Bushido—The Way of Oil

America Goes Into the Energy Business With the Former Evil Empire

For decades, we've heard warnings that the West's overdependence on Saudi oil could have disastrous effects were anything to go wrong in the Middle East. But it's been a hard habit to break—the American public's support for the 1991 Gulf War is proof enough of that.

That was a war between Saudi Arabia, the world's largest oil reserve, and Iraq, arguably the world's second largest oil reserve. Now we are fighting a war against what sometimes seems like a virtual Saudi Arabia, and we may use Iraq to achieve victory. But this will not be a victory over Osama bin Laden, or over terrorism. It will be a victory over our dependence on Saudi oil, and Russia is going to help us win it. Maybe.

It is often said that hunting down and killing Osama will solve nothing. That after this Osama, there will be many Osamas. This is true, but not just because of abstractions like "poverty" or "ignorance." Osama is neither poor nor ignorant. The reason there may be more Osamas is that there is a network that grows them, and that network is, for the moment, indistinguishable from the Saudi elite.

Committed to the conservative Wahhabite strain of the Muslim faith, much of the Saudi power structure has been deeply compromised by its support for the networks of militant Islam—how deeply is the great mystery of this war. But when President Bush made "You're either with us or against us" the war's mantra, he must surely have been talking to people who never had to make the choice before.

How deeply compromised are the Saudis? We don't know, because our government is keeping very quiet about this. But according to the book Ben Laden: La Verité Interdite, which grew out of French intelligence reports (and was the subject of James Ridgeway's November 27 column), the answer is pretty much . . . totally.

In a chapter called "Terrorism's Banker," for example, we learn that Osama's brother-in-law was once the biggest private banker in the world. Until relieved of his duties in 1999, he was also personal banker to the Saudi royal family. His name is Khalid bin Mahfouz, and he was last seen in a Saudi military hospital, being interrogated by U.S. officials about $2 billion gone missing, very probably to terrorist causes.

These are not the type of people lending institutions are comfortable doing business with. And many leading banks have responded predictably: They have taken Bush at his word, and declined to invest in the region. In an end-of-year prognosis published in London's Financial Times, Arthur Andersen partner Carl Hughes said: "The focus of the great geopolitical game will no longer be east versus west, but north versus south. The 'war on terrorism' will hasten this trend, slowing the reopening of the Middle Eastern companies to western oil capital."

The power of the Saudi state, of course, rests on 262 billion barrels of oil, the largest concentration of wealth on the planet. To do battle with that, one must do battle with OPEC, the 13-nation cartel dominated by Saudi Arabia. And nobody can do that better than what the oil industry calls "non-OPEC," led by Russia, the world's second-largest oil-exporter.

The latest skirmish was occasioned by OPEC's November 14 announcement that, in response to the continuing global recession and the resultant fall in the price of oil, OPEC was scheduling a cut in production for the third time last year. But whereas non-OPEC—and especially Russia—had taken advantage of the previous cuts to increase their global market share, this time they were told to contribute a quarter of the planned drop of 2 million barrels a day, scheduled for the first two quarters of 2002.

Mexico and Norway made cooperative noises. Moscow most definitely did not. Having been asked to pony up a cut of 150,000 barrels a day, Russia offered 30,000—just enough to be insulting. Andrei Illarionov, one of Putin's top economic advisors, came flat out against cutting production, calling OPEC "an unreliable partner" and "a historically doomed organization." Eventually, a compromise was reached: Russia promised to cut production the full 150,000, but for the first quarter only—when the Siberian winter forces down output naturally.

The last thing the U.S. economy needs now is higher oil prices. But the delicacy of current relations between the U.S. and Saudi Arabia led to administration murmurs of support for "price stability," instead of the all-out price war the Russians said they were prepared to wage. But soon after there was a slightly different message from America's inconspicuous but powerful secretary of energy, Spencer Abraham. "Obviously we want stability. At the same time, we don't want a recession that's artificially extended because of decisions that are made with only a short-term focus."

In fact, Abraham, previously best known for his opinion that many Department of Energy functions would be best served by privatization, could not be more supportive of U.S.-Russian oil initiatives. In October, for example, Exxon exercised a previously unused option to develop Siberian oil. It's a $12 billion investment, and will reap $35 billion in revenues over the next three decades—and that's just the Russian share.

In this sense, Abraham's pro-Russian position is no different from that of the rest of the administration. Despite the abrogation of the ABM Treaty—a political embarrassment that Putin waved away as being "of no major concern to us"—the administration has supported Tony Blair's initiatives for the fast-track entry of Russia into both the World Trade Organization and even, despite Donald Rumsfeld's objections, NATO itself.

And why not? It's Statecraft 101: After World War II, we used defeated Nazis to help us fight our former Soviet ally. And after the Cold War, we are using the Russians in more or less the same way against our close friends the Saudis: by rebuilding their economy, starting with the oil business. As Secretary Abraham put it: "Greater energy security through a more diverse supply of oil for global markets—these are key elements of President Bush's National Energy Policy."

The quote comes from a visit Abraham paid to Moscow at the end of November. The ostensible and very p.c. purpose of the visit was "strengthening standards for the protection and accounting of nuclear materials," but the main event turned out to be the pronouncement, from all parties concerned, that the days of U.S.-Russian rivalry over Caspian Sea oil have finally ended.

The occasion for the lovefest was provided by the Caspian Pipeline Consortium (CPC), whose members include Chevron-Texaco, Arco, Mobil, Shell, and the governments of Russia and Kazakhstan. The event they were celebrating was the inauguration of a pipeline running from Kazakhstan's Tenghiz oil field (the world's sixth largest) to the Russian Black Sea port of Novorossisk.

Dave O'Reilly, Chevron's CEO, used the moment to proclaim to "the global business community that one can confidently invest in Russia and Kazakhstan." And Secretary Abraham, with the OPEC-Russia fracas no doubt in mind, said that "Russia is emerging as a separate nucleus of the energy equation. We have great respect for the energy role that Russia is playing, and we believe it will be an expanded role in the future." The Russian press even reported that Abraham had endorsed the idea of a "third nucleus," a channel for ongoing consultations among non-OPEC nations (which in theory could include the U.S.).

The CPC represents a complete reversal of the traditional status quo on Caspian Sea oil, whose paradigm until recently was the Baku-Ceyhan pipeline, a U.S.-backed effort to transport oil (how much is uncertain, although the estimate has been diminishing) an enormous distance (1100 miles) at a cost (up to $4 billion) almost double its original projection. The Baku-Ceyhan pipeline would go from Azerbaijan (recently at war with Armenia) through Georgia (occasionally bombed by Russia) and Armenia to Turkey (across the Kurdish war zone)—all in the name of greater "security." This meant the pipeline didn't pass through Russia or Iran. And though it's been promoted for years by its main backer, British Petroleum (BP), it has never been built.

The Russians, of course, always resented the rude and exclusionary attitude to Caspian Sea oil represented by Baku-Ceyhan, and boycotted it accordingly. So imagine the pleasure felt this December in BP offices when representatives were invited to make a presentation—to the Kremlin. If, as expected, Moscow extends its blessing, then giant Russian oil companies like Lukoil and Yukos will be free to invest in the pipeline, locking it into their own extensive networks and using it to transport their own oil to the Mediterranean—a win-win situation for everybody.

More and more in recent years, those networks have extended to Iraq, which has long shipped its oil from Ceyhan. Friendly relations between the two countries go back decades, and Russia is by far Iraq's largest trading partner. It also holds $8 billion in Iraqi debt, giving it a long-term stake in Iraqi stability. Lukoil, for example, holds rights to Iraq's West Qurna oil field. One of the world's largest, West Qurna could eventually pump up to a million barrels a day. So for historical and commercial reasons, Russia has opposed the levying of further UN sanctions against Iraq, and would like to see those in place lifted.

The sanctions have, of course, been a political and humanitarian disaster (which Osama bin Laden has not hesitated to exploit). Depending on whose abacus one uses, the number of innocent children said to have died runs into the hundreds of thousands (according to the UN) or even the millions (according to the Iraqis).

The American and British response has been to lobby intensively for a change in the nature of sanctions. This past summer, they proposed to the UN Security Council the idea of "smart sanctions," which would allow the Iraqi citizenry access to a far greater range of goods, while clamping down more firmly on "dual use" items with potential military applications. France, traditionally a staunch ally of Iraq, went along with the U.S.-U.K. proposal. Russia did not, and the long shadow of a Russian veto kept the Security Council from voting smart sanctions into effect.

Iraq, which claims to have no more weapons of mass destruction, is of course opposed to any sanctions, as well as to the return of UN weapons inspectors. So in August of 2001, in clear appreciation of Russia's backing at the UN, Iraq reassigned rights to its oil fields at Nahr Umar and Majnoon, previously held by the French, to Russia. Their potential is well over double that of the West Qurna fields, which means that in a post-sanctions world, Russia has access, from these fields alone, to more than 3 million barrels a day of Iraqi oil. And there are others.

Russia is, by Western standards, an underdeveloped country, with a GNP about the same size as Holland's. And it is very unlikely that the West will ever stop buying Persian Gulf oil—there are no known sources as cheap or as plentiful. But factoring in ever rising output from both Russian and Caspian fields, the amount of oil Russia can bring to market exceeds Saudi numbers (although the quality of Russian oil is inferior to Saudi, and it costs three or four times as much to extract). Add in Iraqi potential, and it's roughly double Saudi Arabia's current production level of 8 million barrels a day.

The Petroleum Finance Company, an influential consulting and analysis firm, has devoted much study to this, and some of it recently found an echo in The Washington Post. In a December 23 column called "Russia Wins the War," David Ignatius cited a PFC report and found it "obvious that Moscow is on its way to becoming the next Houston—the global capital of energy."

On November 26—the same day Secretary Abraham took off for Moscow—President Bush issued his famous "he'll find out" threat to Saddam Hussein. Although the topic at the time was the admission of weapons inspectors, it was not widely noted that four days later, the UN Security Council was again to put the issue of "smart sanctions" to a vote.

It never happened. The decision was tabled for six months, because a deal had been worked out, it was reported, between the U.S. and Russia. Both countries would come to agreement on a list of prohibited dual-use items, to be presented to the Security Council on June 1, 2002, at which time the whole issue of sanctions against Iraq would be reviewed. In the meantime, Putin has been calling on Iraq to readmit UN weapons inspectors, in the hope that sanctions be lifted.

But whatever happens—air strikes, a new spirit of cooperation from Iraq, nothing at all—one thing is certain. For the foreseeable future, a resurgent Russia, America's new best friend, will be Iraq's main partner in the oil business—Saddam or no Saddam.

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