On Food Riots, Peak Oil and Military Force

Here’s a fabulous look into the political economy of oil by Andy Lees. His view is that the era of cheap oil is over. But, more than that, natural resources as a whole are increasingly dear. And a world of dwindling natural resources has geopolitical implications when supply and demand are finely balanced.

Andy writes about the history of oil and America’s involvement in the Middle East. I have bolded the quote from Jimmy Carter for emphasis:

I am often told that my energy story must be wrong because if it were accurate Saudi Arabia would be the world’s super power. The reality is that Saudi Arabia’s oil supply to the US has enabled the US to remain the world super power. Saudi Arabia is part of the US Empire as highlighted by Jimmy Carter in his 1980 State of the Union Address in which he stated that the US would use military force if necessary to defend its national interests in the Persian Gulf. “Let our position be absolutely clear. An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force”. Seventy years earlier a similar statement had been made by the British Foreign Secretary Lord Landsdowne who warned Russia and Germany that the British would “regard the establishment of a naval base or fortified port in the Persian Gulf by any other power as a very grave menace to British interests, and we should certainly resist it with all the means at our disposal”, although I would suggest this was for reasons of control of strategic waterways rather than the oil at that time.

Ultimately Middle East has the “oil sword” but its use is limited as it would mean a war that the region could not win. The Middle East lacks other resources, the necessary scale of capital or the right climate to use the fuel efficiently at home. It is effectively under the control of the world’s dominant power which today is the US.

And the U.S. will remain the world’s dominant military and economic power for decades to come. It’s nearest country rival is now China. But China has a long way to go given how entrenched U.S. interests are around the world. But, when it comes to manufacturing prowess, China is number one. And that requires a lot of natural resources, principally oil.

Andy continues on this topic, also hitting the problems with natural resources in the Middle East:

Beijing’s former envoy to the Middle East, Sun Bigan warned in a report published by the State Council Development Research Centre “The US has always sought to control the faucet of global oil supplies. There is cooperation between China and the US, but there is also a struggle, and the US has always seen us as a potential foe….Bilateral quarrels and clashes are unavoidable. We cannot lower vigilance against hostility in the Middle East over energy interests and security”. He said “Both now and in the future, the Middle East should be our first choice in importing oil and developing oil cooperation”. He said “Obama’s new Middle East policy is merely a tactical adjustment, and the United States will not and cannot alter its global goals and dominance”.

Today’s reality is that the Middle East’s oil is of growing importance to both China and the United States, and indeed to the world as a whole. OPEC controls 73.9% of stated world oil reserves but only accounts for 44.9% of world production. With RoW oil production falling, the Middle East is the political prize. The cost of that prize is however rising all the time. Domestically, the soaring populations and declining supplies of water and food have meant the inequitable distribution of oil wealth is no longer sustainable, resulting in local uprisings, terrorism and increased government hand-outs, as well as speculation about regional influence and power bases. With the US economically challenged, lacking political leadership and under constant speculation that its power is on the wane there is also an element of uncertainty which both regional and global powers are exploiting. Clearly there is a massive political game of chess happening.

Once you accept the reality of the above, the logic of historic support for autocratic rulers makes perfect sense. Keeping a few individuals in extreme wealth has meant a far lower oil price for the West than would have been the case under democratic rule. The oil importers balanced their oil imports with arms exports which allowed the Middle East to maintain the domestic and regional status quo. The developed world has a massive stake in the survival of the regimes. So what is going wrong?

Peak oil is what. Outside of Saudi Arabia, oil production is declining throughout the Middle East. This means that, in a region where population growth is vast, higher oil prices are an inflation tax on citizens via food and energy rather than a benefit via increased state wealth and subsidies. Around the Middle East and Asia, oil producers have been raising the government-controlled price of oil because they cannot afford the subsidies they used to protect their citizens from the commodity’s price rise. See this recent article from Indonesia’s Jakarta Post, for example. These subsidy cuts are a direct consequence of the end of cheap oil.

Hence, the Food riots.

Andy continues:

A few days ago the BBC highlighted previously unseen footage of the start of the Libyan riots which it said were initially about food shortages but Gaddafi suppressed them with such force that it turned it into the political situation it is today. In 2008 Egypt’s government rushed out bonuses to workers after 2 days of deadly riots over high food prices and low wages in one of the northern industrial cities that the government feared would spread through the country. At the time it was the worst protests in the country since the 1977 Egyptian riots, also over bread prices. Egypt’s oil production peaked in 1996, but it is now changing from an oil exporting nation to an importing nation – (http://www.theoildrum.com/node/7425) – which means that higher oil prices are suddenly a tax on the local economy whereas previously they had been a subsidy. With gas production unchanged since 2005 and the oil minister declaring in 2008 that no new gas export contracts would be made, Egypt has similarly not benefitted from the growth in global LNG. The CIA World Fact Book suggests that Egypt’s government debt was 80.5% GDP last year. http://mid-east-today.blogspot.com/2010/07/population-growth-and-its-impact-on.htmlhighlights a UNICEF report reflecting that “the unemployment rates have reached 83% among young people between the ages of 15 & 29 years. This group constitutes 20% of the Egyptian population. Another UN report also noted that 41% of the Egyptian population is living below the poverty index level which is USD2 per day per person”. The unemployment rates in the Arab world are among the highest in the world. Chances for improvement seem bleak. In the African world Morocco has been maintaining its budget deficit at 4% GDP by offsetting increasing food subsidies with cuts elsewhere but with oil prices also on the rise, something else has to give. Mozambique saw multiple deaths last year in food riots.

Analysts have concluded that Yemen will be the first capital city to run out of ground water. Wells are dropping at 65 feet a year. The shortages pose a special challenge in an impoverished nation that is already fighting 2 insurgencies and al Qaeda. “The problem is not in the future…We are suffering now”. Girls now drop out of school to collect water. The country is collapsing. Oil revenues accounting for 70% – 75% of government revenues and 90% of exports have collapsed in recent years as production has fallen by 32% since 2001. It is rapidly becoming a failed state. The Middle East crisis, whilst again being hijacked by political extremism, is fundamentally about poor standards of living, food and water shortages and inflation. Even the Iranian Revolution 30 years earlier, was fundamentally a backlash against social injustice as the puppet Shah’s regime suffered economic bottlenecks, shortages and inflation, although it was hijacked by Islamists.

These are the issues that will be very much in focus in the 21st century. A world in which basic natural resources are neither cheap nor abundant and in which the debt levels in leading economies are very high is one prone to geopolitical instability. The Middle East will be a large part of that equation. So will military force.

1 Comment
  1. DavidLazarusUK says

    I expect the rioting to extend to parts of Europe, especially as austerity measures are started. The UK government will probably announce further steps giving the police more powers, as a result of the recent riots in London as a consequence of the planned cuts. The problem is that in order to maintain living standards for the few at the top everyone else has to suffer a drop to pay for that. That might be tolerated for a while but then suddenly it will change. The new Irish government will probably find that they will not last long unless they get things to improve, yet with the Irish economy collapsing again they will find that austerity will not be popular. The electorate voted for change not a resumption of austerity.

    Elsewhere as governments start to topple it will lead to a dramatic shift in power away from the status quo. This will cause problems for all governments as instability spreads. It could lead to a drop in food exports as countries become more determined to be self sufficient, and so reduce internal food shortages, and the problems associated with them. This will reduce available supplies and push up food prices further. This will seriously impact western economies as food inflation will blow a hole in central banks zero interest rate policy.

    With the US more interested in using that food to power their vehicles it could lead problems for the US internationally. With 41.8 million Americans on food stamps it could happen domestically as well.

  2. Anonymous says

    I expect the rioting to extend to parts of Europe, especially as austerity measures are started. The UK government will probably announce further steps giving the police more powers, as a result of the recent riots in London as a consequence of the planned cuts. The problem is that in order to maintain living standards for the few at the top everyone else has to suffer a drop to pay for that. That might be tolerated for a while but then suddenly it will change. The new Irish government will probably find that they will not last long unless they get things to improve, yet with the Irish economy collapsing again they will find that austerity will not be popular. The electorate voted for change not a resumption of austerity.

    Elsewhere as governments start to topple it will lead to a dramatic shift in power away from the status quo. This will cause problems for all governments as instability spreads. It could lead to a drop in food exports as countries become more determined to be self sufficient, and so reduce internal food shortages, and the problems associated with them. This will reduce available supplies and push up food prices further. This will seriously impact western economies as food inflation will blow a hole in central banks zero interest rate policy.

    With the US more interested in using that food to power their vehicles it could lead problems for the US internationally. With 41.8 million Americans on food stamps it could happen domestically as well.

Comments are closed.

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