Energy security and global politics: the militarization of resource management

Energy Security and Global Politics

This book analyzes the strategic dimensions of energy security, particularly where energy resources may become the object of military competition. The volume explores the diverse risks that may arise from conditions of increasing economic competition and resource scarcity, and the full range of problems that may follow if major producers or consumers of energy lose confidence in the equity and efficiency of the market, and resort instead to the use of force to secure access to energy. It surveys the strategic outlook of both producer and consumer states, with emphasis on nations or regions (Central Asia, Russia, China, Venezuela, the Persian Gulf) where unstable or rapidly evolving political conditions may undermine the currently prevailing market consensus. It also examines the role of the United States as the chief guarantor of the global economy, and the challenge this unique role poses for its exercise of military power. The book contends that while the global energy market may be largely self-regulating, it is not self-defending. A failure to consider how it can be most effectively defended from emerging and potential challenges merely heightens the risk that those challenges may some day become real. This book will be of interest to students of energy policy, international security, US foreign policy and international relations in general. Daniel Moran is Professor of International and Military History at the Naval Postgraduate School in Monterey, California, where he directs the doctoral program in Security Studies. James A. Russell is a senior lecturer in the Department of National Security Affairs at the Naval Postgraduate School in Monterey, California.

Routledge global security studies Series editors: Aaron Karp, Regina Karp and Terry Teriff

1 Nuclear Proliferation and International Security Sverre Lodgaard and Morten Bremer Maerli 2 Global Insurgency and the Future of Armed Conflict Debating fourth-generation warfare Terry Terriff, Aaron Karp and Regina Karp 3 Terrorism and Weapons of Mass Destruction Responding to the challenge Edited by Ian Bellany 4 Globalization and WMD Proliferation Edited by James A. Russell and Jim J. Wirtz 5 Power Shifts, Strategy and War Declining states and international conflict Dong Sun Lee 6 Energy Security and Global Politics The militarization of resource management Edited by Daniel Moran and James A. Russell

Energy Security and Global Politics The militarization of resource management

Edited by Daniel Moran and James A. Russell

First published 2009 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business

This edition published in the Taylor & Francis e-Library, 2008. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2009 Selection and editorial matter, Daniel Moran and James A. Russell; individual chapters, the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-203-89283-6 Master e-book ISBN

ISBN10: 0-415-77638-4 (hbk) ISBN10: 0-203-89283-6 (ebk) ISBN13: 978-0-415-77638-7 (hbk) ISBN13: 978-0-203-89283-1 (ebk)

Contents

List of contributors Acknowledgments Introduction: the militarization of energy security

vii viii 1

DANIEL MORAN AND JAMES A. RUSSELL

1 The battlefield and the marketplace: two cautionary tales

19

DANIEL MORAN

2 Petroleum anxiety and the militarization of energy security

39

MICHAEL T. KLARE

3 Al-Qaeda, oil dependence, and US foreign policy

62

PETER HAYNES

4 Gulf oil and international security: can the world’s only superpower keep the oil flowing?

75

DUANE CHAPMAN

5 Regional issues and strategic responses: the Gulf states

95

SAAD RAHIM

6 Energy security: the Russian connection

112

AMY MYERS JAFFE AND RONALD SOLIGO

7 Central Asia: energy resources, politics, and security

135

THOMAS H. JOHNSON

8 Maintaining Gazpromistan: the politics of Turkmen gas exports CHRISTOPHER BOUCEK

155

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Contents

9 Energy security: the case of Venezuela

175

HAROLD A.TRINKUNAS

10 Chinese energy security and the Chinese regime

188

JACQUELINE NEWMYER

11 Resource mercantilism and the militarization of resource management: rising Asia and the future of American primacy in the Persian Gulf

211

FLYNT LEVERETT

Index

243

Contributors

Christopher Boucek is Lecturer in the Woodrow Wilson School of Public and International Affairs at Princeton University, Princeton, NJ. Duane Chapman, who died in July 2007, was Professor Emeritus of Environmental Economics at Cornell University, Ithaca, NY. Peter Haynes is a Captain in the United States Navy, and a Doctoral Candidate in Security Studies at the Naval Postgraduate School, Monterey, CA. Amy Myers Jaffe is Wallace S. Wilson Fellow in Energy Studies at the James A. Baker III Institute for Public Policy, Rice University, Houston, TX. Thomas H. Johnson is Research Professor of Central Asian Security Studies at the Naval Postgraduate School, Monterey, CA. Michael T. Klare is Five College Professor of Peace and World Security Studies, based at Hampshire College, Amherst, MA. Flynt Leverett is Senior Fellow and Director of the Geopolitics of Energy Initiative at the New America Foundation, Washington, DC. Daniel Moran is Professor of International and Military History at the Naval Postgraduate School, Monterey, CA. Jacqueline Newmyer is President of the Long Term Strategy Group in Cambridge, MA. Saad Rahim is a consultant on politics and energy, currently working with Chevron Corporation, San Ramon, CA. James A. Russell is Senior Lecturer in Middle Eastern Security Studies at the Naval Postgraduate School, Monterey, CA. Ronald Soligo is Professor of Economics at Rice University, Houston, TX. Harold A. Trinkunas is Professor of Latin American Security Studies at the Naval Postgraduate School, Monterey, CA.

Acknowledgments

The papers assembled in this volume originated as contributions to a conference on “The Militarization of Energy Security,” held at the Naval Postgraduate School in Monterey, California in November, 2006. It is a pleasure to acknowledge the support of the Long Range Analysis Unit of the National Intelligence Council, which sponsored the conference, and especially that of Mat Burrows and Paul Hermann, whose encouragement and engagement were essential to the project’s success. It goes without saying that the views expressed in the chapters that follow are those of the individual authors. Nothing in this book has been reviewed or endorsed by the National Intelligence Council, the Department of Defense, or any other government agency. Daniel Moran James A. Russell December 2007

Introduction The militarization of energy security Daniel Moran and James A. Russell

A series of strategy documents promulgated by the last three American administrations all note the decreasing prospect of large-scale interstate conflict.1 It is becoming increasingly difficult to imagine realistic scenarios of conventional conflict along the lines of the world wars. Needless to say, this does not mean that violent conflict will cease to trouble the world community. Warfare associated with the fragmentation of states, clashes among warlords and other shadowy contestants for political and economic influence, and attempts by the developed world to suppress dangerous behavior by states operating outside accepted international norms – all remain familiar in the present, and likely in the future. There is no question that violence of this lesser and still familiar kind can imperil the stability of the international system as a whole. Yet it is able to do so only by virtue of the reactions it may inspire among the system’s strongest members. In the final analysis a crisis among such states can only be brought about by their own actions. The only way for “rogue states” and “non-state actors” to achieve true strategic leverage is to induce the most powerful members of the system to act in ways that are self-defeating, even if they are not foreseen as such. It is also possible, of course, that states with a presumptively strong stake in preserving international order may conclude that the system no longer serves their interests, and that it is better to risk overturning it by force than to suffer a diminution of their role or prospects. Recent history suggests that the chances of such a miscalculation are not large, however. Since 1945 war has been fought exclusively by or against inferior powers and revolutionary insurgencies with limited military potential. Although the results have often been appalling in human terms, the impact of such violence on global order has been far below what would be expected of general war, or required to incite it. The Cold War provided many opportunities for the United States and the Soviet Union to fight each other. They never did, preferring instead to underwrite proxy wars conducted on terms calculated to limit the impact on the superpowers’ bilateral relationship. Even in its death throes the Soviet Union did not attempt to save itself by rolling the iron dice of war, an expedient well known among doomed regimes of the past. There is little doubt why this happened: the

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world wars had demonstrated, beyond the illusions of even the most ideologically befuddled statesmen, that the consequences of modern war between advanced societies dwarf any prospective benefits. The spread of nuclear weapons has strongly reinforced this conclusion. This book does not seek to challenge the prevailing consensus that large-scale conflict among developed states has become unlikely. Its aim is rather to reflect upon conditions in the one area of international life where serious observers still regard it as possible: energy security. It is in the energy sector that strategic planners now find it easiest to imagine major states reconsidering their reluctance to use force against each other. “Energy security” is now deemed so central to “national security” that threats to the former are liable to be reflexively interpreted as threats to the latter. In a world in which territorial disputes, ideological competition, ethnic irredentism, and even nuclear proliferation all seem capable of being normalized in ways that constrain the actual use of military force, a crisis in the global energy supply stands out as the last all-weather casus belli when the moment comes to hypothesize worst-case scenarios. This is not a reason to assume that wars over energy are more likely now than in the past. Precisely because such conflicts have been limited and rare up to now,2 there is good reason to be cautious about estimating their likelihood in the future. The probabilities are further muddled by the fact that over-emphasis on the possibilities for great-power conflict favors important, and generally conservative, institutional interests within the defense establishments of developed states, particularly the United States. In a security environment that presents increasingly strong incentives to shift force-structure and doctrine toward irregular warfare, counter-terrorism, constabulary operations, and so on, the possibility of war to seize or defend energy resources provides a muchneeded rationale for preserving the heavy conventional forces that still consume the lion’s share of defense spending around the world. This is especially true of naval building programs, whose ostensible purpose is always presumed to include securing the sea-lines of communication that connect the producers and consumers of oil.3 The prominence of energy security to military planning and budgeting may be exaggerated compared to its real salience internationally. Yet the anxiety that this issue is capable of inspiring is itself a measure of its significance, irrespective of any estimate of the probabilities. There were only two world wars in the entire twentieth century, after all, yet that is scarcely a reason to discount their importance. The possibility that access to energy resources may become an object of large-scale armed struggle is almost incontestably the single most alarming prospect facing the international system today. The political stability of advanced societies, and the continued prospects for economic and social improvement in developing countries, are both irreducibly dependent on avoiding such a conflict. Like all international markets, the market for energy is sensitive to war and upheaval, whatever the cause. Energy markets are efficient at discounting risk, and there is a long history of price spikes and shortages whenever political insta-

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bility and large-scale violence, chiefly but not exclusively in oil-producing regions, threatens established patterns of production and consumption. The world today is witnessing this time-honored phenomenon in reaction to the US invasion of Iraq, and to political turbulence in crucial producing states like Nigeria and Venezuela. Strategic planners in the United States and elsewhere are well aware of the degree to which the effect of military operations on the price and supply of oil and natural gas needs to be considered in their work; though the result is not necessarily improved clarity of vision. One of the early rationales advanced in favor of the US invasion of Iraq, after all, was that “regime change” there would allow Iraq to pump more oil, thereby reducing the dependence of world markets on Saudi production, a sadly fanciful idea that shows no prospect of being realized any time soon. Nevertheless, issues of this kind are only a secondary concern of this volume. Its interest is less in the impact of international violence on energy supplies, than on the impact of changes in the supply of energy on patterns of international conflict and alignment, and on the strategic behavior that underlies these. This project does not seek to estimate the likelihood of a major strategic crisis arising in the energy sphere. It seeks instead to survey the range of considerations that might bring such a crisis about. Its concern is with the issues that may arise if control of energy resources, or the rights of buyers and sellers in the energy marketplace, become explicit objects or tools of strategic coercion, either by governments or by others who may be able to seize control of them. Energy resources may become casus belli in themselves; or they may be viewed as alternatives to the use of force by governments, who persuade themselves that wielding the “energy weapon” will somehow obviate or substitute for the use of real ones. Either way, the prospects for global order are sufficiently daunting to bear careful consideration.

“Peak oil” Oil, which sits in the foreground of the global energy picture, is a finite resource. Much remains to be discovered about the ultimate extent of global petroleum reserves, and about the economics of their exploitation. In the final analysis, however, there is no disputing that the world’s supply of oil must be depleted sooner or later. This fact casts its shadow over strategic calculations in the energy sphere. Experts disagree about when what has come to be called “peak oil” will arrive.4 Some hold that it is already behind us – that we have already used up half of mankind’s natural endowment of oil, and are on the downward slope of a curve whose theoretical bottom represents the absolute disappearance of oil as a natural resource. Most experts reject this idea, however, and in recent years estimates of available reserves have pushed the hypothetical peak of oil farther into the future, generally beyond the 20- to 50-year horizon that constitutes the practical limit of even the most ambitious strategic planning. In reality the true moment of peak oil is likely to be apparent only in

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retrospect. At the same time, its looming presence somewhere over history’s horizon seems equally certain to be priced into the market before it actually arrives. The idea of peak oil is already becoming established as a subtext or unspoken assumption among strategists and policy-makers, and reinforces the tendency to see the energy sector as one in which particularly critical threats are liable to arise. In this sense the timing of peak oil is less significant than the strategic inferences that thinking about it and getting ready for it may inspire. Peak oil also has a derivative meaning that strategists must struggle to take into account. In theoretical terms peak oil means simply that oil ceases to be useable for present human purposes. The simplest reason for this would be that the world’s supply of oil dries up – peak oil in its most immediate sense. But mankind might reach comparable conditions by a different avenue, should conditions arise that cause all the environmental externalities associated with the use of carbon-based energy to get priced into the energy market. Energy markets in the industrial era have invariably failed to reflect the true immediate and longterm social costs incurred by mankind’s ferocious hunger for carbon-based fuels, costs that have only recently become apparent, and are now accumulating at a rapid rate. In the same way that estimates of world oil reserves have so far proven to be too pessimistic, estimates of measurable environmental effects linked to climate change have proven no less consistently optimistic. If the graph of peak oil has moved consistently “to the right” by virtue of the accumulation of new scientific knowledge,5 the metrics of impending environmental crisis have all moved no less consistently “to the left” for the same reason.6 Even granting the significant uncertainty that prevails in both areas, it is easy enough to imagine a cross-over point at which the environment impacts of fossil-fuel consumption (a category that includes coal, biomass, and natural gas as well as oil) begin to register in strategic terms, so that a condition akin to “virtual peak oil” is reached well in advance of the real thing. From a market perspective there are risks on both sides of the peak-oil problem. A nation that preemptively abandons a petroleum-based economy before others do may incur additional short-term costs, as an early adopter of new and unproven technologies that place it at a disadvantage relative to competitors that hold on longer to what is still cheap and familiar. A nation that waits too long may find itself paying premium prices for a commodity that has become too scarce to burn, but must be rationed for other, more specialized purposes. The risks associated with “virtual” peak oil also include the possibility that states will attempt to coerce each other to reduce their consumption of fossil fuels (and the resulting carbon emissions), in effect redefining environmental pollution as a form of international delinquency, perhaps even as “aggression,” toward which a strategic response is warranted.

Trusting the market One reason that such seemingly remote anxieties have crept into the foreground of contemporary strategic thinking is uncertainty about whether such problems

Introduction

5

can be adequately addressed in the marketplace. The fact that strong states have been prepared to trust their energy security to the workings of international markets is testimony to their faith in the efficiency of those markets, and to their belief that the costs of war aimed at controlling energy resources would be so great as to outweigh the benefits. In these terms “trusting the market” has made profound strategic sense, and it may continue to do so indefinitely.7 Yet it is important to recognize that the complexity of the problems the market is being trusted to solve is destined to increase. Until now energy markets have been expected to do no more than ensure that supply kept up with demand, and that prices remained within a range that buyers and sellers could tolerate. If it is true that oil may eventually become too expensive to use for energy on the current scale, whether because too scarce or too toxic, then the market must gradually learn to do more. It must drive the price of oil up at a rate that provides adequate incentives for the development of alternative fuels – a development that the producers of oil can be expected to use their market position to resist. It must also do this at a rate that is sufficiently smooth as not to dislocate too severely established patterns of consumption in the developed world, nor thwart too severely the aspirations of those who hope to join that world some day. It must also proceed sufficiently rapidly to forestall the advent of “virtual” peak oil. Such would be the ideal market solution to the array of energy-related problems that currently confront mankind. It is, by any reckoning, the best-case scenario; which may be reason enough not to cling to it too strongly. It certainly begs the question of what kinds of non-market strategies, if any, might be adopted to hedge against its failure to come to fruition. No one can say for sure whether this sort of juggling act is beyond the power of what Adam Smith called “the invisible hand.” But it is most assuredly a more complicated trick than it has performed recently. The replacement of oil by other energy forms is nothing like the replacement of radio by television, owing to the complexities of the social arrangements and cultural attitudes that are necessarily arrayed around the way mankind consumes energy. The only comparable example is the Industrial Revolution itself, during which “the market” was asked to escort Western civilization across the rickety, fog-shrouded bridge that connected its agrarian, wood-fueled past to an industrial, fossil-fueled future – a future in which the early advocates of free markets were sure the natural partnership of peace and prosperity would triumph over the mercantilist obscurantism of the past. That future may yet come. But it is not here yet. The militarization of energy security requires, in the first instance, that something must change that would cause major participants in the energy market to reject their well-grounded calculation that war for energy (or any merely economic advantage) does not pay. High energy prices would be a likely, but probably not a sufficient, motivation for such a change. In addition, governments would have to believe that the normal mechanisms by which prices adjust to changes in supply and demand had broken down, or were on their way to doing

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so. Prices in any market demonstrate three basic tendencies: short-term volatility, medium-term momentum, and long-term reversion to the mean. The meaning of these terms varies depending on what is being bought and sold, but their operation is apparent across an enormous range of economic phenomena. They represent, collectively, the self-modulating action of supply and demand, which is the economist’s equivalent of the law of gravity. From the point of view of those who seek to make money in a marketplace, the first two tendencies – volatility and momentum – are of the greatest interest, since it is by mastering these that one has the best chance to “buy low, sell high.” For strategists, however, it is “mean reversion” that matters most, because this longer-term mechanism provides reassurance during periods when volatility and momentum carry prices and supplies to uncomfortably high or low levels. In recent history, international acceptance of the now-irrelevant Organization of Petroleum Exporting Countries (OPEC) price basket represented an attempt to manage mean reversion, by way of acknowledging the legitimate requirement of producing states that the price of their product be both reasonable and predictable. Mean reversion does not require that prices fluctuate in perpetuity around a flat line. On the contrary, the prospect of peak oil (real or “virtual”) implies that mankind as a whole has a positive interest in getting the line to slope upward at a tolerable rate. But mean reversion does require that aggregate price movements describe a relatively smooth trend, whose variance is markedly less than that displayed by short- and mid-term price changes. Such relationships are no more than mathematical models, which can be calculated in different ways. For our purpose it is not the precise calculation but the general idea that matters, and specifically the military and political consequences that may follow if this general idea is abandoned. Oil prices have more than doubled in the last three years. This development is largely attributable to military and political events that were not widely foreseen, and by no means inevitable. Having occurred, however, there is no assurance that prices will ever revert to the old mean. Before 2003 oil traders regarded $20 per barrel as the trend around which short-term volatility would revolve. Lately the consensus has shifted closer to $40 or $50, an increase of 100 percent or more in the perceived trend in three years. Should this wave-like process of periodic doubling continue at anything like a comparable pace in the future, it seems certain that questions about the market’s ability to revert to historical norms will grow more urgent among the major consumer states.8 What kinds of events or forces might cause governments to conclude that energy prices or supplies will not revert to their established trend? Whatever they may be, it is safe to say they need not be dramatic in themselves. It is most likely that the militarization of energy-resource management will occur as a series of small iterative calculations conceived in response to limited crises or opportunities, each of which will erode the willingness of other participants to trust the market going forward. To speak of militarization as a general phenomenon it is necessary to imagine that such activity reaches a scale at which the normal operation of energy markets is compromised. The possibilities that

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matter need not entail catastrophe in themselves; but they must envision strategic intervention on a scale that is not incidental, and calls into question the future vitality of the market as a whole. A representative list of possibilities would include: • • •

• •

• • •

Direct seizure of energy assets by military means. Destruction of energy assets to deny their use to rivals. Military confrontation arising from competitive efforts to exploit new energy resources on the high seas, where legal claims of sovereignty are absent; in archipelagic regions like Southeast Asia, where they are routinely contested; or in the Arctic and Antarctic, where they are subject to treaty regimes whose resilience has not been seriously tested. Indirect control of energy assets through the creation of puppet states. Military protection of, or attacks upon, the energy production and transportation infrastructure, including oil fields, refineries, pipelines, port facilities, and so on. Active military control of international straits through which energy assets move. Development of exclusive energy trading blocs, reminiscent of the systems of “imperial preference” that existed before 1945. Conveyance of major military assets to regional energy producers in exchange for preferential market treatment, or with a view to enabling them to impose themselves upon neighboring states.

Most of the possibilities on this list are not strategically distinctive in themselves. Even those that are most obviously lamentable – the establishment of puppet regimes, or the transfer of military assets to potentially dangerous clients – are sufficiently familiar that they do not pose a prima facie threat to global stability. The unique problems that will arise from the militarization of energy resources only become apparent when these kinds of actions are envisioned as occurring in a context in which the stability of energy supplies is also recognizably at risk. In such circumstances the great difficulty, from the point of view of both analysis and action, is to account for the enormous range of secondary effects that may follow once force is used on a significant scale. It must be assumed, for instance, that war by a major power to protect or to interfere with energy supplies would coincide with, or inaugurate, a period of sharply declining performance by the world economy, a development whose effects would be felt by the states immediately concerned, and also by potential opponents, collaborators, and by-standers. In general, the militarization of energy security needs to be envisioned as occurring within a context of strategic anxiety and severe economic stress, in which economic productivity is far below what people are used to, and in which the perennial peacetime trade-offs between guns and butter had become correspondingly more contentious. Such conditions have arisen before, in the 1930s, when the developed world’s demand for security increased rapidly,

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under conditions that made the relative social cost of that security extremely expensive. It remains difficult to this day to see how war could have been avoided under such circumstances. The relationship between spiraling energy costs and global stability – social, political, and strategic – are not easy to anticipate in detail. On the whole it is reasonable to assume that the West and the rest of the developed world will be in the best position to afford higher costs. But they may also be the most susceptible to the pressure of public opinion and powerful economic interests. They also possess the most formidable military resources with which to intervene in the market, should they wish to do so. Developing states that are consumers of oil probably have the least leverage in market terms; but this may only make them more willing to choose the military option in moments of desperation. Such states are often disconnected from, and even hostile to, those features of economic globalization that are driving growth and development elsewhere, and may feel that they have little to lose in challenging a system that is failing them in any case. Oil-producing states can benefit from high prices only as long as demand does not collapse, or become translated into calls for direct action outside the boundaries of the market. In the latter case they can be expected to seek the protection of more powerful consumer states. Indeed, the emergence of such relationships, in anticipation of a deteriorating energy market, is one of the more likely ways in which the militarization of energy security may unfold. A state that chose a militarized energy strategy would of course need to consider that other states might gang up against it, and that it might risk being excluded from other markets in which it might have preferred to continue to participate. Nothing of strategic significance that happens in the world of energy can realistically be considered without simultaneous reference to the workings of global financial markets, a realm in which the United States occupies a position comparable to that of the Middle East with respect to oil. States need energy not for its own sake, but in order to be able to make things to consume and to sell. This means they also need customers, investors, and creditors, all of whose reactions must be taken into account in order to obtain a complete strategic picture of what the militarization of energy security would entail. The strategic complexity that surrounds the problem of energy security arises mainly from the need to understand these second-order interactions, whose daunting appearance is not an illusion. The militarization of energy resources would involve a general retreat from “globalization,” a process whose inexorability is too readily taken for granted by policy-makers. The dynamics of globalization are routinely characterized as tending to diminish the influence of states, whose preeminence as shapers of the international order is being reduced by the rising power of multinational corporations, global financial and commodities markets, new information technologies, and so on. It is important to recognize, however, that the basic enabling conditions that allow these institutions and processes to operate – enforceable contracts, liquid currencies, and the physical security of the great global commons (air, sea, and space) – are created and maintained by governments. While states may not have the means to control all

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the results of the processes that they have enabled, they most certainly have the means to bring those processes to an end by withdrawing the juridical and security guarantees that make them possible.

Energy security and the “war on terror” The international energy market has always rested on the possibility that major market participants might be required to use force to defend or manage its operation. The prospect was made plain even before the end of World War II, when Franklin Roosevelt took it upon himself to guarantee the territorial integrity of Saudi Arabia, by way of securing its cooperation in the orderly production of oil in line with American requirements.9 The energy market has never been immune to political and strategic influence. Oil has been used as a “weapon” in the past, and its price (along with that of natural gas) is reflective of a range of political pressures to which a perfectly efficient, strategically agnostic market would be indifferent. Nevertheless, the un-coerced, non-violent interaction of buyers and sellers has been the primary determinant of how energy resources have been produced and consumed throughout the period when those resources have traded freely in global markets – roughly since the final unraveling of European empires, and the emergence of the United States as a net importer of oil. If this situation were to change, such that the strategic interactions of governments and other contestants for political power were to prevail over the commercial interactions of buyers and sellers, a great deal else would change as well. It is thus reasonable to ask who, among present-day occupants of the international stage, would like to see a great deal changed? to which the immediate answer would obviously be the ramshackle assemblage of rogue states and revolutionary movements whose machinations consume such a disproportionate share of time and attention from the defense establishments of the world. As noted earlier, energy security looms large in the strategic planning of advanced societies in part because, to the extent that it holds out some prospect for the resumption of major interstate war, its requirements make it easier to justify cherished force structures and budgets. Yet military planners and civilian strategists are also inclined to point to the potential threat that terrorists and other disenfranchised groups pose to global energy markets; and indeed they have good reason to do so. That terrorists and their ilk are interested in attacking energy-related targets is hard to dispute. A review of data compiled by the National Memorial Institute for the Prevention of Terrorism, or MIPT, indicates that terrorist groups mounted at least 330 attacks against oil and gas facilities around the world during the period 1990–2005.10 Most of these incidents occurred in eight countries: Iraq, Russia, Colombia, Ecuador, Philippines, Turkey, Pakistan, and Algeria. Since the American invasion of Iraq insurgents have systematically attacked the country’s oil export terminal at Basra, various oil pipelines traversing Iraq, and the electrical power grid. These actions have been a serious complicating factor in restoring Iraqi oil production to its pre-war level.11

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The congruence between terrorist stomping grounds and the world’s major energy-producing regions is apparent. The world’s most celebrated international renegade, Osama bin Laden, casts the West’s consumption of Persian Gulf energy as a central part of a complicated narrative that features the plundering of the Middle East’s riches.12 In a videotape released on the fifth anniversary of the September 2001 attacks, his deputy Ayman al-Zawahiri repeated accusations that the West is stealing Muslim oil, and called for stepped-up attacks in the Gulf.13 Islamist insurgents appear to have taken these calls at least somewhat to heart, and have mounted episodic attacks against energy targets. In the summer of 2002, Saudi authorities arrested a group of militants plotting to sabotage the Saudi offshore oil terminal (the largest in the world) at Ras Tanura.14 Later that year, in October 2002, the French supertanker Limburg was rammed off the coast of Yemen by a small boat loaded with explosives.15 In April 2004 Iraqi insurgents attacked Iraqi oil terminals at Khor al-Amaya and Basra and shut down the terminals for two days.16 In February 2006, the Saudis thwarted an attack on the oil-processing facility at Abqaiq and later seized 1.5 tons of explosives that were to have been used in additional attacks on oil facilities.17 In September 2006 security officials in Yemen successfully prevented attacks against oil installations at the port of Dubba and the refinery at Mareb.18 In the fall of 2006, the Royal Navy released a warning to all merchant vessels in the Gulf to be on the alert for suspicious activities.19 It is an alarming picture; yet the consequences of all these actions combined have barely ruffled the consciousness of world opinion, because their material effects have been so small. Nor are the motives that would lead terrorists to choose such targets necessarily easy to discern. In this connection it is worth distinguishing between the motives of revolutionary insurgents seeking to overthrow a particular government, for whom attacks on energy infrastructure may make perfect sense in instrumental terms, and those who wish somehow to direct hammer blows against the inequity of the world system as a whole. It is the latter group whom men like bin Laden and al-Zawahiri purport to lead, and for them the energy sector presents a puzzle. To the extent that terrorists operate according to the same kind of instrumental rationality that motivates other strategic actors,20 their reasons to attack energy assets would presumably be to inflict harm on their adversaries, and to draw attention to their cause by way of demonstrating competence and attracting recruits. In the energy arena these things can be accomplished in two general ways: by attacking major oil-production and refining nodes; or by disrupting the transportation of oil through critical chokepoints like the Strait of Hormuz and the Bab el Mandeb, or (more plausibly) via the network of oil and natural-gas pipelines throughout the Middle East and Central Asia. Both are possible, but both also present serious obstacles if the aim is to achieve sustained, strategiclevel effects that would disrupt the functioning of global energy markets. The impact of terrorist attacks on energy targets has been negligible until now. While the (unsuccessful) Qaeda attack on the Saudi oil-refining facility at

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Abqaiq in February 2006 resulted in a $2-per-barrel price increase overnight, the market soon recovered its equilibrium.21 Despite repeated attacks in South America by various groups on energy targets in Colombia, Venezuela, and Ecuador, markets have had little difficulty dealing with the resulting short-term perturbations. It also goes without saying that producing states take the security of their single most valuable asset quite seriously. The Saudi refining complex at Abqaiq and its export terminal at Ras Tanura are said to be among the bestdefended civilian facilities in the world. By some lights the formidable nature of such places might be a reason to attack them.22 A successful attack against a “hard” target like Abqaiq would test the operational limits of a group like al-Qaeda, but it would pay off dramatically in increased prestige, both in general and among the disenfranchised Muslim youth who constitute its main recruiting base. It could also set in motion excessively violent or otherwise self-defeating reactions among oil-consuming states, which the perpetrators might be able to exploit to their advantage, assuming they were not destroyed in the process. Yet a failure would be no less conspicuous, and while it may be true that there is no such thing as bad publicity, a moment comes when even the most unconventional strategic actor must be able to show that it can connect actions and results in some meaningful way. The energy sector offers a vast array of “soft” targets too, of course, above all the pipelines by which oil and gas are moved from production sites to refineries and export terminals. In physical terms much of this system is simply indefensible, and attacks upon it have been frequent as a consequence. Yet the global market impact that can be achieved by blows of this kind is limited and transient. The oil-pipeline system of the Middle East, in particular, was built with security in mind. The threat it was designed to counter was not terrorism, but the treachery of neighboring governments, whose willingness to allow someone else’s oil to flow through their territories without interference could never be taken for granted. Yet the resulting infrastructural redundancy serves equally well to mitigate the effects of terrorist attacks. If anything, the use of oil and gas pipelines as instruments of strategic coercion is better suited to governments than to international outlaws.23 From a terrorist’s perspective, then, the energy sector presents a complex set of problems and opportunities. The efficiency of global energy markets and the redundancy of global infrastructure make the sector relatively resilient to the disruptive effects of all but the most apocalyptic physical attack. The air travel industry has taken years to recover from the psychological effects of the 2001 attacks on its customers. It is difficult to imagine an attack on a comparable scale having anything like a comparable effect on the energy sector. It is one thing to get people to reconsider their travel plans, another to get them to reconsider driving to work or heating their houses. Nevertheless, despite the difficulty of achieving strategic-level impacts on global markets, it would be a mistake to dismiss the threat out of hand. Saudi Arabia is a particularly attractive candidate for a sustained effort of disruption, because it boasts much of the world’s excess oil-production capacity, the existence of which is critical to the management of

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oil prices. The consequences of a nuclear or radiological attack on a major Saudi facility might well achieve effects of broad and enduring consequence, by virtue of the anxiety it might inspire, or by destabilizing the Saudi regime itself, whose radicalization or overthrow would pose considerable risks to the system as a whole. Globally significant conflict could also arise over the actions of non-state groups with close ties to oil-producing states, whether acting as proxies or simply with their support. The Hezbollah–Iranian relationship is a case in point. It is by no means impossible to imagine that a regional war started by Hezbollah or Israel might lead to Israel (or even the United States) targeting Iranian energy facilities, the revenue from which is part of the foundation of Hezbollah’s existence.24 Such a scenario merely reinforces the point made earlier, however, that the path to strategic disruption of global energy markets, for terrorists or anyone else, lies through the actions of the market’s strongest participants. Such leverage as terrorists may gain in this area is entirely dependent on their ability to anticipate correctly the psychological and political reactions of their adversaries.

War for the market The militarization of energy-resource management poses special problems for the United States, whose national interest is strongly identified with the preservation of market-based access to energy. Much is made of American dependence on “foreign oil,” and on the sensitivity of American domestic opinion to high oil prices. In the final analysis, however, America’s fundamental interest is not in the maintenance of oil prices at a given level, nor in buying oil produced in a given region. It is in the maintenance of the global market mechanism by which the price is set. For the United States the question is not whether the market can be trusted. It is whether, and how, it can be defended, should it require defense. No country is more ideologically committed to the idea of “the market” as the ultimate arbiter of how goods and services are distributed. Prices and supplies that rise and fall, however sharply, in response to the realities of supply and demand cannot in themselves pose a threat to America’s long-term interest. But the possibility that the price and supply of energy may become subject to strategic pressure, disconnected from the demands of the marketplace, is something to which the United States can be expected to react in strategic terms. A harbinger of what such a reaction might entail was provided by President Carter, who declared in January 1980 that Soviet penetration of the Persian Gulf would be met by force, up to and including the use of nuclear weapons.25 International markets have always been sustained indirectly by the armed forces of major participants, above all by the great maritime powers (first Britain, now the United States), whose interest in the expansion of global commerce was and is backed by armed forces that secure an essential piece of the system: free transit of goods across the high seas. But the beneficial effects of such forces are best exemplified by those long historical periods when they have not been required to act too frequently. Such forces play the same role interna-

Introduction

13

tionally that police forces play in relation to domestic markets: their presence reduces interference by non-market actors to manageable levels. If the New York City Police were ever to burst, guns blazing, onto the floor of the New York Stock Exchange, the effect on the market would not be reassuring. If such things were to happen on a regular basis, the functioning of the market as such would be cast into doubt. The same sort of circular conundrum operates internationally: the overt use of force to protect market practices, if done persistently and on a sufficient scale, runs the risk of demolishing what it seeks to build up. The question of how an institution that forswears violence can be defended by force immediately presents the problem of how such operations can be crafted so as to make their strategic purpose clear. A military operation that seizes control of energy assets or transit systems in order to ensure that they are not removed from the marketplace is not easily distinguishable from one intended to improve America’s own energy security by military means.26 The suspicions that such an action would inspire are easy to anticipate. Many of the major participants in the global energy market are not ideologically committed to markets as such, nor to the promotion of economic freedom among their own populations. Such states are unlikely to lend much credence to American claims that it is acting in the interest of international order and the general good. The picture is further complicated by the fact that the United States is, in both per capita and absolute terms, the largest consumer of energy on the planet. This raises the suspicion that American military action in the energy arena will have no other purpose than to defend a pattern of consumption that much of the rest of the world already resents. These kinds of considerations suggest that, in the energy sphere as in all others, the successful application of military force will depend on how it is framed in political terms. Force exercised within the context of international law – in whose further development the United States has a strong, if lately dormant, interest – or at any rate with the blessing and support of major market participants, is manifestly preferable to unilateral action, whose self-interested motives are liable to be taken for granted even by friendly by-standers. Unilateral policies are especially ill suited to an arena in which effective action will almost certainly require the synchronization of military and economic pressure. Sanctions regimes, boycotts, restrictions on the transfer of technology, and so on, are all difficult to employ by any state acting alone. A militarized energy strategy could scarcely be undertaken without imposing much higher prices, and correspondingly reduced consumption, on the American public. That being the case, efforts to reduce consumption in advance of a crisis might well be strategically advisable. Doing so would help to insulate the American economy from the negative effects of its own strategic behavior. A country that has demonstrated strong consciousness of the need to conserve energy resources is also more likely to be perceived as an honest policeman by other market participants. It is also apparent that military intervention to defend the operation of the global energy market, even if successful, harmonizes imperfectly with American policies oriented toward the spread of democratic institutions in parts of the

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world where these are currently unknown. In the broadest terms the picture is natural enough, since there is no question that the most reliable participants in any international market are going to be democratic states presiding over a free citizenry. In the short run and in practice, however, the attempt to bring such conditions about by strategic means – that is, by the calculated use or threat of force – is certain to introduce additional instability and risk into the international system. As recent experience in the Middle East has demonstrated, it is not easy to stabilize a region and to transform it at the same time. To choose transformation is to choose instability, the price of which may be judged quite high in the marketplace. Any state that is committed to defend international markets in their current form must face the unpleasant necessity of accepting other, less attractive aspects of the international status quo, including the prominent role of market participants whose values and outlook may be deeply disturbing in other contexts. Failure to do so risks setting in motion precisely the kind of spiraling movement away from the market that the US wishes to avoid. In the same way that it is not easy to choose both transformation and stability, it is not easy to be both policeman and revolutionary. These are no more than the perennial puzzles that have attended American foreign policy since it first achieved something like its present form, at the turn of the twentieth century. It is merely that, as applied to the problems of energy security, the consequences of misjudgment become that much more severe. Misjudgments by buyers and sellers may eventually be redeemed by “reversion to the mean,” but in the strategic arena mistakes can acquire a kind of finality unknown to other forms of public life. All the more reason to think carefully before embarking on bold initiatives, from which there may be no meaningful retreat.

Prospects and possibilities The chapters that follow cover the issues described above from a variety of perspectives, some regional, some global and systemic. As will be obvious, they represent no established consensus, except on the basic proposition that strategic risks in the energy sector are sufficiently serious to bear sustained consideration from policy-makers. None regards the militarization of energy as an imminent threat, though some consider it a less remote possibility than others. All emphasize the salience of American power to the management of the present system. Some are more confident about how long present arrangements can continue, however, while others are more sensitive to the risks and costs that the actual use of force by the United States might entail. Daniel Moran’s chapter considers the broader historical context out of which current conditions have arisen. While those conditions are new and distinctive in important respects, it is still possible to find earlier episodes that shed a useful light on the interaction between economic interests and strategic action, which have sometimes fallen disastrously foul of each other in ways that bear thinking about.

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Michael Klare’s chapter surveys the current state of global energy politics, with emphasis on the rising pessimism of recent years. His aim, as he says, is to explain the “growing worldwide inclination to contemplate military force to ensure the safe production and transportation of oil supplies”; a question he answers with reference to three general factors: an anticipated insufficiency of petroleum, heightened competition for what is left, and a relative shift of available energy supplies toward unstable parts of the world. The pessimism that Klare points to is also implicated in Peter Haynes’s discussion of the motives that may lead organizations like al-Qaeda to target global energy resources, irrespective of the instrumental logic and operational difficulty of doing so. Like Klare, Haynes is particularly sensitive to the psychological dimensions of the energy issue, an arena in which strategic decisions are likely to be governed less by immediate material circumstances than by rival images of the future. The chapters by Duane Chapman and Saad Rahim are both concerned with what Rahim calls the “energy architecture” of the Persian Gulf, and with the role of the United States in sustaining it. Chapman surveys the mechanisms by which oil-price stability has been maintained in the past, and considers what sort of international regime might be required to achieve comparable results in the future. Rahim emphasizes that global energy security is critically dependent on the political stability of the Gulf States themselves, a subject about which he finds some cause for optimism, while noting the considerable perils that may yet arise from the turmoil in Iraq and the revolutionary aspirations prevailing in Tehran. Iran also figures in the work of Amy Myers Jaffe and Ronald Soligo, albeit chiefly as a cat’s-paw and ally of Russia. Among militarily powerful participants in the world energy market, Russia is the least fully integrated into the global economy as a whole. It is accordingly the one that may be most inclined to view its market position as a direct source of strategic leverage. Jaffe and Soligo show that the historical track record of those who have sought to wield the “energy weapon” is not good. They also note that the resilience of the system has not been fully tested in this regard since the end of the Cold War, during which superpower rivalry may have limited the options of lesser states in ways that no longer apply. One source of Russian strategic leverage is the sway it exercises over the states of Central Asia, largely owing to the legacy of pipeline infrastructure created when the region was part of the former Soviet Union. Thomas Johnson surveys the energy politics of the region. He emphasizes the limited alternatives that governments there face in managing their “Faustian bargain” with Moscow, whose influence has proven an obstacle to both democratic reform and economic diversification. Christopher Boucek focuses on the recent transition of power in Turkmenistan, which he judges to have presented some risks to continued Russian preponderance, which Moscow has navigated successfully so far. Boucek’s portrayal of the regime of the late lamented Turkmenbashi nevertheless testifies to the political immaturity of the region as a whole, in which, as he concludes, ingrained Russian hegemony may yet give way to “overt imperial meddling” if Moscow is to continue to have its way.

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Harold Trinkunas considers the not-altogether-different case of Venezuela, a traditionally pro-Western country whose current president, Hugo Chàvez, is struggling to escape from what he regards as the baleful hegemony of the United States. Like the new states of Central Asia, Venezuela suffers from a combination of limited market options and limited military resources, for which its current leader has sought to compensate by seeking ideological leadership of those producer states who would like to see America’s global influence diminished. Although the rhetoric of the Chàvez regime portrays Venezuelan oil as a weapon with which to advance and defend his “Bolivarian revolution,” the underlying reality, as Trinkunas shows, is that of a state whose worst enemy (and best customer) has little reason to wish it harm. The volume concludes with two chapters on the new economies of rising Asia, whose recent performance has vaulted them to the center of the global energy picture. Jacqueline Newmyer’s discussion focuses on China, the largest Asian nation and the one whose economic and strategic trajectory will go a long way toward determining the future of the entire region. Newmyer considers the challenges that China’s dynamic economy poses for its political leadership, still drawn exclusively from a single political party whose founding ideology is deeply inimical to the values of the marketplace. Although she detects little interest or willingness to turn back the clock on the part of China’s current leaders, the range of choices they face going forward includes several that would place prevailing market mechanisms at risk, along with the future prosperity of China itself. Flynt Leverett’s chapter considers Chinese energy strategy, and that of other major Asian states, within the broader framework of “resource mercantilism,” by which consumers of energy seek privileged access to resources by means that subvert or bypass market mechanisms. Leverett argues that under present circumstances concerns of this kind are overdrawn, and that the principal risk arising from them stems from misunderstanding or over-reaction by the United States. Nevertheless, mercantilism in any form tends to blur the line between the realms of commerce and force. If persisted in beyond current limits and perceived intentions, such policies would inexorably move the world economy back toward the kind of conditions that prevailed in the first half of the twentieth century, when war to secure economic advantage was a far more familiar and natural idea than it is today.

Notes 1 Since the end of the Cold War the unlikelihood of conflict among advanced societies has been a prominent theme of the policy documents known as the “National Security Strategy of the United States,” an annual series produced under the mandate of the Goldwater-Nichols Department of Defense Reorganization Act of 1986. The most recent such statement can be found at http://www.whitehouse.gov/nsc/nss/2006/. The reports on “National Military Strategy,” also mandated to appear annually, have lagged somewhat in their willingness to shift the focus away from conventional operations; though the most recent is quite plain in insisting on the importance of

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3

4 5 6 7

8

9 10 11 12

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irregular warfare, http://www.globalsecurity.org/military/library/policy/dod/nds-usa_ mar2005.htm. The chief exceptions in recent times are the Iraqi invasions of Iran and Kuwait in 1980 and 1990, which are discussed by a number of contributors to this volume, and which included among their motives, a desire to seize energy assets by brute force. The significance of these attacks is not easy to assess, as will be apparent from the treatments of them by various contributors. Some regard the fact that such wars occurred at all as a harbinger of worse to come. Others view their successful containment and suppression as evidence of the resilience of the present international order. Another more remote but still relevant example arises in the run-up to war between Japan and the United States in 1941, an episode discussed in Chapter 1. The outstanding example in this regard is of course China, whose rapidly growing (though still modestly capable) navy is universally viewed as derivative of that nation’s export-driven economic expansion, and corresponding dependence on raw materials imported by sea. See the reports on “The Military Power of the People’s Republic of China,” produced annually since 2002 by the United States Department of Defense, collected at http://www.defenselink.mil/pubs/china.html; and the discussions of Chinese energy policy by Jacqueline Newmyer and Flynt Leverett in Chapters 10 and 11, respectively. See the discussion by Duane Chapman in Chapter 4. Duane Chapman and Neha Khanna, “The Persian Gulf, Global Oil Resources, and International Security,” Contemporary Economic Policy 24/4, October 2006, p. 514. Bill McKibben, “How Close to Catastrophe?” New York Review of Books 53/15, 16 November 2006, pp. 23–5. For a balanced but reasonably confident exposition of this view, see Steve Yetiv, Crude Awakenings: Global Oil Security and American Foreign Policy, Ithaca, NY: Cornell University Press, 2004. For a less reassuring interpretation of similar evidence see Michael T. Klare, Resource Wars: The New Landscape of Global Conflict, New York: Metropolitan Books, 2001. All serious students of energy security, including all the contributors to this volume, are of course aware that the resilience of global energy markets is significantly contingent upon the persistent of manageable (if not exactly “stable”) political conditions in the Middle East; and on the continued willingness and ability of the United States to employ its military resources effectively to support the market. To that extent the line between energy security and military force will always be a short one, however thick or thin one may wish to draw it. In describing economic activity the image of a wave is much less common than that of a circle or a line, by which recursive and progressive processes are usually represented. Among economic historians wave-like change is mainly associated with the idea of “price revolution,” a far-reaching and particularly precarious form of economic transformation. It is beyond the scope of this project to consider whether the recent acceleration in the rate of energy price inflation is symptomatic of such a revolutionary change; but see David Hackett Fisher, The Great Wave: Price Revolutions and the Rhythm of History, Oxford: Oxford University Press, 1996, especially pp. 179–234. See Rachel Bronson, Thicker Than Oil: America’s Uneasy Partnership with Saudi Arabia, Oxford: Oxford University Press, 2006, pp. 36–60. Memorial Institute for the Prevention of Terrorism, “The Terrorism Knowledge Base,” http://www.tkb.org/IncidentTargetModule.jsp. These actions are discussed more fully in Chapters 3 and 5, by Peter Haynes and Saad Rahim, respectively. There are two collections in English of bin Laden’s public statements and writings: Bruce Lawrence, ed., Messages to the World: The Statements of Osama bin Laden, London, Verso, 2005; and Randall B. Hamud, ed., Osama Bin Laden: America’s Enemy in His Own Words, San Diego, CA: Nadeem Publishing, 2005.

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13 “Knowledge Is for Acting Upon – The Manhattan Raid,” http://www.mininova.org/ tor/425201. 14 John C. K. Daly, “Saudi ‘Black Gold:’ Will Terrorism Deny the West Its Fix?” Terrorism Monitor 1/7, 4 December 2003, http://www.jamestown.org/publications_ details.php?volume_id=391&issue_id=2880&article_id=23425. 15 Brian Whitaker, “Maritime Wars,” Yemen Gateway, 25 October 2002, http://www.albab.com/yemen/artic/mei88.htm. For a general discussion of the prospects and limitations of maritime terrorism, see Richard Ferrell, “Maritime Terrorism: Focusing on the Probable,” Naval War College Review 60/3, Summer 2007, pp. 46–60. 16 James Glanz, “15 Miles Offshore, Safeguarding Iraq’s Oil Lifeline,” New York Times, 6 July 2004, http://www.nytimes.com/2004/07/06/international/middleeast/06OIL. html?ei=5090&en=d4151055ad333bcf&ex=1246766400&partner=rssuserland&page wanted=print&position=. 17 Kahlid R. al-Rodhan, “The Impact of the Abqaiq Attack on Saudi Energy Security,” Saudi-US Relations Information Service, 28 February 2006, http://www.saudi-usrelations.org/articles/2006/ioi/060228-rodhan-abqaiq.html. 18 “Yemeni Security Forces Foil Attacks on Oil Installations, Kill 4 Terrorists,” GlobalSecurity.org [citing VOA News], 15 September 2006, http://www.globalsecurity. org/security/library/news/2006/09/sec-060915-voa03.htm. 19 Jim Krane, “Gulf Ships on Alert over al-Qaeda Threat,” The Scotsman, 28 October 2006, http://news.scotsman.com/topics.cfm?tid=1&id=1596432006. 20 On the limitations of this assumption, see the discussion by Peter Haynes, below. 21 “Terrorist Attack at Abqaiq Oil Facility Thwarted,” Saudi–US Relations Information Service (SURIS), 25 February 2006, http://www.saudi-us-relations.org/articles/2006/ nid/060225-abqaiq-attack2.html. 22 See the discussion of this episode by Michael Klare in Chapter 2. 23 Naji Abi-Aad of Qatar Petroleum has noted that, to the extent that the redundancy of the Middle East pipeline system was intended to provide insurance against the political instability of the region, it has not succeeded: “An assessment of the historical record of the petroleum pipelines in the region until the end of 2006 reveals that, of the 360 years representing the cumulative age of the international export pipelines (crossing at least one state boundary), some 165 years of actual pumping, or only 46 percent, have been recorded. It is also interesting to note that every international export pipeline in the region was shut down at least once.” Naji Abi-Aad, “The Middle East: Petroleum Supply Security or Political Stability?,” paper presented at the PETROSEC SEIF-CF Conference, University of Salzburg, September 2007, p. 5. Even so, the oil pipelines of the Middle East afford producers and consumers a range of options that are conspicuously absent from the natural-gas pipelines of Central Asia; on which see the discussions by Thomas Johnson, Christopher Boucek, and Amy Jaffe and Ronald Soligo, in this volume. 24 On Iran’s patronage of Hezbollah and other regional terrorist organizations see Shaul Shay, The Axis of Evil: Iran, Hizballah, and the Palestinian Terror, New Brunswick, NJ: Transaction Books, 2005. 25 President Jimmy Carter, “State of the Union Address,” 23 January 1980, http://www. jimmycarterlibrary.org/documents/speeches/su80jec.phtml. 26 The United States’ current presence in the Gulf illustrates this point. The Bush administration has always denied that the American invasion of Iraq was motivated by anything other than security concerns – counter-terrorism and the proliferation of weapons of mass destruction most particularly. It denies having acted to improve American access to oil, or even to protect the global energy market. Yet suspicion that America’s real interest in Iraq lies in control of its vast oil reserves (which would guarantee its access to it, and afford the US much greater leverage in the management of global oil prices) is virtually universal around the world.

1

The battlefield and the marketplace Two cautionary tales Daniel Moran

Contemporary discussions of energy security are bounded by complex and inconsistent assumptions about the relationship between war and international commerce. The most important is the belief that the growth of international trade has a stabilizing and pacifying effect on international relations. This outlook has a long history, briefly surveyed below. It also has the additional validation of having underlain American foreign policy throughout its tenure as a major actor on the international stage. Although there have always been those who have held that rivalries originating in the marketplace might easily bleed over into the battlefield, such episodes, when they have occurred, have come to be regarded as symptomatic of political under-development, or as irrational attempts to swim against the tide of history. This historical picture is widely regarded as reassuring. The integrative and pacifying effect of global markets is now held in such high regard that it is deemed to operate independently of the ideological convictions of governments. This is especially true in the energy arena, in which profits are so large, and security of access so essential, that neither buyers nor sellers are thought likely to sacrifice their market position on behalf of other interests, at least not for long. This proposition is sometimes boiled down to the claim, widely bruited in the run-up to the American-led ejection of Iraq from Kuwait in 1991, that it does not matter which (or what kinds of) governments control energy resources, because whoever they are, and however reprehensible they may be in other respects, they must sell it to the rest of us in the end, or else go hungry. These beliefs exist uneasily with another, however, the idea that economic sanctions, boycotts, and so on are useful and broadly acceptable tools of international coercion. Such measures are presumed to be more humane and less dangerous than the actual use of force, while being capable of achieving similar results. Their ostensibly non-violent character has caused them to be held in particular regard by market-oriented liberal democracies. In their own way such measures also testify to the respect that the power of the market now commands. Yet the use of economic pressure as a substitute for war inevitably blurs the line between them, and casts doubt on the claim that the natural consequence of market integration is peace. When states use trade strategically, in lieu of force,

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market integration ceases to be a source of peaceful stability, and is revealed instead to be a vulnerability. The aim of this chapter is not to overturn any of these propositions directly, but to explore their operation in two famous episodes in which their effects were clearly in play, and which turned out differently than contemporaries expected. The first is the crisis of July 1914, by which the rapidly globalizing world economy of the nineteenth century, powered by the coal-fired Industrial Revolution in Europe and North America, was cast into the abyss by statesmen who without exception would have insisted that one of their chief cares was to sustain the economic prosperity of their respective nations.1 The second is the decision by the United States, in July 1941, to freeze Japanese dollardenominated assets, an action which the US regarded as consistent with the politics of peacetime, albeit of the “hardball” variety, but which the Japanese perceived as equivalent to an act of war; from which a more unmistakable act of war, the Japanese attack on Pearl Harbor, followed. All Santayanean clichés about the lessons of the past notwithstanding, history does not repeat itself. If it did it might be easier to avoid the kinds of catastrophic miscalculations that lie at the center of these two seminal crises. Their histories are not prophetic, but merely cautionary tales, which warn against the pernicious effects of unspoken assumptions on the conduct of foreign policy. For while it is true that nothing ever happens again, it is also (strangely) true that in politics nothing ever seems to happen for the first time, either. If, at some point in the future, the balance between the battlefield and the marketplace were again to collapse into global war, as it has done twice in the last century, historians of that future will certainly look back on the episodes recounted below as events to which we or our descendants had neglected to lend sufficient weight. That is reason enough to pay them some heed.

The industrialization of war Energy security is a subject about which the history of earlier times appears to have little to say. “Earlier times” in this context means the entire recorded past before the emergence of the global market for petroleum, which began to acquire something like its current form after World War II, and has evolved toward an increasingly open, diversified, and efficient structure ever since. One of the distinctive features of the present is that so much of the material from which energy is generated is consumed far from where it is produced. This was not true when the dominant source of fuel for mankind was wood and charcoal (i.e. for most of human history); and true only to a limited extent after wood products were displaced by coal. Mineral coal was known as “sea-coal” at the dawn of the industrial era in Great Britain because it often arrived in major cities by boat. Its energy density was sufficiently high to make it worthwhile for a maritime nation to maintain a coastal trade in it. Coal also moved around on rivers and canals and by rail, and in Europe and North America it crossed the occasional international frontier in

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the process. But no global market in coal developed, because it was not valuable enough to transport across oceans. Most of the strategic perils to which oil and natural gas are exposed – and which are transmitted to the industrial economies that rely on them – are a product of their high energy value, relative to the effort required to move them long distances.2 But even so, coal was the first form of energy that could possibly be called cheap in human terms – a vast legacy from a remote geological past, whose break-neck consumption has transformed the human prospect in countless ways.3 European soldiers in the nineteenth century would not have recognized coal fields as a distinctive target, nor as requiring special defense. Although the value of coal deposits was sometimes acknowledged when occasion arose to draw up lists of war aims, they were mainly viewed as features of the population centers and industrial infrastructure that grew up around them. But military planners were intensely aware of the new technologies that industrialization was making available for their own use; and also of the disturbing social and cultural attitudes that the accelerating consumption of a new form of energy was engendering among the urban masses. It was by way of thinking through the strategic implications of the new economic and social order that coal was creating that the requirements of the modern battlefield and the modern marketplace became entangled with each other; a subject which will be considered further later. Students of the new economy – who became known as “economists”4 – were equally aware of the danger that war posed for their vision of the future. Cheap energy is the defining characteristic of modernity, as J. R. McNeill has observed,5 but realizing its revolutionary potential required the cooperation of governments. They were (ideally) expected to protect property rights and enforce contracts according to rational norms, but otherwise to get out of the way of a wide range of social and economic transactions that had formerly been mediated by the state. Persuading governments to do this for their own subjects was generally a matter of convincing them that the increased productivity made possible by new practices paid off in terms of state revenues. The international dimensions of the problem were harder to manage, because there was by definition no sovereign authority to whom one could appeal, and because the moral identity of traditional European states, and of the traditional elites that predominated within them, were deeply connected to their willingness and ability to fight each other. The growth of international trade was a central, and not merely a beneficial or derivative, feature of the Industrial Revolution, because it is the nature of industrial methods that they produce more goods than can be consumed locally. In addition, to the extent that industrialization increased the wealth of workers, managers, and investors, it also increased demand for products from faraway places: sugar, cotton, and tea, for instance (to take but three quotidian examples) are all produced in remote corners of the world as far as Europeans are concerned. The views that governments adopted toward such long-distance trade were critical to its existence, and depended on their attitudes toward money, and toward war.

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Pre-industrial European states regarded money as something to accumulate. This made trade across international frontiers into a kind of contest, to be won or avoided as circumstances dictated. Such an outlook, known as “mercantilism,”6 was a stimulus to the creation of overseas empires, which held out hope that the markets and resources required by the new economy might reside within the control of a single government. Early theorists of laissez-faire rejected such beliefs, arguing instead that wealth arose from the circulation of money among buyers and sellers, wherever they were. They also defined a nation’s economic success in terms of the prosperity of its population, rather than the wealth of the state. Their ideas made headway in part because they were more easily represented in systematic terms – “mercantilism” was less an economic system than a means of rationalizing the preferences of governments – and also because of their natural appeal to men of commerce and industry, whose political influence increased along with their economic significance (though by no means in proportion to it). The ideal of the free market also benefited from the failure of empire to fulfill its economic promise. By the turn of the twentieth century it was already apparent that the driver of global prosperity was going to be trade and investment among developed countries, which far outweighed that between the metropoles of Europe and their imperial hinterlands. It was in this latter respect that the claims of market proponents bore upon the concerns of warriors. While the pursuit of empire might multiply reasons for the great powers to fight each other,7 the increasing mutual integration of their economies cut no less strongly in the opposite direction. Where the mercantilists had bound war and commerce together in a single, zero-sum game defined by the interests of the state, early capitalist theorists like Adam Smith and David Ricardo had sought not simply to tear war and commerce apart, but to argue that the latter might eventually displace the former as the principal vehicle for international relations. One of the main advantages of free markets, in the eyes of early advocates, was that they might bring an end to wars, by making them so expensive that even the most blinkered militarist would have to think twice.8 The cause of peace could be expected to advance on multiple fronts as trade and industry increased. To begin with, the increasingly lethal weaponry that industrial technology was creating promised to raise the direct human costs of war to levels previously unimaginable; a possibility of which professional soldiers were of course acutely aware. In addition, it was assumed that the new economy would diminish the social and political standing of entrenched agrarian elites, whose values were still rooted in the martial attitudes of the medieval warrior cast from which they believed themselves to be descended. Finally, market advocates thought that the new economy would raise the indirect costs of war to insupportable heights, a phenomenon which their own approach to economic theory was supposed to illustrate. Mercantilism portrayed war as a kind of high-risk investment, but one fully consistent with economic rationality if undertaken from a position of sufficient strength. Market advocates judge the risks higher in relation to the rewards, because they calculated the cost of war in less favorable terms. In addition to the

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expense of maintaining armed forces, and to the death and destruction that resulted from their use, they added large intangible costs, caused by the disruption of commerce, foregone investment, and so on. Under modern conditions these were more economically significant than the immediate suffering that war caused. In these terms war appeared to be another of those misguided habits, like excise taxes or the licensing of monopolies, in which governments still engaged out of ignorance of their true economic effects. Market relationships were not simply antithetical to military rivalries. They were, or were destined to become, obstacles to them. Increasingly interdependent markets would create overwhelming material incentives for peace, since their disruption would produce universal misery that could not be offset by the prospective gains of war. And if war should occur nevertheless, the resulting precipitate decline in productive activity would limit its scope and duration, further highlighting its pointlessness. As the nineteenth century neared its end, commentators in Britain especially – the nation that had done the most to create the new economy, and had benefited the most from it – were inclined to believe that such conditions were visibly at hand, so that the moment might be approaching when the marketplace would replace the battlefield as the final arbiter of politics among civilized nations.9

July 1914 It is against this background that the first of our cautionary tales unfolded. The onset of the Great War had nothing to do with energy, but it had a good deal to do with the social and economic conditions that cheap energy created, and especially with the way those conditions were interpreted by the men responsible for making war. Ever more extensive, complex, and integrated global markets were supposed to restrain the bellicosity of the great powers, whose greatness was supposed to be recognizably dependent upon access to the wealth that the new economy had laid at their feet. Yet somehow this act of recognition failed to occur. The question is why. The famous crisis by which Europe “slithered” into war requires only the briefest summary.10 On 28 June 1914 the Archduke Francis Ferdinand, heir to the throne of Austria-Hungary, was assassinated in Sarajevo by a Bosnian Serb named Gavrilo Princip. Austria demanded satisfaction from the Serbian government, which it judged to have been complicit in Princip’s deed. This demand was couched in terms that were intended to be refused, thus affording a pretext for war against what would today be considered a “rogue state” and a sponsor of terrorism. Serbia, however, enjoyed the patronage of Russia, which had been a competitor with Austria for influence in the Balkans, and which backed Serbian foot-dragging with a promise of military support. Austria for its part looked to its more powerful ally, Germany, to deter the Russians from intervening on behalf of the Serbs. Germany, however, had reasons of its own to wish to cut through the Gordian Knot of continental alliances in which it felt it had become ensnared; above all

24 D. Moran that between Russia and France, a traditional foe against which German military plans were chiefly directed. Although Berlin had no interests to speak of in the Balkans, the Franco-Russian alliance, which dated from the 1890s, had grown more ominous in the eyes of German military planners because of the accelerating pace of Russian military modernization. If allowed to continue, improvements in Russian military efficiency would pose a threat to Berlin’s future freedom of action. Germany did not seek general war, but it was prepared to risk a regional one if it offered the possibility of detaching Russia from France or, failing that, of confronting them both before the danger posed by their alliance had fully matured. Germany therefore encouraged Austria to press its case against Serbia unreservedly, a course that could only have ended in war. Yet Germany’s own military plans, featuring an overwhelming initial offensive into France, ensured that when war came France and Russia would fight side by side. They would be joined by Great Britain, whose efforts to mediate the crisis fell foul of Berlin’s willingness to let events devolve into war, and whose broader interests militated against the acceptance of German hegemony on the continent. No episode of modern history has been studied more closely than the July Crisis, in part because of its calamitous consequences, but also because after the dust settled all of the major governments implicated in it published vast collections of documents designed to show that the disaster was not their fault.11 These collections make depressing reading for those seeking evidence of the moderating effects of market integration on strategic decision-makers.12 On the contrary, the men of 1914 appear to have lived in a moral universe dominated by the logic of power per se, in which fear of losing prestige and credibility predominated as a motive for action. This in turn provides the beginning of an explanation for the failure of Europe’s rapidly globalizing economy to do its anticipated pacifying work: the new social and economic interests it had created, however significant they may have appeared, had not yet penetrated the corridors of political power. Those remained in the hands of pre-industrial elites for whom the war was a traditional means of self-assertion.13 The chief limitation of such a generic sociological explanation, which is reasonable as far as it goes, is that it suggests that strategic planners in 1914 were either ignorant of or indifferent to the requirements of the new economy. This was not the case. On the contrary, the senior officers of European armies would have been the first to acknowledge that industrial economies, dependent as they were upon remote and intricate systems of supply and distribution, and also upon a newly literate, politically conscious, and potentially mutinous work force, might well break down rapidly under the pressure of war. The inference they drew from this, however, was not that war had become infeasible under modern conditions. It was that modern conditions demanded a new kind of war, which could achieve its aims before the destructive effects of industrialized violence had time to accumulate. Military planning before 1914 was shaped by pessimism about the moral resilience of industrial societies, combined with a lively appreciation of the lethality of modern weapons.14 The second of these judgments falls within the

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orbit of military professionalism. The first does not. It is social prejudice masquerading as strategic insight, but strengthened in that regard by the fact that it is no more than an inverted echo of the benevolent assumptions that had been promulgated by market advocates since the days of Adam Smith. Given their duty to make war nonetheless, European soldiers seized upon the idea that bold offensive operations, undertaken at the earliest possible moment, still held out some hope of success, by catching the enemy before his forces were fully prepared, and pressing forward to victory before one’s own social base could begin to crumble. This imperative need to beat the enemy to the punch contributed mightily to the slide from diplomacy to war in 1914. Stalemate remained a possibility, of course, for which the inevitable remedy was negotiation. Either way, however, modern war could not last long. Protracted war meant economic collapse and social revolution. That was why it was supposed to be impossible. There is evidence that such ideas were hard to believe. In the decades before the war it is easy to find pronouncements by senior civilian and military figures, wondering whether it was really true that industrial economies could only sustain short bursts of violence before becoming unhinged. Doubts on this score contributed to the rising tide of protectionism on the continent from the 1890s onward, invariably with the backing of military authorities who imagined that, by protecting native industry and (especially) agriculture, they were taking out insurance against the possibility that, contrary to expectations, the next war might go on for a while. High tariffs in this period were not necessarily envisioned as preliminary to, or substitutes for, war.15 Yet such measures were certainly intended to have strategic effects, and they did. There is no question, for instance, that high German tariffs on grain helped drive the Russians into the arms of France; grain being the only the thing the Russians could sell in order to finance their own development. It was the fact of the Franco-Russian strategic partnership that was chiefly responsible for the German willingness to risk war in 1914, rather than to act to forestall it, as it might easily have done. Then as now, the interactions of economic and strategic conduct were liable to prove mutually confounding. German tariff policy had not been intended as a weapon. If anything it was envisioned as more in the nature of a shield. It proved in the end to be a snare, from which Germany’s traditional military excellence offered no escape. The relationship of war to the global economy looked somewhat different when viewed from the sea, where the drama of globalization was playing itself out most vividly. What the American navalist Alfred Thayer Mahan called “sea power” had always been linked to the use of naval forces to control and expand maritime trade. In the Age of Sail, from which Mahan and his contemporaries drew their inspiration, this relationship had seemed natural enough: navies created and protected the colonies whose resources and markets sustained the seaborne commerce whose revenues paid for the navies. This virtuous circle – as it appeared, at least, to those on the profitable end of colonial trade – had created the conditions from which the global economy of the industrial era had emerged. Yet adapting maritime strategy to the demands of multilateral free trade

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proved difficult. This was partly owing to new technologies. Steam engines, steel hulls, and long-range shell guns had made warships more powerful than in the past. But similar technologies also made it too dangerous to operate them close to shore, where the perils posed by mines, torpedoes, and coastal artillery ruled out a close blockade of the enemy’s coast. Absent this time-honored expedient of naval warfare, the only remaining choices were to attack enemy commerce on the high seas – an approach that naval theorists disdained as ineffective; or, as the British ultimately attempted, to conduct a “distant” blockade of the European continent as a whole, a measure that entailed serious risk of offending neutral trading states. Their continued willingness to do business would be essential to the prosecution of a major war by any advanced society. It was no longer possible for warships to simply demand of merchantmen that they heave to and produce their papers. The globalized economy that sea power had done so much to create could no longer be coerced in such high-handed fashion, lest its benefits be withheld or, worse, conveyed with prejudice to the other side. Naval strategists on the eve of the Great War viewed the strategic demands of the new economy differently from their military counterparts, though not necessarily more clearly. In their own way they were self-conscious modernizers, who did not shrink from the new possibilities that international commerce afforded: at the height of the Anglo-German naval competition that preceded the July Crisis, Britain was importing £5-million worth of German iron and steel, while Germany was importing £3-million worth of the same materials from Britain.16 Nor did they consider the expansion of global trade an obstacle to war. On the contrary, they imagined that its remarkable increase had shifted the power of military decision into their own hands. Yet when the time came to consider how sea power should actually be applied, they found themselves hardpressed to identify any forms of economic coercion that did not promise more harm than good. In the end they concluded that the best thing was for navies simply to fight each other, in the expectation that the outcome of a great fleet battle would suffice to convey “command of the sea” to the winner. Like their lubberly colleagues on the general staffs, naval strategists ultimately concluded that the only way to fight modern war was to somehow get it over with quickly, before its broader social and economic effects became too complicated to manage. The tragedy of all this is that everyone was more or less right about the consequences of the Great War. They just weren’t right soon enough to spare the 8.5 million men who died fighting it, nor the global economy whose connective tissues were ripped apart in the process.17 The economists and generals were both right that modern, trade-dependent societies would break down under the pressure of war, but the breakdown took years, not weeks or months as they had supposed. The navalists were also right that victory would go to whichever side could retain its commercial and financial connections to the larger world. This was the central achievement of the Royal Navy, albeit one that had nothing to do with the one great fleet action it managed to fight, to no particular advantage, at Jutland.

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The British blockade, conducted at the very edged of international norms with respect to neutral rights,18 also made itself felt, by confronting Germany with something like an energy crisis, in the form of a shortage of food. Cheap food was (and is) a direct consequence of the same cheap energy that powered industrialization and the expansion of overseas trade. Rapidly modernizing countries like Germany had taken to importing food during the latter decades of the nineteenth century, in order to shift labor from farms to factories; a practice that was only possible because steamships were able to move even bulk commodities great distances at costs so low as to make them competitive with local producers.19 In 1914 about 40 percent of German calories were arriving from overseas, a market dependence fully analogous to the kind of energy dependence that preoccupies strategists today.20 Germany did not lose the war because its population starved; but in the last two years of the war Germans experienced hunger of a kind that had been lost to living memory among advanced societies, and this contributed a good deal to the dramatic erosion of civilian morale during the war’s last stages. When, in the final crisis of October 1918, the commander of Germany’s armies, Eric Ludendorff, demanded to know why it was no longer possible to raise new levies for the front, he was told that “that is a question of potatoes.”21 It was a lesson in political economy that generals the world over would not soon forget. Britain was at least as vulnerable. It had led the way toward free trade in grain in 1846 when it repealed its Corn Laws, by which it had previously protected domestic producers. Those states that wished to compete with it for mastery of the new economy had gradually followed suit; though none went as far as Britain itself. In 1914 Britain’s decision to rely on imported food and other commodities, made generations earlier with no thought of anything except the need to keep wages low and commerce humming, was revealed to have been a gigantic bet on the continued ability of British sea power to protect the global network of buyers and sellers with whom Britain’s national existence had become inextricably entwined. In the end theirs was the winning hand, and in some Pyrrhic sense the outcome of the Great War can be counted as a triumph for the marketplace, as its proponents had always promised. But to imagine that such a victory could redeem the cost of the war was nonsense, a fact that the greatest economist of the age, echoing innumerable others who had gone before, went out of his way to explain.22

July 1941 Historians do not normally write about a “July crisis” in 1941, one of the darkest years of modern times, whose outstanding moment came on 22 June, when Germany’s army poured across the frontiers of the Soviet Union – the first day of a campaign that would, for practical purposes, decide the outcome of World War II.23 In most of the world’s capitals the German attack had a clarifying effect, because it brought an end to the Manichean alliance with Stalin by which Hitler had prepared the ground for war in Europe two years earlier. In Berlin

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Joseph Goebbels, weary of the pusillanimity of his master’s deal with the devil, declared the kick-off to Barbarossa a “glorious, wonderful hour” in which he at last felt “totally free.”24 In Washington the Roosevelt administration immediately unfroze Soviet assets, which it had frozen in 1939 in retaliation for the Soviet invasion of Finland.25 In London Winston Churchill, while declining to “unsay” any of his many harsh strictures against the Soviet state, pre-emptively embraced it as an ally.26 In Paris French Communists could finally join the Resistance, having been freed from the Stalinist pretense that they and the Fascists were somehow brothers in arms against liberalism. In Tokyo, however, the first weeks of Barbarossa presented something of a quandary.27 In the summer of 1941 Japan was entering the fourth year of a war with China. It had begun the war in a spirit of opportunistic aggression, anticipating a quick victory over a weak and divided opponent. Yet the “China incident” refused to end, though Japanese forces already occupied most of China’s population centers, and had set up a puppet government in Nanjing by way of creating the appearance that what we would now call “regime change” was complete. They had long since made a client state of the Chinese province of Manchuria. Nevertheless the Chinese had refused to lay down their arms, largely because they were recipients of both Russian and American aid; a reflection in turn of the fact that, once the Japanese arrived, Chinese Communists and nationalists had suspended their mutual loathing in order to fight the common foe. The central question posed by Barbarossa in Tokyo was how the German invasion of Russia could help bring the war in China to a successful end. On the one hand Japan might strike into Siberia, while all but a handful of Soviet forces were being drawn into the maelstrom west of Moscow. Such an attack might have sealed the Soviet defeat, and rendered the Chinese position hopeless by eliminating all possibility of Soviet intervention. The looming presence of the Red Army had always preoccupied the Japanese, whose forces had fought a bruising campaign against it in the summer of 1939,28 and had maintained themselves in a state of readiness for a repetition ever since. Japanese soldiers favored what was called the “northern option.” From their perspective there could be no better opportunity to drive off the Russian bear once and for all. Japan’s naval leaders, on the other hand, tended to believe that the German attack alone sufficed to ensure the Soviets would take no action in Asia. They favored the “southern option,” by which Japan would lay hold of southern Indochina, a French colonial outpost that had been rendered defenseless when the Germans overran France a year earlier. Japan might thus harvest the fruits of an earlier German victory at no cost to itself – Vichy France was a German client, and would not resist a Japanese occupation – and so obtain a stronger foothold in an area rich in oil and other resources necessary to prosecute the war in China. Southern Indochina did not possess oil; but it was a step toward the major reserves of the Dutch East Indies (modern Indonesia), which the Japanese hoped to co-opt once they controlled the nearby French colony. The Japanese were initially unable to choose between these options, because

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infighting between the army and the navy was too fierce to settle outright, and because it was hard to decide which course of action would be more likely to infuriate the United States. The US was officially neutral in all the conflicts then raging around the world. Yet its understanding of what neutrality entailed, as defined in a series of Neutrality Acts beginning in 1935, and culminating in the Lend–Lease Act of March, 1941, had come to look like a clandestine belligerence from Tokyo’s perspective. In July 1941 the Japanese already regarded the United States as the de facto leader and financier of a global coalition directed against Germany, and by extension themselves, a coalition into which the Soviet Union had just been driven by the Germans. The Japanese decision to pursue both the “northern” and the “southern” options, codified by an Imperial Council on 2 July,29 was an admission that there was nothing the Japanese could do to keep the Russians, the British, and the Americans apart. Nevertheless, there is no question that Japan wished to avoid war with America for the time being. Its army refused even to plan for such a contingency, feeling itself fully stretched against the Chinese and the Soviets. It regarded the Soviet Union as the main enemy, and seems to have assumed that a significant expansion of war in Asia could not occur until the outcome of the fighting between Russia and Germany was known. Japanese leaders were also virtually unanimous in concluding, correctly, that America’s fundamental interests internationally lay in Europe, a judgment that was strengthened on 7 July, when American troops relieved the British garrison in Iceland. They believed that an attack on the Soviet Union was an especially likely way to draw the United States into war.30 Nevertheless, the United States was also known to oppose the “southern option.” Even before the fall of the France, the US had warned that it would oppose any attempt to change the status quo in Southeast Asia by force. When the Japanese moved troops into northern Indochina following the French capitulation, the US had responded by placing an embargo on exporting iron and steel scrap to Japan, a measure of limited significance, but one the Japanese ambassador in Washington described, with good reason, as “unfriendly.”31 Japanese leaders expected that an additional move further south would produce a similar response – which is to say, an economic and not a military one. The step Japan was contemplating would not be an act of war, after all, but would be undertaken with the consent of a government the United States recognized as legitimate.32 In the final analysis, Japanese leaders could imagine the US going to war to aid the Soviet Union, an essential ally if Hitler was to be defeated. They could not imagine an American war to save the dregs of European imperialism in Asia. The Americans, for their part, could not imagine any conditions under which the Japanese would choose war with both Britain and the United States. On 25 July, one day after Japanese troops moved into southern Indochina, the American state department ordered that all Japanese assets in the United States be frozen. This policy was not conceived as an oil embargo, much less a complete severance of economic relations with a country that was still America’s largest trading partner in Asia. In a cabinet meeting on 18 July, convened to

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consider additional measures against Japan, the President expressly ruled out an oil embargo as being too likely to provoke an attack on the Dutch East Indies. It was acting Secretary of State Sumner Welles who proposed a financial freeze instead, to which Roosevelt agreed. The point of the freeze was to establish an export licensing scheme, by which the Japanese would have to apply for official permission to conduct transactions in dollars. The resulting policy was supposed to provide a framework for an on-going campaign of economic harassment.33 It became an ultimatum only after both sides realized how much oil was involved, and that it had all suddenly been taken off the table. It was Dean Acheson, then an Assistant Secretary of State, who interpreted the freeze as entailing a complete prohibition of petroleum exports. His reasons for doing so were not capricious, but neither did they represent a fully settled policy. In his memoirs Acheson portrays himself as acting without firm guidance, in an atmosphere which suggested that harsh measures (which he had always favored) were intended.34 The United States had been refusing to sell aviation fuel to Japan for about a year, for instance. Aviation fuel was a specialized product that the Japanese could create for themselves out of ordinary gasoline. Its embargo had been of symbolic significance – a slap at Japanese militarism that could have no serious effect even on the Japanese air force. Acheson reasoned that the new policy was intended to go beyond what had been done in the past; and indeed the measure adopted in July 1941 included a suspension of exports of high-octane gasoline, a serious measure, but well short of a total ban on the sale of oil. The latter arose because Acheson and the Treasury Department wished to ensure that Japan paid for any oil it bought by first using up remaining unfrozen assets outside the United States that were directly convertible into dollars. Until the Japanese were willing to fork over these hidden dollars, they would not be allowed to buy anything. Once they had done so, however, it seems certain that American policy would have evolved toward a more effective version of the one it had adopted toward Italy following its invasion of Abyssinia in 1935. On that occasion the League of Nations sought to force an Italian withdrawal by imposing a general trade embargo, which excluded oil because Britain and France feared that such a step would drive Italy into the arms of Hitler’s Germany. The United States, which was not a member of the League, but which produced about 50 percent of the world’s oil, had imposed a parallel embargo of its own, which sought to limit oil sales to levels that had prevailed before the Abyssinian War by means of a “moral” embargo – meaning one not legally binding on businesses, but merely proclaimed as a duty by the government.35 Two aspects of this earlier episode are useful for understanding what happened in 1941. It illustrates, first of all, that the unique strategic significance of oil among internationally traded goods was well understood by everyone, by virtue of its role as a military transportation fuel. In contrast to other commodities, whose embargo might put financial or social pressure on a government, an oil embargo was recognizably a blow against a nation’s armed forces, which were in relative terms far more dependent upon it than the civilian economies

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that supported them. An oil embargo in 1941 was not an instrument for inflicting generalized social misery. It was a tool for interfering with military operations specifically. This heightened its appeal for a country like the United States, and also its risk. It also helps explain the complex semiotics of US policy toward both Italy and Japan. In both cases the US sought to employ its dominant position in world oil markets in a way that would express disapproval of aggression without transgressing the limits of official neutrality, or of implying generalized hostility to the nation in question. American policy toward Japan in 1941 was calculated to obstruct Japanese policy on terms just sufficiently onerous to cause Tokyo to rethink its war in China, but still flexible enough to allow normal peacetime commerce to continue. These subtleties were lost on the Japanese, who received no oil from the United States after 25 July owing to the difficulty of working out payment arrangements acceptable to the Americans. President Roosevelt seems to have become aware of this only in September.36 The Japanese had understood the new situation at once, however, and their reaction was decisive. At the end of July Japanese military planners were still engaged in working out the deployment of 16 additional divisions along the Siberian border of Manchuria, not to attack the Soviets but to be ready to exploit whatever opportunities might arise if the Russians collapsed under the German onslaught. As the nature of the latest American move became clear, however, the General Staff concluded that war with the Soviets had become impossible under any circumstances, and on 9 August they formally conceded that their counterparts in the navy were right: Japan’s immediate enemy must be the United States, and the immediate concern of its armed forces must be the seizure of sufficient energy resources to allow the Americans to be fought with some hope of success.37 The 16 divisions would still be raised; but they would now be held in reserve, pending the development of war plans against the Dutch East Indies, Malaya, and the Philippines. Here, then, is a cautionary tale indeed, a more bitter one, even, than that of 1914, which at least contains elements of tragedy; whereas the collapse of Japanese–American relations in July 1941 – for that is in fact what it was, though appearances would be maintained a while longer – seems more in the nature of farce or accident. These elements should not be overestimated. The account above does not constitute an explanation for the origins of the Pacific War, which was not a “war for oil,”38 nor a war caused by mere carelessness or vindictiveness on the part of American policy-makers. It was a war to control China and with it the rest of Asia. The Japanese had inherited this ambition from the European imperialists who preceded them, and they could not bring themselves to abandon it despite decades of opposition by the United States. These conditions, arrayed against a background of intensifying global war, virtually ensured that American and Japan would fight each other. The crisis of July 1941 was the last step in a long road, which would have reached its dire destination by some other path, perhaps a slightly longer one, had this one not been chosen. Nevertheless, the last step remains interesting as an example of the impact and limitations of global trade employed as an instrument of strategic coercion.

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At a minimum, it casts a useful light on the proposition that any state with oil to sell can be relied upon to do so, irrespective of its ideological convictions or other interests. The de facto American oil embargo is a telling exception to this rule (if it is a rule) because the state that is refusing to sell in this case is one with a strong commitment to markets in general, whose overall policy in Asia had long since been branded “the Open Door.” Even if one accepts that the Roosevelt administration did not intend to force an immediate showdown in the summer of 1941 – and in truth the artful ambiguities of its policy were so great that it is difficult to be sure of this – there is no question that it was determined to use its market leverage over Japan not to avert war, which was how it portrayed itself, but as a substitute for it. The objective of its economic policy was a military one: to compel Japan to abandon its war in China. It is wrong to suppose that the Japanese, by treating the American embargo as a belligerent act, had misunderstood American intentions. Whatever confusion existed on that score lay on the American side. The fact that the United States would have chosen such a measure for such a purpose was a reflection of the dramatically altered conditions governing the relationship between war and commerce that World War I created. It is the nature of war to dispel illusions, and to create them, and the Great War did its share on both counts. Afterwards it was impossible to believe that market relationships were a significant obstacle to war in themselves; that industrial societies could not stand the strain of prolonged conflict; or that modern wars must be short. By 1918 war had been revealed to be an industrial product in its own right, which strong states could produce ad libitum, using the same methods and technologies they used to make shoes and automobiles. As a consequence statesmen acquired an exaggerated regard for embargoes, sanctions regimes, and other measures of economic coercion, on the one hand; and a corresponding preoccupation with autarky and national self-sufficiency on the other. Economic warfare came into its own, because the real thing had proven so terrible, and because once violence came to be regarded as a kind of commodity, it seemed reasonable to suppose that if you could exercise sufficient control over another state’s economy, you could dictate its strategy as well.39 In surveying the international politics of the interwar years, it is striking to consider how much was expected of measures of this kind: one need only think of the elaborate but ultimately fruitless regime of reparations imposed upon Germany, whose military revival was supposed to be impeded by the draining off of the capital required for it to rearm itself. Such an environment was oddly conducive to American international engagement. The belief that America’s interactions with the broader world should be primarily economic was deeply rooted in American history,40 and in the years between the world wars it became integral to its international identity. America was in no sense an “isolationalist” state in economic terms: both of the major schemes by which German reparations were renegotiated, for instance, were named after Americans.41 From Washington’s perspective, even if World War I had not made the world as safe for democracy as Woodrow Wilson had hoped, it had at least elevated economic

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power to the position it deserved in the conduct of international affairs. Reparations, Lend–Lease, and the de facto embargo of Japan were all rooted in the same fundamental assumption, that it was possible to use economic means to accomplish what armies could not, or would not, attempt. Economic warfare was not an option for Japan. Given its situation – a resource-poor island nation with an economy built on trade – and its ultimate objective – to replace European hegemony in Asia with its own – only an army would do. In contrast to its German ally, which spent five years shoring up the bastions of economic self-sufficiency before embarking on its own war of aggression, the Japanese moved into China against the expressed wishes of a Great Power whose trade was essential to their own war effort. They foresaw the possibility of American retaliation, but they assumed that it would reach a natural and tolerable limit once it began to vie with America’s own economic interests: American trade with Japan was five times greater than that with China, after all. They counted on the deterrent effect of deteriorating conditions in Europe, which they felt certain would attract the lion’s share of American attention and, should it come to it, American military power; and they noted with satisfaction the extreme reluctance of American public opinion to countenance war anywhere, even as the world was bursting into flames around them.42 These calculations were essentially correct; which makes it all the more impressive how quickly they were cast aside once the reality of the American oil embargo was understood in Tokyo. Anyone who doubts the potential of energy security to transform an already mature and long-standing strategic rivalry should contemplate what happened to Japanese military planning in the two weeks following the army’s realization that there would be no more oil from America. Over the previous four years Japan had been subject to an enormous range of economic and political pressures from the United States, up to and including direct threats from the president to the Prime Minister of Japan; and through it all the Japanese General Staff had refused to shift its gaze from China and the Soviets long enough to consider what it would mean to fight the United States. After 9 August it thought of little else. America’s leadership had anticipated such a reaction, feared it, and still managed to bring it about. When Franklin Roosevelt declared Pearl Harbor “an unprovoked and dastardly attack,”43 he must have known that he was merely putting a brave face on a policy that had slipped off the rails months before. It was the oil that did it.

Notes 1 Globalization became measurable in economic terms in the 1820s. By 1913 international trade and investment had reached levels that would not be regained until the 1950s. See Kevin H. O’Rourke and Jeffrey G. Williamson, Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, Cambridge, MA: MIT Press, 1999; and, on the failure of global economic recovery in the interwar years, Harold James, The End of Globalization: Lessons from the Great Depression, Cambridge, MA: Harvard University Press, 2001. 2 About 15 percent of the coal that is consumed today is traded internationally, mostly

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D. Moran between adjacent states like Canada and the United States (United States Energy Information Administration, “International Energy Outlook 2007,” http://www.eia. doe.gov/oiaf/ieo/coal.html); though the decline in the value of the dollar, coupled (as of this writing) with dramatic increases in the price of oil, have led to recent purchases of American coal by Europeans. See Christopher Martin, “Europe Pays to Ship US Coal as Price Sinks,” International Herald Tribune, 5 November 2007, http://www.iht.com/articles/2007/11/05/business/ship.php. Coal is the fossilized remains of plants and other life forms that died roughly three hundred million years ago – a period known in their honor as the “Carboniferous” (360–290M BCE). Its average “energy density” [heat as a function of mass] is approximately 24 mega joules per kilogram; about half that of oil, and between 50 and 300 percent greater than that of firewood. It is remarkable that coal, which fueled mankind’s escape from the near-universal penury of traditional agrarian life, has been widely disliked every step of the way, including in our own time, when the disproportionate production of greenhouse gases by coal-fired power plants is much lamented. See Barbara Freese, Coal: A Human History, Cambridge, MA: Perseus Books, 2003. Before the nineteenth century the word “economist” meant an especially thrifty manager of household affairs. J. R. McNeill, “World Environmental History: The First 100,000 Years,” Historically Speaking: The Bulletin of the Historical Society 8/6, July/August 2007, p. 8. See Robert B. Ekelund and Robert F. Hebért, A History of Economic Theory and Method, 5th edn., Long Grove, IL: Waveland Press, 2007, Ch. 5. See also Flynt Leverett’s discussion of “resource mercantilism” in Chapter 11. The most compelling statement of this point of view is Vladimir Lenin’s famous pamphlet Imperialism, the Highest Stage of Capitalism: A Popular Outline, Saint Petersburg, n.pub, 1917; reprinted Moscow: Progress Publishers, 1968. Lenin’s views were by no means orthodox on the left, however. Many European socialists believed in the integrative and pacifist characteristics of modern markets. See Georges Haupt, Socialism and the Great War: The Collapse of the Second International, Oxford: Oxford University Press, 1972, pp. 150–9. See Edmund Silberner, La Guerre dans la pensée économique du XVIe au XVIIIe siècle, Paris: Librairie du Recueil Sirey, 1939; and idem, The Problem of War in Nineteenth-Century Economic Thought, translated by Alexander H. Krappe, Princeton, NJ: Princeton University Press, 1946. The seminal work of Smith and Ricardo appeared during an exceptionally warlike time. Smith’s first publications came during the Seven Years’ War, and The Wealth of Nations appeared coincidentally with the start of the American Revolution in 1776. Ricardo’s productive career coincided with the even more destructive wars of the French Revolution and Napoleon. Such relentless violence inspired other forms of secular pacifism, including widespread interest in the possibilities of international federalism, as exemplified in our own time by the United Nations. Advocates for such institutions were not receptive to the idea that expanding markets would offer a serious antidote to war. The most famous writer on “perpetual peace” during this period, Immanuel Kant, stakes humanity’s hopes not on the rise of the market, but on the replacement of standing armies by citizen militia. See Zum ewigen Frieden: Ein philosophischer Entwurf, Königsberg: Friedrich Nicolovius, 1795; in English as Kant: Perpetual Peace, translated by Lewis White Beck, New York: Prentice Hall, 1998. Nevertheless, as Silberner notes (The Problem of War, p. 20), all of the (numerous) economists who wrote essays on “permanent peace” in the nineteenth century were advocates of free markets. See Michael Howard, War and the Liberal Conscience, New Brunswick, NJ: Rutgers University Press, 1989, pp. 70–2; and, among primary works, Henry Noel Brailsford, The War of Steel and Gold: A Study of the Armed Peace, London: G. Bell and Sons, 1914; and Norman Angell, The Grand Illusion, London: W. Heinemann, 1913. “Slithered” is David Lloyd George’s characterization of the dynamic by which diplo-

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12

13

14

15

16

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matic crisis gave way to war (War Memoirs of David Lloyd George, London: Nicholson & Watson, 1933–6, vol. 1, p. 49). His account exemplifies the once-common belief that the war was an unintended consequence of well-meaning statesmanship gone awry. This claim is no longer widely accepted. See Richard F. Hamilton and Holger H. Herwig, “World Wars: Definition and Causes,” in idem, eds. The Origins of World War I, Cambridge: Cambridge University Press, 2003, pp. 1–44. A selection of these materials has been published in English by Imanuel Geiss, ed., July 1914: The Outbreak of the First World War, New York: Charles Scribner’s Sons, 1967. Its bibliography includes a listing of the major document collections that appeared after the war (pp. 383–4). Economic expansionism did not loom large either. Although Marxist historiography in particular has been inclined to seek direct economic motives for war, the results have been unconvincing. Yet it is true that, once war had been embarked upon, economic rationales were eagerly sought, and became prominent in documents like the so-called “September program,” in which German strategic objectives were first enumerated; a tribute, in a way, to the power of the new economy to seize hold of a war it was unable to prevent. On the September program see Fritz Fischer, Germany’s Aims in the First World War, New York: W. W. Norton, 1967, pp. 104–5; on economic war aims generally, Gerd Hardach, The First World War, 1914–1918, Berkeley: University of California Press, 1977, pp. 226–48. See for instance Arno J. Mayer, The Persistence of the Old Regime: Europe to the Great War, New York: Pantheon Books, 1981. The claim that war was embarked upon as a means of blocking the advance of new social interests is especially welldeveloped in the German case; on which see Volker Berghahn, Germany and the Approach of War in 1914, 2nd edn., New York: St Martin’s Press, 1993. The social and technological considerations that dominated prewar military planning are summarized in Michael Howard, “Men against Fire: The Doctrine of the Offensive in 1914,” in Peter Paret, ed., Makers of Modern Strategy: From Machiavelli to the Nuclear Age, Princeton, NJ: Princeton University Press, 1986, pp. 510–26. Protectionism is sometimes viewed as introducing an element of warlike bellicosity into economic life by virtue of its seemingly conflictual attitude toward international trade. While it is true that high tariffs can be employed for coercive purposes, that was not how they were viewed by their proponents in the nineteenth century. Protectionist critics of free trade argued that it was likely to inspire violence by less developed states, who would find themselves in danger of losing out economically, and seek to redress the balance by force. Thus even if war was losing its functional value for advanced societies – a point that many protectionists were prepared to concede – its appeal to the frustrated and the unsuccessful would persist. The outstanding figure in this tradition was the German economist Friedrich List (1789–1846), whose work remained well known up until World War I. See especially Das Nationale System der politischen Ökonomie, Stuttgart: Cotta, 1841; in English as The National System of Political Economy, translated by Sampson S. Lloyd, New York, 1885; reprinted London: Cosimo Books, 2005. Paul Kennedy, The Rise of the Anglo-German Antagonism, 1860–1914, London: George Allen & Unwin, 1980, p. 299. Both figures are for 1907. This peculiar exchange of virtually identical goods, which persisted until the July Crisis brought it to an end, is a further illustration of the perverse strategic effects of protectionism. German steel-makers, protected by high tariffs, charged their own armed forces artificially high prices for steel, and offered corresponding discounts to the Royal Navy, thus undercutting their British competitors (who were not similarly protected). German sailors responded by buying steel from the British, who charged no more than German manufacturers, and were often more reliable suppliers. In all about 65 million men took up arms in the Great War, of whom 37 million became casualties (killed, wounded, missing, or taken prisoner). See the figures com-

36

18

19

20 21

22 23

24 25 26 27

D. Moran piled by the United States War Department, February 1924, http://www.britannica. com/eb/table?tocId=9116287&idxStructId=648646&typeId=. On the economics of the war see Stephen Broadberry and Mark Harrison, eds., The Economics of World War I, Cambridge: Cambridge University Press, 2005. A scrupulous respect for neutral rights would have made it impossible to cut Germany off from two critical resources – food and finance – that were only available to it from abroad, chiefly from the United States. Britain’s blockade was rendered more tolerable, however, by the “beastliness” of the submarine campaign that Germany mounted by way of reply; an act of desperation that highlights how impossible the economics of the war were to manage once it was underway. See Nicholas Tracy, Attack on Maritime Trade, Toronto: University of Toronto Press, 1991, pp. 123–73; and Bernard Semmel, Liberalism and Naval Strategy: Ideology, Interest, and Sea Power during the Pax Britannica, Boston, MA: Allen & Unwin, 1986, pp. 84–171. In the Age of Sail long-distance trade was largely confined to commodities of high value relative to their weight. This limited the social distribution of goods brought from overseas, and the strategic impact of interfering with them, which was basically financial. Coal-powered ships changed all this, and made the consumption of imported goods possible for anyone. In the 1880s the expense of transporting a bushel of grain from New York to Liverpool added only two cents to its cost. See Norman Stone, Europe Transformed, 1878–1919, Cambridge, MA: Harvard University Press, 1984, p. 23. On the contribution of food shortages to Germany’s defeat see Avner Offer, The First World War: An Agrarian Interpretation, Oxford: Oxford University Press, 1989. Ibid., p. 76. The bearer of this message was the socialist leader Philipp Scheidemann. Afterwards German conservatives would cherish the notion that the army had been “stabbed in the back” by feckless civilians. Nothing could be further from the truth; on which see Michael Geyer, “People’s War: The German Debate About a Levée en masse in October, 1918,” in Daniel Moran and Arthur Waldron, eds., The People in Arms: Military Myth and National Mobilization since the French Revolution, Cambridge: Cambridge University Press, 2003, pp. 124–58. John Maynard Keynes, The Economic Consequences of the Peace, New York: Harcourt, Brace and Howe, 1920. This is not to suggest that the Soviet Union could have won the war alone, merely that the lion’s share of the burden of fighting Germany fell there. Seventy percent of German casualties were suffered against the Red Army, and it was Germany’s destruction that guaranteed the defeat of Japan. These facts were well understood at the time, and were foundational to strategic decision-making on the Allied side. Joseph Goebbels, diary entry for 22 June 1941, in Fred Taylor, ed. and trans., The Goebbels Diaries, 1939–1941, New York: Penguin Books, 1984, pp. 424–5. Conrad Black, Franklin Delano Roosevelt: Champion of Freedom, New York: Perseus Books, 2003, p. 640. Radio broadcast of 22 June 1941, in Winston S. Churchill, The Second World War, vol. III: The Grand Alliance, New York: Houghton Mifflin, 1950, pp. 331–3. Japanese bewilderment was heightened by their having already been caught off guard twice by Hitler’s policy toward the Soviets. Japan had initially allied with Germany by way of securing a partner against the USSR, an obvious common enemy. The Hitler–Stalin pact, whose negotiation coincided with fierce clashes between Soviet and Japanese forces in Manchuria and Mongolia, was received with something like panic in Tokyo, which declared that it would retain freedom of action with respect to Russia. Yet the mauling that Japanese forces had received at Soviet hands inspired caution, and in April 1941, a bare two months before the onset of Barbarossa, Tokyo and Moscow concluded a neutrality pact that the Japanese believed had finally aligned them correctly with German policy. Among the many reasons why Japan did

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29 30

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35 36 37

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not go to war with the USSR in 1941, some small weight must be given to the fear its leaders felt that they would somehow be left holding the bag by Berlin. On the Japanese– Soviet fighting see Alvin D. Coox, Nomonhan: Japan against Russia, 1939, Stanford, CA: Stanford University Press, 1985. “Bruising” may be too mild. Japan committed about 60,000 troops against the Soviets in the summer of 1939, of whom at least 20,000 were killed or died of illness. This fighting was reported around the world as a major defeat for Japan. See Coox, Nomonhan, pp. 914–51. See Akira Iriye, The Origins of the Second World War in Asia and the Pacific, New York: Longman, 1987, p. 143. America’s primary commitment to the European theater had been codified in a memorandum by the Chief of Naval Operations dated 12 November 1940, and known to history as “War Plan Dog,” http://www.fdrlibrary.marist.edu/psf/box4/t48b01.html. Lest there be any misunderstanding, Roosevelt personally warned Japan’s Prime Minister, Konoe Fumimaro, that a Japanese attack on the Soviet Union would threaten the peace in the Pacific (Iriye, Origins, p. 147). The primacy of the Euro–Atlantic theater for American policy and military plans was readily apparent to friendly and hostile observers alike. See William Langer and S. Everett Gleason, The Undeclared War, 1940–1941, New York: Harper, 1953. This embargo, embodied in a presidential decree of 26 September 1940, applied to all states outside the Western Hemisphere except Great Britain. Japan was in fact the only target of this measure. It could not be identified explicitly owing to the legalism of the Neutrality Acts, and because the administration did not wish to alarm public opinion. On the Japanese characterization of the embargo as “unfriendly” see ‘Memorandum by the Secretary of State Regarding a Conversation With the Japanese Ambassador (Horinouchi),” 8 October 1940, http://www.ibiblio.net/hyperwar/ Dip/PaW/186.html. Japanese caution toward the Dutch East Indies, which actually possessed the oil they craved, but which they had no plans to seize, was owed to the fact that, while the French had surrendered to Germany, the Dutch had not, but had established a government in exile in London. For Japan an attack on the Dutch colony, the territory of a belligerent state allied to Great Britain, entailed the same escalatory risk as an attack on the Soviets. It might still have moved into Indochina if the French had not surrendered the year before. But such an act would have been recognizable as war in Tokyo and everywhere else, rather than a mere bit of imperialist opportunism, which is how the Japanese imagined it. Secretary of the Interior Harold Ickes quotes Roosevelt as remarking that it would be better to simply “slip the noose around Japan’s neck and [give] it a jerk now and then,” rather than drawing it tight all at once. See The Secret Diaries of Harold L. Ickes, 3 volumes, New York: Simon and Schuster, 1954–5, 3, p. 588. Dean Acheson, Present at the Creation: My Years in the State Department, New York: W. W. Norton, 1969, pp. 19–26; cf. Jonathan G. Utley, Going to War with Japan, 1937–1941, Knoxville: University of Tennessee Press, 1985, pp. 154–5. Utley portrays Acheson as having consciously betrayed Roosevelt’s intentions, which goes too far. Acheson was never disciplined in any way for his implementation of the freeze policy. For a discussion of the intricacies and ambiguities of the American embargo, see Michael A. Barnhart, Japan Prepares for Total War: The Search for Economic Security, 1919–1941, Ithaca, NY: Cornell University Press, 1987, pp. 227–33. On US policy during the Abyssinian crisis see Robert Dallek, Franklin Roosevelt and American Foreign Policy, 1932–1945, New York: Oxford University Press, 1979, pp. 110–21. Iriye, Origins, p. 150. Ibid., p. 149.

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38 Many popular books seek to portray Roosevelt’s policy as a conspiracy to provoke an attack by starving Japan of oil. See for instance Gordon Prange, Donald M. Goldstein, and Katherine V. Dillon, Pearl Harbor: The Verdict of History, New York: Penguin, 1991; and Robert Stinnett, Day of Deceit: The Truth about FDR and Pearl Harbor, New York: Touchstone, 2000. 39 The same inference underlay the ascendance among airmen of “strategic bombing” in the 1920s, by which the economy and social cohesion of the enemy was supposed to be attacked directly, without the necessity of having to fight through his army first. See Lee Kennett, A History of Strategic Bombing, New York: Charles Scribner’s Sons, 1982. 40 See William H. Becker and Samuel F. Wells, Jr., eds., Economics and World Power: An Assessment of American Diplomacy since 1789, New York: Columbia University Press, 1984. 41 Both the Dawes Plan of 1924, named for American Vice President Charles Dawes, and the Young Plan of 1929, named for Owen Young, the founder and first chairman of RCA, included provisions to provide Germany with American loans, so that it could finance the industrial recovery required to make payments. The effect was of course to deprive the entire scheme of the strategic pressure it was supposed to exert. 42 Opinion polls showed Americans to be deeply pessimistic about the consequences of war even if America were victorious. One survey in November 1941 reported that 44 percent of respondents opposed sending an army to Europe, even if failing to do so meant the Nazis would win the war (Dallek, Franklin Roosevelt, pp. 310–11). 43 Address to a Joint Meeting of the House and Senate, 8 December 1941, http://www.yale.edu/lawweb/avalon/wwii/dec/dec03.htm.

2

Petroleum anxiety and the militarization of energy security Michael T. Klare

Although American policy-makers have always voiced strong confidence in the role of markets in providing this country and others with the overseas oil they need to satisfy rising domestic requirements, they have recently expressed a growing requirement for military force to ensure the safe delivery of those supplies. In late 2006, for example, a policy group convened by the Council on Foreign Relations concluded, “As the world market for oil relies on increasingly distant sources of supply, often in insecure places, the need to protect the production and transportation infrastructure will grow.” Under these circumstances, the group asserted, the vital role of “US regionally deployed forces” in providing such protection “will be necessary in the future.” In particular, “US naval protection of the sea-lanes that transport oil is of paramount importance.”1 The United States is the world’s leading importer of petroleum, so it is hardly surprising that American policy-makers would express concern over the uninterrupted flow of overseas supplies. The American policy debate is also more open, as a rule, than that of most other countries, so policy reports and statements of the types cited above are normally available to the public in greater profusion than is the case elsewhere. Nevertheless, while it is difficult to obtain comments like these from policy-makers in, say, China, Japan, and Russia, it can be assumed that they are thinking along similar lines. Indeed, inferences can be made from their actions: for example, in a case that will be discussed later in this chapter, both China and Japan have announced their intention to rely on military means to secure their claims to offshore natural-gas fields in the East China Sea. Clearly, reliance on military instruments to ensure access to overseas oil supplies and guarantee their safe delivery is not an exclusively American strategic concern, but one that is shared by many major energy-consuming nations. What explains this growing worldwide inclination to contemplate military force to ensure the safe production and transportation of oil supplies? Surely, it is unlikely that this inclination would arise in a world in which the global supply of petroleum was perceived as being sufficient to satisfy the requirements of all major consumers, and in which the global oil flow was considered immune to the threat of interdiction or disruption. In such a world, the use of military force to secure access to foreign oil or to protect its flow would be considered an unnecessary impediment to the efficient operation of the market, and so would

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be widely discouraged. But policy-makers around the world are becoming increasingly pessimistic about the future sufficiency of petroleum supplies and their unimpeded delivery to consumers, and it is from this anxiety that pressures for the militarization of energy security arise. Perhaps the most vivid expression of this pessimism was provided by former Secretary of Defense and Energy James R. Schlesinger in testimony before the Senate Foreign Relations Committee on 16 November 2005. “In the decades ahead,” he declared, we shall reach a point, a plateau or peak, beyond which we shall be unable further to increase production of conventional oil worldwide. . . . [T]he upshot is, quite simply, that as the years roll by, the entire world will face a prospectively growing problem of energy supply. Moreover, we shall inevitably see a growing dependency on the volatile Middle East. We shall have to learn to live with degrees of insecurity – rather than the elusive security we have long sought.2 In these few words, Schlesinger identified the basic components of the pessimistic outlook that underlies the militarization of energy security: 1 2 3

4

the global output of petroleum is expected to reach a “peak” beyond which it will not recover; not only the United States, but the “entire world” will be affected by this turnaround in production; whatever remains of global oil reserves will be concentrated in the Middle East and other areas of “volatility,” increasing the risk of periodic disruption; and the inevitable result of all this will be abiding and systemic “insecurity,” coloring relations between all major powers.

These four key points are discussed in greater detail below.

Petroleum insufficiency The first and most important source of anxiety about the future availability of adequate petroleum supplies concerns the ability of the global energy industry to continually increase the output of crude to satisfy ever-rising levels of consumption. At present, the industry appears capable of satisfying current world demand, which at the beginning of 2007 stood at an estimated 83.7 million barrels per day (mmbd).3 But serious doubts have arisen in energy and policymaking circles about the industry’s capacity to meet much higher levels of demand in the future, when many existing oil fields are expected to fall into decline. Even if net world oil output rises to a higher level in the years ahead – say 100 mmbd or more – the major consuming nations will still experience a condition of petroleum insufficiency if global demand climbs to levels substan-

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tially above that figure and the industry proves incapable of boosting output to those elevated levels. Consider the most recent projections provided by the US Department of Energy. According to the 2007 edition of the Department’s International Energy Outlook (IEO), world oil consumption is expected to climb from 82.5 mmbd in 2004 to 117 mmbd in 2030, while oil production capacity will rise from 84.3 to 117.7 mmbd over the same period, giving us just barely enough in 2030.4 Assuming these projections prove accurate, this is reassuring news of a sort; but one must look carefully at the underlying assumptions. The demand projections are derived from expectations of economic activity, population growth, global motorization rates, and so forth, and can be considered reasonably reliable as long as there are no earth-shattering events like a world war or prolonged depression; the production projections are based on the output of existing wells and their anticipated decline rates along with predictions of new discoveries, and so entail considerably more guesswork. It is these latter calculations that have aroused considerable skepticism among specialists in the field.5 This skepticism arises from several observations regarding the world’s net oilproduction capacity. The first derives from evidence that many of the world’s most prolific oil fields are nearing the end of their most productive years and are about to experience a substantial decline in output. This is said to be the case for many mature fields in the older producing areas, including those in North America, East Asia, and Western Siberia, but is thought to be particularly true of Saudi Arabia, the world’s leading producer. In a widely cited 2005 book on Saudi Arabia’s long-term prospects, investment banker Matthew R. Simmons wrote that Saudi Arabian oil production “is at or very near its peak sustainable volume . . . and is likely to go into decline in the very foreseeable future.”6 Although Simmons’s conclusions have been contested by Saudi oil officials, it appears that his work (and that of other specialists who have raised doubts about the productivity of Saudi fields) has begun to influence the thinking of analysts. The Department of Energy has steadily downgraded its projections of future Saudi output. In the 2004 edition of the IEO, for example, Saudi Arabian output was projected to reach 22.5 mmbd in 2025; in the 2005 edition, its projected output was reduced to 16.3 mmbd; in 2006, it had slipped again, to 15.1 mmbd. When combined with projected declines in production by other key producers, including Iran, Iraq, Kuwait, Libya, and Nigeria, the drop in Saudi output produced a huge decrease in the Energy Department’s projections for global petroleum output in 2025: whereas the IEO for 2004 and 2005 had projected that total world production capacity would rise to 126.1 mmbd in 2025, the 2007 edition projected output of only 110.7 mmbd.7 Rising oil prices were no doubt part of the explanation for this downward assessment, but it also reflects growing pessimism about the ability of the world oil industry to achieve heroic increases in production.8 A more recent study, released by the International Energy Agency (IEA) in July 2007, continues in this pessimistic vein. Entitled the Medium-Term Oil Market Report and covering the years 2008–12, the report concludes that the global oil industry should be capable – just barely – of satisfying anticipated

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international demand through the end of this period, but cannot be expected to do so much beyond then. This is so, the report indicates, because many older fields in mature producing areas are in decline or will soon be so while newer fields are either less expansive than expected or pose significant production hurdles.9 The second reason for skepticism about the future sufficiency of global production capacity arises from the steady decline in the rate of new oil-field discovery. If the global supply of petroleum is to satisfy anticipated world demand in the years ahead, we would need to see a volume of discovery that equates to both the decline in older field output and the added consumption prompted by global economic growth. But that is not what is happening. According to the Army Corps of Engineers, the peak level of oil-field discovery occurred in the 1960s, when new reserves with approximately 480 billion barrels of oil were identified. Since then, the rate of discovery has dropped in every decade while the consumption of existing reserves has continued to climb, with net extraction overtaking reserve additions for the first time in the 1980s. It now exceeds the discovery rate by a ratio of 2 to 1.10 What this means is that we are now relying on previously discovered oil for an ever-increasing share of our consumption – a pattern that can only result in the exhaustion of existing supplies and an inevitable contraction in supply. A third and final reason for skepticism arises from the fact that whatever discoveries are being made today tend to be located in areas that are difficult to tap into for geographic, environmental, or political reasons, and thus may not be developed to their full potential. This is hardly surprising: it is a common law of resource extraction that developers first pursue mineral deposits that are close at hand, easy to extract, and relatively free of political impediments; only after all the easy-to-exploit reserves are exhausted do developers go after less appealing sites in more distant, less accessible areas. In the case of oil, with many of the world’s mature fields facing decline and no new fields in familiar areas left to be tapped, producers see no choice but to pursue options in remote, hazardous areas, such as sub-Saharan Africa, the deep waters of the Gulf of Mexico, and the Russian Far East. True, giant firms like Chevron, Exxon, and British Petroleum (BP) have the technical capacity to operate in remote, difficult locations. But will they (and their lenders) be willing to risk the many billions of dollars in new infrastructure that will be needed to develop these exceedingly demanding reservoirs? The answer may not always be “yes.” Take the deep waters of the Gulf of Mexico. BP has great hopes for its Thunder Horse platform, which was expected to begin producing in late 2005 with a planned capacity of 250,000 barrels per day. But after Hurricane Dennis swept through the area in July 2005, the platform was found to be listing by 20–30 degrees and its start-up had to be delayed. Now BP is saying that, owing to numerous metallurgical failures, the platform will not begin operating until 2008 at the earliest.11 Moreover, American meteorologists are predicting a significant increase in hurricane activity in the region, raising significant doubts as to the practicality of deploying additional platforms like Thunder Horse in the Gulf, despite the known presence of oil and gas in the area.12 Or take Sakhalin Island in the Russian

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Far East. Here political, rather than meteorological difficulties have stood in the way of higher production rates. In December 2006, Russian authorities used suspect environmental accusations against Royal Dutch Shell to force that company and its partners to cede majority control over the giant Sakhalin-II project to state-controlled natural-gas monopoly Gazprom. The project will still go forward, but the legal machinations involved in Gazprom’s takeover have delayed its onset and frightened off other foreign investors in Russia’s vast energy sector.13 For all of these reasons, it appears highly unlikely that the global energy industry will prove capable of boosting worldwide oil production to the elevated levels projected by the US Department of Energy for 2025 and beyond. No doubt global output will rise above current levels by a significant amount, but, as suggested by Secretary Schlesinger, we are heading toward “a point, a plateau or peak, beyond which we shall be unable further to increase production of conventional oil worldwide.” Exactly when this point will be reached, and at what level cannot be foreseen; but, as the foregoing analysis suggests, the “plateau or peak” that Schlesinger speaks of is already in sight.

Intensified competition for the available supply At the same time that the global energy industry can expect to encounter growing difficulty in adequately ramping up production to satisfy rising demand, the competition for access to oil among the world’s major consuming nations is expected to become increasingly fierce. The sharp rise in competition for energy is the product of a steady increase in demand from the mature industrialized nations, led by the United States, combined with a sharp spurt in demand from the newly industrialized countries, especially China and India. Until recently, the developing nations consumed much less energy than the older industrial powers; but their energy demand is growing so rapidly that they are now catching up in terms of net demand, and are beginning to compete with the developed world on nearly equal terms for access to global oil and gas supplies. As a group, the mature industrialized nations are expected to experience a relatively modest rate of increase in net petroleum usage, estimated at 0.6 percent per year between 2004 and 2030. However, because their consumption in 2004 was already quite substantial, even this moderate rate of increase will boost their combined consumption by 8 mmbd over this period, from 49.1 to a projected 57.1 mmbd. Likewise, the former Soviet Union (FSU) and the Eastern European countries, with a somewhat higher annual rate of increase of 1.0 percent, will see their net oil consumption rise from 4.8 to 6.3 mmbd over this period. By comparison, the developing nations of Asia (including China, India, South Korea, Taiwan, and the Southeast Asian countries) started out in 2004 with a combined consumption of 14.8 mmbd, or 30 percent as much as is consumed by the mature industrial nations; but because they are projected to experience a combined annual growth rate of 2.7 percent, their consumption is projected to jump to 29.8 mmbd by 2030, for a net gain of 15.0 mmbd – far more than that experienced by the mature industrialized nations and the FSU combined.14

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These numbers are, of course, merely projections, and will no doubt be revised in accordance with the push and pull of global economic forces. But they nevertheless suggest that the older industrial countries can expect to face increasingly severe competition from China, India, and other developing nations for access to overseas sources of oil, natural gas, and sources of energy in the years ahead. In the case of oil, this competition could prove especially ferocious if, as suggested earlier, the global energy industry proves incapable of boosting output in step with rising demand but falls increasingly behind anticipated consumption levels.

A shift in the center of gravity of world oil production For most of the Petroleum Era, the production of petroleum was largely concentrated in the global North, especially the United States, Canada, Europe, and the European portion of the Czarist/Soviet empire. As recently as 1950, approximately two-thirds of world oil production was centered in these areas. This is hardly surprising, given the aforementioned tendency of resource producers to focus their initial efforts on the exploitation of the most readily accessible deposits while leaving for later those deposits located in harder-to-reach, more remote locations. But precisely because the nearer-at-hand deposits were the first to be exploited, these are also among the first to face systemic exhaustion. As the demand for crude has grown, therefore, the consuming nations have had no choice but to increase their reliance on providers in the global South. These producers entered the energy business later than their counterparts in the North, and so their fields – in some cases, larger than those in the North to begin with – are at an earlier stage of development and are therefore capable of sustaining higher levels of production in the future. As a result, the center of gravity of world oil production has shifted decisively from North to South and will remain there for the foreseeable future. Signs of this shift are clearly evident in the projections on future global oil output supplied by the Department of Energy. In 1990, producers in the global North (including the United States, Canada, the North Sea countries, Australia, Russia, and a handful of others) jointly accounted for 39 percent of total world oil output; by 2030, their combined share is expected to drop to 24 percent. Meanwhile, the Energy Department projects a significant increase in the share of world supply provided by key producing areas of the global South, notably Africa, the Caspian Sea basin, and the Persian Gulf. Together the proportion of total world output accounted for by these three areas is expected to jump from 44 percent in 2004 to 57 percent in 2030.15 This shift in the center of gravity of world oil-production capacity has profound implications for the energy-seeking nations because it entails a heightened risk to the uninterrupted flow of energy supplies. Although not all nations of the global North are peaceful and not all nations of the global South are conflictprone, there is a greater incidence of disorder in the South than in the North. This is due partly to the endemic poverty and high rates of unemployment found

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in many developing nations – both of which provide the natural fodder for insurgency, ethnic violence, and religious extremism – and partly to the legacies of colonialism, which in many cases include borders drawn to meet the convenience of imperial overlords rather than the aspirations of native constituencies on the ground. The problem of unrepresentative borders arises with particular frequency in the case of oil-producing states, where the allocation of oil revenues is often a significant factor in disputes between the central government and ethnic or regional enclaves, such as Aceh in Indonesia, Cabinda in Angola, Kurdistan in Iraq, the Niger Delta in Nigeria, and the non-Muslim South in Sudan. Many post-colonial nations also suffer from weak state structures and a tendency toward military strongmen and pervasive corruption. What sets the oilproducing countries apart from others like them, however, is the powerful attraction that oil revenues (or “rents”) have for all aspirants to national rule. Once in power, the leaders of these “petro-states” will balk at nothing to remain in power – and thereby keep the oil rents flowing into their private bank accounts – usually by relying on brute force to eliminate all threats to their continued supremacy. This means that their competitors, after having been denied the opportunity to prevail at the ballot box, perceive no option save armed revolt to secure their own place at the feeding trough. The result, more often than not, is a continuous cycle of coups, palace revolts, and counter-coups – often supported by an impoverished and resentful population ready to rebel at the first sign of central government vulnerability.16 The current fighting in the Niger Delta region of southern Nigeria provides an instructive case-in-point. Although most of Nigeria’s onshore oil is produced in the Delta, the mostly impoverished inhabitants of the region have received few of its benefits, while suffering most of its severe environmental consequences. As in other such petro-states, the revenues paid by foreign oil companies for the crude extracted from the Delta is paid to government agencies in the capital, Abuja, where it disappears into centrally administered budgets (and not a few private bank accounts). Little if any of what remains makes its way back to the peoples of the Delta. After years of peaceful protests by various organizations in the Delta failed to result in any alteration in this basic pattern, militant groups have begun relying on violent tactics to compel the federal government to increase the share of oil revenues allocated to their communities. The result has been a growing cycle of violence, with harsh government repression only spurring greater armed resistance. As part of their response, the rebels have attacked pipelines and oil facilities and kidnapped foreign oil workers, leading major producers like Shell and Chevron to shut down some of their Nigerian operations.17 The risk of instability arising from the pursuit of oil in the global South is further compounded by the fact – as vividly demonstrated in Nigeria – that oil facilities have themselves become a target of attack by insurgents and extremists, who often view them as a concrete expression of the West’s plunder of their native soil. This is especially true in the Middle East, where oil has long been

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the principal motive for Western penetration and where oil rigs are the most conspicuous expression of Western influence. For those inhabitants of the region who retain memories of the imperial past or otherwise resent the continued presence of foreigners in their midst, this is an intolerable intrusion and – for those who subscribe to violent measures – an attractive target for attack.18 By targeting refineries and pipelines, the extremists no have doubt concluded, they not only focus attention on the intrusive presence of the Western powers but also deliver a blow at an exceedingly vulnerable point: the West’s disproportionate dependence on Middle Eastern petroleum. “Pipelines are very soft targets,” Robert Ebel of the Center for Strategic and International Studies (CSIS) observed in 2003. “They’re easy to go after. It doesn’t take a rocket scientist to figure out where you can do the most damage, both physical and psychological, with the minimum amount of effort.”19 Al-Qaeda and its offshoots have made a particular effort to target the petroleum infrastructure in Saudi Arabia, the world’s leading oil producer and a major source of energy for international markets. The first such assault occurred on 1 May 2004, when gunmen killed five Western oil industry workers in Yanbu, the site of a major petrochemical complex.20 A second attack occurred four weeks later, on 29 May, when a group of armed militants said to be allied with al-Qaeda stormed a residential compound occupied by Western oil workers in Khobar, near the oil center of Dhahran.21 Both attacks, it seems, were aimed at foreign technicians, who often play a key role in managing the Saudi oil industry. An even more ominous assault occurred on 23 February 2006, when suicide attackers attempted to break through the outer defense perimeter of the Abqaiq oil processing facility and detonate explosive-laden vehicles in the kingdom’s most important energy installation, potentially jeopardizing 6.8 mmbd of output. Although the attack was foiled before the bombers could get close to the facility itself, the determination with which they carried out the assault hints at the extent to which such facilities have come to be viewed as prime targets for attack.22

The militarization of energy security In sum, the shift in the center of gravity in world oil production from North to South, combined with the specific targeting of oil facilities by anti-Western extremists and the other phenomena described above, is likely to heighten the risk of instability and violence in the oil-producing areas and thus increase the risk of disruptions in the flow of oil from supplying to consuming nations around the world. Alarmed by this prospect, American policy-makers are increasingly relying on military instruments to safeguard the global flow of oil. As noted by the task force assembled by the Council on Foreign Relations in 2006, the depletion of conventional sources [of petroleum], especially those close to the major markets in the United States, Western Europe, and Asia, means

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that the production and transport of oil will become even more dependent on an infrastructure that is already vulnerable. For this very reason, the group concluded, “the need to protect the production and transportation infrastructure will grow.”23 It is from this impulse – the perceived need to “protect the production and transportation infrastructure” in distant areas – that the militarization of energy resource management springs. As noted, this trend is most evident in the United States, where discussion of the phenomenon is relatively public, but it can be seen in other oil-importing nations as well. As the trend develops, moreover, it is likely to take three distinctive forms: infrastructure and asset protection, or the physical protection of refineries, pipelines, loading facilities, offshore fields, and sealines of communications; regime protection, or military support for governments that facilitate the export of their country’s oil reserves to foreign markets; and access assurance, or military moves intended to ensure uninterrupted access to key oil-producing regions, such as the Persian Gulf. The United Kingdom was the first great power to practice these activities on a significant scale, most notably in its relations with Iran, Iraq, and the other oilproducing kingdoms of the Persian Gulf during and after the World Wars. France, Germany, and Japan also sought to develop a capacity for these sorts of missions during the interwar years, albeit with limited success. After World War II, the United States began to develop a robust capacity in this area and today ranks as the only power with the ability to conduct access-assurance operations on a global scale. Nevertheless, other countries, including Britain, China, France, India, Japan, and Russia, seek to bolster their ability to conduct at least some operations of these types. And it is from the simultaneous pursuit of such capabilities by these countries that concern arises over the potential for crisis and conflict among the major powers, all seeking to ensure their own societies access to the energy they need.

Access assurance and the extended ‘Carter Doctrine’ The United States has asserted an explicit policy of overseas infrastructure protection and access assurance since 1980, when then-President Jimmy Carter issued his famous dictum, in his State of the Union address of 23 January, that the uninterrupted export of Persian Gulf oil was essential to the US economy and that any move by a hostile power to interdict that flow would be “regarded as an assault on the vital interests of the United States of America,” and, as such, would be “repelled by any means necessary, including military force.” This policy, known thereafter as the “Carter Doctrine,” was initially triggered by the Soviet intervention in Afghanistan, which was seen by Carter as posing a direct threat to the safety of Persian Gulf oil deliveries. “The Soviet effort to dominate Afghanistan has brought Soviet military forces to within 300 miles of the Indian Ocean and close to the Straits of Hormuz, a waterway through which most of the world’s oil must flow,” he observed. “The Soviet Union is now attempting to

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consolidate a strategic position, therefore, that poses a grave threat to the free movement of Middle East oil.”24 It was this threat that the new policy was originally intended to overcome. As time went on, however, the basic principle of the Carter Doctrine – that the free flow of oil from foreign sources of supply to the United States and its allies must be protected against hostile threats – was extended to other potential adversaries and to other sources of supply. Hence, the first true application of the Carter Doctrine occurred during the final years of the Iran–Iraq War of 1980–8, when Iranian forces began attacking Kuwaiti oil tankers while traveling through the Persian Gulf (presumably to discourage Kuwait from providing loans to Iraq for arms procurement). Seeing in this a direct threat to the export of Persian Gulf oil – albeit by Iran rather than the USSR – President Ronald Reagan authorized the “reflagging” of Kuwaiti tankers with the American ensign and ordered their protection by the US Navy. Such action was essential, he declared, to demonstrate the “US commitment to the flow of oil through the Gulf.”25 President George H. W. Bush was the next chief executive to invoke the now-embellished Carter Doctrine. When Iraqi forces occupied Kuwait on 2 August 1990, he determined that military action was necessary to protect the oil fields of Saudi Arabia and, eventually, to drive the Iraqis out of Kuwait. In a nationally televised address on 8 August, announcing his decision to use military force in the Gulf, Bush cited America’s energy needs as his primary impetus. “Our country now imports nearly half the oil it consumes and could face a major threat to its economic independence,” and so “the sovereign independence of Saudi Arabia is of vital interest to the United States.”26 Only later, when American troops were girding for combat with the Iraqis, did he and other top officials express other justifications for war, such as a desire to liberate Kuwait and destroy Iraqi weapons of mass destruction. The record makes clear, however, that the president and his close associates initially viewed the invasion of Kuwait through the lens of the Carter Doctrine and its focus on the safety of Persian Gulf oil.27 Presidents Bill Clinton and George W. Bush have not been as forthright as Reagan and the elder Bush in expressing their adherence to the Carter Doctrine, but they have been equally vigorous in applying its underlying principles – first by imposing sanctions on Iraq in an effort to instigate “regime change” in Baghdad, and later, under Bush, through military intervention.28 As far as the Persian Gulf is concerned, therefore, the Carter Doctrine continues to govern US policy. What is so striking, however, is that its basic principles have also been extended to other oil-producing areas of the world, including the Caspian Sea basin and West Africa. This effort has reflected both a determined US effort to diminish America’s reliance on the ever-turbulent Gulf through the “diversification” of US oil providers, and the realization, discussed earlier, that many of these other producing areas are just as conflict-ridden as is the Gulf itself. The horizontal extension of the Carter Doctrine commenced in the late 1990s, when President Clinton determined that the Caspian Sea basin – until 1992

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largely under the control of the Soviet Union – should become a major source of oil for the United States and its allies, thereby helping to lessen US dependence on the Gulf. The newly-independent states of Azerbaijan and Kazakhstan were eager to sell their petroleum riches to the West, but lacked an autonomous conduit for exports – at that time, all existing pipelines from the land-locked Caspian passed through Russia – and faced serious challenges from ethnic minorities and internal opposition movements. To safeguard the future flow of Caspian Sea oil to the West, Clinton agreed to assist in the construction of a new oil pipeline from Azerbaijan to Turkey via Georgia (thus bypassing Russia) and to help these states enhance their nascent military capabilities.29 Although he never formally invoked the Carter Doctrine in approving these measures, Clinton applied the same “national security” logic to Caspian Sea oil supplies that Carter had applied to Persian Gulf oil. Hence, in a 1997 White House meeting with President Heydar Aliyev of Azerbaijan, he declared, “in a world of growing energy demand, our nation cannot afford to rely on any single region for our energy supplies.” By facilitating Azerbaijan’s oil exports, Clinton avowed, “we not only help Azerbaijan to prosper, we also help diversify our energy supply and strengthen our nation’s security.”30 In consonance with this mode of thought, Clinton authorized the establishment of military ties with the new nations of the Caspian region and initiated a generous program of military assistance. As part of this effort, US forces engaged in a series of annual exercises designed to test the Pentagon’s ability to deploy US combat forces rapidly in the region, in support of friendly governments that might face attack from hostile minorities or insurgents.31 These ties were later utilized by President Bush to facilitate the US intervention in Afghanistan following the attacks of September 2001, and to support the continuing campaign against remnants of al-Qaeda and the Taliban in the region. This, in turn, has led to a substantial increase in American military aid to these countries. Typically, US aid to the Caspian nations has been justified in terms of sustaining the fight against terrorism, but a close reading of State and Defense Department documents suggests that the protection of oil infrastructure remains a paramount concern. In requesting $51.2 million in assistance to Azerbaijan for fiscal year 2005, for example, the State Department affirmed that “US national interests in Azerbaijan center on the strong bilateral security and counter-terrorism cooperation [and] the advancement of US energy security.”32 Meanwhile, in Kazakhstan, the United States is helping to refurbish the old Soviet air base at Atyrau, near the giant offshore Kashagan oil field. This base will be used to house a Kazakh “rapid reaction brigade” whose task, according to the Department of State, will be to “enhance Kazakhstan’s capability to respond to major terrorist threats to oil platforms or borders.”33 A similar pattern of ever-expanding US military involvement is also evident in West Africa and the Gulf of Guinea, another key oil-producing region that is plagued by internal discord and conflict. The growing importance of Africa in satisfying America’s energy needs was first highlighted in the Bush administration’s National Energy Policy of May 2001: “Sub-Saharan Africa holds 7 percent of

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world oil reserves and comprises 11 percent of world oil production. . . . West Africa is expected to be one of the fastest growing sources of oil and gas for the American market.”34 As in the Caspian Sea basin, this has invested Africa with a strategic significance it did not possess before. “African oil is of national strategic interest to us,” Assistant Secretary of State Walter Kansteiner observed in 2002, “and it will increase and become more important as we go forward.”35 America’s strategic involvement in Africa ascended to an entirely new level on 6 February 2007 when President Bush announced that the Department of Defense would establish a new regional command for Africa, dubbed AFRICOM. Until this time, the region had received only scant and intermittent attention from US military officials and responsibility for any American forces operating there was divided between European Command (EUCOM), Pacific Command (PACOM), and Central Command (CENTCOM). Recognizing, however, that US strategic interests in Africa were becoming increasingly significant – in part because of growing US reliance on Africa’s oil, in part because of the growing presence there of radical Islamic movements – the White House concluded that a dedicated command authority was now required to oversee US operations in the area. AFRICOM is expected to become operational on 30 September 2008; for now, a transitional team is working out of borrowed offices at EUCOM headquarters in Stuttgart, Germany, but Department of Defense officials hope that a permanent home can soon be found in Africa itself.36 Having been designated as a “national strategic interest” of the United States, African oil is thus being exposed to the same sort of gradually expanded military initiatives that have been pursued in other oil-producing regions in accordance with the Carter Doctrine. Prior to the announcement of the pending establishment of AFRICOM, the most visible expression of growing US military involvement was an increased Navy presence along Africa’s west coast, the location of its most promising offshore oil fields. In 2003, the head of the US EUCOM, which then exercised control over American forces in sub-Saharan Africa, declared that the aircraft carrier battle groups under his command would shorten their visits to the Mediterranean and “spend half their time going down the west coast of Africa.”37 As in the Caspian region, the Department of Defense has stepped up its military aid and training programs in the region and, according to recent press accounts, is beginning to search for permanent military facilities in the area – typically, “bare-bones facilities,” or airstrips with modest logistical capabilities.38 While military officials tend to emphasize the threat of terrorism when discussing the need for such facilities, a senior officer told a reporter from the Wall Street Journal that “a key mission for US forces [in Africa] would be to ensure that Nigeria’s oil fields, which in the future could account for as much as 25 percent of US oil imports, are secure.”39

Competitive arms diplomacy At this point in time, no other nation possesses a capacity to conduct infrastructure protection and access-assurance operations on a global basis, and few have

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that ability even in local areas. Some, like China, India, Japan, and Russia, possess a limited ability to protect the sea-lanes and oil infrastructure in neighboring seas and countries, but none can project power to distant oil-producing regions like the Persian Gulf and West Africa. It appears, however, that several of these countries are expanding their capacity to engage in what might be termed competitive arms diplomacy, or the use of arms transfers and military aid as a tool of influence in pursuing foreign oil supplies – a practice most evident in Africa and the Caspian Sea basin.40 For Africa, of course, the competitive supply of arms as a tool of influence is hardly a new phenomenon, as both superpowers employed such methods in their tireless pursuit of developing world allies. With the end of the Cold War, however, this motive for military sales disappeared and the flow of arms diminished for a while, only to resume again in the twenty-first century with the competitive pursuit of African oil. Signs of this competition can be seen throughout the region, but it is in Nigeria where it is most conspicuous. Nigeria is, of course, Africa’s leading oil producer and harbors some of its largest oil and gas reserves.41 In seeking access to these reserves, the United States and China have both offered a wide variety of economic and development assistance, ranging from loans and grants to special training programs, demonstration projects, and the like; but the powerful allure of Nigerian energy has also prompted Washington and Beijing to compete on another plane, via the delivery of arms and military-technical services. The United States has long provided the Nigerian military with various forms of military assistance, including Foreign Military Sales credits and International Military Education and Training programs. For fiscal years 2005 through 2007, such assistance was pegged at $80 million. Nigeria was also slated to receive additional support in the form of surplus arms and equipment plus various forms of aid via multilateral security programs, such as the African Contingency Operations Training and Assistance Program (ACOSTA) and the Trans-Sahara Counter-Terrorism Initiative (TSCTI).42 No doubt US military and diplomatic personnel would like to do more to enhance Nigerian military capabilities (and thereby further ingratiate the United States with the government in Abuja), but budgetary constraints in Washington along with competition from other priorities have placed some limits on how much they have been able to allocate for this purpose. This has provided an opportunity for China to curry favor with the Nigerians by providing military inducements of their own. In 2005, for example, the Chinese agreed to sell Nigeria 12 F-8IIM multi-purpose combat jets for its air force, along with a large number of light patrol boats for use in guarding the labyrinthine waterways of the Niger Delta region.43 If Nigeria is the epicenter of this competitive struggle in Africa, signs of its reach can be seen throughout the region. The Chinese, for their part, are providing a wide array of modern arms to Sudan and Zimbabwe, and less advanced weaponry to Kenya, Sierra Leone, Tanzania, and other African states.44 Likewise, the United States is stepping up its military aid and arms

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transfers to states of particular interest, including Angola, Kenya, Mali, and Uganda.45 In general, these transactions involve the delivery of military hardware to Africa: weapons, vehicles, ammunition, protective devices, communications gear, and so on. Increasingly, however, they also entail the deployment of military personnel advisers, technicians, instructors, intelligence officers, and so forth. As part of the Pentagon’s ACOSTA program, for example, there has been a sharp increase in the number of US military advisers and instructors in the region, Likewise, recent Chinese arms transfers have been accompanied by provisions for training and maintenance support.46 These deployments have not yet reached the levels seen in the Middle East and Asia, but represent the early stages of a self-sustaining drive toward ever-greater concentrations of American and Chinese military personnel in conflict-prone areas of Africa. If Africa represents an early stage of this process, the Caspian Sea region provides a more advanced and dangerous version. Here, the process of militarization first noted in Africa – driven by competitive arms sales, military aid agreements, and training deployments – has been carried to a much higher level.47 And, as Nigeria is to Africa, Kazakhstan is to the Caspian: the pivot of great-power competition for influence. All three of the major contending powers – the United States, Russia, and China – have sought access to Kazakhstan’s vast energy reserves, and all three have offered a wide variety of military inducements in their competitive quest. The United States began aiding Kazakhstan’s armed forces in the late 1990s, during the Clinton administration. Eager to bolster Kazakhstan’s independence from Moscow and its ability to deliver oil to the West, Secretary of Defense William S. Cohen signed a “defense cooperation agreement” with President Nursultan Nazerbaev on 17 November 1997, allowing for various forms of American military assistance, including arms transfers and joint training exercises.48 This agreement, later supplemented by others, has led to a steady increase in the flow of security-related assistance to Kazakhstan.49 All told, US spending on these and related endeavors was expected to total $175 million during fiscal years 2005 to 2007.50 Not to be outdone, the Russians have also sought to bolster their military ties with Kazakhstan. These ties are enshrined in the Collective Security Treaty Organization (CSTO), a sort of mini-NATO made up of seven former republics of the Soviet Union, including Russia and Kazakhstan. As part of this fraternal relationship, the two countries are joined in an integrated air-defense system, participate in joint military maneuvers, and consult regularly on common security matters.51 All of this is being leveraged by Moscow to strengthen the bonds between Kazakh and Russian military personnel and to accelerate the flow of Russian arms to Kazakh forces.52 Just as eager to curry favor, China has also begun to provide Kazakhstan with limited forms of security assistance, largely under the auspices of the Shanghai Cooperation Organization (SCO).53 The United States, Russia, and China have also employed arms diplomacy to bolster their ties with the governments of other Caspian basin states, especially

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Kyrgyzstan and Uzbekistan. These two, like Kazakhstan, are members of the SCO and CSTO, and so benefit from their institutional ties with Russia and China. Both are integrated into the CSTO air-defense system and participate in joint military exercises with Russian forces. Both also receive a certain amount of Russian military gear through these channels. Like the Kazakhs, however, the leaders of Kyrgyzstan and Uzbekistan have sought to widen their international maneuvering space by establishing political, economic, and military ties with the United States. Washington first took advantage of this opening during the Clinton administration, when military cooperation agreements were signed with both countries. These ties were accorded greater importance after September 2001, when both countries agreed to house logistical bases for use by American forces committed to operations against the Taliban and al-Qaeda in Afghanistan.54 In recognition of their support, and to further enhance US ties with the armed forces of these two countries, the United States has provided both with considerable arms and security-related assistance. For fiscal years 2004–6 this aid amounted to a combined total of $305 million.55 Clearly, the struggle for influence in the Caspian basin – like that in Africa – is still gaining momentum. As we have seen, this competition is resulting in an ever-expanding flow of munitions into the region, along with the deployment of military advisers, technicians, instructors, and combat-support personnel. Although often touted as a boon to security cooperation, these programs can only heighten the traditional suspicions and rivalries that plague the region, thus increasing the risk of future crises and conflicts – with the major powers inextricably involved.

Gunboat diplomacy Energy-related conflict among the major powers might also arise through the militarization of territorial disputes, especially when one side or another, or both, engage in what might best be described as “gunboat diplomacy.” When states wish to signal to another their determination to pursue certain vital interests or to deter a rival from overstepping certain boundaries, they often deploy air, ground, or naval forces to within shooting range of the intended recipient of the particular “message.” Because naval forces were widely employed by the major imperial powers to subdue weaker states in Asia, Africa, and Latin America in the nineteenth and early twentieth centuries, the term “gunboat diplomacy” is often used to describe such methods. But while warships are still used for this purpose, similar effects have also been achieved through the conspicuous deployment of bombers and marine expeditionary forces. Although inherently dangerous, such operations are still employed by the major powers and have come to play an especially conspicuous role in the global struggle over energy supplies. In perhaps the most dramatic example of such behavior, it was, in fact, gunboats that were the villain of the piece. The site of this encounter was the East China Sea, along the disputed maritime border between China and Japan. Citing

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ambiguous and conflicting provisions of the United Nations Convention on the Law of the Sea (UNCLOS), Beijing and Tokyo have proclaimed conflicting boundaries for their Exclusive Economic Zones in this area – zones extending up to 200 nautical miles from the shore, in which UNCLOS affords states exclusive rights of economic exploitation and management. Japan insists that the border between the Chinese and Japanese zones falls along the median line between the two countries, while China insists that it should fall along its outer continental shelf, which lies closer to Japan than to China; falling between the two competing lines is a large area claimed by both. Further complicating matters is the existence of a large undersea natural gas field – called Chunxiao by the Chinese and Shirakaba by the Japanese – that straddles the disputed area and uncontested Chinese territory. Even though Beijing rejects Japan’s claim that the median line forms their common border, it has pledged to refrain from gas extraction in the disputed zone pending a resolution of the issue. It has, however, insisted on its right to drill on the Chinese side of the median line, even though Tokyo says this inevitably will suck up gas from across the line, in what it considers Japan’s sovereign territory. Japan, for its part, says it has every right to drill for gas in this area, even though Beijing claims it as part of its own sovereign territory. Although several rounds of negotiations were conducted in 2004–5 in an effort to resolve the boundary dispute, no substantive progress was achieved and in early 2005 the China National Offshore Oil Corporation (CNOOC) began drilling operations in the Chunxiao field from a position just a mile or so from the median line claimed by Japan. Soon thereafter, Tokyo announced that it would allow Japanese firms to apply for drilling rights in the contested zone.56 Tokyo raised the ante three months later when it awarded drilling rights in the contested zone to Teikoku Oil. As could be expected, this produced a howl of protest in Beijing. “Giving Teikoku the go-ahead to test drill is a move that makes conflict between the two nations inevitable, though what form this clash will take is hard to tell,” warned a commentary in the government-backed China Daily.57 It was not long before both sides removed any uncertainty as to what form their response would take. By early September the Japan Maritime SelfDefense Force (JMSDF) had begun regular flights by naval patrol planes over Chinese rigs along the disputed median line. Not long after, one of these planes detected an unusual sight in these waters: the arrival of a Chinese naval squadron, comprised of five missile-armed destroyers and frigates.58 A confrontation of some sort was inevitable, and quickly ensued. Within days of arriving in the contested area, one of the Chinese ships aimed one of its guns at a circling JMSDF surveillance plane. Fortunately, no shots were fired and both sides backed away from further provocation. Nevertheless, an ominous precedent had been set.59 Possibly chastened by this incident, Beijing and Tokyo agreed to a new round of negotiations over the East China Sea dispute. Talks commenced in January 2006 and have occurred on an irregular basis since then, although without

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demonstrable progress. In any case, China has continued to pump gas from its rigs along the disputed boundary line and to station naval forces in the area, while Japan has announced plans to expand its own maritime patrol capabilities.60 With no resolution of the East China Sea dispute evident on the horizon, and both sides building up their naval capabilities, there is every prospect that additional – and perhaps more dangerous – instances of gunboat diplomacy can be expected in the area. Gunboat diplomacy (again of the literal sort) has also occurred in the Caspian Sea, notably in waters claimed both by Azerbaijan and Iran. Although three of the Caspian Sea states – Russia, Azerbaijan, and Kazakhstan – have now delineated their maritime boundaries, two others – Iran and Turkmenistan – have refused to agree on the extent of their offshore interests, and have sparred with Azerbaijan over ownership of several promising oil and gas fields in the Sea’s southern reaches.61 The Azerbaijanis have nevertheless proceeded as if their claims to these fields are legitimate, and have awarded concessions to foreign energy firms to exploit the contested fields, sparking predictable protests from the other two. In July 2001 Iran took a more ominous step when one of its warships approached an Azerbaijani oil exploration vessel and ordered it out of the area at the risk of being fired upon. The survey ship complied, but Azerbaijan reportedly sent a patrol boat of its own into the area and chased off the Iranian ship.62 No further incidents of this sort have been reported in the Caspian Sea, but the July 2001 encounter has been viewed by all local powers as justification for the expansion of their naval capabilities. Azerbaijan and Kazakhstan are now building up their navies with assistance from the United States, while Russia has announced a substantial expansion of its own Caspian Fleet. The United States and Russia have also announced competing plans for multilateral fleets in the region, the Caspian Guard and the Caspian Rapid-Deployment Force (CASFOR), respectively.63 So here, too, as in the East China Sea, the stage is being set for additional outbreaks of gunboat diplomacy.

Inadvertent escalation As suggested earlier in this chapter, it will be almost impossible to avert recurring disorder and conflict in the oil-producing areas of the developing world, leading to periodic disruptions in the global flow of petroleum. This will no doubt lead to intermittent great power involvement in efforts to suppress such disorder and thereby ensure the safe flow of oil. But such conflicts, painful as they may prove to the combatants and others involved, will in all likelihood remain local affairs, confined to the immediate area where the trouble initially arose. This still leaves open the question of whether the competition over dwindling supplies of energy may lead to conflict among the great powers themselves. For this, there is no obvious answer. Arguing against the potential for a great-power military confrontation is the widespread understanding that, in the nuclear era, such an engagement has the

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potential to wreak unimaginable damage and to erase any conceivable benefit of “victory” on the battlefield. Even without the use of nuclear arms, wars employing advanced conventional weapons are capable of inflicting extraordinary damage, as has been demonstrated over and over again in the Middle East. A full-scale conflict among the great powers would also disrupt the global economy in ways that would impose far greater harm on most countries than would even a severe shortfall in petroleum or natural-gas supplies. It follows from this that none of the major powers is likely to make a deliberate choice to go to war over energy, as Japan did in 1941 when it seized the oil fields of the Dutch East Indies, thus setting in train America’s entry into World War II. But there is another possibility that must be considered: that, in their relentless struggle over dwindling stocks of energy, the major powers will engage in increasingly risky and provocative behaviors that will systematically erode the firewall between peace and war, increasing the possibility that a minor incident will trigger something far more explosive. In such a scenario, best described as “inadvertent escalation,” none of the individual actions taken by one side in the competitive struggle over energy would be intended to provoke a military response from the other parties involved; rather, it is a cascade of such actions – each more severe than the one preceding it – that eventually leads to the eruption of war. In today’s world, it is this sort of scenario, and not the deliberate initiation of hostilities, that poses the greatest risk of great-power conflict over energy. As we have seen, moreover, the global struggle over energy affords abundant opportunities for a crescendo of escalatory engagements. There are, first of all, the competitive arms-supply relationships developing in Africa, Central Asia, and the Middle East. These typically begin with the delivery of arms and military equipment, then graduate to the deployment of military advisers, instructors, and technicians, often leading to a substantial buildup of foreign military personnel in areas of chronic instability. These transactions can, and have, led to the stationing of personnel from competing great powers in close proximity to one another, in states or regions divided along ethnic, religious, and political lines. Because many of the recipients of these aid packages are themselves engaged in long-term rivalries with their (equally well armed) neighbors, it is not hard to imagine how a minor skirmish at the local level could provoke a larger clash, prompting the major powers to rush additional arms and advisers to their respective clients, leading sooner or later to an unintended encounter between the forces of the major powers themselves, and thence to an even greater conflagration. Gunboat diplomacy of the sort described above can also trigger a chain of events leading to full-scale war. To be effective, maneuvers of this type require that the intended recipient of the “message” interpret it correctly and take the recommended action, thereby averting a military clash. But it is entirely possible for the recipient to misinterpret the message, or to read it correctly but choose to resist rather than submit – in either case, forcing the sender to escalate or back down. This can go on for some time without either side actually firing a shot, as

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in recent naval encounters in the East China and Caspian Seas; but it is too much to hope that this will always prove to be the case, especially if the parties involved view each other in increasingly hostile terms, as seems to be so today. Other scenarios can be imagined in which the major energy-importing powers engage in actions intended to protect overseas energy supplies, which inadvertently trigger a cascade of events leading to the outbreak of full-scale conflict. No strong state is likely to initiate such action with the expectation that such an outcome will actually occur. Yet it is reasonable to expect that they will nonetheless be prepared to take what they perceive to be small risks, in the hope that the other parties involved will choose to back away. History suggests, however, that small risks can invite a corresponding response from one’s rivals, leading to bigger and bigger risks on each side until it becomes exceedingly difficult to avert a full-blown confrontation. No one can predict when, or if, a situation like this will arise, but experience to date, as surveyed above, suggests that the likelihood of such an encounter will grow stronger in the years ahead, as anxiety over the sufficiency and safety of global petroleum supplies intensifies, and national leaders increasingly rely on military forces to guarantee energy security.

Notes 1 John Deutch and James R. Schlesinger, eds., National Security Consequences of US Oil Dependency, New York: Council on Foreign Relations, 2006, pp. 23 and 30. 2 “The New Currency of Foreign Policy,” statement of James R. Schlesinger before the United States Senate Foreign Relations Committee hearing on “The High Cost of Crude,” 16 November 2005, http://www.senate.gov/~foreign/hearings/2005/hrg 051116a.html; emphasis added. 3 British Petroleum, BP Statistical Review of World Energy, June 2007, p. 11, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and _publications/statistical_energy_review_2006/STAGING/local_assets/downloads/pdf /statistical_review_of_world_energy_full_report_2006.pdf. 4 United States Energy Information Administration, International Energy Outlook 2007, pp. 88 and 187, www.fypower.org/pdf/EIA_IntlEnergyOutlook(2006).pdf. These figures are for the ‘reference case,’ assuming oil prices in the middle range between high and low. 5 For background on the debate over future petroleum availability, see Deutch and Schlesinger, US Oil Dependency; Kenneth S. Deffeyes, Hubbert’s Peak: The Impending World Oil Shortage, Princeton, NJ: Princeton University Press, 2001; David Goodstein, Out of Gas, New York: Norton, 2004; and Paul Roberts, The End of Oil, Boston, MA: Houghton Mifflin, 2004. 6 Matthew R. Simmons, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, Hoboken, NJ: John Wiley, 2005, p. xv. 7 United States Energy Information Administration, International Energy Outlook 2004, pp. 213, http://tonto.eia.doe.gov/ftproot/forecasting/0484(2004).pdf; idem, International Energy Outlook 2005, p. 157, http://tonto.eia.doe.gov/ftproot/forecasting/0484(2005).pdf; idem, International Energy Outlook 2007, p. 155. 8 See Deutch and Schlesinger, US Oil Dependency, pp. 14–23. 9 International Energy Agency, Medium-Term Oil Market Report, July 2007, http://www.vtpeakoil.net/community/document.php?id=128. 10 See Donald F. Fournier and Eileen T. Westervelt, Energy Trends and Their

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11 12 13

14 15 16 17

18 19 20 21 22 23 24 25

26 27

M. T. Klare Implications for US Army Installation, Washington, DC: US Army Corps of Engineers, Engineer Research and Development Center, Construction Engineering Research Laboratory, September 2005, p. 13, http://www.scag.ca. gov/rcp/pdf/summit/USCorpson PeakOil.pdf. See also Kenneth S. Deffeyes, Beyond Oil, New York: Hill and Wang, 2003, pp. 47–51. “Repairs to Delay Thunder Horse Production Until 2008,” Oil & Gas Journal Online, 18 September 2006. Sam Fletcher, “OTC: Weather Experts See ‘New Era’ of Hurricane Activity in GOM,” Oil & Gas Journal Online, 9 May 2006. Andrew E. Kramer, “Russians Buy Control of Oil Field,” New York Times, 22 December 2006, http://www.nytimes.com/2006/12/22/business/worldbusiness/ 22shell.html?_r=1&oref=slogin. See also Abrahm Lustgarten, “Shell Shakedown,” Fortune, 5 February 2007, pp. 92–100, http://money.cnn.com/magazines/ fortune/fortune_archive/2007/02/05/8399125/index.htm; and Alex Turkeltaub and Stephen Bailey, “Sakhalin-2 Deal Will Alter Business Climate, Markets,” Oil & Gas Journal Online, 15 January 2007, pp. 34–5. United States Energy Information Administration, International Energy Outlook 2007, p. 88. Ibid., pp. 188–9; includes conventional petroleum only. See Terry Lynn Karl, The Paradox of Plenty, Berkeley: University of California Press, 1997. See John Donnelly, “Burdens of Oil Weigh on Nigerians,” Boston Globe, 3 October 2005, http://www.boston.com/news/world/africa/articles/2005/10/03/burdens_of_oil_ weigh_on_nigerians/; Lydia Polgreen, “Blood Flows with Oil in Poor Nigerian Villages,” New York Times, 1 January 2006, http://www.nytimes.com/2006/01/01/international/africa/01nigeria.html; Jad Mouawad, “Growing Unrest Posing a Threat to Nigerian Oil,” New York Times, 21 April 2007, http://www.nytimes.com/2007/ 04/21/business/worldbusiness/21oil.html?n=Top/News/World/Countries%20and%20 Territories/Niger. See Anonymous [Michael Scheuer], Imperial Hubris, Washington, DC: Brassey’s, 2004. Quoted in Warren Vieth and Alissa J. Rubin, “Iraq Pipelines Easy Targets for a Saboteur,” Los Angeles Times, 26 June 2003, http://www.commondreams.org/headlines03/0625–06.htm. Neil MacFarquhar, “After Attack, Company’s Staff Plans to Leave Saudi Arabia,” New York Times, 3 May 2004, http://query.nytimes.com/gst/fullpage.html? res=9C01E4DC133DF930A35756C0A9629C8B63&sec=&spon=&pagewanted=all#. Idem, “Saudi Military Storms Complex to Free Hostages,” New York Times, 31 May 2004, http://query.nytimes.com/gst/fullpage.html?res=9F01E4D61F3EF932A05756C 0A9629C8B63. See Bhushan Bahree and Chip Cummins, “Thwarted Attack at Saudi Facility Stirs Energy Fears,” Wall Street Journal, 25–26 February 2006. Deutch and Schlesinger, US Oil Dependency, pp. 22–3. Jimmy Carter, State of the Union Address, 23 January 1980, www.jimmycarterlibrary.org/documents/speeches/su80jec.phtml. From an official announcement delivered by Assistant Secretary of State Richard W. Murphy, in Michael A. Palmer, Guardians of the Gulf: A History of America’s Expanding Role in the Persian Gulf, 1833–1992, New York, Free Press, p. 123; for background see also pp. 128–49. As quoted in “Confrontation in the Gulf: Excerpts From Bush’s Statement on US Defense of Saudis” New York Times, 9 August 1990, http://query.nytimes.com/gst/ fullpage.html?res=9C0CE0DC1F3FF93AA3575BC0A966958260. See Bob Woodward, The Commanders, New York: Simon and Schuster, 1991, pp. 225–6, 230, 236–7.

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28 Michael T. Klare, Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum, New York: Metropolitan Books, 2004, pp. 52–5, 94–101. See also Daniel Yergin, “A Crude View of the Crisis in Iraq,” Washington Post, 8 December 2002. 29 See Michael T. Klare, Resource Wars: The New Landscape of Global Conflict, New York: Holt, 2001, pp. 1–5, 81–108. 30 “Visit of President Heydar Aliyev of Azerbaijan,” statement by the White House Press Secretary, 1 August 1997, http://www.clintonpresidentialcenter.org/legacy/ 080197-statement-on-president-meeting-with-heydar-aliyev-of-azerbaijan.htm. 31 These exercises included the annual CENTRAZBAT maneuvers, entailing the deployment of US troops from bases in the United States directly to the Caspian region. For a description of one such exercise, see R. Jeffrey Smith, “US Leads Peacekeeping Drill in Kazakhstan,” Washington Post, 15 September 1997; and idem, “US, Russian Paratroops Join in Central Asian Jump,” Washington Post, 16 September 1997. 32 United States Department of State, “Congressional Budget Justification: Foreign Operations, Fiscal Year 2004,” February 2003, http://stinet.dtic.mil/cgibin/GetTRDoc?AD=ADA413948&Location=U2&doc=GetTRDoc.pdf. 33 As paraphrased by Jim Nichol, “Central Asia’s New States: Political Developments and Implications for US Interests,” Congressional Research Service Report for Congress, 11 December 2002, p. 3, http://www.fas.org/asmp/resources/govern/crsib93108.pdf. 34 National Energy Policy Development Group, National Energy Policy, May 2001, p. 11, http://www.whitehouse.gov/energy/National-Energy-Policy.pdf. 35 Quoted in Mike Crawley, “With Mideast Uncertainty, US Turns to Africa for Oil,” Christian Science Monitor, 23 May 2002, http://www.csmonitor.com/2002/0523/ p07s01-woaf.html. 36 See Lauren Ploch, “Africa Command: US Strategic Interests and the Role of the US Military in Africa,” Congressional Research Service Report for Congress, updated 6 July 2007, http://ftp.fas.org/sgp/crs/natsec/RL34003.pdf. 37 Quoted in Charles Cobb, Jr, “Larger US Troop Presence May Be Needed in Africa, Says NATO Commander,” allAfrica.com, 2 May 2003, http://allafrica.com/stories/ 200305020307.html. In February 2007 the Department of Defense announced the establishment of a separate African Command – a decision that highlights Africa’s growing importance as an energy supplier and suggests rising US concern about the security of those supplies. 38 See Greg Jaffe, “In Massive Shift, US Is Planning to Cut Size of Military in Germany,” Wall Street Journal, 10 June 2003; Eric Schmitt, “Threats and Responses:

Expanding US Presence; Pentagon Seeking New Access Pacts for Africa Bases,” New York Times, 5 July 2003, http://query.nytimes.com/gst/fullpage.html?res=9500E7D81F3AF936A35754C0A9659C8B63. 39 Quoted in Jaffe, “Massive Shift.” 40 Cf. Klare, Blood and Oil, pp. 146–79. 41 On the importance of Nigeria to US energy policy, see the testimonies of Assistant Secretary of State Paul Simon, and of J. Stephen Morrison of the Center for Strategic and International Studies, before the United States Senate Foreign Relations Committee hearing on “The Gulf of Guinea and US Strategic Energy Policy,” 15 July 2004, pp. 3–6, 39, and 43–5, http://www.senate.gov/~foreign/hearings/2004/hrg040715p. html. 42 The $80 million includes Foreign Military Sales Financing, International Military Education and Training grants, narcotics and law-enforcement assistance, Emergency Support Funds assistance, and commercial and Pentagon-managed arms transfers. United States Department of State, “Congressional Budget Justification: Foreign Operations – Fiscal Year 2006,” pp. 307–9, 589, 628, http://www.state.gov/s/d/rm/

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45 46 47 48 49 50 51

52 53 54 55

56 57 58 59 60

M. T. Klare rls/cbj/. On indirect sources of military aid, see Michael Klare and Daniel Volman, “The African Oil Rush and US National Security,” Third World Quarterly 27/4, 2006, pp. 609–28. Dino Mahtani, “Nigeria Shifts to China Arms,” Financial Times, 28 February 2006, http://search.ft.com/ftArticle?queryText=Nigeria+Shifts+to+China+Arms&y=0&aje= true&x=0&id=060228001284&ct=0. For background on Chinese arms transfers to Africa, see Amnesty International, “People’s Republic of China: Sustaining Conflict and Human Rights Abuses – The Flow of Arms Accelerates,” 11 June 2006, http://web.amnesty.org/library/ index/engasa170302006; and David H. Shinn, “Africa and China’s Global Activism,” paper presented at the symposium on “China’s Global Activism: Implications for US Security Interests,” National Defense University, Washington, DC, 20 June 2006, http://www.ndu.edu/inss/symposia/pacific2006/shinnpaper.pdf. See United States Department of State, “Congressional Budget Justification: Foreign Operations – Fiscal Year 2007,” pp. 213–14, 628–9, http://www.state.gov/documents/organization/60641.pdf. On US training programs, see Klare and Volman, “The African Oil Rush”; on Chinese programs, see Shinn, “Africa and China’s Global Activism.” See Klare, Blood and Oil, pp. 152–79. Linda D. Kozaryn, “US, Kazakhstan Increase Military Ties,” Armed Forces Information Service, 26 November 1997, http://www.defenselink.mil/news/newsarticle. aspx?id=41527. See Klare, Resource Wars, pp. 1–2, 95–7. United States Department of State, “Congressional Budget Justification: Foreign Operations – Fiscal Year 2007,” pp. 501, 591, 631. See Jim Nichol, “Central Asia: Regional Developments and Implications for US Interests,” Congressional Research Service Issue Brief for Congress, updated 12 May 2006, pp. 3–4, http://italy.usembassy.gov/pdf/other/IB93108.pdf; Vladimir Socor, “CIS Collective Security Treaty Organization Holds Summit,” Eurasia Daily Monitor, 24 June 2005, http://www.jamestown.org/edm/article.php?article_id= 2369935. See Roger McDermott, “Nazarbayev’s Caspian Security Deals: What Can Moscow Offer?” Eurasia Daily Monitor, 27 June 2006, http://www.jamestown.org/publications_details.php?volume_id=414&issue_id=3779&article_id=2371222. See Bates Gill and Matthew Oresman, China’s New Journey to the West, Washington, DC: Center for Strategic and International Studies, 2003, p. 20. See Klare, Resource Wars, pp. 95–7; and idem, Blood and Oil, pp. 135–9. United States Department of State, “Congressional Budget Justification: Foreign Operations – Fiscal Year 2006,” pp. 375–6, 407–8, 520, 555–6. Military assistance is no guarantee of smooth diplomatic relations. Uzbekistan’s autocratic ruler, Islam Karimov, forced the United States to close its base in his country after Washington condemned a brutal government crackdown on unarmed demonstrators in the town of Andijon in May 2005. See also the account of US–Uzbekistan relations by Christopher Boucek in Chapter 8. “Japan Risks China Anger over Gas,” BBC News, 13 April 2005, http://news.bbc.co. uk/2/hi/asia-pacific/4439171.stm. “Japan’s Dangerous Move in the East China Sea,” China Daily, 18 July 2005, http://www.chinadaily.com.cn/english/doc/2005–07/16/content_460642.htm. Norimitsu Onishi and Howard W. French, “Japan’s Rivalry with China Is Stirring a Crowded Sea,” New York Times, 11 September 2005, http://www.nytimes. com/2005/09/11/international/asia/11taiwan.html. “Oil and Gas in Troubled Waters,” The Economist, 6 October 2005, pp. 52–3, http://www.economist.com/background/displaystory.cfm?story_id=4489650. “China Taps Field for Natural Gas in Disputed Area,” Wall Street Journal, 6 April

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2006; Masaki Hisane, “Japan’s New Energy Strategy,” Asia Times, 13 January 2006, http://www.atimes.com/atimes/Japan/HA13Dh01.html. 61 The question of economic rights in the Caspian Sea is particularly unsettled because of uncertainty as to whether the rules set down in UNCLOS apply there. The former Soviet Union and Iran, which once divided the Caspian Sea between them, regarded the Caspian Sea as a lake; a claim still persisted in by Moscow and Tehran. If the sea is deemed a lake, however, then there is no international legal regime to which the riparian states can appeal in settling their disputes. See Barbara Janusz, “The Caspian Sea: Legal Status and Regime Problems,” Chatham House Russsia and Eurasia Programme, August 2005, http://www.chathamhouse.org.uk/publications/papers/download/-/id/303/file/3939_bp0805caspian.pdf. 62 “Iran Is Accused of Threatening Research Vessel in Caspian Sea,” New York Times, 25 July 2001. http://query.nytimes.com/gst/fullpage.html?res=950CE7DA1F3AF 936A15754C0A9679C8B63&n=Top/News/World/Countries%20and%20Territories/Azerbaijan. 63 See Nichol, “Regional Developments,” p. 11; and Rovshan Ismayilov, “Azerbaijan Ponders Russian Caspian Defense Initiative,” Eurasianet.org, 1 February 2006, http://www.eurasianet.org/departments/insight/articles/eav020106.shtml.

3

Al-Qaeda, oil dependence, and US foreign policy Peter Haynes

This chapter explores the implications of the convergence of three geopolitical trends – al-Qaeda-inspired terrorism, surging worldwide dependence on Persian Gulf petroleum, and the increasing militarization of American foreign policy in the Middle East over the past three decades. It is an attempt to understand the motivations and potential consequences of a major terrorist campaign directed against the petroleum infrastructure of Arab oil-exporting states. It also considers the motivation of successive US administrations in turning, since the late 1970s, toward increasingly explicit military means to ensure access to energy sources in the Middle East, and the probable reactions that might follow a concerted Qaeda campaign to reduce the flow of Persian Gulf oil to the world market. I argue that the potential for al-Qaeda to use oil as a strategic weapon to achieve political ends, such as the retreat of the US from the Middle East, for example, is not as great as US policy-makers and petroleum experts would like to believe. The motivations of Qaeda terrorists and the exigencies of the type of war they are waging require different types of targets than those afforded by the petroleum infrastructure of the Gulf. In contrast, I contend that America’s increasing reliance on its armed forces in effecting foreign policy in the region suggests that the American reaction to indications of a systematic terrorist threat to Gulf oil infrastructure, or to an attack whose horrific grandeur compares to that of 11 September 2001, might well prove to be highly escalatory in military terms. Such actions may well be interpreted by other states, which lack comparable military alternatives of their own, not as a defense of the global economy, but as a self-interested expression of American national interest, potentially at their expense. The events of 11 September 2001 resulted in an American-led construction of a “Great Terror War”1 not unlike the Cold War in its rhetoric and intent to rid the world of an ostensibly universal threat. This terrorism is marked by nonnegotiating Islamic fanaticism, lethal global reach, and modern technological means of communicating and coordinating between terrorist networks.2 The colocation of the world’s major Muslim populations, who constitute the natural constituency to which radical Islam seeks to appeal, and the world’s richest oil reserves, virtually guarantees that critical energy infrastructure will eventually be placed at risk.3 The critical question is what kinds of strategic responses can

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be expected to arise from such attacks, when and if they occur on a substantial scale. At the end of 2003, the Persian Gulf states held 63 percent of the world’s known petroleum reserves and were responsible for 30 percent of the world’s production. Saudi Arabia alone owns 23 percent of the world’s reserves and produces 13 percent.4 Of all the exporting nations, only Saudi Arabia currently possesses the ability to increase its production during worldwide oil crises in order to maintain supply and mitigate an increase in the price of crude oil. The consumption of oil by developing Asian states alone is projected to more than double over the next 25 years.5 Worldwide consumption is projected to increase by 55 percent by 2025.6 Most of this demand will have to come from the Persian Gulf producers, whose share is anticipated to grow from 30 percent in 2003 to 43 percent of the world’s production by 2025.7 This will require Saudi Arabia to double its current production capacity,8 a feat considered by many in the petroleum industry to be unachievable.9 It is estimated that petroleum will account for 40 percent of the world’s energy needs through 2020.10 By then, the United States Department of Energy predicts that America’s dependence on imported oil will have increased from 55 percent (as it was in 2001) to nearly 70 percent.11 The increasing militarization of US foreign policy in the Middle East, which will necessarily provide the starting point for the American response to whatever new challenges may lie ahead, emerged in the late 1960s and 1970s. It was during this period that the United States became a net importer of oil while being forced, more or less simultaneously, to abandon the fixed monetary exchange mechanism that had been put in place after 1945. This structure had provided the chief tool by which the United States managed global energy markets in the immediate postwar period.12 The United States’ ability to finance its hegemony and enforce the subordination of other governments’ policies to American ideas about international economic cooperation was greatly diminished. In attempting to regain its leadership, the US has increasingly pursued more openly militarized, securityoriented strategies in the region, compensating for its loss of financial control by relying on the less subtle tools provided by its unrivaled military capability and competitive trade advantages in military technology.13 The shift toward a more militarized and unilateral policy in the Middle East reached a critical inflection point with the proclamation of what became known as the “Carter Doctrine” in January 1980. In his State of the Union address, then-President Jimmy Carter declared that “an attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.”14 Subsequent administrations, cognizant of America’s role as the architect, leader, and protector of a global order based on liberalism and free-market capitalism, have increasingly employed the doctrine in the Persian Gulf, culminating in the invasion of Iraq in March 2003. As Daniel Moran and James Russell noted in their introduction to this volume, one of the few remaining areas where policy-makers, military

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strategists, and political theorists throughout the developed world find it plausible to imagine strong countries using force against each other is in the energy sector. This is at least partly because of the direct dependence of national defense, in its most traditional form, upon access to oil; a dependence that has been apparent since the birth of the modern style of warfare in World War I. No modern state doubts that petroleum is a strategic commodity irrevocably intertwined with national survival. Consequently, advanced societies are inevitably sensitive to the threat of terrorist actions against the supply of petroleum, as well as to what is perceived to be a destabilizing tendency on the part of the US government, to pursue its foreign policy through increasingly militaristic means. As long as petroleum continues to play a pivotal role in underpinning the economic and military strength of the United States, which is both the world’s largest consumer of energy and the main provider of stability for the global economic order, the US will remain the decisive influence in shaping the developed world’s response to any terrorist campaign directed against the petroleum infrastructure of oil-exporting states.

Understanding terrorism “Terrorism,” as Walter Laqueur has noted, “is dangerous ground for simplificateurs and généralisateurs. To approach it, a cool head is probably more essential than any other intellectual quality.”15 The meaning of the term itself has evolved steadily over the years.16 Most recently the United States Department of Defense has declared that terrorism is “the calculated use of unlawful violence or threat of unlawful violence to inculcate fear; intended to coerce or to intimidate governments or societies in the pursuit of goals that are generally political, religious, or ideological.”17 This definition is as satisfactory as any, though it still does not command universal assent. For our purposes I prefer the somewhat more nuanced view of Bruce Hoffman. Terrorism, he has proposed, is: The deliberate creation and exploitation of fear through violence or the threat of violence in the pursuit of political change. All terrorist acts involve violence or the threat of violence. Terrorism is specifically designed to have far-reaching psychological effects beyond the immediate victim(s) or object of the terrorist attack. It is meant to instill fear within, and thereby intimidate, a wider ‘target audience’ that might include a rival ethnic or religious group, an entire country, a national government or political party, or public opinion in general. Terrorism is designed to create power where there is none or to consolidate power where there is very little. Through the publicity generated by their violence, terrorists seek to obtain the leverage, influence and power they otherwise lack to effect political change on either a local or an international scale.18 This definition bridges two major theoretical approaches – instrumental and organizational – both of which seek to explain the rationale for terrorist behavior, and which will be discussed in more detail below.19

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The first perspective, the instrumental approach, sees terrorism simply as a means to achieve political goals. This perspective reflects the view of many if not most American policy-makers, and mirrors the rationalistic nature of American strategic thinking during the Cold War. Strategists such as Herman Kahn, Thomas Schelling, Walt Rostow, and strategic analysis organizations such as RAND, for example, epitomize what might be called an “engineering” approach to strategic problem-solving. Heirs to the intellectual tradition exemplified by Baron Antoine-Henri de Jomini, they seek to distill strategic problems from their unique historical context, and relocate them in a more precise theoretical framework, where immutable principles promise reliable results.20 From this perspective terrorism is simply a form of coercion by a unitary, non-state actor, which lacks traditional military power, but nevertheless seeks to change the behavior of a targeted state. The behavior of such terrorist groups is conceived to be the result of a cost–benefit dialogue among its members. The instrumental approach views terrorist groups as cohesive, monolithic, and goal-seeking, despite the absence of the formal structures of cohesion that are characteristic of sovereign states. Terrorist groups are supposed to be attracted to the tactic of seemingly random surprise attacks and other forms of atavistic violence only because they lack more powerful, conventionalized means to deliver political results.21 This perspective invites governments to adopt a threat-centric focus, and to develop measures to address the threat of attack, however improbable. Terrorist motivations are deduced from the perceived relationship between the types of targets they strike and their political goals. From an instrumental perspective, terrorism can be integrated quite easily into a familiar understanding of international relations, in which threats to national survival are the dominant concern at the systemic level of analysis.22 In these terms, terrorism is not a condition or a state of mind from which motivations might be distilled. It is a strategic problem that raises the challenge of fixing it, preferably by unconditional extirpation. The policies that result from such a view are characterized by either preemptive or preventative defense, or by a reliance on retaliatory deterrence, which is designed to shift the cost-benefit analyses of the terrorists towards one of immense cost, usually by overwhelming conventional military means.23 The emphasis of this pragmatic, systemic-level approach is all about ending terrorist behavior rather than understanding it. In contrast, the organizational approach sees terrorism as a sociological phenomenon. It views terrorism through the lens of group and individual identity. A person’s decision to become a terrorist is understood in terms of group dynamics, rather than a rationalized process of inferring ends, ways, and means from each other. People join terrorist organizations for reasons that are not merely, or even primarily political, but personal. As Martha Crenshaw notes, “The popular image of the terrorist as an individual motivated exclusively by deep and intransigent political commitment obscures a more complex reality.”24 According to social-identity theory, a person’s sense of self is comprised of two parts: a personal identity and a social identity.25 Social identity refers to the elements of a person’s self-concept that derive from his or her awareness of membership in a

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social group, including the emotional importance tied to such membership.26 In essence, it refers to the myriad of meanings that are attached to an individual by the group and the self. An individual’s personal identity interacts continuously with the social environment in a process akin to perpetual negotiation.27 Committing oneself to a terrorist group, which means adapting its belief systems and pursuing its collective goals through violent means, is seen as an arresting way to fulfill projected self-identities, particularly those that increase one’s social status. Thus, Crenshaw has argued, “the motivation for terrorism may be [as much] to transcend reality as to transform it.”28 The nature of terrorism – dangerous, isolated, and intolerant of internal dissenting opinions – tends to conflate one’s personal and social identities with the group’s identity to an exceptional degree. As sociologists Jane Dutton, Janet Dukerich, and Celia Harquail noted, “when a person’s self-concept contains the same attributes as those in the perceived organizational identity, we define this cognitive link as organizational identification.”29 If the organizational understanding of terrorist organizations is correct, then their efforts to achieve political goals at the systemic level are not so crucial to an accurate understanding of what terrorism is. A genuinely realistic response must take account of the opportunity that membership in a terrorist organization affords to achieve a fulfilling, purposeful self-identity in the midst of a tightly knitted, like-minded community. To this extent, “winning” in instrumental terms may not be the determinative factor in explaining terrorist behavior as much as the opportunity to participate in an idealistic, bonding, and subtly ritualized setting, all of which is perceived to be a life-defining experience.30 Policies designed to respond to terrorism in these terms will underscore the need to understand terrorism as an especially violent and atavistic form of group dynamics. This approach invites emphasis on promoting means to dissuade membership, and to counter the attractions of group cohesion without resorting to escalatory violence, which merely raises the psychological stakes.31 In policy terms, this sort of approach promises an improved understanding of terrorist behavior, from which more effective policies might be developed. Even so, however, it is a long way from understanding to action. Such policies have proven hard to develop, difficult to implement in practical terms or on a large scale, and unlikely to produce rapid and observable results of the kind demanded by an anxious electorate.32

Understanding al-Qaeda Al-Qaeda is comprised of many elements. There is – or rather was – the Leninist-inspired vanguard group that gathered around Osama bin Laden in Afghanistan in the 1980s, followed him to Sudan and then back again, and is now largely dispersed. Nevertheless, the experienced survivors of this group still act as links between such leadership as still exists and other elements to which funding is dispersed. In addition, as Jason Burke noted, there is “the vast, amorphous movement of modern radical Islam, with its myriad cells, domestic

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groups, ‘groupuscules’ and splinters, joining the ‘network of networks’ to the hardcore itself” as drawn from a mass society of sympathizers.33 From this perspective, al-Qaeda should be envisioned less as an organization than as a kind of alternate universe, constructed by a committed vanguard, whose ideals and energy flowed down through an expanded group of receptive and enterprising associative members, and finally spread, even if in attenuated ideological form, among thousands of local networked nodes, each in different stages of revolutionary development. As a term, “Qaeda” has various meanings in Arabic, including “base” or “foundation,” which may also have the connotation of a precept or formula.34 It has, over the course of the last two decades, morphed from the former into the latter. As a consequence, it is now appropriate to think of al-Qaeda less as an “thing” than as a paradigm for collective action in the cause of revolutionary Islam. By reorienting the targets of bickering radical Islamic movements away from local governments, and toward the United States, bin Laden aimed to transform the Arab–Muslim political landscape and radicalize the political consciousness of a somnambulant society by heightening resentment of Western primacy over the Muslim world, all of which was supposed to provide a common direction to overcome the debilitating squabbles among radical Islamist groups that had historically prevented them from harmonizing their efforts. By sponsoring terrorism, he sought to promulgate a program of violent action formed around an alluring worldview designed to appeal to both the aspirations and the resentments of societies in the Middle East. These societies remain imbued with a deep sense of historical injustice, amplified by the persistent failure of repressive, anti-reform, and pro-stability governments to meet the high expectations of social and political performance set by the example of Western (and some Asian) governments over the last 50 years. Islamist terrorism, Mark Juergensmeyer has argued, is largely a religiously framed response to social humiliation.35 For bin Laden and his followers, political goals such as forcing the US out of the Middle East may be in deadly earnest; yet in the larger scheme of things they are means to an end. They serve as stimulants to societal action per se, and to a purifying rebirth. Bin Laden’s portrayal of the US as the deadly foe that is assaulting the Islamic way of life is intended to create a milieu for what Juergensmeyer calls “cosmic war” – a larger-than-life struggle that provides a legitimizing context for religion-imbued group violence.36 Reifying the US as a demonic foe serves bin Laden’s aim of channeling anger and resentment into the symbolic arena, while allowing him to justify violence in orthodox Islamic terms, as defensive religious war. Those who participate are offered the illusion of power, and the honor of having contributed to a collective struggle for cultural existence. As Juergensmeyer noted, “In the images of cosmic war . . . is a grand moment of social and personal transformation, transcending all worldly limitations. One does not easily abandon such expectations. To be without such images of war is almost to be without hope itself.”37 Participating in such a collective effort provides a sense of high-minded purpose and associates one’s identity with that of a righteous community of warriors. Successfully grasping

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the identity of a “holy warrior” promises group and societal respect and honor. In short, as Juergensmeyer stated, The imagined wars identify the enemy, the imputed source of their personal and political failures; they exonerate these would-be soldiers from any responsibility for failures by casting them as victims; they give them a sense of their own potential for power; and they arm them with the moral justification, the social support, and the military equipment to engage in battle both figuratively and literally. It is an incendiary combination, one that has led to horrendous acts.38 Most terrorist groups described in the Western press as “al-Qaeda” are local, grass-roots gatherings that have congealed into groups of self-identified, Qaedainspired warriors. They tend to act on their own initiative and join networks for support and information. These groups of self-defining warriors may initiate contact with facilitating Qaeda members, and possibly the hardcore leadership group, to receive funding and the blessing of bin Laden for their projects. But they are a long way from representing a unified movement operating according to a shared and consistent instrumental logic. The potential for a coordinated Qaeda campaign against the petroleum supply infrastructure in the Middle East is not as great as American policy analysts and petroleum experts might like to believe. Warriors of the kind that al-Qaeda is intended to create (and has in fact created), tend not to think in terms of a narrowly defined strategic cost–benefit analysis. There is little effort to relate tactical successes to strategic gains. Their war is not competitive in tactical military terms. They tend not to deliberate on the most efficient or effective means to achieve what are, in reality, utterly opaque political goals. The desire to participate in the cosmic war and motivate others to join the movement is a more edifying goal than achieving mundane political objectives. Political success, when it comes, will be bestowed by the will of God in recognition of the devotion and sacrifice of the warrior community. Only secondarily do such terrorists address the need to understand or interact with their foe in strategic terms. Their war is not a military contest to secure territory, or even political leverage or “bargaining power” of the usual kind. Instead it is defined around the demands of personal honor, and of binding personal and social identities together by means of violent action. The process by which terrorists select their targets consequently reflects the nature of their personal war, and not that of the competitive military campaign their adversaries may be imagining. Arab Muslims are well aware of the use of oil as a weapon, as demonstrated by the Saudi-led oil embargo in 1973; a perspective that should in theory have grown more compelling in proportion to the growing dependence of the West, Japan, and China on oil from the Persian Gulf. However, today’s terrorists do not seem particularly inclined to develop plans calculated to raise the price of oil on the worldwide market, in order to effect long-term declines in the global economy. Even given such calculations,

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and the evident vulnerability of many parts of the exporters’ petroleum supply infrastructures (particularly pipelines), the amount of coordination and kinetic energy required to deliver a genuinely significant blow, like that of September 2001, no longer appears to be available. This is not to say that Islamist terrorists are not studying the implications of such an effort, or that some innovative form of attack would not result in a far-reaching impact. The creativity displayed by the planners of the attacks on the World Trade Center and the Pentagon should be sufficiently vivid to dispel overconfidence on the part of anyone charged with the protection of critical infrastructure. Nevertheless, it remains true that the exigencies of cosmic war, to the extent that that is indeed the war al-Qaeda is fighting, do lead to a distinctive calculus by which targets are selected. Terrorists in the guise of cosmic warriors are naturally inclined to select targets based on their symbolic value, and the ability to deliver a dramatic effect, disproportionate to the available means. Violence perpetrated upon a symbolic target is almost by definition designed to present a spectacle of power markedly greater than the violence required to deliver it.39 “These acts,” as Juergensmeyer states, “are often devices for symbolic empowerment in wars that cannot be won and for goals that cannot be achieved.”40 As he noted, this type of violence is designed to be theatrical, and is deliberately exaggerated to achieve a stunning, emotive impact.41 The violence of cosmic war is heavily imbued with redemptive religious overtones, which seek to overwhelm any sympathy for nameless victims with an exaggerated demonstration of the level of dedication displayed by the terrorists. In recent years, such attacks, or at least their aftermaths, have often been contrived to facilitate video recording to be played back to a wider audience by modern globalized communications. Such staged violence is broadcast to the family rooms and open cafés of the world, to provide Arab Muslims in particular with a vicarious means of experiencing the cosmic war, and to display the empowering nature of the movement to potential converts. It is, as Burke has noted, theatrical violence intended to dramatize jihad: This is jihad, the sacrifice for God, the testament of martyrdom, the stunning, impressive horror of the power of faith for the witnesses, and the cataclysmic, millenarian violence that will, through the sheer creative power of destruction, instigate the Muslim world to rise up. It is both . . . the call to arms in the cosmic struggle, and the cleansing violence of the battle itself, the unleashing of apocalyptic power which will cause cataclysmic change. From the ashes will rise a new world order.42 Viewed in these terms, the petroleum-producing infrastructure in the Middle East offers little in the way of worthy symbolic targets. Driving bomb-laden cars underneath the thousands of miles of unprotected pipelines or into pumping stations, however effective in stemming the flow of petroleum to the consumer states, does not promise a sufficiently exaggerated sense of dramatic violence,

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even if technology would allow for the recording of such coordinated events. Crashing explosive-filled boats into offshore drilling rigs or double-hulled Liberian-flagged supertankers likewise provides little more than a momentary flash of drama. There are certainly opportunities at what might be thought of as the “high end”: flying airliners into the sprawling Ras Tanura refinery and storage facilities, or setting off a radioactive “dirty-bomb” there, would provide a dramatic scene of infernal, month-long fires and, if executed properly, would result in a substantial reduction in the production of Saudi oil. Yet despite calls on 11 September 2006 by bin Laden’s deputy, the Egyptian cleric Ayman alZawahiri, to commence attacks against the infrastructures of producers whose oil revenues go to the “the enemies of Islam,” and despite the unsuccessful suicide car-bombings of some oil facilities in Yemen two days later, there has been an marked absence of such attacks throughout the Arab Muslim world.43 Only in Iraq have there been sustained attacks against the oil infrastructure. But these have been carried out largely by non-suicidal means, characteristic of normal guerilla warfare, rather than of cosmic struggle. Attacking oil infrastructure is additionally problematic because it does not clearly identify the foe. Most of the facilities of the major producer states were nationalized decades ago. The most visible American and Western presence in the Persian Gulf petroleum industry tends to be either in office buildings or in exploratory drilling projects out in the hinterlands. The message of an attack on Saudi-owned oil terminals, however graphic, would be garbled by attempts to discern who exactly is supposed to represent the symbolic foe of cosmic war. The House of Saud could be the foe, but it has its own claims upon righteousness, and attacking it too directly risks re-awakening the age-old, debilitating arguments among the various strains of Islamist violence. In symbolic terms, the high-value targets remain American.44 But targets offered by Americancontrolled infrastructure in the Middle East would not be critical to the production of oil to drive the world economy.

Understanding the United States It is perhaps surprising to consider that as far back as the mid-1920s, when the United States was a net exporter of petroleum, its government was already expressing grave misgivings about the nation’s dependence upon imported oil. In that sense, at least, the promulgation of the Carter Doctrine in January 1980 can be said to have very deep roots indeed, which may be almost as complicated, in psychological terms, as those that motivate its opponents. The trend towards an increasingly militaristic US foreign petroleum policy first took shape in the late 1970s, a period in which the nation’s disillusionment over its misadventure in Vietnam intersected with a number of discouraging developments in the Middle East: the Iranian Revolution in early 1979; the takeover of the Grand Mosque in Mecca by Islamic militant fundamentalists, and the invasion of Afghanistan by the Soviet Union, both later in that same year; and the start of the Iran–Iraq War in 1980.

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By then the United States had long since lost its capability to increase its domestic petroleum production during oil crises. It was facing a balance-ofpayments problem and persistent inflation, owing to the high costs of financing the Vietnam War. It faced rising economic competition from Western Europe and Japan, whose recovery from the devastation of World War II was now complete. At the same time, the forces of the international oil market had shifted influence away from the monopolistic control of the major Western oil corporations and toward the producing governments of the Organization of PetroleumExporting Countries (OPEC). Their rulers had devised a means to control the structure of surplus profits to ensure their survival at a time when the adjusted price of oil was at an all-time low.45 The events of the late 1970s heralded the transition of the US from a deliberative manager of the capitalist world to an increasingly anxious hegemon, intent on defending its national goals and systemic leadership.46 During this period, the US worked hard on retooling its ability to manage international finance and trade. Its foreign petroleum policy goals remained what they had always been: to ensure access to Persian Gulf petroleum by providing for regional stability, through support of cooperative regional governments whose elites could be counted upon to see reason. As the financial and market leverage at its disposal declined, the US compensated by relying more and more on its undiminished military capacity. This included redeploying an increasingly greater percentage of its global military capability into the region. This started with using its navy to ensure continued access of petroleum supplies during the Iran–Iraq War, an act of ostensibly “neutral intervention” that was also easily and perhaps understandably interpreted as a blow against the Islamist revolution in Iran. Afterwards, the offshore presence of its navy was supplanted by the more intrusive presence of its army and air force, brought ashore to conduct the Gulf War of 1990–1 and left there to symbolize what was supposed to be a recognizably benevolent commitment to the maintenance of regional order. The US also redoubled its efforts in arming moderate Arab states, a policy that was presumed to be consistent with this goal, but which also heightened the impression of Islam’s dependence on the West. The culmination of this general trend, as of this writing, has been the American-led invasion of Iraq in 2003, undertaken in a spirit of defiant unilateralism that has left the US more vulnerable to charges that it continues to selfishly pursue national objectives, irrespective of the “negative externalities” its actions may inflict on global energy markets. It is easy to forget, but important to remember, that for good or ill the war in Iraq has raised the price of gas not just in Peoria, but in every developing country on earth. It is asking a great deal of human nature to expect much in the way of gratitude for such action, even if it turns out in the long run the gratitude proves to be deserved. In explaining the Carter Doctrine, which was proclaimed at a time when the dominant considerations were still those arising from America’s confrontation with the Soviet Union, President Carter emphasized the threat of being cut off from imported oil by using terms like “fear,” “anxiety,” and “vulnerability.” In

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so doing he began the process of reversing the anti-military sentiments that had pervaded American public life since the end of the Vietnam War, and of rebuilding American military capabilities. Both processes would accelerate under the Reagan administration, under whose auspices the initial, and in retrospect decisive, commitment of American forces in the Middle East would be made. Andrew Bacevich has lately termed the results of this policy the “real World War IV,” by which the American campaign to manage and “normalize” the Middle East, commencing with the Carter Doctrine and proceeding through the present war in Iraq, is set on a par with earlier American struggles against militarism, Fascism, and Communism.47 Or rather, it is argued, it is the Carter Doctrine, and its implementation by his successors, that has done this. Like the Truman Doctrine, of which it is the authentic successor, the Carter Doctrine has transcended partisan differences and has remained integral to the policy of each succeeding administration. All have been content to reassure the electorate that the United States will (and should) employ any means at its disposal to ensure continued access to the energy sources that are indispensable to American prosperity. The resulting consensus, that national and systemic survival depends on the ability of the US to counter each and every threat to the stability in the Middle East, has thus become an end unto itself. The capability of the US armed forces – not economic strength or the inherent attractiveness of the liberal capitalist system to the rest of the world – are increasingly regarded as the standard by which national strength is measured and “national survival” assured, through timely intervention in petroleum-rich areas around the world. The potential for al-Qaeda to use attacks upon oil as a strategic weapon to achieve its ends, however understood, must ultimately be judged against the peculiar dynamics of American public life; a process of “net assessment,” if you will, in which the aim is not merely to understand the two sides, but to grasp the nature of their likely interaction. On its face and on the merits, it is difficult to argue that attacks upon petroleum facilities in the Middle East pose as great a threat to objective American interests as US policy-makers purport to believe. Al-Qaeda, for its part, has largely eschewed such targets despite the movement’s presence in the heart of the world’s petroleum region. Yet in doing so it may merely be demonstrating how little it understands its adversary. In the eyes of the American government, whose successive leaders have displayed a consistent willingness to portray energy security and national security as virtually synonymous, the mere threat of a Qaeda-inspired campaign against the region’s oil supply may have greater psychological significance than a strictly instrumental analysis may suggest, and more serious strategic consequences as well. American conduct, no less than that of its enemies, is shaped not just by rational interests, but by the subtleties of individual and social identities. America’s determination to defend the material basis of its way of life may appear crass and unconvincing to those who do not share it. But that is not a reason to underrate its power to motivate strategic behavior by a country that has come to rate military action very high among the policy tools at its disposal.

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Notes 1 Richard A. Falk, “A Dual Reality: Terrorism against the State and Terrorism by the State,” in Charles W. Kegley, Jr, ed., The New Global Terrorism: Characteristics, Causes, Controls, Upper Saddle River, NJ: Prentice Hall, 2003, p. 53. 2 See Charles W. Kegley, Jr, “The Characteristics, Causes, and Controls of the New Global Terrorism: An Introduction,” in ibid. 3 As Moran and Russell note in their introduction to this volume, the National Memorial Institute for the Prevention of Terrorism (MIPT) identifies over 330 terrorist attacks against petroleum infrastructure between 1990 and 2005. See Memorial Institute for the Prevention of Terrorism, “The Terrorism Knowledge Base,” http://www.tkb.org/IncidentTargetModule.jsp. 4 Matthew R. Simmons, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, Hoboken, NJ: John Wiley, 2005, pp. 6–7. 5 Michael T. Klare, Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum, New York: Metropolitan Books, 2004, p. 22. 6 Michael T. Klare, Resource Wars: The New Landscape of Global Conflict, New York: Holt, 2001, p. 56. 7 Klare, Blood and Oil, p. 75. 8 Ibid., p. 80. 9 See Simmons, Twilight in the Desert, pp. xiii–xvii. 10 Neal Jay Adams, Terrorism & Oil, Tulsa, OK: PennWell Corporation, 2003, p. 20. 11 Klare, Blood and Oil, p. 18. 12 See Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power, New York: Simon and Schuster, 1991; and Robert Gilpin, The Political Economy of International Relations, Princeton, NJ: Princeton University Press, 1987. Then as now, oil is priced worldwide in dollars. Since 1971, however, when the United States abandoned the rule-based or “pegged” exchange rate system established at Bretton Woods at the end of World War II, the dollar has traded freely like any other commodity. Its value has declined relatively steadily ever since, and America’s ability to control the price of oil by regulating the supply of dollars has diminished accordingly. Nevertheless, the fact that oil is still priced globally in dollars remains an important (if slowly diminishing) source of political leverage for the United States with respect to global energy markets. 13 See also the discussion of “competitive arms diplomacy” by Michael Klare, in Chapter 2. 14 Jimmy Carter, State of the Union Address, 23 January 1980, http://www.jimmycarterlibrary.org/documents/speeches/su80jec.phtml. 15 Walter Laqueur, The Age of Terrorism, Boston, MA: Little, Brown, 1987, p. 9. 16 Bruce Hoffman, Inside Terrorism, New York: Columbia University Press, 1998, pp. 15–44. 17 United States Department of Defense, “DoD Dictionary of Military and Associated Terms,” http://www.dtic.mil/doctrine/jel/doddict/data/t/05456.html. 18 Hoffman, Inside Terrorism, pp. 43–4. 19 On the distinction between “instrumental” and “organizational” analysis see Martha Crenshaw, “Theories of Terrorism: Instrumental and Organizational Approaches,” in David C. Rapoport, ed., Inside Terrorist Organizations, New York: Columbia University Press, 1988. 20 See John Shy, “Jomini,” in Peter Paret, ed., Makers of Modern Strategy: From Machiavelli to the Nuclear Age, Princeton, NJ: Princeton University Press, 1986, pp. 143–85. 21 Crenshaw, “Theories of Terrorism,” p. 14. 22 Ibid., p. 28.

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23 Ibid., pp. 16–18. 24 Ibid., p. 19. 25 Henry Tajfel and James Turner, “The Social Identity Theory of Intergroup Behavior,” in Stephen Worchel and W. G. Austin, eds., The Social Psychology of Intergroup Relations, Chicago, IL: Nelson, 1986. 26 See Henri Tajfel, “Social Categorization, Social Identity, and Social Comparison,” in idem, ed., Differentiation between Social Groups: Studies in the Social Psychology of Intergroup Relations, London: Academic Press, 1978. 27 See Erving Goffman, The Presentation of Self in Everyday Life, Garden City, NY: Doubleday, 1959; and Tajfel, “Social Categorization.” 28 Crenshaw, “Theories of Terrorism,” p. 20. 29 Jane E. Dutton, Janet M. Dukerich, and Celia V. Harquail, “Organizational Images and Member Identification,” Administrative Science Quarterly 39 (1994), p. 239. 30 Martha Crenshaw, “An Organizational Approach to the Analysis of Political Terrorism,” Orbis 29, 1985, p. 489. 31 Crenshaw, “Theories of Terrorism,” p. 24. 32 Ibid., p. 29. 33 Jason Burke, Al-Qaeda: The True Story of Radical Islam, London: I. B. Tauris, 2004, p. 231, and Chapter 1, passim. 34 Ibid., p. 1. 35 Mark Juergensmeyer, Terror in the Mind of God: The Global Rise of Religious Violence, Berkeley: University of California Press, 2003, p. 212. 36 Ibid., pp. 148–58. 37 Ibid., p. 158. 38 Ibid., p. 193. 39 Ibid., p. 191. 40 Ibid., p. 218. 41 Ibid., pp. 124–8. 42 Burke, Al-Qaeda, p. 38. 43 Hassan M. Fattah, “Suicide Attacks Foiled at 2 Oil Sites, Yemen Says,” New York Times, 16 September 2006, http://travel2.nytimes.com/2006/09/16/world/middleeast/ 16yemen.html. 44 See Martha Crenshaw, “Why Is America the Primary Target? Terrorism as Globalized Civil War,” in Kegley, ed., The New Global Terrorism. 45 Yergin, The Prize, pp. 585–7. 46 Gilpin, Political Economy of International Relations, p. 345. 47 See Andrew J. Bacevich, “The Real World War IV,” Wilson Quarterly 37, 2005.

4

Gulf oil and international security Can the world’s only superpower keep the oil flowing? Duane Chapman1

This chapter reviews the evolution of the global oil market from the midtwentieth century onwards, with emphasis on the stabilizing influence of the target price framework brokered by the United States and Saudi Arabia in the mid-1980s, whose continued viability has now been cast into doubt. Over the 19 years of its life, this framework was responsible for providing the world with a steady supply of oil at reasonable prices. Naval dominion in the Persian Gulf and alliance with its surrounding governments has been a bulwark of American strategy throughout this period, and it has provided a means to guarantee Europe, Asia, and the United States access to the extensive and reliable oil production in this region. Nevertheless, stability in the global oil market was gained at the cost of lingering political instability in the Gulf, an instability that has given rise to recurring regional wars and Great Power interventions to impose order. In the long run the interests of oil-producing and -consuming states alike require a policy framework that deters military appropriation of Gulf oil wealth, reduces the possibility of nuclear weapons use in the region, and addresses the intertwined nature of regional governance and the growth of terrorism directed against Gulf governments and the US. The American effort to create a democratic government in Iraq, which is ongoing as of this writing, has both illuminated and obscured a larger, more dangerous problem: the international consensus that has reliably produced a steady supply of oil at acceptable prices is itself becoming increasingly unstable. The starting point for the analysis that follows is the historical relationship among the Gulf states, the British, the Americans, and the Russians, which have strongly influenced the development of petroleum production in the region. This chapter then considers the recent (1986–2003) framework for price stability and reliable oil production, whose future has been cast into doubt by the Iraq war, compounded by rapidly rising demand in developing Asia. The latter poses a further constraint on United States’ policy, economic if not political, by virtue of America’s trade deficit with, and debt to, China. The principal instruments by which the United States has sought to manage global oil markets, apart from its own armed forces, have been the pro-Western governments in the Gulf, which have generally supported the various long-term price-and-supply frameworks that have been attempted since World War II.

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Their slowly increasing fragility has provided the context for the emergence of al-Qaeda and similar jihadi groups, whose interest in Gulf oil infrastructure as a potential target is now widely taken for granted.2 In political terms the leverage and legitimacy of these regimes rests less upon the cash flow they are able to generate from current production, than from their continued control of crude-oil reserves, which represents a kind of mortgage upon the future world economy. The middle sections of this chapter summarize the current status of crude oil resource estimates, globally and in the Gulf. They also consider the question of “peak oil” and its meaning for security in the region. Broadly speaking, if the “peak oil” theory is correct (and some version of it must be, some day), the Gulf’s oil becomes more important, more valuable and hence more coveted by outsiders. In many respects the ultimate security question in the region is simply whether American primacy, exercised by means of its incomparable but increasingly stretched armed forces, backed by its increasingly suspect regional clients, will be sufficient to maintain regional political stability, and hence global economic stability, under such circumstances.

History and security Western countries, including Russia, have possessed and managed oil concessions throughout the Persian Gulf since the nineteenth century. After World War I Britain and France created national borders there which ensured that the bulk of the region’s oil came under the control of Western oil companies. The subsequent rapid expansion of British Petroleum, originally the Anglo–Persian Oil Company, was directly facilitated by the design of the system of British mandates and protectorates imposed upon the successor states of the Ottoman and Persian Empires. By 1950 American companies had become major players in their turn, and other European companies also participated in joint production agreements with governments throughout the Gulf. In 1971, for example, BP held 40 percent of the production company in Iran, and seven other American and European countries shared 55 percent. Oil concessions of that era were typical of resource-production agreements throughout the post-colonial world. The managing company held near-sovereignty in the area of its concession, while production companies, typically consisting of several partners, managed police, customs, education, health, employment, oil production, and revenue collection, either wholly or in part. The southern Gulf countries, which constitute the Gulf Cooperation Council (GCC) – Saudi Arabia, Kuwait, Oman, Bahrain, United Arab Emirates, Qatar – have remained more or less stable following their independence from colonial rulers, and their ruling families generally experienced little or no significant domestic opposition through the 1980s.3 In contrast, the two northern Gulf countries had already experienced considerable conflict by then. While the role of the United States and Great Britain in Iraq and Iran is well known, the Soviet Union had long sought influence in both countries as well. There were short-lived Soviet republics in northern Iran in 1921 and following World War II, and in the

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late 1940s, Iran’s Prime Minister proposed a joint Russian–Iranian oil company, although nothing came of the proposal.4 In Iraq, the British-installed Faisal monarchy was overthrown in 1958 by the army with Communist support. The Soviet Union became a major weapons supplier to the new government, and continued in this role after the Ba’ath Socialist Party seized power in 1968.5 Well before 1979, Western governments and oil companies had been involved in recurring episodes of “regime change,” to further the management of oil concessions, and, in the case of the United States and its allies, to thwart the expansion of Soviet influence in the region. The establishment of the Saddam Hussein dictatorship in 1979, coincident with the Islamist revolution in Iran, initiated a new era in Persian Gulf politics, when major war finally broke out between these two long-contentious neighbors. As a consequence, for the first time, a major Gulf oil producer attacked the oil facilities of another one. The Iran–Iraq War was initiated by Iraq, and was intended to seize the oil-producing areas on the Iranian side of the Shatt al-Arab, either as a bargaining chip in negotiations, or simply to keep as recompense for having been subjected to revolutionary agitation orchestrated by Tehran. The resulting war is believed to have resulted in as many as a million fatalities,6 while leaving the border between the two countries unchanged. Iraq’s strategy, as faulty as it turned out to be, had been based in part on the perception of disorganization in Iran following the departure of the Shah and the establishment of the Islamic Republic of Iran and the Khomeini government. This was a miscalculation of considerable proportions, but by no means the last. Iraq attempted a second coup de main against a major Gulf oil producer in 1990, when it invaded Kuwait (and also briefly seized the Saudi border town of Khafji). It is easy to speculate that the ease of that conquest, which met with no significant military resistance from either Kuwait or Saudi Arabia, led the Iraqi government to consider the possibility of establishing an occupation in Saudi Arabia, or perhaps converting that country into a state with significant Iraqi influence. Had it succeeded in such a scheme, Iraq would have controlled 76 percent of proved reserves and 54 percent of estimated remaining global oil resources.7 The independence of the remaining four producers south of Saudi Arabia would have been nominal at best. Of course, the US-led coalition forcibly removed Iraqi military forces from Kuwait in 1991. For the next 12 years the US, and to a lesser extent the United Nations, used military power to constrain Iraqi conduct, both internationally and internally. The UN attempted to manage oil exports, while the US and the UK enforced “no fly zones” in the north and south of the country, and international weapons inspectors sought to eliminate Iraqi programs in nuclear, chemical, and biological weapons.8 These familiar facts are worth recalling because, apart from their obvious impact on the peace and stability of the region, they provide the context for important changes in the management of Gulf oil in the international marketplace. For it was during the years when the United States and its allies were focused on thwarting Iraq’s ambitions for regional dominance that a new

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approach to the problem of reliable oil supply and satisfactory oil prices was established.

Price stability, 1986–2003 In what oil men must think of as “the good old days,” American and European oil companies had managed production in the Persian Gulf in much the same way as they did in Texas or the North Sea: the production companies determined output levels, wellhead values, shipping, destination, and labor policy, and basically provided their own security. These practices did not survive the 1973 Arab–Israeli war, however. The conflict created a surge of antagonism in the Arab world against the US and Europe, which in turn afforded the OPEC nations, led by Saudi Arabia, the political leverage required to seize control of oil production within their countries. Their subsequent efforts to raise oil prices were disappointing, however. Although oil prices reached nearly $40 per barrel in the early 1980s, they had collapsed by 1986, when crude prices sank to $10 per barrel. According to Daniel Yergin, in April 1986 then-Vice President George H. Bush went to the Persian Gulf and worked with the Saudi King and government to stabilize oil prices at a higher level.9 This is a controversial assertion in political terms, and also merits some discussion with respect to the underlying economic relationships involved. Very low oil prices affect American producers in three ways. First, prices that fall below production costs require reductions in drilling, as well as the shutting down of unprofitable wells. Second, and consequentially, domestic producers lose market share to lower-cost producers in the Gulf and in Africa, who may not need to make comparably severe adjustments to adapt to the lower price. Third, US producers receive less revenue and profit from wells that continue producing. All of these factors combined in 1986 to create strong incentives for American producers to support efforts by the US government to raise oil prices. Low prices were accelerating the growth of imported oil into the country, in response to increasing American oil consumption. This in turn raised the question of continued US security support for Persian Gulf governments. Vice President Bush, whose background as an oil man assured him political support from the industry, sought to resolve this complex of problems.10 The price-range framework that was created in 1986, and which existed more or less intact through 2003, is illustrated in Figure 4.1. Under its terms the OPEC countries, principally Saudi Arabia, managed production so as to maintain crude prices within the target range. The first price range of $15–$20 per barrel lasted for 12 years. It collapsed in 1998 as a consequence of the economic recession in Asia in that year, compounded by a 300 percent increase in Iraq’s oil output between 1996 and 1998, both of which provided a focus for producerstate unhappiness that the inflation-adjusted value of their exports had gradually declined. A new price range of $23–$30 per barrel, equivalent to the old range adjusted for inflation, was established in 2000. The system as a whole (i.e.,

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35

Dollars per barrel

30

All years are within $0.75 of the first range, except Iraq– Kuwait War, 1990

Second range $23–$30 2000–3

25 20 15 10

First range $15–$20 1986–97

5 0 1985

1987

1989

1991

1993

No target range 1998–9

1995

1997

1999

2001

2003

Figure 4.1 Target price ranges, old and new ($ per barrel).

including both price range periods) was remarkably successful. In its 16 years of effective life, only one year lies more than 75 cents beyond the target range.11 That year was 1990, when Iraq’s invasion of Kuwait increased the average crude price to $22 per barrel. Other Gulf governments undertook major military expansion in the 1990s, in response to the two wars initiated by Iraq against Iran and Kuwait. Weapons acquisitions programs relied primarily on purchases from the US (45 percent) and the UK (29 percent).12 In just over half a decade between 1994 and 1999, total Persian Gulf weapons imports were $153 billion (current dollars). Saudi Arabia led the Gulf nations, spending $103 billion in purchases of conventional weapons. These purchases may have enhanced the ability of Saudi Arabia and other Gulf nations to deter direct aggression to some extent. But notwithstanding their weapons acquisitions, and related technical support from the United States, the member states of the GCC have very limited defense capabilities. Andrew Terrill, in a Strategic Studies Institute (Army War College) report, asserts: Even a united GCC would be an unequal match for an assertive Iran or a hostile and mobilized Iraq, should such an entity emerge from the current effort to define and develop a post-Saddam political system. . . . None of the Gulf Arab states have a serious capacity for self-defense.13 Nevertheless, the expanded trade in weapons had other benefits. In Gulf countries, the brokers who coordinated the purchases received considerable compensation, and these brokers supported the stable price/supply framework. In the US, UK, and France, the weapons exporters also supported the role of military policy in the stable price–supply framework. As a result, a strong association

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between weapons and the oil trade has emerged. The Gulf’s major oil exporters are also significant weapons importers, and the primary source of these weapons are the principal oil importing countries in the West14 – a potentially toxic exchange of goods that has so far been viewed by most observers with relative complacency, precisely because the real security effects of the weapons thus exchanged are relatively modest. Oil production in the Gulf costs about $5 per barrel.15 Why, then, did the Gulf countries not pursue a low-price policy that would have increased their sales and market share, and perhaps also their revenues? The explanation lies in the effect of low oil prices on the political outlook of American oil producers, whose enthusiasm for American military and political support for allied governments in the Gulf declined along with the price. Instead, they sought to influence American policy to raise prices, in 1986 and again in 1998. Conversely, when oil prices were very high, the target price-range system helped create a political environment in which American consumers and oilusing businesses could influence American security policy to moderate producer prices. Congressmen from states without oil production called for termination or reduction of military support for Persian Gulf governments, who were portrayed (along with their American counterparts) as profiteering at the expense of the American consumer.16 Overall, American policy throughout this period was consistently subject to domestic political pressure to withdraw military and political support for friendly Gulf governments when crude oil prices approached either extreme of the price spectrum. The Gulf governments in turn understood these reactions, and the potential threat to their security if prices remained outside the target range for long. Table 4.1 summarizes, in game-theoretical terms, the major political, economic, and military factors that worked to keep prices within the price range, and suggests that neither side could improve its overall situation by working to move crude prices outside the target price range. The 1986–2003 price-range framework disintegrated in 2004. As of this writing, it may be reforming at a much higher range. There are two major issues complicating the re-establishment of a new zone. One is the military and political situation in Iraq, Iran, and throughout the Gulf, which is hampering the coordination necessary for the effective management of production and prices, and is generally perceived as representing substantial additional risk, which is now thoroughly priced into the market. The second issue is that demand for crude oil has grown more rapidly than expected, even by futures markets as they existed before the outbreak of war in 2003.

Energy politics in the gulf American primacy as the guarantor of the security framework in the Persian Gulf has never been uncontested, and the contest has lately grown more complex. Iran is governed by a radical theocracy that dominates the military and security forces, but whose grip upon civil society is suspect. The situation in

1 Higher GNP growth 2 Shut some domestic production 3 Greatly increased oil consumption 4 Significantly more imports 5 More pollution, climate change 6 Declining OECD oil industry political support of Gulf states

1 Stable GNP growth 2 Stable OECD oil production 3 Slow growth in oil consumption 4 Slow growth in import share 5 Stable prices 6 Arctic National Wildlife Refuge production feasible 7 Continued OECD oil industry political support of Gulf states

1 Decline in GNP growth 2 Rapid near-term growth in domestic production

Low

Moderate (target price zone range)

High

3 Stable or declining consumption 4 Arctic National Wildlife Refuge production profitable 5 Negative OECD oil industry political support of Gulf states consumer

OECD countries

Oil prices

1 Loss of OECD political, military support 2 Increased incentives for Central Asia, other nonOPEC production 3 Lower market share 4 Less production, more profit 5 Greater payoff to successful military action to seize resources

1 Stable revenue 2 Stable market share 3 Continued OECD political, military support 4 Cooperation with OECD oil industry

1 Higher market share 2 Lower revenue, greater volume 3 Domestic economic problems 4 Faster depletion 5 Loss of political support from OECD oil industry

Arabian gulf oil producers

Table 4.1 General economic impact of crude oil price decision-making in a game theory 1986–2003 price range framework

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Iraq remains deeply unpredictable: a democratic Iraq, a new dictatorship friendly to the US, an Islamic government, and civil war leading to partition or collapse all seem possible.17 In the six countries of the southern Gulf, dynastic monarchies persist. All have formal defense agreements with the US, UK, or France, and all host American military bases, with varying degrees of good will. Qatar, for example, hosts both al-Jazeera television and US military forces, and has embarked upon a program of ostensible democratic reform in which one-third of the parliament will continue to be appointed by the ruling house. As shown in Table 4.2, the five smaller monarchies of the southern Gulf hold only 23 percent of the region’s 1.54 trillion barrels of remaining oil resources. The three governments that control the remaining reserves (Saudi Arabia, Iran, Iraq) are also the ones that face the greatest internal division. Attacks against oil production facilities and personnel in Saudi Arabia and Iraq have already created a substantial “risk premium” in world oil markets.18 These attacks chiefly reflect the long-standing hostility of al-Qaeda and Osama bin Laden (among other non-state actors) towards American and Western oil interests. In 1996, bin Laden had said: The Saudi regime found another support [in addition to Islamic law]: the money to make people rich. The ordinary man knows that his country is the world’s largest oil producer . . . our country has become an American colony. The Saudis know their real enemy is America.19 Again, from bin Laden, in early 2004: The occupation of Iraq is a link in the Zionist-crusader chain of evil. Then comes the full occupation of the rest of the Gulf states to set the stage for controlling and dominating the world. For the big powers believe the Gulf and the Gulf states are the key to controlling the world due to the presence of the largest oil reserves there.20 Later in the year, another Qaeda leader claimed credit for a May 2004 attack on a Saudi Arabian compound housing oil-company personnel. Abdel Aziz alMuqrin asserted: Our heroic fighters were able, by the grace of God, to raid the locations of the occupying American oil companies . . . which are plundering Muslims’ resources. [The Saudi government is] supplying the United States with oil, according to their master’s wish, so that their economy does not collapse.21 Although the material impact of such attacks on Persian Gulf oil exports has been negligible, they have done much to compound the political uncertainty created by the 2003 war. Figure 4.2 is a representation of the cycle of violence and political radicalization that seems to be arising within the current Gulf security framework. An autocratic government supported by the US reduces the

0.9 33.7 22.4 31.0 3.6 5.0 72.8 15.7 185.1 26 708 539 169

Bahrain Iran Iraq Kuwait (including neutral zone) Oman Qatar Saudi Arabia UAE Total Persian Gulf % world World Rest of the world US

1.1 105.0 100.1 93.6 7.3 9.2 283.5 72.9 672.7 76 883 859 24

Known reserves 0.8 74.8 71.3 66.6 5.2 6.6 201.9 51.9 479.0 70 682 612 70

Reserve expansion 1.7 100.5 83.9 7.2 7.3 6.4 160.9 15.5 383.4 30 1,290 1,107 183

Undiscovered resources 4.5 314.0 275.7 198.4 23.4 27.2 719.1 156.0 1,720.2 40 3,563 3,117 446

Original endowment 3.6 280.3 255.6 167.4 19.8 22.2 646.3 140.3 1,535.1 54 2,855 2,578 275

Remaining resources

100 90 10

0 10 9 6 1 1 23 5 54

Rem. res. % world

Notes 1 Reserve expansion in the Persian Gulf is extrapolated from the ratio of total rest of world expansion (612) to known reserves (859). 2 Some rows and columns do not add up exactly because of rounding. 3 Current 2007 crude production per year: World, 27 billion barrels; US, 1.9 billion barrels. Production including national-gas liquids, etc.: World, 31 billion barrels; US, 7.5 billion barrels. US net imports are currently about 4.5 billion barrels annually. 4 Remaining resources column is the sum of known reserves, reserve expansion, and undiscovered resources. 5 The United States Energy Information Administration estimate (using a similar approach and somewhat different sources) for remaining resources yields a nearly identical world total of 2.93 trillion barrels. See US Energy Information Administration, International Energy Outlook 2004, p. 36.

Sources: United States Geological Survey, “World Petroleum Assessment 2000 – Description and Results,” 2000, www.usgs.gov.; idem, “1995 National Assessment of United States Oil and Gas Resources,” www.usgs.gov.; United States Minerals Management Service, “Outer Continental Shelf Petroleum Assessment,” 2000, www.mms.gov.

Cumulative production

Country

Table 4.2 Persian Gulf production and reserves (2000), in billions of barrels

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D. Chapman 1 Autocratic governments

2 Marginalize dissent

3 Al-Qaeda grows

4 Al-Qaeda attacks US

5 US military action against al-Qaeda

6 US support for

Figure 4.2 A cycle of violence.

strength of secular opposition. Civil dissent and criticism are marginalized and rendered ineffective. Then jihadist organizations fill the space of opposition to the autocracy, further radicalizing dissent. In Saudi Arabia, this process gave rise to the Qaeda attacks in the US in September 2001.22 Conversely, recent attacks against Westerners in Saudi Arabia were followed by US military action against al-Qaeda and its allies in Afghanistan, Iraq, and elsewhere.23 Analogous diagrams could of course be drawn about many other parts of the world, and at many earlier times, including during much of the Cold War, when opportunistic support for authoritarian regimes was no less a feature of American policy than it is today. At no other time or place have the stakes been as high as they presently are in the Gulf, however, for the simple reason that its proven oil reserves are so crucial to the world economy as a whole. American strategy toward the developing world during the Cold War was calculated primarily to contain Soviet expansion, and only secondarily to manage the market for the resources that were found there. The latter has now become the primary concern, and it is by no means certain how far America’s military might affords it the tools necessary for such a task. The US Geological Survey has been evaluating global oil resources for more than 20 years. It uses three basic concepts to categorize remaining oil resources: ,

Known reserves – Economically recoverable conventional crude oil at known fields and reservoirs (883 billion barrels). Potential reserve expansion – Identified reserves expected to be developed in existing fields, including the addition of new reservoirs and pools (682 billion barrels). Undiscovered resources – Geological extrapolation of potential crude oil based upon knowledge of geological formations outside existing fields (1,290 billion barrels).24 Taken together, the amounts for each category yield a 2.9 trillion-barrel estimate for remaining world oil resources. Global crude-oil consumption is 27 billion barrels annually.25 It has been increasing at 2.35 percent per year since 2002,

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with China accounting for almost half of the growth.26 More than 50 percent of the world’s production of crude oil is exported for consumption in another country. The US, for example, imports petroleum from more than 34 different countries. About 12 percent of US petroleum consumption originates in the Persian Gulf and is managed by 30 different companies.27 Although many oil exporters experience periods of political turmoil (for example, Nigeria, Venezuela, Iraq), the system continues to account for these and other contingencies primarily by means of adjustments to the price of crude oil. Visualize a series of stacked demand curves (Figure 4.3).28 Each demand curve indicates how consumption of oil products responds to price. Usually both global per capita income and population rise each year, as does the world’s stock of automobiles, planes, and other petroleum-consuming equipment. Consequently each year’s demand curve is usually higher than that for the previous year. Also consider a series of supply curves, which reflect a range of production costs, from low costs in the Persian Gulf to high costs for new production in the North Sea and Alaska. These supply curves shift outwards each year as oil producers and refiners expand capacity to meet expected growth in demand. When the world economy and oil markets were expanding as expected, the cooperative implementation of the target price range system worked fairly smoothly on a global basis. Each year, the equilibrium intersection of supply and demand was at a higher consumption level than the year before. In the 1986–2003 period these equilibrium points described a rising trajectory of world consumption at stable prices, as Saudi Arabia and other Persian Gulf producers increased or reduced production to stabilize prices within the target range. Other major producers, OPEC and non-OPEC, often cooperated in setting their production levels to work within this system. The growing cost-effectiveness of non-petroleum transportation fuels adds

Dollars per barrel

P

D4 D3 D2 D1 S4

P4 P1

S1 q q1

q2

q3

q1

Billion barrels annually

Figure 4.3 World oil markets if demand shifts and costs increase.

86 D. Chapman additional resilience to the global oil market. Richard Fullerton undertook a balanced assessment of the status of liquid transportation fuels from coal methanol, corn (and sugar) ethanol, hybrid electric vehicles, tar sands, compressed natural gas, and hydrogen fuel.29 He concluded that “it should be apparent that our nation and the world do not face a long-term energy crisis.” Certainly there is some reason for optimism. Five of the six technologies Fullerton investigated are now in use in North America on a commercial basis (the exception is hydrogen fuel). With remaining world oil resources on the order of three trillion barrels, and additional new sources of transportation energy even now entering markets formerly dominated by oil, there is at least no reason to be concerned about depletion in the near future. As Fullerton notes, “So, in the short-term, we do not worry about how much oil the world has – we worry about where it is located.”30

Peak oil and gulf oil The idea of “peak oil” was introduced into debates about energy policy as the result of work by the geophysicist M. King Hubbert, whose original concept applied a straight forward logistic growth curve to the production of oil and to the depletion of oil reservoirs.31 This sort of view, which might be called “Peak Oil A,” has been popularized by Matthew Simmons, who has recently argued that the peak of global crude production actually occurred a few years ago, in 2005.32 A second, more complex version, which might be called “Peak Oil B,” proposes that economic, political, and environmental factors limit the growth in production, and ultimately force a decline in world consumption and production. The latest Oil & Gas Journal report on proven oil reserves shows a figure of 1.1 trillion barrels of conventional crude oil,33 compared to the 0.9 trillion-barrel value for known reserves (see Table 4.2). The advocates of “Peak Oil A” often cite the OGJ or the similar BP Statistical Review to argue that, in their view, remaining world conventional resources of roughly one trillion barrels will soon be unable to satisfy growing world consumption, which is now at 31 billion barrels annually; and therefore that production and consumption will decline. The problem with this interpretation, as al-Husseini points out,34 is that it ignores estimates of ultimately recoverable remaining resources. If estimated ultimately recoverable reserves are taken into account, Persian Gulf nations hold 54 percent of remaining global resources, a considerable but markedly less overwhelming proportion than that hypothesized by Simmons and others of the Hubbert school, who consider known world reserves, 76 percent of which are found in the Gulf. The concept of “peak oil,” however estimated, does nothing to diminish the immediate strategic importance of Gulf production and reserves. These retain considerable importance even within the terms of the more sophisticated approach of Peak Oil B, which is not dependent upon assumptions about limited access to known resources. Peak Oil B, however conceived, places the high point of global consumption somewhere in the future. For example, recent work by Guy Caruso, the administrator for the United States Energy Information

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Administration, shows the peak falling between 2031 and 2068 depending upon assumptions about remaining resources and consumption growth rate.35 The emergence of such a peak will also be influenced by any efforts to regulate the production of greenhouse gases, so as to limit the potential impact of global climate change, a problem whose magnitude is among the greatest unknowns that must be confronted by those concerned with future energy policy. Regulation in this area is more likely to be driven by the consumption of coal than of oil, owing to the relatively greater production of carbon dioxide that coal-burning entails. The effect of such regulatory efforts will contribute in some degree to the eventual development of a peak in world oil consumption. Nevertheless, like Peak Oil A, Peak Oil B anticipates considerable near-term growth in world oil consumption, and to that extent confirms the strategic and economic importance of high-quality, low-cost Persian Gulf oil.

The magnitude of Gulf oil wealth Stephen Brown of the Federal Reserve Bank in Dallas has recently observed that nine of the ten US recessions since World War II were preceded by significant oil-price shocks.36 Economists believe that the American and global economies are linked to oil-price changes, though the strength of that connection is slowly weakening. As a rule of thumb, the empirical findings imply that a $10-perbarrel increase from a base price of $50-per-barrel would reduce gross domestic product (GDP) by an amount in the order of $155 billion from an initial level of $14 trillion (the value of GDP in early 2007).37 This fact alone would cause political leaders to seek to stabilize oil prices. Sudden oil-price increases have a significant impact on job losses, but the reverse is not true: sudden price declines have a minimal effect on job creation.38 This differential impact of oil-price increase versus decrease adds to the political value of oil-price stability in the United States. Oil-price increases also usually have an immediate effect on import values, increasing trade deficits. In 2006 the American merchandise trade deficit was $830 billion, and 33 percent was due to net petroleum imports.39 Persian Gulf oil, as noted earlier, is the lowest-cost petroleum in the world, with production costs averaging about $5 per barrel. This includes the cost of exploration, capital investment, a return on capital, and a risk allowance above normal rates of return. Throughout the Gulf every dollar above $5 is a dollar of additional profit. If the price is $55 (which may be somewhere near a potential new norm, though well below current levels), the additional profit is $50; and if we assume that $50 per barrel represents the average profit from Gulf crude oil over the remainder of the century, this yields an estimated value of remaining resources in the Persian Gulf of $75 trillion. This, then, is the global problem: $75 trillion in oil wealth, in an area with less than 150 million people.40 The $75 trillion has long been an attraction to Western oil companies and governments, and has lately become a potential temptation to governments in the Gulf as well, as Iraq’s wars with Iran and

88 D. Chapman Kuwait illustrate. Persian Gulf governments, aware of the wealth beneath their feet, amassed considerable weaponry in the 1990s, though they have not yet acquired the ability to defend the bequest that nature has given them. The governments of the southern Gulf have also strengthened their alliances with the United States, a policy that has in turn provoked a violent response from alQaeda and others who resent the continued dependence of the Arab world on the West. This is where we stand. For two decades, the problems of production and price stability had been solved by means of a cooperative economic framework, within which no party could benefit from dramatic unilateral action. However, political decrepitude, the spread of high-quality conventional (and potentially nuclear) weapons, and the growing ferocity of regional conflicts and terrorist activities leave little doubt that a breakdown of civil authority throughout the Gulf is at least conceivable. To a greater extent than at any time in the past, price stability has become a function of social and political stability among producer states, which can neither be taken for granted by consumer states, nor dealt with in the peremptory fashion that characterized the immediate post-colonial period.

The future of American primacy There are, broadly speaking, three avenues by which stable oil prices and production might be reconciled with the requirements of regional stability. The first would rest upon the presumptively rational self-interest of regional governments, and might be characterized as “semi-autonomy.” The second places its weight upon an explicit security framework established and maintained by American power. The third emphasizes broad multilateral cooperation among producers and consumers, on terms that would seek to recapture some of the advantages of the framework that operated from 1986 to 2003.41 Each of these has been used in the past, and warrants fresh consideration today. Semi-autonomy “Semi-autonomy” would be a fair characterization of Gulf politics between 1973 and 1990, when the main states in the region pursued their own goals with varying degrees of independence from Western governments. In the northern Gulf, Iran replaced its monarchy, which had enjoyed the active support of the United States. Iraq changed its government from a military dictatorship supported by Communists to a Ba’athist dictatorship. Iraq invaded Iran, a conflict in which the United States eventually sought to intervene on a limited basis, while ostensibly retaining its status as a neutral power. The southern Gulf states continued as oil exporters under independent monarchies dominated by leading families and without major civil disturbances. And of course from 1973 to 1986, the Gulf nations took the lead in transforming OPEC into an organized cartel able to enforce production quotas to support high world oil prices. For most of this period, with the exception of American naval intervention in

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the latter stages of the Iran–Iraq War, the West reacted to OPEC initiatives not by military means, but by developing high-cost oil supplies in Alaska and the North Sea. High prices also created conditions that allowed Mexico and Russia to become major exporters. It was their emergence, combined with the development of OECD oil in the North Sea and Alaska, that unraveled OPEC’s hopes to control prices, and gave rise to Vice President Bush’s efforts, described earlier, to organize the OECD/OPEC price framework that continued into 2003. In political terms the crucial defect of the semi-autonomy was first signaled by Iraq, which saw the $75-trillion prize, and fought to seize it through war. At root, Iraq’s reckless move represented a failure of conventional military deterrence in a region whose armed forces have never been especially capable. Yet it was only the second Gulf war, following Iraq’s invasion of Kuwait, that clearly ended the “semi-autonomy” period with respect to Western governments. Since then the US has moved forcefully to combine military and diplomatic policy in support of the southern monarchies, and to contain and deter both Iran and Iraq. These experiences have suggested that any global policy that leaves Persian Gulf nations to their own devices as far as security is concerned invites future aggression within the region, notwithstanding the significant sums spent on armaments since the 1990s. In the unlikely event that the Gulf were to return to the laissez-faire conditions of 1973–90, it seems certain that new efforts would be made to lay hold of the oil. This is the powerful force that leads to the need for a Persian Gulf security framework. Considerations of equity and practicality require that such a framework have the following basic desirable characteristics: 1 2 3 4 5

Stable oil production within a price range mutually acceptable to OECD consumers and Gulf exporters. Sufficient military power to deter wars to expropriate Gulf oil. Political or military mechanisms to reduce the emerging nuclear threat in the region. Institutional protection against control of oil by the providers of military security. Governments in the Gulf that are accepted and supported by their citizens.

An American security framework Can the United States underwrite such a system on its own? American military strength is clearly adequate to deter or defeat any Gulf nation or regional power that might consider the direct seizure of Gulf oil. Nevertheless, one factor in the disintegration of the old target-price framework was the political reaction in the region to US efforts to contain and eventually transform Iraq by direct military means. Other factors played their part as well, the acceleration of growth in Chinese imports and uncertainties in Venezuela and Nigeria in particular. In earlier times similar strains have been accommodated within the established price framework. But the Iraq War, whose effects have been amplified by

90 D. Chapman continuing terrorist attacks against oil-export facilities in Iraq and Saudi Arabia, have shifted the demand curve upward for spot and future prices, in effect pricing the implied risks of continued American unilateralism into the system. The problem of how to protect Gulf oil from control by the providers of military security has been rendered almost impossible to evaluate in the short term, owing to the continuing conflict in Iraq. In the long run it is safe to say that regional stability depends upon the ability of the Iraqi government to resume the management of Iraqi oil; but when and how this can be accomplished is anyone’s guess. Bolstering popular acceptance and support for other Gulf governments has also been made more challenging by the war. If the American goal is the protection of stable global oil markets at reasonable prices in the long run, then it is logical to encourage the democratization of governments in the Gulf. But as outlined earlier, an American security system linked in the short run to the continuation of the southern monarchies, which marginalize dissent and resist democratizing reform, seems likely to augment, rather than moderate, social discontent, including support for al-Qaeda and its ilk. In the short run the US quest for democracy in the region appears to have been set back by the reaction to the Iraqi occupation. In addition, it must be recognized that genuine democracy and free elections in some Gulf countries might well bring to power governments fundamentally opposed to the United States, and unwilling to accept its strategic protection. Like the regime of “semi-autonomy,” then, a unilateral approach based upon American power suffers from a serious political defect rooted in the military dimensions of the system, and also to some extent in the way the real market for Gulf oil has evolved. Today China, India, Asia, and Europe all import more Gulf oil than does the US. Typically 10–12 percent of Gulf exports go to the US. Yet the US continues to seek to provide the political and military support for the region on what is essentially a unilateral basis. It is an open question as to how long this divergence between economic interests and strategic commitments can be sustained, given the rising costs that the latter have come to entail since 2003. The American effort to establish democracy in Iraq has increased the unpopularity of the United States, and reduced support for democratic reform generally – a point that is supported by the Defense Science Board,42 and the 2007 Telhami survey of Arab public opinion.43 Even if the United States were willing to bear the costs of Gulf security on its own, it is hard to see how it could get its money’s worth, or avoid the kind of unintended consequences that have already become apparent. A multilateral security framework Given the prior success of the price-range system, a multilateral approach would appear to be best able to secure stable oil production and prices, along with sufficient revenues for Gulf governments – though a new target price range would be much higher than the last zone. Whether it could provide sufficient deterrence to avert regional war is less clear, though American participation, if sufficiently

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enthusiastic, would appear to suffice for this purpose, as it would under a unilateral regime. In principle a multilateral framework would make any effort to appropriate Gulf oil by force more immediately recognizable as contrary to the interests of the vast majority of oil producers and consumers alike. It is also unclear whether the re-establishment of a global consensus with respect to oil prices and production would lead to increased democracy in the region, or contribute to the legitimation of the governments that exist there. A new price/production framework that helped dramatize the mutual dependence between governing elites and the oil-consuming West would do little to appease populist or Islamist opposition movements within Arab and Muslim politics. The obvious weakness of a broadly international approach to the problem of price and production stability is the absence of any institution that could embody and enforce the new consensus, once it is achieved. Any important and successful international structure must have the US playing a leadership role. The military dimension might be imagined as something along the lines of NATO. As with NATO, a Persian Gulf Security Organization would include both major military powers and nations that believe themselves in need of military protection. Just as NATO now includes pairs of former enemies, such as Poland and Germany, or Greece and Turkey, a Gulf organization would incorporate Iraq, Kuwait, Iran, Saudi Arabia, and the other Gulf states. Other potential participants include the US, the UK, China, France, Japan, Germany, Russia, and perhaps members from Africa, Latin America, and the Middle East. It might be financed by a tax on oil exported from the Gulf. Such revenues (both tax revenue and revenue from oil export) could be allocated to Gulf states, and also utilized to support the military forces employed to protect and stabilize the region. In the broadest terms, what seems to be required is simply the longoverdue extension to the Gulf of collective security institutions of a kind that were first conceived almost a hundred years ago, and have in fact been operating elsewhere for half a century or more. As things stand, the current US-based security system, resting as it does upon the unilateral application of American power, inherently manifests what economists call the “free rider” problem. The major consumers of Persian Gulf oil are Europe, China, Japan, South Korea, Taiwan, and the Philippines, as well as the US. As long as the US (and to a lesser extent the UK) attempts to manage security unilaterally, there is no incentive for other countries that consume Persian Gulf oil to participate financially in security measures. The political and human costs are also borne disproportionately by the US and its Gulf allies. Under a multilateral system, the burden would be shared among all nations participating in the market for Gulf oil. Nevertheless, there is no certainty that a broadly multilateral structure is feasible, and no recipe for creating one. On the other hand, it is hard to believe that a unilateral framework can contain the growing instability in the Gulf indefinitely, or that the stability of world energy markets will remain resistant to its effects.

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Notes 1 The author would like to acknowledge the assistance of Carol Thomson in the preparation of this paper, and the contributions of Neha Khanna and John Taber to this and earlier work. 2 See the discussion by Peter Haynes in Chapter 3. 3 Daniel Byman and Jerrold Green in “The Enigma of Political Stability in the Arabian Gulf Monarchies,” Middle East Review of International Affairs 3/3, September 1999, report that Iran unsuccessfully encouraged opposition to the Saudi, Bahraini, and Kuwaiti governments for 20 years following the Islamic Revolution of 1979. 4 See Duane Chapman, Energy Resources and Energy Corporations, Ithaca, NY: Cornell University Press, 1983, pp. 83–6. 5 It is alleged that the United States Central Intelligence Agency provided minor support to the Ba’ath Party in its coup. See Roger Morris, “A Tyrant 40 Years in the Making,” New York Times, 14 March 2003, http://query.nytimes.com/gst/ fullpage.html?res=9505EFDB103EF937A25750C0A9659C8B63. 6 Stephen C. Pelletiere and Douglas V. Johnson II, “Lessons Learned: The Iraq–Iran War,” Quantico: Marine Corps Combat Development Command, 1990, p. 118, http://www.fas.org/man/dod-101/ops/war/docs/3203/. 7 See Table 4.2. 8 Hans Blix, Disarming Iraq, New York: Random House, 2004. 9 Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power, New York: Simon and Schuster, 1992, pp. 755–64. 10 See “Bush PAC Reports $1.4 Million Raised,” Houston Chronicle, 16 April 1986; and “Cheap Oil Stirring Clamor for Relief in the Southwest,” New York Times, 15 April 1986. 11 Although the 1999 value is within the first range, it is not included as a systemic success since at that moment the first price range was inoperable, and the second had yet to be firmly established. 12 See Neha Khanna and Duane Chapman, “Weapons Trade and Petroleum Price Stability: Are Measures of Political and Economic Openness and Income Important?,” working paper WP 0408, Binghamton University Department of Economics, 2004, Table 3, http://www.econ.binghamton.edu/wp04/WP0408.pdf. 13 W. Andrew Terrill, “Regional Fears of Western Primacy and the Future of US Basing Policy,” Carlisle, PA: United States Army War College Strategic Studies Institute, December 2006, pp. 46, 71, http://www.strategicstudiesinstitute.army.mil/pdffiles/ PUB742.pdf. 14 Khanna and Chapman, “Weapons Trade and Petroleum Price Stability.” 15 See Table 4.1, and Duane Chapman and Neha Khanna, “An Economic Analysis of Aspects of Petroleum and Military Security in the Persian Gulf,” Contemporary Economic Policy 19/4, 2001, pp. 371–81; also United States Energy Information Administration, “Oil Production Capacity Expansion Costs for the Persian Gulf,” January 1996, http://www.tonto.eia.doe.gov/FTPROOT/petroleum/tr0606.pdf. 16 See, for example, the positions taken by congressmen from consuming states in the high-price period in 2000, as reported periodically in the New York Times, 2, 19, 23, and 29 March 2000. 17 “Iraq in Transition: Vortex or Transition?” Middle East Programme Briefing Paper, Royal Institute of International Affairs, Chatham House, September 2004, http://www.chathamhouse.org.uk/publications/papers/download//id/226/file/3864_bp0904.pdf. 18 “Al-Qaeda Targets US Oil Supplies,” Christian Science Monitor, 1 June 2004. See also “Oil Related Terrorism Mounts,” Jewish Institute of National Security Affairs Online, 24 June 2004, http://www.jinsa.org/home/home.html. 19 Robert Fisk, The Great War for Civilization, New York: Alfred Knopf, 2005, pp. 20–1.

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20 Translated transcript of an audiotape said to be of Osama bin Laden, BBC News Online, 4 January 2004, p. 1, http://www.news.bbc.co.uk/2/hi/middle_east/ 3368957.stm. 21 “Al-Qaeda Targets US Oil Supplies.” 22 Kenneth M. Pollack delineates the stages of this cycle in “Securing the Gulf,” Foreign Affairs 82/4, July–August 2003, pp. 7–9. 23 Chaim Kaufman, “Threat Inflation and the Marketplace of Ideas,” International Security 29/1, Summer 2004, pp. 16–19, 30–2. 24 See Duane Chapman, “Conceptual Definitions of Oil Resources,” Table 9.2, in ibid., Environmental Economics: Theory, Application, and Policy (Reading: Addison Wesley, 2000); and Table 2 in ibid., “A Review of the New Undiscovered Conventional Crude Oil Resource Estimates and Their Economic and Environmental Implications,” working paper WP 2001–22, Cornell University Department of Applied Economics and Management, Ithaca, NY, 2001, http://aem.cornell.edu/ research/researchpdf/wp0122.pdf. 25 Petroleum consumption, including products from natural-gas liquids, tar sands, ethanol, and so on, is higher: 31 billion barrels annually. 26 From United States Energy Information Administration, “International Petroleum Monthly,” 18 November 2004, Table 2.4, http://www.eia.doe.gov/emeu/ipsr/t24.xls. 27 Duane Chapman and Neha Khanna, “The Persian Gulf, Global Oil Resources, and International Security,” working paper WP 2004–15, Cornell University Department of Applied Economics and Management, NY, December 2004, Appendix A, http://www.aem.cornell.edu/research/researchpdf/wp0415.pdf. 28 Duane Chapman and Neha Khanna, “World Oil: The Growing Case for International Policy,” Contemporary Economic Policy 18/1, 2000, pp. 1–13. 29 Richard Fullerton, “The Political Economy of Oil and Conflict,” presented at the Western Economic Association International Annual Meeting, Vancouver, BC, 2 July 2004. 30 Ibid., p. 15. 31 The initial exposition of what became known as the “Hubbert Peak” is in M. King Hubbert’s article “Energy from Fossil Fuels,” Science, 4 February 1949, http://www.hubbertpeak.com/hubbert/science1949/. 32 “Oil Has Peaked, but Where’s the Data?,” Reuters, 14 February 2007, http://www.reuters.com/article/businessNews/idUSL1325232620070214. 33 This value of 1.1 trillion barrels does not include the estimated 174 billion barrels of Canadian tar-sands oil. See Oil & Gas Journal, 18 December 2006, http://www.ogj. com/index.cfm. 34 Moujahed al-Husseini, “The Debate over Hubbert’s Peak: A Review,” GeoArabia 11/2, 2006, pp. 181–210. 35 Guy Caruso, “When Will World Oil Production Peak?,” presented at the Tenth Annual Asia Oil and Gas Conference, Kuala Lumpur, Malayasia, 13 June 2005, http://www.eia.doe.gov/neic/speeches/Caruso061305.pdf. 36 Stephen P. A. Brown, “Oil and the US Macroeconomy,” presented at the Western Economic Association International Annual Meeting, Vancouver, BC, 2 July 2004. 37 D. W. Jones, P. N. Leiby, and I. K. Paik, “Oil Price Shocks and the Macroeconomy,” Energy Journal 25/2, 2004, pp. 1–32. 38 Ibid., p. 6. 39 Monthly Energy Review, January 2007; estimated from 11-month data. 40 The current total population of the Gulf region is about 133 million, based upon national estimates in the CIA Factbook 2007, www.cia.gov/library/publications/theworld-factbook/index.html. 41 See Chapman and Khanna, “World Oil”; and ibid., “Global Oil Resources and International Security,” pp. 507–19.

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42 Defense Science Board, “Report of the Task Force on Strategic Communication,” Office of the Secretary of Defense, September 2004, pp. 33–7, http://www.acq.osd. mil/dsb/reports/2004–09-Strategic_Communication.pdf. 43 Shibley Telhami, “A Six Country Study of Arab Public Opinion,” 8 February 2007, http:www.brookings.edu/views/speeches/telhami20070208.pdf.

5

Regional issues and strategic responses The Gulf states Saad Rahim

The world today finds itself in an era of energy insecurity. A number of broad factors across the value chain, and on both the supply side and the demand side, have contributed to record-high prices.1 What has exacerbated worries over energy has not been solely that prices have risen so high or so fast, but that, having attained these peaks, they have shown no inclination of returning to their “natural range.”2 Rather, ongoing discontinuities continue to plague the system, with the result that prices are now in a structurally higher range of $55–$75 per barrel for West Texas Intermediate (WTI), with peaks (as of this writing) well above that. And while actual and current disruptions bear the brunt of the blame for boosting prices to today’s levels, the role of fear over future threats to supply cannot be overlooked. No other region in the world faces either the same number of potential threats to supply or the same volumes at risk as does the Middle East. The Gulf states of Saudi Arabia, Iran, Iraq, Kuwait, Qatar and the United Arab Emirates between them produce approximately one-quarter of the world’s daily oil production.3 But now, perhaps more than ever, they find themselves collectively and individually bedeviled by a host of threats ranging from the collapse of Iraq to the challenges of a nuclear Iran to persistent terrorist activity. Intra-regional struggles are being exacerbated by the involvement of external players, and neither set of trends appears likely to dissipate any time soon. While the militarization of energy resource management is nothing new to the region, and indeed some of these issues smack of old wine in new bottles, the conflation of these trends at precisely the time that US influence around the globe and this region in particular has waned (and, indeed, partly owing to the fact that it has done so), certainly complicates the issue, possibly to a degree not seen before. Yet there are a number of positive, mitigating trends that can be set against this array of negative factors. Driven by high oil prices and the accompanying revenues, the Gulf states have accumulated unprecedented assets which they are now using to fund a remarkable investment-and-development drive. The manner in which they have done so is unlike their actions in past oil booms. This is in no small part due to an emerging partnership between the public and private sectors in these states, which gives the current investment pattern a wholly different and far more sustainable nature.

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And while the entry into the region of new players such as China and India threatens on one level to further stir the pot, on another it actually strengthens and aids the development of a new energy architecture. This emerging architecture is helping give shape to the positive developments in the region, and thus reinforces a set of trends that collectively suggest that, whatever current or longer-term risks of energy militarization may exist, the positive factors are for the moment ascendant.

Historical perspective The Middle East has long lived with the threat of militarization of energy resources. The first modern instance of this came in World War II, as Hitler’s acquisitive eyes turned to the oil reserves in Romania and then beyond, to Iraq and Iran. Although oil occupied nowhere near as important a role in world affairs then as it does now, it was still considered a vital and strategic commodity. Hitler may have fallen far short of his aims in the Middle East and elsewhere, but the next instance of militarization followed hard on his heels. Iran in 1953 was, ironically, well on its way to becoming what many other nations wish it were today: a functioning democracy, presiding over a wealthy and stable state. Newly elected Prime Minister Mohamed Mossadegh made a key mistake, however, when he decided that the best way to continue the country’s transition toward modernity and economic development would be to nationalize the oil sector, allowing the state to keep a much larger portion of the revenues. This move was viewed as inimical to the national security priorities of the United States and Great Britain, and Mossadegh was overthrown in a coup stage-managed and financed by their intelligence services shortly after the announcement of the nationalization. While not quite open conflict over oil, the events of 1953 demonstrated the willingness of states to intervene forcefully, if not yet overtly, based on real and perceived threats to a strategic resource. The example most often cited when discussing the militarization of energy resources is the oil crisis of 1973. Again, this was less an issue of actual military conflict over resources than of using such resources as a weapon. In response to US support for Israel during its 1973 war with Egypt and Syria, the major oil exporters in the region, having taken no part in the war itself, raised prices dramatically, and then decided to halt exports entirely to “unfriendly nations.” Although the gesture ultimately proved to have no impact on the outcome of the conflict, the multilateral oil embargo wreaked havoc on world markets, the echoes of which are still felt today. The embargo raised the question whether, in the event that a nation’s energy lifeline were seriously disrupted, the affected nation would take retaliatory steps. Given energy’s strategic importance, the steps would almost certainly involve military action of some kind. A quintessential expression of this impulse can be seen in the plans put forth by the Pentagon in 1973 regarding the possible takeover of the oil-rich Eastern Province of Saudi Arabia in the event of future disruptions, or an invasion of the region by the Soviet Union.4 These events set the stage for future concerns over the possible

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use of armed forces to seize energy resources directly. Such concerns had ceased to be hypothetical, and had become real. The next disruption in oil markets did not initially include any attempt to subvert energy markets as such; though it certainly included an effort to seize energy resources by force – the first such effort since World War II. Iran’s 1979 Islamic Revolution removed a substantial volume of oil exports from the market in itself; but this came as an incidental byproduct of the Revolution, and did not represent any attempt to apply pressure on the market deliberately. Such an effort only emerged a few years later, in the so-called “Tanker War” of the 1980s. The Tanker War was a consequence of the escalation of the Iran–Iraq War that began in 1980, when long-standing Iraqi grievances over the definition of its border with Iran spiraled into open conflict, owing to the mutual suspicions and intense ideological competition between the Ba’athist regime in Baghdad, and the new Revolutionary government in Tehran. Oil unquestionably played a role in stimulating this clash, which began when the Iraqis sought to seize control of the Arab-dominated and resource-rich Iranian province of Khuzestan. But the oil sector itself was not a target in the early phases of the war. Had Iraq succeeded in its piratical scheme the impact on the global energy market would presumably have been negligible: Saddam was seizing Iranian oil because he wanted to sell it, after all. But as the fighting dragged on, both sides concluded that the surest path to a favorable resolution would be to threaten the other side’s energy sector more broadly, a process that placed a much wider array of market relationships at risk. The Iraqis carried out the first successful attacks on oil infrastructure when they targeted Kharg Island, a major Iranian export facility. Iran retaliated by attacking an oil tanker in 1984. What made this latter development particularly worrisome was that the tanker in question flew the flag of Kuwait, an ostensibly neutral country whose financial contributions to Iraq were nevertheless a sufficient provocation for Iran to escalate the conflict by targeting Kuwait’s energy lifeline. The attacks continued on both sides, with over 500 attacks carried out on tankers and other ships, until the United States and the Soviet Union both stepped in to allow tankers to be re-flagged under their respective ensigns, affording neutral crude carriers the protection of one great power or the other.5 The Tanker War illustrates a number of important elements that exemplify the risks associated with the militarization of energy security. First, states can and will engage in military activity designed to place energy resources at risk on terms that are deliberately intended to impact global markets. Conversely, they will also act forcefully to guarantee the continued flow of oil into those markets. Both Iraq and Iran targeted each other’s oil sector in order to meet a strategic objective. In the Iraqi case the objective included the aim of attracting the intervention of outside powers, by way of crafting an exit strategy from a war it had concluded it could not win on the ground. Finally, the Gulf War of 1980–8 showed that states external to a region, and otherwise uninvolved in conflict there, may react to military threats against oil resources in ways that may lead to their direct participation in the fighting.

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Perhaps the clearest recent example of energy-inspired conflict, with regional players engaging in outright militarization of the resource base itself, was Iraq’s invasion of Kuwait shortly after the conclusion of the Iran–Iraq War. Saddam claimed that Iraq’s primary motive for invading Kuwait was that the latter was producing oil far above and beyond its OPEC quota, an action that was leading to low oil prices and thus to lower oil revenues for Iraq, at a time when it needed to rebuild itself and pay off the loans that it had accumulated to finance its war with Iran.6 Additionally, Iraq accused Kuwait of engaging in “lateral” drilling and other production activities that were siphoning oil off from one of the major Iraqi oil reservoirs, situated on the border with Kuwait. In contrast to his initial attack on Iran, which was also intended to seize oil resources, but perhaps merely as a bargaining chip that might have been traded for other political concessions, Saddam’s invasion of Kuwait was intended to overthrow the government and lay permanent hold of its oil reserves, with the possible intent of continuing on in the same vein into Saudi Arabia. The response of the international community was to take immediate military action to prevent Saddam from continuing his advance into Saudi Arabia’s oil fields, and then to re-take Kuwait by force. During the latter phase, Saddam in turn introduced a new kind of “energy weapon” – a scorched-earth policy in the most literal sense, by which he set fire to Kuwait’s oil wells. This direct attack on oil infrastructure was on a scale not seen previously or since, and represents the most direct and far-reaching destruction of energy resources yet carried out by armed forces. While its strategic purpose is sometimes obscured by Saddam’s exaggerated reputation as a vengeful madman, the logic of this action is not mysterious: it was an attempt to demonstrate the Pyrrhic risks to global energy markets that could arise if the United States and its coalition partners continued in their effort to liberate Kuwait. It was essentially a threat by a major energy producer to, in effect, commit suicide, rather than submit to the requirements of global order.

The situation today Saddam’s actions set a precedent for the militarization of energy security, which is now entering a new and rather different phase. Since 1991 intra-state regional conflicts in the Middle East related to energy resources have moved both down and up the chain in terms of players. On the one hand, there are rising fears of attacks upon energy assets by non-state actors like al-Qaeda; on the other that shortages or extreme price instability may inspire military intervention by states outside the Middle East itself. In the immediate aftermath of the Gulf War of 1990–1, energy security declined somewhat as a key concern of consumer states. The swift and successful coalition operations led by the United States seemed to suggest that the developed world was more than capable of defending the Middle East’s energy resources against any belligerents, either regional or external. However, beginning in 1998 or so, a new set of players emerged on the energy landscape, giving

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rise to a new set of concerns. In a sense, no sooner had the United States won the Gulf War (with Saudi Arabia at its side) than both states found themselves embroiled in another conflict, and one that was to prove far deadlier in the long run. The rise of al-Qaeda first came to light through a series of isolated attacks carried out in the Middle East and Africa, of which the most lethal was the Khobar Towers bombing in June, 1996. The group’s significance was confirmed by the attacks in the United States on 11 September 2001; but as horrific (and strategically consequential) as these were, their immediate impact on the energy sector was surprisingly limited. Likewise, the fact that al-Qaeda had found refuge in Afghanistan, a country without significant energy resources, meant that the American dismantlement of the Taliban regime in Kabul had no particularly profound impact on energy markets. Not until 2003, when al-Qaeda launched a series of suicide attacks against foreign nationals working in the Saudi oil sector, did al-Qaeda attempt to go after the lifeblood of the world economy.7 Similar incidents have persisted since. Although no major attack on a facility such as Ras Tanura (the world’s most important oil-shipping facility) has been successful, the repeated attempts have inevitably raised questions about the long-term safety of even the largest and best-protected components of the world’s energy infrastructure. These concerns have in turn created the risk that powerful consuming states outside the region might decide that such infrastructure is no longer safe in the hands of its current owners, and that it might be better handled by themselves. By almost any reckoning, energy security in the Middle East, and indeed worldwide, is no longer simply a matter of state actors and national interests. Terrorist groups, ethnic/religious issues and other factors are complicating the picture, and could cause state governments, who still retain the greatest scope for military undertakings, to misconstrue circumstances or misperceive risks in ways that cause them to act, ways that may severely (if not irreparably) impact the current energy architecture. This is arguably the case with respect to the American-led invasion of Iraq in 2003. A variety of less-than-consistent motives have been given by the United States by way of explaining its actions in Iraq. Only the most naïve critics of American conduct could suppose that it was motivated by a simple desire to seize Iraq’s oil. Yet the massive energy reserves to be found under Iraq’s sands certainly played a role in the strategic calculus surrounding the invasion. In its wake, and despite the best of intentions regarding the usage of Iraqi oil to fund reconstruction and reform, the oil sector in Iraq has become entangled within a regime of military occupation and control that may endure for many years, and perhaps indefinitely, depending on the nature of whatever successor regime emerges once America departs. Despite US protestations, the Iraq War has been seen by many in the international community as being, if not by design then certainly in practice, a grab for Iraq’s reserves, or at the very least an attempt to stymie Chinese and Russian efforts to obtain a larger foothold in the oil sector. LUKOIL (a major private Russian oil company) and the China National Petroleum Company (the largest

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Chinese national oil company) had both signed agreements for large exploration and production operations in Iraq. The US invasion essentially rendered those agreements null and void, predictably causing resentment and suspicion on the part of the companies’ respective governments. The fact that the United States, following its successful initial invasion, declared that it would be establishing up to 14 permanent military bases, and would also be assisting the Iraqis in reestablishing their oil sector, only heightened the apprehensions of other key players in the energy sector, that the Americans had come to stay. In recent months the political impasse and rapidly deteriorating security situation in Iraq have created a vortex of instability in the region, which could further escalate the level of resource militarization. For Iraq to regain stability, it would need to develop both a new level of political maturity and much greater administrative efficiency. Both have been lacking so far, and signs of improvement for the foreseeable future are few. Much has been made over whether Iraq is currently in the throes of a civil war or not. This discussion misses the reality, however: Iraq is currently undergoing state collapse, of which widespread, multidimensional social violence is symptomatic. Although this may appear to be a semantic difference, for the oil-sector the difference is significant. Oil companies have operated successfully in countries experiencing civil war of the “secessionist” variety, including Angola and Sudan. Under state collapse, however, oil sector operations become difficult, in part because the risk of complete anarchy is higher (as compared to a conflict between two or more welldefined combatant parties); but also because there is no authoritative decision-making party to deal with on a host of issues, ranging from transportation and pipelines to prices to contracts. Absent stable arrangements on such matters, the business of producing oil becomes an impossibility. Another major factor affecting the energy sector has been the targeting of facilities, personnel, and infrastructure by non-state groups, including both alQaeda terrorists and insurgent militias. Although the frequency of attacks has reportedly decreased since 2006, the sector remains a prime target given its importance to the Iraqi economy. Some of these attacks are designed to disrupt the process of rebuilding, others are mere criminality for purposes of smuggling. Many are also attempts to either gain control over part of the infrastructure, or to test the boundaries and lay the groundwork for an attempted takeover following an anticipated American withdrawal. Unless these attacks can be effectively stymied by state-backed institutions, whether the Iraqi armed forces and police, or a newly formed Iraqi national oil company, or by contracted security forces paid for by independent producers, remains to be seen. But there is no doubt that success in this area will be a critical factor in determining whether Iraq can prosper as a state. If the Iraqi government cannot control or safeguard the nation’s energy sector, it opens the door to further militarization as various power groups within and beyond the region jockey for control of the strategic resource base. State collapse may thus ultimately be worse than civil war, from an energy perspective. A continuation of current trends, combined with a possible US with-

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drawal, may cause some or all of Iraq’s neighbors to act directly to contain the resulting fallout. Any such action will probably prolong the militarization of the energy sector that has already begun as a consequence of the American invasion. Such developments will in turn tend to escalate regional tensions and increase the likelihood of additional conflict over resources. A brief look at the level and types of external interference already present in Iraq reveals the extent to which neighboring players are already poised to intervene. Iran has emerged as the most significant player in Iraq, arguably even more so than the United States at this point. Iranian fears of US policy toward itself have led it to attempt to destabilize its neighbor, or at least to drive events there so as to encourage the emergence of a government that is aligned with the Islamic Republic’s interests, rather than one that has divided loyalties (a fair characterization of the al-Maliki government that is currently in place). Iran maintains a strong military and intelligence presence inside Iraq. For the former, it relies not on its own troops, but rather on arming Shia militias, a practice that is helping to fuel the widespread violence that has made economic recovery impossible so far. One of the key beneficiaries of Iran’s munificence is Shia cleric Moqtada al-Sadr, whose death squads roam the streets of Iraq attacking US and Sunni troops alike. In addition, Iran is supplying funding for political parties, including both al-Sadr and alMaliki’s parties, and supplying economic and humanitarian aid designed to counter similar efforts by the West. Other regional powers, although lagging far behind Iran in terms of both involvement and influence, are also playing important roles on the ground in Iraq, with an eye to managing or at least containing the post-US situation. Saudi Arabia is funding militant groups, primarily Sunni militias, while zealous jihadists from the Kingdom pour over the border to bolster the ranks of those groups. In recent years Jordan has played a far more limited role in the region than it has in the past. Nonetheless, the events on its border have reached a point where the Hashemite Kingdom is also throwing its hat in the ring by funding militant groups. Additionally, Jordan has become a primary refuge for former regime elements and displaced persons. Syria is also funding its own militants, and serving as a key political base for former regime elements. The former regime elements in Syria are playing a much more active role in Iraq than the ones in Jordan, which appears for now to be functioning less as a base of operations than simply as a refuge. The final critical player in Iraq is Turkey. Turkey, much like Iran, maintains a significant military and intelligence presence in Iraq, as well as contributing funding for political parties. The Turks are particularly concerned about the growing power of the Kurds, who have grown enormously in power and influence thanks to American protection and support, which antedates the invasion of 2003. Turkey claims that it cannot countenance an independent or even an autonomous Kurdistan on its borders, especially one with access to enormous oil reserves and the attendant potential revenues. Despite its many ties to the United States, Turkey may prove to be the first regional player to intervene militarily in Iraq in an explicit fashion.

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From the point of view of global energy markets, the manner in which Iraq’s immediate neighbors are attempting to contain and deal with conditions there appears counter-productive at best, and dangerously short-sighted; yet it is essentially the only course of action open to them at this time. The real risk is that one or more of the parties concerned may decide that, rather than simply attempting to stave off a regional conflagration, or to manage the flow of refugees, it will best be served by making a play for Iraq’s oil reserves. Iran could certainly do so, especially given the high number of fields that lie close to the border between the two countries. Others may be tempted as well, particularly after the American presence in the country declines, as it must eventually. Even if the current situation in Iraq were to be resolved, the region remains a tinderbox. The countries in the Middle East have armed themselves at alarming rates since well before the onset of the Iraq War. The 2002 edition of the annual report to congress on arms sales to developing nations offers this by way of historical perspective: The Near East has generally been the largest arms market in the developing world. In 1994–97, it accounted for 47.9% of the total value of all developing nations’ arms transfer agreements ($37.3 billion in 2001 dollars). During 1998–2001, the region accounted for 46.5% of all such agreements ($38.2 billion in 2001 dollars).8 The global decline in international violence since the end of the Cold War has left this regional trend unaffected. In terms of available military hardware the Middle East is the most highly militarized region in the world. The 2005 version of the report quoted above shows that Middle Eastern countries have purchased more arms ($96 billion) over the 1998–2005 time period than any other.9 The region continues to be a leader in terms of arms purchase agreements, with Saudi Arabia, the UAE and Egypt leading the way, with a total combined expenditure amounting to almost half of the above total.10 On some levels this remarkable buildup may have enhanced security, since it has certainly raised the costs of belligerent actions. Overall, however, unabated military spending runs the risk of creating a classic “security dilemma” situation, as every state’s efforts to make itself safer inspire escalatory responses from its neighbors. Should tensions spill over into conflict, the most probable catalyst would be Iran. Iran’s power in the region has been rising steadily in the last few years, and has been accelerated, however ironically and unintentionally, by the United States invasion of Iraq. That action removed Iran’s biggest military competitor, effectively turning it into a quasi-vassal state of a Western power, while also rekindling the formerly dying flames of the Iranian Revolution. American vilification of Saudi Arabia, after some of its citizens were found to be participants in the 11 September attacks, dramatically weakened public, and perhaps official, sympathy for the United States in its other traditionally important partner in the region. Iran appears in the eyes of many to be a weakened and cornered state, desperately reaching out to fickle allies such as Russia, or selling its precious oil

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reserves cheaply to anyone who might offer hope of a strategic security alliance; namely China and India. But this appearance may be deceptive. Iran has become increasingly bellicose in response to America’s military commitments in Iraq and Afghanistan, and its pursuit of a nuclear program is already shaping up to be the next destabilizing catalyst in the region. The key question is thus whether, on balance, Iran is resurgent or vulnerable. If resurgent, Iran could be expected to demonstrate its growing influence through its proxies in Lebanon, Iraq, and Afghanistan. This possibility has already led to fears of a militarized “Shia crescent” emerging in the region, one that extends down into the Sunni-majority Gulf states as well. While the “Shia crescent” is far from a reality at present, even a limited manifestation of some of the key components, especially sectarian stirrings among the Shia populations of Kuwait, Bahrain, and Saudi Arabia, would raise alarm bells among those regimes. For the most part the United States has appeared to favor the Shia of Iraq in terms of post-invasion support, creating the conditions that have allowed Iran to exercise unprecedented influence there and elsewhere, by tapping into key, newly invigorated Shia groups. The conflict between Israel and Hezbollah in Lebanon in the summer of 2006 was another example of Iran’s ability to extend the reach of the Islamic Republic via ideological allies in neighboring states. Another key indicator of Iran’s strength is its ability to continue facing down the United States and the European Union over the nuclear issue. To date, the country has been able to do just that, even in the face of disallowing inspectors and revelations that the nuclear program is much farther along than originally assessed. The US and EU have so far been unable to devise a means for halting Iran’s nuclear work, short of military action. Limited sanctions have proven ineffectual, and indeed have merely hardened Iranian resistance, as well as causing politically disparate groups to coalesce in defense of their country against perceived injustice. Sanctions have also hampered Western and Japanese companies from investing in the country, allowing Chinese, Indian, and Russian firms to take advantage and facilitate the regime’s continued defiance. Two other, interlinked factors are important indicators. If the conservative Islamist factions known as the Alliance of Builders of Islamic Iran (the Abadgaran), whose leading figure is Iran’s current president, Mahmoud Ahmadinejad, succeed in further consolidating their domestic political position, it will be a clear precursor to a more belligerent stance on both foreign policy and the nuclear issue. The Abadgaran can only realistically hope to achieve this type of consolidation of power if they can execute their ambitious populist economic program. In order to do so, however, they need the country’s finances to continue to be bolstered by high oil prices. High prices will afford them both the financial wherewithal to implement their more grandiose economic plans, and create a financial buffer in case of more aggressive sanctions by the international community. A vulnerable Iran, on the other hand, is one in which Tehran does not pull the strings with its regional proxies and allies, while what prove to be false and

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inaccurate perceptions of Iranian control create a backlash. In this scenario the “Shia crescent” is exposed as a myth, Hezbollah asserts itself as an independent organization that can do without Iranian support, and the Iraqi Shia decide to share power more evenly and rebuild Iraq in a national mode rather than a sectarian one. The nuclear issue could yet boil over even under these conditions, however, leading to much harsher sanctions and potentially to the direct use of force. An attack on a weakened Iran might help drive apart the fragile coalitions that are still being formed internally, especially if oil facilities were hit and revenues lost; or if the attacks themselves were seen within Iran as having been inspired by the overly aggressive actions of Ahmadinejad and his associates. Iran’s political stability may suffer if oil prices were to dip substantially, starving the regime’s populist programs of vital funds. And of course the programs themselves, even if fully funded by oil revenues, may fail to deliver the promised benefits, owing to the corruption and incompetence with which they are administered. Such tensions could well shatter the political cohesion of the Abadgaran, which has never been a homogenous group despite outside efforts to paint it as such. Indeed, there are significant political and economic differences between the three key conservative leaders, Supreme Leader Khamenei, Ayatollah Rafsanjani, and President Ahmadinejad. Tensions between the latter two are especially heated, and even a slight misstep by Ahmadinejad could provide Rafsanjani with the opening he needs to discredit the current president. How the nuclear issue plays out will go a long way towards determining Iran’s future. The future of Iran’s nuclear program will in turn be determined in part by the political battles going on inside Iran itself, and by which view of the country’s future wins out internally. The risk remains, however, that Iran may play a destabilizing role no matter which scenario comes to pass, striking out either from a position of strength, or because it feels that it is cornered and must act forcefully to exercise what influence it does have. An attack on Iran would be particularly destabilizing for the region, as almost no assessment of how such an attack might unfold gives any credence to the notion that Iran would be unable to strike back in some fashion. As far as energy security is concerned, regardless of who might initiate the attack on Iran, Iran would almost certainly retaliate against energy installations throughout the Gulf. Any attack by outsiders would leave Iranian leaders feeling that they have little to lose by escalating the conflict, either by attacking American facilities or persons directly, or by attempting to close off the Strait of Hormuz, disrupting tanker traffic, and potentially targeting critical energy facilities such as the key Saudi port of Ras Tanura, where well over five million barrels of oil a day are loaded. Qatar might offer another attractive target, given both the concentration of energy facilities, in particular highly capital-intensive liquefied natural gas (LNG) facilities and the American air-force base there. While Iran would certainly come out on the losing end of any significant military clash with the United States, it could inflict significant damage in the interim, and the impact on energy supplies could be severe. Iran attempted to use similar tactics in its war with Iraq in the 1980s, with limited results. But the

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current consensus is that Iran is better armed than in the past, especially as far as missile technology is concerned; it is certainly better financed this time around; and the United States is no longer the ostensibly neutral “off shore” presence that it was at that time, but has demonstrated a willingness to intervene comprehensively on behalf of “regime change.” Additionally, there is a substantial risk that if the scenario outlined above were to unfold, other powers might escalate their involvement in the region as well. A major attack on or by Iran would be viewed by a wide range of market participants as presenting a major risk to the security of global energy distribution, and, depending on the events leading up to the outbreak of hostilities, any war involving Iran might lead powers such as China and Russia to intervene. Non-state actors like al-Qaeda would almost certainly view the outbreak of hostilities as an opportunity to take advantage of a distracted world and strike at targets within the Gulf. The Gulf Cooperation Council (GCC) countries (Saudi Arabia, Kuwait, Qatar, Oman, and the UAE), on the other hand, have so far remained passive bystanders for the most part, and may well continue to do so. Despite having greatly increased their military spending since Iraq’s invasion of Kuwait in 1990, their capabilities remain very limited, even in the form of a joint defense force (which currently does not exist). The rise of Iran has led the GCC states to reach out to the US again, repairing many of the stresses that emerged after September 2001. Saudi Arabia maintains a bit more distance than it did during the decades of the “special relationship,” but there too improvements can be seen. Fears of a collapsed Iraq and the emergence of the “Shia crescent,” as well as the lack of other viable geo-strategic partners, have led the Gulf states back into the US camp. At least in the Saudi case, however, this is not a binding decision. There will be no return to pre-2001 conditions for Saudi–US relations though there have been signs that the relationship has been regaining some of its traditional warmth. The Saudis are, however, making their own attempts to manage the region. The attempts have yet to bear substantial fruit; yet the Makkah Accord, which Saudi Arabia brokered between Hamas and the Palestine Liberation Organization in February 2007, as well as Saudi-sponsored conferences regarding the conflicts in Iraq, Lebanon, and even Sudan and Chad, have been positive contributions toward mitigating tensions in the region. Any further militarization of energy security in the region would certainly undermine such efforts. Despite its substantial arms purchases over the years, Saudi policy does not rest upon its military potential, but upon a complex foundation of cultural prestige and financial influence, whose exercise will be rendered more difficult by increasing regional violence.

Mitigating strategies and factors Despite the potentially grim outlook for stability in the Middle East that this discussion has presented up to now, there are some important countervailing trends

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to consider as well. Foremost among these is the vast improvement in the economic outlook of the region. The key OPEC countries’ foreign assets are currently almost triple their 1998 levels, and are likely to increase even further between now and 2009. Saudi Arabia’s foreign reserves now reach close to $200 billion, while the UAE holds approximately $500 billion. Kuwait and Qatar are not far behind, and even Iran, which has the smallest holdings of the group, has reached nearly $70 billion in foreign reserves. Beyond simply providing an enormous cushion in case of an oil-price drop, these new funds are driving the emergence of a new model for the Gulf. The major producer states were deeply scarred by the financial and political problems of the 1990s. Saudi Arabia, Oman, and Qatar nearly went bankrupt before implementing some basic reforms aimed at macroeconomic stabilization, beginning in 1995. These reforms, which included saving higher oil revenues rather than squandering them, and independent oversight of the business sector, engendered an evolution in private–public partnership after 2001. Encouraged by regulatory reforms, particularly in the financial sector, and an improved investment environment, domestic private enterprises started to repatriate huge sums and invest in their home economies. Fears of investing in the West, in light of the heightened financial scrutiny (and political suspicion) entailed by measures designed to combat terrorism since September 2001, have also served to encourage local investment. In this context, new business models arose, whereby private merchants modernized their companies, and the state saw commercial entities as a more effective means to mobilize their assets. The Mubadala Development Company, a quasi-private group operating out of the UAE, is an example of the type of investment vehicle that is being created through a combination of public and private means. Because the ruling families of the region have been able to disguise their assets behind new types of companies, some created in partnership with the merchants, they have also invested in their home markets, where they do not fear public scrutiny. Launching both public and private companies on the region’s stock exchanges has been a favorite government method of helping capital to circulate, with initial public offerings in the region reaching well into the billions: the Abu Dhabi Water & Electricity Authority (TAQA) and Dana Gas are two examples of public and private enterprises (respectively) that have been listed with great success on the region’s exchanges. Others, such as Saudi Arabia Basic Industries Corporation (SABIC) and Dubai Ports World have seen their market caps increase sharply, allowing them to fund ambitious projects throughout the Gulf and the globe. Working together in this manner, the public and private sectors have created a virtuous circle that has led to high economic growth rates. Each reinforces the position of the other: the public sector extends reforms and therefore increases opportunities for investment, while the private sector and royals benefit financially. Meanwhile, the public has become part of the economy through involvement in the stock market, more jobs, and higher salaries. Though higher oil prices underlie this model for the time being, the region’s economies are at last

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deepening and diversifying, and foreign investment has picked up to provide continuing impetus for growth. The Gulf governments, with the exception of Iran, are thus changing their strategic focus, and are attempting to create “developmentalist” (rather than rentier) states less dependent on the sale of primary commodities. For the most part they appear to be succeeding. Macroeconomic stability has been achieved, to the point that Gulf countries are far less exposed than they once were to the traditional boom–bust cycles of oil prices and global economic growth, and to the destabilizing political effects that invariably followed. This is not to say that they will not suffer in the case of a global economic slowdown, but they will certainly not suffer as badly as they did in past downturns. Beyond merely cushioning their economies, the Gulf states are markedly increasing their economic maturity, and are learning to look beyond top-line growth in judging economic success. The demographic pressures have become too large to ignore even for regimes that have made turning a blind eye into the defining characteristic of their tenure. The emerging public–private partnerships outlined above have allowed these states to begin deploying funds for developing both physical and human infrastructure. The UAE, for example, has recently announced a $10billion investment fund, while the wife of the Qatari Emir has been leading a variety of education initiatives in Qatar, including the building of an “Education City.” Whether these efforts will help overcome the challenges these countries are facing is yet to be determined, but certainly a shift in approach would have a salutary effect. The key to economic reform will be turning the demographic problem into an economic solution. The Gulf economies are beginning to wrestle with this issue for the first time in their history, and are looking at harnessing energy in new ways to facilitate this transition. While access to the oil and gas sector remains highly restricted in most Middle Eastern countries, the region’s producers are generally either investing their own funds to increase oil and gas capacity, or allowing foreign investment to do so. Moreover, national oil companies (NOCs) are becoming a critical part of the development process. The idea is to use energy produced by the NOCs to fuel new industries, both literally and figuratively. The Gulf states appear to have realized that job generation is as important as revenue generation, if not more so. The latter all too often fails to translate into real, tangible economic benefits for the population, which has become too large to simply pacify with windfall handouts. The issue the Gulf economies face, as do all oil-producing states, is that producing oil does not generate a significant number of jobs in and of itself. Affiliated enterprises may, however, and the petrochemicals area is one to which Gulf governments are paying particular attention. For this reason, Saudi Arabia has stated that it is aiming to become the third-largest petrochemical producer in the world by 2015, and the largest by 2020. The value-added component of petrochemicals would represent a substantial financial boost above and beyond oil production, while providing more employment opportunities per comparable dollar. The additional jobs and revenue are critical, as Saudi Arabia alone adds over 200,000 new entrants into

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the labor force every year, creating a need both for that number of jobs, and approximately $40 billion to cover the costs of the new laborers. Much of this growth will have to come from natural-gas-based industrial development, which will present significant, though scarcely insurmountable, challenges. The Middle East sits on the largest gas reserves in the world after Russia, but the development of these resources has lagged significantly. Qatar, holder of the largest country-level reserves after Russia and Iran, has imposed an indefinite moratorium on new projects, fearing that the spate of recent LNG projects runs the risk of causing a catastrophic decline in pressure in the country’s massive Northern Field. Iran, on the other hand, is keen to develop its gas resources, but is prevented from doing so by the international and investment conditions it has, in large part, created for itself. While Iran has a number of deals signed with various countries, both as investors and buyers, almost none of those deals have progressed much beyond the signature stage. Yet in order to fuel the enormous petrochemical projects that regional elites now envision, as well as to meet the power requirements that will arise from new desalination, real-estate, and commercial projects, significant gas development will have to take place. This leads to a sequencing issue, whereby gas development needs to happen in order to provide economic growth opportunities, but will draw away funds required for infrastructure, education, and capacity investments that will also be critical for sustainable growth. The choice is a difficult one, and also one that the Gulf states have not yet had to deal with in depth, given that they have been able to use their record financial reserves to cover the vast majority of new spending up to now. Looking forward, however, the need to find a new solution is critical, especially in terms of building the capacity to continue the evolution of diversified “developmentalist” economies. The Gulf states appear to have realized that partnering with the private sector may be the only way to build their institutional capacity at home and abroad, and are now seeking ways to expand this cooperation. Energy services are a huge source of opportunities for private-sector development. Many in the region point to the so-called “Norwegian Model,” after that country’s successful use of oil revenues in developing a broader industrial and service base. This type of model has allowed Norway to provide a sustainable return for both public and private finance activities, a key component in ensuring that the partnership survives oil-price volatility. Finance has increasingly become a driving force in the Gulf, with the emergence of new banks and deeper capital markets allowing for better and more productive capital flows. Additionally, “Islamic finance,”11 long thought of as an exotic instrument of limited economic significance within the region, has taken off, and is now estimated to be a $1.3 trillion market. Islamic finance is not only funding many of the mega-projects currently underway in the Gulf, but is also helping to facilitate investments outside the region, ranging from Pakistan to Indonesia, and even feeding into investments being made in China and India. Islamic finance, along with the expanding role of the NOCs, is part of the changing economic strategy the Gulf producer states are undertaking. For obvious historical reasons, national oil companies are the most developed

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institutions in the Gulf producer countries, and they are being called upon to fulfill new roles within a changing economy. Whether they can do so or not will be a critical determinant of the future success or failure of the nascent economic transformation underway in the Gulf. The tension the NOCs are facing chiefly involves the trade-off between investing in greater hydrocarbon production capacity or in social and economic development; an extension, in other words, of the broader domestic policy issues confronting the governments that own the companies. While one might argue that given the current financial situations of the Gulf states, both aims are eminently achievable, high oil prices have also been accompanied by rising production costs. In fact, critical commodities (especially steel), infrastructure (including rigs and ships) and talent (particularly experienced on-site project managers) are in very short supply, and in some cases unattainable. In that light, Saudi Arabia’s $200 billion in foreign reserves does not seem an especially lofty number, when set against the approximately $110 billion the country needs to invest in its production capacity over the next five years alone. Any moderation in prices will therefore bring with it the question of whether to continue investing in long-term economic prospects at the cost of short-term revenues. The choice is a difficult one, and how it is answered will go a long way towards determining the future stability of the Middle East, a region where military options always seem to be available, should the economic ones fail. Creating stable economies in the Gulf is thus a critical component in enhancing global energy security. Is the new model sustainable? In order to answer that question in the affirmative, the Gulf governments will have to be diligent about following through on practices that have so far eluded them. They will have to move toward “second-generation” economic reforms, a task that involves harder decisions than merely reining in spending. Among the changes that will be required will be more careful maintenance of fiscal- and financial-system stability; and again, real change will come only if the governments remain committed to continuing their nascent investments in infrastructure and in people. Only then can the institutional and regulatory improvements required for stable growth take place. But even with these reforms in place, can the Gulf states avoid falling back into their old habits in the case of a down cycle in oil prices? Even with extensive reforms, oil revenues will remain the main engine of growth for some time. Managing the next down cycle will be key. Governments will have to keep tight budget discipline while at the same time ensuring that the still-fragile confidence of the private sector remains intact.

The wildcard: increased outside involvement The Gulf’s unique role in maintaining energy security has meant that more and more attention is being paid to the region by outside governments who have not traditionally been active there. Emerging powers are now looking for a role and place within the Middle East picture, a process that has been exacerbated by the backlash against America’s recent conduct in the region. The example most

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often referred to is China, but others, including India, Russia, and Japan, are also becoming more engaged. While none of these countries can yet act as a true counterweight to the United States, nor serve as an independent strategic partner for any of the Gulf countries, their collective efforts have certainly eroded American influence in the region. The limits of that influence, in terms of both hard and soft power, have yet to be truly tested, but the fact that Gulf countries believe they now have other options is significant in itself. The new players in the region have come bearing gifts, in the form of economic links, substantial investment, education and development assistance, technology transfers, and in some cases military sales. And while market-based transactions do not a strategic partnership make, the outlines for a deeper relationship are beginning to come into focus, primarily as a result of the perceived missteps the United States has made in Iraq, Palestine, and elsewhere. The United States can still repair its older alliances, and indeed has formed new, stronger ones with some of the smaller states in the region, particularly Bahrain, Qatar and Kuwait. The risk, however, is that the United States misperceives or misinterprets growing commercial links between, say, Saudi Arabia and China, as an exaggerated threat to its own rightful interests and influence. Such misperceptions would certainly be exacerbated if it appears that energy arrangements were arising by which the US might be “locked out” of access to energy resources in key producer states. The increasing multilateralism of Gulf politics, although currently positive and helping to play a balancing role, could lead to a broader militarization of energy security in the region, especially if the new outside players come to feel that they have a stake in the game sufficient to challenge the historical preponderance of the United States in the region. In the final analysis, however, the ultimate barrier to the militarization of energy security in the Gulf will be the economic (and social) success of the governments that rule there. It will be their failures that create temptations for militarized intervention, and their achievements that will render them unnecessary.

Notes 1 West Texas Intermediate (WTI), the US benchmark crude grade, is trading at prices approaching $100 per barrel as of November 2007. This compares, in inflationadjusted terms, to the all-time highs experienced after the Iranian Revolution in 1979–80, when oil traded in a range of $96–$103 per barrel in today’s dollars. See “Oil Prices Resume March to $100 a Barrel,” MSNBC, 23 November 2007, http://www.msnbc.msn.com/id/12400801/. 2 Both producers (i.e. OPEC) and consumers (international oil companies, consumer governments) long held that oil had a “natural range”of between $18–$22 per barrel. A price above these levels was thought to evoke a demand response in the form of reduced demand and conservation, while a price below these levels would make further investments an unattractive proposition for the oil companies. On the role of price management as a tool for stabilizing and managing global oil markets, see the discussion by Duane Chapman in Chapter 4. 3 British Petroleum, BP Statistical Review of World Energy, June 2007, http://www.bp.com/statisticalreview. 4 Mai Yamani, “Echoes of 1973: American Invasion Plan Stirs Fierce Saudi Debate,”

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International Herald Tribune, 9 January 2004, http://www.iht.com/articles/2004/01/09/edyamani_ed3_.php; Iason Athanasiadis, “Stirring the Ethnic Pot,” Asia Times, 29 April 2005, http://www.atimes.com/atimes/Middle_East/ GD29Ak01.html. On the Tanker War see Martin S. Navias and E. R. Hooton, Tanker Wars: The Assault on Merchant Shipping During the Iran–Iraq Conflict, 1980–1988 (New York: I. B. Tauris, 1996); and George K. Walter, The Tanker War, 1980–88: Law and Policy (Newport, CT: Naval War College, 2000). Theodore H. Draper, “The Gulf War Reconsidered,” New York Review of Books 39/1, 16 January1992. There is a comprehensive account of the war’s origins in Lawrence Freedman and Efraim Karsh, The Gulf Conflict, 1990–1991: Diplomacy and War in the New World Order, Princeton, NJ: Princeton University Press, 1993, pp. 1–199. “Al-Qaeda Organization in the Arabian Penninsula,” Global Security.org, http://www.globalsecurity.org/military/world/para/al-qaida-arabia.htm. Richard F. Grimmett, “Conventional Arms Transfers to Developing Nations, 1994–2001,” Congressional Research Service Report for Congress, 6 August 2002, p. 10, http://fpc.state.gov/documents/organization/12632.pdf. Richard F. Grimmett, “Conventional Arms Transfers to Developing Nations, 1998–2005,” Congressional Research Service Report for Congress, 23 October 2006, p. 61, http://www.fas.org/sgp/crs/weapons/RL33696.pdf. Ibid., p. 56. Financial models and instruments based on Sharia (Islamic law) prohibit the charging of interest. Islamic finance works on the basis of risk- and profit-sharing between a financial institution (or other investor) and its customers.

6

Energy security The Russian connection Amy Myers Jaffe and Ronald Soligo

The world economy has been undergoing a radical transformation over the past half-century, from one based on significant government intervention in the form of regulation and planning to one based more and more on market forces. The oil market is one example of this trend, as it has moved away from contracts or government relationships between specific buyers and producers to a global market system based on competitive bidding and price discovery through the commercial dealings of a vast number of players. The United States, as a world power and energy consumer, favors an open, transparent, competitive global market for oil in which no seller or group of sellers can dominate the market and thereby threaten the access of the US or its allies to purchase the supplies of oil needed to conduct normal everyday consumer business and military operations. The current global trading system that has emerged is one that is led, and to some extent enforced, by the United States. Since World War II the US has taken the lead in many rounds of international negotiations to reduce tariffs, open markets to unrestricted capital flows and establish rules for protecting investments and intellectual property. At times, the US has relied on multilateral negotiations, at others, when multilateral talks were not promising, on multitrack negotiations.1 By and large this system has worked well and is supported, albeit with various complaints at different times, by the international community. The United States, as the world’s military superpower, backs up the operation of this global marketplace by policing the seas and international commerce from attack by hostile nations or non-governmental groups (NGOs). The broad-based support for a liberal international trading system among industrialized nations arises not only on the bases of philosophy and ideologies but also from experience. Many countries can point to higher growth rates that have resulted from being integrated into the global economy, through better access to markets and by increasing foreign investment. And many countries benefit from having a global economy where there are more players in each market and prices are set more competitively. It is in the interest of resourceimporting countries to have a diversity of supply sources and to have suppliers competing with one another. However, resource exporters often complain that the trading system is biased against them, in that while the products they export are priced at highly

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competitive rates, the goods they import are typically sold in markets that are oligopolistic. The result is unfavorable terms of trade. Complaints have been the loudest from countries that are dependent on exports of one or two primary commodities, since commodity-price volatility often translates into economic instability. As a result primary-goods exporters often distrust free and competitive international markets, and seek ways in which they might cooperate to gain some power in the export markets. This is especially the case when raw material-prices are falling and exporters have to deal with the consequent declines in their economies. While the current period is one of high and rising commodity prices, and commodity exporters are content, there is no reason to believe that the high volatility that characterizes these markets will not continue, and that there will be a period of falling prices, economic hardship, and renewed efforts to collude to raise prices. While the US is the dominant player in the world economy and the guarantor of open sea-lanes, the system would not survive without the acquiescence and support of the majority of countries. Ultimately the global system, like any system of law and order, thrives because the overwhelming portion of participants agree to behave according to a certain set of rules, and act in the belief that other participants will also uphold those rules. If faith in the system falters and fear that participants may not always honor those rules and norms becomes widespread, then countries may take defensive actions to protect themselves in the event of a breakdown of the trading system. The very act of taking defensive positions contributes to the uncertainty experienced by all players, and indirectly undermines the stability of the system. As a result the uncertainty about such a failure in the global system can become self-fulfilling, where the very situation that all fear is in effect created by individual actions taken by countries responding to perceived risks. The use of sanctions against oil-producing states in the past, and the vulnerability of oil-import-dependent countries to sanctions or supply disruptions in the future, has resulted in some countries investing in oil production abroad. While it is not clear how much protection of supplies these investments will provide, their very existence along with the past history of sanctions policies undermines the confidence needed to sustain the global system of open and free energy trade. While some countries might be undertaking policies to hedge the risk of a breakdown in the market, it is well to remember that countries are constrained in their behaviors by their participation in treaty-based institutions like the World Trade Organization (WTO), as well as the web of commercial and financial ties that bind their economic well-being to that of other nations. While countries might risk those ties in ways that lead to a breakdown in the international order – as occurred in the run-up to both World Wars – these occurrences stand out in the historical record precisely because they occur so infrequently. For the most part, countries that wish to challenge the international rules will do so with marginal changes in their policies that, generally speaking, do not threaten the viability of the entire system. It is perhaps noteworthy that Russia, which is primarily an exporter of raw materials, and has of late pursued policies that

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discourage foreign investment, is less well integrated into and intertwined with the international economic system – particularly in relation to its size and economic significance. To that extent, the costs of behaviors that are contrary to international norms might be lower for Russia than for other countries. One challenge to globalism noted by Gilpin and others is the growing trend toward regional groupings such as the European Union (EU), the North American Free Trade Association (NAFTA) and Mercosur.2 Such pacts do impinge on the global trading system by diverting trade and investment toward members of the regional group, at some detriment to globalized markets. However, these trade pacts are primarily aimed at trade in manufactured goods and services, and so far have generally excluded oil and gas for reasons peculiar to the internal politics of the energy-producing states involved. Few countries impose barriers on imported oil or gas. Moreover, while some countries may enter into bilateral or regional agreements to divert or influence the direction of oil and gas flows, such diversions need not have significant impact on other importers since these energy resources are generally fungible. For example, diverting Caspian or Russian oil to China from Europe would release other oil (perhaps from the Gulf or from Africa), which might in turn be shifted from China to European markets. This chapter looks at the potential for failure of the global market in oil and gas and examines the role that Russia alone or in alliance with others might play as a contributor to that failure, as well as its reaction to it. While it is not difficult to create scenarios that would cause short- to medium-term disruptions in energy markets, resulting in significant price increases, generating scenarios that would result in a long-term, sustained increase in prices, or a similarly sustained interruption in the global trading system for energy, is much more difficult. Oil and gas are but two sources of energy among many others, and many of the issues surrounding oil and gas markets do not necessarily apply to energy markets in general. Nonetheless, it is useful to look at the historical experience in one submarket – that of oil.

Energy security: lessons learned The possibility of a sharp departure from the historical trend of oil prices is not solely hypothetical. In the 1970s and early 1980s, there was a significant change in price trends. In retrospect, the sharp price increases were a relatively shortterm, temporary phenomenon. But at the time the price shocks were viewed as but the first round in a new trend of increasing scarcity, high prices, and “limits to growth.” It is instructive to look at how those oil-price shocks were handled by the industrialized oil importers as well as some oil exporters. While the costs of the oil-price shocks of the 1970s have been widely debated, and varied from country to country, there is no doubt that their impact was severe, causing years of economic dislocation and stagnation. In the early 1980s, the costs of the oil-price shocks were estimated at $1.2 trillion in lost economic growth for the seven largest industrial countries in the world.3 In the aftermath of the oil-price shocks, the growth rate for the industrial world came

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to a halt, after witnessing a strong period of 5 percent per annum expansion in the 1960s. In response to the 1970s oil-price shocks, the industrialized oil-importing countries attempted various domestic, bilateral as well as multilateral solutions. Some efforts worked; others were unsuccessful but notably, none involved the militarization of energy supplies. Germany, for example, struck a natural-gas pipeline deal with the Soviet Union despite the tensions this decision would create in US–German relations. France and Japan pursued an ambitious nuclear-power expansion program and imposed substantial taxes on gasoline consumption. France also joined Germany in purchasing natural gas from the Soviet Union. The US, under President Richard Nixon, began a program entitled “Project Independence,” which was designed to end the need for US energy imports by 1980. Utilities, which had previously been moving away from coal for environmental reasons, were asked to resume coal-burning. An Energy Research and Development Administration was created. In 1975, President Gerald Ford, picking up where Nixon left off, proposed a ten-year plan to build 200 nuclear power stations, add 150 coal-fired power stations and 20 major synthetic oil plants. In the end, not much of either plan materialized. Rather, the most substantial contributions were decisions by Congress to endorse construction of an oil pipeline from Alaska and fuel-efficiency standards for US automobiles. Some research work started on alternative fuels and technologies, but most of this stopped when federal funding ceased. By 1981, abandoning the hope of energy independence, President Ronald Reagan deregulated American oil prices and shifted emphasis to developing a military deterrent capability in the Persian Gulf. US bilateral arms shipments and bilateral military support to the region increased steadily. While the US did not intervene as a belligerent in the Iran–Iraq War of 1980–8, a US Navy re-flagging program, supported by convoy escorts and active patrolling, protected shipping and oil exports from the Gulf during the latter stages of that conflict.4 In the 1970s, France tried aggressive diplomatic efforts to try to garner bilateral benefits from Middle East producers. These included selling sensitive weapons systems to Iraq, including nuclear equipment. France tried the forceful promotion of a European–Arab dialogue, took a pro-Arab stance in deliberations on the Arab–Israeli conflict throughout the 1980s, and even blocked a favorable European Economic Community (EEC) response to the Camp David Accords between Egypt and Israel. Paris also provided temporary residence for Ayatollah Khomeini with generous terms during his exile from Iran. Yet for all this diplomacy, France found itself no better off in terms of oil price, supply, or standing in the Middle East, compared to its industrial allies that had taken a pro-Israeli stance. Ayatollah Khomeini cancelled major French industrial contracts with Iran upon his ascension to power in 1979. In 1980, France, along with other customers, found itself on the receiving end of a major price increase for Algerian Liquefied Natural Gas (LNG). When France tried to

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resist this doubling of prices, it saw its supplies cut off. France was also hit by oil-supply disruptions resulting from the Iran–Iraq War.5 Another lesson was learnt when, in 1979, spot-bidding on the Rotterdam cargo market, to offset production losses caused by the Iranian Revolution, touched off a chain reaction. The Organization of Petroleum-Exporting Countries (OPEC) diverted contract oil, then priced at just over $12 a barrel, to the skyrocketing spot market, breaking existing contracts and sending large buyers into the spot market to outbid other oil consumers, further bidding up prices. While the actual shortfall in OPEC supply compared to demand was only 4 percent, prices rose precipitously to well over $30 a barrel, mainly on added demand from countries or large entities panic-buying oil for storage. Additions to world oil storage amounted to 1.2 millions of barrels per day (mmbd) over the course of 1979, at a time when one would have imagined oil inventories would have fallen.6 The experience was a lesson for the industrialized world. While OPEC had actually increased production to take advantage of rising oil prices, thereby replacing most of the initial loss of Iranian supplies, hoarding or other panicbuying activity brought even greater instability than the underlying event itself. Furthermore the US and its allies learned in the 1970s that bilateral sales agreements were less effective than multinational efforts of consumers because oil suppliers are likely to sell their oil to the highest bidder during a period of market crisis or a supply emergency. This was the case even where such bilateral relations extended to extensive arms shipments and other forms of military cooperation. The lessons of the limits to national energy policy, bilateral diplomacy, and bilateral military assistance created a more cooperative framework on international energy matters among the countries of the Organization for Economic Cooperation and Development (OECD). The US took the lead, together with its allies in the OECD, to create an international emergency-preparedness system for the oil market under the coordination of a new multinational institution, the International Energy Agency (IEA). The IEA opened its doors in 1977. The 26-member organization has as its current objectives: to maintain and improve systems for coping with oil-supply disruptions; to promote rational energy policies in a global context through cooperative relations with non-member countries, industry and international organizations; to operate a permanent information system on the international oil market; to improve the world’s energy supply-and-demand structure by developing alternative energy sources and increasing the efficiency of energy use; and to assist in the integration of environmental and energy policies.7 OECD experience has shown that multinational initiatives by groups of consumer nations have produced the best results, especially where stockpiling and crisis management are concerned. Joint consultation and joint decision-making have helped calm market players, stifling panic-buying and hoarding that can drive prices even higher during a crisis. The advent of futures and forward markets also assisted in reducing volatility in the 1980s and into the 1990s, as

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more players were able to “hedge” away price risk so that they didn’t need to respond by entering markets at times of shortfall.8 The impact of the IEA emergency stocks program can be seen in the early days of the US military campaign to remove Iraq from Kuwait in 1991. Although a major stock release was not activated immediately after Iraq’s invasion in 1990, political coordination among IEA member countries, public announcements about the readiness of the IEA system, and a “test” sale of the US Strategic Petroleum Reserve, all helped stabilize oil markets as military events unfolded. While hard to quantify, the existence of the emergency system made an important contribution to the functioning of markets during that extended crisis. In fact, oil prices actually fell several dollars a barrel in the first few hours of US–Iraqi ground combat in Kuwait, as oil traders realized that shortages were unlikely to emerge. The mere existence of the IEA stockpiling system has also served as a restraining force in the deliberations of OPEC. During recent periods of market disruption OPEC has opted on several occasions to make its own incremental supplies available. This policy reflects not only goodwill but self-interest, since any OPEC failure to put extra oil on the market following a sudden, unexpected supply shortfall might invite a release in IEA stocks, leaving consumer governments, rather than OPEC, to profit from any extra oil sales. The crisis of the 1970s was an unexpected one, initially driven by the Arab boycott at a time when the US was preoccupied with Vietnam and when oil was still traded on an inflexible, bilateral contractual basis. Yet despite the more rigid structure of the market at the time, and the backdrop of instability in the world system due to the Cold War and active wars in the Arab–Israeli conflict, consuming countries muddled through, slowly making adjustments to the new oilprice reality. These adjustments included increased energy efficiency (in some cases induced by high energy taxes), increased output in non-OPEC areas, and consuming country collaboration to deal with unexpected price spikes in the future. The experience of the 1970s, while painful and experimental, suggests that countries will not necessarily resort to more aggressive military responses in a world where oil and gas markets are much more developed and competitive, and where consuming countries already anticipate a higher trend line for oil prices. On the other hand, the 1970s were the time of a bipolar world when many countries were constrained in their behavior by one of the superpowers. Fear of Soviet expansion in the Middle East and the threat of Communism created an incentive for oil producers in the Gulf to seek US security guarantees.9 Today the world is more fragmented and the strongest powers hold less sway over other countries. The plurality of aims and interests of individual oil-producing countries are not subjected to second-order concerns about the threat of the Soviet Union. Instead, the US faces a set of states with multiple, conflicting interests that are complicated to manage. In fact, in some cases of regionalized confrontation, weaker states might even join together to counterbalance US policies. In the emerging unipolar world, the US is perceived by some weaker states

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as a threat to, rather than as a protector, of the international order. There is a risk that this new reality might limit the applicability of the 1970s’ experience to the future in the face of an oil crisis.

Privatization efforts in international markets Being a major importer of oil, the US interest is in having as competitive a market in oil as is possible. Beyond the intervention of the IEA systems, the United States has promoted liberalization and privatization in foreign energy sectors as a means to enhance the competitiveness of the oil market and to reduce the risk of unforeseen events on the behaviors of producers on oil markets. US policy has been to encourage diversity of supply both by promoting an increase in the number of countries producing and exporting oil and by increasing the number of suppliers within each producing country. The US–Russia commercial-energy summit, organized by the United States during the early years of Vladimir Putin’s ascension to power in Russia, can be seen as an attempt to support the privatization of the Russian energy industry and to promote joint projects between Russian producers and the international oil companies (IOCs). Similarly, the US backed the Baku–Tbilisi–Ceyhan (BTC) pipeline, connecting the Caspian Sea to the Mediterranean, to diversify the export routes of Caspian oil, and to increase export volumes by adding pipeline capacity and encouraging foreign investment in Kazakhstan and Azerbaijan. The US and the World Bank also encouraged a program of liberalization and deregulation in energy sectors in Latin America, including Argentina and Brazil and, in the early 1990s, Venezuela. The result was increased investment in the oil sector and oil-production gains in those countries. At the turn of the century, the US was on course to achieve its objective of a relatively free and open global energy market. However, the recent tightening of oil markets and the increasing concentration of oil production in the hands of only a few producing countries has led to concerns that global oil markets may not remain competitive, and that the interests of the US and the global system could be challenged or compromised by a major energy producer or group of producers, or by an alliance of major consuming countries, or of consuming countries with producing countries, all to the detriment of the international community and trading system. The reality of conventional oil and gas geology is that approximately 62 percent of remaining proven resources lie in only five countries. In the case of oil, the five largest resource holders are all Middle Eastern countries. Russia is sixth. For gas, Russia has the largest reserves with 31 percent. Four Middle Eastern countries hold another 32 percent of reserves. The largest of these is Iran with 15 percent. Other areas rich in gas reserves are the countries of the former Soviet Union (FSU) that lie between Russia and the Middle East: Turkmenistan, Uzbekistan and Kazakhstan. In the case of oil, Canada holds large reserves of non-conventional oil; but these resources are costly to produce, by virtue of requiring large quantities of

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natural gas and water. While those reserves are impressive, scaling up production will be difficult and costly, as gas and water costs will escalate with increasing demand for them, and also as possible environmental issues are raised. The IEA forecasts that Canadian production will climb from the current 1 mmbd to some 5 mmbd in 2030, slightly more than 4 percent of projected world demand. While current production of oil and gas is not as concentrated as reserves, and significant producers include countries closer to the US in Europe, Africa and Latin America, long-term trends suggest that the world will become more dependent on Russia and the Middle East as resources are depleted in those countries whose resources have been more accessible for development but are smaller in scope. Coincident with the geographical concentration of long-term supplies in Russia and the Middle East, there is a corresponding increase in the concentration of firms controlling these resources. Decades ago countries in the Middle East nationalized their resources and handed primary (or exclusive) control over resource development to national oil companies. Russia has increasingly sought to concentrate oil assets in fewer firms, over which the state has control or outright ownership. State-owned Transneft has a monopoly in the transmission of oil, and Gazprom has a virtual monopoly in gas transport and production. Furthermore, with the exception of the BTC pipeline running from Azerbaijan to Turkey, Russia, through its lock on regional pipeline networks, controls access of Caspian resources to external markets. Currently state-owned enterprises represent the top ten reserve holders. In fact, in 2005, global proven oil reserves were 1,148 billion barrels, with national oil companies in control of 77 percent of the total, allowing no equity participation by foreign oil companies. Partially or fully privatized Russian oil companies control another 6 percent. By comparison, Western IOCs now control less than 10 percent of the world’s oil and gas resource base (although this rises to 30 percent if one includes the non-conventional reserves in Canada).10 The remaining fraction of reserves is being jointly exploited by IOCs and NOCs.11 According to the annual survey of “The Top 50 Oil Companies” published by Petroleum Intelligence Weekly, 13 of the top 20 international holders of oil and gas reserves are either traditional or newly privatized NOCs.12 The growing importance of NOCs to the global supply–demand balance raises questions about the emerging policies, objectives and priorities of these organizations. In particular, shifts in those policies, objectives and priorities will have great impact on the future development of global oil and gas markets. NOCs are expected to control a greater proportion of future oil supplies over the next two decades, as oil and gas production in the mature producing regions of the OECD continues its natural decline. The IEA projects that the vast majority of new hydrocarbon supplies in the next 20 years will come mainly from the developing world. By contrast, 40 percent of new production in the past three decades came from within the industrialized West, with the majority of investment being made by IOCs. There has also been a trend toward concentration within the private sector,

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with recent mergers among the largest energy companies. Of the 100 largest publicly traded oil companies, the five largest controlled 69 percent of reserves in 2005, up from 42 percent in 1990. Among the top 20 publicly traded reserve holders, the share of the largest five increased from 60 percent in 1990 to 84 percent in 2005. These large, consolidated companies have not yet responded in a significant way to expand exploration and development expenditures in the face of rising prices. While there are many possible explanations for the lack of rigorous investment response by the IOCs to tightening markets, it has created the impression that, unlike the 1980s, when their production was rising from fields in the North Sea and Alaska, these IOC firms will soon see their production on the decline, leaving even more of the future supply in the hands of the national oil companies.13 The increasing concentration of control over gas and oil resources raises the question of whether confidence in the continued existence of an open and liberal oil- and gas-trading system will survive. Reduction in the number of players means each player will be more tempted to try to extract rents (economic and geopolitical) using the lever of their energy resources.

Events that could result in the “militarization” of oil Under what circumstances would the world oil market collapse and some countries resort to military action to acquire energy supplies? In our judgment, this is unlikely to occur if prices rise – even at higher rates than in the past – provided the rise is recognized as a reflection of growing energy scarcity, and is not perceived to be the result of collusive manipulation of supply. In other words, if over time demand-growth outpaces supply, prices will rise to ration out the available supplies. As long as this is a smooth process of functioning markets, consumers will adapt by developing ways to conserve energy, and the energy industry will develop technologies to extract oil and gas from more costly frontiers, as well as pursue alternative energy sources to conventional oil and gas. Governments might open for exploration areas that are now closed in response to environmental concerns. The reasons these steps are not being adopted in a widespread manner today is the high level of uncertainty about future price direction. But if governments, energy firms, and investors were certain that oil prices would remain high for structural or geopolitical reasons (say, for example, if it was known that world conventional oil production had peaked; or if the Saudi Arabian government adopted a new policy to maintain high oil prices), the uncertainty that currently blocks massive investment in unconventional resources and alternative energy would be removed, and markets and governments would respond dramatically and definitively to the new reality. Economic adjustments, while taking time, would no doubt come into play, obviating the need to react to scarcity of oil by military means. Over time, nations would be able to mitigate any negative consequences to terms of trade in energy by diversifying fuels. In fact, many other energy resources – unconventional oil and gas, coal, biomass, and uranium – are

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distributed in a very different geographic pattern than conventional oil and gas. For example, the US, China and India have substantial coal reserves. These reserves can be converted into liquid fuels or gasified for cleaner conversion to electricity at a cost below today’s oil prices. Oil and gas exploration and extraction technologies have added to reserves by opening up deep-water deposits off the coasts of many countries, including the US, Canada, and Brazil. Japan and the US are making headway in understanding how to produce methane hydrates which are more abundant than traditional natural-gas resources. Technologies involving alternative energy sources such as wind and solar power have been improved significantly since the 1970s and 1980s in terms of costs and efficiency. While the transport industry is still primarily reliant on oil, new technologies for hybrid vehicles or dual-fuel systems hold the promise for several possible substitutes, including biofuels, liquefied fuel from coal; fuel made from natural gas; or electricity where the electricity is produced with coal, nuclear, or renewable energy sources. The costs of liquefying coal, solar and wind energy and other alternative sources are such that, when more fully developed and optimized, they could in fact set a ceiling on oil prices. Investment in these alternatives has been modest to date because of oil-price uncertainty. Energy firms are reluctant to commit huge sums (and many of these technologies are very capitalintensive) to build alternative energy facilities that can compete with $60 oil, but not $25 oil. Indeed, one policy framework that would solve this chicken–egg problem for alternative energy would be for the US government to use an adjustable oil tax designed to keep oil prices above some threshold level, in order to eliminate the downside price risk facing these alternatives. The fact that markets would ameliorate a trend to permanently higher oil and gas prices does not preclude situations where a country, alone or in combination with others, might resort to military means to secure energy resources. An importing country might do so in order to have access to cheaper or more secure supplies – a major motivation for the colonial empires of the nineteenth and early twentieth centuries. For larger industrializing countries that are net energy importers (e.g. India and China), an aggressive resource strategy would be less likely because of their integration into the world trading system. The potential of trade sanctions serves as an effective deterrent as these countries need access to Western markets for their manufactured goods. Alternatively, an exporter may want to gain control of another exporter in order to gain the resource rents from producing that oil, to gain more market power in the oil market by reducing the number of independent suppliers or to pursue political or strategic ambitions. Iraq’s invasions of Iran and Kuwait in 1980 and 1991 reflected these motives. But as the response to the invasion of Kuwait suggests, such actions, at least by smaller countries, would be unlikely to succeed and expand into a global crisis of confidence, as long as the US remains the overwhelmingly dominant military power, and is willing to use its power to enforce the global system.

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The case of Russia While Russia is also engaged in extensive trading with Western Europe, recent events make it reasonable to raise the question whether there are scenarios under which Russia might act aggressively to challenge the existing global energy trading system. Russia possesses a high proportion of global energy resources and dominates sales to a major energy-consuming region (Europe). It has already shown a proclivity to use its empowered energy position to either grab more resource rents from its immediate neighbors, or to wrest geopolitical or political benefits using energy as a lever. It is also in a position to enhance its power by cooperating with other powers such as China, in relation to Central Asian energy suppliers, or Iran, in pressuring Saudi Arabia and other Gulf producers. However, as discussed below, it is unclear whether Russia, either alone or with potential allies, would have to resort to military means to reap such political or economic gains from energy, or whether non-military opportunities already exist for it to achieve gains through the manipulation of its export supplies and its geographic domination of major transportation routes and existing export infrastructure for the former Soviet Union states. In his classic volume on foreign trade as an instrument of national power, Albert Hirschman points out that under some circumstances “country A” can extract advantages – military, political, economic – from its trading partners. These circumstances occur when “it is extremely difficult and onerous” for trading partners “to dispense entirely with the trade they conduct with A or to replace A as a market and as a source of supply with other countries.”14 To a large extent these conditions are satisfied in the case of Russia’s energy exports – especially to Eastern and Western Europe. Russia’s status as a current and future energy producer is close to unrivaled. It holds the eighth-largest proven oil reserves in the world, but ranks a close second in oil production to Saudi Arabia (9.3 mmbd), and is far ahead of most other world suppliers. When both oil and natural-gas exports are considered, Russia exports more hydrocarbons than Saudi Arabia. Thus, Russia’s position as a major energy supplier has great significance not only for its foreign policy but for its relationships with major energy-consuming countries. Prior to the break-up of the Soviet Union, energy trade was a key lever used by Moscow to achieve political acquiescence in the Warsaw Pact. “The Soviet energy grid is a tangible manifestation of Soviet energy diplomacy, which found its roots in the Brezhnev doctrine of restricted sovereignty,” writes Dr Kevin Rosner.15 Eastern and Central European states were highly dependent on subsidized Soviet energy supplies under the central control of Moscow, linking their economies in a manner difficult to alter. After the collapse of the Soviet Union, economic reform in Eastern and Central Europe opened the way for more competition in the energy space, leaving many assets on the block for privatization. But Russian firms, including state energy behemoth Gazprom, were quick to see the advantages of scooping up ownership control of such assets. Thus the process of reintegration quickly ensued.

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While privatizations and other reforms were characteristic of the Russian oil sector in the 1990s, President Vladimir Putin, in his second term, initiated a retrenchment back toward fuller state control and centralization of investment and export policy in Russia’s energy sector. A reorganization of ownership of key assets, through corporate prosecutions, forced asset sales, or state fiat, has left the Kremlin more firmly in command of the country’s energy-resource development and exports. Once this re-engineered control started to reach critical mass, the Kremlin began to reconstitute its old Brezhnevian strategies, utilizing energy as a lever to regain its status as a superpower and extend its influence in the FSU. Russia’s current energy strategy appears to have two drivers. The first is to build up the assets, size, and strength of major Russian state energy entities like Gazprom and Rosneft, protecting their potential contribution to the Russian economy and their power against foreign competitors. Second, Russia has positioned itself to utilize its comparative advantage in energy resources for political and economic ends. A recent poll taken in Russia as part of an academic study on energy and environmental issues by the Russian Academy of Science shows that 38 percent of Russians surveyed believe that keeping the status of superpower for Russia best meets their individual and family interests, more than strengthening democracy and freedom of speech (12 percent), with only economic growth mattering more to average Russians than enhancing Russia’s status on the world stage. Less than 10 percent of those surveyed thought continued privatization was important while at least a third favored state regulation and support of basic industries. Over 68 percent felt foreign investment in the oil and gas sector was “not acceptable at all.”16 Thus, the Kremlin’s policies of dismantling Yukos and suspending competitive market principles had broad public support as would using energy to assert its international position. Putin’s primary focus in his second term has been domestic, not only on consolidating the power of the Russian state to protect the Kremlin from politically motivated businessmen, but also on guaranteeing Moscow’s firm grip on Russian energy development and supply routes. With the Gazprom takeover of the major Russian oil firm Sibneft, Russian government-controlled and -owned companies became responsible for about one-third of the country’s total oil output. In January 2004, months ahead of the Russian presidential elections, the Russian government announced that it wanted more than $1 billion for a license to explore and develop one of the three Sakhalin-3 parcels, the prime Khirinsky block, the rights to which would be won through a tender process. This decision countermanded the results of a 1993 tender, in which ExxonMobil and Chevron had received the same exploration rights. Foreign investors’ interests were to be considered only after the Russian state’s ability to protect national interests in the energy sector was affirmed.17 By 2006, Russia announced new plans to tighten restrictions on foreign companies and to increase the number of oil and gas fields that the Russian government deemed as “strategic.” Russian officials said the policy was designed to protect Russia’s national interests.18

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Early in his second term, President Putin also moved quickly to end speculation that private investors might be permitted to own independent pipelines. Both the president and his then-Prime Minister, Mikhail Fradkov, stressed that state control over the nation’s oil and natural-gas pipelines will remain a cornerstone of government energy policy, and hence a key tool for containing the economic and political influence of Russia’s powerful and rich private oil and gas producers for years to come. Unlike many prominent reformers who were influential during the administration of Russian President Boris Yeltsin, Putin began to move his policies away from relying on global market forces to provide the economic opportunities to make a successful transition to a modern, European-style economy and political system. Instead, he frequently emphasized during his 2004 electoral campaign that he believes that premature globalization of the Russian economy will lead to greater hardship for the majority of Russians, and that it will lead to the concentration of vast wealth in the hands of a limited number of people with little or no incentive to reinvest in the Russian economy. Evidence that Putin believes in the pre-eminent role of the state in naturalresources development is found in a Candidate of Science dissertation that he authored on the topic of “Mineral Raw Materials in the Strategy for Development of the Russian Economy” while a student at St Petersburg’s prestigious State Mining Institute.19 The treatise focuses on questions of developmental economics and how to introduce Western-style management into Russia’s rawmaterials sector.20 In an article summarizing his dissertation, Putin argues that Russia’s natural-resource base will not only secure the country’s economic development but will also serve as the guarantor of the country’s international position. In his treatise, Putin states clearly that “the state has the right to regulate the process of the acquisition and the use of natural resources, and particularly mineral resources, independent of on whose property they are located; in this regard the state acts in the interests of society as a whole, as well as in the interests of private owners whose interests conflict and who need the help of the state organs of power to achieve a compromise.”21 Such firm and direct language might have served as a useful warning to the owners and managers of Russia’s privately held oil companies that, under a Putin administration, the state would set the priorities in the oil industry. The conviction and imprisonment of former Yukos chairman Mikhail Khodorkovsky and his business partner Planton Lebedev, and the subsequent hemorrhaging of money and personnel within the Yukos empire, signaled a significant move by Putin to assert this concept that the state must control the energy sector, and easily dissuaded other Russian business magnates from confronting the Kremlin head on; especially given the ways in which Putin has strengthened the power of the presidency since beginning his second term in 2004. When Putin first came to power, he lacked the vital informal networks without which rule in Moscow is impossible. Facing entrenched networks or

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“clans,” Putin began recruiting people one-on-one, KGB-style, and quickly repossessed the two most important television networks that broadcast countrywide. He then moved on to neutralize or decapitate the clan networks, and began setting up his personal clients in the oil business, including Alexei Miller at Gazprom and Igor Sechin at Rosneft. Since early 2004 he has been appointing those who share his view of energy strategy to key positions in the cabinet, the presidential administration, and the state-run sectors of the oil and gas industry. Like Putin, many of these men have a background that includes service in the state-security organs, the so-called siloviki. Putin continues to juggle the politics of Russia’s central elite between the liberal reformers and the siloviki. In recent years, the balance of influence has shifted in favor of the siloviki, however. They continue to entrench themselves profitably in the oil and gas sector, and have generally supported the movement toward anti-democratic domestic policies and more hegemonic interactions with Russia’s neighbors.22 Without control over oil and natural-gas production and export routes, the Kremlin could see its foreign policy begin to go askew, with independent producers and even Western firms negotiating deals that might have gone against the federal government’s policy goals. High oil prices freed Putin’s hand to consolidate power, by ensuring a basis for a strengthening economy and emboldening the Kremlin in its dealing with other centers of power in Russian society. Putin consolidated the Kremlin’s position by moving Russia towards a federalist system that has weakened the powerbase of the country’s governors and judiciary, again giving the Kremlin more say in the development of oil and gas assets and export routes in far-flung regions. The Kremlin also grabbed the prerogative for judicial supervision out of the profession’s hands, giving it yet another means to control politics in the regions. In tandem with internal political consolidation in the energy sector, Putin’s administration has also signaled the influence of its energy policies towards relations with neighbors and trading partners. The most productive area in which energy trade can be used to extract political and economic advantages is Central and Eastern Europe, which are the primary destinations of Russian oil and gas exports. Even countries with highly diversified economies, like Germany, are notably reliant on Russia, which supplies 40 percent of its gas and 20 percent of its oil. Eastern European and Baltic countries, as well as Ukraine and Belarus, are even more dependent on Russian energy supplies – a legacy of the Communist era. By dominating the European energy scene now, and more substantially in the future, Russia wields an implicit “energy weapon,” which does not need to manifest itself in explicitly militarized strategies. Rather, Russian energy supply can become a quid pro quo for other ends, such as the reorganization of political coalitions in neighboring countries, along lines that might better suit Russia than pro-Western parties. Russian energy “diplomacy” has already been effective in slowing if not stopping the eastward expansion of NATO. In Ukraine the power of the pro-Western government has been constrained by the most recent parliamentary elections, where pro-Russian parties have made significant gains.

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European governments have expressed concern over the extent to which Russia will use energy policy, especially the threat of supply disruptions, to further its political and strategic aims. There are already three concrete examples where Russia has used cut-offs in what many believe were politically motivated attempts to alter the behavior of its neighbors: Ukraine, Lithuania, and Georgia. Cut-offs of oil to loyal Russian ally Belarus in 2007 were more probably the result of a commercial dispute over gas prices; but nonetheless even this supply disruption has sent a clear message that Russia is willing to play hardball and to cut off energy supplies to achieve its objectives. In the case of Ukraine, Gazprom reduced its flow of gas by 125 million cubic meters on 1 January 2006, ostensibly over a pricing dispute. Gazprom wanted to increase the price that Kiev paid for its gas from $50 to $230 per 1,000 cubic meters, to be in line with international market pricing. Ukraine rejected such an abrupt four-fold increase, and argued that any changes in the price be phased in over several years. Since the Ukraine and Gazprom have had pricing disputes for decades, which had never previously resulted in Russia cutting gas exports to Kiev, the move was widely interpreted as Moscow’s punishment of the proWestern stance of newly elected Ukrainian President Viktor Yushchenko. It was generally believed that Yushchenko’s push to bring his country into NATO and the EU was ill-received in Russia, which was accused of trying to rig the election against Yushchenko and attempting to poison him. One of Kiev’s responses to the Russian ultimatum to cut off volumes was the threat of a sharp increase in the transit fees it charged Gazprom for shipping large amounts of gas through Ukraine to Western Europe, and this threat also contributed to escalation in the conflict. The Ukrainian–Russian gas dealings, in turn, contributed to the undoing of Yushchenko by stimulating a vote of noconfidence in the Parliament, which led to a reorganization of the Ukrainian government under a coalition in which Yushchenko’s party lost its ruling status in favor of a more pro-Russian grouping. At the time the economic ministers of Austria, France, Germany, and Italy all cautioned Ukraine that its relations with the EU might be affected if Kiev failed to deliver the full quantity of gas meant for European destinations, and EU Energy Commissioner Andris Piebalgs warned Moscow not to make the EU “a hostage” to Russia’s dealings with Ukraine. Shortly after the incident, while traveling in Central Asia, American Vice President Dick Cheney warned Russia not to use its energy supplies as “tools for intimidation and blackmail.” The entire affair has led to speculation that Russia is willing to use its gas exports as a lever to influence elections in countries along its borders. Georgia is another country that has elected a pro-Western government interested in joining the eastward expansion of NATO and the EU. Georgia is also a transit country for the BTC pipeline, which was sponsored by the US in a policy of promoting competition and energy security through “multiple pipelines” for Caspian energy resources. At present, only Azeri oil and gas is being transported in the pipeline, but there has been considerable discussion of extending the pipeline either around or under the Caspian Sea, in order to tap into Kazhak

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supplies. At present Kazakh and other Central Asian energy resources are channeled through Russia.23 The BTC pipeline was routed through Georgia because the shorter route through Armenia was not possible, given existing tensions between Armenia and Azerbaijan over the disputed territory of Nagorno-Karabakh. But Georgia itself is also vulnerable to Russian pressure via its own “frozen” domestic conflicts. Two areas, Abkhazia to the northwest and Ossetia to the north, are regions not fully under the control of the Georgian government. Residents of those enclaves can travel on Russian passports, and have expressed interest in separating from Georgia. The population of Ossetia recently voted in a referendum to form an independent state. Georgians suspect that Russia has ambitions to absorb both rebellious regions. Russian–Georgian relations have been tense since independence, and have worsened since the election of Mikheil Saakashvili as Georgia’s President. Recently, when Georgia arrested several Russians for spying, Russia banned all Georgian exports to Russia and mobilized its troops on the Georgian border. And, once again, Russian also used the energy weapon. In January 2006 Russia cut the supply of gas to Georgia, forcing it to scramble to find alternative sources.24 Lithuania was occupied and then absorbed into the Soviet Union at the beginning of World War II. Its public, along with those of the other Baltic states, retained a strong anti-Soviet, anti-Russian sentiment throughout the 50 years of Soviet rule. It was the first Soviet republic to gain its independence with the collapse of the Soviet Union, despite an effort by the Soviet military to prevent succession. In 2004 Lithuania joined NATO and the EU. In July 2006 Russia shut an oil pipeline to Lithuania’s sole oil refinery, after the Lithuanian government signed an agreement in June to sell the refinery to a Polish company, PKN Orlen, for a higher sum than was being offered by Russian entities. Russia maintained the shutdown was necessary to repair a leak in the pipeline. Lithuania accused Russia of cutting off the oil shipments to force it to reconsider the sale.25 Belarus is one of the former Soviet republics that has remained most loyal to Russia. Its pro-Russian President since 1994, Alexander Lukashenko, has held negotiations to unify his country with Russia. In January 2007 Russia interrupted oil flows on the Druzhba pipeline that carries oil to Western Europe through Belarus in response to a dispute with Belarus over the price that Belarus should pay for its imports of Russian gas. Belarus had been receiving a substantial subsidy from Russia in the form of below-market prices for its gas, paying only $46 per 1,000 cubic meters, compared to the prevailing market price of roughly $260. The dispute arose when Russia demanded a price of $105, and Belarus countered with a demand for higher transit fees for Russian oil. The Russian offer would still leave Belarus with the lowest-priced gas from Russia of any of the FSU countries. By contrast Ukraine agreed to pay $135, while Georgia with its more pro-Western government, is being charged $235. While the origin of this confrontation did not have the explicitly political subtext of the others discussed above, the fact that prices of Russian gas are

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negatively correlated with the degree of pro-Western orientation of neighboring governments reinforces the belief that Russia is using its energy resources as an instrument of its foreign policy. And this episode has also reinforced European awareness of its vulnerability in terms of energy security. Russia has also used its control of regional pipeline routes to trap Caspian energy supply and capture the rents from these resources for its own benefit. Russia buys Caspian gas at prices sharply discounted from international levels, and then uses these supplies internally to supplement its own gas, in order to permit more lucrative export sales to Europe. If Russia’s own gas industry is not reformed, allowing for increased production and investment in natural-gas assets by independents, Gazprom may have great difficulty maintaining (much less expanding) its sales to Western Europe, unless it can protect its access to higher volumes of cheap gas from the Caspian countries. Cheap Turkmen gas, for example, is locked into the Russian economy at depressed prices of $65 per 1,000 cubic meters, allowing Russia to export its own natural-gas supplies at over $230 per 1,000 cubic meters to high-paying European customers. Were the Central Asian states to find an outlet for their gas independent of Russian control, say through the proposed trans-Caspian Sea pipeline to Turkey and Europe, or via pipeline routes directly to China, it would greatly reduce Gazprom’s flexibility to meet European demand through increased purchases of cheaply priced Central Asian supplies. Ironically then, European gas supplies are dependent on Russia’s relationship to these Central Asian countries and hence, as pointed out by Peter Zeihan “Suddenly Europe has a vested, if reluctant, interest in ensuring that Moscow is satisfied with its level of influence in the bulk of the largest former Soviet territories.”26 Edward Morse and Adam Robinson argue that Russia is pursuing a strategy of using reliable access to energy to drive a wedge between Europe and the US.27 In the classic case outlined by Hirschman, Europe is dependent on Russian supplies and is therefore open to to pressure over political issues. But it should be noted that European vulnerability is not inevitable, but rather a reflection of the historical development of energy demand-and-supply patterns, including existing pipeline infrastructure, as well as the high historic cost of transporting gas. Looking ahead, Europe can reduce potential Russian leverage by diversifying its gas supplies. As pointed out by Jaffe and Soligo, many sources of gas are now economically available, given the technological changes in the LNG industry that have significantly lowered transport costs.28 Importing more LNG would require substantial investments in terminal and gasification infrastructure but the cost of these should be viewed as the cost of enhancing energy security and maintaining more independence in formulating economic and foreign policies. A relative shift from Russian gas to LNG will also strengthen US–EU ties and common interests in that both would be competing for some of the same LNG supplies. Any increase in gas prices due to an increase in European demand for LNG will of course be shared with US users, as is the case with oil today. This

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would align US with EU interests and counter any Russian attempt to drive a wedge between them. Other policies that Europe could adopt to deal with possible Russian interruptions in deliveries would include developing a unified strategy to deal with energy imports, and building sufficient capacity in energy infrastructure between member countries, whether pipelines or electricity grids, so that supply reductions from Russia (and increased imports from abroad) would be addressed on a continental basis rather than by specific countries. It is useful to think of the Russian “energy weapon” in terms of both shortterm supply interruptions and the longer-term threat of diverting supplies to other markets. European vulnerability to short-term disruptions is a reflection of the fact that it is dependent on pipeline supplies, and does not have sufficient capacity to store large quantities of gas, or to substantially increase imports of LNG in the event of a cut-off of Russian supplies. On the other hand it is important to note that supply disruptions would be costly for Russia. Since it does not sell seaborne cargoes of natural gas in the form of LNG, Russia cannot suddenly change the flow of its gas exports as they are literally welded to European markets by pipe. Its only option would be to forego gas exports altogether. The larger risk may well be that Russia cannot meet European needs owing to its inability to mobilize the managerial skills and financing required to meet its export goals, even without any interference by intimidation strategies. The longer-run threat to shift supplies to the Asian market is less credible. Russia is building pipelines to the East,where it will market its energy output from East Siberia. Those pipeline routes reflect the transportation economics for resources that are located closer to Asian markets. It is unlikely that Russia would build pipelines to shift supplies from Western Siberia, which are closer to the European market, to Asia, unless Asian prices were sufficiently inflated to cover the extra cost of doing so. With respect to the Asian market, China is also interested in Central Asian energy resources as a means of reducing its dependence on seaborne supplies, primarily from the Middle East. At present, China and Russia therefore have conflicting interests in the Caspian region. But, both countries are members of the Shanghai Cooperation Organization (SCO) originally created to deal with security issues and resolve regional border disputes. The members have stated that they would “not allow their territories to be used to undermine the sovereignty, security, or territorial integrity of other member states” – a statement interpreted by some in the US as a reference to US bases and military activities in the region.29 The members of the SCO are China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. At a one-day summit held in Shanghai last June, Iran attended the meeting as an observer. Iran’s president Mahmoud Ahmadinejad said Iran was ready to host a meeting of the energy ministers of SCO members, in order to build cooperation on energy issues. Thus, it is conceivable that the organization could evolve to deal with energy issues as well. China and Russia could well collaborate to share the benefits of cheap Central Asian energy supplies; and Russia, should it wish to, could build ties

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with China by becoming a larger energy supplier to that energy-thirsty country. In early November, China and Russia signed a series of trade and investment deals totaling $800 million, but the deals fell short of Chinese hopes for an agreement on a Caspian oil pipeline. While it would take Russia years of expensive infrastructure development to increase energy sales to China, a strengthening political relationship between Russia and China could still be problematic for the US and its allies over time. A confrontation between the West and a combined Russian–Chinese alliance – even over territorial or other, non-energy related issues – could inspire Russia to use its energy sales to Europe as a threat, raising the stakes of such a conflict. Russia could also enhance its geo-strategic power through collaboration or collusion with Iran. Moscow is supplying Iran with military equipment and nuclear technology, and has been one of the major players blocking UN sanctions over its nuclear activities. While Iran and Russia are natural competitors for access to European gas markets, the possibility of energy collusion between the two could represent a potentially serious challenge to the current global system for energy trading and exports. Iran has traditionally been a strong advocate for higher oil prices, and is considered a pivotal “price hawk” inside OPEC. Tehran’s high-price policy has been relatively consistent since the early days of the Islamic Revolution. Iran’s supply to world oil markets is relatively small at 3.7 mmbd, or 4 percent of world oil production. But the country could have significant influence over oil supplies through its strategic location alongside the Strait of Hormuz, a chokepoint which is the main passageway for 15– 16 mmbd, roughly two-thirds of total world oil trade by tanker, and 20 percent of total world oil demand. Oil and petroleum products from Iraq, Iran, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates transit the Strait of Hormuz, as do large quantities of LNG exported from Qatar. Qatar’s plans include the export of over nine million tons of LNG per year, and Iran is also building LNG export capacity. The significance of the Strait of Hormuz is further heightened by the fact that virtually all of the world’s excess spare production capacity, which can be brought on line quickly to moderate the adverse effects of a sudden oil-supply crisis or disruption, is located in Saudi Arabia, Kuwait and the United Arab Emirates, and could be cut off if the Strait was somehow closed. Iran’s strategic location, as well as its important role as a supplier of oil, and potential as a major supplier of gas, give it leverage to assert itself in energy markets in the future. And Russia, aligned with Iran, could gain tremendous leverage over the energy assets of the Gulf, and the flow of oil and gas to world markets. Russia could pursue a “wedge” policy in the Gulf region, through which it would seek to challenge US dominance by exacerbating tensions between the US and the Gulf states. From a purely economic perspective, coordination of energy policies and production quotas between Russian and OPEC producers would be in Russia’s interest, additionally so if Russia were able to persuade Gulf producers to cut back on output and capacity expansion relative to Russia.

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It is unclear whether force would be necessary to assert this influence, or if non-military means would be sufficient to gain economic or political goals. Russia, through an Iranian proxy, can put enormous pressure on regional producers like Saudi Arabia. Threats would not necessarily have to take the form of military actions, or even of organized terrorist attacks on Arab oil facilities. The potential to foment political unrest in oil-producing regions with Shi’a populations large enough to destabilize the region’s established Sunni monarchies may be sufficient for those regimes to take Russian and Iranian interests into account in their own policy decisions. The vast majority of Saudi oil comes from its Eastern province, which is home to between 250,000 to 500,000 Shia Muslims, representing about a third of the population and roughly 75 percent of Saudi Aramco’s work force there. Iranian influence is also strong in southern Iraq, which is dominated by Shia militias with strong ties to Tehran.

Conclusions The first part of this chapter argued that, under the current global economic order, it is unlikely that countries would resort to serious military confrontations in order to secure energy supplies if faced with a situation where oil and gas prices were rising at historically high rates. As compared with the last episode of rapidly rising prices in the 1970s and early 1980s, there are now relatively few legal barriers to the movement of energy resources, and fewer regulations that prevent prices and economic actors from adjusting to changes in relative energy prices. Flexible, well-functioning markets will encourage both economy and innovation in both the supply and demand for energy. Even if some players lose faith in the global system and attempt to pre-empt supplies through aggressive investment strategies in oil-producing countries, those actions will have little effect on the overall global allocation of energy resources. In the end no exporting country will voluntarily sell its resources without compensation, in monetary or other terms, that approximates to international levels. Attempts to use military instruments to lock up supplies will not work as long as the US maintains overwhelming superiority in military and, in particular, naval power. The second part of the chapter examined the role of Russia in the emerging energy reality where remaining oil and gas reserves are increasingly concentrated in relatively few geographical places, in particular Russia and the Middle East. Russia is in a strong position to use energy supply as a political lever in dealing with Europe. Partnership with Iran potentially gives it the power to influence the entire global energy market. Russia need not use military means to exercise its influence over Europe. The potential for supply disruptions will of necessity lead European governments to be more sensitive to Russian interests. In the Gulf, the threat of civil unrest and terrorism will have to be considered by those governments when making energy and foreign-policy decisions. Russia is potentially in the position to drive a wedge between the US and both Europe and the moderate Gulf oil energy producers. In the European sphere we suggest that Europe can take steps to reduce or at

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least delay growing Russian influence by diversifying sources of gas supplies and building additional storage capacity. While diversification implies that resource flows might deviate from the most efficient pattern, the additional cost involved in a more diversified energy-supply system is offset to some extent by the increased security of energy supply, and increased autonomy in formulating both domestic and foreign policy. Increased storage capacity will serve both as a deterrent, and as a way to provide gas in the event of a supply disruption. To strengthen common interests and present a stronger deterrent, the US and Europe could form an LNG/gas strategic storage system for the Atlantic Basin, coordinated through the IEA. In the Gulf, however, Russian influence can be constrained only by the presence of US military forces, as long as the antagonism between the US and Iran pushes Iran to depend on Russia for its own security interests. Ironically, while this chapter has focused on the relationship between high oil prices and the potential for destabilization of the world order by Russian efforts to use its energy resources to extract rents and increase its strategic influence, the more critical concerns from a Russian perspective might well arise from a sharp decline in energy and natural resource prices. Russia is a very large country with potential discord between regions and ethnic groups over access to resources and demands for local autonomy. With prices rising and the economy booming, dissent is muted. Sufficient revenues mean that most groups are experiencing some improvement in their lives. If natural-resource prices should fall, so will government revenues and incomes in general. When the state has to make hard choices as to how to allocate a dwindling revenue stream, in an environment of falling incomes for the population as a whole, political cleavages that are now hidden behind the soothing effect of abundant revenue will reappear. It is in this environment of dissent and potential challenges to the ruling elites that a Russian government might be tempted to increase its resource revenues by putting additional pressure on other producers, by colluding to restrict output and raise prices or, in the case of the Caspian countries, by squeezing further income from them by reducing the price it is willing to pay, or by increasing its charges for transporting their energy to market. Another possibility is that political elites would precipitate a crisis with one of its neighbors in order to divert public attention from internal economic problems and use an external crisis to silence dissent and preserve their power. A scenario of falling prices and deteriorating terms of trade for Russia is likely to occur at some time, even if the secular trend in prices is upward. Rawmaterial prices are notoriously volatile and there are many historical examples of countries dependent on exports of primary products whose fortunes have changed severely with fluctuations in the prices of these export commodities. A worst-case scenario would be where elites in both Russia and Iran chose to restore or maintain unity in their countries by collaborating to produce a conflict or crisis with another country in the region.

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Notes 1 Robert Gilpin, The Challenge of Global Capitalism, Princeton, NJ: Princeton University Press, 2000, Chapter 8. 2 Mercosur is a Spanish/Portuguese acronym for Mercado Común del Sur [Spanish] or “Southern Common Market.” Its members are Argentina, Brazil, Paraguay, and Uruguay. 3 OECD Economic Outlook, July 1981; also Robert Stobaugh and Daniel Yergin, Energy Future: Report of the Energy Project at Harvard Business School, New York: Ballantine Books, 1980. 4 Nadia El-Sayyed El-Shazly, The Gulf Tanker War: Iran and Iraq’s Maritime Swordplay, London: Macmillan, 1997; and Rosemarie Said Zahlan, “The Impact of US Policy on the Stability of the Gulf States: A Historian’s View,” in Joseph Kechichian, ed., Iran, Iraq and the Gulf Arab States, New York: Palgrave, 2001. For more on the US role in the Iran–Iraq War, see John Partin, Special Operations Forces in Operation Earnest Will/Prime Chance I, USSOCOM History and Research Office, April 1998, pp. 5–7; also Hassan Hamdan Al-Alkim, “The Arabian Gulf at the New Millennium: Security Challenges,” in Kechichian, Iran, Iraq and the Gulf Arab States; and the discussions by Peter Haynes and Saad Rahim in Chapters 3 and 5, respectively. 5 For a more detailed discussion of the EEC experience with energy issues and the Middle East, see Robert Lieber, “Cohesion and Disruption in the Western Alliance,” in Daniel Yergin and Martin Hillenbrand, eds., Global Insecurity, Boston, MA: Houghton Mifflin Co, 1982. 6 International Energy Agency, Energy Policies and Programmes of the IEA Countries: 1979 Review, Paris: International Energy Agency, 1979. 7 International Energy Agency homepage, http://www.iea.org. 8 Barbara Ostdiek and Jeff Fleming, “The Impact of Energy Derivatives on the Crude Oil Market,” Center for Political Economy and the James A. Baker III Institute for Public Policy, 1998, http://bakerinstitute.org/Pubs/studies/caspian/iedcom/iedcom. html#Author%20Note. 9 Rachel Bronson, Thicker Than Oil: America’s Uneasy Partnership with Saudi Arabia, London: Oxford University Press, 2006. 10 International Energy Agency, World Energy Outlook 2006, Paris: International Energy Agency, 2006, p. 105. 11 Amy Myers Jaffe, “The Changing Role of National Oil Companies (NOCs) in International Energy Markets,” March 2007, executive summary, http://www.rice.edu/ energy/publications/nocs.html. 12 “2006 Ranking the World’s Top Oil Companies,” Petroleum Intelligence Weekly, 18 December 2006, p. 1. 13 Amy Myers Jaffe and Ronald Soligo, “The International Oil Companies,” working paper in the Baker Institute Energy Forum on “The Changing Role of National Oil Companies (NOCs) in International Energy Markets,” March 2007, http://www.rice. edu/energy/publications/docs/NOCs/Papers/IOCs_Jaffe-Soligo.pdf. 14 Albert O. Hirschman, National Power and the Structure of Foreign Trade, Berkeley: University of California Press, 1945, p. 17. 15 Kevin Rosner, Gazprom and the Russian State, Global Market Briefing, Institute for the Analysis of Global Security, London: GMB Publishing, 2006. 16 Polling statistics provided to authors by the Institute of World Economy and International Relations (IMEMO) at the Russian Academy of Sciences. 17 Martha Olcott, “Vladimir Putin and the Politics of Oil,” working paper in the Baker Institute Energy Forum on “The Energy Dimension in Russian Global Strategy,” October 2004, http://www.rice.edu/energy/publications/docs/PEC_Olcott_10_2004.pdf. 18 Arkady Ostrovsky, “Russia to Place Further Limits on Foreign Oil Groups,” Financial Times, 13 June 2006.

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19 “Candidate of Science” was the first level of post-graduate study in the former Soviet Union, ostensibly equivalent to a PhD degree in the West. 20 Olcott, “Vladimir Putin.” 21 Olcott, “Vladimir Putin.” 22 Stephen Kotkin, “It’s Gogol, Again,” working paper, in the Baker Institute Energy Forum on “The Energy Dimension in Russian Global Strategy,” March 2005, http://www.rice.edu/energy/publications/docs/PEC_Kotkin_web.pdf. 23 See also the discussion of Russian relations with the states of Central Asia by Thomas H. Johnson and Christopher Boucek, in Chapters 7 and 8, respectively. 24 Johan Lembke and Sever Voinescu, “The Black Sea Region in the Twenty-first Century: Energy, Security and the Euro-Atlantic Community,” occasional paper, Network of European Union Center of Excellence, Texas A&M University, October 2006, http://eucenter.tamu.edu/Publications/OccasionalPapers/The_Black_Sea_Region_ final-9–19–06.pdf. 25 Steven Lee Myers, “Russian Gas Company Plans Steep Price Increase for Georgia,” New York Times, 3 November 2006, http://www.nytimes.com/2006/11/03/world/ europe/03georgia.html. 26 Peter Zeihan, “Russia’s Gas Strategy: Turning up the Heat on Ukraine,” Stratfor.com, 4 January 2006. 27 Edward L. Morse and Adam J. Robinson, “Growing Pains: Russia’s New Muscle,” Aspenia 32–4, February 2007, pp. 110–19, http://www.aspeninstitute.it/icons/img Aspen/pdf/Aspenia/Asp34_morse_e.pdf. 28 Amy Myers Jaffe and Ronald Soligo, “Market Structure in the New Gas Economy: Is Cartelization Possible?,” in David G. Victor, Amy M. Jaffe, and Mark H. Hayes, eds., Natural Gas and Geopolitics: From 1970 to 2030, Oxford: Oxford University Press, 2006. 29 “Iran Offers Energy Cooperation at Asia Summit,” Financial Times, 16 June 2006.

7

Central Asia Energy resources, politics, and security Thomas H. Johnson

There is little doubt that Central Asian oil and natural-gas infrastructure and reserves have come to be regarded as strategic assets, and are the object of rising political and economic rivalry. Today China, Russia, India, and the United States (among others) are competing for influence and market shares of Central Asian energy. Many observers of Central Asia, as well as policy-makers, are beginning to believe that it is only a matter of time before the region experiences an intense struggle over energy resources.1 Central Asian governments, for their part, have sought to mitigate the influence of the major consumer states in the region, while profiting from their need, in order to pursue their own agendas.2 The success of those agendas, however, has been limited. This is chiefly owing to the legacy of Soviet influence in the region. While the dissolution of the Soviet Union resulted in significant institutional and societal changes in the former Soviet republics of Eastern Europe, independence from the yoke of Moscow has not brought similar changes to the independent Central Asian Republics (CARs). The Central Asia that emerged at independence was scared, greedy, and crippled, primarily because of the legacy of dependence on the former Soviet Union for the essentials of governance, livelihood, and material resources for everyday life. The effects of the old Soviet regime are especially prominent in the energy sector.3 Since 1991 Russian actions suggest they believe that they have the right, or at any rate the historical and psychological leverage, to exploit the wealth and resources of Central Asia in their own interest. Moscow has placed obstacles in the way of Western energy investment in Central Asia, including exorbitant fees and limited pipeline export volume. This policy effectively limits the economic benefits to all involved, including Russia,4 and has contributed to regional economic and political turmoil. As suggested by one veteran observer, Russia’s “efforts to control Central Asian petroleum exports and limit the share of profits collected by both the Central Asian governments and Western oil companies” have “[resulted] in a Central Asia more vulnerable to problems,” and have created a substantial risk to regional stability.5 Analysts have observed Russia’s growing use of economic mechanisms to exert influence in the “near abroad” for some time.6 Some observers suspect that Russia is pursuing economic dominance in Central Asia via gas and

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hydroelectric power in particular. In this regard, one of Russia’s most effective tools is the large amount of debt, totaling nearly $5 billion, owed to Moscow by most of the Commonwealth of Independent States (CIS) countries.7 Offering debt for equity swaps presents an attractive alternative to the poorest countries or those that owe the most. In 2003 it was noted that Russian business executives were “acting as shock troops in the Kremlin’s latest bid to reestablish its controlling influence over former Soviet republics, confirming that economic considerations are exerting increasing influence over the policymaking establishment in Russia.”8 While this analysis concerned Russian policy in the Caucasus, it predicted that if the strategy was successful, it would probably be used in Central Asia as well. This observation has proven to be correct.9 Nevertheless, the politically precarious positions of Central Asia’s leaders do not lend themselves to market-based reforms, even of the “hard ball” variety, if for no other reason than because their personal standing as insiders in their national energy sectors contributes mightily to their grip on power. This fact alone has critical implications for any assessment of the possible militarization of the region’s energy resources, a process that would further aggravate the regional political strains that have already become apparent.

From the Soviet to the Russian yoke Since independence Central Asian regimes have attempted to build their respective states and societies almost exclusively on the basis of resources inherited from the former Soviet Union. Despite the increasing prevalence of nationalism in the political discourse of Central Asia, the prominence of leftover Soviet infrastructure, ideological legacies, and personal relationships have limited the means by which national interests can be asserted. The dichotomy between the reality of a persistent Soviet legacy and the ostensibly forward-looking nationalist agendas of the ruling elites is overwhelmingly evident in the management of Central Asian energy resources. In the early 1990s Western energy firms discovered substantial petroleum deposits in Kazakhstan, Uzbekistan, and Turkmenistan. This provided the fledgeling countries with a potential monetary resource by means of which they might break away from, or at least limit their dependence upon, Russia economically, and alleviate their domestic poverty. Russia believed, however, that its past involvement in the Central Asian oil and gas industry entitled it to a large portion of the revenue from this windfall.10 The Russian government has used its remaining influence in the region to insist that Central Asian oil and gas be exported to the north through Russia, “so that Moscow can profit from the transport fees and maximize its control over the process.”11 Central Asia’s landlocked position necessarily makes it dependent upon its neighbors to export its natural resources to the rest of the world. This simple geographical reality casts a long shadow over Central Asian economic policy, above all in the energy sector. The dominant concern, as one writer has noted,

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is not economic – that is, how much crude oil and natural gas will be put into the market place, who are the likely buyers, and the impact these new supplies might have on prices. Instead, the dominant concern is largely political – what route any pipeline will take.12 The oil and gas pipelines and infrastructures that dominate the region were originally created as part of a system for natural-resource exchange within the Soviet Union, and with its allies and clients. Since the independence of the CARs these pipelines and related infrastructure have taken on geopolitical importance, creating a mutually dependent relationship among the resource-rich CARs, Russia and, more recently, China. To undo the legacy of Soviet infrastructure will require time and determination, and may well entail political and even military risk. Nonetheless, the accelerating global demand for oil affords the oil- and gas-rich CARs the motivation and the apparent opportunity to alter the pipeline landscape and break their Russian dependence. The slow pace of change that has characterized the first 15 years of independence may be poised to accelerate, resulting in shifts in the political and economic landscape of Central Asia that may be difficult to anticipate. Currently, almost all infrastructure within the CARs points north toward Russia. While the Soviet Union may no longer exist, its civil engineering lives on. Little has changed in this respect since the fall of the Soviet Union, with the exception of the proposed and partially completed Kazakhstan–China pipeline. The ramifications are thus obvious: all oil and gas producers in Central Asia are still very much reliant on Russia, and on each other, for both transportation and trade. The vast majority of Central Asian oil is routed through two major pipelines leading to Russia: the Caspian Pipeline Consortium (CPC) and the Atyrau–Samara pipeline.13 This creates a dependence on Russia as the primary agent for resale. Concern over Russian willingness to play this role is not unwarranted. In the 1990s Turkmenistan fell victim to Russian control when Turkmen gas, shipped through existing pipelines, was in direct competition with Russian gas. As a result there were dramatic decreases in Turkmenistan’s overall natural-gas exports.14 Although demand for natural gas did pick up in 1999, and Turkmenistan came back on line, the balance of power had been established. With the completion and initial servicing of the Baku–Tiblisi–Ceyhan (BTC) pipeline, the first non-Russian alternative for oil export has finally taken hold in the Caspian Basin. Despite Kazakhstan’s willingness to ship oil across the Caspian Sea via the BTC, thus diversifying its almost total reliance on Russian pipelines, the actual amount of oil being shipped is currently only 145,000 barrels per day (b/d), which pales in comparison to the 560,000 b/d from the CPC and the 600,000 b/d from Atyrau–Samara pipeline.15 China’s entrance into the Central Asian energy market has also helped Kazakhstan (and in the future possibly Turkmenistan and Uzbekistan) to diversify oil and gas exports. Even when the project is completed, however, imports from Kazakhstan via the

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Kazakh–Chinese pipeline will represents only 5 percent of China’s expected oil demand at that time.16 These realities would be difficult to change (except for the worse) by military means, a factor to consider in judging the possibility and potential effect that any military action, planning, or posturing may play in the region. No military action will change the fact that, for now, all roads connecting Central Asian energy to the world lead north to Russia. Russia in turn still views this region as a part of its geopolitical and security space: President Putin and President Karimov recently signed a mutual defense pact that considered any attack on Uzbekistan as an attack on Russia.17 To this extent the natural resources are already effectively under Russian military control. For the CARs, especially those with major oil and gas exports, rupturing the system by force is not an option. The collapse of the Soviet Union represented the most auspicious political opportunity to break the yoke of Russian control. Even when Russian power was at its nadir, however, the infrastructural reality on the ground prevented any of the newly independent states from taking such a significant step. There is also some concern of conflict erupting between the countries of Central Asia over the resources that are unevenly distributed in the region. This inequality, however, has so far proven to be more a source of cooperation than of conflict. The Central Asian countries enjoy comparative advantages with respect to different resources due to the uneven distribution of oil, natural gas, and other primary commodities throughout the region. Each depends on the others for various forms of energy and other natural resources. This interdependence, combined with the distance to outside energy markets, fosters “regional economic cooperation in the energy sector.”18

The present regional energy situation Central Asia does not possess a large share of the world’s energy resources. What makes their energy important is their proximity to the energy-hungry great powers that abut them, and the relative significance of energy revenues for the CARs themselves. British Petroleum, long active in the region, recently published the estimates of the Central Asian energy situation summarized in Table 7.1. Broadly speaking, the states of Central Asia may be divided, in energy terms, among the “haves” and the “have-nots.” The former group are comprised of Uzbekistan, Turkmenistan, and Kazakhstan, the latter of Kyrgyzstan and Tajikistan. An accurate understanding of their economic, political, and strategic options requires a brief survey of each country’s endowment of natural resources, which in some cases extend beyond natural gas, and oil, to include precious and semi-precious minerals and water (itself a potential energy resource, albeit one that is still largely under-developed in the region).19

39,800 3.3 1,426 1.7 3.00 1.7 23.9 0.8

Kazakhstan 500 – 163 0.2 2.86 1.6 62.2 2.2

Turkmenistan

600 – 125 0.1 1.87 1.0 55.4 1.9

Uzbekistan

Source: British Petroleum, BP Statistical Review of World Energy June 2007, http://www.bp.com/statisticalreview. All figures are for 2006.

Proven oil reserves (millions of barrels) As percentage of total world oil reserves Oil production (thousands of barrels per day,) As percentage of world oil production Proven gas reserves (trillions of cubic meters) As percentage of world gas reserves 2006 gas production (billions of cubic meters) As percentage of world gas production

Table 7.1 Central Asia’s role in world energy markets

40,900 3.4 1,714 2 7.73 4.3 141.5 4.9

CAR total

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Kazakhstan Kazakhstan shares a unique relationship with the former Soviet Union because of its geographical border, its large Russian population, and its extensive integration into the former Soviet military-industrial complex, particularly the space program. Despite being one of the most developed of the Central Asian republics, second only to Uzbekistan in industrial infrastructure during Soviet rule, it has struggled since independence to find ways to develop its extensive natural resources and build a more diversified economic base. Over the past few years, however, there have been significant improvements to Kazakhstan’s energy sector. “With huge reserves of oil, and well endowed with minerals, Kazakhstan has managed to attract large amounts of foreign investment.”20 Kazakhstan now has one of the strongest economies in the region, albeit one that is primarily built on oil reserves. Kazakhstan possesses around 39.8 billion barrels of proven oil reserves plus significant natural-gas reserves, estimated at three trillion cubic meters.21 Kazakhstan also has large deposits of copper, lead, zinc, iron ore, and coal. At the same time, the country has struggled with limited water resources – water resources in the region are concentrated most heavily in Kyrgyzstan and Tajikistan, and provide them some bargaining power in the region to make up for their lack of energy reserves. Kazakhstan’s management of its water resources has also been dreadful historically. State policies since Soviet times have decimated the Aral Sea, although recent efforts have been made to reverse these trends, with some success in the little Aral Sea located in Western Kazakhstan.22 Nevertheless, Kazakhstan definitely ranks as a powerful economic and political player in the region, and has significant potential for future development. President Nursultan Nazarbaev served as Kazakhstan’s First Secretary of the Central Committee of the Communist Party from 1989 until the dissolution of the Soviet Union, and became the first (and still the only) president since Kazakhstan’s independence. The corrupt and conservative nature of the regime has undermined investor confidence, and led to several scandals involving members of the Nazarbaev’s family that have been detrimental to the economy.23 Nevertheless, despite all political doubts, Western investors have clambered for a stake in the production of Kazakh oil/gas condensate fields; though the same enthusiasm was not extended to pumping those products to some place other than Russia, at least not right away.24 In the aftermath of the Soviet Union’s dissolution, the Kazakh government remained highly vulnerable to Russian policy choices outside the energy sector, a consideration that further limited its independence. In the middle of the 1990s, Western investors, along with the Clinton administration, pushed for the creation of the BTC pipeline to transport Caspian oil directly to Western markets, with the intention of enticing the Kazakhs to join the pipeline. Unfortunately the project stalled on multiple fronts. Although, the BTC came online in 2006, Kazakh involvement remains minimal, despite expressed overtures from the government regarding the building of an undersea pipeline to the port of Baku.

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While the logistical hurdles facing the creation and completion of an undersea pipeline are enormous, this alone fails to explain Kazakh action. It is worth recalling, first of all, that the break-up of the Soviet Union was not welcomed in the CARs, whose populations were aware of their dependence upon the Soviet state, and were apprehensive about the consequences of its disappearance.25 In addition, at the time the BTC project was unfolding, Nursultan Nazarbaev found himself head of a country whose titular nationality was in fact one ethnic minority within a multiethnic state. Ethnic Russians living in Kazakhstan represented the managerial and skilled-labor sectors of the work force. They also comprised a local majority in Kazakhstan’s northern provinces, where secessionist rumblings were soon heard. Nazarbaev, faced with this internal reality, set out on a path to include Russians in the future Kazakh state, by adopting Russian-friendly language policies, a pro-Russian foreign policy, and returning Soviet nuclear arms to Russia, among other actions. In his boldest move, Nazarbaev moved the capital of Kazakhstan from the southern city of Almaty to Astana in the north. In terms of both foreign and domestic policy, the importance of this move for Nazarbaev cannot be over-emphasized, since Nazarbaev’s personal political base lay in the south. In essence, Nazarbaev moved the capital of his country, if not quite into foreign territory, then at least into ethnic Russian political and cultural space, which was dominated by his political rivals. The effect of this massive effort at appeasement on his freedom of action has been considerable. For Kazakhstan, the prospect of joining with the BTC pipeline represented not just a chance for income at world-market levels, but the opportunity to reduce its dependence on Russia. For the Russians, however, the prospect of new pipeline construction represented a threat to future energy revenues. Given the restrictive domestic framework under which Nazarbaev has been forced to operate, his options with respect to inclusion in the BTC were (and are) limited. While Nazarbaev is working to decrease his nation’s dependence on Russia, any foreseeable Kazakh involvement in BTC will continue to be shaped by Moscow. The BTC experience is broadly illustrative of Kazakhstan’s position within the international system, and of the difficulties involved in improving it. Since independence, Nazarbaev has gradually attempted to shift Kazakhstan’s relationship with Russia from one of excessive vulnerability to reasonable sensitivity. This strategy recognizes that the two countries will always maintain mutually dependent, particularly in the energy sector. It also recognizes the danger of tethering the state’s economic fate too exclusively to that of Russia. Recent dealings between Kazakhstan and China, along with the jockeying of European nations for influence, have reinforced and perhaps accelerated this policy. To date, the biggest single attempt by Kazakhstan to reduce its dependence on Russia was the $4.2-billion acquisition of PetroKazakhstan (PetroKaz), a Canadian oil company, by the China National Petroleum Corporation (CNPC).26 Quite apart from its effect on Kazakh–Russian relations, there are several aspects of this deal that should give the United States reason for caution in

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Kazakhstan. First, the CNPC acquisition was a direct result of the congressional rebuff of the China National Offshore Oil Corporation’s (CNOOC) offer to buy the American oil company Unocal. Congress blocked the Chinese purchase, ostensibly on grounds of national energy security and “independence” – Unocal was eventually sold to Chevron for a lower price – and in doing so it forced the Chinese to look elsewhere, and pay a considerable penalty in the bargain. China’s burning desire to secure access to energy becomes apparent in light of the fact that PetroKaz was valued at $3.2 billion, but purchased for $4.2 billion, amid widespread rumors of unethical practices.27 In general, the price of doing business in Kazakhstan has never been cheap, and is rarely ethical.28 Finally, lost in the news about the deal was the fact that on 4 July 2005, the Chinese Premier, Hu Jintao and Nursultan Nazarbaev signed a strategic partnership agreement between their respective countries, which, while it does not contradict the established security relationship with Moscow, at least presents an important counterpoint to it.29 On balance, there can be little doubt that Kazakhstan’s energy policy is shifting toward a new partnership with China, and toward a further prioritization of economic development at the expense of political reforms. Since signing the strategic partnership agreement, Kazakhstan has announced a flurry of cross-boader initiatives designed to strengthen ties with China. These include building “the world’s largest regional power stations”30 and opening a new Kazakh–Chinese (KZ–CH) joint venture pipeline.31 These announcements reflect a substantial realignment of the national interests of Kazakhstan with those of China; a reflection, perhaps, of a new belief on the part of the Kazakh government that it has finally found a partner capable of exercising regional political influence comparable to Russia’s. For all intents and purposes, China beat the United States to the punch, in part no doubt because the strings of “democratic reform” do not come attached to a Chinese partnership. Nevertheless, the United States continues to support Nazarbaev, and in so doing appears hypocritical to the Kazakh people, who are aware of the corruption under which they live. While the population of Kazakhstan enjoys greater wealth than any of their Central Asian neighbors, the possibility that Kazakhstan may become a “rentier state,” utterly dependent on the export of a single primary commodity, remains. Failure by Nazarbaev to diversify the economy will undoubtedly lead to more corruption, and sustain America’s image as a supporter of authoritarian regimes. There is currently no obvious avenue by which the United States could seek to counterbalance Chinese influence in Kazakhstan. By making such a major investment, China has extended its area of responsibility farther east than ever before, thereby cutting into Russia’s sphere of influence. This is a reality that the US must accept. It is not entirely hurtful: rising Chinese influence means Russian influence will wane, and whatever new degrees of freedom may accrue to Kazakhstan may eventually be employed to reach out to the West. Kazakhstan’s deals with China appear strictly economic, and aimed at reducing its dependence on Russia. In contrast expansion into European markets continues to be infused with a heavy political component that is evident in

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Kazakhstan’s continuing reluctance to join the BTC. Kazakh involvement in the BTC pipeline has been lukewarm for over a decade. The issue has recently come to the fore again as the BTC has come online and, at about the same time, Kazakhstan has begun seeking the 2009 chairmanship of the Organization for Security and Cooperation in Europe (OSCE). In light of the recent gas feuds between Russia and Ukraine, and between Russia and Belarus, Europe has become more concerned about its reliance on Russian energy sources, and has looked towards Kazakhstan as a future partner. To date, Kazakhstan has made only slight maneuvers toward Europe, allowing a Polish company to purchase a 50 percent stake in three Kazakh oil companies, and reviving the idea of constructing the Odessa–Brody pipeline. Yet the Kazakh extension to the BTC pipeline remains stalled, and the simple fact that Kazakhstan has chosen not to reach out to Europe with the same vigor as it has toward China reveals that Nazarbaev must believe the current level of interdependence with Russia is manageable.32 Looking back on the 15 years of Kazakhstan’s behavior in the international system, dependence on Russia no longer appears to be the primary motivating force driving foreign policy. With China, Nazarbaev has found what he believes to be a steady partner, who has reduced, to some extent, Kazakhstan’s vulnerability to Russian policy whims. Nazarbaev remains vulnerable to Russian caprice, which may explain why he has chosen not to venture too far westward in terms of energy policy. But it may well be that, if Nazarbaev felt that his country was still in a vulnerable position, it might expand with the BTC, given that the project has been in the works longer than any other pipelineconstruction deal. Russia, for its part, might have attempted to interfere with Kazakhstan’s eastward shift. But perhaps the Kremlin is more comfortable with the non-democratic political influence of the Chinese, as opposed to the more reform-minded Europeans and Americans. Or perhaps Russia and China have made an unofficial agreement about the level of Chinese involvement within the Kazakh energy sector. As has been suggested, some alteration of Kazakhstan’s outlook might follow if it were to be awarded the rotating chairmanship of the OSCE in 2009. Failing such a vote of confidence from Europe, however, the continuing diversification of Kazakh energy resources will probably be restricted to an eastward movement. Turkmenistan Natural-gas and oil account for 77 percent of Turkmenistan’s export revenue.33 It thus exemplifies to an unusual degree the lack of economic diversity, particularly in the manufacturing sector, that characterizes the entire region. Turkmenistan has over 500 million barrels of proven oil reserves, and in recent years the country has made efforts to expand its refining capacity. Natural-gas reserves are even larger, and amount to 2.01 trillion cubic meters. The major factor limiting revenues in both these industries is export infrastructure. From a policy perspective, Turkmenistan’s significant fossil-fuel reserves are offset by a chronic shortage of water. Geographically the country lies in the

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midst of the Kara-Kum Desert, and is one of the last in line for water from the Amu Darya River. Authorities in the country have started construction on a 132cubic kilometer reservoir in the middle of the desert, but this project has created fears within the region about where the water will come from to maintain the level in this reservoir.34 Like Kazakhstan, Turkmenistan has failed to reform its politics in ways that make it attractive to investors from consumer states. Furthermore, the existing natural-gas infrastructure put in place by the Soviets still restricts and complicates the export of Turkmen gas. All the pipelines in the region are owned by the Russian Gazprom company and travel through Russia. This not only allows Russia to control the amount of Turkmen gas reaching the market, but also allows Russia to set the price for it. Among the CARs, Turkmenistan was the most vulnerable to Russian whims at the time of the Soviet collapse. This asymmetric relationship re-asserted itself in the mid-1990s when Russia cut off all Turkmen gas exports to the West. Reflecting its extreme vulnerability, Turkmenistan was not able to combat this decision by Russia until years later, when the Korpeje–Kurt Kuy Pipeline was opened with Iran in 1997.35 To this day, however, this pipeline’s capacity pales in comparison to those running north toward Russia. Nevertheless, Turkmenistan’s vulnerability to Russian actions has lately been balanced somewhat by the depletion of existing gas fields in Russia, and the lack of foreign investment there, which have meant Gazprom has been unable to meet current commitments, both domestic and foreign, without Turkmen gas.36 Recognizing this impending fact, Turkmenistan’s first-ever president, Saparmurat “Turkmenbashi” (“Father of all Turkmen”) Niyazov, broke the existing agreement with Russia twice in three years, raising the price of Turkmen gas from $44 to $100 per 1,000 cubic meters, an impressive demonstration of Turkmenistan’s ability to dictate terms to Russia, less then ten years after its naturalgas exports had been cut off by Russian action.37 It would, however, be a mistake to attribute the current reduction of Turkmen vulnerability to Russia to deft maneuvering by its recently deceased president. The reality is that Russia’s own market position has declined, and Turkmenistan has profited accordingly. While Niyazov failed to take advantage of the situation to diversify his pipelines, his successor, Gurbanguly Berdymukhammedov, appears poised to do so.38 And while Berdymukhammedov has assured Gazprom of Turkmenistan’s continued willingness to fulfill the most recent contract, he has also begun liberalizing domestic reforms that have given hope to the West. Should this take place, foreign interest in developing Turkmenistan’s natural gas would surely increase, thereby allowing for pipeline diversification and a further reduction in Turkmen market vulnerability. How such a move would be greeted by the Russians is difficult to say, particularly since it may coincide with Russian efforts to expand and diversify its own infrastructure, thus heightening competition between them. On the other hand, Russian ascension into the World Trade Organization (WTO) will bring international pressure for Russia to adopt world market prices for its domestic gas market, which would give the Turk-

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mens yet another mechanism for leverage, since Russia is not merely an important partner, but a major customer as well. Uzbekistan Uzbekistan has modest natural-resource endowments in comparison to its Central Asian neighbors. It is thought to have as much as 600 million barrels of oil reserves, but the development of these havs been slow mainly owing to repressive government meddling. Uzbekistan is among the world’s ten largest international gas exporters, with 1.87 trillion cubic meters of gas reserves, and the eighth largest producer of gold and copper, with sizeable amounts of silver, lead, zinc, coal, and uranium waiting for further development. At the same time, like so much of Central Asia, it is short of water. Uzbekistan has probably felt the repercussions of the environmental catastrophe of the Aral Sea more profoundly than any other state, since it was a prime source of its water at one time.39 A further complicating factor for Uzbekistan is that it is doubly landlocked (i.e. surrounded by states that are themselves land-locked), which makes its export options exceptionally complicated and tenuous. Russia aside, the Uzbeks have long been the dominant military power in their region, and the country continues to exhibit a confrontational stance under the leadership of Islam Karimov, a former senior apparatchik of the Soviet Union who has held the presidency since independence. His economic policies are used chiefly to exact political concessions or inflict retribution on his neighbors. Uzbekistan is second only to Russia as the primary energy supplier to the region. However, Uzbekistan often halts distribution if payments are missed or late, especially during the winter months when energy is most needed. In response Kyrgyzstan will withhold water and hydroelectric power, creating tense, tit-fortat contests that invariably leave bad blood behind. Such conduct has inspired Kyrgyzstan, and to a lesser extent Kazakhstan, to look for other suppliers of energy. As elsewhere in the region, political and social reform have taken a back seat to the routinized extraction of natural wealth. As one observer has noted, “There is hardly a family [in Uzbekistan] in which a member has not been detained, questioned, arbitrarily imprisoned or beaten by internal security forces.”40 The main target of official repression is Islamic fundamentalism, whose adherents, some of whom have organized as the Islamic Movement of Uzbekistan (IMU), have conducted a campaign of terrorism and social violence, including several attempts on Karimov’s life, unlike anything experienced by the other energy-rich states of the region; though the Islamist label is disputed by some who claim it is merely a mask for indiscriminate political repression. A peak of official violence was reached in the so-called Andijan massacre of May 2005, in which between several hundred and several thousand people were killed by government security forces. Although the United States and the European Union sought an international inquiry into this incident, China, India, and Russia all stood by the government’s claim that its actions were justified.41

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Since then, relations with the West have cooled, while those with Russia and China have become correspondingly warmer. In June 2004 Karimov and Chinese Premier Hu Jintao signed a joint statement seeking to expand relations between Uzbekistan and China. Since then, China has agreed to over $106 million in financing for oil and gas exploration and infrastructure development in Uzbekistan.42 Russia, having pledged billions of dollars in investments towards upgrading pipeline infrastructure and developing gas fields, has signed a mutual defense pact that provides additional security for its investment.43 Uzbekistan is thus the country in Central Asia where energy policy has become most thoroughly entangled with military and security concerns of a more traditional kind. Since Andijan, public protest of any form has almost disappeared from Uzbekistan, and the Islamic militants who once terrorized the country now appear to be fighting in Pakistan.44 Yet the obvious fragility of the regime’s social base persists, as does its propensity to obtain the consent of the government by whatever forcible means may be necessary. For the oil and gas sector the larger question is whether it will be the West, or Russia and China, who will be better prepared to confront whatever threat to the regime emerges next. Andijan made it impossible for the United States to support Karimov’s government but, prior to that episode, when confronted with IMU incursions and assassination attempts, Karimov had chosen to reach out to the US rather than to Russia or China. When the next crisis occurs for Karimov, the US may have yet another opportunity to align itself with Uzbekistan, if Russia and China are unable to assist him. Should the US do so, the already substantial energy-related investments that China has made there may become a point of contention between world powers, not just Central Asian ones. Kyrgyzstan Kyrgyzstan is one of two proverbial ‘have-nots’ of the Central Asian region. Possessing just 40 million barrels of oil reserves, its geological structure makes the recovery of even these relatively limited deposits difficult and slow. The country continues to search for greater reserves, and for assistance in developing them. Its 5.6 billion cubic meters of gas reserves are subject to similar problems as those of the oil sector, and remain largely undeveloped, with little to entice outside investment. On the other hand, the country has significant gold deposits as well as deposits of other lesser minerals. Gold accounts for 30 percent of exports and 11 percent of the gross domestic product. By far the most important natural resource in Kyrgyzstan, particularly in regard to its relations with the other Central Asian countries, is water. Kyrgyzstan lies at the head waters of the two great Central Asian Rivers, the Amu Darya and Syr Darya, and unlike many of its neighbors it has a relative abundance of water. The country has attempted to maximize this resource by building hydroelectric plants, with more in the works.45 This will provide a source of revenue in itself, as well as energy for domestic consumption.

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Tajikistan Tajikistan is the other energy-poor state of Central Asia. Its natural resources are few, and exploration has been limited. Tajikistan has 12 million barrels of oil reserves, with limited infrastructure to extract it; plus 5.6 billion cubic meters of natural gas; but development again has been slow, and most of its domestic gas is supplied by Uzbekistan. Like Kyrgyzstan, Tajikistan has sufficient water to supply itself via mountain rivers, providing some incentive to pursue hydroelectric power production.46

Economic development and energy security These patterns of natural-resource endowment have in turn shaped how Central Asian countries have pursued economic development. Logically, as Robert Ebel has observed, the investors and the Haves need each other if resource development is to proceed. But some of the Haves rejected this mutual dependence. Just send money, they say, and we will do it ourselves, reflecting a spirit of nationalism unencumbered by reality.47 The “have-nots,” on the other hand, have taken a more measured approach and have welcomed any and every offer of outside investment, borrowed heavily, and submitted to the demands of the International Monetary Fund (IMF) and World Bank. As Ebel again notes, “the Have-nots must either develop their own resource bases, which are constrained by geology, or build a mutually advantageous trading relationship with the Haves.”48 Perhaps because they lack the means to buy off dissent, it is the have-not countries that have experienced the most intense, and at times bloody, political upheavals within the region. Either by necessity or choice they have looked to political reforms in order to change the economic landscape in their favor if they can. The Tajikistan civil war brought a coalition government to power, and while it has not translated into great economic reforms so far, it may one day. Kyrgyzstan is, as of this writing, undergoing a second revolution (of sorts) in as many years. Having forced one president from office the parliament and people of the country are continuing to seek reform and change in an effort to create a brighter future. The Russians currently have a strong military presence in Kyrgyzstan and Tajikistan. The former’s consists of an air base with air force and army personnel, deployed under the auspices of the Collective Security Treaty Organization (CSTO) as a quick reaction force to combat regional terrorist outbreaks. It is interesting to note, however, that Russian personnel and equipment sat idle during the 12–13 May 2007 raid on the Kyrgyz–Tajik border by suspected terrorists. In Tajikistan, the 201st Motorized Rifle Division deployed outside of the Tajik capital, Dushanbe, is also deployed under CSTO auspices, having

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previously manned the Tajik–Afghan border.49 More recently the Russians have been aiding the Indians in setting up an Indian air base in Tajikistan, the first such permanent Indian deployment in the CARs.50 These bases are in the region’s two most economically weak nations – Kyrgyzstan and Tajikistan. Conversely, the three energy-rich CARs do not have a single Russian military base among them, though Uzbekistan’s mutual defense pact with Russia evidently represents a significant strategic commitment, the more so by virtue of having been concluded shortly after the United States was evicted from its air base at Karshi-Khanabad (K2), an important facility in southern Uzbekistan that played a critical role in Operation Enduring Freedom (OEF). Military cooperation between the Central Asian states and other international players has provided a context for the regional actors to come together. In the words of Kyrgyz President Bakiyev in September of 2006, the “new blueprint” for foreign policy stresses the importance of cooperation with his neighboring states – Kazakhstan, Uzbekistan, Tajikistan, and China – with respect to border security and trade, a telling combination.51 Kyrgyzstan’s relations with Uzbekistan have been marred historically by both trade disputes and border clashes. Since 2005, however, the two countries have stepped back from their traditionally harsh rhetoric. In July 2006 they signed a new agreement on anti-terrorism operations and a renewal of the 1996 Treaty of Eternal Friendship.52 Furthermore the Central Asian countries have capitalized on the economic and security interest of the United States, Russia, European Union and China to foster a competitive relationship between these four, by which they hope to avoid the potential smothering influence of any one of them. One of the forefathers of formal military and security cooperation in the region today is the Central Asian Battalion (CENTRASBAT). Kazakhstan, Uzbekistan, and Kyrgyzstan were its founders in 1995, with the purpose of preventing conflicts in the Central Asian Region. It has served as a vehicle for cooperation between Central Asia and the West, with exercises being sponsored by NATO and its Partnership for Peace (PfP). Countries such as the United States, Russia, and Turkey have all participated in these exercises.53 In conjunction with this initiative others have flowered to provide greater ties and cooperation on the security front, such as the aforementioned CSTO founded in September 2003. In truth, Central Asia has no shortage of organizations, treaties, and initiatives intended to advance regional integration. The Economic Cooperation Organization (ECO) expanded in 1992 to include Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. These countries joined Iran, Pakistan, and Turkey in the ECO with the stated intent of sustaining economic development of member states. In 1997 the Central Asia Regional Economic Cooperation (CAREC) was initiated by the Asian Development Bank seeking to encourage economic cooperation among the Central Asian countries. The Central Asian Cooperation Organization (CACO) was formed in February 2002, out of the merger of two similar entities, the Central Asian Eco-

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nomic Community Organization (CAEC) and the Eurasian Economic Community (EurAsEC). A variety of global organizations have also made their way to the Central Asian region. The Silk Road Initiative, under the direction of the United Nations, seeks to provide a forum for development of trade, investment, and tourism and “. . . to enhance regional cooperation and development.54 The European Union has several of its own initiatives, the first being the Transport Corridor Europe–Caucasus–Asia (TRACECA), which will establish a continuous railway from the Chinese port of Lianyungang on the Yellow Sea to the Georgian ports of Poti and Batumi on the Black Sea, and then continue on into Western Europe.55 Another project linked to TRACECA is the Interstate Oil and Gas Transport to Europe (INOGATE). It will seek to rehabilitate the existing oil and gas pipelines from the Central Asian region to carry oil and gas from the Caspian Sea region to Central and Eastern Europe. Inevitably, these and other efforts to promote cooperation will provide occasion for friction as well. Geography will play a decisive role in the route selection for transportation infrastructure, for instance, and may create new grounds for dispute. Yet there is no question that the region will have to accept its interdependence as a prerequisite for economic development. Among the myriad organizations seeking to promote economic and security cooperation in Central Asia, one of the most unusual is the Shanghai Cooperation Organization (SCO). It was founded in June 2001, and is an organization for mutual defense linking China, Russia, Kazakhstan, Tajikistan, and Uzbekistan against perceived common threats of terrorism, extremism, and internal subversion. Yet the true strength of the SCO may lie in the economic and trade agreements it is seeking to broker,56 agreements that would in turn have strategic significance, since economic cooperation within the region is a way for the two big regional and world powers, of China and Russia, to improve their hold on the energy resources in Central Asia. At the same time, having China and Russia in the SCO together may make it easier for the CARs to avoid a bid for direct hegemony by either of them. “It is clear,” as one knowledgeable observer has argued, that, in their interaction with large powers such as China and Russia, the states of Central Asia are significantly influenced by these two regional powers’ agendas. On the other hand, the smaller powers of the SCO are still able to outline their national interests and security and economic concerns, and to articulate them within the frameworks provided by the organization. 57 The future of Central Asia’s energy sector depends heavily upon the perspectives and actions of the respective players. From Russia’s perspective the current infrastructure is a lifeline for all parties. Not only do all pipelines point north, but Russia remains the largest market for exported energy resources from each of the CARs. Deviations in the regional energy market, such as the KZ–CH pipeline, are definite threats to Russia’s monopoly. These new pipelines,

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however, are still minuscule in comparison to the existing infrastructure, and the risks entailed by forcible or threatening actions to avert the creation of such competitive structures would scarcely be repaid by the potential gain. The sheer amount of money and expertise necessary for pipeline construction more or less guarantees continued Russian dominance over the near-term. Russia’s position, as has been noted, is reinforced by important historical and cultural ties. Central Asians still feel that Russia is the guarantor of their security from more remote international threats, and resource-sharing is their reciprocal offering. While China represents a huge market for all Central Asian goods, the reality remains that the current infrastructure is not conducive to an eastward flow of goods, including energy. Any attempt to encroach upon current Russian economic preponderance must be viewed in terms of overall Beijing–Moscow relations. Kazakhstan continues to carry the torch for expanding economic ties with China, and other Central Asian states may well follow. There will, inevitably, be rifts to overcome. China recently announced that it will begin to divert major rivers flowing into Lake Balkash, in Kazakhstan, and its proposed acquisition of Canada’s Nations Energy by China International Trust & Investment Corporation has been met with caution by Kazakh leaders.58 Conversely, while the China National Petroleum Corporation (CNPC) was able to complete last year’s acquisition of PetroKaz, the fact that the deal left the Kazakh state oil company with a 33 percent stake in PetroKaz indicates the limits of China’s ability to overawe even relatively weak neighbors.59 Despite signing exploratory deals with Turkmenistan and Uzbekistan to bring natural gas to Western China, the logistics of this deal are yet to be worked out, meaning specifically how pipelines will be upgraded and expanded to reach into China. Overall, economic and political relations with Central Asia have not been as smooth for China as some may have suspected, which in turn means that only the most limited security risks can be expected to arise from that connection. As present, the CARs still only supply about 5 percent of China’s energy needs, and unless that percentage were to rise dramatically for some reason, the possibility of China attempting to forcibly redirect or seize resources in the region appears remote. As far as Russia is concerned, there can be no doubt that Moscow is actively seeking to increase its influence in Central Asia through numerous cultural, political, economic, and military mechanisms. By targeting the energy industry specifically, Moscow is able to achieve the most political bang for the buck via its government-controlled energy giants. Russia will continue in its attempt to dominate the regional energy producers using economic leverage, including debt-forequity swaps and “pipeline politics.” Along the way it may be able to achieve integration rivaling that of the Soviet era. The economic danger, of course, is that rather than building efficiency through competition and letting market forces allocate resources effectively, Moscow is once again simply exploiting its geographical and historical position to extract the energy resources of Central Asia on favorable terms. This time it is not to further an ideological agenda, but simply to maximize profits on European markets. Yet it is hard to imagine that any outsider powerful enough to stop them would ever consider intervening to do so.

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The potential political cost of such domination in Central Asia will be borne in the first instance by the people who live there, in the form of continued state backwardness and a neo-colonialist economic and political structure. Such conditions, unless remedied, are bound to produce failed states sooner or later; and it will be through the management of the resulting political explosions, indiscriminate terrorism, and so on, that the armed forces of the energy-consuming world are most likely to be drawn into the region. This is not a problem that Russia’s present policies can be expected to moderate, or even to manage. On the contrary, Moscow’s present tendency is both to support the local authoritarian regimes in the region, and to play upon their fears of subversion, by way of heightening their dependence on their powerful neighbor (and biggest customer) to the north. Under almost any circumstances, the realities of geography and economic interest will make it difficult for the United States and Europe to expand their influence in the region, given the increasingly well-organized, assertive, and even cooperative presence of Russia and China there. As it is, Western involvement in Central Asian politics and economics may actually increase the likelihood of civil unrest there, by giving hope and encouragement to opposition movements, but without providing the necessary protection to save them from repression by those currently in charge. While Russia is susceptible to some pressure from the West, it is unlikely that the United States or Europe will be able to exert sufficient influence to loosen Russia’s regional dominance. This trend can modified, though scarcely reversed, by finding some way for the West to work with Russia or the CSTO on areas of mutual interest in the region, in a spirit akin to “burden-sharing.” Russia does not desire American dominance in the region; but neither does it want “to bear the full responsibility for securing political stability and economic development in Central Asia.” Thus, the argument goes, the Kremlin should be interested “both in preserving a ‘certain level’ of American presence in Russia’s strategically sensitive ‘southern underbelly’ and in maintaining some sort of partnership with the United States.”60 In the end, if nothing significant changes the current balance, the Central Asian Republics will have made a Faustian bargain. They will have sacrificed economic diversification and political liberalization for job security at the downstream end of the energy sector. Opening themselves up to Western investment would allow them to construct new energy corridors for export that would liberate them from Russia, or at least offer her a good run for her money, spawning lower prices and technological innovations along the way. But no investment will come to a region where regimes lack transparency, the rule of law, independent judiciaries, and protection of property rights. It is likely that the CARs will continue to relinquish control of strategic energy interests in order to be able to stave off the popular revolt that is inevitable in light of their entrenched authoritarianism – a bargain Moscow appears to have no problem accepting, though its ability to foresee, much less control, the consequences of such a policy are most assuredly in doubt. There may, indeed, be more than one Faustian bargain involved here.

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Notes 1 Igor Torbakov, “Will Baku-Tbilisi-Ceyhan Pipeline Carry Revolutionary Ideas Along with Crude?” Eurasian Daily Monitor 2/104, 27 May 2005, http://www.jamestown. org/publications_details.php?volume_id=407&issue_id=3348&article_id=2369809. 2 See Roy Allison, “Strategic Reassertion in Russia’s Central Asia Policy,” International Affairs 89/2, March 2004, pp. 277–93. 3 See for instance Martha B. Olcott, Central Asia’s Second Chance, Washington, DC: Carnegie Endowment for International Peace, 2005, p. 58, where it is suggested that “the Russian Government used its control of the Soviet-era oil and gas pipeline system that passed across its territory to seek concession from Kazakhstan, Turkmenistan, and Azerbaijan.” 4 Mark N. Katz, “Central Asian Stability: Under Threat?,” SAIS Review 17/1, 1997, p. 5. 5 Katz, “Central Asian Stability,” p. 1. 6 For recent changes in “near abroad” policy see Vladimir Socor, “Kremlin Redefining Policy in ‘Post-Soviet Space’,” Eurasian Daily Monitor 2/27, February 2005, http://www.jamestown.org/edm/article.php?article_id=2369222. 7 “Russia’s Lavrov: Oil, Gas Chief Diplomatic Tools against Disloyal CIS Partners,” Foreign Broadcast International Service, 13 October 2005. 8 Igor Torbakov, “Russia Seeks to Use Energy Abundance to Increase,” Eurasia Insight, 19 November 2003, http://www.eurasianet.org/departments/insight/articles/ eav111903.shtml. 9 Russia’s electricity giant Unified Energy System RAO, in which, like Gazprom, the government has a controlling share, was able to secure large stakes in energy sectors in Armenia and Georgia (controlling 80 percent and 75 percent respectively of their energy-generating capacity). Ibid. 10 Katz, “Central Asian Stability,” p. 39. 11 Ibid., p. 38. 12 Robert Ebel, Energy Choices in the Near Abroad: The Haves and Have-nots Face the Future, Washington, DC: Center for Strategic and International Studies, 1997, p. 6. 13 CPC capacity is 560,000 b/d, with expansion plans for 1.34 mmbd by 2009. The Atyrau–Samara pipeline’s capacity is 600,000 b/d. 14 United States Energy Information Administration, “County Analysis Briefs: Caspian Sea,” September 2005, http://www.eia.doe.gov/emeu/cabs/Caspian/Full.html. 15 Ibid. 16 Ibid. 17 “Putin, Karimov Sign ‘Unprecedented’ Alliance Treaty,” Radio Free Europe/Radio Liberty, 14 November 2005, http://rferl.org/featuresarticle/2005/11/A3B8C0BFB64E-4A6D-A8C4–10E792C13BF9.html. 18 James P. Dorian, “Central Asia: A Major Emerging Energy Player in the 21st Century,” Energy Policy 34/5, 2006, pp. 550–1. 19 Cf. Ebel, Energy Choices in the Near Abroad. 20 “Country Risk Assessment for Kazakhstan,” Jane’s Sentinel, 2006. 21 British Petroleum, BP Statistical Review of World Energy, June 2007, http://www.bp.com/statisticalreview. 22 Olcott, Central Asia’s Second Chance, p. 265. 23 For example, the attempt in 2002 by the government to force a change in the bookkeeping procedures of TengisChevrOil cut into overall profitability. This move forced the suspension of a $3-billion development plan that was only reinstated following the Kazakh government’s reversal of its earlier decision. See Robert M. Cutler, “The Caspian Energy Conundrum,” Journal of International Affairs 56/2, Spring 2003, p. 4. 24 “Prosecutor Says US Oil Giant Is Subject of Investigation in Kazakhstan Corruption Probe,” Eurasianet, 4 April 2003, http://www.eurasianet.org/departments/business/

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articles/eav040403.shtml; and Alec Appelbaum, “Judge Rebukes Prosecution In Kazakhstan-Related Corruption Case,” Eurasianet, 30 July 2004, http://www. eurasianet.org/departments/business/articles/eav073004.shtml. Mehrdad Haghayeghi, Islam and Politics in Central Asia, New York: St Martin’s Press, 1996. Andrew Kramer, “Chinese Company’s Bid for PetroKazakhstan Is Approved,” New York Times, 27 October 2005, http://www.nytimes.com/2005/10/27/business/worldbusiness/27lukoil.html. Jo Johnson, “India Accuses Goldman of ‘Moving the Goalposts’ in Kazakh Oil Auction,” Financial Times, 17 October 2005 http://search.ft.com/ftArticle?queryText=%22PetroKazakhstan+Inc%22&page=5&id=051017000591&ct=0. “Prosecutor Says Us Oil Giant Is Subject Of Investigation In Kazakhstan Corruption Probe”; and “CNPC, PetroKazakhstan Oil Deal Agreed,” China Daily, 19 October 2005, http://en.chinabroadcast.cn/855/2005/10/19/[email protected]. People’s Republic of China, Ministry of Foreign Affairs, “China and Kazakhstan Decide to Establish and Develop Strategic Partnership,” 4 July 2005, http://www.fmprc.gov.cn/eng/wjdt/2649/t202457.htm. “China Plans to Build Large Power Plant in Kazakhstan,” Asia Pulse, 18 December 2005, http://au.biz.yahoo.com/051219/17/fl2a.html. Bagila Bukharbaeva, “Kazakhstan to Open Oil Pipeline to China,” Business Week Online, 14 December 2005, http://www.businessweek.com/ap/financialnews/ D8EFV18O0.htm?campaign_id=apn_home_down&chan=db. “Poland, Kazakhstan Seek to Revive Odessa–Brody Oil Pipeline,” Budapest Business Journal, 26 March 2007, http://www.bbj.hu/main/news_23100_poland+kazakhstan +seek+to+revive+odessa-brody+oil+pipeline.html. “Turkmenistan,” CIA World Fact Book 2007, https://www.cia.gov/library/publications/the-world-factbook/geos/tx.html. Olcott, Central Asia’s Second Chance, p. 266. United States Department of State, “Country Analysis Briefs: Turkmenistan”; and “Background Note: Turkmenistan,” http://www.state.gov/r/pa/ei/bgn/35884.htm. Mark Rice-Oxley, “Gazprom Tries to Reassure Customers ‘There’s Enough for Everyone’,” Guardian Unlimited, 30 November 2006, http://business.guardian. co.uk/story/0,,1961159,00.html; Carl Mortished, “Gazprom Risks Serious Shortfall of Gas for Export,” Times Online, 23 March 2006, http://business.timesonline. co.uk/tol/business/economics/article724097.ece; “What the Russian Papers Say,” RIA Novosti, 21 April 2006, http://en.rian.ru/analysis/20060421/46808586.html; E. O. Ndefo, P. Geng, S. Laskar, L. Tawofaing, and Michael J. Economides, “Russia: A Critical Evaluation of Its Natural Gas Resources,” Energy Tribune, 13 February 2007, http://www.energytribune.com/articles.cfm?aid=379; Daniel Kimmage, “Russia: Moscow Unhurt by Price Hike on Turkmen Gas,” Radio Free Europe/Radio Liberty, 11 September 2006, http://www.rferl.org/featuresarticle/2006/09/005b84f8–0197– 4a26–964c-a3df1a93dee5.html. BP Statistical Review of World Energy. “Focusing on Trans-Caspian Pipes to Diversify Supplies,” Civil Georgia, 22 March 2007, http://www.civil.ge/eng/article.php?id=14845; Joshua Kucera, “West Should Take Action to Check Gazprom’s Influence in Turkmenistan–Expert,” Eurasianet, 21 March 2007, http://www.eurasianet.org/departments/business/articles/eav032107. shtml; Andrea R. Mihailescu, “UPI Energy Watch,” United Press International, 21 March 2007, http://www.upi.com/Energy/upi_energy_watch/20070321–125143–4961r/. “Country Risk Assessment for Kazakhstan.” Cutler, “The Caspian Energy Conundrum,” p. 6. Galima Bukharbaeva and Matluba Azamatova, “No Requiem for the Dead,” Institute for War and Peace Reporting, 16 May 2005, http://www.iwpr.net/?p=rca&s= f&o=244226&apc_state=henircacf7495ec772c51bd7257d239abe393dd.

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42 “China, Uzbekistan Seek More Cooperation,” Radio Free Europe/Radio Liberty, 18 June 2005, http://rferl.org/featuresarticle/2005/7/3F7969F5–711A-4412-B82ACE29774C6EB9.html; “Uzbekistan Signs Production Sharing Protocol with China’s CNPC, 4 Other Firms,” Forbes.com, 31 January 2007, http://www.forbes.com/ afxnewslimited/feeds/afx/2007/01/31/afx3378839.html; “China’s CNPC Unit to Invest 210 mln USD in Oil Exploration in Uzbekistan – Report,” ibid., 14 June 2006, http://www.forbes.com/business/feeds/afx/2006/06/14/afx2816411.html; Andrew Yeh, “Uzbekistan Signs $600m Oil Deal with China,” FT.com, 25 March 2005, http://www.ft.com/cms/s/cd1b49f2-cd3c-11d9-aa26–00000e2511c8.html. 43 “Putin, Karimov Sign ‘Unprecedented’ Alliance Treaty.” 44 Ismail Khan, “100 Dead in Militant Clashes in Pakistan,” New York Times, 21 March 2007, http://www.nytimes.com/2007/03/21/world/asia/21cnd-pakistan.html?_r=1&hp &oref=slogin. 45 “Country Risk Assessment for Kazakhstan.” 46 “Country Risk Assessment for Tajikistan,” Jane’s Sentinel, 2006. 47 Ebel, Energy Choices in the Near Abroad, p. 3. 48 Ibid., p. 2. 49 “World Armies: Russian Federation,” Jane’s World Armies, http://www4.janes.com/ subscribe/jwar/doc_view.jsp?K2DocKey=/content1/janesdata/binder/jwar/jwara226.h tm@current&Prod_Name=JWAR&QueryText=; Roger McDermott, “Russia Plans Expansion of Its Military Presence in Kyrgyzstan,” Eurasia Daily Monitor, 16 March 2006, http://http://jamestown.org/edm/article.php?article_id=2371090. 50 Shishir Gupta, “Tajik Air Base Is Ready, Gives India Its First Footprint in Strategic Central Asia,” Sunday Express, 25 February 2007, http://www.indianexpress.com/ sunday/story/24207.html. 51 Jim Nichol, Central Asia: Recent Developments and US Interests, Congressional Research Service Report for Congress, updated 5 July 2007, http://www.ncseonline. org/NLE/CRSreports/07Jun/RL33458.pdf. 52 Ibid. 53 Robert Ebel and Rajan Menon, eds., Energy and Conflict in Central Asia and the Caucasus, New York: Rowan & Littlefield, 2000, pp. 138–9. 54 Silk Road Regional Programme, http://www.silkroad.undp.org.cn/index/index.php. 55 Teimuraz Gorshkov and George Bagaturia, “TRACECA-Restoration of Silk Route,” Japan Railway & Transport Review 28, September 2001, pp. 50–5, http://iatp.ge/ publications/64.pdf. 56 Martha B. Olcott, testimony before the Helsinki Commission on “The Shanghai Cooperation Organization Changing the ‘Playing Field’ in Central Asia,” 26 September 2006, http://www.carnegieendowment.org/files/MBO0906.pdf. 57 Ruslan Maksutov, The Shanghai Cooperation Organization: A Central Asian Perspective, Stockholm International Peace Research Institute Project Paper, August 2006, p. 5, http://www.sipri.org/contents/worldsec/Ruslan.SCO.pdf/download. 58 “Kazakhs Seeking to Halt Deal,” University of Alberta China Institute, 24 November 2006, http://www.uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=53376&nav 02=43876&nav01=43092. 59 Kramer, “Chinese Company’s Bid for PetroKazakhstan Is Approved.” 60 Igor Torbakov, “Russian Foreign Policy Experts Debate Interaction with America in Greater Central Asia,” Eurasia Daily Monitor 2/196, 21 October 2005, http://www.jamestown.org/edm/article.php?article_id=2370378.

8

Maintaining Gazpromistan The politics of Turkmen gas exports Christopher Boucek

Since the collapse of the Soviet Union, Turkmenistan has become an essential component in European and Russian energy-security calculations. This little understood former Soviet republic sits atop massive hydrocarbons, including the second largest gas reserves in the Commonwealth of Independent States (CIS). The sudden death of President-for-Life Saparmurat Niyazov in December 2006 again highlighted the vital importance of Turkmenistan’s significant energy resources, and the country’s central role in the region’s emerging energysecurity calculus. The infamous Niyazov, otherwise known as Turkmenbashi, or Father of all Turkmen, had ruled Turkmenistan since its independence in 1991, and had generally maintained a temperamental relationship with Moscow. He sought to diversify away from Russian domination of Turkmenistan’s hydrocarbons. During the presidency of his successor, former Deputy Prime Minister and Minister of Health, Gurbanguly Berdymukhammedov, however, Moscow has moved close to Ashgabat, and sought to support the new regime by providing critical support and assistance. Russia’s increasingly linked foreign and energy policies rely upon continued access to Turkmen natural gas, and it has accordingly sought to restore its strategic influence over the former republic. Gazprom depends upon Turkmen gas to meet European export contracts as well as rising Russian domestic consumption. Without access to Turkmen gas, Moscow would not be able to use its energy clout as leverage to advance political ends, nor would Gazprom be able to power southern Russia and parts of the Urals. This chapter will examine Turkmen gas exports since the death of Niyazov, with a focus on the impact on Russian–Turkmen relations. It begins with a brief overview of Turkmenistan’s recent history and the rule of President Niyazov, followed by an assessment of the Turkmen hydrocarbon sector. This is followed by an examination of Russia’s relationship with Ashgabat in the post-Niyazov period. It concludes with an assessment of President Berdymukhammedov’s policies vis-à-vis the gas sector and a look at the other competing non-Russian export options for Turkmen gas. The chapter’s overall aim is to illustrate the importance of Turkmenistan to the Kremlin, and to explore how Moscow and the new Turkmen government have managed the transition. For Moscow and Gazprom, this has meant working to maintain Russian strategic influence, and

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preventing the emergence of any potential competing suitors for Ashgabat’s hydrocarbons.1

Turkmenistan from Niyazov to Berdymukhammedov Until 1991, Turkmenistan was a constituent republic of the Soviet Union. The Turkmen Soviet Socialist Republic (TSSR) was a full union republic, created in 1924 out of the Czarist province of Transcaspia, the territory east of the Caspian Sea conquered by Imperial Russia in the late nineteenth century. No independent nation of Turkmenistan had ever existed prior to 1991. For Turkmenistan, as for a number of the other newly independent Central Asian republics, political independence also marked the beginning of a search for a modern political national identity. In Turkmenistan, the resulting ideological vacuum would be filled by President Niyazov, who created an unrivaled cult of personality. Saparmurat Atayevich Niyazov dominated political life in Turkmenistan for 21 years. At the fall of the Soviet Union, Niyazov presided over every aspect of Turkmen politics, holding all the important positions in both the government and the Communist Party. In 1985 he was appointed Chairman of the Council of Ministers of the TSSR,2 replacing Muhammad Nazar Gafurov in Mikhail Gorbachev’s anti-corruption campaign.3 That same year he was elected First Secretary of the Central Committee of the Communist Party of Turkmenistan,4 and from 1986 to 1991 he also served on the Central Committee of the Communist Party of the Soviet Union. In 1990, Niyazov became Chairman of the Supreme Soviet of the TSSR (the republic’s highest legislative body), and was elected the TSSR’s first president. Niyazov maneuvered with some skill to avoid being caught in the rubble of the USSR. He staged a dubious referendum in March 1991, whose results favored continued membership in the Soviet Union, and in August 1991 he openly sympathized with the anti-democracy coup leaders in Moscow,5 He then reluctantly accepted independence under his own leadership. As the only candidate in a June 1992 referendum, he was elected President of the Independent Republic of Turkmenistan with 99.5 percent of the vote.6 His term was extended in a 1994 referendum in which he earned 99.9 percent of the vote.7 In December 1999, the Khalk Maslakhaty (People’s Council) lifted all restrictions on his tenure, and named him President-for-Life. Niyazov’s rule has been well documented. A number of sources have catalogued the idiosyncratic naturel of the regime, the apparent whimsy with which policy was decided, and the self-aggrandizement of Niyazov as Turkmenbashi.8 Repression, mismanagement, narcissism, and corruption were the bywords of Turkmen government at every level. During his rule, Niyazov oversaw the nearcollapse of public-service infrastructure, especially the degradation of the education system and evisceration of the national health-care system. At the same time, Turkmenistan continued to export natural gas, and the income paid for the massive government programs, including the construction of large-scale prestige building projects in Ashgabat. Gas proceeds were also allegedly used to enrich

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Turkmenbashi himself,9 and to lubricate extensive patronage systems throughout the country, especially in the security and intelligence services. Niyazov’s death was announced by the Turkmen government on the morning of 21 December 2006. According to reports by the Turkmen media, Niyazov was said to have died from cardiac arrest at 1:10 a.m. local time.10 A massive coronary event was long thought to be the manner in which Niyazov would die; however, there have been some reports that Niyazov may have ultimately died of cardiac-related diabetic complications.11 It was well known that in 1997 he traveled to Germany for extensive cardiac bypass surgery. Although there have been rumors that Niyazov was poisoned,12 they cannot be confirmed, and such stories appear to be examples of how rumors proliferate in an environment lacking access to information. Of more practical significance was the question as to how a successor would be chosen. Before his death, many analysts believed that an actual announcement would be delayed for some time until succession issues were in order and the remnants of the regime could coalesce around a central figure. The creation of the State Security Council to oversee the transition; the immediate elevation of Deputy Prime Minister and Minister of Health and Medical Industry Gurbanguly Berdymukhammedov to Acting President; the abrupt investigation and subsequent arrest of the constitutionally mandated successor Khalk Mejles (National Assembly) Speaker, Ovezgeldy Atayev; and the sudden organization of large-scale commemorative events all suggest prior coordination and that Niyazov may actually have died some time earlier than was reported. In any event, the public evidence of Niyazov’s failing health suggests that the regime’s inner circle was certainly forewarned of the need to begin preparations for a transfer of power, which in fact culminated in the well-managed coronation of a successor who was expected to perpetuate the Niyazovist system. Nevertheless, Niyazov’s successor can scarcely hope to rely so heavily on the cult of personality that had been the central pillar of Turkmenbashi’s regime – although Berdymukhammedov has at times displayed some troubling “sultanistic” impulses. As a consequence, Berdymukhammedov’s hold on power is likely to become increasingly dependent upon his government’s economic success, and upon its ability to employ the fruits of that success to promote social modernization and development without inspiring unmanageable discord and distress.

Turkmenistan’s hydrocarbon resources Turkmenistan’s prospects are of course utterly dependent upon its successful exploitation of its vast energy reserves, about which there is a distinct lack of reliable data. There are two major hydrocarbon basins in Turkmenistan, the Caspian Shelf and another which stretches from the center of the country to the eastern border with Uzbekistan; the latter basin is primarily associated with natural gas.13 Turkmen hydrocarbon reserves include significant deposits of both oil and natural gas, although the actual size of those deposits has been the

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subject of some debate. Turkmenistan has sizeable oil reserves, estimated to be approximately 546 million barrels14 (or slightly less than Equatorial Guinea15), although that figure could be as high as 1.7 billion barrels (comparable to Tunisia16), according to the United States Energy Information Administration.17 While oil reserves are sizeable, Turkmenistan is best known for its substantial natural-gas reserves. Since Niyazov’s death, it has often been repeated that Turkmenistan possesses the world’s fifth-largest natural-gas reserves.18 Most internationally accepted estimates of the size of Turkmenistan’s gas deposits vary from 2.01 trillion cubic meters (Tcm)19 to 2.9 Tcm.20 These are generally thought to be very conservative, and some estimates of potential Turkmen gas reserves have been as high as 4.49 Tcm.21 The Turkmen government has claimed that its gas reserves are much higher, at upwards of 20 Tcm, although there is no publicly available data to support these claims. Niyazov notoriously refused to allow any independent surveys of Turkmenistan to be conducted, and the Turkmen government has been uncooperative in sharing information about the actual size of the reserves that are known to it. A recently completed assessment of Turkmenistan’s gas reserves was not released,22 although it has been reported that a 2005 assessment by DeGolyer & McNaughton for the Asian Development Bank and its proposed Trans-Afghan Pipeline generated a forecast that was “lower than expected.”23 Niyazov allegedly kept the only five copies of the DeGolyer & McNaughton audit locked in his office safe, presumably because their assessment differed from the one Ashgabat wanted to advance.24 Turkmenistan’s vast potential was given increased attention with the discovery of a major new gas field in late 2006. In 2006 Turkmen authorities announced the discovery of a super-giant gas field at South Iolotansk with alleged reserves of 7 Tcm.25 If this size were to be confirmed, the new find would be about twice the size of Shtokman gas field, Russia’s fifth largest. Several months later in March 2007, the Turkmen exploration company Turkmengeologia discovered a new gas field at Osman near South Iolotansk.26 No reliable date is yet publicly available regarding the Osman platform, and it may in fact be part of the same geological system.27 Authoritative industry publications have put the size of South Iolotansk at closer to half the Turkmen public pronouncement, or roughly 3 Tcm28 to 4 Tcm,29 and the total Turkmen discovered natural-gas reserves at approximately 9 Tcm.30 On almost any reasonable estimate, these recent discoveries significantly expand the size of Turkmenistan’s reserves, and dramatically alter the regional energy balance. They also raise the stakes appreciably for Ashgabat vis-à-vis other powers in the region that have designs on its resources. Most current estimates place annual gas production at roughly 60 billion cubic meters (Bcm), with the majority of roughly 50 Bcm exported to Russia. This is down from the Soviet period: just prior to the collapse of the Soviet Union, the Turkmen SSR was producing 84.7 Bcm per year, and held approximately 70 percent of Central Asia’s gas reserves.31 Some analyses have questioned whether Niyazov may have signed contracts to supply more gas than

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Ashgabat can hope to meet.32 This possibility will be examined in greater detail in the section on export options, below. Turkmenistan’s energy infrastructure is in desperate need of investment; after years of neglect, significant investment is needed in maintenance, expansion, and upgrades.33 Russia had previously pledged to invest in Turkmenistan’s transport sector, but has not done so up to now. In 2004 one potential investor, Gazprom, reportedly chose to invest in the modernization of the Uzbek portion of the Central Asia-Center pipeline rather than support upgrades in Turkmenistan, because of doubts over the volume of Turkmen reserves.34 Such doubts, amplified by concerns about preponderant Russian influence, have influenced potential investors from other consumer states as well. Thus the country’s Soviet-era infrastructure is in large part responsible for the country’s inability to increase its export volumes, which in turn undermines the attractiveness of investment in Turkmenistan’s energy infrastructure. This issue is compounded by concerns about the level of personal expertise and competence that prevail in the Turkmen energy sector. There have been reports that the middle and upper levels of the Turkmen hydrocarbon industry suffered from a combination of mismanagement, neglect, and official harassment during Niyazov’s rule.35 Niyazov banned foreign travel, including the participation in conferences, and he also removed any officials who displayed independence or competence; all of which has had the effect of increasing uncertainty, and reducing the supply of reliable information required to overcome it. To address these deficiencies, Turkmen have begun training in Russian oil and gas universities, including Gubkin State University of Oil and Gas, State Oil Technical University (in Ufa), Polytechnic University (Tomsk), State Oil and Gas University (Tyumen), and the Oil Institute (Almetyevsk).36 The training of Turkmen petroleum engineers in Russian institutes – in Russian no less – will not only improve the state of the local hydrocarbon sector, but will add another means by which Moscow will seek to influence events.

Russian–Turkmen relations Turkmenistan is an essential component in Moscow’s resurgent foreign, economic, and energy policies. It has been well documented in recent years that Moscow has used its energy influence to advance political ends.37 Exports from Turkmenistan38 provide energy to major portions of southern Russia, thus allowing Moscow to meet its income-generating export demands in Eastern Europe. Without continued access to Turkmen natural gas, Russia would not be able to leverage gas exports for political gain, much less export gas for hard currency to European customers. As a result, Gazprom relies upon continued access to Turkmen gas in order to meet its own domestic and foreign export demand. Rising costs, including mounting domestic extraction costs and subsidized fees, and Gazprom’s recent acquiescence in the 2006 Turkmen price renegotiation, all demonstrate the extent to which the energy giant needed continued and sustained access to Turkmen gas.39 In recent years, Gazprom has become

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increasingly dependent upon inexpensive Turkmen gas in order to fulfill its European gas contracts.40 Russia is the source of nearly 50 percent of Europe’s gas imports (varying by country), and some estimates suggest that European demand will double in 30 years’ time.41 Turkmen gas is also essential for Russia in other ways. As the yields decrease in Russia’s main gas fields and production sags due to a combination of ageing infrastructure and a lack of upstream investment, Turkmen gas allows Gazprom to meet mounting European energy demands.42 Gazprom is Ashgabat’s largest trading partner, and it buys approximately 70 percent of Turkmenistan’s annual gas production.43 The importance of Turkmen gas to Russia and Gazprom was highlighted in an analysis on the day of Niyazov’s death: “Because of Gazprom mismanagement, the European part of Russia cannot exist without Turkmen gas. Control over it is a categorical imperative during the next ten years.”44 Although Russia is thought of as primarily a “producer state” within the framework of global energy markets, it has also managed to acquire some of the strategic liabilities of a “consumer state” as well, by virtue of its inordinate reliance upon the hydrocarbon reserves of a single, much smaller, and politically fragile neighbor. Under the terms of a much publicized renegotiation that concluded in September 2006, Gazprom agreed to raise the price it pays for Turkmen gas from $65 to $100 per 1,000 cubic meters (Mcm).45 The new price is a 54 percent increase, which makes it the biggest rate hike in both absolute dollars and percentage terms that Gazprom has ever paid any source, further underscoring the importance of Turkmenistan to Gazprom.46 Per the new contract with Gazprom, Turkmenistan will supply 50 Mcm/y until 2009, at which point the price will be renegotiated. As it is, the new price represents a 400 percent increase over that prevailing in the immediate aftermath of the Soviet break-up, when Turkmenistan was earning roughly $24 per Mcm. Even at current rates, however, Turkmen gas is sufficiently cheap for Gazprom to re-sell it at a hefty profit to consumers such as Ukraine. Moreover, Turkmen gas reportedly possesses certain chemical qualities that make it more energy-efficient when it burns, thereby adding extra value to Gazprom’s purchase. In actuality, this is because none of the heavier gaseous hydrocarbon (such as propane, butane, etc) which is normally separately processed as natural-gas liquids is removed from Turkmen gas, again demonstrating the extremely poor state of the technological infrastructure of the Turkmen gas industry.47 In recognition of the importance of Turkmenistan to Moscow, Russia sent senior representatives of the Kremlin to Niyazov’s funeral including Prime Minister Mikhail Fradkov and former Prime Minister Viktor Chernomyrdin. However, the Russian delegation was most noteworthy for the attendance of Gazprom CEO Alexei Miller and other senior representatives of the mega firm.48 While many other diplomatic exchanges since Niyazov’s death have conveyed the importance of Ashgabat to Russia, the presence of the senior delegation led by Gazprom’s CEO spoke volumes in itself. In the aftermath of Niyazov’s death, there was worry in the Kremlin that

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Turkmenistan might descend into chaos in the absence of a clear line of succession or any other mechanisms to ensure a peaceful transition of power. This prospect prompted some Russian law-makers to urge their government to formally reach out to Niyazov’s associates in order to prevent a possible Turkmen default its gas contracts.49 Were Turkmen gas to become unavailable for any reason, Gazprom would be unable to source the 41 Bcm it currently sells Ukraine on short notice.50 Despite the recent price hike, Russia was also seeking to increase its gas imports from Turkmenistan in the weeks after Niyazov’s death was announced.51 Moscow was also eager to use the occasion of Niyazov’s death to draw Turkmenistan closer to Russia. This was partly a desire to restore Russian influence in the “Near Abroad” generally, but also an attempt to thwart any moves by the United States or other Western powers to increase their presence in the region.52 Central Asia had been a Russian sphere of influence since 1865, when the Russian Imperial Army had conquered Tashkent.53 The removal of the obstinate and mercurial Niyazov and the advent of a new regime in Turkmenistan presented Russia with a unique opportunity to advance its position on CIS integration, Caspian delimitation, counter-terrorism cooperation, and other military–security issues.54 It would be difficult to argue, from a Russian perspective, that such concerns were misplaced. Since the launch of Operation Enduring Freedom in 2001, the United States has projected a sizeable military presence into the region. Despite the fall of the Taliban in December 2001, the Afghan campaign does not appear to be drawing to a close in the near future. The dispersal of al-Qaeda and Taliban forces, rather than their defeat or capture, will ensure that the United States and its coalition allies maintain a military and security presence in the region for the foreseeable future. Although the political intricacies of the region present problems for the United States – it closed its air base at KarshiKhanabad, in Uzbekistan, following the events of Andijon55 in May 2005 – it remains extremely unlikely that American forces will leave the Central Asian theatre in the foreseeable future, given what is at stake in the region. These realities have only heightened Moscow’s desire to maximize their influence in Ashgabat. Another issue of concern for Moscow is the plight of ethnic Russians in Turkmenistan.56 Under Niyazov, Russian language and culture were curtailed, and dual citizenship was forbidden. Berdymukhammedov has intimated that he would restore some rights to ethnic Russians, and Moscow has encouraged the return of Russian language schools, previous banned under Niyazov’s educational “reforms.”57 Russia has significant leverage in Turkmenistan. During Niyazov’s reign, it was rumored that Gazprom and the Russian security services had extensive contacts throughout the country in order to protect Russian strategic interests. Russian security and intelligence services have developed close relationships with their Turkmen colleagues, in particular the Committee for National Security (NKB).58 Prior to Niyazov’s death, there were reports that Gazprom and

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elements of the Russian security services were working together covertly to advance Russian energy interests in the country.59 Moscow has worked hard to ensure that its position and influence in Turkmenistan are maintained during the political transition, and during Berdymukhammedov’s tenure.60 On the eve of the Turkmenbashi summit, Russian influence was seen to have returned, and the Moscow paper Vremya Novostei quoted Kremlin insiders as satisfied that “a proRussian trend in Turkmenistan’s post-Niyazov foreign policy” had emerged.61 Since Berdymukhammedov’s election in February 2007, he has met with President Vladimir Putin on several occasions, including an official visit to Moscow in April, an informal CIS summit in June in St Petersburg, and a farreaching energy summit at Turkmenbashi in May. Various issues have been discussed, including increased access for Russian energy firms, greater rights for ethnic Russians, and closer military cooperation. Since Niyazov’s death, Russia has secured a number of energy deals in Turkmenistan.62 Adding to the close hold Moscow has on Turkmenistan’s gas reserves, in June 2007 LUKOIL (Russia’s largest oil company) was awarded the rights to develop three very promising oil fields.63 Russia has also succeeded in gaining greater rights for Russian speakers, and increased access to Russian language in Turkmen schools.64 Discussion of closer military cooperation has included increased counter-terrorism collaboration65 and Russian reactivation of Soviet-era missile and air-defense facilities located in Turkmenistan.66 In fact, in advance of Berdymukhammedov’s attendance of the CIS summit in St Petersburg, there was a suggestion that Putin would convince Turkmenistan to upgrade its membership in the organization.67 While he failed on an institutional level, on a personal level, Putin has managed to make himself an indispensable ally to Berdymukhammedov. Berdymukhammedov saw Putin at the Turkmenbashi summit just days before Chief of the Presidential Guards, Lieutenant General Akmurat Rejepov, was dismissed and arrested in May 2007.68 It is hard to believe that the two leaders did not discuss the matter, although that cannot be known with certainty. There have even been suggestions that Berdymukhammedov flew with Putin on the Russian President’s airplane from Ashgabat to Turkmenbashi for the gas summit out of more than just diplomatic courtesy. According to some assessments, in the aftermath of the purges in the Turkmen security services, Berdymukhammedov may feel more comfortable in the company of his Russian colleague.69 It was at the Turkmenbashi energy summit that Russia secured its biggest victory in post-Niyazov Turkmenistan. In May 2007, Putin and Berdymukhammedov, along with Kazakh President Nursultan Nazarbaev, declared their intent to expand and upgrade gas-transport pipelines from Turkmenistan and Kazakhstan along the Caspian coast to Russia.70 These upgrades mark a setback to other competing export options for both the Central Asian states concerned, and include an agreement to restore their combined delivery capacity to Russia up to 50 Bcm/y by 2010.71 For Russia and Gazprom, a compliant and like-minded government in Ashgabat – one that ensures that the gas keeps flowing – is the main priority.

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Moscow’s increasingly linked foreign, economic, and energy policies rely upon continued access to Central Asian hydrocarbons, particularly Turkmen gas. Since Niyazov’s death Moscow has been best positioned to influence the unfolding events in Turkmenistan, and it has since made use of that position to make sure that Turkmenistan does not slip away.

Berdymukhammedov’s new policies Since assuming the presidency, Berdymukhammedov has sought to enact a series of measures to revitalize and reinvigorate the Turkmen energy sector. Publicly, Berdymukhammedov pledged to pursue the policies established by his predecessor, using the occasion of State Flag Day and the anniversary of Niyazov’s birthday to affirm his intention to follow the lead established by Turkmenbashi.72 However, in practice, Berdymukhammedov has actually acted much more shrewdly. In the first six months of his presidency he reassured jittery international markets, created a new agency within the office of the president to coordinate energy policy, and embarked on a cautious foreign-policy drive aimed at re-engaging with Turkmenistan’s neighbors and the international community. This is perhaps the greatest change from the Niyazov era of strict isolationism, and it represents a recognition by Berdymukhammedov that Turkmenistan needs to open up to foreign investment and pursue a limited reengagement with the international community in order to develop Turkmenistan’s economic potential. In the hours after Niyazov’s death was announced, Berdymukhammedov appeared on television and stated that the situation was stable and that all contracts for foreign deliveries would be honored. He stated, “Consumers of our oil and gas should not worry. Turkmenistan will respect its obligations and no event can affect our deliveries.”73 A week after Berdymukhammedov had assumed the presidency Oil and Gas Minister Gurbanmurat Atayev appeared before a joint session of the State Security Council and Council of Ministers to report that “all sectors of the oil and gas complex of the country are functioning in line with set parameters. Agreements with foreign partners on Turkmen natural-gas supply are being accurately implemented with the strict observance of the agreements signed.”74 Similarly, in March 2007, Tachberdy Tagiyev, Deputy Chairman of the Council of Ministers for Oil and Gas, announced a 20 percent rise in gas production for 2007, up to 80 Bcm.75 Berdymukhammedov has said that there would be a role for foreign companies in developing Turkmenistan’s oil and gas resources, and he pledged that “the state will put as much investments in this sector as necessary for its further development.”76 This has been a departure from the way things had been handled under Niyazov. Since Berdymukhammedov made this pledge in January 2007, BP and Chevron77 have opened offices in Turkmenistan, CNPC and LUKOIL have increased their business in the country, and Arab companies have been invited to participate in the Turkmen hydrocarbon sector.78 One of Berdymukhammedov’s most significant steps in reinvigorating the

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Turkmen energy sector has been his effort to reform the industry. A key part of this has been the creation of a new “State Agency for the Management and Use of Hydrocarbon Resources under the President of Turkmenistan.”79 This was an important step because in September 2005 Niyazov had disbanded the State Agency’s predecessor, the “Competent Body on the Use of Hydrocarbon Resources” and instead vested important policy- and decision-making functions in the far less capable Ministry of Oil and Gas Industry and Mineral Resources.80 Berdymukhammedov’s new State Agency will be responsible for overseeing all aspects of national energy policy, including license distribution, contract implementation, and other associated activities, including equipment procurement, infrastructure development, and investment management.81 Berdymukhammedov has also sought to pursue a policy of limited reengagement with Turkmenistan’s neighbors and the international community, and this marks a major deviation from the policies of his predecessor. Niyazov set Turkmenistan on a foreign policy of “permanent neutrality” which was designed to facilitate greater international gas sales, regardless of the consumer’s political alignment. While this policy may have been intended to maximize Turkmenistan’s international interactions, in reality it had just the opposite effect. Carried to the extreme, Niyazov refused to participate in most international organizations, and Turkmenistan stayed out of most of the regional groups, including the Central Asian Cooperation Organization, Collective Security Treaty Organization, Shanghai Cooperation Organization, and Eurasian Economic Community.82 Niyazov even downgraded Turkmenistan’s membership in the CIS in August 2005 to that of an “associate member.” As a result of this and other policies, Turkmenistan grew incredibly isolated, and it is this isolation that Berdymukhammedov is now seeking to move beyond. Berdymukhammedov recognizes that Turkmenistan must break out of its self-imposed isolation in order to develop its hydrocarbon resources. This is vital to attract much needed-foreign investment and economic contacts. Toward this end, Berdymukhammedov has set about re-establishing relations with Ashgabat’s neighbors in order to get the required industrial upgrades, training, and educational overhauls needed to be competitive.83 While Ashgabat had previously enjoyed bilateral relations with a number of countries under Niyazov, relations were frequently strained. The difficult nature of maintaining positive relations was further complicated by reports of widespread domestic repression and an inhospitable investment climate. Berdymukhammedov has expressed his support for the construction of multiple export pipelines already conceptualized during Niyazov’s rule. During his presidential campaign he stated that the most promising proposals were for export routes to “China and Afghanistan–Pakistan–India.”84 Although we may never know, it remains probable that this was said for political reasons, as only several months later Berdymukhammedov signed a major deal to increase Turkmenistan’s gas exports via Russian-controlled pipelines northwards along the Caspian Sea.

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Non-Russian export options Apart from the decrepitude of its downstream infrastructure, Turkmenistan’s ability to exploit its gas reserves is restricted by its relative lack of export options. At the present time, there are two export routes for Turkmen gas: northwards to Russia or to Iran in the south. The overwhelming majority of Turkmen exports flow to Russia, as a result of the existing pipeline infrastructure constructed during the Soviet-era. Approximately 50 Bcm is exported yearly to Russia, while a much smaller amount, roughly between 5 Bcm/y to 8 Bcm/y is exported to Iran. Niyazov sought to engage numerous parties in pipeline negotiations, and he signed deals with the Chinese, in addition to expressing interest for routes across the Caspian and Afghanistan. These export options, plus the current route to Iran, are evaluated below. In order to meet all these obligations, Turkmenistan will have to at least triple its current gas production.85 China Recently Turkmenistan has sought to broaden its export options and diversify away from Russia’s near monopsony on gas purchases, and toward that end former President Niyazov led the entire Turkmen government on an official visit to Beijing in April 2006.86 During the visit Niyazov and Chinese Premier Hu Jintao signed a preliminary agreement to sell 30 Bcm per year to Beijing.87 The agreement also called for the construction of a 3,000-kilometer pipeline to deliver the gas, to be completed by 1 January 2009.88 With a completion date less than two years away, no arrangements for financing, and construction still yet to begin, this project appears increasingly unlikely. The pipeline, estimated to cost upwards of $10 billion, faces a number of challenges, including the fact that by necessity it will cross the territory of two other states (Uzbekistan and Kazakhstan) before it even reaches China, and one of these, Uzbekistan, may or may not be inclined to facilitate transit.89 The pipeline will have to run through the territory of Kazakhstan at the very least; it will be much longer if it only goes through Kazakhstan; however, this might allow for it to link up with other projects. Alternatively, the planned pipeline to China would need to thread through Uzbekistan and Tajikistan, although as Tashkent has cut off energy in transit to Dushanbe in the past, this might not be the best option.90 Nonetheless, China may proceed with the Turkmen gas pipeline despite feasibility or funding questions, strictly as a strategic investment to secure locked-in access to known sizeable gas reserves, much as it did with the Kazakh oil pipeline.91 In light of increasing economic challenges with the project, geopolitical realities may account for Beijing’s sustained interest in seeing the Turkmen gas pipeline continue. It is questionable whether or not Turkmenistan has the capacity to meet this and its other export contracts,92 and it seems likely that Niyazov’s interactions with the Chinese were intended to help Turkmenistan maximize its position in

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its recent price negotiations with Gazprom.93 Industry sources have questioned the quality and size of the fields in Turkmenistan believed to have been designated to supply the gas for the planned pipeline to China.94 Early assessments after Niyazov’s death questioned the long-term viability of Chinese interests in Turkmenistan.95 Nonetheless, at the end of November, the China National Petroleum Corporation signed a three-year deal worth an estimated $150 million to explore the South Iolotansk gas field, and since Berdymukhammedov’s presidency in February 2007, Chinese firms have continued to do business in Turkmenistan. Including CNPC, which was granted the first foreign operator’s license to survey and extract raw materials issued to a foreign company in the history of Turkmenistan.96 Iran Turkmenistan currently exports 5 to 8 Bcm per year to northern Iran via the Korpeje–Kurt Kuy pipeline, and has been doing so since December 1997.97 The gas is sourced from Turkmenistan’s Dauletbad field, which has been in production since the Soviet period, and is frequently discussed as a possible source for a Trans-Afghan pipeline.98 Iran uses the gas to run the power plant at Neka, an important facility for providing electricity to northern Iran.99 The Korpeje–Kurt Kuy pipeline owes its impetus in part to the 1998 pricing dispute with Gazprom which led to the closure of Turkmenistan’s only export route.100 This incident greatly effected Niyazov,101 and no doubt impacted his later decisions to pursue multiple pipeline proposals and his 2006 successful price renegotiations with Gazprom. Turkmenistan was the first Soviet successor state to construct a non-Russian export option, and this remains Ashgabat’s only independently controlled avenue to export its natural gas. There were hopes that the opening of Korpeje–Kurt Kuy pipeline would give steam to plans to eventually extend the pipeline to Turkey, thereby delivering Turkmen gas to Western Europe through Iran.102 However, the position of the US government regarding Iran and investment in its energy sector effectively killed any hopes of skirting Russia with a southern Caspian land route to Europe. In order to facilitate greater gas exports to Iran, in 2005 Ashgabat installed a new $140 million gas processor on the pipeline.103 According to Turkmen contracts, shipments were scheduled to rise from an initial 2 Bcm/y up to 7 Bcm/y by 2003 and then to 12 Bcm/y by 2006,104 although they have not risen much above 5–8 Bcm/y. There is the capacity to deliver up to 14 Bcm/y, and Iran has stated that it would like to increase imports up to 14 Bcm/y.105 One of the reported reasons that Iran has not increased its gas purchases is not because Ashgabat cannot accommodate the demand, but rather because of a failure to reach a suitable price agreement beyond the $42/Mcm.106 However, it remains to be seen if Ashgabat will be able to meet increased Iranian demand, as well as the increased Russian and Chinese demand to which it has committed itself.

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Trans-Afghan Pipeline The Trans-Afghan Pipeline (TAP) or the Turkmenistan–Afghanistan–Pakistan pipeline is another frequently discussed alternative export option for Turkmen natural gas. Most variations of this project involve building a pipeline that would originate from Turkmenistan’s Dauletabad field across Afghanistan to Pakistan, and possibly continuing on to Pakistan and even India.107 This idea was originally known as the Unocal plan, after the American partner Unocal (now part of ChevronTexaco) which abandoned the project in 1998 after the East African Embassy bombings and subsequent attacks on al-Qaeda training camps in Afghanistan. Turkmenistan was an eager backer of the plan, which was proposed by Unocal and the Saudi-based Delta corporation in 1994,108 and its revival under different auspices is by no means out of the question. Another version would have the pipeline dodge unstable Afghanistan and track through Iran on the way to Pakistan. In 2005 a feasibility assessment for this pipeline was completed for the Asian Development Bank. It estimated that the 1,600-km pipeline would cost $3.5 billion, and would be economically and technically feasible, in the event that financing was secured. It was estimated that 15– 30 Bcm of gas per year would move through the pipeline. Nevertheless, a pipeline route that avoids Afghanistan by way of Iran would incur the wrath of the US Iran Sanctions Act, which penalizes investments in the Iranian energy sector exceeding $20 million. Thus financing would be a concern, and not the only one. Trans-Caspian Gas Pipeline The United States for its part has been eager to have Turkmenistan join a project to build a pipeline across the bottom of the Caspian Sea to Baku, where it would link into the South Caucasus Pipeline and the planned Nabucco Pipeline. The TransCaspian Gas Pipeline (TCGP) would have delivered an estimated 25–30Bcm per year from Turkmenbashi to Western European markets.109 Completion of the TCGP would have given Ashgabat another critical option for the export of its most vital commodity. The Trans-Caspian project was intended to provide an alternative to both the current Russian-dominated route and the prospect of expanded Iranian exports, and was eagerly endorsed by both the EU and the US. Washington had funded the original feasibility studies for the project dating back to 1998.110 The notion of building a gas pipeline across the Caspian is problematic for a number of reasons, including cost, feasibility, and political will. The TCGP has been estimated to cost upwards of $5 billion,111 with little serious discussion about financing. The feasibility of the project has also been questioned because of earthquake risks112 and the geology of the seabed floor,113 although it is thought that these factors could be mitigated through technology.114 A number of other factors also contributed to the demise of the TCGP, including a failure of the littoral states to settle on the delimitation of the Caspian Sea, and Niyazov’s reported demand for an up-front payment of $300 million115 to $400 million.116

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Ultimately, it seems that there is not the political will to build a trans-Caspian pipeline in the near future. This was reinforced by the May 2007 deal between Presidents Berdymukhammedov, Putin, and Nazarbaev, described earlier, to build a new pipeline along the shore of the Caspian and increase Turkmen gas exports to Russia.117

Conclusion The death of President Niyazov vaulted Turkmenistan into the international spotlight. Its massive hydrocarbon wealth again highlighted the central role that Ashgabat plays in Russian and European energy security. For both Moscow and energy giant Gazprom, Niyazov’s death presented an unparalleled opportunity to maximize Russian strategic influence in Turkmenistan and the prospect to further lock-up access to critical Turkmen gas. Thus far, Russia has been extremely successful in attaining its goals. Not only has it made sure that the very precarious situation presented by Niyazov’s passing did not end Gazprom’s special relationship with Turkmenistan, but Russia has also been able to increase its standing in the Central Asian state. The Turkmenbashi energy summit and the vital support given to Berdymukhammedov have all reinforced Gazprom’s position as the primary consumer of Turkmen gas. Despite the gains made by Russia and Gazprom, however, the prospects for conflict still exist. The political transition from the kleptocratic Niyazovist system still has yet to unfold in its entirety, and the prospects for uncivil government remain. Moreover, China’s interests in securing locked-in access to known hydrocarbon sources may lead Beijing to pursue a gas pipeline through Kazakhstan despite the economic realities, for purely strategic reasons. What kind of response such a move might invite from Russia is hard to anticipate. As this chapter has demonstrated, Niyazov highly valued having options, and playing different actors off against one another. In the future, Berdymukhammedov may follow his predecessor’s example, and turn against Moscow. In that event, when challenged on matters vital to its own economic vitality and energy security, Russian influence may shift from a willingness to renegotiate prices and terms to something more closely resembling overt imperial meddling in an attempt to maintain strategic influence.

Notes 1 As with any work on Turkmenistan, there are considerable gaps in the available information, in particular with regard to the inner workings of the government in Ashgabat. The near-complete self-imposed isolation of Turkmenistan, the absence of international media coverage, and the difficulty of conducting academic research in the country complicates any assessment. As a result, this and any analysis of political and economic developments in Turkmenistan is by its nature incomplete. There will always be some factors whose influence outside observers and analysts simply cannot anticipate until they have become apparent to all.

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2 Michael Fredholm, The Prospects for Internal Unrest in Turkmenistan, Camberley: Conflict Studies Research Centre, 2003, p. 5. 3 Steven Sabol, “Turkmenbashi: Going It Alone,” Problems of Post-Communism 50/5, September–October 2003, p. 49. 4 International Crisis Group, “Cracks in the Marble: Turkmenistan’s Failing Dictatorship,” Asia Report 44, 17 January 2003, p. 3, http://www.crisisgroup.org/ home/index.cfm?l=1&id=1445. 5 Economist Intelligence Unit, “Turkmenistan Country Profile 2006,” p. 5. 6 Shahram Akbarzadeh, “Political Islam in Kyrgyzstan and Turkmenistan,” Central Asian Survey 20/4, 2001, p. 455. 7 Ibid. 8 See International Crisis Group, “Cracks in the Marble”; idem, “Repression and Regression in Turkmenistan: A New International Strategy,” Asia Report 85, 4 November 2004, http://www.crisisgroup.org/home/index.cfm?id=3091&l=1]; Fredholm, Prospects for Internal Unrest; J. H. Saat, Turkmenistan: People! Motherland! Leader?, Camberley: Conflict Studies Research Centre, 2005; “Inside the Mad Despot’s Realm,” The Economist, 27 May 2006, http://www.economist.com/ research/articlesbysubject/displaystory.cfm?subjectid=2743324&story_id=6982211; and the archives of news services such as the Institute of War and Peace Reporting, http://www.iwpr.net; Eurasianet, http://www.eurasianet.org; and Radio Free Europe/Radio Liberty, http://www.rferl.org. 9 “It’s a Gas – Funny Business in the Turkmen–Ukraine Gas Trade,” Global Witness, 25 July 2006, p. 4, http://www.globalwitness.org/media_library_detail.php/ 479/en/its_a_gas._funny_business_in_the_turkmen_ukraine_g. In May 2007, Deutsche Bank AG answered Global Witness’s claims, and denied that the bank ever maintained any accounts for Niyazov personally, stating that it simply held accounts for the Turkmen state and the Central Bank. See Patrick Donahue, “Deutsche Bank Denies It Helped Prop Up ‘Turkmenbashi the Great’,” Bloomberg.com, 10 May 2007, http://www.bloomberg.com/apps/news?pid= newsarchive&sid=agYviKnuF4bI. 10 See “Saparmurat Niyazov – Founder and First President of Independent Neutral Turkmenistan,” official statement of the State Information Agency of Turkmenistan, 21 December 2006; “Official Statement Confirms Nyyazow’s Death,” Agentstvo Voyennykh Novostey, 21 December 2006; and “Turkmen TV Reports Niyazov’s Death at 66 – Russian Embassy,” RIA Novosti, 21 December 2006. 11 “Turkmenbashi Dies, but Impact for Turkmenistan Unclear,” Eurasianet.org, 21 December 2006, http://www.eurasianet.org/departments/insight/articles/eav122106. shtml. 12 John C. K. Daly, “The Curious Death of Turkmenbashi,” Jamestown Foundation occasional paper, January 2007, http://www.jamestown.org/docs/JamestownDeathofTurkmenbashi.pdf. 13 Maureen S. Crandall, Energy, Economics, and Politics in the Caspian Region: Dreams and Realities, Westport, CT: Praeger Security International, 2006, p. 95. 14 “Worldwide Look at Reserves and Production,” Oil & Gas Journal 103/47, 19 December 2005, p. 24. 15 “Rank Order – Oil – Proved Reserves,” CIA World Fact Book 2007, https://www. cia.gov/library/publications/the-world-factbook/rankorder/2178rank.html. 16 Ibid. 17 United States Energy Information Administration, “Central Asia,” http://www.eia. doe.gov/cabs/centasia/full.html. 18 In 1998, the International Monetary Fund estimated that Turkmenistan possessed the sixth-largest reserves. See Dale Gray, “Energy Tax Reform in Russia and Other Former Soviet Union Countries,” Finance & Development 35/3, September 1998, http://www.imf.org/external/pubs/ft/fandd/1998/09/gray.htm. In one of the best

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C. Boucek articles on the Turkmen energy sector, Nancy Lubin states that Ashgabat possesses the third-largest gas reserves. See her “Turkmenistan’s Energy: A Source of Wealth or Instability?,” in Robert Ebel and Rajan Menon, eds., Energy and Conflict in Central Asia and the Caucasus, Lanham, MD: Roman & Littlefield, 2000, pp. 107–21. “Worldwide Look at Reserves and Production,” p. 24. British Petroleum, BP Statistical Review of World Energy, June 2007, http://www.bp.com/statisticalreview. Anoushiravan Ehteshami, “Geopolitics of Hydrocarbons in Central and Western Asia,” in Shirin Akiner, ed., The Caspian: Politics, Energy and Security, New York: RoutledgeCurzon, 2004, p. 70. See for instance Tommasso Nelli, “Energy Competition Likely to Intensify,” Turkish Daily News, 22 December 2006, http://www.turkishdailynews.com.tr/ article.php?enewsid=62376. United States Energy Information Administration, “Central Asia.” “Mild Optimism in Turkmenistan Following President’s Death,” European Gas Markets, 12 January 2007. Roman Kupchinsky, “Turkmenistan: Potential ‘Super-Giant’ Emerges on Energy Scene,” Radio Free Europe/Radio Liberty, 10 November 2006, http://www.rferl.org/ featuresarticle/2006/11/cb06dcde-c0d7–40c7-b0e9–8ac1bd48f6f2.html. International Crisis Group, “Central Asia’s Energy Risks,” 24 May 2007, p. 14, http://www.crisisgroup.org/home/index.cfm?id=4866&l=1; and “Large Natural Gas Deposit Discovered in Southeastern Turkmenistan,” Turkmenistan.ru, 14 March 2007, http://www.turkmenistan.ru/?page_id=3&lang_id=en&elem_id=9610&type= event&sort=date_desc. See International Crisis Group, “Central Asia’s Energy Risks,” p. 14n, for more information and citations about the Osman platform. “Mild Optimism in Turkmenistan.” “Turkmen Claim Another Giant Gas Discovery,” European Spot Gas Markets, 15 March 2007. “Mild Optimism in Turkmenistan.” M. E. Ahrari, The New Great Game in Muslim Central Asia, McNair Paper number 47, Washington, DC: National Defense University Institute for National Strategic Studies, 1996, p. 16, http://www.ndu.edu/inss/mcnair/mcnair47/mcnair 47.pdf. “Few Will Mourn the Passing of Eccentric Dictator,” Asia Africa Intelligence News Wire, 23 December 2006. Michael Ritchie, “Turkmenistan Seen Cultivating Gas Markets under New Leadership,” International Oil Daily, 8 January 2007. “Turkmenistan Security,” Jane’s Sentinel Security Assessment, 28 December 2006. “Mild Optimism in Turkmenistan.” “First Turkmen Students Training in Russia Oil & Gas Universities,” ITAR-TASS, 7 October 2007. “Breaking Free of Gazprom,” Jane’s Foreign Report, 14 December 2006. “Trouble in Turkmenistan,” Japan Times, 28 December 2006, http://search.japantimes.co.jp/cgi-bin/ed20061228a1.html. “Does Gazprom’s Tail Wag Russia’s Dog?” Jane’s Foreign Report, 25 May 2006. “China’s March in Central Asia Stirs Concern,” Petroleum Intelligence Weekly, 4 December 2006, p. 1. Christopher Boucek, “Energy Security Implication of Post-Niyazov Turkmenistan,” Central Asia-Caucasus Analyst, 10 January 2007, http://www.cacianalyst.org/ ?q=node/4378. Ibid. Jean-Christophe Peuch, “Turkmenistan: New President Modifying Niyazov’s Neu-

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trality Policy,” Radio Free Europe/Radio Liberty, 11 May 2007, http://www.rferl. org/features/features_Article.aspx?m=05&y=2007&id=D1165CF8–4CE2–4E7EB13A-F8CDD86057F3. Victor Yasmann, “Russia: Death of Turkmen Leader Prompts Integration Hopes, Gas Worries,” Radio Free Europe/Radio Liberty, 21 December 2006, http://www. rferl.org/features/features_Article.aspx?m=12&y=2006&id=080C63AE-3F1D4460-A2DC-E43EC7472CAB. Rachel Graham, “Gazprom, Turkmenistan Agree 54% Gas Price Hike,” Platts Oilgram News 84/170, 6 September 2006, p. 6. In November 2007 Gazprom agreed to pay $130 per hcm for Turkmen gas, with a further hike to $150 later in 2008. Julia Nanay (Petroleum Finance Corporation), remarks given at the Heritage Foundation, Washington, DC, 16 January 2007. Author’s interview, September 2007. Daly, “Curious Death,” p. 8. Simon Saradzhyan, “Niyazov Dies, Leaving No Heir,” Moscow Times, 22 December 2006, http://www.themoscowtimes.com/stories/2006/12/22/001.html. Based upon a research note written by the Moscow office of Deutsche UFG Bank, “Niyazov Dead; Gas-Dependant Ukraine Asks What Next,” Eastbusiness.org, 22 December 2006. John Roberts, “Turkmenistan Ups Drilling in Chinese Interest Zone,” Platts Oilgram News 85/5, 8 January 2007, p. 5. Saradzhyan, “Niyazov Dies.” Adeeb Khalid, Islam after Communism: Religion and Politics in Central Asia, Berkeley: University of California Press, 2007, p. 34. The Russian army had been moving southward for 150 years before this. Roger McDermott, “Putin Seeks Closer Ties with Turkmenistan,” Eurasia Daily Monitor, 20 February 2007, http://www.jamestown.org/edm/article.php?article_id= 2371923; and idem, “Neutral Turkmenistan Presents Security Dilemma in the Caspian,” Eurasia Daily Monitor, 2 January 2007, http://www.jamestown.org/ edm/article.php?article_id=2371760. Andijon was the final rift in an already deteriorating relationship. See Kurt H. Meppen, “US–Uzbek Bilateral Relations: Policy Options,” in John C. K. Daly et al., eds., Anatomy of a Crisis: US–Uzbekistan Relations, 2001–2005, Washington, DC: Central Asia-Caucasus Institute & Silk Road Studies Program, 2006, pp. 31–2, http://www.silkroadstudies.org/new/inside/publications/0602Uzbek.pdf. See for instance “Turkmenistan Key to Central Asian Stability,” Canberra Times, 26 December 2006. Victoria Clement, “Rewriting the ‘Nation’: Turkmen Literacy, Education, and Power in Central Asia, 1904–2004,” PhD dissertation, Columbus, OH, Ohio State University, 2005. “Turkmenistan Security and Foreign Forces,” Jane’s Sentinel Security Assessment, 28 December 2006. Boucek, “Post-Niyazov Turkmenistan.” Ritchie, “Turkmenistan Seen Cultivating Gas Markets.” Peuch, “New President Modifying Niyazov’s Neutrality Policy.” John C. K. Daly, “Turkmenistan Back in the Former USSR’s Orbit,” Eurasia Daily Monitor, 8 June 2007, http://www.jamestown.org/edm/article.php?article_ id=2372217. “Turkmenistan Grants Russia’s LUKOIL Access to 3 Fields,” RIA Novosti, 13 June 2007, https://www.usrbc.org/resources/russiannews/event/483. “Turkmen Schools to Teach More Russian” and “More Hours for Russian Language Studies in Turkmenistan Schools,” ITAR-TASS, 25 September 2007. “Putin Proposes Turkmen President to Discuss Antiterrorist Cooperation,” Interfax Russian News Agency, 24 April 2007.

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66 Open Society Institute Turkmenistan Project, “Russian Anti-Aircraft Defense in Turkmenistan?” Turkmenistan News Brief 18, 27 April–3 May 2007, part 2, item 1b, citing “Russian Anti-Aircraft Defense in Turkmenistan?” Deutsche Welle/watan.ru, 29 April 2007, http://www.soros.org/initiatives/turkmenistan/articles_publications/ publications/newsbrief_20070427. 67 Daly, “Turkmenistan Back in the Former USSR’s Orbit.” 68 Rejepov was widely considered to be the real power in Turkmenistan, and was thought to have engineered the succession that installed Berdymukhammedov as president. Rejepov served 17 years as chief of the Presidential Security Service, and he was said to be one of the few people trusted by Niyazov. His removal marks a major development for the current president. 69 “Purges and Clans in Turkmenistan,” Jane’s Intelligence Digest, 15 June 2007. 70 Vladimir Socor, “Russia Surging Farther Ahead in Race for Central Asian Gas,” Eurasia Daily Monitor, 16 May 2007, http://www.jamestown.org/edm/article.php? article_id=2372168. 71 Economist Intelligence Unit, “Central Asia Politics: Moscow’s Pipeline Coup,” 14 May 2007. 72 “New Turkmen Leader Reiterates Will Follow Predecessor’s Policy,” Turkmenistan News Brief 8, Altyn Asyr Turkmen TV, via BBC Monitoring, 19 February 2007. 73 “Battle for Power and Gas Looms in Turkmenistan,” Agence France Presse, 22 December 2006. 74 “Turkmenistan Fulfills Gas Export Commitments ‘Without Delay’ – Deputy Premier,” BBC Monitoring International Reports, citing ITAR-TASS [in Russian], 06:26 GMT, 29 December 2006. 75 Open Society Institute, Turkmenistan Project, “Turkmenistan to Boost Gas Production 20%, Double Investment in Energy,” Turkmenistan News Brief 13, 23–29 March 2007, part 2, item 3a, citing “Turkmenistan to Extract 80 Billion Cubic Meters of Natural Gas and 10.4 Million Tons of Oil in 2007,” Turkmenistan.ru, 26 March 2007, http://www.turkmenistan.ru/?page_id=3&lang_id=en&elem_id= 9667&type=event&sort=date_desc; and “Turkmenistan to Produce 80 Billion Cubic Meters of Gas in 2007,” RIA Novosti, 28 March 2007, http://en.rian.ru/world/ 20070328/62739110.html. 76 John Roberts, “Foreigners Still Have Role in Turkmenistan,” Platts Oilgram News 85/6, 9 January 2007, p. 7. 77 “Chevron to Open Office in Turkmenistan,” Interfax Russian News Agency, 26 September 2007. 78 “Turkmenia Invites Arab Companies to Develop Oil and Gas Reserves,” ITARTASS, 27 August 2007, http://www.inform.kz/showarticle.php?lang=eng&id= 154685. 79 “Turkmenistan Sets up State Hydrocarbon Agency,” Interfax Russian News Agency, 12 March 2007; and John C. K. Daly, “A New Day for Turkmen Energy,” Eurasia Daily Monitor, 4 April 2007, http://www.jamestown.org/edm/article.php?article_ id=2372075. 80 “Turkmenistan Sets up State Hydrocarbon Agency;” and International Crisis Group, “Central Asia’s Energy Risks,” p. 5n. 81 “Turkmenistan Security.” 82 “Turkmenistan External Affairs,” ibid. 83 “Is Turkmenistan Returning to CIS Fold?” News Briefing Central Asia, 6 June 2007. 84 Ritchie, “Turkmenistan Seen Cultivating Gas Markets.” 85 “Turkmenistan Security.” 86 See Sergei Blagov, “Turkmenistan Seeks to Strengthen Energy Ties with China,” Eurasia Daily Monitor, 10 April 2006. 87 “Chinese, Turkmen Presidents Sign Energy Deal,” Radio Free Europe/Radio Liberty, 3 April 2006, http://www.rferl.org/featuresarticle/2006/04/024d3d38-

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a5a7–44ce-be8e-a996f8bc6466.html; and “China Pursues Nearby Energy,” Oil & Gas Journal, 10 April 2006. John Roberts, “China to Help Develop Turkmen Resources,” Platts Oilgram News 84/161, 23 August 2006, p. 6. In September 2007 the Russian paper Vremya Novostey suggested that the pipeline would transit 4,500 kilometers inside China. See Aleksey Grivach and Arkadiy Dubnov, “Turkmen Green Light,” Vremya Novostey, 4 September 2007. “Turkmenistan Eyes Gas Sales to China,” World Gas Intelligence, 12 April 2006. “Uzbeks Hold Key to Turkmen–Tajik Energy Deal,” News Briefing Central Asia, 28 February 2007. Ritchie, “Turkmenistan Seen Cultivating Gas Markets.” Kathleen J. Hancock, “Escaping Russia, Looking to China: Turkmenistan Pins Hopes on China’s Thirst for Natural Gas,” China and Eurasia Forum Quarterly 4/3, 2006. Boucek, “Post-Niyazov Turkmenistan.” “Turkmen Gas Gets Price Boost from Gazprom,” Petroleum Intelligence Weekly, 11 September 2006. “Mild Optimism in Turkmenistan.” Grivach and Dubnov, “Turkmen Green Light.” Nancy Lubin, “Turkmenistan’s Energy: A Source of Wealth or Instability?,” in Ebel and Menon, Energy and Conflict, p. 108; and International Crisis Group, “Central Asia’s Energy Risks,” pp. 15 and 18. United States Energy Information Administration, “Caspian Sea: Natural Gas,” http://www.eia.doe.gov/emeu/cabs/Caspian/NaturalGas.html. Julia Nanay (Petroleum Finance Corporation), remarks given at the Heritage Foundation, Washington, DC, 16 January 2007. International Crisis Group, “Central Asia’s Energy Risks,” p. 14. Ibid. Germana Canzi, “Turkmenistan’s Caspian Resources and Its International Political Economy,” in Akiner, The Caspian, p. 196. United States Energy Information Administration, “Central Asia.” Crandall, Energy, Economics, and Politics, p. 98. Nanay, remarks at the Heritage Foundation, 16 January 2007. The National Iranian Gas Export Company (NIGEC) announced in September 2007 that gas imports from Turkmenistan beginning in 2008 are expected to reach 14 billion cubic meters per year, although no details were provided about pricing. See “Turkmenistan Gas Exports to Iran to Rise from 2008,” Mehr News Agency, 18 September 2007, http://www.mehrnews.ir/en/NewsDetail.aspx?NewsID=554657. Ritchie, “Turkmenistan Seen Cultivating Gas Markets.” United States Energy Information Administration, “Caspian Sea: Natural Gas”; and Crandall, Energy, Economics, and Politics, p. 96. Rustam Burnashev and Irina Chernykh, “Turkmenistan’s Armed Forces: Problems and Development Prospects,” Central Asia and the Caucasus 4/22, 2003, p. 41; see also Ahmed Rashid, Taliban: Militant Islam, Oil & Fundamentalism in Central Asia, New Haven, CT: Yale University Press, 2001. Crandall, Energy, Economics, and Politics, p. 96. Abdujalil Abdurasulov, “Turkmenistan: Multiple Pipelines Still Possible,” Institute for War & Peace Reporting, 19 May 2007, http://www.iiss.org/whats-new/iiss-inthe-press/may-2007/turkmenistan-pipelines-still-possible. Vladimir Socor, “Azerbaijan Spearheading Initiative on Trans-Caspian Gas Pipeline,” Eurasia Daily Monitor, 30 March 2006. Crandall, Energy, Economics, and Politics, p. 96. Author’s interview, December 2006. Author’s interview, September 2007.

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115 Nelli, “Energy Competition.” 116 Crandall, Energy, Economics, and Politics, p. 96. 117 See Economist Intelligence Unit, “Central Asia Politics: Moscow’s Pipeline Coup,” cited in EIU ViewsWire, 14 May 2007; and Abdurasulov, “Multiple Pipelines Still Possible.”

9

Energy security The case of Venezuela Harold A. Trinkunas

Venezuela is the fourth largest oil exporter to the United States, and the United States is the largest customer for its energy production. Venezuela holds some of the largest oil reserves in the world, the largest if ultra-heavy crude deposits are included in the calculation.1 Geographic proximity, low transportation costs for oil products across the Caribbean, and the well-developed production and distribution network connecting the energy industries in both countries traditionally formed the basis for a stable and mutually beneficial relationship. Venezuela’s leadership in OPEC and its regional ambitions in Latin America have occasionally generated friction in its relations with the United States in the past. Yet such incidental tensions pale in comparison to the contentious state of the US–Venezuelan relationship today. President Chávez’s references to the ‘stench of sulfur’ in his comments following President Bush’s UN appearance in 2006 confirm the hostility and tension that characterize relations between the two governments.2 Given the importance of Venezuela as an oil producer and President Chávez’s perception of the United States as a major threat to his Bolivarian revolution, it is sensible to consider the prospects for the militarization of Venezuela’s oil policy. Since their inception, international oil markets have largely been secured through economic, contractual and legal mechanisms rather than force. This security is a byproduct of the efforts made by major powers to police the global commons and ensure the free flow of commerce between states. The use of legal and economic mechanisms to secure the distribution of oil across borders is not the inevitable product of an oil-based international economy. We only have to recall the alternative examples provided by the vertical integration of early oil trusts in the United States, or the subordination of market relations to strategic requirements during the two World Wars, to visualize alternatives. The use of legal mechanisms to protect the security of energy markets is the product of the give and take between transnational oil companies and oil-producing states. In some instances, including that of Venezuela, transnational oil companies in the early twentieth century were part of the process by which domestic legislation governing energy exploration, management, and distribution was written in oilproducing states, most of which were (and are) in what is now termed the developing world, and lacked access to alternative sources of expertise or models for

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regulating transnational corporations. As these states modernized and became integrated into the international economy, they have been able to construct the tools required to regain authority over their own oil resources, particularly at times when energy markets are tight and prices are high.3 During most of the twentieth century, Venezuela has been aligned with the West, and it has accepted the basic rules for the management of international energy markets laid down by Western powers. However, it has consistently worked with other oil-producing states to shift the terms of trade to favor producers, and also to shift the relative power between oil-producing states and transnational oil companies in favor of governments. This includes convincing other major oil producers in the Middle East to take a more assertive stance visà-vis transnational energy corporations and consumer states, eventually leading to the creation of OPEC. During the 1980s and 1990s, it also pursued an expansive international strategy of acquiring refineries and oil companies in consumer states as a way of guaranteeing long-term access to distribution and markets. Venezuela’s energy strategy has been to extract the maximum rent from international energy markets, primarily to support domestic political objectives, and also to advance a leadership role for Venezuela in Latin America and among oilproducing states. Venezuela has traditionally sought positive relations with its main customer for oil exports, the United States. Prior to Hugo Chávez’s election as President in 1998, most Venezuelan officials believed that their foreign-policy goals were essentially compatible with US interests, and they certainly did not expect the use or threat of force to be required to achieve them; nor did they expect that their energy policies could make their country a potential object of strategic calculation by others. Under Hugo Chávez, however, Venezuelan policy has been marked by a suspicion of markets as such, combined with a general hostility to US interests in the region, and a perception that the US might act to reverse the Bolivarian revolution itself. These considerations have added a new dimension to Venezuela’s energy strategy. Internationally, Venezuela continues to work to build its influence in Latin America and among oil-producing states. However, it is also using the rents it derives from oil to build partnerships with a network of states and political movements that share its disaffection from the United States, and to develop relationships with new customers such as China. This has included advocating a policy of replacing some market mechanisms for the distribution of oil with bilateral and regional energy-integration partnerships, particularly in Central and South America. Domestically, it has sought to reassert state authority over the operations of international oil companies, returning to the more nationalistic energy policies of the 1970s and 1980s. The Chávez administration is critically dependent on high levels of rents derived from the sale of oil to support a populist and redistributive economic policy at home. This has meant that many mechanisms designed to ameliorate the impact of windfall oil profits on inflation, and on the amplitude of the swings within the Venezuelan business cycle generally, have been sidelined, including an autonomous central bank and a macroeconomic stabilization fund. Instead, proceeds from

Energy security: the case of Venezuela 177 energy production have increasingly fallen directly under the control of the presidency, where they are more readily subject to manipulation for political or strategic purposes. The relatively high price of oil on international markets during the past three to four years has provided the Chávez administration with the leverage to accomplish its domestic objectives, but it has met with more limited success internationally. In addition, the perceived threat posed by the United States and regional allies like Colombia is driving new thinking in Venezuela on how to provide for the national defense. This includes new military doctrine centered on asymmetric warfare and an international arms-purchasing spree. As Venezuela has begun to challenge the United States and its interests, its leadership has also begun to think more seriously about how to provide for both regime security and national security. Action has lagged, however, and the level of investment and social reorganization needed to provide for a credible deterrent against US intervention was only at a preliminary stage in 2007. The novelty and significance of changes to Venezuela’s energy strategy under the Chávez administration are most apparent when viewed in light of the evolution of Venezuela’s oil policies prior to the 1998 election that brought Chávez to power. A brief survey of those earlier developments follows, in light of which the changes that have taken place in oil strategy during the Chávez administration can be analyzed with greater precision. The discussion will conclude by examining how changes in Venezuela’s foreign policy are raising the prospects for the militarization of its energy security.

International dimensions of Venezuelan energy policy, 1945–98 Since it became an oil-producing nation in 1922, Venezuela has alternated between two possible models of generating revenues from oil production, each with its own implications for the state’s international policies. One strategy, followed during the initial development of the oil industry, was simply to maximize profits by lowering production costs and generating revenues by increasing the volume of product sold. This strategy suited the international oil companies that founded and controlled the Venezuelan oil industry – Standard Oil’s subsidiary Creole and Royal Dutch Shell – and reflected the relative lack of control exercised by the Venezuelan state over its natural resources. An alternative strategy, favored by nationalist politicians in Venezuela, was to generate revenues by selling smaller quantities of higher-priced oil, and to then capture most of the profit in the form of “rents,” to be collected through higher taxes and royalties on producers. Because oil is a non-renewable resource, the latter strategy was preferred by those who wanted to extract the maximum rents from its production. The price of oil was beyond Venezuela’s control, set initially by international oil companies and later by more complex, competitive markets. This led Venezuelan politicians to pursue a strategy of increased national control over oil production, but also to encourage other states where oil production was

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located to gain greater control of their own oil and increase prices, taxes and royalties.4 The latter strategy came to the fore when the nationalist and populist Acción Democrática (AD) party came to power through a coup d’etat in 1945. AD quickly pursued a strategy of increasing revenues from oil production, initially pushing for a 50/50 distribution of rents between the transnational oil companies and Venezuela. Although national governments across the world were eventually to extract as much as 90 percent of the profits from oil in the form of taxes and royalties, Venezuela was really the first to set legal terms that expressly favored the state. Even when civilian politicians lost power to the military between 1948 and 1958, international oil companies did not recover much ground, and they instead reacted by shifting their investments to other lessregulated countries, particularly in the Middle East, where similar impulses toward the nationalization of the energy of the energy sector had been more effectively opposed by a combination of Western political and commercial interests. This in turn spurred Venezuelan proselytizing to the governments of oilproducing states for higher taxes on oil companies and greater state control of the production of natural resources, both as a way of gaining allies and as a means of preventing international oil companies from jurisdiction-shopping for favorable treatment across different countries.5 The logical extension of this campaign was the founding of the Organization of Petroleum-Exporting Countries (OPEC), an organization designed to replace the market dominance of transnational oil companies with an oligopoly of oil-producing states. Private sector under-investment in part explains why Venezuela decided to nationalize its oil industry in 1976, although the political boost to the populist administration of President Carlos Andrés Pérez (1974–9) was undeniably part of the attraction.6 The heyday of OPEC in the wake of the 1973–4 oil crisis marked a temporary shift in power and resources from oil-consuming states, where many transnational oil companies were headquartered, to oil-producing states. The oil wealth generated during the 1970s allowed Venezuela to pursue a more assertive foreign policy, and often one that irritated the United States. Its role in the creation and leadership of OPEC gave it a new prominence during the oil crises of this period. President Carlos Andrés Pérez promoted a Venezuelan leadership role in the non-aligned movement, and was often critical of US policies. In 1974 Venezuela re-established diplomatic relations with Cuba, a step of little economic significance, but enormous political resonance within the Western hemisphere. Venezuelan support for the overthrow of the regime of dictator Anastasio Somoza in Nicaragua in 1979 showcased a willingness to actively subvert governments once considered US allies. Venezuela also sought to contain and change US Central American policies during the 1980s through its leadership role in the Contadora group, promoting confidence-building and regional peace negotiations as alternatives to a more confrontational US stance with Nicaragua and Cuba. Part of the political importance of Venezuela in the region can be explained by its policy of strategically subsidizing oil exports to

Energy security: the case of Venezuela 179 Central America and the Caribbean. Venezuelan influence in the region, especially when backed by abundant oil money, occasionally frustrated US designs.7 The Latin American debt crisis of the 1980s and the relatively low price of oil during the same period slowly undermined Venezuela’s populist economic system and opened the doors to a change in oil strategy. Lacking the rents with which to continue the exhausted state-led development model of the 1970s and 1980s, President Carlos Andrés Pérez began a program of neoliberal economic adjustments in 1989, focused on freeing trade, markets, prices, and privatization of the state’s assets (with the exception of the vital oil industry). This generated a violent civil, and eventually military, backlash, leading to two coup attempts in 1992, and the eventual impeachment of the president in 1993. However, the political turmoil of the period also opened a window for Petroleos de Venezuela (PDVSA), the state oil company, to secure greater autonomy from the Venezuelan political class. PDVSA secured more favorable tax treatment domestically during the Ramón Velásquez transitional administration (1993–4), and it completed a transition to a new strategy designed to greatly expand oil production from 2.5 million barrels per day to over five million barrels per day, making it one of the largest oil producers in the world, and it achieved vertical integration on a transnational scale, a process which had started in the 1980s.8 The strategy of expanding production and transnationalizing the Venezuelan oil industry was essentially a return to the pre-1945 high-volume, low-price strategy, except with PDVSA as a major player in the international oil sector, with ambitions that went beyond the extraction of rents to support the government’s domestic-policy priorities. The rationale put forth by oil managers for a new transnational oil strategy was that in an era of cheap oil, such as during the 1980s and 1990s, securing access to markets in the United States and Europe for Venezuela’s relatively sour and heavy basket of crude required PDVSA to play a more active role in the energy industry in consumer nations. This type of oil required refineries to invest in more expensive technology, which PDVSA could ensure via ownership of said enterprises, and vertical integration would also capture downstream revenues in the refinery and distribution chain for petroleum products. This strategy led to the acquisition of CITGO in the United States and of significant stakes in a number of European refineries. During the Caldera administration (1994–9), PDVSA also favored opening investment in Venezuelan oil production to international companies, the so-called apertura petrolera, as a way of financing the development of additional production capacity that the company could not pay for itself. Critics later accused PDVSA of being a ‘subversive’ oil company, meaning that its strategy had the effect of denationalizing control of the Venezuelan oil industry, to the extent that its practice of investing its profits in international subsidiaries placed oil revenues beyond the reach of the state.9 These critics would return to haunt PDVSA with the election of former coup-leader Hugo Chávez in 1998. It is interesting to note that Venezuela’s oil strategies during the twentieth century share two features. The first is a certain suspicion of the fairness of markets. Both the early, rentier policy and the later, internationalist one were

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designed to limit market risks and raise the share of profits captured by Venezuela as an oil-producing state. The second is a general confidence in the ability of diplomacy and law (international and commercial), as distinct from the untrammeled activities of buyers and sellers, to provide secure access for Venezuela’s production to oil markets. The Venezuelan armed forces occasionally examined the risks posed to Venezuelan oil fields, particularly on its border with its traditional rival Colombia, but apart from this elementary sense of precaution there was no component of the state’s oil strategy that relied on military force for its success.10 Essentially, Venezuela benefited throughout this period from its alignment with the West. The United States ensured that no major extracontinental powers threatened Latin America, and it also went to great lengths to ensure the survival of a market-based system for oil production and distribution. This reduced the need for Venezuela to invest in the security of the oil industry, beyond what was required to maintain a minimum deterrence vis-à-vis its neighbors, none of whom posed a serious offensive military threat to its oil fields or sea-lines of communication in any case.

Changing strategies under the Chávez administration Since taking power in 1999, Hugo Chávez has carried out a series of revolutionary changes in Venezuelan domestic and international policies. At home, he has dismantled the checks and balances of representative democracy in favor of what he has termed participative democracy. In practice, this has meant developing a “hyper-presidentialist” system that deliberately undercuts the autonomy of major state and private-sector actors. The armed forces, the state oil company PDVSA, the central bank, and the national election council, all of which had preserved a modicum of independence under the ancien régime, have been politicized and brought under the control of the President’s supporters. Internationally, Hugo Chávez has placed his country at odds with the United States to such a degree that some militarization of Venezuelan energy security has become almost inevitable. The pursuit of a high-risk international strategy has been made possible by Chávez’s success in reasserting government control over PDVSA, the source of the resources needed to achieve his strategic objectives. An important element of Chávez’s campaign for president in 1998 was his contention that PDVSA had grown arrogant, that it had become a state within a state, and needed to be reined in. In essence, he advocated a return to state control over PDVSA and to an OPEC-centered international oil strategy. Once in office, one of President Chávez’s first priorities was altering Venezuela’s oil policy to bring it back to a high-price, lower-volume strategy, which was directly at odds with the preferred strategy of PDVSA managers. Initially, he reinvigorated state control over the oil industry through a new hydrocarbons law, higher taxes and royalties, and a strengthened Energy Ministry.11 In particular, Chávez moved to exert greater control over the management of PDVSA, replacing its leadership with outsiders, an action which violated the internal corporate norm which mandated ‘meritocracy’ for the selection of senior

Energy security: the case of Venezuela 181 leaders. When this meddling provoked a general strike in the oil industry in 2003, President Chávez took advantage of this to fire nearly 19,000 employees, including many of those involved in long-term planning through the financial, strategic development, and research arms of the industry. While his actions broke the strike, they also reduced the industry’s ability to maintain and expand oil production through new exploration, investments, and acquisitions.12 Most recently, President Chávez has forced the renegotiation of the terms of contracts that foreign, largely Western, oil companies had entered into during the apertura petrolera, and he has instead looked for new investment from non-traditional sources, particularly China.13 Although Chávez’s approach to the oil industry did not always make economic sense, it has certainly re-subordinated the sector to the state and turned it into a key instrument for sustaining his domestic political support, and for adopting a more assertive stance internationally. Venezuelan oil diplomacy under Chávez has been used to build influence among OPEC members and in the Latin America region. On its face this would appear to be a reversion to the “internationalist” policies pursued by Venezuela during the 1970s’ oil boom; but now the goal is different, at least ostensibly so. By his own account, President Chávez aims to lead a general reshaping of the international system, in order to achieve a multipolar world order in which US hegemony is checked.14 The chief source of the strategic leverage by which this can be accomplished is control of oil. Using Venezuela’s oil to achieve Chávez’s objectives required higher oil prices than those prevailing when he came to power in 1999, so one of his first foreign-policy initiatives he undertook was a coordinated effort with Saudi Arabia to raise oil prices and strengthen the role of OPEC in international energy markets. This initiative succeeded, dramatically raising oil prices from under $10 per barrel in February 1999, to over $35 by September 2000,15 and eventually over $100 per barrel in 2007 and 2008. Although his efforts to orient OPEC in a more radical political direction have so far failed, he has succeeded in developing a particularly close relationship with Iranian President Mahmoud Ahmadinejad, coordinating economic and security policies. He has also reached out to build closer ties to major non-OPEC oil producers, and in the Russian case, to acquire new military systems for a major rearmament program. Chávez has also targeted China as a major new consumer of Venezuela’s oil. Although the economics of such a relationship at current prices make little sense owing to transportation costs, the Chinese market offers Venezuela an alternative to its disproportionate historical dependence on the United States. The Chinese have shown some interest in an economic relationship, but have so far rejected Venezuelan efforts to pursue closer military and political links. Even in economic terms, a closer relationship would necessitate considerable investment to upgrade Chinese-owned refineries to allow them to process heavier, high-sulfur Venezuelan crudes. Venezuela has invested heavily in international assistance programs designed to build a coalition of regimes that share President Chávez’s suspicion of the

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United States, free markets, and capitalism. Chávez has donated oil or money to poor communities across the Americas, including the United States, and he has resurrected an old policy of providing oil at preferential rates to countries of the Caribbean and Central America, known as PETROCARIBE. He has also undertaken new initiatives to foster energy integration in the region through programs such as PETROSUR, designed to strengthen the role of government in the exploitation and commercialization of energy in the region. This even includes promoting a controversial natural-gas pipeline designed to connect Venezuela with gas consumers in the Southern Cone. Perhaps the most important target of Venezuelan oil assistance is Cuba, which receives the equivalent of over $1 billion in free or highly discounted oil per year. In return, the Venezuelan government receives assistance from Cuban doctors, educators, military trainers, and intelligence officers. Finally, Chávez has also targeted support to likeminded political movements in the region, such as Frente Farabundo Martí para la Liberación Nacional (FMLN) in El Salvador and the Frente Sandinista de Liberación Nacional (FSLN) in Nicaragua. He is also alleged to have provided material support for the election campaigns of sympathetic leaders in Ecuador (Rafael Correa), Peru (Ollanta Humala), and Bolivia (Evo Morales). It is less clear whether the Partido Revolucionario Democrático (PRD) candidate Andrés Manuel López Obrador received more than verbal support from President Chávez in the 2006 Mexican elections.16 But if he did, it would have been no more than a confirmation of a general pattern. So far, Venezuela has only achieved limited success with its oil-fueled foreign policy. President Chávez believes he has scored victories with the election of Evo Morales in Bolivia and Daniel Ortega in Nicaragua, both leaders who sympathize with Chávez’s objectives. However, it has been less successful in states such as Peru and Mexico, where Chávez’s rhetoric in favor of Ollanta Humala and López Obrador backfired by setting off a nationalist rejection of Venezuelan meddling. Perhaps the most significant sign of Chávez’s inability to translate his oil wealth into international support was the failure to secure a seat on the UN Security Council in 2006, even against a Guatemalan candidacy ‘tainted’ by overt US support. However you judge his efforts so far, however, he has succeeded in attracting the hostility of the Bush administration, and this has implications in itself for how Venezuela thinks about its energy security.

Towards a militarization of Venezuela’s energy strategy? Hugo Chávez has taken diametrically opposed policy positions to those of Venezuela’s major customer (and superpower), the United States, across a wide range of issues. These include support for Iran’s nuclear program, support for Hezbollah in its conflict with Israel, support for North Korean missile-testing, opposition to US-sponsored counter-narcotics and counter-insurgency programs in Colombia, and a close relationship with Cuba. This opposition is expressed in everything from intemperate language about US leaders to financial support for

Energy security: the case of Venezuela 183 anti-US regimes. In turn, the Bush administration has found it difficult to conceal its distaste for Venezuela’s current regime, and its glee over the brief overthrow of Hugo Chávez in April 2002 was quite apparent. Chávez has repeatedly alleged that the United States plans to invade Venezuela or assassinate him, and under the circumstances, it is not surprising that he should be thinking about how to defend Venezuelan oil and access to consumers.17 Rhetorically, Venezuelan political and military leaders have stated that that they would pursue an asymmetric defense of the national territory in the event of a US invasion.18 Concretely, what Venezuela instead seems to be doing is engaging in a fairly traditional arms-purchasing spree that appears to be designed to reconstitute military capabilities that have deteriorated considerably since the last major oil-fueled arms binge during the 1970s. The outline of the Venezuelan asymmetric defense scenario that can be gleaned from public statements by political and military leaders, and it centers on a new doctrine called Defensa Integral de la Nación (Integrated National Defense), envisions prolonged popular resistance to an external invasion. Venezuelan leaders have cited admiringly, as examples, both Vietnam’s resistance to the United States in the 1960s and Iraq’s present insurgency. Chávez has called for the creation of a million-plus man reserve as the cornerstone of this defense policy.19 Some weekend training of reservists has begun, and the professional military education provided in Venezuelan war colleges now includes a greater focus on asymmetric warfare. A large number of conferences have also been held on “fourth-generation warfare.”20 Wargames and exercises simulating popular resistance to a US invasion have also taken place in recent years, although reporting suggests that the exercises are not taken very seriously by the civilian participants. All grand geostrategic gestures to the contrary, there appears to be greater interest within the Venezuelan military in the possibility of conflict with the traditional rival, Colombia, and military officers have expressed concern that US implementation of Plan Colombia is shifting the balance of power in favor of this perennial adversary.21 If Venezuela’s objective is to seriously implement such a policy of asymmetric defense, it certainly has the right kinds of allies to provide assistance in training and planning: both Iran and Cuba have similar asymmetric defense doctrines. However, recent weapons acquisitions, which include billions of dollars of spending on AK-103 rifles, helicopters and warplanes from Russia and naval equipment from Spain, fall more in line with rebuilding Venezuela’s traditional capabilities.22 Apart from the AKs, the kinds of weapons the Venezuelan armed forces have been buying are not particularly useful for an asymmetric defense scenario. They instead appear to be substitutes for the ageing F-16, Mirage, and helicopter squadrons that now have only limited operational capabilities owing to lack of maintenance and spare parts. Equally important to the Venezuelan government, the new acquisitions also serve to break the training and doctrine links that traditionally existed between the Venezuelan and US militaries.23 The US government has been contributing to this trend by limiting Venezuela’s access to military systems from traditional European suppliers,

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which means that Russia will become more significant as a source of equipment for the Venezuelan armed forces.24 China, which could serve as another potential supplier to Venezuela, has thus far only focused on improving its commercial links, much as it has in the rest of the developing world, as part of its pursuit of secure access to raw materials. While oil rents allow Venezuela the possibility to develop new military capabilities, its role as a major oil producer in what is already a very tight market could provide other means to defend the Bolivarian revolution. Hugo Chávez has repeatedly threatened to destroy his country’s oil industry in the event of an invasion, citing admiringly Saddam Hussein’s policy in Kuwait during the Gulf War (while ignoring its futility). He has also threatened to halt oil shipments to the United States in the event that he is assassinated or overthrown; though exactly how such a policy would be enforced would seem subject to doubt.25 Other, more credible public threats include the possibility of joint action with Iran to halt oil shipments if Iran is attacked by the United States.26 There have also been rumors that Iran and Venezuela might cooperate to affect world currency markets by shifting from a dollar- to euro-denominated bourse for oil markets, thus ending the US dollar’s dominance as the world reserve currency, although some analysts consider this a very unworkable strategy.27 All these scenarios suggest that Venezuelan political leaders perceive the denial of oil to world markets to be a credible deterrent against military intervention. The ability of world oil markets to handle the disruption posed by the Venezuelan oil industry’s general strike in 2003, which cut off oil exports for several weeks, might appear to be grounds for skepticism in the eyes of a dispassionate observer. But the political leadership of Venezuela, as of most other nations, cannot be counted on for dispassion in a crisis, and a more prolonged stoppage, particularly if supported by other producing states, could pose a serious challenge to existing market mechanisms, and perhaps inspire a strategic response by consumer states.

Conclusion Historically, Venezuela has been aligned with the West, and it has profited from Western efforts to maintain a relatively stable, open, and secure international market for oil. There has been some debate in Venezuela over what strategy to pursue to maximize the economic rents provided by oil, and periodic efforts to shift the balance of power in favor of oil-producing nations, but no serious challenge to the international oil market as the best means of allocating and distributing this product. Even though Venezuela’s current foreign policy places it at odds with the United States, Venezuela is still highly reliant on international market mechanisms for deriving benefit from its oil production. Altering its preponderant dependence on the United States, as the principal consumer of Venezuelan crude, is a process that will take both time and substantial investment, either by Venezuela itself – thus diverting oil rents from other, perhaps more pressing uses – or by a potential customer willing to bet that Venezuela’s

Energy security: the case of Venezuela 185 disaffection from the US will last long enough for its investment to pay off. Politically motivated deals brokered with sympathetic political movements or potential new customers such as China all have their costs, but at present these are borne by Venezuela, rather than by other market participants; and they have not had any significant impact so far on the operations of the international energy markets. Nevertheless, Venezuelan perception of the threat from a United States hostile to the Bolivarian revolution inevitably prompts its leaders to consider the links between its military posture and its energy strategy, and perhaps to seek to strengthen them. President Chávez has assiduously sought to develop a network of alliances with like-minded governments, political movements and NGOs, but it is unclear whether these would be of much use to his regime in the event of a militarized confrontation with the United States. US troubles in Iraq have bolstered President Chávez’s claim that a vigorously prepared “asymmetric” defense will be sufficient to deter the United States; and it is safe to assume that, if he really believes this, his conduct may become correspondingly more bold. Thus far, the available evidence suggests that Chávez’s rhetoric has not translated into a practical military reality, Venezuela’s recent arms purchases notwithstanding. If we look to Cuba and Iran for examples of what is required to construct a credible defense of this nature, we can see that it is a an endeavor with enormous social costs, requiring a popular mobilization of truly revolutionary dimensions. And while President Chávez has cited Saddam Hussein’s ignition of Kuwait’s oil industry in the Gulf War of 1990–1 as an example of what he might do in the event of invasion, we have only to think a little more deeply about this comparison to realize that the deterrent effect of oil-denial is very limited. What we are left with is Venezuela choosing to pursue a foreign policy that places it at odds with the United States, yet without a credible deterrent to shield the regime; except, of course, for that provided by the energy market itself. As far as the United States is concerned, Venezuelan security is sustained less on the threat of asymmetrical resistance than by American reluctance to compromise its current market relationship with a country that it regards as a more secure and economical source of oil than would be available in more remote parts of the world. Such risks of militarization as exist rest mainly on the possibility that the leadership of one or the other of these historically friendly states might lose sight of this basic and long-standing fact.

Notes 1 Venezuela’s oil reserves tend to be relatively heavy and sour (i.e. they have a high sulfur content) because its lighter, sweeter, and more easily extractable oil fields were the first to be exploited and depleted. This means that Venezuela’s oil tends to be more costly to extract and refine than that of many of its competitors in Africa and the Middle East, and processing it successfully often requires additional capital and technology investment by refineries in oil-importing countries. Venezuela’s ultraheavy crude is usually not included in calculations of its total petroleum reserves, since extracting and refining this highly viscous type of oil is not considered

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cost-effective given current technology and costs. Mark Milner, “Chávez Seeks to Peg Oil at $50 per Barrel,” Guardian, 13 April 2006, http://business.guardian.co.uk/ story/0,,1745467,00.html. Andy Webb-Vidal “Venezuela in Final Push for Security Council Seat,” Financial Times, 15 October 2006, http://search.ft.com/ftArticle?queryText=Venezuela+ in+Final+Push+for+Security+Council+Seat&y=8&aje=true&x=8&id=061015003904 &ct=0. Terry Karl, Petroleum and Political Pacts, Berkeley: University of California Press, 1997. Luis E. Lander, “Gobierno de Chávez: Nuevos rumbos en la politica petrolera Venezolana?,” in idem, ed., Poder y Petróleo en Venezuela, Caracas: Faces-UCV/PDVSA, 2003, pp. 62–72. Karl, Petroleum and Political Pacts, pp. 71–91. Lander, “Gobierno de Chávez,” pp. 62–72. Michael Barletta and Harold Trinkunas, “Regime Type and Regional Security in Latin America: Towards a ‘Balance of Identity’ Theory,” in T. V. Paul, James J. Wirtz, and Michel Fortmann, eds., Balance of Power: Theory and Practice in the 21st Century, Stanford, CA: Stanford University Press, 2004, pp. 334–59. Juan Carlos Boué, “El Programa de Internacionalización de PDVSA: Triunfo estratégico o desastre fiscal?,” in Lander, Poder y Petróleo, pp. 133–46. Bernardo Mommer, “Subversive Oil,” in Steve Ellner and Daniel Hellinger, eds., Venezuelan Politics in the Chávez Era: Class, Polarization and Conflict, Boulder, CO: Lynne Rienner, 2003, pp. 131–46. Harold Trinkunas, “Crafting Civilian Control of the Armed Forces,” Journal of Interamerican Studies and World Affairs 43/3, Fall 2000, pp. 77–109. Lander, “Gobierno de Chávez,” pp. 82–92. Harold Trinkunas, Crafting Civilian Control of the Military in Venezuela, Chapel Hill: University of North Carolina Press, 2005. “Chávez: China to Expand Oil Cooperation,” China Daily, 23 August 2006, http://www.chinadaily.com.cn/china/2006–08/23/content_672174.htm. Harold Trinkunas, “Defining Venezuela’s ‘Bolivarian’ Revolution,” Military Review 85/3, July–August 2005, pp. 39–45. Matthew Simmons, “1998: A Year of Infamy,” World Oil Magazine 200/2, February 1999, http://www.worldoil.com/magazine/MAGAZINE_DETAIL.asp?ART_ID=478 &MONTH_YEAR=Feb-1999; and International Monetary Fund Research Department, “The Impact of Higher Oil Prices on the Global Economy,” 8 December 2000, http://www.imf.org/external/pubs/ft/oil/2000/oilrep.PDF. Robert Collier, “Chávez’s Anti-US Fervor: Emerging Force among Non-aligned Nations,” San Francisco Chronicle, 21 September 2006, http://www.sfgate.com/cgibin/article.cgi?file=/c/a/2006/09/21/MNGPDL9LS51.DTL. Conn Hallinan, “Hunting Hugo,” Foreign Policy in Focus, 23 October 2006, http://www.fpif.org/fpiftxt/3630. Darío Pignotti, “Venezuela podría convertirse en un objetivo militar prioritario de EE. UU.,” Página 12, 21 February 2006, http://www.aporrealos.org/tiburon/n73711.html. Interview with General Alí Uzcategui, Secretary of National Security and Defense, Venezuela, http://www.alternativabolivariana.org/modules.php?name=News&file= article&sid=923. Jorge Serrano Torres, “El sistema de inteligencia venezolano y la guerra asimétrica,” VoltaireNet.Org, 12 December 2005, http://www.voltairenet.org/article132343.html. Omar Piña, “Plan Colombia: How US Military Assistance Affects Regional Balances of Power,” Master’s Thesis, Naval Postgraduate School, June 2004. Maria Esperanza Sanchez, “Chávez: reserva ‘contra agresión externa’,” BBC Mundo, 13 April 2005, http://news.bbc.co.uk/hi/spanish/latin_america/newsid_4442000/ 4442783.stm.

Energy security: the case of Venezuela 187 23 Anibal Romero, “Las armas de Chávez,” Libertad Digital, 11 September 2006, http://exteriores.libertaddigital.com/articulo.php/1276232271. 24 Francisco Olivares, “Amenaza potencial,” El Universal, 5 March 2005, http://archivo.eluniversal.com/2006/03/05/pol_art_05161A.shtml. 25 “Chávez Has Plan in Case He Is Killed,” China Daily, 16 May 2005, http://www.chinadaily.com.cn/english/doc/2005–05/16/content_442364.htm. 26 “Venezuela’s Chávez, Iran’s Ahmadinejad Pledge Mutual Support,” FoxNews.com, 29 July 2006, http://www.foxnews.com/story/0,2933,206204,00.html. 27 For a more in-depth version of this argument, see William Clark, Petrodollar Warfare: Oil, Iraq, and the Future of the Dollar, Gabriola Island: New Society Publishers, 2005. For an economic perspective challenging such a possibility, see Robert Looney, “A Euro-denominated Oil Bourse in Iran: Potential Major Force in the International System?,” Dubai: Gulf Research Center paper, May 2006.

10 Chinese energy security and the Chinese regime Jacqueline Newmyer

Any attempt to anticipate how the People’s Republic of China (PRC) would act in a world where the market in energy ceased to operate – that is, any attempt to assess Beijing’s energy-security strategy – must first acknowledge critical uncertainties concerning the future of energy technology and the PRC’s economic and political trajectory. Among these uncertainties, even though alternative energy prospects hold some promise, material claims about the composition of China’s future energy needs or vulnerabilities can be advanced with the greatest degree of confidence. Barring a major economic contraction, shifts in technology that dramatically reduce the consumption of fossil fuels, or the discovery of substantial new Chinese energy reserves, the PRC’s future external requirements will center around oil, of which China became a net importer in 1993, and gas, of which it will be a net importer by about 2010 if current trends away from coal and toward gas-fueled power generation persist.1 These estimates need to be considered alongside another assumption, widely and perhaps too readily taken for granted, which is that the PRC’s rise to Great Power status will continue, and ultimately end in succeess. This assumption, if accepted, can be said to bound the Chinese energy-security question, but it does not begin to answer it, given the notorious secrecy that enshrouds the ruling Chinese Communist Party’s (CCP’s) strategic policies. If, during the PRC’s current period of remarkable economic growth and attendant social dislocation, it were to incur a sudden, dramatic setback that compromised the ability of the CCP to maintain its authority, then all inferences from past and current CCP behavior would be rendered moot. These uncertainties are further clouded by the fact that, all too often, judgments about what stance the United States should adopt toward the PRC’s rise are distorted by concerns about the motives that lie behind Chinese behavior. For instance, Beijing’s outreach to oil- and gas-producing states in the Middle East and Africa is often characterized as a deliberate challenge to American diplomacy and policy goals across the board – from countering nuclear proliferation in Iran to promoting human rights and democracy in Sudan.2 Such arguments often fail to consider that partnership with these unsavory regimes may be all that is left to Beijing in light of what some Chinese sources identify as a US monopoly on relations with less disreputable energy producers like Saudi

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Arabia.3 The claims that Chinese energy policy represents an assault on American national interests tend to come disproportionately from scholars and policy experts who are most disposed to point out the ostensible threat to US military pre-eminence posed by the improving capabilities of the Chinese People’s Liberation Army (PLA), and most ready to recommend steps to slow or complicate China’s rise, militarily or otherwise. Conversely, Western friends of the PRC have been quick to argue that, far from betraying a concerted effort to challenge or undermine the United States, China’s recent forays into the global energy market have actually served to align Chinese and American interests behind that market’s continued, undisrupted operation.4 All of which raises the question whether it is even appropriate to view Chinese policies in the energy sphere through the prism of US interests. Perhaps alternative standpoints would provide a more accurate picture of the balance of forces at play. Given the constellation of CCP, PLA, and national oil-firm players and equities involved,5 for instance, it is reasonable to ask how far Chinese energy-related actions are even centrally coordinated. To the extent that they do represent a coordinated, unified policy, are they aimed at generic economic and geopolitical power-maximizing ends? Or are they in fact specifically designed to thwart American objectives and degrade Washington’s ability to constrain the PRC’s actions? Or is there perhaps a third option? Could Chinese energy activities be best described not as those of a generic “rising power,” nor as those of a determined foe of the United States, but rather as artifacts of China’s distinctive political system? In order to address these questions while respecting the various uncertainties around the PRC’s future, this chapter is divided into two parts. The first part examines the range of approaches that Chinese policy-makers might adopt to prepare for a world in which the market in energy supplies ceased to operate reliably. China might seek to build and participate in an alliance of fellow consumer states; it could try to manipulate producing states into relationships of mutual dependence; or the PRC could adopt an overtly militarized approach, seizing, guarding, and transporting energy assets to distribution centers on the mainland. These options are presented together with an analysis of the advantages and obstacles that Beijing would encounter in executing each of them, incorporating the lessons of modern Chinese history, and concluding that a breakdown of the market in energy would probably elicit a military response from the PRC. But casting Beijing’s alternatives in terms of recourse to diplomacy, subversive measures, or military force is of course reductionist, a thought experiment more than an exercise in policy analysis. It simplifies the PRC into a unitary, rational actor poised to pursue one of three logically distinct courses. Nothing about the hypothetical courses of action just described is particular to the Chinese context. No attempt is made in the first part of the chapter to see the challenge of energy security through the eyes of PRC decision-makers, nor in light of the specific character of the Chinese regime. The second part seeks to redress this insensitivity by considering three alternative frameworks for capturing Beijing’s distinctive perspective on energy security.

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The first framework envisions China as the opposite of a unitary actor: China as a state lacking a central authority to pursue a determinate goal or set of goals connected to an energy-security agenda. Under this model, PRC energy policies are the fruit of a largely ad hoc, uncoordinated process driven by a range of people and institutions with divergent interests, including profit-seeking oil firms, security-concerned military elites, and high-ranking members of the CCP preoccupied with China’s domestic stability and their own need to retain their hold on power. Such a model almost inevitably predicts a variety of Chinese energy-related activities aimed at a plethora of ends, not all of which would serve China well under militarized conditions. The second framework, by contrast, imputes to Chinese decision-makers the long-term objective of usurping the United States’ place as the leading power in Asia. Under this framework, Chinese military and energy-related activities are geared toward preparing for a time when the PRC’s progress toward this goal might provoke the US to try to interdict Chinese supplies, or otherwise interfere with its access to imported energy. A third framework posits neither the absence of coordination nor coordination oriented toward overtaking the US per se, but rather coordination around a set of nested objectives associated with the distinctive character of the Chinese regime. These objectives range from maintaining CCP authority – through economic growth and cheap domestic oil – to securing China against external efforts to block its oil supplies.6 Under this model, Beijing’s ambitions are conceived as more defensive than offensive, while accepting that a suspicious posture toward the US could quickly become an adversarial one. This third way of approximating China’s perspective on energy security shares with the first framework a prediction of a diversity of energy-related activities; however, the distribution of aims and results would be less random than under the completely ad hoc model, as the regime would be likely to follow up systematically on forays that appeared to be working. Finally, the conclusion offers reflections on the energy-security issue as a window onto alternative Chinese futures writ large. Two potential discontinuous developments, one external to China and one internal, merit particular attention. What might be the consequences of a dramatic and sustained rise in world oil prices arising from events entirely outside China’s sphere of relations? And when, or under what conditions, might Chinese foreign policy depart from the course of pursuing peace to allow for continued development? Both lines of inquiry inspire caution about projecting from current trends and suggest the need for American contingency planning.

Diplomacy, subversion, militarization As Daniel Moran and James Russell point out in their introduction to this volume, even the United States, champion of global free-market economic interaction, and its allies in Western Europe have engaged in non-market behavior around the pursuit of oil. (The term non-market is used advisedly to refer to

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efforts that depart from what might be considered two pillars of laissez-faire – not intervening in the internal politics of other sovereign states and refraining from using military tools to constrain market participation by rival consumers.) In fact, it is not wholly clear what counts as a market approach to energy. Certainly the line has been blurred capriciously enough in the past. Was American recognition of Nasser’s sovereign right to seize the Suez Canal from the British and the French in the 1956 Suez crisis “pro-market”? What about Washington’s sponsorship of the coup that deposed Mossadegh and restored the Shah of Iran to his throne rather than tolerate the nationalization of Iranian oil resources? It is hard to understand, in “market” terms, why the nationalization of a major, privately held economic asset should be deemed acceptable in one case but not the other. At a minimum it seems clear that, even when market interests are regarded as important in strategic terms, they are almost never the only important interests at stake. The US embargo of Japan prior to Pearl Harbor, and Washington’s continuing commitment to the Saudi Arabian monarchy, certainly demonstrate a willingness to use national power to shape the terms of other states’ access to energy resources as well as the US’s own. If even the most stalwart advocate of free trade has a mixed record where energy-related commodities are concerned, this suggests that the interesting question with regard to China, already suspected of having adopted a mercantilist approach to oil supplies,7 is not whether Beijing will pursue a non-market energy strategy but what kind of non-market strategy it will pursue. Three alternative approaches stand out: 1

2

3

China might partner with like-minded consumer states in order to enhance its bargaining position in negotiations with producers. (Call this the diplomatic course.) China could intervene in the internal politics of oil-producing nations to ensure preferential treatment by applying subversive techniques. (Call this the subversion path.) China might apply military power to the problem of ensuring the flow of energy supplies on favorable terms. (Call this the military route.)

A dissenter might object that there is no reason to expect Beijing to pursue any one of the above options in the future because increasingly, commercial incentives, and therefore market incentives, will govern the investments of China’s major national oil companies (NOCs) – China National Petroleum Corporation (CNPC), China Petrochemical Corporation, and China National Offshore Oil Corporation (CNOOC) – as well as of their listed subsidiaries: PetroChina (subsidiary of CNPC) and Sinopec (subsidiary of China Petrochemical Corporation). After all, capitalism has made substantial inroads in China since Deng Xiaoping initiated the era of reform in the 1980s, and many state-run firms are gradually being privatized. An easy rejoinder would be to point out that the deterioration of perceived or real energy supplies, and therefore market conditions, could demand radical new

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approaches worldwide. In the case of China, moreover, a number of recent studies highlight that the Communist Party retains a share of the management in and responsibility for the big oil concerns, regardless of whether their status is nominally state-owned or private.8 In fact, the surest way to know that the aforementioned options are realistic is that Beijing is already testing some of them, and has tried others in the past.9 The resulting mixed record of success constitutes a revealing roadmap for the future. Option 1: the diplomatic course Beijing’s pursuit of a diplomatic or alliance-based strategy would conform with what some have characterized as “China’s charm offensive,” or a “soft-power” approach to achieving great power status. Rather than quarrel with the idea that China has, at the very least, been probing what kind of dividends it might reap from cultivating closer ties with important neighbors, perhaps it suffices to note that there are fundamental historical obstacles to partnership with, say, India or Japan, two of the other major energy consumers in China’s neighborhood. True, India has inked some deals with China in the past few years, but Beijing’s pursuit of military facilities and partnerships on India’s flanks in the Indian Ocean, Pakistan, and Central Asia,10 not to mention Hu Jintao’s recent resurrection of Sino–Indian territorial disputes, do not augur well.11 China also faces a looming supply crisis of another critical resource, water, that Beijing has indicated a readiness to procure by diverting Indian rivers that have their headwaters on the Tibetan plateau. Such conduct does not suggest an easy road to PRC–Indian cooperation in the energy field. If China and India had merely fought a major war as recently as 1962, the possibilities for partnership might be rosier; but the fact is that some of the old grievances persist, even as new areas of conflict emerge. For instance, given the continuing rivalry between India and Pakistan, Delhi is not likely to appreciate Chinese support for Pakistani’s nuclear development.12 At best, then, prospects for a Sino–Indian alliance are constrained. Lingering mistrust between China and Japan is even more apparent. Japan’s new Prime Minister, Shinzo Abe, ran on a platform of proceeding with promilitary constitutional revision and, following the North Korean nuclear test, has quietly countenanced talk of Japan’s acquiring nuclear weapons. On the Chinese side, as will be familiar, Beijing has facilitated demonstrations by Chinese university students when Japan’s head of state visits the Yakusuni shrine memorializing Japan’s World War II dead. The energy field is itself a realm of continuing friction, as Beijing and Tokyo contest each other’s claims to the oil-rich zones around the Diaoyu/Senkaku Islands. Perhaps this passage from a recent paper by Jiang Xinfeng of the Academy of Military Science (AMS) of the PLA will communicate the limits of Beijing’s willingness to rely on an alliance with its historic enemy: Japan is a typical maritime power. . . . There are three phases of development: the budding phase in the sixteenth century, the founding phase in the

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nineteenth century, and the evolving phase since the end of World War II. After the Cold War, thoughts on maritime strategies rejuvenated in Japan, putting forward a strategy of going outward to the sea. Japan has built a theory of maritime strategies owing to both official and unofficial efforts, established a mechanism of maritime researches and leadership under the guidance of the government, launched an offensive for maritime rights, fighting for every single inch of the sea. Thus the intention of Japan’s maritime strategies is clear to all: by means of intensifying an effective control of the Diaoyu [Senkaku] Island and consolidating the Okinotori Reef, Japan attempts to ‘hold the islands and delimit the open sea.’ Under a false pretense of investigating the continental shelf around its circumjacent seas, Japan endeavors to expand its range of the continental shelf and enlarge its area of the sea. Although Japan’s defensive areas will be greatly extended, the pinch of scarce resources besetting Japan for years will be relieved.13 If reservoirs of mistrust diminish prospects for Sino-Japanese and Sino-Indian cooperation on energy, Beijing might be expected to look to Southeast Asia to find allies. Scholars and subject-matter experts, ranging from Kishore Mahbubani to Kurt Campbell, have noted that China has been seeking to ingratiate itself with the members of the Association of South East Asian Nations (ASEAN) – including former enemies such as Vietnam – by hosting multilateral forums, sending official emissaries, building Confucius Institutes, and, most important, offering aid and other economic inducements such as favorable trade deals.14 But as Joshua Kurlantzick points out, China’s success in cultivating places like the Philippines, Thailand, Indonesia, and, to some extent, even Vietnam – as well as new allies in Latin America – has been built on one-way transactions. For instance, China now gives more aid to Indonesia than the US. It has invited record numbers of young Cambodians to study at Chinese universities,15 and has offered to “shelve” territorial disputes with its southern neighbors in order to conduct joint – but primarily Beijing-backed – exploratory ventures in the South China Sea.16 Acceptance of Beijing’s largesse should not be mistaken for consent to make sacrifices under straitened conditions. Option 2: the subversion path If diplomatic ties with fellow consumer states do not appear likely to bear fruit, Beijing might be expected to consider the alternative approach of cultivating – or trying to subvert – producer states. China’s one-time ally the USSR enjoyed striking success in bringing developing-world states into its orbit. From the start, the Bolshevik movement depended on support from abroad, and subsequent generations of Soviet leaders retained an appreciation for the potential of an adept combination of internal and external pressure to effect revolutionary change.17 Conversely, armed with a nominally egalitarian ideology that traveled well, Russian Communist elites were no less willing to exploit their knowledge

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of repressing dissent to appeal to foreign dictators and would-be potentates, especially strategically situated or resource-rich ones.18 A good deal of evidence suggests that Chinese elites lack the knack of effective cooptation that their Russian comrades exemplified. This is evident not only in the short history of the PRC itself but also in the record of Han Chinese dynasties during China’s 2,000-year imperial age. Arthur Waldron’s history of dynastic foreign policy explains that, as regimes grew weak through the spread of corruption and the decline of central authority – in other words, when they most needed supportive allies – Chinese monarchs tended to alienate the neighboring powers that had been strategic and commercial partners in better times.19 Further, scholars of the last dynasty, the Qing, argue that the Qing actually owed their success in pacifying China’s non-Han neighbors and traditional enemies to the fact of their Manchu identity.20 Not being Han, they were familiar with the diverse spiritual beliefs and social divisions of rival forces on China’s periphery and used this knowledge to divide and conquer.21 At the peak of the dynasty, the Qing propagated a unifying, ethnicity-transcending ideology and applied such cosmopolitan imperial techniques as incorporating elements of its various subject populations’ traditions into rites at the central court. Communism, or its Chinese variant, Maoism, might be thought to have provided the PRC with a unifying ideology for the twentieth century, suitable for export to foreign powers that promised to be strategically useful. But from the founding of the PRC to the death of Chairman Mao – after which Maoism waned within China – the young country proved singularly incapable of sustaining alliances or even friendships with fellow Communists. The Sino-Soviet alliance gave way to a rift and then a series of bloody military confrontations at Zhenbao/Damansky Island in 1969. Though China sent hundreds of thousands of soldiers to aid the North Vietnamese Communists through the 1960s, by 1979, the newly ascendant Deng Xiaoping was leading an invasion to teach Hanoi a lesson – or to expose the hollowness of Moscow’s defense commitment to Hanoi. Arguably, the only place where a subversive approach by Beijing might be proving successful is Taiwan, which is Han-dominated and therefore not as genuinely foreign as, for instance, Angola. For whatever reason, then, and despite recurring efforts, the PRC has proved unable to develop a Chinese analogue to Soviet-style, subversion-based alliance-building. Nonetheless, today’s PRC will require a mechanism for generating allies more durable than largesse or bribery, the twin pillars of “resource diplomacy” described above. A Chinese effort to recapitulate the success of the Soviets would require something like ideological subversion, because many of the producer states with which Beijing has been interacting feature state oil companies overseen by elites who combine venality with insecurity and sometimes also cruelty. China cannot rely simply on the rule of law to protect its property interests. Beijing’s recognition of the special circumstances surrounding commerce with, say, Sudan, receives expression in a variety of ways. For instance, Chinese firms pay more than market prices, and they seek to procure and reinforce their control over energy assets from the ground up, deploying Chinese security

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forces to guard their investments.22 These are part of the cost of doing business with rogue regimes, some of which are liable to be taken over by populist demagogues with a penchant for repatriating valuable infrastructure, while others could launch or descend into wars that damage valuable infrastructure. Bribes and guards go some distance toward mitigating these risks, but ultimately, Chinese interests remain exposed in places lacking stable government and secure property rights. Option 3: the military route If ideological subversion is not likely to suffice, the PRC’s military modernization of late indicates a third possible approach, particularly in the event of an economic downturn that precluded further gift-giving in the developing world. The realm of foreign relations in which the PRC has arguably experienced the greatest success – even before the last decade’s strides toward replacing a people’s-war-style army with modern, high-tech forces – is the military realm. In its first 30 years, the PRC went to war on all of its flanks,23 claiming victory, sometimes improbably, in almost every conflict. Where strategic energy resources and sea-lines of communications are concerned, the military instrument has been unquestionably effective. Before Beijing offered to “shelve” some of its territorial disputes with other powers in the region, the PLA grabbed a number of islands in the South China Sea, evicting Vietnam from the Paracels in 1974, defeating the Vietnamese in a battle over Fiery Cross Reef in the Spratlys in 1995, and seizing Mischief Reef over Philippine protests in 1995.24 Despite all of Beijing’s friendly overtures in the last few years, its claim to these territories has if anything grown, as China has quietly built dual-purpose fishing/military installations on the islands where it has established a presence. Such modest initiatives are insufficient to sound an alarm, but they are helpful in connecting some dots that might prove relevant in the event of a sudden economic, social, or political dislocation. It is not just that a downturn in the PRC’s fortunes would deprive Beijing of the resources to continue to subsidize its “resource diplomacy,” but also that such an event or set of events might lead Beijing to replace charm with force, the latter being a realm of policy where it believes that it has enjoyed significant historical success. Many of the potential triggers of a disruptive event would be linked to external threats, after all: financial disruptions arising from a volatile mix of Western capital and defunct state banks; environmental degradations blamed in part on Western factories; growing numbers of evangelical Protestants in Chinese cities and farming areas in eastern and central China; potentially restive populations of Uighur Muslims educated in Saudi-financed madrasahs in the west; troublesome advocates of Chinese democracy, backed by Western human-rights organizations; or Tibetan rebels aided by India and the Dalai Lama that New Delhi continues to harbor. Such a list could be extended without difficulty. Individually these threats appear manageable, but their sheer number may be sufficient, under some circumstances to make a regime that has proven historically awkward in dealing

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with outsiders feel beset. Any downside scenario associated with or traceable to a foreign-linked source would strengthen the case for applying the military capacity that China has been building so assiduously, thus repeating the aggression-from-weakness pattern of Chinese history identified by Waldron. Overall, then, historical mistrust constrains China’s ability to enter into cooperative agreements with other major energy consumers. The strategy of building alliances through extensions of financial aid depends on continuing Chinese prosperity, and Beijing can have little confidence that such friendships would endure under conditions of duress. Bribing local elites and installing security forces do not guarantee the protection of property in unstable zones. China might therefore judge the use of force to be its best option if political instability or war impaired its access to oil from trouble spots such as Sudan and Angola (not to mention Iran or Saudi Arabia), or if a domestic downswing constrained its ability to use lavish expenditure to attract allies and protect energy assets. On this logic, indicators that a military approach was being prepared could include follow-through on plans for the development of an aircraft carrier. Carrier capacity would enable China to progress from holding hostile powers away from its coast to defending sea-lines of communication out to the Middle East. A spike in Chinese oil purchases, followed by a renewal of the kind of fait accompli actions that the PRC executed in the South China Sea from the 1970s through the mid-1990s, would also be indicative of a turn to militarization. In the current climate of record levels of trade and economic engagement, such a development may seem all but unfathomable. Not only is a militarized approach hard to envision, but, as was suggested earlier, it arises most readily when the PRC is approached, as it has been in the discussion up to now, as a kind of generic, rational, unitary actor, poised to prosecute any of three equally plausible routes to energy security. It is therefore important to proceed beyond the artificiality of such arguments, which can do no more than illustrate a range of logically possible options, in order to ascertain whether there is a particular Chinese approach to the energy question.

Decentralization, replacing the United States, defending the regime In order to see the issue of energy security from the perspective of Chinese political elites – in other words, to come up with a model that captures the view from Beijing – it is necessary first, to negotiate a set of China-specific challenges. One such challenge is that two decades of virtually unprecedented economic growth could be changing the PRC so rapidly that today’s model will be outdated tomorrow. Another challenge arises from the pronounced politicization of China-related research in the US, alluded to earlier, which creates a temptation to let prior opinions about how to manage relations with the PRC color analysis of Chinese attitudes and tendencies going forward. Finally, there is the need to account for that part of China’s strategic tradition that accords pride of place to deception.25 It may be that openness and strategic transparency are luxuries of

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the strong, so that China’s current opacity should be attributed not to its deception-steeped tradition but rather to the natural anxiety of a still relatively weak, rising power. Questions nonetheless remain about the credibility of Chinese sources when they speak about strategic issues. In light of these challenges, the alternative models of Chinese energy strategy suggested below are advanced tentatively, with an eye toward generating testable propositions about future behavior that will facilitate an evaluation of each model’s explanatory power. Model 1: decentralized, ad hoc energy pursuits One possible framework for capturing the logic of Chinese energy-related activities is that of decentralized, ad hoc policy-making, policy-making that is occasionally undercut by the behavior of profit-seeking commercial firms. This is the framework currently in vogue among Western China energy experts. Kenneth Lieberthal and Mikkal Herberg have argued, for instance, that “rather than a coherent strategy, Beijing’s energy policies are more a collection of ad hoc initiatives – some coordinated, some not, and some state-driven, others market and commercially driven.”26 This characterization suggests a complicated landscape of actors with interests in, and authority to affect, Chinese energy activities. Proponents of the ad hoc model emphasize that the Chinese state bureaucracy has only recently come to include high-ranking offices with oversight over energy policy. According to the geologist and Chinese-energy expert Philip Andrews-Speed, for instance, “weaknesses in China’s current energy policy can be traced primarily to the absence of an Energy Ministry or equivalent strong and well-staffed agency responsible for energy policy.” He continues, “the fragmented institutional structure of the energy industry has led to a fragmented energy policy, aggregated from specific industry objectives driven more by the leaders of these industries than by the formulation of sector-wide initiatives.” Philip Andrews-Speed identifies a trend toward independence for China’s NOCs dating from the mid-1990s but believes that this progress has not enhanced the ability of the government to regulate the firms: Until the mid-1990s China’s energy sector was dominated by a small number of very large state-owned companies or ministries which fulfilled the functions of both enterprise and government. They reported to the State Planning Commission (SPC) and the State Economic and Trade Commission (SETC) which respectively held responsibility for strategic and operational matters. Most importantly the SPC was required to approve all major investments and all energy prices. The year 1998 saw the start of a process of major restructuring of both government and large energy companies which marked an important step in the drive to corporatize and improve the performance of the sector. The key government functions relating to the energy sector were allocated to the renamed State Development Planning Commission (SDPC), the SETC and

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J. Newmyer the newly created Ministry of Land and Resources. Clear strategic direction was lost as a result of these reforms, as the SDPC and SETC competed for leadership. This lack of clarity was resolved in 2003 when the SETC was abolished and the renamed National Development and Reform Commission (NDRC) took nominal control of energy strategy with the creation of an Energy Bureau. Two further regulatory initiatives were the creation of the new State Electricity Regulatory Commission (SERC) and the establishment of the State-owned Asset Supervision and Administration Commission (SASAC) to oversee the management of the major state-owned companies. In early March 2005 China’s government announced that it intended to establish a national leading group under the State Council to oversee the country’s energy sector. This was a rather belated and timid response to the realization that the Energy Bureau set up in 2003 was not up to the task. Though in form these changes might appear to have addressed a number of key concerns in the making and implementation of energy policy, in practice the impact has been minimal. The creation of the Energy Bureau may indeed represent a consolidation of authority and expertise, but given the challenges it faces, the level of authority of this bureau in the government hierarchy is inadequate, as is the level of staffing. Further, the pricing of energy is still determined by another bureau with the NDRC. In the past, the leaders of the major state-owned energy companies were able to play a major role in determining the policies and plans for their individual industries. Progressive corporatization and disaggregation of these companies has reduced the power of these executives to influence national policy to a great extent, but the capacity of government to lead has not been enhanced in a commensurate way.27

To Andrews-Speed’s historical analysis one might add the fact that within the Chinese Communist Party, there exists a cadre of elites with ties to the oil industry, potentially further impinging on state efforts to dictate policy. For instance, the son of former Premier Li Peng, who from the early 1990s advocated an international acquisition approach to energy security, is head of Huaneng Power International, which is listed on the New York Stock Exchange and constitutes one of China’s largest power firms. The influence of the PLA and the Ministry of Foreign Affairs – two organs of state represented in the Energy Bureau but entirely independent of all the abovelisted regulatory bodies – adds yet another level of complication to the picture. Both the military and the Foreign Ministry have stakes in the future of Chinese energy security, though their role is not always acknowledged in Western scholarly assessments.28 The diversity of actors within the PRC energy landscape may add credence to the theory of a largely ad hoc, uncoordinated Chinese approach to energy security. But to assess how well this framework captures the reality of Chinese behavior requires scrutiny of the ends being pursued by these actors. If the model is

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accurate, then we should observe the pursuit of a variety of at least occasionally conflicting ends. It should be easiest to define the ends of the major Chinese oil firms. The model casts them as primarily profit-maximizers, serving financial interests defined independently of, and potentially at odds with, the interests of their progenitor, the state. In other words, if the ad hoc framework is apt, it should not be possible to situate the Chinese NOCs and their pursuits within the greater landscape of Chinese energy policies without a lot of obvious seams and bumps, exemplifying the inevitable cross-purposes that arise between competitive enterprises and public policy. What does the record of NOC behavior show? Answering the question requires examining the rise of the NOCs in the broader context of the evolution of Chinese energy policies. In the 1980s under the leadership of Deng Xiaoping, the state created CNOOC, Sinopec, and CNPC to execute different tasks associated with the PRC’s anticipated entrance into the global energy market. CNOOC was charged with pursuing exclusively offshore ventures; Sinopec was to handle refining; and CNPC received the onshore and close-in offshore exploration and production missions. Deng’s decision to engage with foreign oil and gas companies was controversial. From the late 1970s, China had been pursuing a policy of petroleum-led export growth, necessitating the limitation of domestic oil consumption. By 1986 a number of indicators suggested that supplies would no longer be sufficient to allow for continued export growth while sustaining China at the level of development that had been achieved. Nonetheless, as the former CIA analyst Erica Downs explains, some CCP elites believed that China should try to maintain its energy self-sufficiency and avoid exposure to the international market, even at the cost of sacrificing economic growth.29 These nay-sayers lost the argument, needless to say, as Deng was unwilling to abandon the goal of domestic development. Though proponents of the ad hoc framework would draw a line from Deng’s embrace of the global market to the substantially independent functioning of the Chinese NOCs today, no one would dispute the firms’ attachment to the state through their first decade of existence. It was not until the early 1990s that the three majors began taking positions in foreign ventures,30 and through this period all of their domestic transactions were subject to official price-fixing. For the first decade and a half of their existence, CNPC lost out in every transaction with Sinopec, as the state controlled the price that CNPC could charge domestically for its crude while requiring it to sell to the indigenous refiner, which the state was trying to boost. This subsidy to Sinopec meant that CNPC was too cash-strapped to invest much in exploration, hastening the moment in 1993 when China became a net oil importer. At this time, the government gradually started lifting price controls on the sale of crude, creating a windfall for CNPC, a windfall that political elites encouraged the company to devote to international deal-making, from acquiring rights to the products from, or shares in, foreign oil fields to drafting pipeline deals and offering stakes in Chinese refining ventures. Thus, initial Chinese

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NOC forays into Canada, Peru, Papua New Guinea, and even, haltingly, Central Asia and Iran in the early 1990s came at the state’s instigation.31 The state also played a critical role in 1997 in re-apportioning the assets of CNPC, CNOOC, and Sinopec to create three vertically integrated conglomerates, covering the spectrum from upstream exploration and production to downstream refining and marketing. By making the firms peers, the move was designed to facilitate salubrious competition among them, though each has retained an emphasis on its original mission area. In the meantime though, the early 1990s saw a relaxation of domestic price controls on crude, the price of the finished product has remained capped, so that now Sinopec, as the leading refiner, faces the strain of being unable to pass along high crude prices to consumers.32 The government’s continuing influence over the NOCs emerges not only through the direct strain that price controls impose on their bottom lines but also, indirectly, through disruptions in the domestic Chinese market. For instance, hoarding by refiners in anticipation of administrative price increases has consistently given rise to supply shortages, while Chinese energy efficiency has declined in light of the over-consumption encouraged by capped prices for consumers.33 Moreover, Chinese pipelines have proven to be an attractive target for thieves confident that after poking holes, they will be able to sell stolen products at a premium by crossing borders.34 The state’s persistent authority over the affairs of the big Chinese oil concerns is also clear from examining the population of CCP elites and NOC executives. A pattern of connections has endured despite the changes in the relationships among the NOCs and between the NOCs and the state that occurred in the 1990s. For instance, a 1994 article in a Western oil industry publication noted with disdain that the management team for CNPC’s foreign exploration and production efforts was dispersed among subsidiaries and affiliate companies: Some of the subsidiaries have close relationships with the local agencies that operate China’s domestic oil fields. The president of CNPC Central Asia is the former head of Liaohe oil-producing complex in Liaoning province.35 The article goes on to provide more evidence of a revolving door between high CCP postings and executive roles within the NOCs. That was then, one might say. But more than a decade later, in June 2007, the head of Sinopec, Chen Tonghai, known for his opposition to price controls on fuel, abruptly resigned, and the government immediately announced as his successor Su Shulin, formerly of PetroChina, who had most recently been appointed an official in Liaoning province.36 Liaoning’s staying power as a strategic seat for CCP elites with oil-industry ties should not be a surprise, by the way. In addition to the Liaohe oil field, the province is home to the giant port of Dalian, a refining hub and the site of one branch of China’s new Strategic Petroleum Reserve. The role of the CCP in the Chinese political system is the missing link that explains the coincidence of NOC and state interests. China remains a one-party state, and the interests of the state therefore overlap almost completely with those of the ruling CCP. After the death of Mao, Deng Xiaoping pioneered the

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view that the state’s – and therefore the Party’s – well-being depended on pursuing a program of “reform and opening up” (gaige kaifeng). The record of Deng’s tenure, from his courtship of foreign business leaders to the crackdown at Tiananmen, suggests that the emphasis was intended to be on economic reform and military modernization, not political change. Up to the present, none of Deng’s successors has seen fit to adjust this goal. As mentioned above, it was CCP elites like Li Peng – along with former president Jiang Zemin and former premier Zhu Rongji – who propelled China’s NOCs on the course of market interactions with foreign firms.37 And still today it is CCP elites who make the decisions to bail out loss-makers like Sinopec, after setting the policies or price controls that at least contribute to, if not fully explain, these firms’ deficits. Another strain on the NOCs’ finances is their tendency to overpay for overseas equity oil.38 This habit may be interpreted as evidence of the firms’ subservience to the state if one assumes that the PRC has a security interest in owning foreign reserves, but the strategic utility of a Chinese-owned oil field in, say, Angola is a matter for debate, at least until the day when the PRC has a blue-water navy capable of protecting long supply lines back to the mainland. More plausible is an argument that the Chinese oil firms are willing to pay a premium to reap the benefits of diversifying their portfolios: There are clear business incentives for owning upstream assets, as they provide a hedge against global oil-price hikes. The NOCs may be seen as serving state interests through these deals, then, only insofar as wise investments help line the pockets of firmaffiliated CCP elites. A test for the future would be whether, at some point, one of the giant conglomerates were allowed to go under, without any special compensation paid to affected Party members; a difficult test to monitor, admittedly, since any compensation could easily be hidden from foreigners. Given the secrecy surrounding Chinese defense and diplomatic or political priorities, it is difficult to think of an indicator short of a bankruptcy that would clearly signify a move toward Chinese NOC independence. Overall, then, scrutiny of the NOCs’ historical evolution and leadership casts doubt on any theory that casts these firms as actors pursuing ends independent of the state’s or, more precisely, the Party’s. But it remains to be determined how Chinese political elites conceive of energy security among other ends. If maintaining authority over what Lucian Pye once called a civilization masquerading as a nation is the overall objective, how do senior Party members rank the goal of perpetuating export-based economic growth, say, against that of acquiring oil supplies and the ability to defend China’s access to them? To address this question is to entertain the idea that Chinese energy-related activities may fit into a larger strategic scheme. Model 2: planning to replace the United States in Asia Deng Xiaoping, the launcher of China and its energy industry on a trajectory of economic growth and global engagement, is said also to have urged that

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militarily, the PRC bide its time and hide its capabilities. He justified the path of reform and opening on the grounds that international conditions were peaceful enough to permit the nation to prioritize domestic development and turn away from foreign struggles.39 Deng’s strategic message about waiting and concealing Chinese forces, taken in light of the military modernization campaign that he initiated concomitant with the gaige kaifeng, may be interpreted as implying that eventually the PRC would be strong enough to reassert military power. If so, it is plausible to propose, as a second framework for China’s approach to energy security, that its ultimate aim is to supplant the United States as the strategic arbiter in Asia. Such a view is not easy to reconcile with the position of dependence on US trade, technology, and even sea-lines of communication (SLOC) protection into which the PRC has cast itself from Deng’s time up to the present. It only becomes plausible if ones take seriously the perennial and oft-repeated injunctions about waiting and concealing, and also attaches an appropriately distant horizon to China’s ambition. Even without positing such a long-term goal, however, it is not controversial to suggest that China’s efforts to secure access to Middle Eastern, African, and South American oil and gas, as well as strategic port facilities and listening stations in such places as the Indian Ocean, East China Sea, and South China Sea, are connected to a naval modernization program that has already yielded a significant fleet of diesel and nuclear submarines, guided missile destroyers, guided missile and stealth frigates, anti-ship cruise missiles, and more than modest satellite communication and navigation facilities, among other new systems. Such investments, even if they prove to have been misconceived (as the naval building programs of other aspiring maritime powers, including the Soviet Union, have in the past), cannot have been made in a strategic vacuum. Similarly, deals between Chinese energy companies and Russian and Central Asian oil and gas suppliers have often included at least preliminary plans for developing pipelines to terminals on the mainland.40 Thus, even though the People’s Liberation Army Navy’s (PLAN’s) anti-submarine and air-defense capabilities remain less well developed than its capabilities for anti-surface warfare and convoy protection, it seems as though the PRC has been making progress on virtually all fronts related to safeguarding energy supplies in transit on land and at sea.41 Preparation for a militarized environment does not in itself imply a strategic intention to bring one about, of course. Moves to acquire and diversify overseas supplies and supply channels could reflect a combination of business interests and defensive security concerns. With regard to the question of who might target the PRC’s SLOCs, Chinese sources sometimes identify India and Japan as potential threats. But considering that China is a nuclear power and that the US has ruled the seas almost unchallenged since the end of World War II, it is hard to imagine that the US is not the principal cause for concern, a point borne out by Chinese naval literature, which clearly accords the US threat pride of place, at least for purposes of planning and procurement.42 The American menace is often said to stem from the imperialist impulses it is supposed to have displayed

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in recent years toward Haiti, Somalia, Bosnia, Kosovo, and Afghanistan, not to mention Iraq; or from its long-standing commitment to Taiwan. Either way, Chinese plans for defeating an American blockade are routinely cast as purely defensive. But what if the rhetoric about preparing to withstand an act of American aggression were designed to help disguise plans to challenge the United States? Following Deng’s dictum, the PRC is supposed to hide its capabilities until it has reached a certain threshold, and until the external environment has changed sufficiently to warrant a return to foreign military adventures. Given US surveillance capacities, however, Chinese defense modernization cannot be entirely concealed. What better way to account for the acquisition of “leapfrog” military capabilities than to feign concern over a possible American attack? On the assumption that Chinese energy pursuits constitute a preliminary to Chinese aggression against the United States, Chinese talk of an American threat may be seen as constructively disingenuous. A piece of evidence that lends credence to the framework is that Chinese political elites voiced concerns about the possibility of a US blockade dating back at least to the early 1990s, around the time when the PRC first became a net importer of oil (nearly all of which, then as now, arrived by sea). This timing is noteworthy on two counts. First, it means that the concern has been extant for over a decade, raising the question of why it has suddenly come to the fore. Second, Chinese fears seem to predate any US mention of the possibility of a blockade.43 A China that was biding its time while preparing to take on the US would want to be able to explain away its military modernization program, or justify it on minimally threatening grounds. Through the 1990s, Beijing could plausibly ascribe its defense spending to the Taiwan threat. But by the early 2000s, with Chinese power-projection capabilities already far in excess of those necessary to seize and hold the island (assuming the United States did not intervene directly to save it), a new justification was needed. Enter (or, actually, re-enter) the energy question. In SLOC defense, Beijing found, once again, a cause that could be invoked to explain an aggressive military build-up without raising undue alarm. At the same time, the fact that Chinese expressions of concern about oil chokepoints precede the first US mentions of this tactical option in the mid1990s may signify that China was anticipating American military moves before the US had even conceived them, because Beijing had already embraced the long-term goal of ending American pre-eminence in Asia. This model of China as a resolute, long-term foe of the US, when applied to other Chinese energyrelated activities, suggests that in addition to diversifying supplies and gaining access to strategic ports and listening stations, Beijing has sought to play a spoiler role through proliferation. Take, for instance, the PRC’s willingness to share nuclear know-how with Pakistan, in the spirit of cooperation against that other threat to Chinese SLOCs, India.44 In addition to cementing a relationship that has provided the PLAN with access to Pakistan’s deep-water port at Gwadar, this technology transfer seems to have had, from the PRC’s

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perspective, the extra benefit of generating a cycle of proliferation, which menaces the US more than it menaces China, at least in the short term.45 In the absence of intelligence about an actual Chinese plan to confront the United States, of course, all of this analysis has the feel of speculation, if not willful manipulation of the facts. Short of a military confrontation clearly provoked and premeditated by the PRC, it may not be possible to validate or disprove this picture of Chinese intentions. One indicator for the future would be if, after making considerable progress on naval power projection and diversification of energy supplies, the PRC came up with another threat to justify further defense investment in capabilities that would be useful in a conflict with America, especially if that rationale were to be expressed before any American sources articulated the threat as a US strategic option. The space theater comes to mind here. In the meantime, however, there is a less sinister interpretation of Beijing’s fears about SLOC vulnerability and the actions associated with this anxiety, to which we now turn. Model 3: regime defense The most parsimonious explanation for the PRC’s approach to energy security is that it is driven by a concern to defend and sustain the existing regime. The PRC’s concerns about SLOC defense may be consistent with a deeply laid and elaborately concealed plan to overtake the US in Asia. But they are also readily explained as part of the general security orientation of a “middling” power with few true friends, even if it also has few obvious enemies. Even in the absence of aggressive Chinese intentions, it is absurd to imagine that the government in Beijing would be indifferent to the possibility that foreign governments might attempt to identify and exploit Chinese strategic weaknesses, among which a paucity of indigenous gas and oil supplies is a glaring example; or that it would not take whatever steps it could to anticipate and meet such threats. Re-examination of the CCP regime’s record provides evidence of such an orientation. If neither the ad hoc nor the anti-US model is ultimately convincing as a framework for understanding Chinese behavior, both nonetheless serve to direct attention to important aspects of Chinese energy policy. What comes to the fore in considering the ad hoc framework, ironically, is the role of Party elites in determining the state’s interests and overseeing the Chinese NOCs’ pursuits. Maintaining low fuel prices and economic growth domestically has clearly been a CCP priority. With the retreat of Maoism as a unifying ideology, and in an age of technocratic rather than charismatic leadership, the legitimacy of Party rule has come to depend on the promise of prosperity, and the specter of internal unrest, up to now at least, has loomed largest on the CCP’s radar screen. At the same time, Chinese political elites have clearly also been keen to influence the external environment, so as to ensure that no foreign powers could or would interfere with its ability to contain domestic threats by means of its own choosing. Deng’s calculation was that peace abroad permitted a retreat from foreign policy, and a more consistent focus on internal development, of which

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military modernization is merely an aspect. Deng’s vision contained within it an assumption that a peaceful environment could and should be preserved through the period of growth and modernization. The adherence to this guidance under Deng’s successors reveals not only a paramount concern with warding off domestic unrest, but also a striking confidence in Beijing’s ability to ensure that no rival power would try to check China’s rise. During the period of inward focus, then, the Chinese regime has done its best to reassure states whose economic or military superiority might create obstacles for it; and it has been remarkably successful at doing so. An image now emerges of the CCP leadership as domestically preoccupied, yet almost oddly confident about Beijing’s capacity to manipulate foreign impressions and shape foreign decision-making. A wide variety of additional PRC energy-related data support this picture. Take, for instance, Chinese claims that “energy independence” lies in the ability to guide trends.46 The ambition to exert mastery over a dynamic sphere like the world energy market is at once outsized and fitting for a regime that believes that it can control how other states perceive and react to potentially unnerving developments, including its own dramatic military modernization program. Beijing’s modes of dealing with the giant energy supplier to the north, Russia, along with efforts to negotiate between Central Asian and Russian interests in the Shanghai Cooperation Organization, further reinforce our understanding of the Chinese regime as confident about managing trends. On the one hand, China has lobbied Russia to build a pipeline terminating in Daqing in northern China, not in the Pacific as the Japanese would like, with offers of generous financial terms.47 On the other hand, the progress of Chinese migrants crossing over the border into Russia’s depopulated far east creates a situation where the Kremlin must look warily, and think twice before crossing, the power on its southeastern flank.48 How this strategy of subtly threatening while also seeking to woo Moscow will play out for the Chinese remains to be seen. It certainly reflects a determination that Russia will be a key player in the future energysecurity environment. More to the point for our purposes, however, it reflects Beijing’s confidence that it will be able to harness that insight to good strategic effect, without inciting violent confrontation. To that extent it is in keeping with the regime image sketched above.

Chinese energy strategy and US policy implications Both the historical record and the demands of intellectual parsimony – meaning the avoidance of unwarranted or self-fulfilling assumptions – favor a model of Chinese energy policy as the product of a regime that is preoccupied with domestic stability, and confident about preserving peaceful foreign relations. Two final questions arise. First, what happens if a conflict originates entirely outside China’s sphere of relations but has major spillover effects on the world energy market? And second, when, if ever, will Deng Xiaoping’s calculation about prioritizing domestic development over foreign conquests be revisited?

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Neither question can be answered categorically, but our analysis does at least point the way to some preliminary responses. The first question suggests that there may be some circumstances in which conclusions from the first and second parts of this chapter could come together. If a conflagration anywhere in the world results in a cessation or major reduction in global energy-market activity, Beijing is likely to respond with force for the reasons adduced above: neither fellow consumers nor producers would be reliable partners, and the ultimate aim of maintaining domestic prosperity and cheap fuel would be imperiled. Under such circumstances, Chinese behavior would probably approach that of the generic “rising power” described in the first half of this chapter, and the PRC would not hesitate to use what force it possessed to secure its interests. With regard to the question of revisiting Deng’s assessment about pursuing development while managing trends so as to secure peace, the most likely scenario for conflict initiation would be in response to a Chinese miscalculation in assessing international trends or managing foreign perceptions. While the PRC’s record in preserving a peaceful context in which to execute its rise has been impressive to date, the hardest cases – those of relations with Russia, Japan, India, and the US – are by no means resolved, and in the case of states like Russia and India, which are themselves undergoing rapid and unpredictable transformation, even the idea of “resolution” may be naïve. Finally, although the Chinese do not use the expression “rogue state,” they are no less exposed than other major powers to the idiosyncratic behavior of those who occupy the fringes of the international system. Governments like those in Tehran and even Pyongyang may be no more predictable when viewed from Beijing than they are from Washington or Tokyo. And if globalization ever ceases to wear the exclusively Western face that it has displayed up to now, but begins to look (as it must increasingly do) more and more like a cosmopolitan phenomenon, in which Asians have a full share, then China may find itself exposed to the kinds of atavistic resentments and provocative attacks that have, so far, fallen exclusively upon the West. These are conditions with which the Chinese have no more experience than Americans or Europeans, and it is reasonable to expect that their ability to anticipate trends and manage perceptions will be no less sorely tested as a result. At the same time, under such conditions the PRC may look to the West for aid, which the US may not be prepared or equipped to deliver if Washington does not begin to consider the problem today.

Notes 1 With abundant coal reserves, China is the world’s leading coal producer but, as the world’s leading coal consumer, is also experiencing serious health and environmental difficulties as a consequence of this consumption habit. China is self-sufficient in gas right now, but gas only contributes about 3 percent of the PRC’s energy overall – a very low share by international standards. For more on the basic resource situation, see Erica S. Downs, China’s Quest for Energy Security, Santa Monica, CA: Rand, 2000; Paul H. Suding, China’s Energy Supply: Many Paths, One Goal, Berlin: World Energy Council, 2005; Kent Calder, “Coping with Energy Insecurity: China’s

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Response in Global Perspective,” East Asia, 23/3, Fall 2006, pp. 49–66; Peter Cornelius and Jonathan Story, “China and Global Energy Markets,” Orbis, Winter 2007, pp. 5–20. See for instance Steven W. Mosher’s testimony before the United States House of Representatives Committee on International Relations, Subcommittee on Oversight and Investigation, on “Chinese Influence on US Foreign Policy,” 14 February 2006, http://www.foreignaffairs.house.gov/archives/109/26076.pdf; Gordon G. Chang, “How China and Russia Threaten the World,” Commentary 123/6, June 2007, pp. 24–9; Richard Bernstein and Ross H. Munro, The Coming Conflict with China, New York: Knopf, 1997. Xia Yishan, “Woguo nengyuan xingshi ji zhanlue shi wo jian [My View on China’s Energy Situation and Energy Strategy],” Renmin Ribao [People’s Daily], 10 August 2001, p. 7; English translation cited in Amy M. Jaffe and Steven W. Lewis, “Beijing’s Oil Diplomacy,” Survival 44/1, Spring 2002, pp. 115–34. See for instance Michael May, “Energy and Security in East Asia,” working paper, Asia/Pacific Center, January 1998, http://iis-db.stanford.edu/pubs/10043/ Mayfront.PM.pdf; Daniel Yergin, “Ensuring Energy Security,” Foreign Affairs 85/2, March–April 2006, pp. 69–78; idem, “What Does ‘Energy Security’ Really Mean?,” Wall Street Journal, 11 July 2006; idem, “Energy Independence,” ibid., 23 January 2007; Bruce Blair, Chen Yali, and Eric Hagt, “The Oil Weapon: Myth of China’s Vulnerability,” China Security, Summer 2006, pp. 32–63, http://www.wsichina. org/%5Ccurr03.html. Erica S. Downs, “The Chinese Energy Security Debate,” China Quarterly 177, March 2004, pp. 21–41; Kenneth Lieberthal and Mikkal Herberg, “China’s Search for Energy Security: Implications for US Policy,” NBR Analysis 17/1, April 2006, pp. 11–16, http://www.nbr.org/publications/issue.aspx?ID=93a9dcaa-b9d5–4601-ac32–93 f702696db5; Leland R. Miller, “In Search of China’s Energy Authority,” Far Eastern Economic Review 169/1, January–February 2006, p. 39, http://ssrn.com/ abstract=892607. For alternative rankings of PRC priorities, see Thomas Christensen, “China,” in Richard Ellings and Aaron Friedberg, eds., Strategic Asia 2001–02: Power and Purpose, Seattle, WA: National Bureau of Asian Research, 2002, pp. 27–69; Ross Terrill, “What Does China Want?,” Wilson Quarterly, Autumn 2005, pp. 50–62; and Aaron Friedberg, “ ‘Going Out’: China’s Pursuit of Natural Resources and Implications for the PRC’s Grand Strategy,” NBR Analysis 17/3, September 2006, p. 34, http://www.nbr.org/publications/issue.aspx?ID=392. James Traub, “China’s Africa Adventure,” New York Times Magazine, 19 November 2006, p. 74, http://www.nytimes.com/2006/11/19/magazine/19china.html?_r=1& n=Top/News/World/Countries%20and%20Territories/Angola&oref=slogin; Stephen Blank, “China’s Emerging Energy Nexus with Central Asia,” Jamestown Foundation China Brief 6/15, 19 July 2006; Wenran Jiang, “China’s Booming Energy Relations with Africa,” Jamestown Foundation China Brief 6/13, 21 June 2006, http://www.jamestown.org/publications_details.php?volume_id=415&issue_id=3805 &article_id=2371291; Joshua Eisenman and Joshua Kurlantzick, “China’s Africa Strategy,” Current History, May 2006; David B. Ottaway and Dan Morgan, “China Pursues Ambitious Role in Oil Market,” Washington Post, 26 December 1997, http://www.washingtonpost.com/wp-srv/inatl/longterm/china/stories/oil.htm. Mark O’Neill, “Market Reforms Risk Going Backwards,” South China Morning Post, 6 April 2006, p. 2; Enid Tsui, “CNOOC Investors against Changes to Clause,” Financial Times, 3 January 2006, p. 24; Kun-Chin Lin, “Disembedding Socialist Firms as a Statist Project: Restructuring the Chinese Oil Industry, 1997–2002,” Enterprise and Society 7/1, March 2006, pp. 59–97. Friedberg, “ ‘Going Out’,” p. 22, points out that “Beijing’s policy for securing access to minerals and raw materials appears to be a work in progress.”

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10 John Garver, The Protracted Contest: Indian–Chinese Rivalry in the Twentieth Century, Seattle: University of Washington Press, 2001. 11 “India Ponders Hu’s Upcoming Visit,” Reuters, 15 November 2006, http://www.cnn.com/2006/WORLD/asiapcf/11/15/india.china.reut/index.html. 12 Joby Warrick, “Pakistan Expanding Nuclear Program,” Washington Post, 24 July 2006, http://www.washingtonpost.com/wp-dyn/content/article/2006/07/23/AR200607 2300737.html. 13 Quoted from The Seventh International Symposium on Sun Tzu’s Art of War, selected paper abstract, Hangzhou, China, May 2006, pp. 87–8. 14 Philip Saunders, “China’s Global Activism: Strategy, Drivers, and Tools,”, occasional paper 4, National Defense University, Washington, DC, June 2006, http://www. ndu.edu/inss/symposia/pacific2006/saunders.pdf. 15 Joshua Kurlantzick, “China’s New Diplomatic Strategy,” monograph for Long Term Strategy Group, October 2006. 16 Tan Jingling and Chang Lu, “China and Vietnam Agree to Promote South China Sea Joint Exploitation,” Xinhuanet, 20 July 2005, http://au.china-embassy.org/eng/xw/ t204203.htm. 17 Richard Pipes, Russia under the Bolshevik Regime, New York: Vintage Books, 1994. 18 Steven R. David, Choosing Sides: Alignment and Realignment in the Third World, Baltimore, MD: Johns Hopkins University Press, 1991. 19 Arthur Waldron, The Great Wall: From History to Myth, Cambridge: Cambridge University Press, 1990. 20 Pamela Crossley and Mark Elliott, two leading Qing historians, disagree over the significance and extent of Manchu ethnic self-identification but concur on the importance of the dynasty’s introduction of foreign (non-Han) imperial modes. 21 Peter C. Perdue, China Marches West: The Qing Conquest of Central Eurasia, Cambridge, MA: Harvard University Press, 2005. 22 Kurlantzick, “China’s New Diplomatic Strategy”; Downs, “Chinese Energy Security Debate,” p. 36. 23 Terrill, “What Does China Want?” 24 David G. Weincek, “South China Sea Flashpoint,” Jamestown Foundation China Brief 1/2, 24 July 2001, http://www.jamestown.org/publications_details.php? volume_id=17&issue_id=630&article_id=4558. 25 Michael Pillsbury, China Debates the Future Security Environment, Washington, DC: National Defense University Press, 2000, http://www.fas.org/nuke/guide/china/ doctrine/pills2/index.html; Ross H. Munro, “China’s Strategy toward Countries on Its Land Borders,” monograph prepared for the Director, Office of Net Assessment, United States Department of Defense, August 2006. 26 Lieberthal and Herberg, “China’s Search for Energy Security,” p. 17. 27 Philip Andrews-Speed, “China’s Energy Woes: Running on Empty,” Far Eastern Economic Review 168/6, June 2005, pp. 13–17. 28 Downs, “Chinese Energy Security Debate,” includes the PLA and MFA as important actors in the PRC energy policy picture; but Lieberthal and Herberg, “China’s Search for Energy Security,” only mentions the military and Foreign Ministry in passing. Andrews-Speed, “China’s Energy Woes,” leaves out the PLA and MFA, presumably because the article argues that, starting in 2003, the new administration of Hu Jintao recognized that “the main threat to security of energy supply was domestic rather than international.” 29 Downs, China’s Quest, pp. 12–13; Cornelius and Story, “China and Global Energy Markets,” p. 9. 30 “China Stepping Up Foreign E&P Investment as Oil Imports Soar,” Oil & Gas Journal 92/19, 9 May 1994, p. 56. 31 Ibid.; Downs, China’s Quest, pp. 15 and 21–3; “Iran/Chinese Cooperation,” The Mining Journal, 23 July 1993, p. 53.

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32 Aries Poon, “Sinopec Receives Another Infusion of Chinese Cash,” Wall Street Journal, 28 December 2006, p. 12. 33 Mao Yushi, “Politics vs. Market,” China Security, Summer 2006, pp. 106–15, http://www.wsichina.org/%5Ccurr06.html; Cornelius and Story “China and Global Energy Markets.” 34 See for instance “Sinopec, PetroChina Hold May Crude Runs Steady; Eleven Refineries Plan to Operate at Rate of 87%,” Oilgram Price Report 85/95, 17 May 2007, p. 13. 35 “China Stepping Up Foreign E&P Investment.” 36 Shai Oster, “Sinopec Shake-Up Shows Risks of Investing in China,” Wall Street Journal, 26 June 2007, p. C3. 37 Downs, “Chinese Energy Security Debate,” p. 30. 38 Ibid., p. 36. 39 It should be noted, however, that immediately after acceding to power in 1979, Deng led the PRC into an ill-fated, if short-lived, war with Vietnam. 40 It must be said that China’s ambitions for pipelines both with Kazakhstan and Russia have encountered setbacks. See Cornelius and Story, “China and Global Energy Markets,” pp. 16–17; Jaffe and Lewis, “Beijing’s Oil Diplomacy,” pp. 125–6; Stephen Blank, “The Eurasian Energy Triangle: China, Russia, and the Central Asian States,” Brown Journal of World Affairs 12/2, Winter–Spring 2006, pp. 53–67; and Lyle Goldstein and Vitaly Kozyrev, “China, Japan, and the Scramble for Siberia,” Survival 48/1, Spring 2006, pp. 163–78. 41 Whether or not the PLAN will acquire an aircraft carrier, however, remains to be seen. See Andrew Erickson and Andrew Wilson, “China’s Aircraft Carrier Dilemma,” Naval War College Review 59/4, Autumn, 2006, pp. 13–46, http://www.centurychina.com/plaboard/posts/3770201.shtml; Richard D. Fisher, “Trouble Below: China’s Submarines Pose Regional, Strategic Challenges,” Armed Forces Journal, March 2006, http://www.armedforcesjournal.com/2006/03/1813965; Lyle Goldstein and William S. Murray, “Undersea Dragons: China’s Maturing Submarine Force,” International Security 28/4, 2004, pp. 161–96. 42 Gabriel Collins, Andrew Erickson, and Lyle Goldstein, “Chinese Naval Analysts Consider the Energy Question,” in Gabriel Collins et al., eds., Maritime Implications of China’s Energy Strategy: Interim Report, Newport, CT: Naval War College China Maritime Studies Institute, 2006, pp. 122–42. 43 In ibid., Collins, Erickson, and Goldstein cite an article by Zhang Ming in the Chinese periodical Xiandai Jianchuan [Modern Ships] that refers to a statement about China’s chokepoint vulnerability by former national security adviser Zbigniew Brzezinski. But while Zhang identifies Brzezinski as a source of Chinese concerns, the 1997 book in which Brzezinski mentions Asian energy supply lines only raises this issue in the context of a discussion of the PRC’s pre-eminent position in Southeast Asia, and the leverage that this affords China over Japan. See Zbigniew Brzezinski, The Grand Chessboard, New York: Basic Books, 1997, p. 165: Military cooperation with Burma gains China access to naval facilities on several Burmese offshore islands in the Indian Ocean, thereby also providing some further strategic leverage in Southeast Asia generally and in the Strait of Malacca particularly. And if China were to control the Strait of Malacca and the geostrategic chokepoint at Singapore, it would control Japan’s access to Middle Eastern oil and European markets. 44 China’s technology transfers to Pakistan began in a period when the PRC was concerned about Soviet aid to India but have continued since the disappearance of the Soviet Union. 45 Chang, “How China and Russia Threaten the World.” 46 Downs, China’s Quest, p. 11. The issue of trends and trend management features

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prominently in classical Chinese sources on strategy. For more on this issue in the Chinese tradition and in PRC behavior see Francois Jullien, The Propensity of Things, trans. by Janet Lloyd, Cambridge, MA: MIT Press/Zone Books, 1999; and Jacqueline Newmyer, testimony before the US–China Economic and Security Review Commission, Hearing on Chinese Military Modernization and US Export Controls, 16 March 2006, http://www.belfercenter.org/files/06_03_16_17_newmyer_chinese_strategy. pdf. 47 Goldstein and Kozyrev, “The Scramble for Siberia”; Cornelius and Story, “China and Global Energy Markets”; Blank, “The Eurasian Energy Triangle.” 48 Munro, “China’s Strategy toward Countries on Its Land Borders.”

11 Resource mercantilism and the militarization of resource management Rising Asia and the future of American primacy in the Persian Gulf Flynt Leverett1

In a broad sense, the “militarization” of resource management describes the growing inclination of energy producers and consumers to base decisions about their behavior in global energy markets on political and strategic calculations as well as on commercial and economic considerations. As this volume attests, the ongoing militarization of resource management is generating profound challenges for American interests around the world, challenges that will shape the US foreign and defense policy agenda for at least the next quarter century. Some of the most significant policy problems associated with the militarization of resource management are posed by the deepening engagement of the world’s two most important rising powers, China and India, with the world’s most important energy-producing region, the Persian Gulf. Although the United States has long enjoyed effective hegemonic status in the Middle East, China and India are intensifying their economic, diplomatic, and strategic ties to energy-producing states there, driven by their exploding demand for imported hydrocarbons.2 More particularly, these states seem to be pursuing energy security through what can be described as “resource mercantilism” – that is, the use of economic and foreign policy instruments by national governments to help their state-owned national energy companies (NECs) secure access to overseas hydrocarbon resources on more privileged bases than simple supply contracts based on market prices.3 Considerable attention has been focused on the presumptively destabilizing impact of China and India’s global “hunt” for hydrocarbon resources on global energy markets and international relations.4 In the Persian Gulf, the coincidence of closer Chinese and Indian ties to energy-producing states in “west Asia” with an ongoing decline in America’s strategic standing in the region prompts concerns, in some quarters, about the risks of arms races and even military conflict over access to Middle Eastern oil and gas supplies in the future.5 In particular, some analysts see the potential for China to project military power into the Persian Gulf, either directly or indirectly, in ways that will challenge US interests.6 Others see the potential for Sino–Indian conflict over access to the Gulf’s

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hydrocarbon resources. Such scenarios are frequently used to bolster the case for US–Indian strategic cooperation to contain China’s rising influence.7 This chapter argues that concerns about China and India’s energy-driven engagement in the Persian Gulf fueling either the destabilization of global energy markets or the militarization of resource management in the Middle East are overdrawn. Additionally, this chapter argues that, if such concerns become the basis for policy-making, the results are likely to be counterproductive to US interests. As will be discussed, there are significant limits on how far Chinese and Indian NECs can go to “lock up” access to Middle Eastern oil and gas reserves. Moreover, the prospect of military confrontation between the United States and either China or India over access to Persian Gulf energy resources seems remote. In all probability, Beijing and New Delhi will each seek to balance the other’s efforts to expand its naval capabilities in the Indian Ocean, aggravating what Mikkal Herberg has aptly described as the “potential future problem of military maritime competition to control the Sea Lanes of Communication in Southeast Asia.”8 Nevertheless, for the foreseeable future, the United States will maintain unique capabilities to exercise military power in the Gulf. This is true with regard to deploying naval forces and maintaining maritime supremacy in the Gulf.9 It is also true with regard to the projection of ground forces into the region. US logistical capabilities to lift sizeable infantry and armored forces into the Persian Gulf by air and sea will remain unequalled for the foreseeable future. There is certainly a risk that the United States could find itself in a competition for geopolitical influence with rising Asian powers – especially China – in the most strategically critical area of the world.10 To some degree, such a competition may already have started. But this risk is largely self-generated. If Washington pursues policies aimed at stabilizing and managing shifting geopolitical balances in the Gulf, the United States should be able to maintain its strategic primacy in the region, with China and India effectively legitimating that primacy. If Washington supplements that articulation of a new grand strategy for the Middle East with efforts to bring China and India into the International Energy Agency (IEA) and encourage the further internationalization of Chinese and Indian NECs, the United States can help Beijing and New Delhi transition to more market-oriented approaches to energy security. If, on the other hand, the United States continues to pursue policies that are perceived to be regionally destabilizing, its strategic standing will continue to decline. Under these circumstances, China and Middle Eastern energy producers may ultimately forge a de facto strategic alliance and look collaboratively for non-military means to contain American influence in the Gulf. This chapter develops these arguments in six sections. The first section looks at resource mercantilism as a particular manifestation of the militarization of resource management, conditioned by continuing structural shifts in global energy markets. The second section then looks more closely at resource mercantilism as practiced by China and India in the Persian Gulf as a “top down,” strategic response to perceived challenges to their energy security. The third section

Resource mercantilism and militarization 213 takes a different approach, focusing on the interaction of Chinese and Indian NECs with their governments to present resource mercantilism as a fundamentally “bottom up” phenomenon driven by the corporate agendas and interests of individual NECs. Against this backdrop, the fourth section assesses the economic and political limits of resource mercantilism as an energy-security strategy, while the fifth section draws implications for US policy. Finally, the sixth section draws out the likely consequences of poorly conceived US policy.

Conditions for militarization Resource mercantilism, particularly as practiced by China and India, needs to be understood in the wider context of the geopolitics and geoeconomics of energy, which are being reshaped by continuing structural shifts in global energy markets, on both the demand side and the supply side. These shifts have encouraged the militarization of resource management in various ways, including the emergence of resource mercantilism. On the demand side, the world has witnessed sustained and robust growth in the demand for crude oil, refined products, and natural gas since the beginning of the millennium. More specifically, a consequential portion of the increase in aggregate demand for oil and natural gas during the past five years or so has been conditioned by the emergence of new major demand centers in Asia, especially China and India. During 2001–4, 35 percent of the increase in oil demand worldwide was generated by China alone. During 2002–5, that figure increased to 40 percent. Indeed, the “explosion” of demand for crude oil and refined products in Asia has been one of the most important contributors (along with continued demand growth in the United States) to the dramatic rise in energy prices since late 2003.11 The International Energy Agency and the US Department of Energy’s Energy Information Administration, among other sources, project that oil demand in Asia will continue growing robustly over the next 20 to 25 years. However much cyclical dynamics or idiosyncratic (and, thus, at least theoretically changeable) national policies may have contributed to the recent expansion in Asian energy demand, this expansion is fundamentally grounded in the developmental trajectories of the most important emerging Asian economies, China and India – trajectories that are not likely to change radically in the foreseeable future.12 On the supply side, there has been a lag in the growth of installed productive capacity in upstream oil and gas sectors to accommodate rising demand. Historically, there has always been a cyclical quality to upstream energy investments; to some degree, the present lag is the predictable outcome of “underinvestment” in productive capacity since the mid 1980s.13 But, in the current environment, the potential to expand productive capacity is conditioned by the ever increasing concentration of the world’s hydrocarbon reserves under the control of national governments and NECs in the Middle East and former Soviet Union. Combined with continuing demand growth, this trend means that, among other things, the import dependence of major energy-consuming states and regions will continue

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growing during the next two decades.14 This trend also means that, in the future, state actors, not international energy companies (IECs) and private investors, will largely determine the pace at which hydrocarbon reserves are developed and the direction in which they are marketed. As these trends play out and play off one another15, they are prompting strategic and political responses by producer and consumer states alike. On the supply side of global energy markets, many observers have commented on the rise of “resource nationalism” in energy-producing states, as national governments seek to derive greater economic and political power from the monetization of their countries’ hydrocarbon reserves.16 On the demand side, resource mercantilism is, in many respects, an analogous strategic response by rising consumer states to structural shifts in global energy markets. At the heart of contemporary resource mercantilism is the increasing reliance of energyimporting states, especially in Asia, on their own NECs to acquire equity stakes in oil and gas reserves abroad, with national governments extending various kinds of support to their NECs’ efforts to conclude such deals.17 The outstanding exemplars of resurgent resource mercantilism in Asia are, of course, China and India. In broad terms, these two countries – rhetorically collectivized under the neologism, “Chindia” – work within similar parameters in trying to define their external energy strategies.18 Both perceive increasingly acute vulnerabilities to their energy security stemming from their growing reliance on imported hydrocarbons to fill critical portions of their energy mix. Both have state-owned energy companies – originally established to develop significant indigenous reserves of crude oil and natural gas – that have become increasingly active overseas.19 Both have sought to integrate their NECs’ overseas acquisition efforts into national strategies for energy security. And, for both countries, the Persian Gulf is an inescapable focus of their external energy policies. In both the Chinese and the Indian cases, resource mercantilism needs to be understood on two levels. On one level, external energy strategies grounded in the logic of resource mercantilism are shaped by high-level calculations in Beijing and New Delhi about national interests and strategic vulnerabilities. From this perspective, the overseas acquisition efforts of Chinese and Indian NECs are structured primarily through “top down” guidance and support from national governments. But, on another level, Chinese and Indian external energy strategies are shaped by the corporate agendas and interests of individual Chinese and Indian NECs. From this perspective, the overseas acquisition efforts of Chinese and Indian NECs are driven primarily from the “bottom up” – that is, by the NECs themselves. Neither perspective captures “the whole truth” about resource mercantilism as pursued by China and India; both must be taken into account in any analysis of China and India’s external energy strategies.

Resource mercantilism and militarization 215

Resource mercantilism and energy security At the strategic level, the attempts by Chinese and Indian NECs to secure access to oil and natural-gas reserves abroad are part of wider national efforts to deal with perceived vulnerabilities created by increasing dependence on imported hydrocarbons. With regard to crude oil, China and India already have strategically meaningful levels of import-dependence.20 Rising demand for transportation fuels makes it highly likely that demand for crude oil and refined products in China and India will continue to grow significantly in coming years; in turn, this prospect means that, like other major consumer countries, China and India will become even more dependent on foreign sources of oil through the next decade and beyond.21 China and India only recently started to import natural gas. Looking forward, though, rising demand for electricity in both countries means that China and India will almost certainly develop significant importdependence for natural gas in coming years.22 As China and India’s import-dependence for crude oil has grown over the past decade, Persian Gulf producers have assumed a central role in supplying both countries’ energy needs. As China and India increase their imports of crude oil and natural gas in coming years, the Persian Gulf will figure even more prominently in both countries’ external energy strategies. Currently, almost half of China’s oil imports are sourced from the Middle East, largely through supply contracts of varying durations. More than two-thirds of India’s oil imports today come from the Gulf, also through supply contracts supplemented by spot purchases. Although policy-makers and strategic planners in Beijing and New Delhi alike stress the importance of diversifying the sources and transport routes for hydrocarbon imports, for a variety of reasons the Middle East will continue to hold a leading position in supplying Chinese and Indian energy markets through the next decade and beyond. There is little reason to anticipate that China or India will be able to reduce the percentage of their oil imports sourced from the Persian Gulf in the next 10–20 years; indeed, the percentage of Chinese and Indian oil imports sourced from the Gulf is more likely to grow during this period. For policy-makers and strategic planners in Beijing and New Delhi, this growing reliance on imported hydrocarbons – and, especially, hydrocarbons from the Persian Gulf – is at the heart of the energy-security challenge facing their countries. In this context, the attractiveness of resource mercantilism to Chinese and Indian elites, as a strategy for managing this challenge, flows naturally from their acceptance of certain propositions about the workings of international energy markets, and optimal ways to achieve energy security – propositions that are, in many ways, at odds with liberal economic orthodoxy. From the resource-mercantilist perspective held by many elites in Beijing and New Delhi, the energy-security challenge facing China and India has at least two dimensions. First, Chinese and Indian elites are concerned about “volume risk” – that is, the adequacy of oil and gas supplies available on international markets. Volume risk is an inescapable feature of energy markets because of

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their inherent physicality and complexity. During the past 30 years or so, trading in various types of crude oil and refined products has become much more integrated on a global basis. This effectively reduced volume risk by making it more difficult for exporters to use oil as a “weapon” merely by cutting off supplies to particular customers. But, as market conditions have tightened all along the supply chain for crude oil in recent years, the prospective impact of potential supply disruptions – as a result of natural disaster, accident, terrorism, political instability within oilproducing states, or interstate conflict – has grown. Moreover, despite significant movement toward the creation of a single, integrated market for crude oil and refined products, there remains a profound degree of “regionalization” in oilsupply relationships. Thus, today, two-thirds of the Middle East’s oil exports are delivered to Asia, and the most important “growth” markets for future production from the Persian Gulf also lie to the East. This means that rising Asian economies will be looking to access ever larger supplies of oil, particularly from the Middle East, at the same time that established customers, such as Japan and Korea, are looking to expand their own access to those supplies.23 In reality the global oil market has already been divided up to a great extent through investments in field development and transport, the historical predominance of Western energy companies, and the relative stability of supply flows in that market., These conditions have created, and continue to reinforce, perceptions in Beijing and New Delhi that, in developing overseas upstream positions and ensuring secure supply flows from abroad, China and India are doing no more than playing “catch up” with the advanced industrial countries of the West.24 The regionalization of energy-supply relationships is even more pronounced for natural gas.25 As natural-gas usage expands in coming years, analysts, policy-makers, and strategic planners in Beijing and New Delhi anticipate that there is likely to be intensifying competition – involving China and India along with established energy consuming states in Asia, Europe, and North America – for access to pipeline and liquefied natural-gas (LNG) exports, particularly from the Persian Gulf. In light of these considerations, a significant number of Chinese and Indian elites are skeptical of the view propounded by most Western analysts that oil and gas will always be available, albeit at varying prices, on international markets.26 From their perspective, energy security is simply too important to be trusted to the uncertainties of energy markets. In addition to their concerns about volume risk, many Chinese and Indian elites are also worried about heightened “price risk” – that is, volatility in the prices of crude oil, refined products, and natural gas. Given their skepticism about the workings of international energy markets, some Chinese and Indian elites are more interested in insulating their societies from the effects of price-volatility than in allowing their economies to respond efficiently to price signals. Elite skepticism in Beijing and New Delhi about the functioning of international energy markets has been bolstered by the rise of resource nationalism,

Resource mercantilism and militarization 217 as discussed above. In this regard, many Chinese and Indian elites believe that, if national governments in energy-producing states across the Middle East, the former Soviet Union, Latin America, and Africa increasingly treat hydrocarbon reserves as strategic assets, and not simply as economic commodities, China and India have no choice but to take a similar perspective as energy consumers. In the Chinese case, the suspicion of international energy markets is further reinforced by a sense that the United States will not always let these markets work in a disinterested fashion where Chinese interests are in play.27 Given their view of the energy-security challenge confronting their countries, many policy-makers and strategic planners in Beijing and New Delhi recommend the acquisition of equity positions in overseas oil and gas assets by Chinese and Indian NECs so that, if their countries were in a situation in which they had adequate financial resources, but were unable to buy oil or gas on international markets because of constrained supply, the NECs’ foreign equity production could be sent home. Similarly, Chinese and Indian advocates of “equity oil” maintain that hydrocarbons produced abroad by Chinese and Indian NECs are insulated from fluctuations in market prices and could provide home-country consumers with cheaper energy supplies than those available on the international market. Working from these premises, the Chinese and Indian governments have adopted external energy strategies grounded, to a considerable degree, in the logic of resource mercantilism. In broad terms, China has taken the lead in developing a resource-mercantilist approach to energy security, with India effectively following China’s example. These strategies seek, inter alia, to utilize Chinese and Indian NECs to improve – indeed, to maximize – China and India’s access to overseas hydrocarbon resources, including in the Persian Gulf. Within the Gulf, the region’s major energy producers are the highest priority “targets” for Chinese and Indian “energy diplomacy.” These targets include the “OPEC Five” – Saudi Arabia, Iran, Iraq, Kuwait, and Abu Dhabi in the United Arab Emirates – for oil, and Iran and Qatar for natural gas.28 These strategies also seek to diversify the sources and transportation routes for China and India’s foreign energy supplies.29 For many Chinese elites in particular, diversification of transportation routes is especially important, given that 80 percent of China’s oil imports – including all of its imports from the Persian Gulf – currently must pass through the Straits of Malacca, where they are vulnerable to piracy, terrorism, and interdiction by US naval forces.30 Within the Persian Gulf, Iran is uniquely important for Chinese and Indian efforts to diversify transportation routes for oil and gas supplies, as it is the only major energy-producing state in the region whose geographic position would permit transport of oil and gas exports to Asian markets via pipeline as well as via sea routes.31 China’s external energy strategy is codified in the so-called “going out” (zou chu qu) policy. This policy was elaborated in 2002–3 as the current, “fourthgeneration” leadership cadre was consolidating its accession to power; in substance, though, it reflected positions that had guided official practice under

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China’s “third-generation” leadership of President and party chief Jiang Zemin and Premier Zhu Rongji. In keeping with the basic precepts of resource mercantilism, this policy explicitly encourages Chinese NECs to create more secure energy supplies for China by purchasing equity shares in producing oil and gas assets overseas, the exploration and production of new fields abroad, and the construction of refineries and pipelines. Under the rubric of “going out”, China’s three major NECs – the China National Petroleum Corporation (CNPC), China National Petrochemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC) – have emerged as prototypes for a new kind of actor on the global energy scene: the “INOC”, or “international/national oil company”, as one Chinese energy executive describes it.32 Broadly speaking, India has followed the Chinese approach to crafting an external energy strategy rooted in the logic of resource mercantilism. The Indian government first began to articulate elements of its resource mercantilist external energy strategy during the tenure of Prime Minister Atal Bihari Vajpayee’s most recent BJP-led coalition (1999–2004). Although the focus of the Vajpayee government’s energy policy-making was the reform of India’s domestic energy sectors, its principal policy document on energy issues included some discussion of state-supported overseas acquisitions by Indian NECs.33 During the tenure of the current Prime Minister, Manmohan Singh, New Delhi has deliberately emulated the Chinese approach to empowering NECs as part of its external energy strategy.34 Singh’s first Minister of Petroleum and Natural Gas, Mani Shankar Aiyar, publicly articulated an ambitious agenda for overseas acquisitions and projects by Indian NECs; although lower profile, Aiyar’s successor, Murli Deora, is also publicly committed to encouraging foreign “equity oil” deals by Indian NECs. From a strategic perspective, external energy strategies grounded in the logic of resource mercantilism, like those of China and India, unfold in three stages. First, the Chinese and Indian governments seek to build a wide range of diplomatic links to key energy-producing regions, including the Persian Gulf, to pave the way for Chinese and Indian NECs to develop positions in these regions. In the Persian Gulf, Chinese leaders have concluded a number of such agreements with local regimes. These include the elaboration of a “strategic energy partnership” with Saudi Arabia (starting in 1999 and continuing through the reciprocal visits of Saudi King Abdallah to China and Chinese Premier Hu Jintao to Saudi Arabia in 2006), multiple trade and investment agreements with Saudi Arabia and smaller Gulf Arab states over the last several years, an energy cooperation agreement with Kuwait, and a variety of economic and technological cooperation agreements with the Islamic Republic of Iran.35 Additionally, China has instituted a regular series of dialogues with the Gulf Cooperation Council (GCC) and is currently negotiating a free trade agreement with the GCC.36 More recently, Beijing cancelled Iraq’s Saddam-era official debt to China.37 In 2005, China supplemented its diplomatic engagement with energy-producing states in the Persian Gulf and with the GCC by opening a regular dialogue with OPEC. In connection with its external energy strategy, India has launched its own

Resource mercantilism and militarization 219 “energy diplomacy” directed at hydrocarbon exporters in the Persian Gulf. Although an extensive Indian expatriate presence in the Gulf has long provided a basis for positive ties, Indian governments have, in recent years, sought to forge an expanding array of connections to the region to facilitate greater access by Indian NECs to oil and gas supplies.38 In January 2006, during Saudi King Abdallah’s visit to India, the Saudi monarch and Prime Minister Singh signed the so-called “Delhi Declaration.” This document structures the development of Saudi–Indian relations in a number of strategic issue areas; with regard to energy, the Delhi Declaration commits the two countries to developing a “strategic energy partnership”, including long-term contracts for the supply of Saudi oil to India and joint ventures in upstream and downstream projects.39 Indian governments have been pursuing closer ties to the Islamic Republic of Iran since the end of the Cold War. Since the beginning of the new millennium, however, energy interests have compelled the Vajpayee and Singh governments to take Indo-Iranian relations to a new level.40 Since 2006, finalization of a nuclear cooperation agreement between the United States and India has induced some rhetorical caution on the Singh government’s part regarding Indo-Iranian energy ties; nevertheless, Indian officials and NECs continue to pursue energyrelated agreements (as well as oil and gas deals) in Iran.41 Since 2002, the Vajpayee and Singh governments have worked steadily to develop bilateral relations between India and Qatar. The most recent step in the process was the conclusion of a bilateral defense agreement in 2007, under which India will provide military-to-military assistance to Qatar.42 Currently, India is negotiating its own free-trade agreement with the GCC. To some extent, Chinese and Indian efforts to formalize closer ties to energyproducing states in the Gulf are intended to help Chinese and Indian NECs conclude larger and longer-term supply contracts. But, in keeping with the logic of resource mercantilism, these diplomatic efforts are also meant to help Chinese and Indian NECs secure “equity oil” and gas deals in the upstream and develop strategic assets in the downstream (i.e., refineries and LNG trains). Thus, in the second stage of their countries’ external energy strategies, Chinese and Indian NECs take advantage of the openings created for them by their governments’ diplomatic engagement in energy-producing regions around the world to develop upstream and downstream positions. In the Persian Gulf, Chinese NECs have concluded a number of investment agreements and are continuing to pursue additional deals. In Saudi Arabia, Sinopec won one of the three initial concessions for developing non-associated gas in the Kingdom in March 2004. Sinopec has also entered into two joint ventures with Saudi Aramco to develop new refining capacity in China (one of which also includes ExxonMobil as a partner). In June 2007, CNPC won a contract to build a pipeline carrying oil from Saudi fields to Fujairah in the United Arab Emirates.43 In Kuwait, CNPC won a contract in the late 1990s to build two oil-gathering centers for the Kuwait Petroleum Company (KPC). More recently, Sinopec has concluded a preliminary agreement with KPC to develop a joint venture refinery project in China.44

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In Iran, Sinopec signed a memorandum of understanding (MOU) with the National Iranian Oil Company (NIOC) in 2004, prospectively valued at $70 billion to $100 billion, to develop and buy LNG from the South Pars field and to participate in developing the Yadavaran oil field. Since then, China’s two other major NECs, CNOOC and CNPC, have signed MOUs to undertake significant LNG and upstream oil and gas projects in Iran.45 And, in December 2007, Sinopec concluded an initial investment contract from its MOU with the NIOC, covering the initial phase of developing the Yadavaran field. Sino–Iranian energy cooperation agreements also envision the construction of a pipeline to connect Iranian oil production to the Kazakhstan–China pipeline.46 In June 2007 – shortly after Beijing announced the cancellation of Iraq’s official debt to China – CNPC received a commitment from the Iraqi government to revive the company’s agreement with the Saddam Hussein regime to explore and develop the al-Ahdab oil field.47 Chinese NECs have also signed production contracts (including service contracts as well as equity participation) in Oman and Yemen.48 Like their Chinese counterparts, Indian NECs are seeking to take advantage of the diplomatic openings created by their government to develop commercial positions in the Persian Gulf. The most prominent Indian NECs with regard to overseas acquisitions and operations are: the Oil Natural Gas Corporation (ONGC) and its international subsidiary, ONGC Videsh Limited (OVL); the Indian Oil Corporation (IOC); Oil India Limited (OIL); Bharat Petroleum Corporation Limited (BPCL); Hindustan Petroleum Corporation Limited (HPCL); and the Gas Authority of India Limited (GAIL).49 In the Gulf, Indian NECs have made their greatest progress in developing commercial positions in Iran. In 2002, OVL and OIL acquired rights to explore and develop the offshore Farsi oil block. In 2004, OVL signed a memorandum of agreement taking a roughly 20 percent stake in the development of Iran’s Yadavaran oil field (alongside the primary foreign stakeholder, Sinopec). In 2005, IOC signed a memorandum of agreement with Petropars, a subsidiary of the National Iranian Oil Company (NIOC), to develop part of the South Pars gas field and an associated LNG train; that same year, GAIL concluded a similar memorandum of agreement with the NIOC. Perhaps most significantly, Indian officials are continuing to negotiate with Iranian and Pakistani counterparts to finalize a framework agreement for a pipeline that would transport Iranian natural gas to Pakistan and India. Such an agreement would almost certainly open up new commercial opportunities for Indian NECs.50 Besides Iran, Indian NECs are also developing positions in Qatar and Iraq. In 2004, Petronet, a consortium of Indian NECs – including OVL, IOC, and GAIL – with Gaz de France as a strategic partner, concluded the first contract to begin importing LNG to India from Qatar.51 (The contract was concluded with RasGas II, a joint venture between Qatar Petroleum and ExxonMobil.) In 2005, OVL won a 100 percent stake in the exploration and development of Qatar’s Najwet Najim offshore oil block. In the aftermath of the decision to revive CNPC’s Saddam-era agreement to explore and develop the al-Ahdab oil field, Iraqi

Resource mercantilism and militarization 221 energy officials said that a Saddam-era agreement with OVL to explore and develop a block in western Iraq will also be amended and restored. The Iraqi Oil Ministry has also invited IOC to consider building new refineries in Iraq.52 Finally, in the third stage of Chinese and Indian external energy strategies, Beijing and New Delhi continue providing various types of support to their NECs as the companies follow up on the openings created for them by China and India’s energy diplomacy. As Chinese NECs pursue and implement “equity” oil and gas deals in energy-producing regions around the world, the Chinese government provides them with both financial and political support. Financially, the Chinese government provides direct support to the NECs through the provision of loans, at below-market rates and sometimes even without interest, by state-owned “policy banks” to underwrite the companies’ overseas acquisitions. The government also provides indirect support to Chinese NECs by extending a variety of incentives for energy-producing states to offer investment opportunities to the companies; these incentives include the provision of foreign aid and the construction of basic infrastructure by Chinese firms.53 With considerable variation across specific cases, Beijing has employed all of these measures to support Chinese NECs’ acquisition efforts in the Persian Gulf.54 Politically, the Chinese government supports its NECs with high-level meetings between Chinese leaders and their counterparts in energy-producing states, the involvement of China’s leaders in negotiations over specific projects, and the use of China’s membership in various international organizations to cover the interests of important energy exporters.55 Beijing has employed all of these tools in supporting acquisitions by Chinese NECs in the Persian Gulf, in addition to the financial tools just discussed. In the context of the Gulf, the most salient example of Chinese policy-makers using their country’s political influence to buttress its external energy strategy is Beijing’s handling of the Iranian nuclear issue. All of China’s energy agreements with Iran run against long-standing US policy, which seeks, in effect, to keep the Islamic Republic’s oil and gas reserves in the ground. On the nuclear issue, China is working to balance its interests in continued good relations with the United States and acting as a “responsible stakeholder” on non-proliferation with its interests in developing closer energy ties to Iran, and in defending what policy-makers see as important principles in Chinese foreign policy, including the peaceful resolution of disputes and non-interference in the internal affairs of other states.56 In the Indian case, the government requires its NECs to finance their overseas acquisitions on international capital markets, for the most part. The Indian government, however, is stepping up its political support for the efforts of Indian NECs to develop positions abroad, particularly through high-level meetings between Indian leaders and their counterparts in energy-producing states and other manifestations of “energy diplomacy.”

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Resource mercantilism and corporate interests Looking at China and India’s external energy strategies as “top down” initiatives, Chinese and Indian NECs seem to be more or less interchangeable instruments through which unitary state apparatuses in Beijing and New Delhi pursue well-elaborated programs for securing privileged access to hydrocarbon resources in targeted countries, including in the Persian Gulf. But there is another level on which China and India’s external energy strategies need to be understood. This level focuses on the corporate agendas and interests of individual NECs. Chinese and Indian external energy strategies are not solely the reflection of national efforts to assuage strategic vulnerabilities stemming from these countries’ growing reliance on imported hydrocarbons. These strategies are also the evolving products of bargaining and competitive maneuvering between various elements of the bureaucratic apparatuses in Beijing and New Delhi, on the one hand, and Chinese and Indian NECs, on the other. And, in this process, the autonomy of Chinese and Indian NECs vis-à-vis their respective national governments is growing. This trend is especially pronounced in the Chinese case, but it is observable in the Indian case as well. The increasing autonomy of Chinese and Indian NECs is a function of their origins and evolution as corporate enterprises in a policy environment characterized by continuing economic liberalization. In the Chinese case, all three of the major NECs were created out of ministerial structures in the 1980s as part of the initial reform program championed by Deng Xiaoping and China’s “secondgeneration” leadership.57 Under China’s “third-generation” leadership, all three NECs became ever more market-oriented and profit-driven in their strategic orientation and operational practices as a result of additional restructuring. Between 1997 and 1999, CNPC and Sinopec were restructured as vertically integrated energy companies operating across the whole supply chain for oil and gas – upstream, midstream, and downstream. Both companies retained some of their original strengths and weaknesses after the restructuring, with CNPC still more established as an upstream player and Sinopec more established in the downstream and each still maintaining regional strongholds in different parts of China.58 At the same time, though, vertical integration helped them become more efficient and expanded their political resources vis-à-vis the state. Between 1999 and 2001, all three of the major Chinese NECs were transformed into holding companies that transferred most of their assets to operational subsidiaries that were then publicly listed on various stock exchanges. While the Chinese government remains the majority shareholder in all three NECs, the fact that the companies are listed on international stock exchanges through these subsidiaries reinforces their market orientation and focus on profitability.59 In the Indian case, the major NECs were created out of previously established state agencies in the early days of Indian economic reform in the 1990s. Thus, India’s Oil and Natural Gas Commission, established originally to oversee the development of the country’s upstream oil resources, was converted into ONGC

Resource mercantilism and militarization 223 in 1991 and later partially privatized through the public offering of a minority of its equity.60 Similarly, IOC – originally established as a state-owned enterprise (SOE) focused on downstream activities – was corporatized and partially privatized in the late 1990s.61 The autonomy of Indian NECs has been reinforced by other policy initiatives. Most importantly, since 1997, the Indian government has granted its most profitable SOEs – in India, state-owned enterprises are formally described as central public-sector enterprises (CPSEs) – considerable operational autonomy and a more limited degree of financial autonomy. So far, nine SOEs/CPSEs – collectively described as navaratnas (“nine jewels”) – have been treated this way.62 The major Indian NECs – including ONGC, IOC, and GAIL – are all in this special category. From a “bottom up” perspective, the increasing autonomy of Chinese and Indian NECs has had a critical impact on the formulation and implementation of China and India’s external energy strategies, in at least three important ways. First, the corporate agendas and interests of Chinese and Indian NECs were at least as important as the strategic preferences of policy-makers in Beijing and New Delhi in launching these strategies. In the Chinese case, it was NECs – specifically CNPC – and not the state that initially pushed for overseas investment opportunities in the early 1990s. Initially, the Chinese leadership did not support overseas investments by Chinese NECs, but, as China’s oil imports increased over the course the 1990s and CNPC began to earn money from its initial investments abroad, the Chinese government became more supportive of its NECs’ overseas activities. As in the Chinese case, the interest of Indian NECs in investing abroad preceded but eventually overlapped with the strategic interests of national-level policy-makers. According to Indian energy executives and researchers, both ONGC and IOC were prompted to undertake their initial overseas investments because economic reform and restructuring in the 1990s had made them more profitable, and corporate leaders did not want to lose their higher profits to a revenue-hungry government.63 Second, the relative autonomy of NECs, in both China and India, means that there is no comprehensive national strategy, let alone a specific plan, for acquiring oil and gas assets abroad. On a project-specific basis, the foreign investments of Chinese and Indian NECs are driven primarily by the companies themselves, even in countries where the Chinese and/or Indian governments have concluded “strategic energy partnerships” or other similar agreements. For both Chinese and Indian NECs, the primary motives to invest overseas are to acquire new reserves, generate profits, and become more internationally competitive. Third, in both China and India, the NECs are applying market- and profitoriented criteria in making investment decisions. Particularly in the Chinese case, the leading NECs are developing ever greater independence in this regard. While preferential financing through state agencies may give the NECs a lower “capital hurdle” than that of IECs, Chinese NECs nonetheless seem to consider anticipated return on capital carefully in making investment decisions.64 Indeed,

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there are a growing number of instances in which Chinese NECs have refused, on business grounds, to pursue overseas (and domestic) initiatives that were favored by the national government. In this context, it is interesting to note that there is a growing public debate in both China and India about the relationship between NECs’ foreign acquisitions and energy security. In China, several NEC executives have said publicly that they fundamentally disagree with the notion that the acquisition of oil and gas assets abroad can enhance China’s energy security.65 In India, as noted, the government requires its NECs to finance their overseas acquisitions on international capital markets, for the most part. Just last year, the State Planning Commission recommended that NECs undertake overseas investments only in accordance with sound commercial criteria.66 A recent study of overseas investments by NECs by two analysts at the Wood Mackenzie consultancy found that ONGC is making its investment decisions according to criteria comparable to those applied by private energy companies.67 In the Persian Gulf, the agendas and interests of individual NECs and the increasing autonomy of NECs vis-à-vis their governments have significantly affected “on-the-ground” outcomes with regard to Chinese and Indian energy investments. The pattern of Chinese and Indian investments in energy projects in Iran illustrates this with particular clarity. With regard to the behavior of individual Chinese NECs, it is noteworthy that Sinopec – the Chinese company with the most developed downstream capabilities and a strong interest in using overseas acquisitions to compensate for its weakness relative to CNPC in the naturalgas sector – was the first Chinese company to conclude a memorandum of agreement for an LNG project in Iran. Both CNPC and CNOOC were subsequently motivated to sign their memoranda of agreement with Tehran for LNG projects to avoid being left out of potential opportunities in Iran. More significantly, with regard to the NECs’ interaction with Beijing, all three companies have sought to develop positions in Iran even after initial enthusiasm for their efforts in some parts of the Chinese government has cooled as the Iranian nuclear issue has heated up.68 Nevertheless, it is also noteworthy that the three Chinese NECs have been slow to conclude actual investment contracts for their planned projects in Iran, particularly for LNG. While it is tempting to conclude that the companies are responding to directives from Beijing, their behavior is actually shaped far more by the agendas and interests of the NECs themselves. Like Royal Dutch Shell, Total, and other European IECs that are negotiating contracts for planned LNG projects in Iran, all three Chinese NECs perceived a significant measure of political risk posed by the possibility of US military action against the Islamic Republic over Tehran’s nuclear activities. Furthermore, like their European counterparts, the major Chinese NECs are all concerned about the impact of rising costs for LNG projects on the profitability of their prospective investments in Iran. The companies are unlikely to proceed to conclude contracts and make sizeable investments in the projects until these concerns are resolved. A similar dynamic is reflected in the Chinese NECs’ handling of potential

Resource mercantilism and militarization 225 upstream oil deals in Iran. Apart from supply contracts, only one of the upstream oil projects in Iran to which Chinese NECs have committed themselves has moved to an actual investment contract, much less implementation of that contract; the one investment contract concluded so far is Sinopec’s December 2007 agreement with the NIOC regarding the initial phase of developing the Yadavaran field. Even that deal – coming in the immediate aftermath of the public release of the December 2007 US National Intelligence Estimate on Iran’s nuclear program – primarily reflects Sinopec’s interest in protecting the position it staked out in its 2004 MOU. Again, concern about the profitability of upstream oil projects under the notoriously difficult terms offered to foreign investors under the Islamic Republic’s “buy-back” system seems to be the principal constraint to more fulsome investment by Chinese NECs. As a Beijingbased analyst for a leading Western oil and gas consultancy says, “At the end of the day, Chinese companies are out to make money. If they just wanted oil they would have signed more ‘buy backs’.”69 Indian NECs have also been slow to move beyond MOUs to actual contracts on upstream oil and gas and LNG projects in Iran. In this regard, Indian and Iranian consultants and energy executives suggest that Petronet has used IOC and GAIL’s commitments to LNG projects in Iran to leverage better prices for future LNG supplies from Qatar. They also suggest that Indian NECs are reluctant to conclude LNG contracts in Iran for the same reasons as their Chinese counterparts.70 Similarly, despite the Indian government’s strong interest in moving ahead with the Iran–Pakistan–India “peace pipeline” (as long as security issues can be adequately addressed), Indian NECs are and will continue to be reluctant to make contractual commitments to the project until the price for Iranian gas supplies is set on terms they consider commercially sound.

Limits of resource mercantilism Of course, resource mercantilism is not a new phenomenon, “invented” by Chinese and Indian policy-makers and energy executives during the past decade. Both France in the 1960s and 70s and Japan in the 1970s and 80s crafted external energy strategies based on state-supported NECs working to access crude-oil reserves abroad. Ultimately, these policies’ excessive costs and lack of results forced Paris and Tokyo to move toward less statist and more market-oriented approaches. If Chinese and Indian external energy strategies are viewed as “bottom up” initiatives, driven largely by the corporate agendas and interests of Chinese and Indian NECs, it is striking how serious are the limits on resource mercantilism, as either a potential threat to the stability of international energy markets, or as a long-term basis for Chinese and Indian energy-security strategies. While increased demand from China and other rising Asian economies has had a very direct effect on global oil prices, there is little evidence that Chinese and Indian “equity” oil and gas deals, in the Persian Gulf as well as other energy-producing regions, are keeping or will keep an economically or strategically significant part

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of the world’s hydrocarbon reserves “locked up” and unavailable to international markets. Currently, oil produced from Chinese and Indian overseas equity assets worldwide represents less than 1 percent of the oil produced and traded globally. If the most optimistic projections of Chinese and Indian acquisitions abroad prove correct, overseas equity oil production by Chinese and Indian NECs might represent as much as 2 percent of total worldwide production in 2020 – hardly a major “blow” to the stability of the global oil market. Just as Chinese and Indian “equity” oil and gas deals will not fundamentally alter the structure of international energy markets by themselves, there is little evidence that they will significantly ameliorate the energy-security challenges posed by China and India’s growing reliance on imported hydrocarbons. Today, the amount of oil produced by Chinese NECs from equity assets outside China equals roughly 11 percent of the country’s domestic oil production, and constitutes approximately 15 percent of its total oil imports and 8 percent of its overall oil consumption. The amount of oil produced by Indian NECs from equity assets outside India represents an even smaller portion of India’s oil demand. Given projections of growth in demand for oil and natural gas in China and India, and the intensity of international competition for upstream positions around the world, it is difficult to imagine that, in the next one to three decades, Chinese and Indian NECs, will be able to fill a dramatically higher portion of their countries’ demand for imported hydrocarbons from overseas “equity” oil and gas projects.71 As the limits of resource mercantilism as an energy-security strategy become ever more apparent in coming years, it seems highly likely that the pursuit of state-backed “equity” oil and gas deals by Chinese and Indian NECs will increasingly be justified as industrial policy rather than as external energy policy.72 Beyond the issue of how much “equity” oil and gas Chinese and Indian NECs will produce in coming years, the direct contribution of that production to China and India’s energy security is subject to serious question. In most of their overseas equity projects, Chinese and Indian NECs are minority stakeholders, not majority stakeholders and/or operators. Thus they do not really “control” most of the foreign assets in which they have invested. Moreover, much of the “equity” oil produced from these foreign assets is not likely to be physically transferred to China and India. Rather, it will be sold on local markets to reduce transportation costs and generate higher profits for the producing companies. This is particularly the case for the Chinese NECs. Chinese energy executives and officials say that less than 10 percent of the oil produced outside China by the three major Chinese NECs is physically transported to China. The rest is sold on local markets.73 Clearly, Chinese NECs are prioritizing higher returns on the sale of their production over satisfying statist perceptions of China’s energysecurity requirements. It would seem that Indian NECs transfer a higher percentage of their “equity” oil production to India than Chinese NECs send back to China. Nonetheless, Indian NECs currently sell a significant share of their overseas production on international markets and are likely to increase that share in the future.

Resource mercantilism and militarization 227 With regard to the Persian Gulf, very little of China or India’s equity oil is currently produced there. In the future, there are likely to be truly severe constraints on how far Chinese and Indian NECs will be able to go in developing equity positions there. When the prospective cumulative impact of these constraintsare considered, it seems likely that China and India will increase their access to oil and gas supplies in the Persian Gulf primarily through supply contracts, rather than the expansion of equity positions by their NECs.74 Although their capabilities are steadily improving, Chinese and Indian NECs cannot yet offer the same range of technical expertise and experience as more experienced and sophisticated IECs, which puts them at a competitive disadvantage as potential operators for technically challenging projects. In three of the “OPEC Five” countries, Chinese and Indian NECs face the same barriers to foreign involvement in upstream oil and gas projects as US and European IECs. These barriers include an outright ban on foreign participation in upstream oil projects in Saudi Arabia and Kuwait, and the poor security and political environment in Iraq. In Qatar, Chinese and Indian NECs will be challenged to access more LNG in the face of an indefinite moratorium on new gas projects there. In Iran, the unattractiveness of the “buy back” system will almost certainly continue to restrain the growth of foreign investment in upstream energy projects, including investment by Chinese and Indian NECs, even with the recent decline in the perceived risk of US–Iranian military confrontation. Barring a significant shift in the Iranian approach to foreign energy investments, the expansion of the positions of Chinese and Indian NECs in the Islamic Republic is likely to proceed slowly.

Implications for US policy The US response to Chinese and Indian engagement in the Persian Gulf should be guided, first of all, by an appreciation of the political and economic limits of resource mercantilism. US policy should also be guided by unexaggerated assessments of the ability and inclination of rising Asian powers to challenge US hegemony in the Persian Gulf directly, at least in the near-to-medium term. As two Harvard researchers note with regard to China, Beijing “recognizes that it is not about to replace the United States in this region, rather it is focusing on shifts at the margin.”75 The same could be said about India’s strategic ambitions in the region. On this basis, the US policy response to China and India’s energy-driven engagement in the Persian Gulf needs to contain two principal elements. The first is the formulation and implementation of a new American “grand strategy” toward the Middle East, to restore the legitimacy of US hegemony in the region. The second is the renovation of the current global energy “architecture” to meet the requirements of a new era.

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Grand strategy in the Middle East As previously noted, China and India’s intensifying engagement with energyproducing states in the Persian Gulf is taking place against a backdrop of an ongoing decline in America’s strategic standing in the region. Perceptions of a decline in America’s strategic standing in the Gulf may create some opportunistic openings for China and India to increase their influence in the region, and for Chinese and Indian NECs to pursue investment opportunities there. Nevertheless, America’s current difficulties in the Middle East also create profound dilemmas for Chinese and Indian policy-makers (and for decision-makers in the Gulf). On the whole, China and India have a better chance to meet their energysecurity goals and other important strategic objectives if the United States is acting as an effective hegemon in the Persian Gulf. They suffer no less than other energy consumers if US policies in the region prove to be destabilizing, or are widely perceived as introducing additional risks that the market must somehow discount – as is presently the case with respect to the possibility of US military action against Iran to slow the Islamic Republic’s nuclear development. Since the end of the Cold War and the prosecution of the first Gulf War in 1990–1, America’s exercise of hegemony in the region has played out in an international environment characterized by deepening processes of globalization. China and India’s energy-driven engagement in the Gulf reflects the intensifying participation of both Asian and Middle Eastern players in these processes. As Daniel Yergin points out, the explosion of energy demand in China and India is a globalization “success story,” as investment inflows, export expansion, and sustained economic growth lift hundreds of millions of Chinese and Indians out of poverty and these populations consume ever greater amounts of energy.76 In the Middle East as well, Saudi Arabia, smaller energy-producing states in the GCC and other regional states (like Egypt) are making their own belated, but now increasingly apparent turn toward globalization. In the 1990s, analysts of the Middle East regularly lamented the region’s slow embrace of economic liberalization. However, by the end of the decade, regional leaderships were launching serious economic reform initiatives. The intersection of those initiatives with the liquidity “boom” generated by high energy prices in recent years has turned the Middle East – especially the Gulf – into one of the world’s most economically dynamic regions, making it a global economic player in ways not seen before.77 Globalization has been closely associated with America’s economic and military primacy, both globally and in key regions. Globalization has also been linked to America’s leading role in shaping a global energy “architecture”, meaning an interconnected set of market norms and practices, together with formal and informal institutions, which are collectively intended to promote various aspects of global energy security.78 This architecture has several constituent elements that were initially put in place by the United States and other major consumer states to counter the dramatic display of market power by the

Resource mercantilism and militarization 229 Organization of Petroleum-Exporting Countries (OPEC) in the 1970s. All these elements remain bound up with America’s role as international leader: the United States played a key role in establishing the International Energy Agency (IEA) in the 1970s, in response to the 1973–4 oil-price “shock”; it encouraged the liberalization and internationalization of upstream investment, reflected in major “plays” by IECs in the 1970s, 1980s, and 1990s, in places such as the North Sea, the North Slope, and the deepwater Gulf of Mexico; and it provided critical support to the creation of a single, integrated, and truly global market for trading crude oil and refined products, with prices based on spot transactions and the dollar serving as the currency in which crude oil is priced.79 US leadership in shaping the global energy architecture has been reinforced by America’s commitment to provide physical security for the world’s major oil flows, particularly from the Persian Gulf. Since the promulgation of the Carter Doctrine in 1980 and the “Reagan corollary” in 1981, the United States has publicly committed itself to use force to defend the security of Persian Gulf oil reserves and the free flow of oil exports from the region as vital American interests. Spurred by these commitments, the United States has built up operational capabilities over the past quarter-century that have turned the Persian Gulf, in military terms, into an “American lake.” The rise of China and India as players on the Persian Gulf energy scene is taking place during a period in which American primacy in the region is coming under mounting strain. Much of this strain has been generated not by outside actors, however, but by US policy choices – on Iraq, Iran, Arab–Israeli affairs, and other issues – that have disappointed regional and international expectations of America’s leadership in the region during a period of continuing globalization. In a strategic sense, globalization is fundamentally about the diffusion of economic power across national boundaries. Thus, in a globalizing world, there will inevitably be shifts in geopolitical balances, both globally and regionally. The responsibility of the hegemon, in such an environment, is to manage these shifting geopolitical balances and mediate important conflicts so that increasingly cooperative frameworks can develop, both within key regions and across regions. Unfortunately, for much of the post-Cold War period, US policy toward the Middle East – under the Clinton administration as well as under the current Bush administration – has run increasingly in directions that are incompatible with these expectations.80 Regional dismay with America’s choices is prompting Middle Eastern energy producers to explore various versions of an “Eastern option” in their foreign policies, creating openings for China, India, and other external players to expand their influence in the Gulf. For example, Saudi Arabia is using its status as the world’s largest oil producer, oil exporter, and holder of oil reserves to cultivate closer ties to China, India, and other important energy importers in Asia; the Kingdom is forging a genuinely strategic relationship with China, in particular, partly as a “hedge” against precipitous deterioration in the Kingdom’s traditional strategic partnership with the United States.81 The Islamic Republic of Iran, for its part, has long

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sought to reduce US influence and presence in the Gulf as a high foreign-policy priority. Today, Iranian diplomats describe Iran’s expanding relations with rising and established economic powers in Asia as providing it with alternatives to the United States and Europe for investment and trade partners. They also note that these relations give Tehran cover against US pressure over Iran’s nuclear activities, involvement in post-Saddam Iraq, and other points of US–Iranian contention.82 These developments are exacerbated by a relative decline in America’s economic influence in the Middle East, as other international actors – including the European Union, as well as rising Asian powers – increase their trade and investment ties to the region.83 Current and prospective investments by Chinese and Indian NECs in the Persian Gulf are part of this broader trend. In this context, an important part of the US policy response to China and India’s energy-driven engagement in the Persian Gulf is the formulation and implementation of a new “grand strategy” toward the Middle East. This grand strategy should combine pursuit of a multilateral regional settlement on Iraq, carrots-and-sticks engagement with Iran and Syria, and definition of a substantive political horizon for resolving the various tracks of the Arab–Israeli conflict.84 A new strategy for the Middle East should also include a return to the “over-the-horizon” military posture that served US interests in the region so well in the 1980s and early 1990s, but from which American administrations have moved away since the end of the first Gulf War. Such an approach would revivify and re-legitimate American primacy in the region, and would win broad international support – including that of China and India. Renovating the global energy architecture Beyond getting its Middle East policy “right”, the US response to expanded Chinese and Indian engagement in the Persian Gulf also needs to include a new effort to renovate the global energy architecture for a new era. Defining this agenda in full is beyond the scope of this chapter. However, it is relevant here to consider the integration of China and India into the IEA, the principal international regime for important energy-consuming states. While the IEA is working to build closer working relations with both China and India, full inclusion of these countries in the organization would require, effectively, the IEA’s reinvention. Western officials frequently point to China and India’s deficiencies as potential members of the IEA (i.e., their non-membership in the OECD and their lack of strategic petroleum reserves specified by IEA guidelines for member states). But, it is just as important to recognize that Western powers would have to accept significant changes in the IEA regime for Chinese and Indian membership to become plausible. In particular, under current IEA rules, new members are allocated weighted voting power in the organization based on their oil consumption in 1974. This is hardly an attractive prospect for either China or India, and even if accepted would introduce a substantial degree of unreality into IEA

Resource mercantilism and militarization 231 proceedings. To date, there has been little serious discussion among IEA members about the necessity of reforming the organization’s decision-making structure to accommodate China and India’s eventual inclusion. In this context, the United States should also strongly support the internationalization of Chinese and Indian NECs as a way to encourage China and India to take more market-oriented approaches to ensuring their energy security. Current US policy is, at best, ambiguous on this issue. The NECs are, in many respects, already America’s best allies to promote more market-based policies in both China and India. Their further internationalization (including through joint venture projects with US and other IECs) will make them even stronger advocates of more liberal approaches.

The consequences of incorrigibility If the United States takes these steps, it can maintain its strategic primacy in the Persian Gulf, as well as its dominant role in the global energy architecture. If, however, the United States persists in a more unilateral approach to the most strategically critical region of the world – in a manner that is dysfunctional for the interests of other important regional and international players – and eschews effective leadership in reforming the global energy architecture to accommodate rising powers like China and India, the long-term consequences for America’s regional position in the Middle East and its international standing generally are potentially serious. Under these conditions, Middle Eastern energy producers and rising Asian energy consumers, especially China, may ultimately forge a de facto strategic alliance and look collaboratively for non-military means to contain American influence in the Gulf. Such as scenario is consistent with the conditions for and modalities of “soft balancing” against US power, as described by Robert Pape and others.85 The dramatic rise in energy prices in recent years has prompted an enormous transfer of resources from established consumer states to energy producers and to manufacturers who serve markets in energy-producing states.86 (Thus, alongside China, which is expanding its manufactured exports to energy-producing states in the Persian Gulf, Germany has built up a significant current account surplus in recent years, and Japan has maintained its surplus.) At this point, what energy-producing states in the Middle East do with their current account surpluses is at least as important to the financing of global economic imbalances as the management of China’s current account surplus. China and a number of Middle Eastern energy-producing states with significant current account surpluses seem to be in the early stages of diversifying their foreign exchange reserves away from dollar-denominated assets. Given these realities, at least two options for strategic cooperation between China and Middle Eastern energy producers to contain US influence in the Persian Gulf present themselves.87 First, China and Middle Eastern states could ultimately move to use their continued willingness to finance America’s

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burgeoning current account deficit and overall debt levels as a source of strategic leverage over US foreign policy.88 Second, China and Middle Eastern states with substantial influence in OPEC could coordinate their actions to effect a shift in the currency regime for international oil trading so that oil would no longer be priced solely in dollars, but rather against a basket of currencies. Such a move would put significant pressure on the value of the dollar and, by extension, on the US economy. Either of these two options would constitute a major blow to America’s international standing. Fortunately, neither of these scenarios is likely to play out in the near term; the United States still has time to recover from its strategic mistakes in the Persian Gulf and other critical arenas. But, if these strategic mistakes are perpetuated, the long-term consequences for America’s global leadership are likely to be profound.

Notes 1 The author gratefully acknowledges the contributions of Hillary Mann Leverett and Pierre Noël to his analysis and understanding of the issues treated in this chapter. He also thanks John Mearsheimer, Robert Pape, and participants in the University of Chicago’s Program on International Security Policy Workshop; participants in the Global Public Policy Institute’s Transatlantic Energy Security Dialogue, “Global Energy Governance and the Rise of China and India”; and Fatih Birol and staff members of the International Energy Agency’s Economic Analysis Division, Oil Industry and Markets Division, and Office of Global Energy Dialogue for comments on earlier versions of arguments presented here. 2 For discussion of Chinese and Indian engagement in the Persian Gulf, see Geoffrey Kemp, “East Moves West,” The National Interest, Summer 2006; Masataka Osumi, “India and China’s Energy Strategies in Middle Eastern Oil-Producing Nations,” Presentation to the Institute of Energy Economics, Japan, 25 August 2006, http://eneken.ieej.or.jp/en/data/pdf/373.pdf; Afshin Molavi, “The New Silk Road,” Washington Post, 9 April 2007; and Dominic Barton, Kito de Boer, and Gregory Wilson, “The New Silk Road: Opportunities for Asia and the Gulf,” in a special issue of McKinsey Quarterly, February 2007, http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/The_new_Silk_Road_Opportunities_for_A sia_and_the_Gulf_1814_abstract. 3 The phrase “resource mercantilism” was first coined by Flynt Leverett in “The Geopolitics of Oil and America’s International Standing,” testimony to the US Senate Committee on Energy and Natural Resources, 10 January 2007, http://geostrategymap.com/freepdfs/Energy_Testimony_Leverett.pdf. 4 For example, the US–China Economic and Security Review Commission claimed in its 2006 annual report to the US Congress that China’s strategy of securing ownership and control of oil and natural gas assets abroad could substantially affect US energy security – reducing the ability of the global petroleum market to ameliorate temporary and limited petroleum supply disruptions in the United States and elsewhere. More broadly, the Commission argued that China’s energy policies, taken as a whole, are not consistent with the economic or geopolitical behavior of a responsible stakeholder; they distort markets and destabilize volatile regions. As China’s energy needs and consumption grows, its failure to observe these international norms becomes increasingly problematic.

Resource mercantilism and militarization 233 See US–China Economic and Security Review Commission, Report to Congress, November 2006, pp. 7–8, http://www.uscc.gov/annual_report/2006/annual_ report_full_06.pdf. 5 In this regard, Henry Kissinger has gone so far as to argue that competition over access to hydrocarbon resources will be the most likely cause for international conflict in coming years; see Caroline Daniel, “Kissinger Warns of Energy Conflict,” Financial Times, 2 June 2005. 6 For example, Ian Lesser claims that In Asia, growing reliance on Middle Eastern . . . energy sources may encourage importers to augment political and commercial ties with deeper security relationships and increased direct investment in regional energy projects. This could go well beyond existing arms transfer relationships. With China set to import ever larger quantities of oil from the Gulf, it is not inconceivable that some form of Chinese naval presence in the region will be commonplace in 2010. See Lesser, “Energy and Middle Eastern Security: New Dimensions and Strategic Implications,” in Nora Bensahel and Daniel Byman, eds., The Future Security Environment in the Middle East: Conflict, Stability, and Political Change, Santa Monica, CA: RAND, 2004. On the risk of Sino-American military confrontation in the Middle East, see also Toshi Yoshihara and Richard Sokolsky, “The United States and China in the Persian Gulf: Challenges and Opportunities,” The Fletcher Forum of World Affairs 26/1, Winter–Spring 2002; and, more sensationally, Jed Babbin and Edward Timperlake, Showdown: Why China Wants War with the United States, New York: Regnery, 2006. Alongside the risk of Sino-American military confrontation, Richard Russell argues that China’s energy-driven engagement in the Middle East will prompt Beijing to continue transferring weapons of mass destruction capabilities and expertise to regional states, with potentially destabilizing consequences for the regional security environment and US interests; see Russell, “China’s WMD Foot in the Greater Middle East’s Door,” Middle East Review of International Affairs 9/3, September 2005, http://meria.idc.ac.il/journal/2005/issue3/jv9no3a6.html. Kenneth Pollack claims that Chinese engagement with energy-producing states in the region “can be very detrimental to the US, particularly if the Chinese were to adopt the role that the Soviets did during the Cold War, supporting whichever state opposed the United States”; see Adla Massoud, “Oil May Fuel Sino-US Conflict,” al-Jazeera, 29 June 2006, http://globalpolicy.igc.org/security/natres/oil/2006/0629massoud.htm. 7 See for example Ashley Tellis, “South Asia,” in Richard Ellings and Aaron Friedberg, eds., Strategic Asia 2001–02: Power and Purpose, Seattle, WA: National Bureau for Asian Research, 2002; Stephen Blank, “India and the Gulf after Saddam,” Strategic Insights, April 2004, http://www.ccc.nps.navy.mil/si/2004/ apr/blankApr04.asp; Enders Wimbush, “The Shape of New Asia,” Asian Wall Street Journal, 20 September 2004; C. Raja Mohan and Parag Khanna, “Getting India Right,” Policy Review, February/March 2006, http://www.hoover.org/publications/ policyreview/2913806.html; C. Raja Mohan, “India and the Balance of Power,” Foreign Affairs 85/4, July–August 2006; Ashton Carter, “America’s New Strategic Partner,” ibid.; and Ashley Tellis, “What Should We Expect from India as a Strategic Partner,” in Henry Sokolski, ed., Gauging US–Indian Strategic Cooperation, Carlisle, PA: United States Army War College Strategic Studies Institute, March 2007, http://www.strategicstudiesinstitute.army.mil/pdffiles/pub755.pdf. In addition, see Robert Blackwill (then-US ambassador to India), “The United States, India, and Asian Security,” Presentation to the Institute for Defense Analyses Fifth Asian Security Conference, 27 January 2003, http://www.mtholyoke.edu/acad/intrel/bush/blackwill2.htm. For analyses of Sino-Indian relations that question whether India can ultimately be induced to ally with the United States to contain China, see Peter Brookes, “Meeting 21st-Century Security Challenges in Asia,” Testimony to the

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United States House of Representatives Committee on Armed Services, 27 September 2005, http://www.heritage.org/Research/AsiaandthePacific/upload/85825_1.pdf; Lora Saalman, “Redrawing India’s Geostrategic Maps with China and the United States,” Japan Focus, 21 September 2005, http://www.japanfocus.org/products/details/2065; Chietigj Bajpaee, “India Recovers Lost Ground in the International Energy Game,” Power and Interest News Report, 16 March 2005, http://www.pinr.com/report.php? ac=view_report&report_id=279&language_id=1; and Kemp, “East Moves West.” 8 Mikkal Herberg, “The Emergence of China throughout Asia: Security and Economic Consequences for the US,” Testimony to the United States Senate Committee on Foreign Relations, 7 June 2005, http://www.senate.gov/~foreign/hearings/ 2005/hrg050607p.html. For an insightful discussion of the energy-related dimensions of Sino-Indian strategic interaction, see Stein Tønnesson and Åshild Kolås, Energy Security in Asia: China, India, Oil, and Peace, Report to the Norwegian Ministry of Foreign Affairs, Oslo: International Peace Research Institute, April 2006, http://www.prio.no/page/Publication_details//9429/47777.html; see also Anindita Chatterjee and Mohit Sinha, Power Realignments in Asia: China, India, and the United States – Report of a US–India Policy Dialogue, University of Pennsylvania Center for the Advanced Study of India, and The Observer Research Foundation, pp. 14–17, December 2006, http://casi.ssc.upenn.edu/research/Power%20Realignments%20report.pdf. 9 Dennis Blair and Kenneth Lieberthal note that China and India (along with Japan and Russia) “are the only other countries with the economic potential to build large bluewater navies in the same league with the United States’, but they are still at least 20 years away from developing the fleet strength, naval-supply networks, and operational skills” needed to mount sustained operations far from their home ports; see Blair and Lieberthal, “Smooth Sailing: The World’s Shipping Lanes Are Safe,” Foreign Affairs 86/3, May–June 2007. Beijing is working to expand its blue-water naval capabilities over time, including the creation of a “string of pearls” network of basing facilities along the sea-lanes from the Persian Gulf to China. Nevertheless, China’s naval modernization appears to be focused primarily on the promotion of Chinese interests vis-à-vis Taiwan. In this regard, Bernard Cole judges that Beijing’s “concern for the security of its overseas energy supplies does not dominate its national security policy process, and the most important aspects of energy security for Beijing are economic and political, not military”; see Cole, “Chinese Naval Modernization and Energy Security,” paper presented to the National Defense University’s Institute for National Security Studies Pacific Symposium, 20 June 2006, http://www.ndu.edu/inss/symposia/pacific2006/colepaper.pdf. For discussion of China’s naval development and its implications for the military balance in the Persian Gulf, see Richard Sokolsky and Eugene Rumer, “The Role of Outside Powers,” in Richard Sokolsky, ed., The United States and the Persian Gulf: Reshaping Security Strategy for the Post-Containment Era, Washington, DC: National Defense University Press, 2003; David Shambaugh, “China’s Military Modernization: Making Steady and Surprising Progress,” in Ashley Tellis and Michael Wills, eds., Strategic Asia 2005–06: Military Modernization in an Era of Uncertainty, Seattle, WA: National Bureau of Asian Research, 2006; Anthony Cordesman and Martin Kleiber, Chinese Military Modernization: Force Development and Strategic Capabilities, Washington, DC: Center for Strategic and International Studies, 2007; and Ronald O’Rourke, “China Naval Modernization: Implications for US Naval Capabilities – Background and Issues for Congress,” Congressional Research Service Report for Congress, 29 May 2007, http://www.fas.org/sgp/crs/row/RL33153.pdf. India is better positioned than China, both geographically and in terms of naval capabilities, to project power along sea-lanes of communication running through the Indian Ocean, and the Indian navy has embarked on an ambitious modernization program. Nevertheless, as John Gill notes, “deficiencies in logistical support, reconnaissance aircraft,

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and command/control will . . . continue to hamper the navy’s efforts to achieve a true blue water power projection status”; see Gill, “India and Pakistan: A Shift in the Military Calculus?,” in Tellis and Wills, Strategic Asia. On this point see Flynt Leverett and Jeffrey Bader, “Managing China–US Energy Competition in the Middle East,” Washington Quarterly 29/1, December 2005, http://www.twq.com/06winter/docs/06winter_leverett.pdf. The risk of a Sino–American competition for influence in key energy-producing regions is also highlighted in Council on Foreign Relations, National Security Consequences of US Oil Dependency, Independent Task Force Report 58, New York: Council on Foreign Relations, 2006, http://www.cfr.org/content/publications/attachments/EnergyTFR.pdf; John Keefer Douglas, Matthew Nelson, and Kevin Schwartz, “Fueling the Dragon’s Flame: How China’s Energy Demands Affect Its Relationships in the Middle East,” paper presented to the US–China Economic and Security Review Commission, 14 September 2006, http://www.uscc.gov/researchpapers/2006/China_ME_FINAL.pdf; and Hanns Günther Hilpert, “Asien in der Nahe/Mittlere Osten: Wirtschaftliche und Energie Interessen,” in Muriel Asseburg, ed., Regionale (Neu-)Ordnung im Nahen und Mittleren Osten und die Rolle externer Akteure, Berlin: Stiftung Wissenschaft und Politik, March 2007. The recent trend toward higher oil prices can be dated to March 1999, when the Organization of Petroleum-Exporting Countries (OPEC) successfully increased market prices by limiting member states’ production for the first time since 1985. Between March 1999 and September 2000, oil prices roughly tripled – albeit from a low base – as a result of OPEC’s actions. In September 2000, OPEC publicly stated that it would work to keep its “basket” price for crude oil within a $22–28-per-barrel band. Oil prices remained relatively stable until November 2003, when rising demand from Asia began to drive prices steadily upward. Since then, world oil prices have more than tripled again. See Ken Koyama, Perspectives on Asian Oil Demand: Outlook and Uncertainties, Tokyo: Institute of Energy Economics, February 2007. See Daniel Yergin, “It’s Not the End of the Oil Age,” Washington Post, 31 July 2005. See Friedemann Müller, Energy Security: Demands Imposed on German and European Foreign Policy by a Changing Configuration in the World Energy Market, Berlin: Stiftung Wissenschaft und Politik, January 2007. See Flynt Leverett and Pierre Noël, “The New Axis of Oil,” National Interest, Summer 2006. For a discussion of somewhat analogous trends in international gas markets, see Amy Jaffe and Ronald Soligo, “Market Structure in the New Gas Economy: Is Cartelization Possible?,” in David Victor, eds., Natural Gas and Geopolitics: From 2040, Cambridge: Cambridge University Press, 2006. For a comparative analysis of structural trends in oil and gas markets, see Mueller, Energy Security. Resource nationalism is often defined as a national government’s assertion of ownership rights over oil and gas reserves within their territorial boundaries, usually in ways that contradict liberal paradigms for encouraging foreign investment, and work against the interests of IECs. This species of resource nationalism is epitomized by the efforts of President Vladimir Putin’s administration to re-establish a dominant measure of state control over Russia’s hydrocarbon resources, and by the nationalization of foreign investments in Venezuela’s Orinoco region by President Hugo Chávez’s administration. But, beyond this essentially economic aspect, there is a more purely political dimension to contemporary resource nationalism – namely, national governments seeking to derive strategic influence from the control over the production and marketing of hydrocarbon reserves exercised by their NECs. The political species of resource nationalism can take the blunt form of unilateral supply cut-offs, as both Chávez and Iranian President Mahmoud Ahmedinejad have threatened, notwithstanding OPEC’s commitment not to use oil as a political weapon; on

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this point, see Mueller, Energy Security. The political species of resource nationalism can also take a more subtle form, with resource-owning governments using their control over the monetization of reserves as a source of strategic leverage; on the strategic dimensions of contemporary resource nationalism, see Leverett, “The Geopolitics of Oil and America’s International Standing.” 17 On Asian NECs and their roles in national governments’ external energy strategies, see John Mitchell and Glada Lahn, “Oil for Asia,” briefing paper, Energy, Environment and Development Programme, London: Royal Institute of International Affairs, March 2007, http://www.isn.ethz.ch/pubs/ph/details.cfm?v21=111300&lng=en&click 53=111300&ord61=alphaNavi&id=30644; Keun-Woon Paik, Valerie Marcel, Glada Lahn, John Mitchell, and Erkin Adylov, Trends in Asian NOC Investment Abroad, working background paper, Energy, Environment and Development Programme, London: Royal Institute of International Affairs, March 2007, http://www.chathamhouse.org.uk/files/7076_r0307anoc.pdf; Hiroyuki Ishida, Energy Strategies in China and India and Major Countries’ Views, Tokyo: Institute of Energy Economics, March 2007, http://eneken.ieej.or.jp/en/data/pdf/388.pdf; and Mikkal Herberg, “Asia’s National Oil Companies: International Expansion and Competitive Implications,” Presentation to the Institute of Energy Economics, Japan, 5 April 2007, http://eneken.ieej.or.jp/en/data/pdf/389.pdf. 18 On China’s external energy strategy see Mikkal Herberg, “Asia’s Energy Insecurity, China, and India: Implications for the US,” Testimony to the United States Senate Committee on Foreign Relations, 26 July 2005, http://www.prio.no/files/file 47777_060420_energy_security_in_asia__final_.pdf?PHPSESSID=b8a3+ac; David Zweig and Bi Jianhai, “China’s Global Hunt for Energy,” Foreign Affairs 84/5, SeptemberOctober 2005; United States Department of Energy, Energy Policy Act 2005, Section 1387: National Security Review of International Energy Requirements, February 2006, http://www.epa.gov/oust/fedlaws/publ_109–058.pdf; Kenneth Lieberthal and Mikkal Herberg, “China’s Search for Energy Security: Implications for US Policy,” NBR Analysis 17/1, April 2006, http://www.nbr.org/publications/ issue.aspx?ID=93a9dcaa-b9d5–4601-ac32–93f702696db5; Aaron Friedberg, “ ‘Going Out’: China’s Pursuit of Natural Resources and Implications for the PRC’s Grand Strategy,” NBR Analysis 17/3, September 2006, http://www.nbr.org/publications/ issue.aspx?ID=392; Erica Downs, China, The Brookings Institution, Foreign Policy Studies, Energy Security Series, December 2006, http://www.brookings.edu/reports/ 2006/12china.aspx; and Daniel H. Rosen and Trevor Houser, China Energy: A Guide for the Perplexed, Washington, DC: Peterson Institute for International Economics, May 2007, http://www.iie.com/publications/papers/rosen0507.pdf. On India’s external energy strategy, see Herberg, “Asia’s Energy Insecurity”; Vibhuti Hate, “India’s Energy Dilemma,” South Asia Monitor 98, Washington, DC: Center for Strategic and International Studies, 7 September 2006, http:www.heritage.org/Research/AsiaandthePacific/upload/bg_2008.pdf; and Tanvi Madan, India, The Brookings Institution, Foreign Policy Studies, Energy Security Series, November 2006, http://www.brookings.edu/reports/2006/11india.aspx. 19 On the international activities of Chinese NECs, see United States Department of Energy, Energy Policy Act 2005, Section 1387; Eurasia Group, China’s Overseas Investments in Oil and Gas Production, Report to the US–China Economic and Security Review Commission, 16 October 2006, http://www.uscc.gov/researchpapers/2006/oil_gas.pdf; Peter Parry, Eric Spiegel, Edward Tse, John McCreery, and Adrian del Maestro, “The Roaring Dragon: Unocal Bid Just a Minor Bump in the Road,” Washington, DC: Booz Allen Hamilton, 2006, http://www.boozallen.com/ media/file/153443.pdf; Xin Ma and Philip Andrews-Speed, The Overseas Activities of China’s National Oil Companies: Rationale and Outlook, Beijing: China Institute of International Studies, 2006; Xiaojie Xu, “Chinese NOCs’ Overseas Strategies: Background, Comparison, and Remarks” in the Baker Institute Energy Forum on “The

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Changing Role of National Oil Companies in International Energy Markets,” March 2007, http://www.rice.edu/energy/publications/docs/NOCs/Papers/ChineseNOCs_Xu. pdf; and Rosen and Houser, China Energy. On the international activities of Indian NECs, see Madan, India; and United States Energy Information Administration, Country Analysis Brief: India, January 2007. Since China became a net oil importer in 1992, the portion of its oil supplies coming from abroad has risen steadily. China currently uses roughly 6.6 million barrels per day (mmbd) of crude oil; almost half of this figure – just over 3 mmbd – is provided by imports. India’s dependence on foreign oil is of longer standing and deeper than China’s. India currently uses at least 2.5 mmbd of crude oil; more than two-thirds of this figure – roughly 1.7 million mmbd – are provided by imports. Working from estimates of China’s oil demand by the International Energy Agency (IEA), the United States Energy Information Administration (EIA), and the Institute of Energy Economics, Japan, and from estimates of China’s domestic oil production by the same agencies as well as by Chinese NECs, one can project that China’s import dependence for oil will reach 60–80 percent of its total consumption in 2020. Even more dramatically, both the IEA and the Indian government estimate that India’s import-dependence for crude oil could exceed 90 percent by 2020; see International Energy Agency, World Energy Outlook 2004, Paris: International Energy Agency, 2004, http://www.iea.org/textbase/nppdf/free/2004/weo2004.pdf; and Integrated Energy Policy, Report of the Expert Committee, New Delhi: Government of India State Planning Commission, August 2006, http://planningcommission.nic.in/ reports/genrep/rep_intengy.pdf. In contrast to domestic oil production, for which the best that the Chinese and Indian energy industries might do is to delay the moment at which production starts to decline, and ameliorate the steepness of that decline, both China and India have the potential to increase domestic gas production in coming years. Nevertheless, by 2020, both countries will, in all likelihood, have to import well over half of the natural gas they consume. In this regard, analyses by the IEA, EIA, and Chinese NECs project that, by 2020, China may have to import as much as 70 percent of the natural gas it consumes. The IEA projects that, by 2020, India will become at least as dependent on imports for its natural-gas supplies as China. Today, 88 percent of Japan’s oil imports and 81 percent of Korea’s are sourced from the Middle East – significantly higher figures than the percentage of Chinese and Indian oil imports sourced from the region. On this point in the Chinese case, see Friedemann Müller, “China’s Energy Policies – Geopolitical Repercussions,” in Gudrun Wacker, ed., China’s Rise: The Return of Geopolitics?, Berlin: Stiftung Wissenschaft und Politik, February 2006, http://www.swp-berlin.org/de/common/get_document.php?id=1666. For further discussion of the regionalization of oil and gas supply relationships, see Müller, Energy Security. Chinese and Indian elites are by no means alone in their concern about volume risk in global energy markets. A survey conducted in 2005–6 under the auspices of the World Economic Forum’s Energy Industry Partnership Program indicates that uncertainties about security of supply from the Middle East in the near term, and adequate growth in supply globally in the longer term, are the leading concerns of chief executive officers of international energy companies; see “Energy Community Survey” in World Economic Forum, Energy Vision Update, Spring 2006, p.6. See Leverett and Bader, “Managing China–US Energy Competition.” The “OPEC Five” control the world’s five largest national holdings of proven reserves of conventional crude oil. Iran and Qatar hold the second- and third-largest reserves of natural gas in the world, respectively (after Russia). Of course, these external energy strategies are parts of broader energy policies that also include measures aimed at managing demand and increasing the energy

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efficiency of the Chinese and Indian economies. It is beyond the scope of this chapter to consider these other dimensions of Chinese and Indian energy policies. However, in both the Chinese and the Indian cases, policy-makers have generally put more effort into policies aimed at increasing the availability of energy supplies rather than policies aimed at reducing demand and increasing efficiency. See Downs, China, p. 14. See Müller, Energy Security. Personal communication with the author. This document, Hydrocarbon Vision 2025, was released in February 2000. For discussion, see Translating India’s Hydrocarbon Vision into Reality, Strategy Report, India Oil and Gas Industry, New Delhi: Ernst and Young India, 2004, pp. 31–32, http://199.50.29.97/global/download.nsf/India/ECU_Translating_India’s_HydrocarbonStrategy_Report/$file/Translating_India’s_Hydrocarbon-Strategy_Report.pdf. In an address to a global energy conference in New Delhi in January 2005, Singh acknowledged, “I find China ahead of us in planning for the future in the field of energy security.” Given this state of affairs, Singh argued, “We can no longer be complacent and must learn to think strategically, to think ahead, and to act swiftly and decisively. . . . We need to strengthen our oil companies in launching them as global firms.” See Keith Bradsher, “India Finds Itself Trailing in Fight for Global Energy Deals,” International Herald Tribune, 17 January 2005, http://www.iht.com/articles/2005/01/16/business/rupee.php; and “India Must Catch Up with China on Energy, Singh Says,” Bloomberg 16 January 2005. On China’s relations with Saudi Arabia, see Leverett and Bader, “Managing China–US Energy Competition”; John Calabrese, “Saudi Arabia and China Extend Ties beyond Oil,” Jamestown Foundation China Brief 5/20, 27 September 2005, http://www.jamestown.org/publications_details.php?volume_id=408&issue_id=3474 &article_id=2370272; David Andelman, “The Sino-Saudi Connection,” Forbes, 17 April 2006, http://members.forbes.com/global/2006/0417/018.html; and Javid Hassan, “Saudi-Sino Relations Poised for Further Expansion,” Arab News, 6 December 2006, http://www.arabnews.com/?page=15§ion=0&article=89621&d=17&m= 11&y=2007. On the Abdallah and Hu visits in 2006, see “China, Saudi Arabia Forge Closer Relationship,” China Daily, 24 January 2006, http://www.chinadaily.net/english/ doc/2006–01/24/content_515060.htm; “China, Saudi Arabia Extend Energy Ties,” Asia Times, 25 January 2006, http://www.atimes.com/atimes/Middle_ East/HB23Ak03.html; Jianjun Tun, “The Strategic Considerations of the Sino–Saudi Oil Deal,” Jamestown Foundation China Brief 6/4, 15 February 2006, http://www.jamestown.org/publications_details.php?volume_id=415&issue_id=3621 &article_id=2370779; and “Energy, Defense Deals Inked as China President Visits Saudi,” Agence France Presse, April 22, 2006. On China’s relations with Iran, see Leverett and Bader, “Managing China–US Energy Competition”; Sharif Shuja, “Warming Sino–Iranian Relations: Will China Trade Nuclear Technology for Oil?,” Jamestown Foundation China Brief 6/4, 23 July 2005, http://www.jamestown.org/ publications_details.php?volume_id=415&issue_id=3621&article_id=2370779; Dario Cristiani, “China and Iran Strengthen Their Bilateral Relationship,” Power and Interest News Report, 6 October 2006, http://www.pinr.com/report.php?ac= view_report&report_id=566&language_id=1; and John Garver, China and Iran: Ancient Partners in a Post-Imperial World, Seattle: University of Washington Press, 2007. On China’s expanding ties to GCC, see Julian Madsen, “China’s Policy in the Gulf Region: From Neglect to Necessity,” Power and Interest News Report, 27 October 2006, http://www.pinr.com/report.php?ac=view_report&report_id=575&language_ id=1. The GCC includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. On Beijing’s forgiveness of Iraqi debt as part of an effort to re-establish and expand

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42 43 44 45 46 47 48 49 50

Chinese–Iraqi energy ties from the Saddam era, see Christopher Bodeen, “China Agrees to Reduce Iraqi Debt by ‘Large Margin’,” Associated Press, 21 June 2007, http://www.uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=61797&nav02=575 98&nav01=57272; Samuel Ciszuk, “Iraq Woos Chinese Oil investments Amid Increasing Iraqi Frustration with Lack of Progress,” Global Insight Daily Analysis, 20 June 2007, http://www.uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=61792& nav02=57598&nav01=57272; and Shai Oster, “Iraq Turns to China for Help in Reviving Oil Industry,” Wall Street Journal, 20 June 2007. Derek Sands, “Analysis: India and Middle East Cozy over Energy,” UPI Asia Online, 22 May 2007, http://www.upiasiaonline.com/Economics/2007/05/21/analysis_india_ and_middle_east_cozy_over_energy/7607/. Indian officials have referred to the Persian Gulf as part of India’s “extended neighborhood” for most of the post-Cold War period. For representative statements see M. H. Ansari (then-Indian ambassador to Saudi Arabia), “Security in the Persian Gulf: Evolution of a Concept,” Strategic Analysis 22/6, September 1999, http://www.ciaonet.org/olj/sa/sa_99anm01.html; and Satyanarayan Pattanayak, “Oil as a Factor in Indo-Gulf Relations,” Strategic Analysis 25/3, June 2001, http://www.ciaonet.org/olj/sa/sa_june01pas02.html. See Subhash Kapila, “India–Saudi Arabia: The Strategic Significance of the Delhi Declaration,” paper 1734, South Asia Analysis Group, 14 March 2006, http://www. saag.org/%5Cpapers18%5Cpaper1734.html. In 2001, Prime Minister Vajpayee traveled to Iran to sign the Tehran Declaration with Iranian President Mohammad Khatami; this document committed both countries to the development of closer economic and energy ties. In 2003, the Vajpayee government took another step in building India’s partnership with Iran with the conclusion of a framework agreement for Indo-Iranian energy relations during a visit to New Delhi by President Khatami. See Pramit Mita and Vibhuti Hate, “India–Iran Relations: Changing the Tone,” CSIS South Asia Monitor, 8 March 2006, http://www.csis.org/media/csis/pubs/sam92.pdf; cf. K. Alan Kronstadt and Kenneth Katzman, “India–Iran Relations and US Interests,” Congressional Research Service Report for Congress, 2 August 2006, http://fpc.state.gov/documents/organization/70294.pdf; Sanam Vakil, “Iran: Balancing East against West,” Washington Quarterly 29/4, Autumn 2006, http://www.twq.com/06autumn/docs/06autumn_vakil.pdf.; and C. Christine Fair, “India and Iran: New Delhi’s Balancing Act,” Washington Quarterly 30/3, Summer 2007, http://www.twq.com/07summer/index.cfm?id=265. “India, Qatar to Sign Defence Agreement,” Press Trust of India, 24 June 2007. “Two CNPC Units to Jointly Build Crude Oil Pipeline in UAE,” Dow Jones Chinese Financial Wire, 4 June 2007, http://www.uofaweb.ualberta.ca/chinainstitute/nav03. cfm?nav03=61434&nav02=57598&nav01=57272. See “Sinopec–KPC $5 Billion Refinery Gets Early Go-Ahead,” Reuters, 31 July 2006, http://www.uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=48642&nav02 =43875&nav01=43092. For details see “China’s Energy Investment Plans in Iran,” Reuters, 21 December 2006, http://www.uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=54769&nav 02=43873&nav01=43092. See Vakil, “Iran: Balancing East against West.” See Oster, “Iraq Turns to China for Help in Reviving Oil Industry”; and “Iraq to Revive CNPC Deal,” Upstream, 25 June 2007. In addition, Chinese NECs have signed production contracts in several Middle Eastern countries outside the Persian Gulf, including Algeria, Libya, Morocco, Syria, and Tunisia. See also Lee and Shalmon, “Searching for Oil.” For further discussion see Madan, India. See Amy Yee and Najmeh Bozorgmehr, “Iran Close to India–Pakistan Gas Deal,” Financial Times, 29 June 2007.

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51 Petronet was created with Indian government encouragement in 1997 as a joint venture to handle the import and marketing of LNG within India. 52 In addition to the positions developed by Indian NECs in the Persian Gulf, Reliance Industries – India’s largest private energy company – has developed positions in Oman and Yemen and established an overseas subsidiary based in Dubai. Indian NECs have signed production agreements in Middle Eastern countries outside the Persian Gulf, including Egypt, Libya, and Syria. 53 See Peter Evans and Erica Downs, “Untangling China’s Quest for Oil through StateBacked Financial Deals,” Brookings Institution Policy Brief, May 2006, http://www.brookings.edu/papers/2006/05china_evans.aspx. 54 For example, Sanam Vakil notes that it was the Chinese that helped the Iranians build the Tehran metro system, and a second transportation project is already underway. Additionally, the Chinese are building Iranian highways and airport runways, even as China’s own infrastructure development moves at breakneck speed. Furthermore, China’s Cherry Automobile Company burst onto the Iranian scene in 2003 and now manufactures 30,000 annually. Today there are more than 100 different projects percolating on the Iranian–Chinese stove. See Vakil, “Iran: Balancing East against West.” 55 In this context, it should also be noted that Beijing’s current efforts to expand diplomatic and economic ties to the Persian Gulf take place against a historical backdrop of China’s provision of arms and sensitive technologies to states in the region. See Daniel Byman, China’s Arms Sales: Motivations and Implications, Santa Monica, CA: RAND, 2000; and Shirly Kan, “China and Proliferation of Weapons of Mass Destruction and Missiles: Policy Issues,” Congressional Research Service Report for Congress, updated 22 October 2007, http://www.fas.org/sgp/crs/nuke/RL31555.pdf. In recent years it has been difficult to discern a consistent pattern of Chinese arms sales to countries with which China has substantial energy interests. Overall, arms exports are probably less effective than the financial and political tools Beijing has at its disposal to facilitate closer ties to energy-producing states in the Persian Gulf, because Chinese weapons systems are generally not considered state-of-the-art by potential buyers in the region. 56 See Leverett and Bader, “Managing China–US Energy Competition”; Vakil, “Iran: Balancing East against West”; and Dengli Shen, “Iran’s Nuclear Ambitions Test China’s Wisdom,” Washington Quarterly 29/2, Spring 2006, http://www.twq.com/ 06spring/docs/06spring_shen.pdf. 57 Over the course of the 1980s, the management and production functions of the ministries of petroleum, coal, nuclear power, and electric power were transferred to newly established state energy firms, including the three NECs. Thus, CNOOC was formed in 1982 out of the Ministry of Petroleum Industry to focus on developing China’s offshore oil and gas resources, Sinopec in 1983 out of the Ministry of Chemical Industry to focus on downstream sectors, and CNPC in 1988 out of the Ministry of Petroleum Industry to focus on onshore exploration and production of oil and gas resources. 58 For additional historical background and comparative discussion on the three NECs, see Steven Lewis, “Chinese NOCs and World Energy Markets: CNPC, Sinopec and CNOOC,” in the Baker Institute Energy Forum on “The Changing Role of National Oil Companies in International Energy Markets,” March 2007, http://www.rice.edu/ energy/publications/docs/NOCs/Papers/CNOOC_Lewis.pdf; and Rosen and Houser, China Energy. 59 For further discussion of how “marketization” and openness to foreign investment reinforce trends toward the “corporatization” of Chinese NECs, see Lewis, “Chinese NOCs and World Energy Markets.”

Resource mercantilism and militarization 241 60 See Sumit Ganguly, “The ONGC: Charting a New Course?” in the Baker Institute Energy Forum on The Changing Role of National Oil Companies in International Energy Markets, March 2007, http://www.rice.edu/energy/publications/docs/NOCs/ Papers/ONGC_Ganguly.pdf 61 In addition, ONGC and IOC swapped 10 percent of their equity with each other in 2000. 62 Originally, 11 SOEs were designated, but two of these companies were subsequently privatized. 63 Personal communications with the author. 64 This point is amplified in Rosen and Houser, China Energy. 65 See Erica Downs, “The China Energy Security Debate,” China Quarterly 177, 2004, pp. 21–41; Christian Constantin, “China’s Conception of Energy Security: Sources and International Impacts,” working paper 43, University of British Columbia Centre of International Relations, March 2005, http://www.iir.ubc.ca/site_template/workingpapers/Constantin-WP43.pdf; and Edward Cunningham, “China’s Energy Governance: Perception and Reality,” MIT Center for International Studies Audit of the Conventional Wisdom, March 2007. 66 See Integrated Energy Policy. 67 See Norman Valentine and Tom Ellacott, “Asian NOCs,” Oil & Gas Investor, August 2006. 68 See Xu Yihe, “Beijing Irked by Iran Agreements,” Upstream, 5 January 2007. 69 Quoted in Emma Graham-Harrison, “Slim Mideast Pickings Seen for Chinese Firms,” Reuters News, 27 November 2006, http://www.uofaweb.ualberta.ca/chinainstitute/ nav03.cfm?nav03=43883&nav02=43096&nav01=42792. 70 Personal communications with the author. 71 In this regard, an analyst with the Wood Mackenzie consultancy says flatly, “China will never be able to satisfy its oil demand through foreign acquisitions”; quoted in Stakelbeck, “Energy Brings Beijing and Tehran Closer Together.” This point is also made in Lee and Shalmon, “Searching for Oil.” 72 The author is grateful to Pierre Noël for this point. 73 Personal communications with the author; see also Rosen and Houser, China Energy. 74 With regard to China, this point is also made in Lee and Shalmon, “Searching for Oil.” 75 Ibid. 76 Daniel Yergin, “Energy’s Challenges,” Forbes, 23 April 2007. 77 On the Saudi economy, see SAMBA Financial Group, The Saudi Economy: 2006 Performance, 2007 Forecast, Riyadh, February 2007, http:www.samba.com/investment/economywatch/pdf/Saudi_2007_Forecast_en.pdf; and idem, The Saudi Economy: 2004 Performance, 2005 Forecast, Riyadh, February 2005, http://www.samba.com/investment/economywatch/pdf/Saudi_Economy_Feb_2005_E ng.pdf. On the Gulf Arab economies collectively, see Brad Bourland, “The Middle East Boom: How Big and How Long Will It Last?,” presentation to the Annual Conference of the Arab Bankers Association of North America, New York, 25 April 2006, http://www.arabbankers.org/download/123321_U127360__88782/Click% 20here%20to%20download%20Mr.%20Bourland’s%20presentation.pdf. See also Kito de Boer and John Turner, “Beyond Oil: Reappraising the Gulf States”; Jaap Kalkman, Laurent Nordin, and Ahmed Yahia, “Moving Energy-Intensive Industries to the Gulf”; and Hans-Martin Stockmeier and Ozgur Tanrikulu, “Capturing Opportunities in the Gulf’s Financial Sector,” all in a special issue of McKinsey Quarterly, February 2007, http://www.mckinseyquarterly.com/Energy_Resources_ Materials. 78 I have borrowed the concept of global energy architecture from Saad Rahim; the definition is my own. 79 See Pierre Noël, Les Etats-Unis et la Sécurité Pétroliere mondial: Politique pétrolière

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américaine et production d’un bien collectif global, Paris: Le Centre Français sur les États-Unis, July 2004, http://www.ifri.org/files/CFE/PN_US_SecuritePetroliere.pdf. See Flynt Leverett, “Black is the New Green,” The National Interest, January– February 2008. The idea of a Saudi “hedging” strategy is elaborated in Flynt Leverett, “Reengaging Riyadh,” in idem, ed., The Road Ahead: Middle East Policy in the Bush Administration’s Second Term, Washington, DC: The Brookings Institution Press, 2005; see also Chas Freeman, “The Arabs Take a Chinese Wife: Sino–Arab Relations in the Decade to Come,” remarks to the World Affairs Council of Northern California, Asilomar, 7 May 2006, http://www.mepc.org/whats/SinoArabRelations.asp; and “National Security Issues and the Saudi–US Relationship: A Conversation with Jean-François Seznec,” Saudi–US Information Service, 12 March 2007, http://www.saudi-usrelations.org/articles/2007/interviews/070312-seznec-interview.html. See Vakil, “Iran: Balancing East against West.” Russia also occupies an important place in Iranian versions of the “Eastern option.” See M. K. Bhadrakumar, “US ‘Allies’ Keep Iran Options Open,” Asia Times, 6 June 2006, http://www.atimes.com/atimes/Middle_East/HF06Ak02.html; and Flynt Leverett, “The Race for Iran,” New York Times, 20 June 2006, http://www.nytimes.com/ 2006/06/20/opinion/20leverett.html?_r=1&oref=slogin. See Leverett, “Black Is the New Green. See Leverett, “Illusion and Reality,” American Prospect, September 2006. Pape introduced the concept of soft balancing in “The World Pushes Back,” Boston Globe, 23 March 2003. He elaborated his thesis in “Soft Balancing against the United States,” International Security 30/1, Summer 2005. See also Stephen Walt, “Keeping the World ‘Off Balance’: Self-Restraint and US Foreign Policy,” in G. John Ikenberry, ed., America Unrivaled: The Future of the Balance of Power, Ithaca, NY: Cornell University Press, 2002; the contribution by Josef Joffe in “Exchanges & Returns: Is the World Pushing Back?,” Boston Globe, 2 April 2003; Josef Joffe, “ ‘Gulliver Unbound’: Can America Rule the World?,” Twentieth Annual John Boynton Lecture, Centre for Independent Studies, Sydney, 5 August 2003, http://www.aicgs.org/documents/csi.pdf; T. V. Paul, “Soft Balancing in the Age of US Primacy,” International Security 30/1, Summer 2005; and Stephen Walt, Taming American Power: The Global Response to US Primacy, New York: Norton, 2006. The author is grateful to Øystein Noreng for this point. For further discussion, see Leverett, “Black Is the New Green.” Yuan-Kang Wang, China’s Grand Strategy and US Primacy: Is China Balancing American Power?, Washington, DC: Brookings Institution, July 2006, http://www.brookings.edu/papers/2006/07china_wang.aspx.

Index

References to notes are prefixed by n. 11 September 2001 attacks 62, 99, 102 Abadgaran 103, 104 Abkhazia 127 Abqaiq 11 Abu Dhabi Water & Electricity Authority (TAQA) 106 Abyssinia 30 access assurance 47–50 Acción Democrática (AD) party 178 Aceh 45 Acheson, Dean 30 ACOSTA (African Contingency Operations Training and Assistance Program) 51, 52 Afghanistan: and al-Qaeda 99; Carter Doctrine 47; and US aid 49 African Contingency Operations Training and Assistance Program (ACOSTA) see ACOSTA AFRICOM 50 Ahmadinejad, Mahmoud 103, 104, 129 air bases 147–8 Aiyar, Mani Shankar 218 al-Qaeda 46, 49, 53, 66–70, 72, 76, 82, 99, 100 Algeria: France and 115–16; terrorist attacks 9 Aliyev, Heydar 49 Andijan massacre 145 Andrews-Speed, Philip 197, 198 Angola 45 Argentina 118 Armenia 127 arms transfers 50–3, 56, 79–80, 102, 115 ASEAN (Association of South East Asian Nations) 193

Ashgabat 155 Association of South East Asian Nations (ASEAN) see ASEAN Atayev, Gurbanmurat 163 Atayev, Ovezgeldy 157 Atyrau–Samara pipeline 137 Austria 23 Azerbaijan: and Armenia 127; maritime boundary disputes 55; pipeline 49, 118 Ba’ath Party 77, 88, 97 Bacevich, Andrew 72 Bahrain 76, 110 Bakiyev, Kurmanbek 148 Baku–Tbilisi–Ceyhan (BTC) pipeline see BTC pipeline Balkans 23 Baltic countries 125 Barbarossa 28 Belarus 125, 126, 127 Berdymukhammedov, Gurbanguly 144, 155, 157, 162, 163–4 Bharat Petroleum Corporation Limited (BPCL) see BPCL bin Laden, Osama 67, 82 biomass 4, 120–1 Bolivia 182 “bottom up” perspective 222–5 BP (British Petroleum) 42, 76, 163 BPCL (Bharat Petroleum Corporation Limited) 220 Brazil 118 Britain 22, 24; see also UK Brown, Stephen 87 BTC pipeline 118, 119, 126–7, 137, 140, 141, 143 Burke, Jason 69

244

Index

Bush administration: Venezuela and 183 Bush, George H. W. 48, 78 Bush, George W. 48, 49 Cabinda 45 CACO (Central Asian Cooperation Organization) 148 CAEC (Central Asian Economic Community Organization) 148–9 Caldera administration 179 Campbell, Kurt 193 Canada 118–19 CAREC (Central Asia Regional Economic Cooperation) 148 CARs (Central Asian Republics) 135, 137–8 Carter Doctrine 47–50, 63, 70–2, 229 Carter, Jimmy 12, 47–8, 63, 71–2 Caruso, Guy 86–7 CASFOR (Caspian Rapid-Deployment Force) see Caspian Rapid-Deployment Force Caspian energy supply 126, 128 Caspian Guard 55 Caspian oil 118, 119 Caspian Pipeline Consortium (CPC) see CPC Caspian Rapid-Deployment Force (CASFOR) 55 Caspian Sea 48–9, 52–3, 55, 149 CCP (Chinese Communist Party) 188–9, 198, 200–1, 204–5 Center for Strategic and International Studies (CSIS) see CSIS Central Asia: economic development 147–51; and energy resource management 136; military cooperation 148; regional energy situation 138–47; Russia and 135–8 Central Asia Regional Economic Cooperation (CAREC) see CAREC Central Asian Battalion (CENTRASBAT) 148 Central Asian Cooperation Organization (CACO) see CACO Central Asian Economic Community Organization (CAEC) see CAEC Central Asian Republics (CARs) see CARs Chávez, Hugo 175, 176–7, 180–3, 184 Chen Tonghai 200 Cheney, Dick 126 Chernomyrdin, Viktor 160 Chevron 45, 163

China: arms transfers 51; and Caspian basin states 52–3, 129; and Central Asia 137–8, 149, 150; coal 188; corporate agendas 222–5; energy strategy models 196–205; “going-out” policy 217–18; and Gulf states 110; and India 192, 202; and Japan 28, 53–5, 192–3, 202; and Kazakhstan 52, 141–2, 143; naval expansion 16n3, 202; and Nigeria 51; non-market approaches 191–6; oil consumption 43, 85; oil demand 43; possible frameworks 189–90; regime defense 204–5; resource mercantilism 213–14, 225–7; rising power of 211–12; and Russia 205; “top down” initiatives 222; and Turkmenistan 165–6; and United States 188–9, 201–4, 205–6; and Uzbekistan 146; Venezuela and 181, 184; and Zimbabwe 51 China National Offshore Oil Corporation (CNOOC) see CNOOC China National Petroleum Corporation (CNPC) see CNPC “Chindia” 214 Chinese Communist Party (CCP) see CCP (Chinese Communist Party) Chinese People’s Liberation Army (PLA) see PLA Chunxiao/Shirakaba gas field 54–5 Churchill, Winston 28 CIS 163; summit (2007) 162 CITGO 179 Clinton, Bill 48, 49 CNOOC (China National Offshore Oil Corporation) 54, 142, 191, 199–200, 218, 220, 224 CNPC (China National Petroleum Corporation) 99–100, 141–2, 163, 166, 191, 199–200, 218, 220, 222, 223 coal 4, 120–1 Cohen, William S. 52 Cold War 1 Collective Security Treaty Organization (CSTO) see CSTO Colombia: terrorist attacks 9, 11; Venezuela and 182, 183 colonialism 45 Committee for National Security (NKB) see NKB competition: for access to oil 43–4 competitive arms diplomacy 50–3 consumption: of oil 40–1, 43–4, 63, 84–5 Contadora group 178 control: of energy resources 3

Index corruption 140, 142, 156 “cosmic war” 67, 69 Council on Foreign Relations 39, 46–7 CPC (Caspian Pipeline Consortium) 137 Crenshaw, Martha 65, 66 Creole and Royal Dutch Shell 177 crises: (1970s) 117; First Oil Crisis (1973) 96; July 1914 crisis 23–7; Latin American debt crisis 179 CSIS (Center for Strategic and International Studies) 46 CSTO (Collective Security Treaty Organization) 52, 53, 148, 151 Cuba 178, 182 currency alternatives 232 current account surpluses 231 Dana Gas 106 Dawes Plan 38n41 decentralized ad hoc model: Chinese energy strategy model 196–201 defense spending 2 “Delhi Declaration” 219 demand growth 40–1, 43, 213–14 demand projections 41 Deng Xiaoping 194, 199, 200–2, 204–5 diplomatic course: China 192–3 Downs, Erica 199 Druzhba pipeline 127 dual-fuel systems 121 Dubai Ports World 106 Dukerich, Janet 66 Dutch East Indies 28, 30, 37n32, 56 Dutton, Jane 66 East China Sea 53–5 Eastern European countries: oil consumption 43 Ebel, Robert 46, 147 ECO (Economic Cooperation Organization) 148 economic expansionism 35n12 economic sanctions 19–20 Ecuador 9, 11, 182 education initiatives 107 El Salvador 182 embargoes 29–31, 33, 68, 96 Energy Bureau 198 energy costs: global stability and 8–9 energy demand: increase of 40–1, 43, 213–14 “energy diplomacy” 218–19, 221 Energy Information Administration 213 energy markets 216–17; “trusting” 4–9

245

energy policies: Venezuela (1945–98) 177–80; Venezuela (1999–) 180–4 Energy Research and Development Administration 115 energy-resource management: militarization of 6–9 energy resources: alternative 120–1; control of 3 energy security: as casus belli 2; resource mercantilism and 215–21 energy strategy models: China 196–205 environmental impacts: fossil-fuel consumption 4 escalation, inadvertent 55–7, 62 ethnic/religious issues 99 ethnic violence 45 EU (European Union) 114, 126, 145, 149 EurAsEC (Eurasian Economic Community) 149 Europe: and Central Asia 151; and Kazakhstan 142–3; and Russia 128–9 European Union (EU) see EU exporters 112–13 exports 85 extremism 45–6 Faisal monarchy 77 Ferdinand, Frances 23 First Oil Crisis (1973) 96 food imports 27 Ford, Gerald 115 Foreign Military Sales credits 51 foreign reserves: OPEC countries 106 former Soviet Union (FSU) see FSU forward markets 116 fossil-fuel consumption: environmental impacts 4 Fradkov, Mikhail 160 France: access assurance 47; and Algeria 115–16; and Germany 24; Gulf oil concessions 76; Iran and 115; and Middle East oil producers 115; nuclearpower program 115; resource mercantilism 225; World War II 28 Franco–Russian alliance 24, 25 free rider problem 91 free trade 27 FSU (former Soviet Union) 43, 118, 128, 140 Fullerton, Richard 86 futures markets 116 Gafurov, Nazar 156

246

Index

GAIL (Gas Authority of India Limited) 220, 223 gas: reserves 118–19, 145, 155; resources 108; Russia’s use of 135–6; unconventional 120–1 Gas Authority of India Limited (GAIL) see GAIL gas fields: Chunxiao/Shirakaba 54–5 gas supplies: Russian 126–9 Gazprom 43, 119, 122, 125, 126, 128, 144, 155, 159–62 GCC (Gulf Cooperation Council) 104, 218 general war 1 Georgia 126–7 Germany: access assurance 47; current account surplus 231; natural-gas pipeline deal 115; reparations 32; and Russia 125; World War I 23–7; World War II 27–9 Gilpin, Robert 114 global energy architecture 227, 228–9, 230–1 global financial markets 8 global market system 112–13, 118 global oil output 44 global stability: and energy costs 8–9 globalization 8–9, 25–6, 228, 229 Goebbels, Joseph 28 “going-out” policy 217–18 “grand strategy”: United States 228–30 Great Britain see Britain great-power military confrontation: potential for 55–7 “Great Terror War” 62 Great War 23–7 Gulf Cooperation Council (GCC) see GCC Gulf of Guinea 49–50 Gulf of Mexico 42 Gulf oil: and American primacy 88–91; energy politics 80–6; history 76–8; overview 75–6; peak oil 86–7; price stability 78–80; production and reserves 83; wealth 87–8 Gulf states: assets 95; economic outlook 106–9; and emerging powers 109–10; investment-and-development drive 95–6; present situation 98–105 Gulf War (1980-8) 97 Gulf War (1990-1) 71, 88–9 gunboat diplomacy 53–5, 56–7 Han Chinese dynasties 194 “hard” targets 11 Harquail, Celia 66

Hashemite Kingdom 101 Herberg, Mikkal 197, 212 Hezbollah 103, 104, 182 Hezbollah–Iranian relationship 12 Hindustan Petroleum Corporation Limited (HPCL) see HPCL Hirschman, Albert 122, 128 historical perspective: of militarization of energy-resource management 96–8 Hitler, Adolf 27, 96 hoarding 116 Hoffman, Bruce 64 HPCL (Hindustan Petroleum Corporation Limited) 220 Hu Jintao 142, 146, 165, 192 Huaneng Power International 198 Hubbert, M. King 86 hybrid vehicles 121 hydrocarbons 155, 157–9 hydroelectric power 136, 146, 147 IEA (International Energy Agency) 41, 116, 117, 212, 213, 229, 230–1 IEA projects 119 import dependence 215 IMU (Islamic Movement of Uzbekistan) 145, 146 “inadvertent escalation” 55–7 India: China and 192, 202; corporate agendas 222–5; and Gulf states 110, 219; and Iran 219; oil consumption 43; oil demand 43; resource mercantilism 213–14, 218, 225–7; rising power of 211–12; “top down” initiatives 222 Indian Oil Corporation (IOC) see IOC Indochina 28, 29 Indonesia 45, 193 Industrial Revolution 21 industrialization: of war 20–3 infrastructure and asset protection 47 INOGATE (Interstate Oil and Gas Transport to Europe) 149 instability: risk of 44–6 instrumental perspective: of terrorism 65 insurgency 45, 100 intelligence services: Russian 161–2 International Energy Agency (IEA) see IEA international energy markets 216–17 International Military Education and Training Programs 51 international oil companies (IOCs) see IOCs international oil markets 175–6

Index international trade: growth of 21–3; stabilizing effect of 19 interstate conflict 1 Interstate Oil and Gas Transport to Europe (INOGATE) see INOGATE IOC (Indian Oil Corporation) 220, 221, 223 IOCs (international oil companies) 119, 120 Iran: as catalyst for conflict 102–5; and China 217, 224–5, 229–30; energy politics 80; foreign reserves 106; and France 115; gas reserves 118; gas resources 108; and India 217, 219–20; invasion by Iraq 16n2; and Iraq 101; Islamic Revolution (1979) 70, 71, 97, 116; maritime boundary disputes 55; monarchy 88; nationalization of oil sector 96; Russia and 130–1; sanctions against 103; and SCO 129; and Turkmenistan 166; and UK 47; Venezuela and 182 Iran–Iraq War (1980-8) 48, 71, 77, 88–9, 97 Iraq: Ba’athist dictatorship 88; and China 217, 220; energy politics 82; and India 217; insurgent attacks 9, 10; invasion by USA 18n26; invasion of Iran 16n2; invasion of Kuwait 16n2, 77, 88–9, 98, 121; Iran–Iraq War (1980-8) 48, 71, 77, 88–9, 97; and Kurdistan 45; and Kuwait 48; non-state groups 100; and Soviet Union 76–7; state collapse 100–2; terrorist attacks 9, 82; and UK 47, 76–7; and US 76; US sanctions 48 Iraq War (2003) 71, 99 Islamic finance 108 Islamic fundamentalism 145 Islamic insurgents 10 Islamic Movement of Uzbekistan (IMU) see IMU Islamic Revolution (1979): Iran 70, 71, 97, 116 isolationism: Turkmenistan 164 Israel 12, 103 Italy 30 Japan: access assurance 47; and China 192–3, 202; current account surplus 231; and Dutch East Indies 56; and Gulf states 110; methane hydrates 121; nuclear-power program 115; resource mercantilism 225; World War II 28–33 Japan Maritime Self-Defense Force (JMSDF) see JMSDF

247

Jiang Xinfeng 192–3 Jiang Zemin 201, 218 jihad 69 JMSDF (Japan Maritime Self-Defense Force) 54 job generation 107–8 Jomini, Baron Antoine-Henri de 65 Jordan 101 Juergensmeyer, Mark 67, 68, 69 July 1914 crisis 23–7 Kahn, Herman 65 Kansteiner, Walter 50 Karimov, Islam 138, 145, 146 Kazakh–Chinese (KZ–CH) joint venture pipeline see KZ–CH pipeline Kazakhstan: and BTC pipeline 137; and China 150; energy situation 139–43; gas reserves 118; KZ–CH pipeline 142, 149; and military assistance 52–3; naval capabilities 55; petroleum deposits 136; and United States 49 Khamenei, Supreme Leader Ali 104 Kharg Island 97 Khobar Towers bombing 99 Khodorkovsky, Mikhail 124 Khomeini, Ayatollah 115 Khuzestan 97 Kissinger, Henry 233n5 Korpeje–Kurt Kuy pipeline 144, 166 Kurdistan 45, 101 Kurlantzick, Joshua 193 Kuwait: defense capabilities 105; foreign reserves 106; India and China 217; invasion by Iraq 16n2, 98; invasion of 121; occupation 48; stability 76; “Tanker War” 97; and US relations 110 Kyrgyzstan 53, 140, 145, 146, 147, 148 KZ–CH pipeline 142, 149 Laden, Osama bin 10 Laqueur, Walter 64 Latin America 193 Latin American debt crisis 179 League of Nations 30 Lebedev, Planton 124 legal mechanisms 175 Lend–Lease Act 29, 33 Lenin, Vladimir 34n7 Lesser, Ian 233n6 Li Peng 198, 201 Liaohe oil-producing complex 200 liberalization: Latin America 118 Lieberthal, Kenneth 197

248

Index

Liquefied Natural Gas (LNG) see LNG Lithuania 127 LNG (Liquefied Natural Gas) 115, 128, 130 Ludendorff, Eric 27 Lukashenko, Alexander 127 LUKOIL 99–100, 162, 163 McNeill, J. R. 21 Mahan, Alfred Thayer 25 Mahbubani, Kishore 193 Makkah Accord 105 al-Maliki government 101 Manchuria 28, 31 Maoism 194 maritime boundary disputes 53–5 maritime strategy 25–6 maritime terrorism 10, 18n15 market approach 191, 231 market integration: stabilizing effect of 24 market price mechanism 12–14 markets: “trusting” 4–9 mean reversion 6 Medium-Term Oil Market Report 41–2 mercantilism 22–3 Mercosur 114 mergers 120 methane hydrates 121 Mexico 182 Middle East: militarization of energy resources 96; nationalization 119; pipeline system 11; resource holders 118; terrorist attacks 45–6; see also Gulf states; individual countries militarization: of energy-resource management 6–9, 46–7, 96–8, 120–1, 211; of energy security 46–7 military aid 50–3, 56 military force: and market practices 12–14; protection of oil supplies 39–40 military operations: oil production and 3 military planning 2–3, 24–5 military route: China 195–6 Miller, Alexei 125, 160 MIPT (National Memorial Institute for the Prevention of Terrorism) 9–12 momentum 6 monetary exchange mechanism 63 Morse, Edward 128 Mossadegh, Mohamed 96 Mubadala Development Company 106 multilateral security framework 90–1 al-Muqrin, Abdel Aziz 82

NAFTA (North American Free Trade Association) 114 National Development and Reform Commission (NDRC) see NDRC National Energy Policy (2001) 49–50 National Iranian Oil Company (NIOC) see NIOC National Memorial Institute for the Prevention of Terrorism (MIPT) (see MIPT) national oil companies (NOCs) see NOCs “National Security Strategy of the United States” 16n1 nationalization 96, 119 NATO 148 natural gas 4, 108, 143, 215, 216 natural-gas pipelines: Venezuela 182 “natural range” 95 naval building programs 2 naval expansion: China 16n3, 202 naval forces: United States 25–6, 39, 131, 212; see also gunboat diplomacy naval strategies 25–6 Nazarbaev, Nursultan 52, 140, 141, 142, 162 NDRC (National Development and Reform Commission) 198 NECs (national energy companies) 211, 218, 222–5 Neutrality Acts 29 Nicaragua 178, 182 Niger Delta 45 Nigeria 3, 45, 51–2 NIOC (National Iranian Oil Company) 220 Nixon, Richard 115 Niyazov, Saparmurat 144, 155, 156–7, 165 NKB (Committee for National Security) 161 NOCs (national oil companies) 107, 108–9, 119, 191, 197, 199–200, 201 non-market approaches: China 191–6 non-market behavior 190–1 non-petroleum transportation fuels 85–6 non-state groups 12, 100 North American Free Trade Association (NAFTA) see NAFTA North Korea: Venezuela and 182 Norwegian Model 108 nuclear-power programs 115 nuclear programs: Iran 103, 104, 221, 228 OECD (Organization for Economic Cooperation and Development) 116

Index OIL (Oil India Limited) 220 oil demand 40–1, 213–14 oil embargoes 29–30, 32, 33, 68, 96 oil-field discovery 42–3 Oil India Limited (OIL) see OIL oil insufficiency 40–3 oil markets 175–6 Oil Natural Gas Corporation (ONGC) see ONGC oil output, global 44 oil-price shocks 87, 114–16, 229 oil prices 78–80, 81, 88–91, 95, 109, 114–16, 181; currency alternatives 232 oil production 3–4, 39, 44–6, 84 oil reserves 40–3, 84–5, 86–7, 118–19, 143, 145, 146, 175 Oman 76, 105 ONGC (Oil Natural Gas Corporation) 220, 222–3, 224 ONGC Videsh Limited (OVL) see OVL OPEC (Organization of Petroleum Exporting Countries) 6, 78, 85, 88–9, 116, 176, 178, 218, 229 OPEC Five 217 “Open Door” policy 32 Operation Enduring Freedom 161 Organization for Economic Cooperation and Development (OECD) see OECD Organization of Petroleum Exporting Countries (OPEC) see OPEC organizational perspective: of terrorism 65–6 Ossetia 127 OVL (ONGC Videsh Limited) 220, 221 Pakistan: terrorist attacks 9 panic buying 116 Pape, Robert 231 Partnership for Peace (PfP) 148 patronage 156 PDVSA (Petroleos de Venezuela) 179, 180 peak oil 3–4, 40, 43, 76, 86–7 Pearl Harbor 33, 191 People’s Liberation Army Navy (PLAN) see PLAN People’s Republic of China (PRC) see China Pérez, Carlos Andrés 178, 179 Persian Gulf states: and China 211–12, 215; and India 211–12, 215, 218–19; petroleum reserves and production 63; see also individual countries Peru 182 “petro-states” 45

249

PETROCARIBE 182 petrochemical industry 107–8 PetroChina 191, 200 PetroKazakhstan (PetroKaz) 141, 142 Petroleos de Venezuela (PDVSA) see PDVSA petroleum insufficiency 40–3 Philippines 9, 193 Piebalgs, Andris 126 pipelines 11, 137–8, 149–50, 162, 165–6, 182 PLA (Chinese People’s Liberation Army) 189 PLAN (People’s Liberation Army Navy) 202 post-colonial nations 45 poverty 44–5 PRC (People’s Republic of China) see China price-and-supply frameworks 75–6 price-range frameworks 78–80, 81 price revolution 17n8 “price risk” 216 price spikes 2–3, 117 price stability 78–80, 90–1 prices: basic tendencies 6; rises 6, 8–9; see also oil prices primary-goods exporters 112–13 private sector 119–20 private–public partnership 106, 108 privatization 118–20, 222–3 production: protection of 46–7 production projections 41 production stability 90–1 protectionism 25 Putin, Vladimir 123–5, 138, 162 Pye, Lucian 201 Qatar: and China 217; democratic reform 82; education initiatives 107; foreign reserves 106; gas resources 108; and India 217, 219; neutrality 105; stability 76; as target 104; and US relations 110 Qing dynasty 194 Rafsanjani, Ayatollah 104 re-flagging program 97, 115 “Reagan corollary” 229 Reagan, Ronald 48, 115 “regime change” 48 regime defense model: China 204–5 regime protection 47 regional stability: oil prices and 88–91 regionalization: of supply 216

250

Index

Rejepov, Akmurat 162 religious extremism 45 reparation schemes 32–3 resource exporters 112–13 resource holders 118–19 resource mercantilism: and corporate interests 222–5; definition 211; and energy security 215–21; limits of 225–7; and militarization of resource management 213–14 resource nationalism 214 revolutionary movements 9–12 Ricardo, David 22 Robinson, Adam 128 rogue states 9–12 Roosevelt, Franklin 9, 30, 31, 33, 37n30 Rosneft 125 Rosner, Kevin 122 Rostow, Walt 65 Royal Dutch Shell 43 Russia: and Asian market 129; and Caspian basin states 52–3; and Central Asia 135–8, 149–51; and China 129–30, 205; cut-offs 126–7; energy strategy 123–5; energy trade 122; Franco-Russian alliance 24, 25; and Gulf states 110; and international economic system 113–14; and Iran 130–1; and Kazakhstan 141; and Kyrgyzstan 147; LUKOIL 99–100; military assistance 52–3; privatization 118; resource holders 118; Sakhalin Island 42–3; and Saudi Arabia 131; state control 123–5; state-controlled companies 119; status as energy producer 122; and Tajikistan 147–8; terrorist attacks 9; and Turkmenistan 144–5, 159–63; use of empowered energy position 122, 126–8; and Uzbekistan 146, 148; World War I 23 Russian–Georgian relations 127 Saakashvili, Mikheil 127 SABIC (Saudi Arabia Basic Industries Corporation) see Saudi Arabia Basic Industries Corporation Saddam Hussein 98 Saddam Hussein dictatorship 77, 97 al-Sadr, Moqtada 101 Sakhalin Island 42–3 sanctions 19–20, 48, 103, 113 SASAC (State-owned Asset Supervision and Administration Commission) 198 Saudi Arabia: 11 September 2001 attacks

102; al-Qaeda 46, 99; and China 217, 229; defense capabilities 105; export terminal security 11; foreign reserves 106, 109; and India 217; and Iraq 101; Makkah Accord 105; oil embargoes 68; oil production volume 41, 63; petrochemical industry 107–8; price stability 78; stability 76; terrorist attacks 10, 82; as terrorist target 11–12; and United States 9 Saudi Arabia Basic Industries Corporation (SABIC) 106 Schelling, Thomas 65 Schlesinger, James R. 40, 43 SCO (Shanghai Cooperation Organization) 52, 53, 129, 149, 205 scorched-earth policy 98 SDPC (State Development Planning Commission) 197–8 Sechin, Igor 125 security services: Russian 161–2 semi-autonomy: Gulf politics 88–9 Serbia 23 SERC (State Electricity Regulatory Commission) 198 SETC (State Economic and Trade Commission) 197–8 Shanghai Cooperation Organization (SCO) see SCO Shell 45 “Shia Crescent” 103, 104, 105 Shia militias 101, 131 Shinzo Abe 192 Shirakaba/Chunxiao gas field 54–5 shortages, energy 2–3 Sibneft 123 Silk Road Initiative 149 Simmons, Matthew R. 41, 86 Singh, Manmohan 218 Sino–Indian territorial disputes 192 Sinopec 191, 199–200, 218, 219–20, 222, 224 Sino–Soviet alliance 194 Smith, Adam 22 “soft balancing” 231 “soft” targets 11, 46 solar power 121 Somoza, Anastasio 178 South America: terrorist attacks 11 South Korea: oil consumption 43 Southeast Asia: oil consumption 43 Soviet Union: and Afghanistan 47; and developing-world states 193–4; threat from 117; and war 1–2; World War II

Index 27–8, 29; see also FSU (former Soviet Union) SPC (State Planning Commission) 197–8 spot-market bidding 116 Stalin, Joseph 27 Standard Oil 177 state collapse: Iraq 100–2 state-controlled companies: Russia 119 State Development Planning Commission (SDPC) see SDPC State Economic and Trade Commission (SETC) see SETC State Electricity Regulatory Commission (SERC) see SERC State-owned Asset Supervision and Administration Commission (SASAC) see SASAC State Planning Commission (SPC) see SPC stockpiling system 117 Strait of Hormuz 130 “strategic energy partnerships” 223 Su Shulin 200 subversion path: China 193–5 Sudan 45 Suez Canal 191 Syria 101 Tagiyev, Tachberdy 163 Taiwan: China and 194; oil consumption 43 Tajikistan 140, 147 Taliban 49, 53, 99 “Tanker War” 97, 115 TAP (Trans-Afghan Pipeline) 167 target price-range system 78–80, 81, 85, 89 tariffs 25 TCGP (Trans-Caspian Gas Pipeline) 167–8 Terrill, W. Andrew 79 territorial disputes 53–5 terrorism: al-Qaeda inspired 62; definition 64; instrumental perspective 65; organizational perspective 65–6 terrorist attacks 9–10, 62–3, 82, 84 terrorists 9–12, 99 Thailand 193 Thunder Horse platform 42 “top down” initiatives 222 TRACECA (Transport Corridor Europe–Caucasus–Asia) 149 trade pacts 114 Trans-Afghan Pipeline (TAP) see TAP

251

Trans-Caspian Gas Pipeline (TCGP) see TCGP Trans-Sahara Counter-Terrorism Initiative (TSCTI) see TSCTI Transcaspia 156 transnational oil companies 175 Transneft 119 Transport Corridor Europe–Caucasus–Asia (TRACECA) see TRACECA transportation infrastructure 137–8, 143; protection of 39, 46–7 transportation routes 217 Treaty of Eternal Friendship 148 TSCTI (Trans-Sahara Counter-Terrorism Initiative) 51 TSSR (Turkmen Soviet Socialist Republic) 156 Turkey 9, 101, 148 Turkmen Soviet Socialist Republic (TSSR) see TSSR Turkmenistan: Berdymukhammedov presidency 163–4; energy infrastructure 159; energy situation 143–5; export options 165–8; gas reserves 118, 155; hydrocarbon resources 157–9; maritime boundary disputes 55; petroleum deposits 136; recent history 156–7; and Russia 137; Russia and 159–63 UAE (United Arab Emirates) 76, 105, 106, 107, 217 UK (United Kingdom): access assurance 47; arms transfers 79; Gulf oil concessions 76; see also Britain Ukraine 125, 126 UN (United Nations) 77, 149 unemployment 44–5 United Arab Emirates (UAE) see UAE United Kingdom (UK) see UK United Nations (UN) see UN United States: access assurance 47–50; arms transfers 79; and Caspian Sea 55; and Central Asia 151; and China 201–4, 205–6; Cold War 1–2; foreign policy in Middle East 63; geopolitical influence 212; and global financial markets 8; global market system 12–13, 112–13; and Gulf oil production 78–80, 115; and Gulf states 110; imported oil dependency 63; invasion of Iraq 3, 9; Iraq War (2003) 99–100; and Kazakhstan 141–2; methane hydrates 121; and Middle East 98–9; militarization of energy-resource

252

Index

United States continued management 46–7; militarization of foreign petroleum policy 70–2; and military assistance 51–3; naval forces 25–6, 39, 131, 212; and non-market behavior 190–1; oil demand 43; Partnership for Peace (PfP) exercises 148; perception of 117–18; policies 118, 227–31; “Project Independence” 115; protection of oil supplies 39–40, 229; Saudi Arabia and 9; security framework 89–90, 91; strategic primacy, maintaining 231–2; and Turkmenistan 161; and Uzbekistan 145, 146; Venezuela and 178, 180; World War II 29–33 Unocal 142 uranium 120–1 US–Russia commercial-energy summit 118 USSR see Soviet Union Uzbekistan: energy situation 145–6; gas reserves 118; petroleum deposits 136; regional integration 148; and Russia 138; and United States 53 Vajpayee, Atal Bihari 218 Vakil, Sanam 240n54 Velasquez, Ramon 179 Venezuela 3, 11, 175–85 Vietnam 193, 195 violence: cycle of 84; theatrical 69–70 volatility 6 volume risk 215–16

Waldron, Arthur 194 war: industrialization of 20–3; and international commerce 19 “war on terror” 9–12 “War Plan Dog” 37n30 warfare 1 water resources 140, 143–4, 145, 146, 147 weapons acquisitions 79–80, 183–4; see also arms transfers Welles, Sumner 30 West Africa 49–50 West Texas Intermediate (WTI) see WTI wind power 121 world demand: for oil 40 World Trade Organization (WTO) see WTO World War I 23–7 World War II 96; July 1941 27–33 world wars 1–2 WTI (West Texas Intermediate) 95 WTO (World Trade Organization) 113, 144 Yemen 10 Yergin, Daniel 78, 228 Young Plan 38n41 Yukos 123, 124 Yushchenko, Viktor 126 al-Zawahiri, Ayman 10, 70 Zeihan, Peter 128 Zhenbao/Damansky Island 194 Zhu Rongji 201, 218 Zimbabwe: China and 51