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Islam and Politics ( 30 Oct 2014, NewAgeIslam.Com)

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High Price of Cheap Oil



By Praveen Swami

October 31, 2014

It was alchemy, a dark magic beyond human comprehension: the evil-smelling, toxic sludge being pumped out from the bowels of the earth in ever greater quantities was turning all it touched into gold. From his lavish office in Caracas, Juan Pablo Perez Alfonso, founder of the Organisation of the Petroleum Exporting Countries (Opec), had watched entire nations transfigured by the unimaginable wealth their oil had brought. And yet, that afternoon in 1976, as he spoke to the scholar Terry Lynn Karl, Perez Alfonso seemed strangely pessimistic. “Ten years from now,” he told her, “20 years from now, you will see, oil will bring us ruin.” “We are drowning”, he went on, “in the devil’s excrement.”

Nearly 50 years from that day in Caracas, it is hard not to hail Perez Alfonso as a prophet. The devil’s excrement brought untold wealth to West Asia-North Africa, but it also throttled education and industry, leaving the world’s largest oil exporters poorer, relative to the world’s great economies, than they had been. It sustained despotisms, paving the way for civil war and terrorism. Indeed, it opened the door to endless war: the United States has fought in the region 14 times since 1980, in interventions to keep oil sources and shipping routes secure.

In the coming decades, China and India are set to become the two largest importers of Persian Gulf oil. Their economic growth and the lives of billions will depend on their access to reliable, affordable energy. The withdrawal of the US from global oil markets is pushing down oil prices, which is great news for India’s economy, and the reason Prime Minister Narendra Modi has been able to deregulate diesel. The bad news is that since the US has less reason to commit its troops to securing oil-producing regions in the Persian Gulf, India will have to start paying the bill in cash — and blood.

Last summer, the world changed, without a single newspaper headline to herald the transformation: the US replaced Saudi Arabia as the world’s largest oil producer. Industry studies make it clear that the boom in natural gas and oil production, enabled by new technologies like hydraulic fracturing and horizontal drilling, will increase the US’s oil production by 50 per cent or more by 2050. In a recent study, the Brookings Institution concluded it was “on track to become the dominant player in global energy markets”.

 To understand just how significant this development is, one has to travel back five decades, when the Opec cartel sent crude oil prices hurtling up: in 1970, it was under $20 at today’s prices, but by 1979 it had already touched the current levels of over $90. In addition to this blow to the global economy, there was a series of geopolitical shocks: the revolution in Iran and the Soviet intervention in Afghanistan. All of these posed threats to the Strait of Hormuz, through which Persian Gulf oil reached the world.

“Persian oil,” President Franklin D. Roosevelt said to a British diplomat in 1944, “is yours. We share the oil of Iraq and Kuwait. As for Saudi Arabian oil, it’s ours.” In 1980, President Jimmy Carter laid down a thick red line to protect the US’s most vital interest. “Let our position be absolutely clear,” he said, “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.”

In the course of the Iran-Iraq War, President Ronald Reagan used the US navy to escort oil tankers through the Persian Gulf. In 1991, President George H.W. Bush had to send in the military to protect oil-rich Kuwait from Iraqi ruler Saddam Hussein’s troops. Libya, Lebanon, Kuwait, Somalia, Afghanistan, Yemen, Pakistan, and Syria: the list of interventions necessitated to protect the geopolitical order in West Asia-North Africa has been an ever-growing one.

Hudson Institute scholar Arthur Herman, in a superb analysis written earlier this year, noted that “keeping the region’s shipping lanes, including the Strait of Hormuz, open to tanker traffic costs the Pentagon, on average, $50 billion a year — a service that earns us the undying enmity of populations in that region”. Princeton University’s Roger Stern has estimated that the US’s oil mission cost it $6.8 trillion from 1976 to 2007. “On an annual basis”, he noted, “the Persian Gulf mission now costs about as much as did the Cold War.”

The US’s oil and gas boom will not erode its global power. It will be able to exercise power over both oil-producing states and the global economy through market mechanisms — releasing supplies to lower prices or withholding them to send prices spiralling. Herman notes: “Iran saw its former stranglehold over Europe’s oil supply collapse as the US’s tumbling demand for imported oil allowed Europe to buy what it needed from other sources, and at relatively low prices. This year, the Saudis will have to cut their production by 3 per cent to keep prices and revenues up as US demand for Opec imports declines.”

For India and China, though, there is an important lesson here: the US won’t need to send troops to their death to secure its objectives. Through the decades since 1947, India, like China, had a free ride on the US-led order in West Asia, which has ensured that the flow of oil remained free for all. In the future, though, it is far from clear if that will be the case. China is already preparing for the first, expanding its naval presence in the Persian Gulf and enhancing military-to-military cooperation with countries like Iran.

 It isn’t that India’s foreign policy establishment is unaware of these challenges. A revolution in Saudi Arabia or the disintegration of Iraq is prospects too real to be ignored and their consequences for India’s energy security too awful to be wished away. New Delhi’s acquisitions of large transports like the C-130, its planned acquisition of large maritime troop carriers and its growing naval reach all suggest that there is a serious effort at capacity-building. In 2009, then army chief General Deepak Kapoor had initiated a discussion between army commanders on out-of-theatre deployment capacities and expeditionary warfare, sparking off serious joint forces thinking on the issue.

 Yet, there are considerable risks, which led former Prime Minister Manmohan Singh to shy away from a military role in West Asia and will likely nudge Modi to steer clear of joining the international coalition fighting the Islamic State (IS). India fears, among other things, that its own Muslim citizens will be divided by the country’s involvement in sectarian wars in West Asia. It worries about involvement in a Western coalition fuelling the radicalisation of Islamists at home, and is concerned about adding more enemies to the long list of terror groups.

These are all good reasons. But the choice India must make is being forced upon it by circumstance. Participation in the coalition against the IS is as good a first step as can be envisaged. India will act with regional partners of diverse ideological hues, from whom millions of Indian citizens have earned a living. It will act against an entity that has publicly threatened harm against India and has harmed Indian citizens.

It’s rare that the right thing and the necessary thing are the same thing — and the chance may not come again.