Oil Warms – and Cools – Geopolitics

Concentration on fluctuations in oil prices has detracted attention from the fundamental changes that are occurring in world oil and gas markets. Start with President Bush's inaugural address, in which he promised to support democratic reformers in the Middle East.

"More foolish than brave," warn those who worry about the security of oil supplies. The policy shift comes at a time when that dependence on imported oil leaves the U.S. more vulnerable than ever to the changes that are occurring in world energy markets. Increasingly powerful state-owned players are putting America not only at an increasing economic disadvantage, but at risk of losing a good deal of diplomatic leverage in Asia, Europe and the Western hemisphere.

We are witnessing nothing less than the geopoliticalization of the world's oil and gas industry. Governments rather than traditional commercial enterprises are taking control. And those governments have interests quite hostile to America's.

China is forging closer economic and political ties in the Middle East, and not just because it needs more and more oil. Its rapidly increasing trade with Iran is not the ordinary buying-and-selling of profit-driven companies. China can and, according to reliable sources, does pay not only with cash but with ballistic-missile components and components for nuclear weapons. A new supply of oil and a chance to thumb its nose at the U.S. embargo is an irresistible combination for this emerging superpower.

China is not confining the extension of its influence to the Middle East. The Western Hemisphere is also in its sight. Canadian Prime Minister Paul Martin came away from a visit to Beijing with an agreement to cooperate in a wide variety of energy projects, including plans for a pipeline and ports that would allow oil from Alberta's tar sands to move to Canada's West Coast for export to China, rather than to the U.S., as American planners had hoped.

And, as always, there was more to the deal than a mere commercial transaction between consenting nations. According to their joint communiqué, the Strategic Working Group set up by Canada and China, in what can only be a shot at the U.S., "Canada and China share the view that the United Nations and other multilateral institutions have an essential role to play in the development of a peaceful, prosperous and sustainable world."

In Latin America, China is investing $100 billion in a series of energy deals to extend its influence, and diminish that of the United States. Most threatening is the $400 million investment in Venezuela's oil and gas industry, strengthening the hand of Venezuelan president Hugo Chávez, a man who says his country is under "a new U.S. imperialist attack." Flush with Chinese cash, and emboldened by his new friendship, Chávez has suspended operations of American companies ConocoPhillips, Harvest Oil, and Chevron Texaco, hammering their shares.

Meanwhile, Vladimir Putin has been developing what Times columnist Roger Boyes calls "a new policy instrument" to reassert Russian power. That instrument is "the Russian gas and oil-exporting companies that already all but dominate Europe's energy supplies…. Gazprom has woven a web of energy dependencies from Turkey to Turkmenistan, from Berlin to Baku." According to the International Energy Agency, by 2020 natural gas will account for 62% of Europe's energy consumption and Russia will supply two-thirds of that gas.

This domination has more than commercial consequences. When Gerhard Schröder told a television audience that Putin is a "dyed-in-the-wool-democrat," the German chancellor was indicating that he is not prepared to bite the hand that controls the valves of the pipelines that warm his country. Germany already gets 35% of its oil and 40% of its gas from Russia, figures that will steadily increase as Germany pursues its policy of winding down its nuclear power industry.

Russia also plans to use its ample reserves of oil and gas to extend its influence in Asia. It has agreed to allow Japan to finance an $11.5 billion (some say $18 billion) oil pipeline from eastern Siberia to the Pacific, from where crude oil can be transported to Japan and other Asian nations. This was no mere commercial transaction: Japanese Prime Minister Junichiro Koizumi led the lobbying team that persuaded Putin to select the route that Japan favored. Putin is a man who knows how to accumulate IOUs.

Perhaps most important is Russia's use of oil to cement relations with China. A few weeks ago Russian energy minister Viktor Krishtenko visited Beijing, amid signs that Russian fuel is starting to warm historically chilly Sino-Russian relations. Putin has offered China National Petroleum Corporation a piece of Yukos, the Russian oil giant that produces 1% of the world's crude oil, and effectively re-nationalized by slapping the company with a bankrupting demand for back taxes. Since American companies would have loved to have had a crack at an interest in Yukos, Putin's decision to freeze them out is widely seen as an expression of his unhappiness with American criticism of his power grabs, as well as an opportunity to cement relations with China, with which Russia's Gazprom already has signed agreements to cooperate in oil and gas markets.

So America finds that supplies from Canada, its largest supplier, and Venezuela, which sells it the light, sweet crude oil that U.S. refineries are best equipped to handle, will now be shared with China.

Meanwhile, Russia dominates the European energy market, giving Germany and France still another reason to side with it in any dispute with the United States, just as China can rely on Latin American countries that benefit from billions of its investment dollars to give that fact some weight in formulating their foreign policies.

Add the emerging relationship of China and Russia, and you have something for American planners to worry about.

A version of this article appeared in The Sunday Times (London) and a longer version was published in The Weekly Standard.