Geopolitical Energy Competition Term Paper

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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…

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