The Energy Wars
The rise of a new global energy elite means high oil and gas prices are here to stay.

WEB-EXCLUSIVE COMMENTARY
By Michael Hirsh
Newsweek
Updated: 6:55 p.m. ET May 3, 2006
May 3, 2006 - It is a mantra of the globalization crowd. In today’s global economy, we are told, all that really matters is which country produces the best brains and skills. The world is flat, after all. The playing field is leveled. Wrong, wrong and wrong. What also matters, we are learning, is who controls the world's energy resources. Evo Morales's abrupt decision earlier this week to nationalize Bolivia's natural-gas industry was only the latest worrisome move in a long-term trend. Morales, a leftist elected president last December, was apparently influenced by a meeting he had in Havana last Saturday with Venezuelan President Hugo Chavez, who's rocketed to international prominence by doing much the same thing to his country's oil industry. President Chavez, sitting atop his growing pile of petrodollars, has gleefully thumbed his nose at Washington’s efforts to rein him in. Similarly, Iranian President Mahmoud Ahmadinejad is defiantly enriching uranium and sneering at Western threats of sanctions. And he obviously thinks he can, perhaps because no one is threatening to cut off Iran's oil exports as part of the forthcoming sanctions plan.

The would-be czar of this new global energy elite is Vladimir Putin. Having spent the better part of his six years in office wresting control of his nation's vast oil and gas resources, the Russian president is now playing a brass-knuckle game of power politics. When Putin partially cut off gas supplies to Ukraine and therefore to Western Europe in the first three days of the year—mainly to bully Ukrainian President Viktor Yuschenko into taking a lower price—the European Union went into a state of near panic. According to the Energy Charter Secretariat in Brussels, by 2020 the Western Europeans are expected to get half their gas from Russia, which commands 28 percent of world gas reserves, more than any country in the world. Suddenly the Europeans realized there weren’t that many alternative suppliers. Putin’s Kremlin-controlled gas monopoly, Gazprom, has hired German Chancellor Angela Merkel's predecessor, Gerhard Schröder, as a consultant. Gazprom deputy CEO Alexander Medvedev admitted at an economic forum earlier this month that even Britain’s flagship utility, Centrica, should be considered a potential takeover target. "With our present financial strength, it is very difficult to find a company which is not on our watch list," he said.

What does all this geostrategic strutting have to do with soaring prices at the gas pump? For one thing, the uncertainty created by Iran, Iraq and Venezuela has added a $10-$20 risk premium to the price of oil per barrel, according to Wall Street analysts. The politics of energy also doesn't bode well for future prices, as U.S. Secretary of Energy Sam Bodman seemed to suggest last weekend when he said Americans might have to get used to paying $3-plus per gallon for gasoline.

Today, oil and gas experts around the world are growing alarmed not just at future scarcity—the idea that the world may have hit “peak oil” seems to be taking hold—but at who's in control of the precious stuff. As demand for energy explodes worldwide, there is less of it available and less exploration for it. That is partly because of a dropoff in investment created by the decline in oil prices in the '90s. But it is also because multinational corporations like ExxonMobil (despite its record profits) now own just 6 percent of supplies, versus a whopping 77 percent that's now owned by state-owned entities, according to the Petroleum Finance Corp., a Washington-based consulting group. State control guarantees less efficiency in the exploration for oil, and in the extraction and refinement of fuel. Further, these state-owned companies do not divulge how much they really own, or what the production and exploration numbers are. These have become the new state secrets.

Quietly an understanding of this power shift in the world is growing in Washington, as well. The price shock after Hurricane Katrina, especially—not to mention the plummeting poll numbers that followed for Bush—led administration officials to understand just how fragile U.S. economic security has become because of energy. Nothing quite like it has happened since the 1973 OPEC embargo. Administration sources say the Katrina effect, as well as concern over moves by Chavez, were mainly behind Bush's surprising call for an end to "America's oil addiction" in his State of the Union address last January. At the same time, U.S. officials have come to realize that there is deep anger and enmity in the Kremlin against the United States (particularly over U.S. efforts to win Ukraine and Georgia to the West), and that Putin has his own agenda. One example: even as Moscow has joined the Western effort to confront Tehran over its nuclear program, Russia and Iran are taking a unified stand in resisting a U.S. effort to build a trans-Caspian pipeline that would reroute gas out of the Russian system to Baku, Azerbaijan.

Putin has long been nursing ambitions of using Russia's vast oil and gas supplies as an instrument of power. In the mid '90s, after 15 years in the KGB, Putin went back to school, attending the St. Petersburg Mining Institute. He wrote a dissertation titled "Toward a Russian Transnational Energy Company." The topic: how to use energy resources for grand strategic planning. There is reason to believe that Putin's highly publicized confrontation with Mikhail Khodorkovsky, the former owner of the defunct Yukos—the last of the big private energy concerns in Russia—was about much more than wresting political power from the so-called oligarchs, former apparatchiks who gained control of Russia’s resources after the Soviet Union’s collapse. Putin is not known to be personally corrupt, or even particularly power-hungry. What he is hungry for—and indeed has been since he was elected in 2000—is a restoration of Russia's power and influence. Some observers believe that Putin's trumped-up arrest of Khodorkovsky—who will be spending the next few years in a Siberian labor camp—was mainly about taking control of the energy sector, rather than edging aside a political rival.

It is tempting to say that oil and gas have become the new strategic weapons of the 21st century. But in one crucial respect that is not true. As Putin discovered from his aborted effort to cut off Ukraine’s gas—and as even Ahmadinejad is learning—when you threaten to cut off your customers, you only cut off your own nose. You have to sell oil to someone; otherwise crude is just black muck. Where the control of energy counts is in accumulating wealth, and therefore power and influence. As former U.S. under secretary of State Marc Grossman says, "The question is what are they doing with the money."

The Bush administration may think it has one trump card in Iraq. U.S. interests obviously lie with the vast proven and potential Iraqi oil fields, said to be the world's largest. The Iraqi oil ministry has signed about 40 memorandums of understanding, many with U.S. companies, according to industry sources. Under them, the majors such as ExxonMobil, Chevron and ConocoPhillips are giving technical advice "free" to the ministry (a typical get-in-the-door strategy for the industry). Challenged at a congressional hearing in March, CENTCOM commander Gen. John Abizaid was frank in suggesting that, while oil was not the reason America went to war, it may provide a critical reason for staying. "The United States and its allies have a vital interest in the oil-rich region," Abizaid said. "Ultimately it comes down to the free flow of goods and resources on which the prosperity of our own nation and everybody else in the world depend."

But after three years of explosive anger against the U.S. occupation, it would be foolish to think that the Iraqi government, too, won’t catch the nationalist bug that’s spreading worldwide, in what appears to be an outgrowth of both antiglobalization sentiments and anti-Americanism. “I think the likelihood is high that American companies will have some significant position in Iraq,” says J. Robinson West, head of Petroleum Finance Corp. “On the other hand I think it’s highly unlikely that the petroleum sector will be dominated by American companies. We really didn't go to war over oil, and I think at this late date we don't want to make it look like we did.” ExxonMobil spokesman Russ Roberts adds, "The Iraqi oil belongs to the Iraqi people. If the Iraqi people determine that they want the help of international oil companies in developing their resources, then ExxonMobil would certainly be interested in participating."

What does it all mean? "Welcome to the age of energy insecurity," says West, a former Reagan administration official (and friend of Dick Cheney's, the man who once dismissed energy conservation as a "personal virtue"). "Worldwide production will peak. The result will be skyrocketing prices, with a huge, sustained economic shock. Jobs will be lost. Without action, the crisis will certainly bring energy rivalries, if not energy wars. Vast wealth will be shifted, probably away from the U.S. For the last 20 years, U.S. policy has discouraged production and encouraged consumption. If we dither any more, we will pay a terrible price, the economic equivalent of a Category 5 hurricane. Katrina was Category 4."

Washington appears as helpless in preparing for this crisis as it did in anticipating Hurricane Katrina. As we have seen in recent weeks, Congress is still dithering over such silly proposals as a $100 rebate to gasoline customers. But Republican leaders are balking at sponsoring proposals that could really make a difference, like a new gasoline tax that would change U.S. consumption habits and a serious increase in CAFE (corporate average fuel-economy) standards, which require automakers to meet an average mileage requirement. With the GOP facing a bitter fight for control of the Congress later this year, such measures are considered too politically painful. There could be a lot more pain for Americans down the road, however, at the hands of Putin and his energy-rich allies.

© 2006 Newsweek, Inc.