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Oil rush comes East
bringing cities to a halt

The West's dependence on oil won't set the tinderbox alight. The stress points will be farther east as China and India bulk up on an unrestrained hydrocarbon diet.

October 2010

Beijing traffic jam - Long queues of cars grind to a halt as drivers talk to each other perplexed

Evening traffic snarl in Beijing brings the throng to a halt - Photo: Getty Images

WHEN nations don’t produce all of something they need, they want it more. When nations lose traditional clients for something they sell, they try harder to sell it. This is true even in today’s wired, interconnected, globally traded world. All this becomes painfully true when what they want, or what they sell, is oil.

Despite the “Green Energy Revolution” spearheaded by the European Union, there’s no quick substitute for oil in the transport sector. Cars and buses and jet aircraft all burn petroleum products, and will for the foreseeable future. But demand for oil is undergoing rapid geographical change. The Asia-Pacific Region is drinking more and more of the world’s favourite hydrocarbon. This trend will colour its policies and those of the producers in the Middle East that sit on nearly 60 percent of the World’s oil reserves, and 30 percent of its output.

Today Asia-Pacific is the world’s largest oil consuming region. According to the latest BP Statistical Review of World Energy, it consumes 26 million barrels a day (b/d), or 31 percent of world demand, and those figures are rising. By contrast, the US, long the world’s biggest oil guzzler, consumes “only” 18.7 million b/d, but that figure’s falling. As in so many other fields, the key to Asia-Pacific’s burgeoning oil demand, and its consequences, lies in the two presumptive future superpowers, China and India. Everyone else in the region will have to adjust to the ride.

Bill Barnes

Bill Barnes

As in so many other fields, the key to Asia-Pacific’s burgeoning oil demand, and its consequences, lies in the two presumptive future superpowers, China and India. Everyone else in the region will have to adjust to the ride

Half a century ago, the US imported almost no oil. As a non-oil importer, it brushed aside a half-hearted oil embargo by Arab oil producers in the wake of the 1956 Suez crisis. Seventeen years later, by 1973, the US imported about a third of the oil it consumed. The OAPEC oil embargo that followed that year’s Arab-Israeli war tripled oil prices (in 2009 dollars) compared with 1956, and caused a world-wide recession.

In 1993, China became a net oil importer. Seventeen years later it’s the world’s second largest oil consumer. It imports just under 60 percent of its oil consumption. Over the same period, India’s oil consumption has leapt 242 percent, and it imports 76 percent of its oil consumption. Since 1993 oil prices (in 2009 dollars) have tripled. War and instability have spread from the Gulf into Central Asia, and much of the world is mired in a significant recession.

As the Chinese and Indian economies follow their high-growth trajectories, the countries find themselves facing many of the same energy challenges that the US faced in the last decades of the Cold War: to import energy or rely on domestic supply? Natural gas or coal? How to moderate energy demand growth? Hummers or Nanos? Most importantly, how will they balance their citizenry’s desire for mobility and foreign travel with the need to import an increasing proportion of their transport fuels? It's either Thomas Cook to Florence, or more sofa soirees watching the Discovery channel.

The answers to such questions necessarily influence a country’s foreign investment and foreign policy strategies. Chinese and Indian oil companies are drilling at home, acquiring foreign oil reserves and building international infrastructure, expanding worldwide from Kazakhstan to Venezuela (and raising global production costs by paying silly money to outbid their counterparts on many such transactions). But because keeping the Hummers (and the Nanos) off the roads and the middle class out of airline seats aloft is difficult, demand will continue to climb.

There’s no near-term substitute for oil when it comes to transport fuels, so ensuring an adequate supply is a pressing national priority. Allowing for differences in per capita income, it’s really not all that different from the challenges faced by the US and other advanced economies after the oil crises of the 1970s.

Leaving aside the difficulties imposed by worries over Climate Change, all of the two presumptive superpowers’ acquisitions and drilling leave them facing the same problem as the rest of the world: over half of the world’s oil reserves are in the Persian Gulf. This will not change: nearly all forecasts show the Gulf, specifically Saudi Arabia, as the indefinite supplier of last resort for conventional oil supplies. In the best case scenario, the Gulf producers will be able to increase their production of oil to match market demand and keep prices high; in the worst case, ”peak oil” scenario, the Gulf producers won’t be able to match demand, and prices will go through the roof. The jury’s still out on which scenario will prevail, but betting on a single region’s ability to supply the entire world’s oil demand growth indefinitely seems a stretch.

China’s and India’s increasing oil imports mean that the two countries will become increasingly energy security conscious, eventually requiring the will and the means to protect their energy interests and keep their citizens content. This means that their relationships with the Gulf producers, other hydrocarbons producers worldwide, and with each other, to say nothing of their competitors for world energy supplies, will become increasingly important.

In the near term, the keenest competition will likely be with the US, whose historical interests in the Gulf have since the 1950s dominated the region. But US imports of oil from the Gulf are less than 15 percent of its total oil imports, according to the US Energy Information Administration, down from around 20 percent up to 2003. China’s and India’s interests, and inability to project military power, may encourage them to free-ride on the coattails of US military influence in the region. In the longer term, they will wish to set out their very own distinct stalls.

This may happen sooner rather than later. According to the International Energy Agency (IEA), oil demand in the leading industrialised countries, and in particular the US, is now in long-term secular decline, as the motor pool reaches saturation levels and automobile efficiencies improve – even in gas-guzzling America. American daily oil demand peaked in 2005, well before the start of the world financial crisis – and has declined an average 2.5 percent in every year since, according to BP.

Meanwhile, Chinese oil demand has been rising at over five percent a year over the same period, and Indian demand is keeping pace. Effectively, the industrial countries are weaning themselves off oil, albeit slowly, while the two prospective superpowers are taking bigger and bigger swigs of the barrel. Absent a step-change in automobile technology (and a generation to build the infrastructure to fuel it) this trend will continue until the motor pools in China and India reach saturation.

These developments are already affecting the oil markets. The US has lost its role as the world price leader. Oil traders note that the time when a glance at US oil demand and inventory statistics was enough to give you likely price directions are long gone. Now, accurate knowledge of Chinese and Indian market balances (at a minimum) is necessary.

As US imports of oil, and of Gulf oil in particular, diminish, US interest in the Middle East, outside of its ineluctable commitment to the security of Israel, will also inevitably decline. As that interest declines, America's willingness to see its soldiers killed and its currency debauched to ensure that the Gulf falls under its security umbrella will also decline.

Possibly Iran – and its Gulf neighbours – have a desire to protect themselves against “nuclear blackmail” from the emerging powers of the East. China, India, and unstable Pakistan are all nuclear weapons states

Without the US security umbrella, other countries that depend on the Gulf – and which have so far had a “free ride” under the US security mantle, while complaining about the evils of American influence — will need to evolve their own policies and will be forced to take their own positions to address the longstanding instability in the region. The succession to Saudi Arabia’s aging King Abdullah may provide the first significant such opportunity to launch new policies.

It is worth recalling that – Arab-Israeli wars aside—there has hardly been a year since the fall of the Shah of Iran in 1979 that the Gulf or a neighbouring country has not been influenced by one simmering conflict or another: the 1980-1988 Iran-Iraq War, the 1990-1991 Kuwait War; the “jailing” of Saddam Hussein by sanctions and no-fly zones between 1991 and 2003, and the 2003 invasion of Iraq, not to mention the nearly decade-old Afghan war that followed the September 11, 2001 attacks. Taking responsibility for ensuring that tankers continue to pass through the Strait of Hormuz is a long-term commitment.

It is too easy to forget that much energy will be deducted from the confrontation between the Western industrialised nations, mainly the US, and Islamic fundamentalists, if one side or the other loses interest in defending its enemies’ objectives. Should the Western countries lose economic interest in maintaining the free flow of energy from the Gulf, and consequently in retaining an on-the-ground presence — with all the associated cultural baggage – there, then it’s likely that the jihadists worldwide will gradually cease to bother with that enemy, and assail other “anti-Islamic” targets closer to home. There are plenty of territories lost to the Caliphate besides those in Europe. And what would be the Islamic world’s reaction to Chinese bases in the Gulf instead of American ones?

The Gulf regimes are aware of this. As more and more barrels of their practically only export move to the Asia-Pacific markets, they will tailor their foreign policies to follow their revenues and the recipients will recalibrate as well.

This will be particularly true in the security field. Today’s most ballyhooed security threat is embodied in Iran’s alleged development for its own nuclear weapons, a development which the industrialised countries consistently condemn, but which China and India seem unwilling to thwart. Quite apart from the fact that Iran has wanted a bomb since the Shah was firmly in power, there is the question of “What is the Iranian bomb for?”

That bomb may indeed be for use against Israel, as the Israelis fear. But weapons can be fired in more than one direction, and a subsidiary desire must be to attempt to overawe its neighbours around the Arabian Peninsula. But would this succeed, or spark an arms race? Key Gulf states are themselves busy discussing the merits of “civilian” nuclear power and planning reactors. The Kuwait, the United Arab Emirates (UAE), and Saudi Arabia all appear committed to the development of “civilian” nuclear power generation, with the UAE already having ordered four nuclear power stations from Korea Electric Power Co (KEPCO).

Finally, would Iran – and its Gulf neighbours – not have a desire to protect themselves against “nuclear blackmail” from the emerging powers of the East? China, India, and unstable Pakistan are all nuclear weapons states which buy a significant amount of Gulf oil. In some future oil crisis, might a desperate Chinese or Indian or Pakistani government resort to veiled, or not so veiled, nuclear threats to ensure the flow of oil to its ports? Pakistan sits on Iran’s eastern border. A missile that can reach Tel Aviv from Tehran can also reach Delhi.

It is not conceivable that Iran’s search for nuclear weapons’ capability is driven as much by its desire to “protect” itself from the future pressures of its clients to the east, as it is by long-running historical animosities to its west and south, or worries over the future actions of that “Great Satan”, the US. If that is indeed one of the rationales behind the Iranian bomb, then what will be the response of the putative superpowers of the 21st century as they become ever more dependent on oil imports to fuel their ever more consumerist societies?

Nations do indeed change their worldviews as their interests evolve, and they recognise that they no longer produce all of something they need. Particularly when that “something” is oil. Are China and India (and the rest of the Asia-Pacific countries) prepared for the responsibility that their growing dependence on Gulf oil suppliers is creating? If not, should we all not begin to worry?

Bill Barnes is a consultant in the power generation and oil and gas sectors, based in London. He advises on the development of large-scale conventional and solar power generation projects and natural gas contracting. Bill holds degrees from London Business School and from Davidson College in the USA.

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taptin (4 November, 2010) – thai
in thailand we waste lot of oil and energy. too many car too much aircon and big city like krungthep waste more. govt shld have policy 2 xplore new source also to educate public abt waste.
olaf (27 October, 2010) – denmark
this is huge question. in germany and scandinavia weare looks at new enrgy takes time but we must do this.
olaf peterssen (26 October, 2010) – sweden
this isa very troubling matter that many persons arenot looking at seriously today. it will be a major issue tomorrow. govcernment shld get awayfm oil dependence and try alternitive fuels. another solution isto cut down consumption. drive less and use less electricity. not too long back this is how our grandparents live. hard to believe. thanks for these insights.
J Voorst (26 October, 2010) – Netherlands
An excellent article with extensive research. I agree with many of the authors comments but cannot see USA taking away its security umbrella from the gulf. How will China and India respond? And nuclear Iran is the good guy?

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