MuseLetter #170 / June 2006
by Richard Heinberg

News reports flitting across computer screens these days seem increasingly to be related to the subject of energy. But what do they signify? The modern world affairs analyst is in little better position to discern the patterns and portents than was his or her ancient Roman counterpart, the reader of entrails. What is one to make of items like these?

· In January, Russia’s Gazprom (the state-owned natural gas company) temporarily cut supplies to Ukraine in order to obtain higher prices. While Russian president Vladimir Putin re-established gas shipments as soon as Western countries complained (they did so because they were running short, due to Ukraine’s skimming off of gas being trans-shipped to Europe through its territory), Western officials saw this as Russia unsheathing its “gas weapon.”

· In April, China’s president Hu Jintao visited the US, where president Bush effectively humiliated him at the White House by “mistakenly” playing the Taiwanese national hymn upon Hu’s arrival, rather than the hymn of the People’s Republic, and by allowing a Taiwanese “journalist,” a Falun Gong member, to rant uninterruptedly for more than three minutes about Chinese human rights violations during a filmed White House press conference, with Hu in attendance. Hu, himself displaying no bad manners, left Washington for Saudi Arabia, where he signed a series of accords involving Chinese access to future Saudi oil production in exchange for the transfer of sophisticated weapons and other technologies.

· Also in April, Bolivia’s new president Evo Morales met with Hugo Chavez of Venezuela and Fidel Castro of Cuba, then announced the nationalization of his country’s oil and gas fields. <br> · As a result of Washington’s rejection of NAFTA decisions favoring Canada, the two countries’ relations have soured. Canada may shift some of its oil trade away from the US: Ottawa’s minister of natural resources has said that within a few years one quarter of the oil Canada now sells to the US may instead go to China.

· On May 9, CNN Money reported that Cuba has invited oil companies from China and India to drill in its Gulf waters. US firms had also been invited, but were prevented from participating by the longstanding American embargo on trade with Cuba.

· Russia’s Gazprom has hired former German Chancellor Gerhard Schröder as a consultant and has taken a majority holding in the Northern European Gas Pipeline. Gazprom also has Britain’s flagship utility, Centrica, in its sights for takeover; Tony Blair initially objected, then acquiesced to the deal.

· On a visit to Vilnius on May 4, US vice president Dick Cheney accused Russian president Vladimir Putin of using energy resources as a weapon to brandish against other Eurasian countries. “No legitimate interest is served when oil and gas become tools of intimidation or blackmail, either by supply manipulation or attempts to monopolize transportation,” he said. The next day, Cheney visited Kazakhstan to promote oil and gas export routes bypassing Russia. In his May 10 state-of-the-nation address, Putin responded by referring to America indirectly using the metaphor of a voracious wolf, mentioning the US by name only in the context of peripheral comments about Africa and South America.

· Oil- and gas-exporting Iran, defying Washington’s demands that it halt uranium enrichment, is being hauled before the UN Security Council, where the US is insisting on sanctions while Russia and China appear ready to block them. The evolution of the rhetoric on Washington’s part is frighteningly reminiscent of that which accompanied the run-up to the 2003 invasion of Iraq.

· Meanwhile, oil prices have hit historic highs of over $75 per barrel while global production has been stalled at about 85 million barrels per day for the past year.

While the specific meanings of-and connections between-these occurrences are often difficult to discern, their overall drift is becoming plainer with every passing day: The world is plunging into an energy crisis unlike any before, while geopolitical alliances are shifting quickly and to a degree not seen since the end of the Soviet era, and perhaps not since the end of World War II.

Global oil production is peaking-for all practical purposes, now. In the past weeks, the New York Times, Bill Clinton, and the executive vice president of Ford Motor Company (among many others) have stated that world oil flow is at peak. We have even seen one of the major oil companies (Chevron) place ads in multiple magazines and newspapers in order-gently, perhaps, but insistently and conspicuously-to break the news to the American people that the era of cheap oil, and cheap energy in general, is finished, over, done, dead, and gone. And that era just happens to be the only one that Americans alive today have ever known.

Oil is not the only problem; natural gas is turning out to be just as big a worry in North America and many European countries, and just as big a geopolitical prize to those who have and covet it. Gas prices have grown unusually volatile in the US, lurching from the long-time norm of $2 per thousand cubic feet up to $15 and back to $7 or less in six years. Globally, there are enormous natural gas deposits in Russia and Iran, but getting that gas to market in the growing quantities at which importers would like to use it will likely prove difficult, expensive, and perhaps even impossible given the geopolitical and economic context as well as the practical difficulties involved. This is very bad news for North Americans, who will have to rely increasingly on liquefied natural gas imported from far away by tanker-and will have to get used to paying the geopolitical costs that far-flung supply networks entail.

Welcome to the twenty-first century. And welcome to a world for which none of us is prepared. Take a good look around: things are changing quickly everywhere, and the omens are . . . well, ominous.

Russia: The Dealer Wins

When Washington succeeded in engineering the economic and political collapse of the USSR at the end of the 1980s, some heralded this as the “end of history”-a judgment that proved premature at best. After a decade of turmoil, during which foreign (mostly American) companies plundered Russia’s treasures, that nation elected as president Vladimir Putin, an ex-KGB officer who, as a career move, had recently spent a stint at the St. Petersburg Mining Institute writing a dissertation titled “Toward a Russian Transnational Energy Company.” His thesis: Russia should use its vast energy reserves for geostrategic advantage.

After entering office in 2000, Putin moved to reconsolidate state control over the country’s oil and gas industries. Now, with that task almost fully accomplished, he appears to be making his dissertation a reality. Putin has paid off much of Russia’s foreign debt, the nation has accumulated impressive financial reserves, and Gazprom recently overtook BP to become the world’s second-largest energy company.

Putin is sewing up an increasing portion of the European gas and oil market (Russia supplies about a quarter of Europe’s oil and a third of its gas), and that of Japan as well. He knows his country will need enormous capital investments in order to keep pumping the hydrocarbons; Europe and Japan need those hydrocarbons and have cash to invest. Putin’s goal seems to be a kind of natural-gas version of OPEC, a cartel with supply networks throughout Central Asia and with pipelines supplying Europe and China.

Russia’s relations with China have warmed in recent years. The Shanghai Cooperation Organization (SCO) was born on June 15, 2001, with Russia, China, and four former USSR Central Asian republics (Kazakhstan, Kyrgystan, Tajikistan, and Uzbekistan) as charter members. While there is little discussion of the SCO in US media, that organization has been patiently expanding its capacity to act as a geopolitical counterweight to Washington. The US may have won the Cold War, but Russia will not be so easily bested in the energy war. Currently Russia is nearly tied with US ally Saudi Arabia in oil production (though the Saudis export more because Russia uses a larger proportion domestically). While Russia’s rate of production is likely to stall in the next year or two and then begin its inevitable and terminal decline, much the same can likely be said for Saudi Arabia’s. Meanwhile, Russia is unequaled globally in natural gas reserves. The matter is not simple, though. Russian gas output is currently in decline and this, combined with a severe Russian and European winter, may have forced Russia to reduce its gas exports. Also its own populace pays very little for gas, so indigenous demand is enormous. This is one reason why Gazprom is reputedly short of cash for such matters as large-scale Arctic gas development.

East Asia: Crouching Tiger, Hidden Peril

China, flush with cash from its enormous trade accounts surplus, appears to be successfully competing with the US for future oil supplies not only in Asia but in Africa, South America, and Canada as well.

However, behind this new geopolitical strength, and beneath the spectacular recent growth rates of the Chinese economy, lurks long-term vulnerability. Given its huge population and an inherent demographic conflict between its industrialized coastal cities and the impoverished agricultural interior, China is actually acting out of desperation. Internal political upheaval will erupt if growth cannot be sustained, and growth will sputter without endlessly expanding energy supplies.

China’s burgeoning appetite for energy implies problems for Japan and South Korea, which also need hydrocarbons. For the past half-century these nations were cornerstones of America’s global sphere of influence. But America’s ability to assure future energy supplies is now questionable compared with that of Russia, and Korea and Japan will have to jostle with China to maintain their share of what is available.

Currently, Japan and China are at odds over territorial rights (and access to drilling opportunities) in the East China Sea. Would the US be able to come to Japan’s aid if competition turns to conflict? Significantly, a vigorous debate is breaking out in Japan as to whether it should start building a real defense capacity of its own.

Japan has also for many years been the primary holder of US foreign debt, banking on the ongoing stability of the dollar while enabling Washington to run up enormous deficits. However, the dollar’s soundness is increasingly in question.

If the US can supply Japan with neither energy resources, nor reliable military protection, nor financial security, why should Tokyo continue to support America diplomatically? And why should it continue to prop up the dollar by buying yet more US debt instruments-except to protect its existing dollar holdings?

Central Asia: Betwixt East and West

In Central Asia Washington has followed an old and familiar imperial playbook, supporting corrupt, autocratic regimes that offer sweetheart energy deals and that host US military bases, while undermining governments that refuse to play along. The playbook was on display in early May when Mr. Bush hosted Azerbaijan’s president Ilham Aliyev at the White House, stressing in his welcoming words the importance of their nations’ security and energy ties. But Washington is half a world away from Baku, while America’s rivals (Russia and China) are relatively close by. The Caspian basin was of key interest to American strategists even before the oil and gas discoveries of 1999-2000 in Kazakhstan. Thus last year’s announcement by Uzbekistan that it would no longer permit US military bases on its soil was an alarm bell for American geostrategists overseeing the region.

The Bush administration wants to curb Moscow’s influence in Central Asia and to weaken Gazprom’s growing control of energy supplies to Europe and the Caucasus, promoting new oil and gas shipment routes bypassing Russia and Iran in favor of its loyal ally Turkey. On May 15, Kazakhstan’s prime minister announced that his nation-with current oil production of about 1.3 million barrels a day expected to grow to 3Mb/d by 2015-will begin next month to pump its oil through BP’s US-backed Baku-Tbilisi-Ceyhan (Azerbaijan to Georgia to Turkey) pipeline. Score one for Washington.

However, Russia and Iran have the lion’s share of the needed resources, and these nations are geographically placed to deliver hydrocarbons to developing markets. Washington, in contrast, is itself an oil and gas importer whose ability to back up threats by projecting military force is now questionable as a result of events in Iraq.

Washington’s nightmare scenario would consist of a Russian-Iranian alliance to dominate Central Asian oil and gas production and trans-shipment routes. Such an alliance is counter-intuitive in that Russia and Iran are competitors for export markets. But the Bush administration’s belligerence toward both nations could well persuade them to overcome their mutual wariness.

India: Whose Ally?

During the past year president Bush has gone out of his way to woo India as a geopolitical counterweight to China, sharing nuclear technology with Delhi-while bashing Iran for developing its own nuclear program (the irony may be lost on Americans, but not on others). However, India’s long-term interests are more naturally aligned with those of the rest of Asia than with those of the distant US. India has rejected US pressures to withdraw from an oil pipeline deal with Iran, though that deal has yet to be concluded due to security considerations regarding Pakistan (through which the pipeline must pass). For its part, Pakistan has announced its intention to build the pipeline regardless of India’s decision.

The Financial Times reports that Washington “warned India that Delhi’s own nuclear deal with the US could be ditched if the Indian government did not vote to refer Tehran to the United Nations Security Council.” Delhi voted accordingly, but may have second thoughts if Iran threatens to scuttle the $20 billion Indian gas pipeline deal just mentioned. India uses only the gas it extracts from indigenous sources at the moment, but would use more if it were available.

India’s main ties to the US are based on trade and security. If, as the US dollar tumbles and the Iraq quagmire deepens, America proves unable to ensure these benefits, then Delhi may have no choice but to add its considerable weight to the SCO Asian bloc. The deputy editor of The Hindu recently observed that “if the 21st century is to be an ‘Asian century,’ Asia’s passivity in the energy sector has to end.” While hosting “the world’ s largest producers and fastest growing consumers of energy,” he wrote, Asia currently relies on “institutions, trading frameworks and armed forces from outside the region in order to trade with itself.” It seems unlikely to continue doing so for much longer.

Meanwhile, India’s industrial growth depends on energy supply, and with oil prices high and coal shortages looming, the country’s long-term growth prospects are questionable.

Europe: Buddy, Can You Spare a Btu?

Europe’s indigenous oil and gas reserves in the North Sea are rapidly depleting, with oil production decline rates averaging over 7% per year.

Europe has been allied with the US for many years (Western Europe since World War II or before, Eastern Europe since 1990), led in this regard by Britain. Prime Minister Tony Blair, who staked his career on support for Bush in the Iraq invasion, is clearly on his way out. His nation, now an oil and gas importer, faces a future of increasing dependency on foreign sources, with Russia the logical long-term option for gas. Britain and the rest of Europe are fearful of Moscow’s intentions, but they are negotiating from weakness: Europe has few alternative potential suppliers, but Russia has a willing and immediate alternative customer-China.

In a recent statement to European ambassadors, Gazprom’s chief executive Alexei Miller said that an April meeting between Vladimir Putin and European Commission president Jose Manuel Barroso was the “final straw” in persuading the former to finalize a major gas deal with China. Miller reported that Mr. Putin was “taken aback” by the EU’s insistence on limiting Gazprom’s share of the European gas market. Apparently in response, Mr. Barroso later complained of Moscow’s “use of energy resources as an instrument of political coercion.”

Gazprom pipes about a third of its gas to Europe, with sales totaling over $25 billion last year. But European trade accounts for a disproportionate share of the company’s revenues due to continued domestic energy price subsidies in Russia. Gazprom’s 1,200 km gas pipeline to Germany under the Baltic Sea, now under construction, bypasses Poland, the Baltic states, and Ukraine-which are generally seen as more loyal to Washington than to Moscow. Russia is not shy about the political implications: its ambassador to Belarus said recently that “when the Baltic pipeline is built, Gazprom will be able to cut off Belarus without cutting off Germany. That means Poland too.” The Polish defense minister has compared the pipeline to the 1939 Hitler-Stalin deal partitioning Poland.

Ties between Europe and the US run deep and are unlikely to dissolve overnight. Moreover, any shift away from traditional trans-Atlantic alliances is likely to be disruptive to the fragile European Union. Nevertheless, Washington can no longer count on automatic diplomatic support from Brussels, nor perhaps soon from London either, given the growing Russian stranglehold on European access to gas and oil; nor can Europe count on continued US economic strength or America’s ability to assure (by military means if necessary) ongoing energy supplies.

Middle East: Seismic Rumblings

While the situation in Iraq continues to unravel (some speculate that the Bush administration has now resigned itself to a dismemberment of the country along ethnic lines), all eyes are fixed on nearby Iran. The international diplomatic consensus seems to be that relations between that nation and the US have degenerated to such a point as to constitute the most worrisome international confrontation in decades.

America’s worries over Iran’s uranium enrichment and nuclear ambitions, while real, are also a mask for deeper issues-unresolved aspects of the two nations’ historic relations dating back many decades, and American irritation at Iran’s status as a nexus of the emerging Asian energy network. For their part, Iranian leaders truly want the ability to produce nuclear electricity: they have the capital to invest (thanks to high oil and gas prices), and they know that their country’s hydrocarbon resources are draining away. Iran’s oil production is in decline to the point that the nation is unable to produce its OPEC quota; meanwhile it must import half the gasoline it uses due to inadequate refining capacity. Iran also imports natural gas from Turkmenistan for various reasons, as does Russia.

At the next meeting of the Shanghai Cooperation Organization on June 15, Iran will be inducted as a full SCO member. At the same meeting, India, Mongolia, and Pakistan will also be invited to join. In April, Iran’s deputy foreign minister Manouchehr Mohammadi told ITAR-Tass in Moscow that his country’s membership in SCO would “make the world more fair.” Mohammadi also spoke of an emerging cooperative Iranian-Russian “gas-and-oil arc.”

Meanwhile China, the other primary SCO founder, is signing a $100 billion oil and gas deal with Tehran. Washington has exerted enormous diplomatic pressure on the Chinese to forego the agreement, but with no success. As mentioned above, there is also a nascent gas pipeline agreement between Iran, India, and Pakistan, and there is still talk of an Afghan gas pipeline.

The Bush administration-on the diplomatic, political, and military defensive over Iraq-is desperately seeking a way to maintain the appearance as well as the reality of power and influence in Eurasia. Iranian president Ahmadinejad is thumbing his nose at the US, and desires to lead an anti-American uprising of Muslim nations in the region. The American neocons evidently want to bomb Iran’s nuclear research facilities, but Iran holds strong deterrent cards in its emerging ties with Russia, China, and India. The old-guard foreign policy establishment in Washington views this US-Iran confrontation (quite rightly) as another strategic disaster in the making. Powerful behind-the-scenes forces in Washington are working quickly but methodically to topple the Bush administration before it can act, or at least to hobble its ability to act if it survives. If they do not succeed and an attack ensues, conflict is likely to spread throughout the region. The consequences are potentially cataclysmic.

Africa: Dividing the Spoils

Evidently the industrialized world views Africa (with the partial exception of South Africa) less as an emerging market than as a heap of resources ripe for taking.

China’s president Hu recently visited Nigeria-America’s fifth-largest oil supplier-where oil production is increasingly threatened by well-organized rebels. In just one week in early May, three Italian oil workers were kidnapped, an American oil worker was assassinated, and an illegally tapped pipeline line exploded killing over 200 villagers attempting to steal gasoline. There is widespread speculation that at least some rebel groups are being covertly trained and supplied by nations interested in Nigeria’s oil and gas-including the US, China, Britain, Pakistan, and India.

If oil and gas pipelines are geopolitical bargaining chips in Europe, Asia, and South America, the same is true in Africa. The Chad-Cameroon pipeline, delivering 160,000 barrels of oil per day, is in effect being held hostage by Chad’s president Idriss Deby in his attempts to ward off World Bank creditors. Meanwhile, insurgents operating in Chad are threatening neighboring Sudan, whose oil resources are in turn being eyed hungrily by both the US and China. The latter nation refused to condemn Sudan over recent killings in Darfur, after Sudan allowed Beijing to build a 500-mile pipeline to the coast.

Equatorial Guinea, Africa’s third-largest oil exporter, is led by dictator Teodoro Nguema (recently lauded by Condoleeza Rice as a friend of the US), who was the object of a coup last year led by none other than Sir Mark Thatcher, son of former British Prime Minister Margaret Thatcher.

South Africa, the economic engine of the continent, has enormous coal reserves and state-of-the-art coal-to-liquids technology, yet still imports most of its oil from the Middle East. Tentative plans to develop biofuels production on the continent threaten to pit fuel production against food production in countries where hunger is already endemic.

Meanwhile the US has undertaken a quiet military buildup in West Africa, with personnel dispatched to Nigeria and warships to the Gulf of Guinea.

South America: Emerging from the US Shadow

Evo Morales’s nationalization of Bolivia’s gas adds to a growing rebellion (most notably in Venezuela, but also in Argentina, Chile, and to a certain extent Brazil) against the “Washington consensus” of neo-liberal, US-dominated trade agreements. Historically, the United States has regarded Latin America as its backyard and has not permitted much independent maneuvering by leaders there (one has only to contemplate the fates of Torrijos, Noriega, Arbenz, and Allende to grasp this). But it may be that this time matters have gotten too far out of hand to be reined in by the usual methods. Assassinations and the toppling of regimes might backfire badly, given the widespread recent mobilization of anti-US popular opinion in many South and Central American countries. Moreover, full-scale military intervention is practically impossible given US fixations with Iraq and now Iran.

What would have been unthinkable only five years ago seems to be happening: South America is slipping out of Washington’s control and may even become united in hostility to its northern neighbor. If Daniel Ortega wins election in Nicaragua this fall, Central America could eventually follow.

The United States: What Can Bombs and Bluster Buy?

The US, the world’s undisputed superpower for the past 15 years, is stumbling. Once the world’s energy king, its domestic oil production has been in steep decline for decades (ANWR and coastal drilling won’t change that). Its natural gas extraction is also in decline, its electricity grid is in need of overhaul, its transportation system is inefficient, its roads are crumbling, and its urban infrastructure is designed to function only with massive ongoing inputs of cheap energy.

As if that weren’t enough, the US dollar is on the ropes as a result of extraordinary rates of borrowing-plus tax cuts and growing trade deficits. Downward pressure on the dollar’s value may further intensify if Iran and Venezuela follow through on threats to begin selling their oil for euros, and if Russia starts pricing its crude in rubles, as it has announced the intention of doing. For decades, the fact that nearly all international oil sales have been denominated in US dollars has encouraged nations to keep substantial holdings of dollars in reserve, and this has in turn kept the currency’s value high and stable. A widespread rejection of the dollar in oil trading would have an impact on the US economy somewhere between serious and fatal, in the opinion of various commentators.

America’s domestic political situation is equally dire. The current administration came into office on the basis of a promise-set forth in the 2002 “National Security Strategy of the United States”-to achieve and maintain virtually complete global hegemony by discouraging any nation or combination of nations from achieving military or economic parity. That promise also-and crucially-included the goal of gaining unchallenged control of the world’s oil and gas flows. Tactics reserved to that end included pre-emptive war and “regime change” anywhere necessary. The US corporate/banking/military elite gave the neocon-dominated executive group virtually free rein to pursue these goals. Given that group’s lack of a robust popular constituency, this entailed the fixing of elections, the mobilization of the media, the redirection of immense amounts of government revenue, the overriding of the Constitution as well as international laws and treaties, and the orchestration of a spectacular terrorist attack.

The Bush-Cheney-Rumsfeld crew had its chance and, by near-universal opinion, achieved colossal failure on all counts. This failure was in fact predicted by many-including the millions who marched in streets to try to avert the Iraq invasion. But the current tragicomedy of the neocons’ fall from grace can offer little satisfaction to anyone, in that it implies extraordinary perils to both the nation and the world.

Over the past few months the consensus of the traditional power elites has shifted dramatically: they have evidently (judging by their statements and by the attitude of the mainstream media) concluded that the neocon cabal must go. Washington prosecutors, backed by the establishment’s old-guard foreign policy “realists” inside and outside of government, are preparing revelations of scandals and the handing down of still more indictments.

This may all be well and good in itself. However, the neocons’ efforts have meanwhile squandered immense amounts of fiscal, political, and diplomatic capital. And these efforts have played out (not coincidentally) as global energy streams are drying up. America’s power elites bet the farm on the neocons and lost. There can be no second chance. A recovery of America’s former position of unquestioned dominance, enjoyed until only years ago, is simply not in the cards. The best that can be hoped for is a partial re-consolidation based on withdrawal and reconciliation abroad, and massive inflation at home. This is a reversal of truly historic proportions.

The danger, of course, is that the neocons may be unwilling to surrender without a fight, and the casualties of that fight could conceivably number in the millions.

In short, we are witnessing nothing less than the beginning of the disintegration of the American empire abroad, and of long-standing national economic and political structures at home. It is important to avoid overstatement: the US is still an immensely powerful nation militarily and economically, and one that yet commands respect in at least some quarters. But the degree of the recent erosion of that respect, while difficult to quantify, is nevertheless considerable and unprecedented.

* * *

With the decline of Washington’s “full-spectrum dominance,” we are seeing the emergence of countervailing power blocs, primarily in Asia but also in South America. Liberal pundits have sometimes mocked Bush’s campaign promise to be “a uniter rather than a divider,” claiming that the president’s policies are effectively uniting the rest of the world against the US. There is more than a little truth to this.

This is the end of an era. And the transition toward whatever stable geopolitical arrangements are yet to come is likely to take some time and to be extremely dangerous and messy. If you want to understand the progress of that transition, follow the energy.

Richard Heinberg, a journalist and educator, is a member of the core faculty of New College of California in Santa Rosa, where he teaches a program on Culture, Ecology, and Sustainable Community. He writes and publishes the monthly MuseLetter.