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Middle East Crises, Paying For Oil - Twice Over

Politics / Middle East Nov 24, 2012 - 04:02 AM GMT

By: Andrew_McKillop


November 22 - Recent days have given all the proof needed that enthusiastic oil traders never miss a trick, for talking up prices, whenever the Middle East Crisis button is hit a couple of times. Even the first announcement of the Egyptian brokered truce deal between Hamas and Israel was not enough. Traders pumped up prices a little more on the basis that "we can't be sure the truce deal will hold". When or if the Hamas-Israel hostilities completely stop, oil traders can beat a retreat to Syrian war musing and Iran bombing scenarios, whenever they fear that oil prices are getting soft. A little later on, by about Spring 2013, we can have Arab Spring-2 or Spring-3 fears and rumours rolled out, as a handy lever to talk up prices.

Oil traders, through keeping prices high, also help to keep the pot of geopolitical-security-threat boiling, which feeds back as oil prices rising. The to and fro of crude and refined product cargoes, with both types of cargoes originating, transiting and finally consumed in North America, Asia, Africa - including a Middle East leg or stage in the value added and transport chain - results in it being possible to point out "the USA's high or increasing dependence on Saudi crude". For example, in August-September 2012, US our oil imports from Saudi Arabia, some of them re-exported, increased about 20% relative to first quarter averages.

This was in fact almost totally unrelated to US oil industry-driven rapid increase of domestic production of shale oil, which has pushed net oil imports of the US to their lowest in 5 years, and light years away from White House Rose Garden musings on the right, that is politically correct, stance that the US and its Allies should adopt with our oil providers, especially those in the Middle East. For the moment and officially, there "no question" that Arab oil exporters should pay for protection.

The American public, like taxpayers in several EU27 countries, Japan, Korea, Australia and others are laying out literally tens, and perhaps hundreds of millions of dollars - a day - keeping massive naval and airborne task forces in the Persian Gulf, in and around the Strait of Hormuz, in the Red Sea and Horn of Africa, and to a lesser extent outside this "geopolitically sensitive zone". The direct beneficiaries of this are the Gulf States of Kuwait, Qatar, Bahrain, Dubai, U.A.E., Oman and of course Saudi Arabia. The main supposed threat is Iran, but a few handfuls of Somali and other pirates are added as another "potent menace" to global oil security.

Slowly but surely the strange equation, that is "oil security" equals "free military services for GCC countries" is getting the attention and criticism it merits. Very simply, if the GCC states are so terrified about Iran's not very impressive navy, they can buy the protection they seem unable to organize and unwilling to provide themselves. Western and allied military fleets can then sail away.

The US presence is the most massive: its Naval Forces Central Command (NAVCENT), which has been operating since January 1st 1983, patrols a wide region including the Red Sea, Gulf of Oman, Persian Gulf, and Arabian Sea.  It consists of the United States Fifth Fleet, counting 288 ships and 318 000 active duty personnel,  and several subordinate task forces, as well as military and support vessels and aircraft from a total of 25 other nations. Navcent's commander, Admiral Mark Fox in interview this year, justified the highly approximate and unrealistic official claimed costs of Navcent to US taxpayers, of about $6.1 billion per year, by counterclaiming that piracy and ship ransom on a worldwide basis has an estimated cost of about $12 bn a year.

The US Federal "nice number' for annual costs of Navcent and related oil security spending in the Persian Gulf region, about $6.1 bn per year, is probably less than one-quarter of the real costs. Numerous studies by US academics and security analysts, ranging from Ravenal (1991) and Kaufmann and Stienbruner (1991), and 2006 estimates by the National Priorities Project of the Western New England College, updated for inflation since 1991 arrive at estimates, for 2006, of about $26.5 billion-$73 billion being annually spent to defend oil interests in the Persian Gulf region. Including the necessary strategic depth for the Persian Gulf region operations, only of US armed forces, which includes airborne support extending to east Africa and Europe, some estimates place total costs at over $100 bn per year.

An idea of Navcent oil security costs can be gleaned simply from its own oil consumption. Fox's mega fleet includes many large vessels each consuming up to, or more than 10 metric tons of oil per hour, that is 73 barrels per hour or 1750 barrels per day. The fuel oil is purchased from "friendly Gulf producers" at prices which are treated like state secrets, but whatever the price is - it is high.

Down the years, then decades this freespending "oil security" quest has very rarely been the focus of serious political opposition. Today, as in 1978 - when Navcent was being pushed by US military and security industry interests, before its final approval in 1982 - the exact same rationales are utilised. President Jimmy Carter, in his third State of the Union Address, in 1978, said: "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". Nothing has changed since that time - only the oil price and costs of providing oil security have grown.

The prime alternative is to make the Gulf Arab states pay for their own protection - if they want it, they pay for it. A variant of this, is to charge the Gulf Arab states the actual cost of naval and airborne, and terrestrial military security operations.

A large number of energy industrial options exist, such as pipeline development in the region, which all suffer from cost and their own land-based security challenges. Seaborne options include further increasing the Panama canal's capacity and thoughput of large vessels. These options also naturally extend to reducing oil's role in the energy mix and increasing the pace of oil substitution.

For the US in particular - the biggest payer and provider of current Persian Gulf oil security action - its own fast changing energy status, to growing producer and in the case of natural gas, exporter, makes the review and reform of this oil security spending ever more necessary.

The key role of Middle Eastern geopolitical threats to oil security in maintaining oil prices at artificially high levels is well known; action to reduce or eliminate this prop to overpriced oil is in the interests of all oil importer countries. Under recent and current conditions, the "geopolitical risk premium" on oil prices is likely as high as $25 per barrel.

By Andrew McKillop


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

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

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.

© 2012 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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