Vol. 5, No. 7 16 October 2005
The World Oil Crisis: Implications for Global Security and the Middle East
The global oil market environment of very strong demand and very little spare capacity offers a huge opportunity to the radical jihadists. The terrorists believe that the best way to hurt the global Western economy is to go after oil.
Since the end of the major hostilities in Iraq, there have been close to 300 attacks on pipelines, refineries, and other facilities, and there have been attacks on oil installations in many other parts of the world, including Chechnya, Pakistan, India, Russia, Azerbaijan, and Nigeria.
The cumulative impact of those attacks amounts to about 1 million barrels a day that has been taken off the market as a result of sabotage. If this million barrels a day had reached the market, oil prices would have been at least $20 a barrel lower.
We are seeing today in essence a transfer of wealth of historic proportions from the economies of the United States, Japan, China, and Europe to the economies of the oil-producing countries. Of course, this is not a way to win a war on radical Islamic terrorism when the side that needs to defeat terrorism and radical Islam is constantly enriching the enemy.
We are seeing the beginning of a new era in the Middle East where other players, particularly China, will move in and want to cut deals and alliances. The U.S. and Europe are trying to curb Iran's nuclear program, to stop it from developing the bomb, but the Chinese have signed a $70 billion energy deal with Iran, and it will be very difficult to get them on board at the UN Security Council.
One of the main causes of friction between China and Japan involves access to oil and gas deposits in the East China Sea. The Chinese are also developing a strong foothold in Pakistan, where thousands of Chinese workers are building a new port in Baluchistan at Gwadar, which sits right at the entrance to the Persian Gulf.
Spare Oil Production Capacity Falls Drastically
In the United States, gas prices have reached $3.30 a gallon. In a country where one cannot even get a loaf of bread without getting into a car and driving somewhere, this is a major issue.
The oil crisis we face today is not the supply-driven crisis we had in 1973. This is a demand-driven crisis, due in large measure to increased demand for oil in China and India, whose economies are growing by leaps and bounds. Their need for energy has caused a chain reaction, since this has almost totally eliminated the oil market's spare production capacity of about five million barrels a day that Saudi Arabia and other countries could produce in times of emergency to stabilize the market.
Today there is a very thin layer of insulation in the oil market amounting to approximately one million barrels a day, meaning that every small disruption, be it a hurricane in the Gulf of Mexico or riots in Nigeria or instability in the Middle East, immediately creates a rise in prices. This situation will be with us for a long time because there is no new spare capacity. Building spare capacity requires an investment of billions of dollars to create infrastructure that may sit idle most of the time. Nobody will invest on those terms.
Jihadi Terrorists Target Oil Production
This environment of very strong demand and very little spare capacity offers a huge opportunity to the radical jihadists. The terrorists believe that the best way to hurt the global Western economy is to go after its oil, to blow up pipelines, refineries, pumping stations, tankers, and take them off the market. They realize that when they blow up a pipeline in Iraq or in Sudan or anywhere in the world, this translates immediately into a price rise in all the markets. It is much easier for terrorists to blow up an oil facility or take out a tanker somewhere in the world than to infiltrate into the United States and blow up the World Trade Center.
Osama bin Ladin and the jihadists have said many times that their war against the West is not only a religious war or a political war but an economic war. This is an economic war against the infidel similar to the war they fought against the Russians. "We bled them to the point of bankruptcy. So if we were able to do it to the Russians, we can now do it to the Americans, and the best way to do it is to go after their Achilles heel and attack oil." This is what they have been doing primarily in Iraq. Since the end of the major hostilities in Iraq, there have been close to 300 attacks on pipelines, refineries, and other facilities, and there have been attacks on oil installations in many other parts of the world, including Chechnya, Pakistan, India, Russia, Azerbaijan, and Nigeria.
The cumulative impact of those attacks amounts to about 1 million barrels a day that has been taken off the market as a result of sabotage. If this million barrels a day had reached the market, oil prices would be at least $20 a barrel lower. This shows that the jihadists, using very simple tactics, have been very successful in driving up oil prices significantly, taking advantage of a very tight market.
Transferring the World's Wealth
In 2001, oil was selling for $20 a barrel; today it sells for more than triple. This means that the Saudis, the Iranians, and all the other producers are making an extra $40 a barrel. We are seeing today in essence a transfer of wealth of historic proportions from the economies of the United States, Japan, China, and Europe to the economies of the oil-producing countries. Of course, this is not a way to win a war on radical Islamic terrorism when the side of the world that needs to defeat terrorism and radical Islam is constantly enriching the enemy. American taxpayers send their dollars and soldiers all over the world to fight for freedom and democracy. At the same time, every time they go to a gas station, they finance the enemy that is out there to kill us.
Some 77 percent of the world's oil reserves are in the hands of governments. These governments have little interest in bringing down oil prices. Unfortunately, most of the oil-producing countries are corrupt dictatorships.
How Oil Shapes Foreign Policy
What happens when you have the United States, China, India, Europe, and Japan all competing over the same oil? We are seeing today the beginning of a new era in which the Middle East will no longer be a unipolar arena. There will be other players, particularly China, that will move in and want to cut deals and alliances.
The United States and Europe are trying to curb Iran's nuclear program, to stop it from developing the bomb, but the Chinese have signed a $70 billion energy deal with Iran, and said they will veto any attempt to impose sanctions on Iran at the UN Security Council.
When the Security Council tried to impose sanctions on Sudan - one of China's main oil suppliers - over the issue of Darfur, the Chinese again said no. These are two cases in which China's energy interest trumped their interest to be part of the international community.
A third incident happened this year in Central Asia, which is a very important new energy domain. In May a massacre occurred in Uzbekistan, with hundreds of people killed by President Islam Karimov. The United States and Europe asked for an international investigation, but China, which had signed a $600 million gas deal with Uzbekistan, said no. A few weeks later, the United States was told by Uzbekistan that it had 180 days to evacuate the air force base it was using to fly over Afghanistan in the context of the war on terrorism. China has been a leading force in calling for the United States to remove all its military forces from Central Asia, including Kurdistan. So we see how oil shapes foreign policy.
We are seeing a situation in which America's policy of bringing democracy to the Middle East is being constantly compromised by the fact that the United States and China are essentially competing over energy resources. This is happening all over the world, not only in the Middle East and Central Asia. It is happening in Africa and even in the Western Hemisphere, where China is moving into Venezuela and Canada.
Access to energy resources will shape the world in the years to come. It will dictate the international behavior of countries as it plays an increasing role in relations between the major powers. We will see new alliances forged, such as between China and Saudi Arabia.
One of the main causes of friction between China and Japan involves access to oil and gas deposits in the East China Sea. Similar occurrences are happening all over the world. The Chinese are also developing a strong foothold in Pakistan, where thousands of Chinese workers are building a new port in Baluchistan at Gwadar, that sits right at the entrance to the Persian Gulf.
Israel should be very sensitive to developments between the United States and China, and should be very careful in pursuing military relations with China because there will be a cost. There are a lot of things that can be done with China on many issues, but for Israel to pursue military relations with China at a time when very important parts of the U.S. defense establishment and Congress are extremely hawkish on China is a very dangerous game to play.
American Dependence on Foreign Oil Has Doubled
Americans are beginning to understand that their dependence on foreign oil has doubled in the past thirty years. In 1973 America imported 30 percent of its oil. Today it imports more than 60 percent and that will increase. Americans are beginning to understand that dependence on oil imports is America's Achilles heel and that this needs to be addressed. Oil is no longer an environmental issue. It is increasingly becoming a national security issue.
In 1973, Brazil imported 80 percent of its fuel. Today the Brazilians are on the road to energy independence because they have developed an agricultural sector that allows them to produce transportation fuel from sugar cane. Brazil today does not feel the impact of an oil crisis as other countries do.
A lot of investment is going toward producing transportation fuel from coal. In South Africa, planes that fly out of Johannesburg run on synthetic jet fuel made from coal, not oil. So a country does not have to subjugate its entire foreign policy just to satisfy its need for petroleum products. Two-thirds of U.S. oil consumption is in the transportation sector. With a quarter of the world's coal reserves, America can do the same and embark on a path toward weaning itself from its oil dependence. This has already been done in the U.S. power sector - today only about 2 percent of U.S. electricity is generated from oil.
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Dr. Gal Luft is Executive Director of the Institute for the Analysis of Global Security (IAGS) and co-chair of the Set America Free Coalition. He specializes in strategy, geopolitics, terrorism, Middle East and energy security. This Jerusalem Issue Brief is based on his presentation at the Institute for Contemporary Affairs in Jerusalem on August 17, 2005.
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