Game-Changer: Oil Trends and Geopolitics

A healthy body of policy practitioners and market analysts, and even a few scholars, have always recognized the nexus between politics, oil, and geopolitics and have developed a refined understanding of its complexities over time. Still, most analyses remained constrained to examining simple cause and effect. But, the ghastly events of September 11, 2001 exposed new dimensions of the nexus between geopolitics and oil.

Middle Eastern oil-based regimes had, since the 1950s, attempted a grand experiment in the foundations of governance that throughout history has ended rather badly: to sever the wealth and function of governance from the production of wealth through the resourcefulness, diligence, and grind of the overall population. The Middle Eastern oil states essentially discouraged productivity and resourcefulness and made the broader welfare and wealth of society entirely dependent on government largesse.

They seemed successful for several decades; a constantly increasing amount of that oil wealth was spent from the 1970s forward to preempt, coopt, or externally direct and export rising radical ideas among their indulged youth, the elites of which led to the rise of al Qaeda and the like. It is a short line between the oil monarchies and the rise of ideologies that view their subject peoples with dehumanized disdain and entertain raw destruction without regard for any cares of national production, income, or state revenue.

Emerging Game-Changing Trends

The Middle East

Several new, or soon to emerge, factors will affect the international energy scene, and ultimately change the way we view energy.

Technological innovation and geological tools and analytics have combined to revolutionize hydrocarbon exploration and production. Western oil and gas companies have invested large amounts in the last two decades to find new ways to drive down the cost of unconventional oil and gas plays—namely, the ability to extract vast amounts of oil and gas from shale—and locate new fields where none had ever been expected (such as the Israeli offshore gas and potential oil play). Not only have these factors led the United States to again become an oil production superpower, but also have structurally built in a constant downward pressure on oil and gas prices. The battle for oil prices has thus yielded to the battle for market share—a condition that undermines the viability of cartels.

OPEC still supplies about 40% of the international oil market, but its control of the market is under question. The dramatic drop in oil prices over the last year is in large part an attempt by oil producers in OPEC, especially Saudi Arabia, to maintain market share. In a recent OPEC meeting, the Iranians—whose stimulated appetite for a massive influx of easy oil revenue advocated reduced production quotas to drive up prices yet further—ran up against the Saudis—who prioritized increasing their production and allowing lower prices in order to avoid a collapse of their market share.

For a time, the Saudi strategy will work. Riyadh can continue to sell oil at low prices, even if it means bleeding its national resources and depleting its wealth, because bleeding slowly is preferable to the consequences of losing market share to Western production sources altogether—and subsequently overseeing a decline in revenue to trace levels. Western producers are finding it difficult to stay apace of the downward price, and many are now facing genuine stress. According to Daily Finance, since the beginning of 2015 nearly 31,000 jobs were lost in the oil sector in the U.S. The first consequences were felt by providers to oil and gas companies such as drillers and engineering firms (Schlumberger alone cut 9,000 jobs by early 2015). By April this year, the Wall Street Journal put the number of lost jobs as high as 91,000.

But these are short-term trends. First, the Saudis can continue their selling at cut rate prices to prevent losing market share, but at some point they will no longer have the buffer to fall back on. Second, Western innovation and advances will render production yet cheaper, and sooner or later, alternative sources of energy will also emerge. In short, it will take time for elasticity to kick in, but eventually it will. And while it will take some time for the West’s oil and gas industry to turn around and resume the aggressive pace of exploration and production of a year ago, eventually it will. The Saudis are delaying the inevitable, but the inevitable has a pesky way of prevailing.

When it does, politically, it will be a cataclysm. The Middle Eastern oil bonanza represented over the last 75 years perhaps the greatest transfer of wealth in human history not only between nations, but even between civilizations. The implications of terminating that wealth transfer cannot be exaggerated.

The refugee flow from Europe is in part a function of failed western policies on Syria and Libya, but only in part. Over the last 50 years, oil wealth shielded Arab states from their utter failure, as revenue flowed to producers and large remittances flowed to non-producers via their expatriates. When the inevitable happens, and the continued transfer of wealth from the developed and developing world to the Middle East withers, the sort of despair, chaos and population movements out of the region that we now see will dramatically, even exponentially, increase. It has been in vogue in recent years in Washington to discuss the concept of “failed states” and the need to deal with their aftermath, but that misses the point. We may be on the eve of a “failed civilization.” The region’s population is fleeing the region as the first, tenuous, and probing wave of what may be an eventual deluge.

Behind, amidst the residue of a failed region, arises from the chaos a haunting premonition of what might be left—ISIS and other similar movements.

The West’s failure to understand the depth of the region’s emerging failure—which emanates from a horrific distortion of governance and the use of oil to cover the resulting failure and deepen the eventual reckoning—and its dismissal of the rise of Sunni Islamism and its increasing radicalization as an aberration or perversion of Islam—prevent it from properly estimating the reslient draw of authenticity which these movements represent. The West’s efforts to understand the appeal of these movements through mechanics—such as marketing, recruitment structures, or process of indoctrination—dangerously belittles the power and appeal of the underlying ideas these movements represent. Sunni Islam as a whole is facing a crisis of survival, as it is driven by the collapse of states and economic activity and torn amid a stark choice between fundamental theological reform and strict retrenchment.

Advocates of retrenchment have argued that Islam is an all-embracing totality, and that removal or interpretation of parts of it would lead not to a stronger, altered Islam, but to its collapse. This rending choice has faced Sunni Islam before, and in all previous historical periods in which Sunni Islam faced such choices, it has retrenched. While facing such a crisis, the region’s Islamists who advocate retrenchment into literal Koranic purity are confident in their victory regionally, and eventually against the West globally. They are confident because they believe that the West lacks a religious soul, and is thus doomed to self-doubt and collapse.

Russia

Russia is different. Europe imports substantial amounts of its energy needs from Russia. Nearly 50 percent of Sweden’s imports are from Russia. About 30 percent of Germany, Italy, Belgium and The Netherlands’s import needs and about 20 percent of France’s and about 15 percent of Spain and Britain’s imports are met by Moscow, according to The New York Times. Many Eastern European countries depend on Russia for virtually 100 percent of their oil and gas. As such, European ambitions to rein in Russia generally are doused by European dependence on Russia and the attending transfer of wealth from Western Europe to it. Not only is that oil wealth transferring to Russia, but disproportionately to a narrow clique surrounding Putin. Consequently, Russia is not only punching above its weight, but the Putin clique remains the best-funded mafia and thus most entrenched and powerful gang in Russia.

Revenues amassed by Russia through its exports—the per annum amount of money transferred to Russia just from Germany, Belgium, and the Netherlands for their energy needs amounts almost to $100 billion—also allows Moscow to buy into critical Western energy infrastructure and transmission structures to expand its influence (and revenue) beyond the oil and gas originating in Russia to essentially control all energy flowing into Europe—whatever its source.

Russia is also making a play—sadly successful in an era of U.S. strategic absence—to become the dominant guarantor of stability in the eastern Mediterranean. The first signs of the profound strategic shift manifested itself in the Levant Basin hydrocarbon production area (offshore Cyprus and Israel) in the summer of 2011, when Turkey sent an exploration ship and naval vessels into Cypriot waters to challenge Cyprus’ rights and threaten an American operator. The United States Navy, whose presence in the eastern Mediterranean was the foundation of regional security for decades, was nowhere to be found to defend Cyprus’ waters. Instead, Israel stepped in to extend a defense umbrella to the island’s waters, but most significantly, the Russian Navy’s carrier, Admiral Kuznetsov, parked provocatively in those areas to defend Cyprus and Greece—a NATO member. Turkey backed off immediately. Russia, and to some extent Israel, now anchor eastern Mediterranean stability.

The behavior of the West in the Middle East has convinced Moscow that the West has lost its way and fails to recognize the magnitude of the threat posed to the West by Sunni radicalism and is strategically vulnerable.

While Sunni radical Islamists seek to raise the banner of Sunni resurgence and carry the black flag to victory, Russia increasingly asserts itself in regional policy as the protector of the region’s minorities: primarily Christians (especially non-Catholic), but also Shiites, Alawites and others against Sunni resurgence. Russia’s increased military role in Syria is no transient act of pique or a nostalgic relic of Cold War affinities, but a reflection of a strategy in the broader war between it and Sunni radicalism.

Europe and Eastern Mediterranean Hydrocarbons

The greatest strategic challenge facing the West right now is being launched by the two great oil producing civilizations at a time when their future prospects are dim but their geopolitical aspirations are increasingly expansive. It is precisely that combination of despair and ambition that might lead to the urgency and intensity behind the strategic effort they undertake.

The geopolitical fall-out, either driven or funded by the Near East and Russia’s respective situations, converge on the continent of Europe. Russia seeks to leverage its only genuine asset—oil wealth—to fund a civilizational-military challenge to Europe, while radical Islam seeks to leverage the looming economic catastrophe driven by the collapse of oil revenues and the exposed devastation of the failed Arab state to demographically overrun Europe.

Europe seems unaware that it is descending into a battlefield between Russia and radical Sunni Islam over their respective attempts to use the consequences of their oil policies to subdue Europe’s independence and change its culture. Russia and Sunni Islam are on a collision course, and Europe is slowly descending into a geostrategic football.

Western Hydrocarbon Strategy to Challenge Russia

Russia is using oil and gas to play a grand game with a weak hand; Moscow’s use of energy to fund its civilizational agenda is only as effective as there are consumers depending on Russia’s hydrocarbon export.

If American strategic confidence revives and Washington becomes again assertive, it and Europe hold the cards to answer these destructive forces intruding on the Euro-continent and threatening its political stability. The rise of a robust gas market and transmission network removed from the clutches of Russia—anchored to Israel, Cyprus and Egypt—could export enough gas to Europe to break Russia’s strategically dangerous monopoly and ease the pressure Europe faces by relying on Algerian transmission structures for another 15-20 percent of its gas imports. With a secure Suez Canal and stable Cyprus, the eastern Mediterranean export system could also eye Asia as U.S. naval vessels can convoy shipments through the Bab-el-Mandab.

Unfortunately, the United States and Europe are missing the significance of what is emerging to its southeast in the waters off Egypt, Israel, and Cyprus. Russia, however, is not. Both Europe and the United States are currently failing to see the significance of geo-strategic moves being made by Russia to control the eastern Mediterranean either directly or through energy transmission structures to Europe—especially those in Greece and Asia Minor.

Until now, Russia has seen not only Cyprus, but especially Greece’s financial crises as a strategic opportunity to expand Russia’s Aegean involvement—a critical element remaining the predominant eastern Mediterranean naval power blocking Turkish expansion—which Moscow sees as an intergral part of the Sunni threat—southwestward. A review of Russian offers to “help” both countries with loans and restructuring over the last several years suggests less altruism and more strategy.

Moscow treads cautiously with respect to Turkey even though it sees Ankara’s Islamist regime as essentially inimical. Pipelines from Central Asia—and Kurdistan—always commanded Russia’s focus. In 2013, Turkey decided to suspend energy projects with the Italian company, ENI, which has a share in the Samsun-Ceyhan crude oil pipeline along with Russia’s Rosneft and Transneft, in retaliation for ENI’s involvement in Cyprus’ oil and gas projects. The Samsun-Ceyhan crude pipeline project, which crosses Turkey from the Black Sea to the Mediterranean oil hub in Ceyhan, is in limbo.

Russia also fears the entry of Kurdish gas and oil via Turkey, and thus the ENI-Rozneft-Tranzneft (Samsun-Ceyhan) pipeline, if realized, will allow Russia to keep its hands on this most sensitive spigot—a control valve they lose if ejected from Turkey. Similarly, Russia does not look with great eagerness at the entry of Azeri or other Central Asian gas and oil flowing through Turkey without its being able to maintain control of the spigot/safety valve.

Further south, Russia has been knocking at the gates of Jerusalem to penetrate Israel’s offshore exploration and production, which so far represents the majority of the proven discoveries in the Levant Basin. But ignoring Moscow is no longer easy for Israel. Without America’s strong regional presence and solid backing, Russia has strategic levers of influence to employ against Israel should its interests be crossed. Moreover, to signal Israel just how tough a game it is willing to play, Russia has already informed Lebanon that it would like to be awarded license tenders from Beirut in the offshore areas currently disputed between Israel and Lebanon.

Finally, historically, the willingness of Israel’s neighbors to cooperate with Jerusalem has proven to be far more motivated by their geostrategic need to ingratiate themselves with the predominant superpower—the United States—than economic self-interest, which historically rarely drives Middle Eastern politics. And yet, we are entering a period in which the United States is regionally held in ever-lower esteem, and thus commands ever less consideration. In contrast, Russia has been rising as an insurance policy to backstop regime survival, not only for its long-standing associates like Syria and Iran, but increasingly others as well, such as Egypt and Algeria—both of which have seen visits and high-level interactions unseen since both were orbiting as satellites around the Soviet empire in the 1970s.

If current trends continue, it is reasonable to expect Russia’s emergence as a major player in Egyptian and Jordanian considerations, and the same geostrategic conditions which in the past led Egypt and Jordan to cooperate with Israel to ingratiate themselves with the U.S. superpower, will lead them now to ingratiate themselves with the emerging Russian neo-empire. Out of geostrategic interests, these nations will choose to accommodate Russia’s demands. Russia will emerge as the main supplier of needed gas to the Mediterranean littoral. Indeed, Egypt has already signed major LNG import deals in the last months with Russian gas supply companies, and Jordan is slowly succumbing to the temptation, the clearest sign of which its choosing Russia two years ago over others in the tender to building its first nuclear reactor.

The power and prestige of the United States in the Middle East has reached a nadir—perhaps historically as low as Britain faced in the 1950s as it was replaced by American power. The precipitous U.S. decline has appeared orderly only because Washington has enlisted first a resurgent Russia, and now an agreement with Iran—to cloak its retreat and avoid the short-term effects of having to defend American interests. The magnitude and thoroughness in all spheres—from security to economics—of this shift have yet to be analyzed.

The decline of U.S. power in the Middle East and eastern Mediterranean, and the abandonment of long-standing close ties to countries around the eastern Mediterranean littoral have led to a dangerous indulgence of Russian ambitions and a trail of missed Western strategic opportunities. With the discovery in Israel, Egypt, and Cyprus of far more gas and potentially oil than any of them could consume, these three neighbors will become significant exporters. But what was certain in an age of American predominance is questionable, complex, and ranging near impossible in an age of American retreat.