Energy Madness

The importance of energy is not new, it is only rediscovered over and over again. It is oil that constitutes the major part of the global energy-mix.  Oil like the majority of commodities is traded in US-Dollar (USD). The value of the USD, oil prices and war and peace tend to interact.

In autumn 1918, both the winners and losers of the Great War that fought in the name of mobility had come to the conclusion that oil was a strategic commodity. Access to the then-known oil fields in Northern Mesopotamia was the major British goal. Winston Churchill, then only a junior politician for colonial matters, was aware of the fact that controlling oil would determine future economic and political hegemony. This conviction was taken over by Washington when the US replaced the British in the Gulf, and the British pound was replaced by the USD as the world currency in commodity trading.

For China and other players of a new multi-polar world, it is a priority to make sure that their concessions and pipeline contracts materialize. The Chinese, for example, are rebuilding a fleet and envisaging a presence in the Gulf. Brazil is turning into a distributor of nuclear technology. The next changing of the guard may be on its way.

The Arabian Peninsula and the Persian Gulf where a large majority of today’s proven reserves of oil and natural gas lie are shaped by the geopolitics of energy. The old saying in the oil-business that "oil makes and breaks nations" is even more valid in this volatile summer of 2008.  Iraq is still at the brink of implosion, Iran may be the target of a military operation conducted by Israel and seconded by the US. West African oil producer Nigeria is in perpetual turmoil and even Bolivia may face territorial disputes in its gas rich province. Borders could change with the new energy-alliances brokered by current or future powers.

High energy-prices, galloping inflation plus the war-mongering atmosphere in the Gulf, all that forms an explosive mix for the world economy and international relations. The price for a barrel (c. 159 litres) has gone through various "historic ceilings" since 2004. The average 2002/3 price was moving around 25 USD/b; at press time, it had crossed the trading mark of 140 USD/b. Investment banks predict a price of 200 USD/b in July.

Of course there are hidden agendas: The core portfolio of the commodity fund of Goldman & Sachs is made up of oil contracts, so there is a definite interest in driving up prices. Another reason for the surge lies in the weakness of the USD and the irresponsible monetary policy by the Federal Reserve. Simply printing fresh money to recreate trust between banks mistrustful after the sub-prime crisis is not the solution. On the contrary, it only fuels inflation. Coupled with high commodity prices and a slow-down of the economy, we are just a step away from stagflation.

The weak USD has been pushing investors, both individual and institutional, to change their investments from positions in dollars to commodities.

"People start considering oil as an alternative currency in which to stockpile their fortunes," is the analysis of one commodity trader. This trend sparks the rise of oil and food prices. And then comes speculation.

Will we witness more tragedies? Silent wars kill millions in Congo, where the race for commodities is in full swing, Ethiopians are starving because the Horn of Africa has been hit by climate change probably more than any other region apart from Australia. A billion USD –

the entire foreign currency reserves of that country – had to be spent this year on higher energy prices.

In the northern hemisphere we close our eyes and worry only about how to replace big cars by smaller ones. A suburban lifestyle made in America could end very soon. But the real issue for the future lies elsewhere.

If a military operation takes place in the Gulf this year, we might see prices going up to 300, 400 USD/b, as the Algerian oil minister and current president of OPEC, the Organisation of oil exporting countries, Chekib Khelil stated end of June. Then the fight for daily survival will not be the news from Africa, but from the north.

Volatility has always been the name of the game on oil, but this time it could escape all predictions. The only certainty may be how far prices will drop once we are in a quagmire.

 

Dr. Karin Kneissl is an attorney, a journalist  and an expert on the Middle East, specializing in energy issues. She is author most recently of Die Gewalt Spirale (2007) and Der Energie Poker: Wie Erdöl und Erdgas Die Weltwirtschaft Beeinflüssen. She is Professor of International Relations at Webster University Vienna.