Notes on the Looming Global Energy Crisis

Ioannis Michaletos, Athens, Greece, October 24, 2007

Iranian President Mahmoud Ahmadinejad (right) and his Russian counterpart Vladimir Putin hold a joint press conference on Oct. 16 following the summit meeting of Caspian Sea states in Tehran (Photo: Behrouz Mehri / AFP-Getty Images)

In January, the average price for a barrel of oil was just above $50, by mid-October it had reached almost $90 a barrel, an impressive 70 percent increase without there having been a major catastrophe or war in between. International investment houses, such as Merrill Lynch and Citigroup, predict the average price will reach well above $90 a barrel and do not attribute any radical change as a catalyst for this upward trend.

Moreover, according to Matthew Simons, president of the investment bank Simmons and Co., prices might triple (reaching above $200) if certain events take place in parallel, for instance, a Turkish invasion of Kurdish-dominated Northern Iraq, a war in Iran, and widespread terrorist attacks, to bring the economy to a phenomenal recession.

One of the reasons for the oil price increase is the deteriorating value of the dollar, which is priced at 1.43 euros. Since petroleum, and most other commodities for that matter, are priced with the dollar, as long as its value decreases the price of oil will increase. Furthermore, the International Monetary Fund in its mid-term report describes the dynamism of the worldwide economic environment, which is characterized by significant growth in the economies of Asia, especially China's and India's. Due to the sheer size of their domestic markets and energy consuming industries, there is a strong demand for oil that naturally assists the rise in the energy price index.

Goldman Sachs, in its third quarter report, notes a decrease in global oil reserves, for the first time over the past 10 years. According to analysts, the price of oil might exceed $93 this winter if it is colder that the previous year or $77 if as hot as last year. The winter of 2006-2007 was most probably the hottest in recent history; 850,000 barrels of oil per day less than usual were consumed.

Caspian Energy Blues

With the world's attention focused on energy problems, important developments have emerged in the Tehran meeting between Russian President Vladimir Putin, Iranian President Mahmoud Ahmadinejad, and Caspian Sea-area leaders. It seems that another regional entente based in energy is emerging, one composed of countries that control almost half of the world's natural gas assets and 20 percent of global oil reserves. The most important aspect of this meeting was the joint proposal by Iran and Russia to veto the construction of any pipeline traversing the Caspian states. This initiative will be decided in next year's conference in Baku, Azerbaijan, and if accepted by all interested parties will signify an important shift in energy issues that gives Russia a stronger hand in dictating the rules of the game in relation to Western oil multinational corporations. Of course, it will elevate the role of Iran as well.

Russia also proposed a division of the Caspian Sea basin equally between all five Caspian states—Russia, Kazakhstan, Turkmenistan, Iran, and Azerbaijan—thus sharing the energy commodities lying beneath. For the surface of the energy-rich Sea, Moscow proposed joint ownership, which ultimately means Russian dominance due to its size and importance. Iran benefits as well, because according to the present day borders it can only legally exploit but a small portion of the territory.

All the Caspian heads of government agreed not to allow use of their territories for attacks against Caspian countries, therefore presenting a direct message to the West and especially the United States against the use of force in relation to the Iranian nuclear crisis. A joint declaration was also signed supporting the use of nuclear energy for civil purposes by Iran, a second crucial step that differentiates today's Central Asian stance toward Tehran from that of the United States, Israel, and most of Europe.

Overall, the looming energy crisis and the Russian initiatives alter the current state of world affairs and present a landscape in which the main producers, such as Russia, are able to use energy as leverage for geopolitical advancement. Also, it seems that the traditional Washington-Riyadh energy axis is being supplemented by an emerging Moscow-Tehran axis, perhaps adding Astana, Kazakhstan, and Baku to the equation. Certainly, the 21st century "energy game" has begun, and the countries without their own resources might find themselves in a difficult strait characterized by continuous antagonism, unpredictable upturns, and most certainly for those interested in international affairs, intriguing political developments. The average citizen, however, is liable to feel the effects more acutely.

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