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Trading Lessons

The Last Oil Wars

Politics / Crude Oil Sep 16, 2011 - 06:20 AM GMT

By: Andrew_McKillop

Politics

Best Financial Markets Analysis ArticleIn almost undisguised fashion, French and British media, with a weaker version in US mainstream media is talking up the Libyan war as an outright cheap oil victory - after all Libya has about 40 billion barrels of proven reserve, the oil is cheap to produce, and high quality. What matters now is who gets what, and the suppliers of airpower and munitions will be high up the list of winners.


Years ago, I wrote a book with the title 'The Next Oil War' but the book was out of date already in 2005, when I wrote it. Oil wars have changed, and some claimed oil wars are so far off the mark it is not worth candle pretending they are oil wars. Nobody can realistically claim the Afghan war is an oil war today, or was an oil war when it started in 2001. They are forced to pretend Afghanistan is simply paved with REE or rare earth elements, for the family Prius hybrid, the local windfar's giant mills or the homely low-watt lightbulb the windfarms run. Diehard theorists of oil war are forced to say the Afghan war was the springboard for the real oil war, in Iraq. - but why invade Afghanistan when in fact you really wanted to invade Iraq ?

Oil war theorists then have to explain why the Afghan and Iraqi wars cost so much these costs could never be covered by oil from Iraq - unless it was totally free, and for decades.

NOT WORTH THE CANDLE
The 2003 start of the Iraq war we know - but when did it stop, or is it still going ? US official and other figures on how much this oil war cost go as high as $ 2 000 billion, but even if it was a superproduction by costs, it did not spill over the whole region and, more importantly, this oil war was and is a total failure: compare its costs with the value of actual and real physical oil imported by the USA from Iraq !

For May 2011, the day average 550 000 barrels imported from Iraq, if you used a handy round number of $ 100 a barrel, was worth about $ 55 million-a-day or $ 20 billion-a-year. Only 100 years of that is needed to cover war costs, assuming no interest adds to its total costs - assuming the oil was totally free. If the USA pays anything at all for this war oil, which it does, and interest on the money it borrowed to fight this Imperial Oil War, which it does, the payback period become even more lurid.

Compared with past superproductions, oil wars are downsizing, likely signalling they are finished, but "we didnt know" because everybody goes on doing oil wars. Small-sized oil wars are a near permanent part of the scene: from Russia's Chechen war, producing a small but useful 40 000 barrels/day of stolen oil, to the relatively small and cheap French-English oil war in Libya that as we said could pay really big dividends, in stolen oil.

Recent and ever possible future oil wars often unsurprisingly focus the Arabian peninsula, right from Yemen to the Persian (or Arab) Gulf. Gas-plus-oil conflicts, disputes and possible future wars bubble and seethe between Egypt and Israel, Palestine and Israel, Qatar and Iran, Turkey and Syria. Internal or domestic oil wars includes Kurds versus the New Iraq Baghdad central government crowd, and Kurds against Turkey, with players from far and wide, from India to the USA, Russia, UK and other Europeans, on both sides. Disputes able to hatch oil wars are also operating, at low level for the moment, in plenty of other places from east and central Africa and the South China Sea, to the Arctic.

There are oil wars and potential oil wars all over the place, but the genre is finished. Today, it is a whole lot easier to simply the print the chaff money needed to pay for oil at any price, and a decent interval later on, default on your debts.

To be sure, neither mainstream media nor the war "players" know this or pretend they dont know it. Their victims have no choice but to go on believing in oil wars.

DOWNSIZING AND FADING
Oil wars are downsizing. We could say the Arabian and Middle Eastern theatres of world war 1, and these theatres plus the SE European and North African Maghreb theatres of world war 2, were all oil wars and the ultimate peak of the genre. When the British finally took Baghdad from Turkish defenders in 1917, after months of siege, the death toll was around 300 000.  When the Turkish Ottoman empire (or Suzereinty) fell apart, oil was the No. 1 prize in Arabia Felix. The Turks vented their Imperial rage on the Armenians, with 1.5 million dead. World war 1 sowed the seeds of world war 2. The scope and size of these wars was huge - it really was a supershow and oil helped an awful lot when the they were being cooked up.

But even with the Iraq oil war there is a new twist; making third parties pay. The New Iraq government sells oil to anybody who pays the highest possible market price, and hands over some of the proceeds to the USA - which America then uses to pay for regular high priced oil it buys on the market, from any other exporter.

Part of this game is the USA (and New Iraq) need the highest possible oil price to make it look like a deal. You understand ? America's creditors, most of them oil importers and holding an estimated $ 4 400 billion of US overseas debt (Dec 2010, on a debt total of $14.7 trillion) certainly do not understand this deal. It is bad business for them. The US debt total is enough to cover about 55 years of the USA's total oil imports (about 12.5 million barrels/day) at an average barrel price of $ 100. Certainly since 2007, each year's growth of debt covers about 7 years of oil imports, at $ 100-a-barrel.

As alert readers noticed, the intuitive reasons for an oil war - to get cheap or free oil - turn into a game where high-priced oil is wanted by oil war winners, and chaff mony printing is needed to pay the import of high priced oil - and everything else. Simply because the USA imports so much oil, and manufactured goods (and increasingly food), it has to operate other tricks like constantly devaluing the US dollar. Also not so intuitive, the USA's debt load is increased for reasons including the costs of its supposedly successful oil war in Iraq - for cheap oil. You still understand ?

LESSONS FROM THE PAST
Thing were in fact always like that. The Hyksos invasion of Egypt and northern Sudan (using today's geographic definitions), of around 1200 BC could be called a useful role model for schadenfreude imperial boot boy rampage, with no war booty, leading to complete abandonment of the trivial quest. The Hyksos invasion, by asiatic peoples from around where Iraq is today, simply overreached. There was little resistance - but also not much booty, which today is politely called Peace Dividend. 

Imperial architects and war planners had of course excitedly talked up the quest as the Right Stuff, using the 1200 BC equivalent of government friendly media. Egypt was literally paved with gold. Its slave labour was second to none. The booty could only be immense.

In fact the only gold Hyksos invaders found was in northern Sudan, but the mines were already close to worked out - and the slave labour had a depressing way of dying. We can fast forward a millenium, to the Crusades, which are also a great role model for the US-European war against terror and for cheap oil: delivering neither, getting downsized, and then abandoned.

By 1200 AD the Crusades were already downsized and faring very badly, as resistance went on growing and the booty shrank to nothing. Historians date the very final shutdown to this 200-year Feel Good achadenfreude quest to the year 1299 and the Fall of Jerusalem. This fell to Islamic fighters, to be sure, but very soon after they were themselves taken out, invaded and subdued by pagan Mongols.

The Crusades had an Allied Coalition, NATO-style, they had a Christian ideology to defend and an Islamic ideology to attack - they had the boot boys but where was the booty ? Early attempts to talk up the sure and certain massive Peace Dividend that would be won started eccentric. And got more so. Saintly relics, like knuckle bones and rib cages of saints, hermits and iconic personalities, were a big hope but this only led to a huge new industry of fake trinket manufacturing and a depressing fall in unit prices. Gold wasnt found in any serious quantities, but fake gold was everywhere. The papal authorities tried to launch religious tourism, but mass market package tours unhappily did not yet exist, although today it helps provide a slender rationale for Israel's existence, as a late-late version of the sun-drenched Holy Land surrounded by Islamic barbarians.

HOW TO WIN
The golden rule of Imperial Adventure is simple but, at least through the period 1200 BC to AD 2011, it does not get applied.

Imperial wars have to be against small, lightly armed countries or peoples who sit on top of something worth stealing. Otherwise print money and forget it.

There is no use playing on petit bourgeois schadenfreude - the boot boy neighborhood bully number - because even the most avid consumer of Smart Missile and Drone Killer video clips, stored alongside their Snuff Movie clips, gets bored with the gore the same way everybody got bored with Al Gore. If they also find their local filling station forecourt prices didnt fall much at all, or even rose, the oil war is a no-no. Refocusing, as its called, is needed - and New Enemies must be found.

We therefore find the born loser streak of post-oil war posturing, with today's imperial war variant called War on Terror. This is so diffuse and wide spread for its definition of New Enemies that vast tracts of the planet could be in the crosshairs. But as for war booty, it doesnt exist !

Where we go now is unsure: War on Terror could or might be brought back home, avoiding all problems of rubbing up against Other Boot Boys who can get in a really big kick - China or India for example. But as for oil wars of the classic genre, this is fading fast.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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