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The Geopolitics of $130 Oil
May 27, 2008 | 1913 GMT Graphic for Geopolitical Intelligence Report
By George Friedman Oil prices have risen dramatically over the past year. When they passed $100 a barrel, they hit new heights, expressed in dollars adjusted for inflation. As they passed $120 a barrel, they clearly began to have global impact. Recently, we have seen startling rises in the price of food, particularly grains. Apart from higher prices, there have been disruptions in the availability of food as governments limit food exports and as hoarding increases in anticipation of even higher prices. Oil and food differ from other commodities in that they are indispensable for the functioning of society. Food obviously is the more immediately essential. Food shortages can trigger social and political instability with startling swiftness. It does not take long to starve to death. Oil has a less-immediate — but perhaps broader — impact. Everything, including growing and marketing food, depends on energy; and oil is the world’s primary source of energy, particularly in transportation. Oil and grains — where the shortages hit hardest — are not merely strategic commodities. They are geopolitical commodities. All nations require them, and a shift in the price or availability of either triggers shifts in relationships within and among nations. It is not altogether clear to us why oil and grains have behaved as they have. The question for us is what impact this generalized rise in commodity prices — particularly energy and food — will have on the international system. We understand that it is possible that the price of both will plunge. There is certainly a speculative element in both. Nevertheless, based on the realities of supply conditions, we do not expect the price of either to fall to levels that existed in 2003. We will proceed in this analysis on the assumption that these prices will fluctuate, but that they will remain dramatically higher than prices were from the 1980s to the mid-2000s. If that assumption is true and we continue to see elevated commodity prices, perhaps rising substantially higher than they are now, then it seems to us that we have entered a new geopolitical era. Since the end of World War II, we have lived in three geopolitical regimes, broadly understood: * The Cold War between the United States and the Soviet Union, in which the focus was on the military balance between those two countries, particularly on the nuclear balance. During this period, all countries, in some way or another, defined their behavior in terms of the U.S.-Soviet competition. * The period from the fall of the Berlin Wall until 9/11, when the primary focus of the world was on economic development. This was the period in which former communist countries redefined themselves, East and Southeast Asian economies surged and collapsed, and China grew dramatically. It was a period in which politico-military power was secondary and economic power primary.
This does not mean that the U. The surge in commodity prices — particularly oil — has superseded the U. Economic power creates political and military power. It is a cliche that money and power are linked. They control huge and increasing pools of cash that they can use for everything from achieving domestic political stability to influencing regional governments and the global economic system.-jihadist war will not continue to rage. the winners in this game are those who export oil. oil was viewed very differently than it was at $130.S. Countries in which service makes up a larger sector than manufacturing obviously use less oil for critical economic functions than do countries that are heavily manufacturing-oriented.* The period from 9/11 until today that has been defined in terms of the increasing complexity of the U. if that is desired. Indonesia and Nigeria might benefit from higher prices. Countries such as Saudi Arabia do not need to use so much of their wealth for domestic needs. The ability to control where exports go and where they don’t go transforms into political power. Rather. It is nevertheless true. When $70-a-barrel oil seemed impermanent. the international system. Third. much as the war superseded the period in which economic issues dominated the global system. The system was ignoring higher prices.jihadist war. oil prices had not risen to the level where they had geopolitical impact.-jihadist war — a reality that supplanted the second phase and redefined the international system dramatically. The victory is not only economic but political as well. the permanence of higher prices had not been clear. The real winners are countries that can export and generate cash in excess of what they need domestically. Second. The rise in the price of oil is triggering shifts in economic power that are in turn creating changes in the international order. The big losers are countries that not only have to import oil but also are heavily industrialized relative to their economy. and likely to fall below $50. The international system has accommodated itself to the conflict. The ability to export in a seller’s market not only increases wealth but also increases the ability to coerce. As oil passed $120 a barrel. Indeed. Second. So countries such as Venezuela. With the U. just as political and military power can create economic power.S.S. and the losers are those who import it. consumers in countries such as the United States are hurt by rising prices. First. where a decline to $100 would be dramatic and a fall to $70 beyond the calculation of most. The game is somewhat more complex than this. the entire Arabian Peninsula is in this position. any more than 9/11 abolished economic issues. and its claims on that system are lessening. Obviously. Certainly.-jihadist war in either a stalemate or a long-term evolution. First. started to reshape itself in what will be a long-term process.S. but they absorb all the wealth that is transferred to them. The conflict is no longer drawing other countries into it. it means that a new dynamic has inserted itself into the international system and is in the process of transforming it. And these countries’ economies . it has lost its dynamism. This was not apparent until now because of three reasons. in our view. it is becoming an endemic reality rather than an urgent crisis. they had not been joined in crisis condition by grain prices. its impact on the international system is diminishing.
The Chinese have their hands full between natural disasters.S. which have refused to distribute at capped prices. are holding prices. Although somewhat strained. will tread lightly in order to ensure that it doesn’t happen. the Chinese continue to export and. They have now more than rebalanced their financial system and are making the most of it. for example. they are continuing to cap the domestic price of gasoline. They will not need to. which imports all of its oil and remains heavily industrialized (along with South Korea). Therefore. they face potential domestic unrest. This has caused tension between the government and Chinese oil companies. Between subsidies and no-profit exports. The Chinese dilemma is present throughout Asia. leaving their financial system — already overloaded with nonperforming loans — vulnerable. taking steps to stabilize the region. where shortages of diesel fuel have been reported. under Vladimir Putin. This is a time when they absolutely do not want anything disrupting the flow of oil from their region. the biggest winners are the countries of the Arabian Peninsula. China’s reserves could shrink with remarkable speed. not to assume that energy prices will remain high and has taken advantage of high prices to accumulate substantial foreign currency reserves. economy is weak and the ability to raise prices is limited. Tibet.might slow. Closing the Strait of Hormuz. As we have already said. using influence with Sunnis in Iraq to confront al Qaeda. Politically. That would lead to unemployment. Russia is the big winner. They do not need a wave of business failures. precisely because the Russians are in a surplus-cash position. But just as Asia is the big loser because of long-term high oil prices coupled with food disruptions. China’s miracle — rapid industrialization — has now met its Achilles’ heel: high energy prices. Russia is an exporter of natural gas and oil. if they chose. The reason is simple. is obviously affected. aware of what could happen. Japan. That puts them in a doubly-strong position. But higher oil prices simply do not have the same impact that they do on countries that both are primarily manufacturing-oriented and have a consumer base driving cars. these countries never really suffered during the period of low oil prices. As oil prices increase costs. which in turn will lead to instability. This includes supporting Israeli-Syrian peace talks. making certain that Shiites in Saudi Arabia . China is facing higher energy prices at a time when the U. they are becoming major players in global acquisitions. They could tweak energy availability. would be disastrous to them. The Chinese are aware that slowing exports could cause some businesses to fail. Economically. We therefore see the Saudis. but given the need to export. Behind this power struggle is this reality: The Chinese government can afford to subsidize oil prices to maintain social stability. they are effectively squeezing profits out of exports. Russia has been very careful. But the most immediately affected is China. hurting the Europeans badly. terrorism and the Olympics. with some exceptions. If they take the cap off. countries that have become dependent on Russian energy exports — and this includes a good part of Europe — are vulnerable. East Asia has been most affected by the combination of sustained high oil prices and disruptions in the food supply. It also could be a massive exporter of grains if prices were attractive enough and if it had the infrastructure (crop failures in Russia are a thing of the past). The Europeans. in particular.
along with Canada. The Saudis are using their money to try to stabilize the region. China is in an increasingly insular and defensive position. With oil above $120 a barrel. but its relative vulnerability to high energy prices is nothing like it was in 1973. and because they have neglected their oil industry over the last 30 years. The Iranians themselves are facing problems. It is obvious that there is now internal political tension between the president and the religious leadership over the status of the economy. Groups such as al Qaeda and Hezbollah are decidedly secondary to these considerations. a wire has been tripped. The Russians are becoming more assertive.) In addition. the United States is a food exporter. The war in Iraq did not begin over oil — a point we have made many times — but it might well be brought under control because of oil. De-industrialization has clearly had its upside. We are very early in this process. Saudis and Kuwaitis are thinking of ways of getting into the action. (Other Gulf countries are doing the same with their Shiites. In Iraq — but not in Afghanistan — the war has already been regionally overshadowed by high oil prices. Our point is this: High oil prices can increase as well as decrease stability. Despite being the world’s fifthlargest oil exporter. Oil-exporting countries are in a moneymaking mode. using their economic position to improve their geopolitical position in the region. They do not want to see the Iranians mining the Strait of Hormuz or the Americans trying to blockade Iran. This is designed to remove one of Iran’s levers in the region: a rising of Shiites in the Arabian Peninsula. the Saudis are using their economic power to reestablish the relationship they had with the United States before 9/11. Argentina and others. and these are just our opening thoughts. The tension is palpable. They can buy peace on the Peninsula. Higher grain prices help the United States. But in our view. At the same time. Australia. and the world is refocusing on high commodity . their ability to participate in the bonanza is severely limited. The United States is an oil importer. The high price of oil makes even Iraqis think that it might be time to pump more oil rather than fight. but they might create a new dynamic in the Gulf region that could change the framework of the Iraqi war. the situation is largely a push. it’s hard to see how they can without the participation of the Western oil majors — and this requires burying the hatchet with the United States. Put differently. taking in roughly 40 percent of its annual demand. the last thing they need is a war disrupting their ability to sell. This is far from an exhaustive examination of the global shifts caused by rising oil and grain prices. the regional dynamics have changed. Because of the type of oil they have. For the United States. and even the Iranians are trying to figure out how to get into the action. and all have the means and geography to benefit from an Iraqi oil renaissance. the Arabian Peninsula can be very helpful. during the Arab oil embargo. which Russia has traditionally dominated and where China is becoming increasingly active in making energy investments. Suddenly. Iran also is the world’s second-largest gasoline importer. With the financial institutions in the United States in disarray. The Saudi royal family is secure against any threats. Iranians are asking how they got into this situation. The shifts will not change the status of the United States. particularly in Central Asia. Certainly the Iranians.profit from the boom.
It seems to us that history is moving. issues from the last generation linger. . As always in geopolitics. But history moves on. but they are no longer the focus.prices. Last week there was talk of Strategic Arms Reduction Treaty (START) talks between the United States and Russia — a fossil from the Cold War. These things never go away.
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