May 23, 2005; Page A14
The Great Game. That is how journalists and oilmen inevitably describe every promising new province or heated rivalry in oil and gas. Over the years, the jostling by Big Oil for access to the black gold in Persia, Saudi Arabia and the Caspian have all been described in such breathless terms. Within a decade, the scramble to develop oil reserves under the Arctic Ocean will no doubt inspire such gush. Today’s Great Game involves Russia and China-and according to the conspiracy theorists, this could prove bad news indeed for the West.
A glance at recent developments suggests that there may be cause for concern. Vladimir Putin’s bizarre and brutal crackdown on Yukos, the country’s largest private-sector oil firm, is now nearly over. In its own bumbling way, Russia is creating a state-run oil giant to be controlled by (or as a companion to) Gazprom, its inept state-run gas monopoly. Most alarming, to those so inclined, are the noises Mr. Putin has made suggesting that he might give a stake in the new oil monopoly to China . This would come on the heels of Chinese oil deals in Venezuela, where high oil prices are financing the petro-follies of another elected autocrat.
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That points to the other half of this conspiracy theory. Much has been written about China’s soaring consumption of oil, and its impact on world oil prices. Now, attention is turning to the increasingly aggressive forays overseas by its state-controlled energy companies in places as far-flung as Sudan, Ecuador and Saudi Arabia. They have tried to buy the right to drill for Caspian oil and to mine Canada’s “tar sands” (mucky hydrocarbons that can be made into gasoline with much effort). A Chinese government firm was even rumored to be in the chase for Unocal, a midsized American oil firm recently purchased by Chevron Texaco.
And if Russia really parts with a stake in “Gosneft,” as the putative state oil firm has been dubbed, then the acquisitive Chinese will have won a lucrative concession that any Big Oil boss would give his right arm for. Could this emerging alliance of erstwhile enemies disrupt the stability of oil markets, or lead to sharply higher prices? Might this eventually lead to a realignment of geopolitics that threatens the West’s essential energy supplies?
Nonsense. One reason to think such fears are overblown is that oil is a fungible global commodity traded on vibrant futures markets. Therefore, the actual ownership of oil assets matters little these days. After all, even the most anti-Western regime must still sell its oil on the world market if it is to feed its people — as, for example, the Ayatollah Khomeini discovered in Iran after the early heady days of his revolution. That also explains why it is a folly for China (and India, for that matter) to waste billions on equity oil in pursuit of “energy security”: a genuine oil shock will send the price of every barrel of oil shooting past $100, regardless of such investments.
Another reason to dismiss fears of a new Axis of Oil lies in the fact that neither Russia nor China is as big a force on the world oil scene as scaremongers will have you believe. A look at where the world’s proven oil reserves lie reveals that Russia holds less than a fifth of the world’s total, while Saudi Arabia sits atop a whopping quarter share. It is true that Russia’s oil production today, about 10 million barrels per day, is on par with that of the Saudis, but that is a bit like a poor man splurging on his credit card. Given its paltry reserves, Russia simply cannot challenge the Saudis over the long term for control of the world oil market.
Now, there would be cause for concern in the West if a resurgent Russia began to act like a member of the Organization of Petroleum Exporting Countries. If Russia curbed its output in cahoots with the cartel in order to squeeze prices, then consumers would surely suffer. But that argument makes little sense. Russia’s self-interest lies in doing what it has done for years: not cutting output, but pumping freely and therefore “free-riding” on OPEC’s discipline. Besides, the Chinese would surely not support Russian efforts to raise prices for their consumers, or for the world at large that they hope will buy Chinese goods.
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As for China , it is true that oil demand shot up 16% last year, and was clearly a force propping up oil prices. However, as with Russia, the current sizzle can be misleading. Last year’s oil boom is simply not sustainable. Much oil went to one-off stockpiling or as a temporary fix to power shortages. Contrary to popular perceptions, all that oil did not go to fuel new Chinese SUVs. Besides, China still pales besides the real goliath of oil guzzling. Much as Russia will not displace Saudi Arabia on supply, Chinese demand will not surpass America’s for decades.
That suggests that the most important energy relationship to watch is the only one that has really mattered for more than half a century: the one between Saudi Arabia and America. Indeed, as non-OPEC sources of oil dwindle in coming years, every official forecaster expects Saudi output to soar sharply. With that can only come increased risk of terrorist attack, embargo and economic shock. These age-old troubles, not any sinister new Axis of Oil, are the real reason to worry about oil — and the best reason to start kicking the habit today.
Mr. Vaitheeswaran is the Global Environment & Energy Correspondent for The Economist and author of “Power to the People” (Farrar, Straus & Giroux, 2004).