been growing by leaps and bounds, reaching over $13 billion in 2004, up from only about $3 billion in 2001. Given their geographical proximity, the two rising powers jostling for influence in Asia would have had to come to the table at some point. That they have done so sooner rather than much later, and that they appear to have reached an understanding, has come as a bit of surprise. It seems that they have agreed to an approach whereby China provides the hardware and India provides the software. In other words, China will continue its strong manufacturing and industry-based growth, while India will focus more on services and, to a lesser extent, commodity production. In terms of energy, although there is some competition for resources, it is no more than that with other companies or countries, and given that India’s needs are far less at this point, this will likely not be the major source of strife between the two emerging powers, at least in the medium term. Should either one feel that their security of supply is threatened, however, then conflict may well emerge.
Multiple Bypass Operations
The US and Europe have adopted two very different approaches to managing change as the strategic triangle develops. Washington’s approach is painfully obvious: attempt to force change in the Middle East first through rhetoric and propaganda, then sanctions and censure, and, when all else fails, military force. The US still views Asia as a region over which it holds sway, a view it has held since World War II. The rise of a potential strategic competitor in the form of China is something the US appears to be unable to countenance, as evidenced by the recent textile tariffs and threats over currency revaluation, not to mention the ongoing standoff over Taiwan.
The US and India have had a limited history of direct relations, as the former was a firm supporter of Pakistan during the Cold War, while India fell somewhere between the nonaligned camp and the Soviet one. America’s response to India’s first fumblings toward becoming a regional strategic power has been to not so subtly remind India that the US is still the ultimate arbiter of power in the both the Middle East and Asia. These issues came to a head during the recent Indian attempts to secure gas from Iran, with the US explicitly demanding that India scuttle these plans. The US offered few alternatives other than the nebulous suggestion that “technology gains” might somehow help India replace a 25-year supply of gas worth $40 billion and an interest in Iran’s largest oil field.
The US strategy toward Russia is, at least on the surface, driven by the idea of “non-negotiable rights of human dignity.” Rather than overtly antagonizing Moscow, no matter how much certain members of the Bush administration would like to do so, US officials have adopted this vacuous phrase as their new mantra. What this means in practice is that the US has identified certain factors it views as critical in the drive to implement its version of stability and growth — namely, democracy, free enterprise, secularism and equal rights. While relations between church and state are not an issue in Russia, the US feels that Russia under President Vladimir Putin has regressed on many of the other fronts, especially in terms of democracy and the unfettered conduct of markets.
Turning back to the Middle East, despite much talk about “non-negotiable rights of human dignity” there, the region is simply not strategically important to Washington without oil. Any strategy or policy or action toward the region is by default oil-motivated to some degree. But what is the most successful method for tapping into this region to make sure that oil keeps flowing and radical Islamism does not spread? To date, the invasion of Iraq seems to have fulfilled neither of these two conditions, yet instead of rethinking its strategy, the US continues to threaten both Iran and Syria, and to continue quietly nudging Saudi Arabia as well. The US seems to have decided to hedge its strategy of explicit calls for reform throughout the Middle East with strategic relationships with the smaller Gulf producers of Kuwait, Qatar, Bahrain and the United Arab Emirates. Washington’s ties with all of these nations are exceptionally strong, and the US military maintains bases, airfields or ports in each. The idea, then, is an old British one: divide and rule. By undermining the support Saudi Arabia receives from the Gulf states, the US hopes to keep the region divided and eventually return oil prices to lower levels. The US appears to be pursuing a similar strategy in the former Soviet Union, whereby it is attempting to bypass the large state of Russia and cut a series of deals with the smaller producers in central Asia. Hydrocarbon deals have been accompanied by US force emplacements in the former Soviet republics, a development that has been none too welcome in Moscow. Washington has also carried this strategy to Asia as well, where it has tried to maintain a sizable naval force in order to control the strategic seaways.
At the end of the day, the larger countries in the strategic triangle will be more important given their size, resources and geopolitical weight — so the US approach is fraught with risks. Europe has elected to travel a different route, and the success or failure of its initiative will determine not only Europe’s role in the world, but perhaps even prospects for future domestic stability as well.
For Europe, unlike the US, the Middle East is not a remote, alien region to be treated according to narrow interests. While it is true that European interests do focus primarily on energy, given the Middle East’s importance in hydrocarbon production, the concerns extend beyond that issue. The entirety of the broader Middle East, stretching from Morocco to Iran, borders the EU, and thus Middle Eastern events can spill across the boundaries. Anywhere between 10–15 percent of the population of France is now of Muslim origin, mainly from Algeria, and between five and seven percent of the population in England, Spain and Germany is Muslim. These immigrant groups are rapidly becoming political actors in their own right — fomenting fears of domestic unrest and other signs of anti-immigrant backlash. Europe hopes to stem the tide of immigrants by generating adequate economic opportunities in the immigrants’ home countries. But the EU has not attempted to force an external economic or political model on the region. Instead, in the 1990s, the heads of the EU governments called together foreign ministers and finance ministers from Morocco, Israel, Lebanon, Syria, Jordan, Tunisia, Turkey, Algeria, Egypt and the Palestinian Authority. In 1995, these meetings culminated in the Barcelona Declaration, which laid out the parameters for a strategic multilateral partnership aimed at promoting economic, political and cultural development in the southern Mediterranean states.
The Barcelona process, or the Euro-Med Partnership, is the formalization of numerous bilateral agreements, linkages and informal relations between European countries and their southern Mediterranean partners. The partnership is focused on economic cooperation and development, political reform, and cultural and social exchange.
On the economic front, Euro-Med has sought to achieve a “substantial increase” in EU financial assistance and provide guidance in reforming the financial markets of the southern Mediterranean countries. The majority of the financial investments are directed into infrastructure projects undertaken by the Facility for Euro-Mediterranean Investment and Partnership (FEMIP), an arm of the European Investment Bank (EIB). Twice a year, representatives from the partner countries on both sides, the EIB, the EU Commission and regional financial institutions meet to discuss projects. Permanent EIB offices have been opened in Cairo, Rabat and Tunis. According to its website, the EIB aims to invest approximately 10 billion euros between 2002 and 2006. FEMIP’s stated goal “is to help the Mediterranean Partner Countries boost the competitiveness of their economies…and assist the process of reform in order to stimulate economic development.” A key difference between FEMIP and the now defunct Greater Middle East Initiative of the Bush administration, according to the EIB, is that “although FEMIP is governed by the EIB’s proven operational and decision making structures, the Mediterranean Partner Countries are associated with these through a forum for dialogue.” The EIB says the resulting sense of “ownership” of FEMIP on the part of its partner countries is “of paramount importance to the EIB and the European Union.” The EIB has invested over 13 billion euros between 1992 and 2003 alone. Typical projects have included everything from construction of power plants, gas pipelines and refineries to loans to small private- sector enterprises.
The broader Euro-Med Free Trade Area has been one of the more tangible results of the Barcelona process. While there have been obstacles to the process, namely the difficulties inherent in any process involving both Israeli and Palestinian representatives, it is still widely viewed as a highly positive effort, one which has already begun to yield gains for both sides. To date, Israel, Tunisia, Morocco, the Palestinian Authority and Jordan have all signed, ratified and implemented their entries into the Free Trade Agreement. Egypt, Algeria and Lebanon have also signed and ratified and are finalizing their implementations. The two remaining nations in the area are thus Syria and Libya, with the former in the final stages of negotiation, and the latter having begun the process to move from observer status to a full member.
In addition to the approximately 2 billion euros slated for investment each year, Euro-Med provides for the training of officials working in public administration and institutions. The current goal is to train over 1,000 officials by 2006. Education is seen as critical to both the partnership and to the improvement of the long-term development prospects for the Mediterranean partner countries. A number of programs and exchanges have been set up to exchange knowledge and best practices between institutions in Europe and those in the southern Mediterranean. Vocational and training centers have also been set up, as have financial aid grants, scholarships for study both within the home nation and various European nations, and a regional “knowledge network” is also underway. The aim of these efforts is thus to develop a longer-lasting program of development rather than simply handing out economic aid. Educating future leaders in business and government, reforming capital markets and political systems and developing networks and favorable trade conditions will all help both sides in the partnership immensely.
By providing the means to promote the creation of a middle class through economic development, and good governance through political guidance and the establishing of institutions, Europe may well be providing the long-sought alternative model to the Washington consensus of the 1990s and to “regime change.” By cooperating with the legs of the strategic triangle to provide the Russian, Chinese, Indian and Middle Eastern governments with what they need and want, rather than trying to enforce what Western sensibilities may wish for, Europe may have found the key to working with, and not against, the strategic triangle.