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March 2, 2006

The Brinksmanship of Energy Geopolitics

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"It is thus probably no overstatement to say that the Russian campaign has been won in the space of two weeks." - German Chief of General Staff Franz Halder, July 3, 1941

"The whole situation makes it increasingly plain that we have underestimated the Russian colossus." - General Halder, Aug 11, 1941.

Never underestimate how quickly an overstretched, embattled army can turn the tables in a war zone. In the process, it can induce a reordering in the global power structure by simply exiting. Yes, the Persian Gulf crisis can indeed escalate into an extreme, maximalist scenario. The decisive factor - as always - depends on the energy reservoir of the protagonists. In this case the question of 'energy' takes a more literal interpretation.

Upon closer scrutiny, the United States has some startling weapons at its disposal.

Global Energy Bank

PARIS, Feb 14 (AP) - The head of the International Energy Agency said Tuesday that its member governments could coordinate a release of strategic oil reserves that would offset a shutdown of Iranian crude output for up to 18 months.

Asked whether the agency's efforts could wholly mitigate such a production shortfall, Claude Mandil, executive director of the energy watchdog for the Organization for Economic Cooperation and Development, said: "The answer is clearly 'yes'."

Worries over the international response to Iran's nuclear program pushed oil prices back near US$70 a barrel earlier this year, though data showing adequate supplies have calmed the market. Western leaders fear the program is aimed at developing nuclear weapons, though Iran insists it is only intended to generate electricity.

"We have 4 billion barrels in strategic stocks," Mandil told Dow Jones Newswires. Even taking account lower estimates, he said, the IEA could keep oil supplies flowing for a year and a half.

The Paris-based IEA says its member countries hold 4.1 billion barrels in public and industry stockpiles, of which around 1.4 billion barrels are controlled directly by governments for emergency purposes.

The agency estimates that Iran's oil production was 3.92 million barrels a day in January, which would translate into 2.1 billion barrels of output over the next 18 months.

Mandil said the IEA's coordinated response to hurricanes that hit the United States last year demonstrated that the agency could act effectively.

The IEA's "coordinated response" last year never made big news though one wonders how oil could have breached $70 per barrel during the hurricane season if it had acted so "effectively." Current levels of stockpiles have reached unprecedented levels in history. That's a fact. The business world views all these tensions over peak oil and ballooning prices as the handiwork of "speculators."

Recent signals from Tehran reveal a palpable awareness of the perils ahead. If a full-scale war breaks out in the Middle East - one involving state actors - there might be enough oil around to reorder the global political economy. The IEA though has not revealed the locations of its strategic stockpiles, which member nations have the largest inventories and the subsequent distribution formula in case of an Iranian shut down.

State of High Tension

The maximalist scenario can unravel under many circumstances. All it needs is a sustained state of high tension over an indefinite period. The first sparks could come from a UN Security Council resolution against Iran, provocations by either the United States or Tehran, or an escalating civil war in Iraq that may spill over to neighboring states. These could dovetail with autonomous or coordinated incidents like a successful terrorist attack on the world's biggest oil processing complex in Abqaiq, Saudi Arabia (recently foiled) or a series of strikes in the Niger Delta.

At the time of writing, the biggest threat seems to be a looming civil war in Iraq; this time sparked by the bombing of Samarra's al- Askariya mosque under highly suspicious circumstance.

According to Iraqi National Security Adviser Mouwafak al-Rubaie, armed men wearing special forces uniforms broke inside the shrine and seized the guards, including policemen, responsible for protecting the site. The gunmen planted the explosives and fled.(AP, Feb 22)

That this was a well-coordinated, shrewdly calculated attempt at escalating tensions is undeniable. It smacks of psyops. Attempts to pin down the culprits can be daunting as there are no shortage of "infidels" in this drama. That was precisely the term used by both Shi'ite and Sunni militias against each other during the ensuing bloodbath that has seen 100 mosques attacked and 1,300 civilians killed, including clerics.

It is also significant that the 1,200-year-old tombs of two revered Shi'ite imams were not destroyed. The Golden Dome is only about a century-old and can be repaired, and the US government has pledged to do just that. It is quite telling of contemporary journalism that this significant detail was omitted in most commentaries. The extent of an Iraqi civil war or the possibility of de-escalation may depend on this one vital factor. Till today, the exact details are not known.

The culprits may have deliberately tried to minimize possible damages to the tombs. But the bombing did enough to ignite wanton sectarian massacres.

Imagine what would happen if a few sophisticated hand-held missiles obliterated the Abqaiq complex or shrines in Najaf and Karbala? The former would shoot oil to a new record high - possibly $80-$90 depending on the speed of repair, and immunity from an ever looming Islamic revolt in Saudi Arabia.

If Najaf or Karbala are attacked, Tehran would find US security wanting, and would be compelled to intervene, either indirectly through arms supply to Shi'ite factions or directly through troop involvement in Iraq.

Do not also forget that there are many games to be played out once the International Atomic Energy Agency (IAEA) meets on March 6 to decide whether Iran should be referred to the UN Security Council. UN sanctions - of varying, graduated degrees - might be imposed while Moscow and Tehran are bogged down in an endless haggle over Iran's uranium enrichment program. Troubles may come from unexpected quarters. Sectarian conflict across the contiguous Pakistani province of Baluchistan may cause a security nightmare for the Iranians and a Trojan Horse for whomever is interested.

In this state of sustained tensions, nations like Nigeria and Ecuador cannot be counted on as reliable suppliers. The former is still reeling from a recent terrorist attack on a Royal Dutch Shell installation, entailing supply losses of 455,000 barrels a day, or 19 percent of the country's daily production.

These may lead to...

Balkanization of Iraq

Once the Rubicon is crossed in the Middle East, Pentagon planners will waste no time in seizing the initiative. This chance will not come by again. If Iraq descends into civil war, the US Army might be pulled out to avoid massive casualties. Zalmay Khalilzad, the White House envoy to Iraq, has promised just that if factional politicking keeps leading - inevitably - to sectarian violence.

A US drawdown from Iraq will be popular at home, even if some divisions have to be redeployed to the Sunni-ruled Gulf States. There is a good reason for this. Iran - even if it stays out of Iraq - will emerge stronger in the Persian Gulf. Tensions will remain but conflict can still be limited to Iraqi soil for a short period. A US presence may paradoxically prevent Israel from conducting a rash attack on Iran. Americans may understand the need for such pre-emptive strikes in normal circumstances but not when Tehran can retaliate, claiming thousands of US lives in the process.

But before even a troop drawdown begins, the international community - which had condemned the 2003 invasion of Iraq - might privately beg for the retention of US troops on Iraqi soil. An Iraqi civil war will not be confined to Iraq indefinitely and when that happens, oil will flow past the Straits of Hormuz in gooey slicks rather than in tankers.

The only solution now seems to be the balkanization of Iraq, and the international community might help along. Conflicts come and go, but our energy supplies cannot be held ransom to sectarian violence, can it?

Will that solve the problem? Almost definitely not. Once such a proposal is put forth, Iraqis militias will be out in the streets. And more US soldiers would die. There will neither be time nor a controlled condition to replace them with a fresh, inexperienced international force. The Sunni insurgents - funded by powerful individuals in the Gulf States - will turn up the heat in anticipation of a Iranian, Shi'ite dominated Persian Gulf. Turkey will attempt to destabilize Kurdistan.

The stakes are too high.

Reordering the World

Now, if you take any of the above scenarios - just a sampling of the complexities involved - the Middle East will inevitably burn. It is a matter of either slowly, gradually, or in one almighty fire and brimstone.

That could mean anything from $100-300 per barrel, depending on the nature and the speed of developments. And here is the surprise.

The United States is actually less dependent on Middle Eastern oil than other major powers. Have you noticed the "surprisingly higher" inventories since late December? How could it come as a surprise in this energy-strained world? Someone was prepared for a worse-case scenario.

Only 20 per cent of US total oil demand comes from the Arab Gulf States.

By comparison, Japan, South Korea and Taiwan import all their oil, of which 75 percent is from the Gulf. India imports 75 percent, of which 80 percent is from the Gulf. China imports 35 percent, of which 60 percent is from the Gulf. Imports into India and China are expected to grow by 8 percent to 10 percent a year.

Even Europe is only 30 percent dependent on the Gulf.

By 2010, a higher percentage of China's imported oil will come from the Middle East, perhaps as much as 90 percent.

A Middle Eastern inferno - with little oil flowing from the Persian Gulf - will put a stop to that. China planned "String of Pearls" - those geostrategic commercial and military installations from the Gwadar port in Pakistan to similar facilities in Bangladesh, Myanmar, Thailand, Cambodia and the South China Sea - will be strung aroung Beijing's neck.

These "pearls" are indeed cast to swines and dictators. Take a look at dictatorships and authoritarian states across the seven seas, and you'd find veritable bulls in a China shop. However, these nations - reeling under an oil shock - will be tempted to switch sides as China cannot possibly meet their needs. That is unless the IEA can pump them out of its Paris Hq over 18 months for all amicable parties. Most major stockpiles are concentrated in the United States, Europe and Japan. The US will be in a position to dictate supplies to whom.

"Stockpiles" largely refer to petroleum, gasoline, diesel, kerosene and other oil derivatives. Liquefied natural gas is not stored in large numbers. It's way too expensive and Russia's Jan 1 supply cut off to Europe demonstrates this aptly. Natural gas is best transported through a pipeline. Once pandemonium breaks out, even these would be targeted. There are no shortage of "terrorist" organizations willing to commit this.

All these would add some helium to the price of oil, making nations like Venezuela very rich - and market neutral - if the United States stays out of its internal affairs.

The United States, on the other hand, can print dollars to buy up oil in the international exchange, rocketing prices above the stratosphere. These can be gifted to strategic partners and allies in a barter deal to compensate for a possible shutdown in Chinese imports. Everything China manufactures can be sourced elsewhere. If the US is profiting massively from this situation, would there be an immense, domestic financial turmoil? That's a tricky question for economists. There has been no parallel. Worldwide inventories of goods are now tracked in real-time, adding some certainty to demand and supply.

As for other nations (read dictatorships), the US can impose a simple universal dictum - adhere to the UN Charters on fundamental rights. Nothing more needed. Most will fall into line before the prospect of a violent upheaval overtakes them. Call this hypocrisy after all those collusions with tyrannies but the US has a much better track record than China. In fact, when you look back at the past 100 years, it beats out Europe.

The pro-China lobby in the US Congress will not like this one bit. Expect "impeachment" proceedings against Bush and evidences of "new" scandals. The whole wide world had been feasting on White House scandals ever since this administration came to power.

That's not the only weapon at Washington's arsenal. In a prescient move, the Federal Reserve will cease publishing the M3 money aggregate from March 23, 2006. Psychologically, this will strengthen the value of the dollar vis-à-vis other major currencies. It will create much uncertainty over the quantity of US dollars in circulation worldwide. Central Banks will unlikely cooperate in sharing figures in this great oil hunt and would rapidly dump their diversified currencies to maintain oil imports in dollars. Currencies of other nations will be devalued by the day. On the street, there will be a frenzy on dollar buying. The paradox of the historic US twin deficits will not matter and the petrodollar hegemony would be a fait accompli.

China's massive dollar and euro reserves will dwindle in weeks, but it will still have a short breathing space to export finished goods till the oil crunch hits home. Unless it can come to terms with a reordered world, Beijing will face industrial collapse and social anarchy within two or three months. However, the paradoxically-named People's Liberation Army might opt for something incredibly stupid to "save face." Any action has to be decided within days or weeks of a possible supply disruption from the Persian Gulf. It can attempt to seize Taiwan, and prevail at a massive cost, and face the world later in a much weakened state. Anyway, Taiwan is already partly integrated into the mainland's economy. The United States though may make things harder by pledging to aid another democracy.

The US, after all, is the only major power with vast shorelines facing both the Atlantic and Pacific theatres. Russia to a lesser extent.

Military satellites of the US, EU, Russia, India, Israel and Japan will particularly watch Chinese military maneuvers during this period.

One by one China's allies will drop out of its orbit. The only steadfast stooge it can count on is Pyongyang, or rather its crackpot dictator Kim Jong-il, whose understanding of international relations is limited to the kidnapping of Japanese nationals for home-made movies. This is a nation so hopelessly enslaved that it will be forced by Beijing into some sort of military action against South Korea, Japan or even Russia. Either Kim Jong-il has to be deposed or his nation will receive swift retribution.

There are hardly any news of troop movements in Russia's Far East. Such unusual activity will be noticed by the half to one million Chinese immigrants camped in the region. Moscow's military doctrine has evolved since the Cold war and it reserves a first-strike option. If Russian territory is invaded, by either the Chinese or North Koreans - or combined - Moscow might resort to radiological weapons to preserve its Siberian oil fields intact. Russia's energy geopolitics masterpiece on Jan 1 was an unmistakable message to Europe: "Don't mess around with us under any circumstances, especially in a situation like this."

NATO, sooner rather than later, will invoke Article 5 of its foundation charter, adding European involvement in deterring any attack on a US ally. Prominent among them include the prospect of an Iranian attack on Israel or a Turkish misadventure into Iraqi Kurdistan. The trickiest part though is neutralizing Iran's Shahab-3 missiles, not its nuke installations.

Pakistan is the dark horse, and Jihadists there will have to choose between democracy, acute hunger or 72 virgins. India might be targeted but retribution will more likely come from Israel, putting an end to the Islamic bomb once and for all.

Frightening scenario, huh? Well, this is just a précis of possibilities. And it doesn't end there.

One problem lingers. Someone still has a leash on Al Qaeda and may use the opportunism present in the scenario described to eliminate the US leadership. Those who live by the sword will die by it. Whatever blood-stained games the Bush-Cheney combo played, it is time to take out the old goat, his harem, and most importantly his handlers. Beware of "allies" as well.

And all these could start without any outright US provocation in the Persian Gulf. A civil war in Iraq would do just fine.

The China Threat

Does China need to be contained? Well, it shakes hands with any lunatic from Khartoum to Harare to Yangon in search of vital raw materials; unfettered, of course, by ethical limitations. In return, it builds military-related infrastructure in such states to perpetuate a symbion of tyranny. Beijing's rapid inroads into such nations augur enormous human rights implications for subjects of satellite states, and a security nightmare for people of neighboring nations. For oil, platinum, gold and manganese, it will sell arms and weapons of information control like the "Great Firewall" to keep such people subdued.

It is true that China does not normally interfere in the internal affairs of other nations. It does something better. Satellites states are used to stir up trouble in a targeted, neighboring nation. If India calls for a return to democracy in Nepal, you have China right at Katmandu’s doorstep, fresh with discounted arms sales and military-related infrastructure development. And who is King Gyanendra up against? Maoist rebels, impoverished and hardened by the wanton misuse of power in their nation. Ideology can always be dumped for the wealth of ruling dictatorships anywhere. China is a member of the Nuclear Suppliers Group (NSG), and it can veto uranium supplies to any nation. Indirectly, satellites states can get their hands on them. Beijing had tacitly helped develop the North Korean and Pakistani nuclear and missile programs. The Iranian Shahab-3 is reportedly similar to the North Korean Nodong missile and Tehran's nuclear program got a massive boost from the A.Q. Khan network.

All uranium trails lead to Beijing. And so do missile blueprints.

Only in the current hypocritical international order can a top proliferator of nuclear and missile technologies sit as a veto-wielding patron of genocidal regimes and dictatorships. Here is an example. China routinely vetoes UN Security Council sanctions against Sudan. More than one Darfur-type genocides were perpetrated by Khartoum but these do not matter to Beijing. Why should it? The UN is a safe haven for legitimate dictatorships which "represent their people." China is their arbitrator, peacemaker, and guardian.

It's neighbors however can tell a different story. Beijing routinely patronizes, intimidates and bullies bordering states through its policy of proxy threats and territorial revisionism. Even Russia has not escaped unscathed. Some old trading map is usually whipped up to reveal ancient Chinese trading links. By this logic - and often they stretch way too far - the United States should belong to China as a map or two keep appearing on ancient voyages that had beat Leif Eriksson to the New World discovery race. Unfortunately, the US is too powerful for further claims on Pacific Island chains.

What about human rights and freedom of speech?

China employs 30,000 Internet guardians as it can get a little wimpy over words like "freedom." If it's queasy over "freedom" and associated words, imagine what Beijing might do when it is the superpower. This is the nation that wants Japanese texts revised over its war-time role, which, happened six to seven decades back, but suppresses information and its own people in favor of communist lies today. Tiananmen Square will not find a suitable place in Chinese texts either. Other Asian nations have faced brutal Japanese occupation but have moved on. The exception is South Korea, a fellow democracy, which, suffered worst under Imperial Japan.

What if Beijing gets it way? Well, Robert Mugabe will rule roost, Darfur can be repeated, Aung San Suu Kyi can remain incarcerated while in the long-run, Islamic militants will get better weapons for their Jihad, sold of course through proxies, unless the Israelis relent to selling sophisticated successors to the Phalcon AWACS.

Beijing's disciplined dictatorship would be replicated in its unstable satellite states. Dictatorships will be forced to maintain status quo. Look at Myanmar and North Korea. If these nations turn democratic, they will seek out similar trading and security partners. Once China's forward projection capabilities are complete, these tyrannies cannot be rolled back easily, and the world would again be polarized into two camps. Conflict cannot be avoided indefinitely.

Till then expect US lawmakers to let it be. After all, if Wall Street and Medicare ever collapses beyond redemption, such honorable representatives and senators would be the first to benefit from a willing donor list of executed Chinese dissidents. Those Silicon Valley kids who sold out the lives of Chinese activists may qualify as well.

Or they might go for Hugo Chavez, a democrat and a socialist who does deal in free markets. That's worse than Osama bin Laden. Ask Pat Robertson, who, can "combine the hypocrisy of an American Bible missionary with the cunning of" an "Asiatic."* China will stay out of this one as subversion of democracy works in its long-term favor.

US foreign policy has - in many ways - been harsher to Japan, a nation that has doled out billions in development aid and the promotion of democratic institutions around the world. It has been nitpicking on patches of rice in a highly populated Japan under GATT rules, and overlook China's prison labor when convenient.

If George W. Bush is serious about freedom, he needs to engage and prioritize trade with democracies first.

An Inferno in the Persian Gulf?

Why not? Though this commentary focuses on a near-term maximalist scenario, we do live in a world of frazzled nerves, peak oil, and erosion of democracy. The power of energy geopolitics was demonstrated by none less that President Franklin Delano Roosevelt in 1941. FDR’s reported goal was to spare future generations of Americans from a "hopeless confrontation with a totalitarian world." There are other factors at play. Bush's announcement of a dazzling new array of alternative energies for the United States has been dismissed by Democrats and Republican lawmakers alike, but venture capitalists and private initiatives are leading the way for an eventual infrastructure implementation. These guys were largely responsible for the information and communication technologies revolution. Sweden has already shown the viability of alternative energy. In the medium-term, this could mean a significant shift in manufacturing back to the United States. For this, it needs to contain China in the near-term.

In the meantime, if the world is serious about de-escalating tensions in the Middle East, perhaps the US can install an early warning system on a neutral soil for the benefit of Iran and Israel. It would benefit Sunni Arab states as well. Such an early warning installation should be staffed by Iranian, Israeli and Arab officers and that should be strictly non-negotiable.

However, if all hell breaks loose in Iraq, nothing will work. Expect a more dangerous world this year, perhaps this month or so.

Personal Stance?

If fear or conscience bothers you, we shall return again to the diary entry of summer 1941.

Few realize that Hitler's top two army commanders had contemplated assassination against him at the height of Nazi power in 1939. One of them was Gen Franz Halder. After the deck became impossibly stacked, he proceeded to draw up plans for Operation Barbarossa, one month before Hitler turned his attention towards the Russian colossus. Those are the personal choices in a maximalist world of warfare. In such situations, duty, relativity and personal stance may supplant conscience, or they may co-exist, uneasily.

As Halder ultimately learnt, it's not just who dares who wins, but who has the energy to do so.

He was later implicated in the July 20 (Stauffenberg) plot against Hitler and was sent to the Dachau concentration camp. He survived it and received the Medal of Freedom from fellow WWII veteran John F. Kennedy.

Where will you be when the deck is stacked?

* Incidentally, Hitler's description of Japanese Foreign Minister Yosuke Matsuoka during the run up to Pearl Harbor. (Kershaw, p364) Halder's diary entries can be found on p391.

Mathew Maavak had studied crisis management, media crisis, propaganda and psychological warfare at the University of Leeds, UK. He is currently a visiting fellow at Jakarta's Centre for Strategic and International Studies.

Jakarta, March 3, 2006

Copyright @ Mathew Maavak 2006

Most of Mathew Maavak's commentaries can be read here or visit thePanoptic World homepage.

Posted by Mathew at March 2, 2006 7:43 AM Category: Peak Oil --- Social Implications