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Yale Center for the Study of Globalization

The Rising and Falling Power of Hydrocarbon States

The Oil Card is Good For Only a Few Rounds in The Long-Term Game of International Diplomacy

LONDON: The fast rising demand for oil by China and India, sharply declining fresh discoveries, and high prices are empowering the countries with large reserves of black gold as never before. Venezuelan President Hugo Chavez provides a striking example of how petroleum has emboldened leaders of oil-rich states to thumb their noses at the giant neighbor in the north - the US.

Aside from his hint that Venezuela might be seeking nuclear power, the highlight of Chavez's recent visit to Moscow was to finalize a contract to purchase five Russian diesel submarines for $1 billion to safeguard his country's oil-rich underwater shelf and thwart a possible embargo by the US in response to his anti-Washington crusade in Latin America for the past several years. Under his presidency, Venezuela has become the second largest purchaser of Russian weapons after Algeria.

"We are strengthening Venezuela's military power precisely to avoid imperial aggression and assure peace, not to attack anybody," said Chavez in a recent speech at a military base in Caracas.

The arms procurement is funded by a treasury overflowing with foreign exchange due to high petroleum prices. This gives Chavez the clout to challenge the US, sorely dependent on imports of Venezuelan oil, and insult President George Bush with impunity.

Oil income has enabled Chavez to consolidate his popular base at home. And he has used price discounts on petroleum to gain diplomatic backing of the Caribbean and Central American countries to the detriment of Washington. He has financially helped debt-ridden Latin American countries like Argentina.

At the same time Chavez is forging strong hydrocarbon ties with oil-hungry China as insurance for the day when the US decides to stop importing the Venezuelan crude. By 2009 Venezuela's oil exports to China will treble to 500,000 barrels per day (bpd). A Chinese oil company is collaborating with the state-owned Petroleos de Venezuela SA to explore a new heavy oil field in the Orinoco Basin. "The support of China is very important [to us] from the political and moral point of view," Chavez said during his visit to China last year.

Another leader recently challenging Washington is Russian President Vladimir Putin. He threatened to point his military's nuclear missiles at European cities, if Bush extended the present California-Alaska anti-missile defense line to Poland and the Czech Republic. This threat was the latest illustration of a radical change in the Kremlin's foreign policy, with Putin repeatedly attacking Washington's stance in the international arena.

His tough stance stems from the soaring wealth created by the extraction of Russia's enormous hydrocarbon reserves and his policy of bringing the leading Russian hydrocarbon companies under the control of the Kremlin and using them as an instrument of Russia's foreign policy.

Four years ago Russia overtook the US to become the world's second largest oil producer after Saudi Arabia. Last year Gazprom, a Russian company, forged ahead of BP as the globe's second largest energy corporation by market value. With petroleum prices rising fivefold between 1998 - when the Russian ruble crashed, forcing the Kremlin to beg for foreign financial aid - and now, the Russian treasury is overflowing with cash. It has since paid off its foreign loans and built up a foreign exchange nearing $300 billion.

Another example of oil riches enabling a country's leaders to act with uncommon resolve is Iran. Its refusal to suspend enrichment of uranium demanded by the United Nations Security Council has led to two sets of sanctions against it. But these have proved ineffective. Iran's exports are rising and the high oil prices mean that the government can go on using the hydrocarbon revenue on subsidies for food and fuel at home.

What would really hurt Iran are sanctions on oil exports. But, given the rising demand for the commodity, the tight supply in the petroleum market and the fact that Iran is the second largest oil exporter in the Organization of Oil Exporting Countries, a ban on the oil trade with Iran is almost inconceivable. Iran's threat to cut off its petroleum exports, if attacked militarily by the US or Israel, thus causing a big jump in prices, has so far restrained the hawks in the US and Israeli governments.

These examples amply illustrate how petroleum has proved to be a leading factor in determining international relations. Condoleezza Rice made this discovery only after becoming the US Secretary of State in January 2005. In her testimony to the Senate Foreign Relations Committee in April 2006, she said, "Nothing has taken me aback more as secretary of state than the way that the politics of energy is - I will use the word 'warping' - diplomacy around the world."

This statement from a former director of Chevron was truly astonishing: It showed her ignorance of oil's importance in America's diplomatic annals. Summing up the post-World War II situation in August 1945, a top US State Department official wrote: "A review of the diplomatic history of the past 35 years will show that petroleum has historically played a larger part in the external relations of the United States than any other commodity." This quote appears in many US history textbooks.

Actually, the US has the distinction of being the first to "warp" diplomacy by deploying oil to further its economic and diplomatic interests. During the first six decades of the last century, when the US was the leading producer of oil, the government used the commodity to further national interests abroad.

The US did so when joining the Allies in April 1917, at a time when its oil output amounted to two-thirds of the global total.

By supplying four-fifths of the Allies' petroleum needs, in addition to sending troops, Washington helped defeat the Central Powers.

As a quid pro quo after the war, the US compelled the victorious Britain and France to give open access to American companies in Europe and the Middle East (under the British and French mandates) where the discovery of a bountiful oilfield in Iran in 1908 held the prospect of hydrocarbon cornucopia.

Once the US entered World War II in December 1941, its petroleum companies began extracting oil furiously to supply the Allies, thus depleting the proven reserves at an alarming rate. Worried policymakers turned their attention to Saudi Arabia where a massive oilfield had been discovered in 1938. That forged strong links between Washington and Riyadh, which continue to this day.

In 1956, when Britain-France-Israel invaded Egypt, the Egyptians blocked the Suez Canal with sunken ships, thus disrupting oil supplies from the Persian Gulf region to Western Europe. The West Europeans appealed to US President Dwight Eisenhower to meet their oil needs, knowing that American petroleum corporations at home had a spare capacity of 4 million bpd.

But Eisenhower refused to oblige. He regarded the UN-brokered ceasefire inadequate and urged the occupying forces to withdraw from Egypt. Facing crippling oil shortages as winter advanced, London and Paris conceded a quick evacuation. However, once US oil output peaked in 1970 and began declining irrevocably thereafter, making the nation increasingly dependent on petroleum imports - currently accounting for three out of five oil barrels consumed domestically - it could no longer wield the oil weapon.

Such will be the fate, a half century from now, for the countries now enjoying an economic boom and hefty diplomatic clout due to their hydrocarbon riches.

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