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The Next War Has Already Started

by John Steinberg  (30th June 2005)

There is a famous quote from Albert Einstein about war. He said "I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones."

I am considerably less qualified than Einstein to predict the weapons to be used in WWIII, but I am pretty sure of what it will be about, and who we will be fighting against. In fact, the war has already begun. The war is about oil, and our dance partner is China.

Wars over oil are nothing new, of course. Oil played a significant part in both World Wars – indeed, Iraq is an artificial state created by a young Winston Churchill in the aftermath of World War I exactly because of the growing importance of oil to the ebbing British Empire. The Allies occupied it during WWII for the same reason. Oil is a strategic asset, as military types would say. What makes a resource strategic is the likelihood that demand will exceed supply – that is, that it may become scarce.

And make no mistake, oil is about to be come very scarce indeed. As many others have noted, the endless "up" escalator of increasing oil reserves and production is about to become a slow but painful trip down. An increasing number of experts are voicing the heretical notion that world oil reserves are on the downside of the bell curve. Some experts think the peak is as much as a decade off; others think we are there right about now.

If world demand for oil could be throttled back, the impact of this trend could be relatively mild. But there are a number of reasons why that is simply not in the cards. One is of course our nation’s profligate consumption: Americans consume nearly three times as much energy per capita as Europeans do, and nearly six times the world average. But even if Americans were to suddenly abandon their dreadnought SUVs en masse, world consumption would likely continue to increase. And one of the primary reasons is China.

We all know that China's economy is growing like bamboo (a mind-boggling 9% annual rate for the 25-year period from 1978 to 2003), and that it is increasingly willing to flex its muscles in politics and international finance. Less well-known is the fact that China is already the 2nd largest consumer of energy in the world.

We tend to think of China as a backward country unused to casting a global shadow. But as The Economist has pointed out "China was the largest economy for much of recorded history. Until the 15th century, China had the highest income per head and was the technological leader." Perhaps in part because of its long history, China tends to take a long view of events. While American businesses worry about next quarter, China is making decisions that will bear fruit a generation from now. And so it invests in education and manufacturing while we file dutifully into Walmart to buy their $30 DVD players."

As China has become the world’s factory, it has also become the leading consumer of many industrial commodities including steel, coal and cement. And as prosperity turns Chinese workers into acquisitive consumers, their demand for the high-energy badges of modernity like automobiles is exploding. Volkswagen now sells more cars in China than in Germany."

How will China fuel its increasingly affluent economy? It will have to secure access to a truly staggering amount of oil – oil that would otherwise be targeted for our Hummers and Suburbans. And China may well get it without firing a shot.

A couple of months ago ChevronTexaco (remember when anti-trust laws broke up what has again been joined together?) announced that it was to acquire fellow big oil player (and former Taliban coddler) Unocal for $16.4 billion. But such announcements do not always lead to the desired results; in one of the essential rituals of American big business, Unocal is "in play." In other words, its management, duty-bound to get the highest possible price for its shareholders, must consider other offers. China National Offshore Oil Corp. (CNOOC), the number three oil company in China, is publicly contemplating putting in a higher bid. The blogosphere yawns, but a bid from CNOOC could be the Pearl Harbor of the next great war.

America's economy, foreign policy, internal future, and wet dreams of another century of hegemony are all tied to cheap oil. And the way we have kept oil cheap is by being the 800-pound gorilla (also guerilla) of the world energy market. OPEC controls some of the supply, but make no mistake that Big Oil – American Big Oil – calls the shots for the world energy market.

But Big Oil cannot change the decline in basic supply. And even if they could change the effect that will follow from that cause, they would have absolutely no incentive to do so, because the immediate and primary effect of even minor shortfalls in supply will be huge increases in the price of a barrel of oil. In past disruptions, note that shortages of only 5% in supply caused 400% increases in its price. But the oil crises of the 1970s were short-term, artificial phenomena. The coming crisis is real, systemic and terminal.

Put together the contraction in supply and the growing ability of China to control some of that supply, and you get a taste of the cataclysm that will follow when China's growing productivity and affluence really go toe-to-toe with our oil addiction. China, which may be less than a true free market at home, has no problem bitch-slapping us with Adam Smith's invisible hand at the most macro level. So it seems rather obvious that China will flex its growing muscles and buy its own secure supply by bidding on bigger and bigger helpings of Big Oil.

In most ways, the Bush Administration is simply the policy arm of Big Oil. Who will man the marionettes if the Chinese take control of Big Oil? Will the champions of the free market stand by if the Chinese outbid us fair and square for the energy (and control of that energy) we have taken for granted?

One of the inherent flaws in the free market system is that, left unchecked, it usually results in the accretion of a great deal of power in the hands of one or a few. The winners are known as monopolists to economists, or bullies to the rest of us. Republicans have always defended the system, and thus the bullies, but of course they have coincidentally always been the biggest kids in the sandbox. Last week, CNOOC in fact bid $18.5 billion for Unocal. Numerous voices in the Administration and Congress (on both sides of the aisle) are already squealing. Bullies tend to become crybabies when their reign ends due to the arrival of a bigger bully. Time will tell how our oil bullies will react, but I predict they will squeal like stuck pigs when China assumes its inevitable role as the bigger bully.

Whether the war this crisis triggers will be fought with guns and bombs or money and lawyers, I do not know. But war it will be.

Due to technical problems, this column was delayed nearly two weeks. The CNOOC bid was actually made after the first draft was submitted.

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revised 14 September 2005