Geopolitics Of Oil
Oil prices have been swinging of late, with the government allowing continuous price rise in petroleum products. Though it has resisted a raise in the prices of diesel and kerosene, it will be finding increasingly difficult to subsidise them further, given the growing volatility global oil market where a barrel now costs above $120. But then rising oil prices mean higher inflation, which accelerates, among other things, the cost of food. All this, in turn, slows the rate of economic growth. And this was something Prime Minister’s economic adviser C Rangarajan admitted last week, warning that the country might not witness the projected 9 per cent economic growth this year.
It is, indeed, a great irony that the rise in the prices of oil all over the world is defying the normal supply-demand principle. Global demand has been actually down and global supply up during the recent time, particularly after Japan, the second largest importer of oil in the world, was crippled by the worst tsunami in its history, with most of its oil refineries being damaged. But then three things are said to be have worked against a fall in the prices.
First has been the turmoil in the Arab world that saw Saudi Arabia, the world’s largest producer of oil, sending troops to Bahrain to control the insurgency and mediating in the ongoing civil war in Yemen. Add to this the anti-government movements in Libya, another major oil producing country, Syria and Egypt. This political instability in West Asia and North Africa has created uncertainties in the oil business, resulting in speculative rises.
Secondly, “Commodities Trading” has driven up the oil prices. Global investors are finding it increasingly non-profitable to invest money in real estate and stock markets. As a result, there has been an influx of investment money into what are called commodities markets. Here, the primary commodities that are traded are oil, gold and agricultural products. Since no one really wants to transport all those heavy materials, what are actually traded are commodities’ future contracts or options. These are agreements to buy or sell at an agreed upon price on a specific date. In fact, this sudden surge drove up not only oil prices but also food prices all over the world, creating a speculative bubble. In the case of oil, this trend is likely last longer now that in the post-tsunami Japan, there is a strong public opinion all over against the use of nuclear energy. That means greater dependence on oil for energy. I shall analyse this point at a greater length in a future column.
Thirdly, high oil prices are also driven by a decline in the worth of dollar. Most oil contracts around the world are traded in dollars. As a result, oil-exporting countries usually peg their currency to the dollar. When the dollar declines, so do their oil revenues, but their costs (of extraction) go up. Therefore, oil producers do raise the price of oil to maintain their profit margins and keep costs of imported goods constant.
Considering all this, we should be realistic enough to accept that oil prices are never going to fall back to $50 a barrel and it could fluctuate between $60 and $200 a barrel for foreseeable future. This is what many dispassionate experts on oil-business warn. And this, in turn, could have some serious geopolitical dimensions. For, a high oil price has implications far beyond the global economy. Geopolitically, it helps increase the clout of some powers and weaken others.
Among the geopolitical winners will be those oil-exporting states that earn more income than they spend on domestic services. All oil-producing states on the Arabian Peninsula and in Russia (a major oil producer but not member of OPEC) are in this enviable position and today have large resources of cash. The way these states choose to invest and spend these large cash reserves will impact global politics. These states may use the new wealth to increase their military capabilities, win over new allies or invest abroad via sovereign wealth funds (SWF), which are impacting the global economic system on an ever-increasing basis. SWF—investment accounts owned by national governments—have started to acquire stakes in strategic sectors of western economies, including in the US. As Chinese have proved with the government- bonds they have bought from the United States, these stakes may easily translate into political leverage in the years to come, with SWF holders increasingly being tempted to use their financial clout as a foreign policy tool.
Meanwhile, Russia, a clear beneficiary from lucrative energy exports, has enhanced its political clout over energy-dependent neighbouring countries and Europe. With Russia’s sword of Damocles—in the form of supply cuts—hovering over these vast regions, no energy-dependent state in Eurasia is willing to pose too strong of a political challenge to Russia. In the new energy-centric world of today, Russia’s geopolitical power undoubtedly is on the rise. The Kremlin’s assertiveness and strident defence of national interests is ascribed to the boom in world prices of natural gas and oil, which Russia exports in abundance. Russia has reaped direct dividends from the steep increase in fossil fuel prices by accumulating foreign exchange reserves to the tune of above $500 billion. Indirectly, possession of the much-coveted strategic minerals has enabled Russia to neutralise energy-hungry Western European countries, particularly Germany, so that the “West” is divided over taking an anti-Moscow foreign policy line.
Similarly, thanks to steady increases in the price of oil, Iran’s star has risen astronomically in the most volatile area of the world. As the second-largest producer of oil and natural gas, Iran could build its own web of alliances in Europe and the rest of Asia to counter the impending American and Israeli threats to its territorial integrity. Flush with petro-dollars, President Mahmud Ahmadinejad has matched American and Israeli belligerence with a scaled-up defiance that brought back memories of the Islamic revolution of 1979.
In Venezuela, too, oil bonanzas helped spur revolutionary policies under the leadership of President Hugo Chavez, an out and out autocrat. In fact, the mainstream discourse in political science about petro-states has been about their internal political repercussions. Through a “rentier effect”, resource-plenty states tend to be plagued with authoritarian regimes in perpetuity due to low or absent taxation levels and consequent lack of dissent in society. In this sense, the high oil prices are cementing dictatorial forms of politics in many oil producing countries. In fact, Thomas Friedman, a New York Times columnist, has coined the term “petro-dictatorships”, which are being funded by oil-guzzling Western societies “via the greatest transfer of wealth in the history of the world”.
Viewed thus, rising oil prices not only worsens global inflation but also promotes and consolidates anti-democratic forces, including terrorists and religious fundamentalists. India happens to be one of those countries that have suffered this fallout. It is the Gulf money, particularly that from Saudi Arabia, which has financed the most the terrorists in Kashmir. It is the Saudi money that is singularly responsible for the growing number of mosques, madrasas, and publishing houses inculcating the Saudi worldview that talks of radicalisation of Muslims and breeds intolerance. The Ahle-Hadith (People of the Tradition of the Prophet), a Sunni Islamic sect with ties to the Saudi state dating back to the 1920s, has arguably been the biggest beneficiary of Saudi monetary assistance, contributing to internecine rivalries among various Indian Muslim sects. While the early Ahle-Hadith was in many ways progressive, it has now altered into an intolerant, literalist strand.
By Prakash Nanda