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[Leslie <cayadopi AT yahoo.com>]

Warning:  this one is super long and is an article related to your comment on 
oil.  
I happen to agree that this stuff can fuel a war......  
 
 
 
 
November 2006
 
Russia attacks the West's Achilles' heel 
By W Joseph Stroupe 

Russia has found the Achilles' heel of the US colossus. In concert with its 
oil-producing partners and the rising powerhouse economies of the East, 
Russia is altering the foundations of the current US-led liberal global 
oil-market order, insidiously working to undermine its US-centric nature and 
slanting it toward serving first and foremost the energy-security needs and 
the geopolitical aspirations of the rising East.
 
All this is at the impending incalculable expense of the West. What is 
increasingly at stake is secure US access to global energy resources - 
strategic US energy security - because the West's traditional control 
respecting those global resources is seriously faltering in the face of the 
compelling strategies undertaken by Russia and its global partners. 

The US giant is increasingly at risk as it faces what is gradually but now 
more widely being recognized as Russia's clever exploitation of US foreign 
energy dependency and the hemorrhaging of its all-important 
economic-geopolitical capital: its traditional global energy leadership and 
dominance via its onetime virtually all-pervasive oil majors. 

US Senator Richard Lugar, who recently labeled Russia an "adversarial regime" 
that increasingly uses its growing energy dominance as a powerful 
geopolitical weapon, has warned of economic "catastrophe" for the United 
States, notwithstanding its status as a superpower. Consequently, informed 
and reasoned leaders such as Lugar increasingly see the US in energy-based 
jeopardy. 

Such leaders clearly do not put blind trust in the conventional wisdom that 
keeps insisting the US giant has no Achilles' heel and is virtually immune to 
the efforts on the part of comparatively smaller powers such as Russia and 
its partners to undermine the current US global position of supremacy. 

Backing up the mounting concerns of such leaders as Lugar, as reported on 
October 1 by The Guardian Unlimited, widely respected energy economist 
Professor Peter Odell, who was an adviser to Tony Benn, the British energy 
minister in the late 1970s, and who has since worked for a host of different 
foreign governments, said he was not being alarmist or controversial when he 
recently warned that the West was at imminent risk of losing access to global 
energy resources as a result of Russia's global oil grab. 

Odell warned that at any time Russian and Chinese state-owned oil companies, 
backed by certain rich members of the Organization of Petroleum Exporting 
Countries who are closely aligned with the two, could make hostile takeover 
bids for key Western oil majors such as BP-Shell, ExxonMobil and/or Chevron, 
thereby gutting what little remains of the Western oil majors' control over 
the global markets and thereby further threatening US access to strategic 
resources. 

Odell warned that the Western oil majors were already losing their leadership 
of the global oil system, had now been reduced to controlling a mere 9% or 
10% of the world's reserves, and were unable to win new production rights or 
even hold on to those granted by current PSAs (production-sharing 
agreements). Recent developments regarding Russia's Sakhalin-1 and Sakhalin-2 
projects, in which the position of the Western oil majors is being 
threatened, illustrate the ominous trend that is accelerating worldwide. 

To rock the US colossus forcefully out of its position of global dominance 
and credibly threaten to inflict economic and geopolitical "catastrophe" on 
the West, Russia and its strategic partners need not exceed, nor individually 
even remotely match, US economic, political or military strength in a 
conventional head-to-head contest of might. 

Instead, they need only to exert effectively their mounting energy-based 
strengths against US vulnerabilities in that same sphere, not in a 
conventional head-on confrontation but instead by going after the Achilles' 
heel by employing a clever asymmetrical end-run strategy around the US. This 
targets the foundations of the current US-dominated liberal global oil-market 
order, a strategy that leaves the US giant with significantly reduced secure 
access to, and control over, global strategic resources. 

Once that goal is accomplished, without ever a conventional confrontation 
with the US giant, then the US economy can be effectively and powerfully held 
hostage to the political and economic aspirations of Russia and the rising 
East. 

Conventional wisdom holds that neither the West in general nor the US in 
particular can be effectively targeted with the energy weapon any time soon. 
This is because the structure of the global oil market prevents targeted oil 
embargoes from being effective. Once oil is sold on the global market, no 
producer can control where it does or does not go, the argument says. 
Additionally, the argument continues, producers attempting an embargo cannot 
afford to withhold their products for long enough to damage the targeted 
economy lest their own economies, which are inordinately dependent on oil and 
gas exports, themselves collapse.
 
The clear insinuation is that any talk of an energy-based economic checkmate 
of the West is merely hyperbole and sensationalism. 

But these arguments are already in the process of collapsing under their own 
weight in the face of an entirely new array of mounting trends and 
developments that constitute an impending and grave threat to the strategic 
energy security of the West. 

In its recent report "National Security Consequences of US Oil Dependency", 
the US Council on Foreign Relations disagrees with such reassuring 
conventional wisdom and the myths and assumptions associated with it. It 
warns that the US faces increasingly potent, negative political, economic and 
geopolitical consequences arising from its dependence on foreign energy 
resources. The report laments that the US is "insufficiently aware of its 
vulnerability" because its leaders and people have come to rely on reassuring 
myths and assumptions that do not square with the facts. 

To understand why the conventional wisdom on this issue has become severely 
faulted and how Russia and its partners are already ominously succeeding in 
altering the fundamentals of the current US-dominated global oil-market 
order, it is first necessary to understand how the current oil markets work 
and how they have evolved over the past three decades since the Arab oil 
embargo of 1973-74. 

Changing the world's oil markets 
In the era leading up to the embargo of 1973-74, crude-oil pricing and 
delivery were handled quite differently than now. That era featured the 
rigid, bilateral long-term supply contract resulting in considerably less 
global oil-market supply liquidity than now. It was an era when exporting 
states tended to conclude agreements individually with consumer states 
(usually through their national and multinational oil companies) over the 
price and delivery of crude oil. 

Such contracts could be concluded for terms of one or two decades or even 
more. In that era of rigid bilateral oil contracts, the oil market was much 
less open and dynamic, and far less able to adjust to supply disruptions, 
than it is now. Oil tended to be "locked up" within the long-term supply 
contracts, thus significantly limiting supply liquidity, or fungibility, of 
oil. 

The structure of the global oil market was neither designed nor implemented 
with a focus on the key requirement of high liquidity because, prior to the 
1973-74 Arab embargo, no one envisaged the now-obvious key requirement for 
the market to adjust rapidly and naturally to a cutoff of oil to one or more 
importing nations resulting from a targeted embargo or a supply disruption. 

Naturally, in that era it was in the interest of any individual exporting 
state to conclude a sufficient number of rigid bilateral long-term contracts 
with importing states so as to have most or all of its exportable oil 
accounted for and sold virtually at the time it was pumped out of the ground. 

That being the usual case, if an exporting state or group of states for some 
reason either failed or refused to honor their commitment of deliveries to a 
particular consumer state, then that embargoed state found it necessary to 
meet the emergency by trying to acquire replacement crude-oil supplies from 
elsewhere, usually from third-party traders and/or by arranging with other 
buyers for their tankers to be diverted from their original destinations. 

That ad hoc process involved many additional, intolerable risks, time delays, 
and much more complicated logistics and higher costs, all of which were 
entirely unacceptable over a period of anything more than the very short 
term. The old oil-market order did not naturally facilitate a compensating 
for such a supply disruption, and the effort to make it compensate was 
cumbersome and its risks were unacceptable. 

Additionally, the psychological effects of an embargo greatly magnified its 
literal effects, leading to panic buying by consumers, resulting shortages, 
higher prices and ripple effects throughout the economy. That helps explain 
why the US could be effectively targeted in 1973-74 by the Arabs. Though that 
targeting was not nearly perfect, it was sufficient to inflict much of the 
intended pain. 
As the months wore on, the US could not afford to continue to rely on the 
intolerable and significantly less secure ad hoc logistics it was forced to 
resort to in its effort to replace the oil that the Arab nations were 
refusing to ship. Recently declassified British government documents from 
that time reveal that both the US and Britain were actively planning for a 
seizure of Middle East oilfields, illustrating how intolerable the combined 
physical and psychological effects of the embargo were. 

Of note is the ominous fact that at that time the US imported only about 36% 
of its oil, whereas now it imports nearly 60%, making it far more vulnerable 
to the energy weapon if Russia and its partners only partially succeed in 
changing the current liberal global oil order so as to revive even a partial 
level of effectiveness of a targeted embargo. 

US and Britain create a liberalized market 
In the aftermath of the 1973-74 crisis, events and the markets themselves 
gradually evolved to alter radically the nature of the global oil market, 
thereby dramatically increasing crude oil's former comparatively low degree 
of fungibility. 

This means that as long as the current US-backed liberal oil market is 
globally adhered to, if a group of exporting nations attempts another 
targeted embargo, oil from other exporters could be rapidly and naturally 
exchanged or substituted to replace the lost oil. The global market has 
evolved from rigidity to dynamism, and from low to very high liquidity. 

Over time, the US had come up with an ingenious idea that impacted directly 
on the issue. Through deregulation and the creation of oil-futures contracts 
and spot oil markets in New York and London, the old foundations and the 
market dominance of the rigid, bilateral long-term supply contracts was 
undermined in favor of much shorter-term contracts. 

Extremely liquid oil-futures contracts ("paper oil") that looked forward only 
a few months to a few years at most and that could be freely and openly 
bought and sold on a daily basis on the new exchanges replaced the 
traditional, rigid, discrete long-term supply contracts negotiated directly 
between exporting and importing states. The global oil-market order was 
becoming tremendously liberalized, open and highly liquid under US leadership 
and control. 

The new oil exchanges created in the early 1980s provided a way for 
speculators to profit from the buying and selling of "paper oil" as well as 
for exporters and importers to sell, buy and arrange for physical delivery of 
oil. The spot exchanges also facilitated the factoring in of a much wider 
range of market forces in real time in determining the daily global price of 
oil. Oil-export startups, those attempting to establish themselves as oil 
exporters, favored the spot markets as opposed to the rigid long-term supply 
contracts because, with their limited track record and credibility, they had 
a hard time successfully negotiating long-term contracts. 

However, they could sell on the spot markets by undercutting the price of the 
more established exporters and get a foothold. Thus the new arrangement 
encouraged a flourishing of new exporters and a global supply that very 
comfortably outpaced global demand. 

By the mid- to late 1980s, the new oil-market arrangements in New York (and 
later in London) had been firmly established and were enjoying phenomenal 
success. While some exporters refused to drop entirely the traditional rigid 
bilateral long-term supply contracts in favor of the spot markets, up until 
today most oil is marketed on the exchanges. Oil-futures contracts are freely 
bought and sold on the exchanges and oil for physical delivery is bought 
comparatively "at the last hour" on the spot market, where delivery to the 
importing nation is then arranged. 

Global effects of the new order 
Under the new market arrangement, nearly all oil became highly visible and 
instantly accessible because the traditional long-term supply contracts 
became the minor factor while the spot markets and highly liquid oil-futures 
contracts became the major factors. 

In effect, this radically raised the visibility, accessibility and 
fungibility of global oil supplies to unheard-of heights and made it possible 
for oil lost for some reason in one part of the market to be easily, 
naturally and almost instantly replaced by oil from another part of the 
market. 

In effect, the new exchanges facilitated the creation of one virtual global 
pool of oil denominated in US dollars into which nearly all exporters sell 
their oil and out of which nearly all importers purchase oil, all on a daily 
basis. 

A discrete global pool of oil does not physically exist anywhere on the 
planet, of course. But it does exist in a virtual sense, powerfully mimicking 
a literal global pool of oil, because the structure and presence of the new 
exchanges and the global adherence and devotion to them ensures that oil is 
bought, sold and delivered largely as if such a pool literally exists. And 
the global dominance of the West's oil majors, whose task it has been to 
capture global oil supplies for full incorporation into the new US-led 
liberal global oil-market order, has been the key factor perpetuating the 
global dominance of that order.
 
As long as the Western oil majors hold global sway and the US-backed liberal 
order is globally adhered to, therefore, any attempt to target the US with an 
oil embargo, as by the efforts of an exporter or group of exporters refusing 
to sell to the US, would fail miserably because the US would merely draw oil 
elsewhere from the global pool to suffice its needs. 

Importantly, the US and Britain accomplished two goals of profound importance 
and value with the creation of their new liberalized global oil-market order. 
First, they prevented the enacting of any targeted oil embargo, and they 
greatly enhanced the leverage of the West's oil majors, their de facto state 
sponsors and the West's financial institutions in the new market arrangement 
while simultaneously fundamentally undermining the leverage of producers, 
thus powerfully bolstering the strategic energy security of the West. 

Second, they consolidated and powerfully solidified the role of the US dollar 
as the unquestioned international currency, since the one virtual global pool 
of oil created and maintained by the new liberalized market order is 
denominated in US dollars alone. 

But it is crucial to understand that the West's immunity from a targeted 
embargo is assured only as long as the current liberal, highly liquid US-led 
global oil market is unwaveringly adhered to. Once the movers and shakers 
(now Russia and its producing and consuming partners) begin again to revert 
to the rigid bilateral long-term supply contracts conducted privately between 
producers and consumers, thereby incrementally altering the foundations of 
the global oil-market order by decreasing its level of liquidity, then the 
real potential for a revoking of a significant measure of oil's fungibility 
exists. 

This means that the ability to enact an effective targeted embargo is once 
again incrementally revived. A meaningful loss of fungibility of oil would 
spell potential economic-geopolitical doom for the West. This is the 
Achilles' heel of the West. 

As we shall see, it is that very Achilles' heel Russia and its partners have 
found and are already energetically exploiting in a bid to shift the US 
colossus out of its current position of global dominance. 

Swiftly mounting anxiety on the part of increasing numbers of the globe's key 
energy-hungry economies in the East as respects energy security is already 
fueling incremental abandonment and circumvention of the US-dominated liberal 
global oil market. 

This is in favor of a proliferation of private, state-to-state long-term 
supply contracts and agreements awarding equity stakes in production acreage 
to the consumer states. As a consequence, the US-led order is already 
beginning to suffer a wavering of international adherence and support. Russia 
continues to lead the global race to establish a new energy order that 
fundamentally threatens the current US-led one. 

The same factor of mounting anxiety over energy security is also fueling the 
accelerating global trend toward the establishment of new oil and gas 
exchanges in the Middle East and the East as de facto rivals to the New York 
and London exchanges. 

These new exchanges have two very prominent and significant features. First, 
they are bringing together primarily the globe's producers and the rising 
economies in the East to facilitate new Asia-centric (rather than US-centric) 
energy pricing and security arrangements. Second, they are denominated in 
currencies other than US dollars or are being structured with the autonomy 
and sophistication to switch from dollars to other currencies. 

The reign of the US-backed current oil market has been a frighteningly short 
one, barely two decades. It could turn out to be more of a stint than a reign 
as its fundamentals could be altered to revive the possibility of an 
effective targeted embargo. And it is already being altered along those lines.
 
 
Russia has set the agenda for the global transition to an entirely new model 
of international energy security designed to address intensifying concerns, 
especially those of the rising East. 

Russia, possessing unequaled energy-based leverage, has taken the leadership 
among the world's producers and the rising powerhouse economies of the East 
to promote a vast worldwide web of alliances and ties prominently featuring 
rigid bilateral, private long-term supply contracts
 
This model runs counter to and increasingly circumvents the established 
liberal US-backed global oil market denominated in US dollars. The West 
relies on the current order for its energy security. It cannot function 
without it, and therefore the order is its single point of weakness. And 
Russia is acting as the "point man" to locate and exploit, with the help of 
its partners, this Achilles' heel of the West. 

A conspicuous feature of global developments over the past several years is 
Russia's distinctive leadership role in fueling global transition in three 
key spheres - energy, economic and geopolitical. 

Within six months of taking office as Russia's new president, Vladimir Putin 
was by the summer of 2000 already moving hard against the capitalist-inspired 
oligarchs who were fleecing Russia of its natural resources and industry 
with, at a bare minimum, the full complicity of the West. 

Western institutions operating within Russia and those exercising what the 
Kremlin saw as undue influence from without, most notably the West's oil 
majors and their closely related financial institutions, certain 
non-governmental organizations and the media, have eventually either been 
pushed out or brought to heel. 

Russia's strategic resources have been brought firmly under de facto Kremlin 
control in direct opposition to the West's loudly proclaimed liberal 
democratic principles of private ownership and control. Russia's example and 
success in such endeavors have instigated a global wave of nationalization 
and consolidation of state control over energy resources, with an 
accompanying loss of leverage and control by the West's oil majors. That wave 
is accelerating. 

The rise of a powerful and wealthy resources-based corporate state in Russia 
("sovereign democracy"), its rapidly expanding control over global strategic 
resources, and the resultant loss of leadership and control of the global oil 
market by the West's oil majors are developments that move directly against 
the very foundations of the US-led oil-market order and the wider US-centric 
global economic order. This is because Russia is quite literally fueling the 
rise of the powerhouse economies of the East and helping to achieve a new 
global center of economic power in the East. 

It was also Russia that fundamentally led, along with its key partner China, 
the opposition to the US invasion of Iraq in 2003. It has been Russia first 
and foremost that has taken leadership among its strategic partners since 
then to continue to stand firm inside and outside the United Nations in a 
hugely successful strategy to force the full and mounting geopolitical, 
economic and military burdens of Iraq on to US and British shoulders alone. 

Thereby, Russia has taken the lead in proving that the US-dominated 
geopolitical order can be successfully opposed. Consequently, it has clearly 
been primarily under Russia's leadership that the US-dominated global 
oil-market, global economic and geopolitical orders are being transformed, 
circumvented and opposed by growing numbers of the world's nations. 

Against this backdrop, an impending, forcible shift of the US colossus out of 
its position of global dominance can be clearly seen, less as merely random 
and uncoordinated events, and more as a progressive coalescing of a coherent 
global strategy. 

The new model 
As indicated above, in a throwback to the 1970s, the comparatively more rigid 
bilateral long-term supply contract is making a significant comeback on oil 
markets. As Putin explained at the July Group of Eight summit: "We want to 
form a stable system of legal, political and economic relations that ensures 
a reliable demand and stable offer of energy resources on the international 
market." 

Putin later complained at the Valdai Club meeting outside Moscow on September 
9 that consuming nations in the West too strongly focussed on their own 
energy interests and security while simultaneously slighting the interests 
and security of producers. He noted that consuming nations wanted suppliers 
to pledge continuity of supplies for the long term, "so customers should not 
be able to turn around and say, 'We don't need it now.' Security works both 
ways. We need assurances, too." 

Putin explicitly stated that Russia and other suppliers wanted bilateral 
long-term supply contracts with consuming nations so that suppliers would 
know there would be a stable demand for their exports. 

The underlying, impending risk to the liquidity of the current oil order 
posed by such a throwback to the rigid bilateral long-term supply contract 
was highlighted recently in the testimony of David Goldwyn before the US 
House of Representatives Committee on Government Reform's Subcommittee on 
National Security, Emerging Threats and International Relations and the 
Subcommittee on Energy and Resources on May 16. 

Goldwyn is senior fellow at the Center for Strategic and International 
Studies, a prestigious Washington, DC, think-tank, and president of Goldwyn 
International Strategies, a leading provider of political and business 
intelligence, energy-sector analysis and Washington strategy advice to 
Fortune 100 companies and investment advisers. 

Goldwyn stated: "The United States is more energy-insecure today than it has 
been in nearly 30 years. We are insecure because the global oil market is 
more fragile, more competitive and more volatile than it has been in 
decades." 

Goldwyn referred to the fact that "the growing [energy] dependence of rising 
powers such as China and India is rapidly eroding US global power and 
influence around the world" as those rising powers increasingly enter 
bilateral long-term contracts with suppliers, ever greater numbers of which 
do not allow free market access by the West's oil majors to production and 
exploration acreage and which are creating a strategically tight market for 
the rest of the world. 

Goldwyn observed: "This 'tight' market is undermining the fluidity and 
fairness of the market for available oil supplies and exploration acreage. 
New competitors like China and India are trying to negotiate long-term supply 
contracts (at market prices) to ensure that they have supplies in the event 
of a crisis or supply disruption ... the trend is counter to the market 
system that operates so efficiently ... the trend of long-term contracts runs 
counter to the modern liquid global market which operates efficiently in 
rapidly moving supplies to meet market demand ... China has not yet developed 
faith in these market mechanisms." 

While Goldwyn presented such concerns in the context of a rising but not yet 
imminent threat to the current order, in testimony before the US Senate 
Committee on Foreign Relations nearly a year earlier, on July 26, 2005, 
Mikkal Herberg of the National Bureau of Asian Research in Seattle, Senator 
Richard Lugar, the committee chairman, heard the following facts: 
For China and India both, as well as the other Asian powers, energy is 
becoming a matter of "high politics" of national security and no longer just 
the "low politics" of domestic energy policy. Governments in both countries 
have decided that energy security is too important to be left entirely to the 
[US-led liberal] markets as their economic prosperity increasingly is exposed 
to the risks of global supply disruptions, chronic instability in energy 
exporting regions, and the vagaries of global energy geopolitics. 

Both governments are responding to their growing sense of insecurity with a 
broad range of similar strategies regionally and globally to try to guarantee 
greater supply security and reduce their vulnerability to potential supply 
and price shocks. These efforts are growing in scale and scope and they range 
from largely cooperative and market oriented strategies to those that are 
deeply neo-mercantilist and competitive. Both China and India are 
accelerating their efforts to gain more secure national control of overseas 
oil and gas supplies by taking equity stakes in overseas oil and gas fields, 
promoting development of new oil and gas pipelines to feed their booming 
markets, developing broader trade and energy ties, and following up with 
diplomatic ties to cement relations with the major oil and gas exporting 
countries. 

And both governments sense they are excluded from the major institutions that 
govern global oil cooperation, such as the IEA [International Energy Agency], 
and feel largely excluded from the global oil industry they feel is dominated 
by the large oil companies from the industrial countries. Both feel they are 
playing "catch-up". For China's leaders, energy security clearly is too 
important to be left to the markets and so far its approach has been 
decidedly neo-mercantilist and competitive. 
The term "neo-mercantilist" refers to the economic strategy and ideology 
pursued by the European colonial powers, wherein the natural resources and 
other wealth of the colonies that had been established by each colonial 
empire were rigidly dedicated exclusively to the sustenance of the mother 
empire. 

In application to India, China and the other rising powers of the East, the 
term refers to the somewhat comparable strategy of concluding rigid, private 
bilateral long-term supply contracts between themselves individually and 
producers they each target around the globe. This has the net effect of 
securing oil and gas exclusively for the individual consumer state at the 
expense of the liquidity of the global oil market, and hence at the expense 
of oil's fungibility. 

Herberg went on to make the case that China's three main state-owned oil 
companies (National Petroleum Corp, China Petroleum and Chemical Corp and 
China National Offshore Oil Corp) alone, by the latest data and estimates 
available more than a year ago, "have managed to establish control over about 
300 mb/d [million barrels a day] of crude production, which could reach up to 
600 mb/d by 2008". 

Herberg went on to make the case that both China and India strengthen and 
solidify the exclusivity of such rigid long-term supply contracts with 
multiple layers of cross-investment and commercial ties between themselves 
and their producer partners, and with deepening diplomatic ties as well. The 
net effect is to shut out the free markets and Western oil majors and place 
rapidly growing portions of global supply under private lock and key. As 
Herberg noted: 
China now [as of July 2005] has signed some form of "strategic energy 
partnership" with nine countries, including Russia, Sudan, Iran, Venezuela, 
Brazil, Angola and Kazakhstan. Beijing's leadership has followed up with a 
long list of high-level diplomatic visits to cement stronger diplomatic, 
energy and trade ties. China has also used state diplomacy to secure future 
LNG [liquefied natural gas] supplies in contracts with Australia, Indonesia 
and Iran. China's leadership sees the development of broader diplomatic and 
trade ties and alliances as a key element in securing its access to future 
oil and gas supplies. This also includes military sales and cooperation, 
sales of nuclear equipment and other potentially problematic trade ties. 
None of this includes the profoundly important strategic partnership 
agreement China signed with Saudi Arabia in January, nor its ever more 
wide-ranging energy-based agreements with the other Persian Gulf 
oil-and-gas-exporting states of Qatar, the United Arab Emirates, Kuwait and 
others around the globe. India also is pursuing a global strategy very 
similar to that of China. In July 2005, Herberg noted: 
Currently, nearly two-thirds of the Gulf's oil exports go to Asia, and this 
will grow sharply in the future. The growing nexus of diplomatic, trade and 
military ties with China and India appeals to the Gulf producers who are 
looking to diversify their economic and geopolitical base beyond traditional 
dependence on the US and European markets and diplomatic relationships. 
Herberg concluded with this assessment of the negative effects on the 
dynamism and liquidity of the US-led oil market: 
Another area of concern involves a range of impacts of China and India's 
booming oil demand as well as the impact of their implied strategy of 
"locking up" national control of certain oil supplies to fuel their own 
economies, in effect, "taking oil off the market". Both countries clearly aim 
to lock up their own national oil supplies with many of their investments in 
places like Sudan and this practice is likely to contribute to higher oil 
prices and price volatility by reducing global market flexibility to handle 
tight markets, shortages and supply disruptions. 
Exploiting the Achilles' heel 
The economic (and consequently also the geopolitical) single point of failure 
for the highly industrialized nations of the West irrefutably is its 
continued unwavering global adherence to the liberal oil market that created 
and sustains oil-market supply fairness, liquidity, and oil's currently high 
level of fungibility. 

The net effect of the (now former) global dominance and control of the West's 
oil majors over the lion's share of global energy resources was to ensure 
that those resources were irreversibly captured into the US-led market, 
thereby perpetuating the global dominance of that very order. 

As such, the hemorrhaging of the dominance of West's oil majors to the 
current pitiful state that only 9% or 10% of global reserves are controlled 
by them represents a sea change. Where, that is, into which model, the lion's 
share of global energy resources will now be captured is no longer up to the 
West. That determination has already been forfeited to the rising East and 
the increasingly East-friendly producing regimes around the world, led by 
Russia. And nowadays the US depends on the market for nearly 60% of its 
energy needs. 

In effect, the world is seeing the globe's energy resources increasingly 
divided between two rival, incompatible energy markets, one suffering loss of 
global support and becoming ever more slanted toward serving the energy needs 
only of the West, and the other enjoying mounting global support and fully 
serving the energy needs of all the rest. 

Decisions of state-owned or state-controlled oil and gas companies such as 
that made known on October 9 respecting Russia's Gazprom, which has decided 
to exclude all foreign (notably Western) energy majors from its giant 
Shtokman gas project, or the recent decisions to threaten to revoke 
permanently the operating licenses of Western oil majors in the Sakhalin-1 
and Sakhalin-2 projects, are representative of the wave of consolidation of 
control of global resources by state-owned and state-controlled energy 
companies around the world. 

Such producing regimes, which display an ever greater self-assertiveness and 
an ever deepening political affinity with Russia and the East, are deciding 
to place a growing amount of their production into the Russian-led 
energy-market model rather than unwaveringly adhering to the US-led one. 

The lucrative economic, financial, political and diplomatic package of 
enticements being offered to producers around the globe by China, India and 
the other economies of the East far outweigh what the US can offer - the US 
simply cannot compete. It cannot prevent, nor turn back, the steadily 
advancing global trend of the locking up of oil and gas by virtue of private, 
bilateral long-term supply contracts, and the mounting strategic control of 
oil and gas by state-owned enterprises. Its global leverage (and that of its 
oil majors) in the energy-rich regions of the world is severely contracting 
as a result. 

The tentative decision announced recently by Putin to redirect from the US to 
Europe the gas production from the giant Shtokman project illustrates how 
such state-owned (or controlled) enterprises can turn on a dime. Today, they 
may sell their products on the established New York and London exchanges, but 
tomorrow they can switch away from this order to a growing number of 
alternatives, including the security of rigid bilateral long-term supply 
contracts. 

Russia, China, India and the rest of the world outside the West have little 
fundamental attraction or loyalty to the US-supported global oil market or 
the governing institutions from which (such as the IEA and the Organization 
for Economic Cooperation and Development) they have largely been excluded. 
They do not feel an integral part of the global system they see as greedily 
and inordinately dominated by the multinational oil companies of the West, 
with which their relations are growing ever more tense. As such, they 
certainly cannot be expected to bolster the US-led model, and they are not 
doing so. 

As the new Russian-led model locks up increasing amounts of oil and gas away 
from the global pool, that one virtual global pool of oil is increasingly 
being transformed from being a truly global one into a Western one. This 
revives the possibility of a targeted embargo because producers can decide to 
place less oil in the US-led system in favor of locking up more of their 
production into bilateral contracts with consumers in the East, and they can 
move rapidly to accelerate in that direction. 

Professor Peter Odell, quoted in Part 1 of this report, alluded to this 
danger when he warned that Russia's oil grab presented an impending threat to 
the energy supplies of the West. The issue here is control of the production 
of oil and gas fields, and therefore where and to whom that production will 
be offered - within the open, liberal US-led model or within the rival, more 
rigid and private Russian-led one. 

The global production and profits of the West's international oil majors are 
still very high. However, behind that facade of apparent market control and 
dominance lurks the specter of an impending, perhaps precipitous, collapse of 
the role and leverage of those oil majors the West relies on for its energy 
security. 

In The Observer of London on October 29, in an article titled "Big oil may 
have to get even bigger to survive", the author notes that the West's 
international oil majors are in real trouble as regards the collapsing of 
their control over global energy reserves and face a global wave of 
nationalization, forced renegotiation of existing agreements, inability to 
get access to new exploration and production acreage and rising taxes. It is 
a caustic mix that is dissolving the glue that holds together the US-backed 
oil order. 

As the oil majors produce oil for the market, they must replace their 
reserves. In 1997 they were able to replace 140% of their reserves, but in 
2005 they were able to replace far less - only 75%. Consequently, they are 
rapidly shrinking while the state-owned companies around the globe are 
rapidly expanding as respects market dominance as measured by the crucial 
parameter of control of reserves. 

Furthermore, the mounting global wave of oil-sector nationalization that is 
pushing international oil majors on to the sidelines as respects control of 
reserves could easily and quickly take an even more ominous turn - cutting 
significantly into the current production capabilities of the oil majors and 
placing the energy security of the US in acute jeopardy. 

Assumptions that such a scenario deserves little worry and attention are not 
valid or safe in the environment of ever more nationalistic leanings on the 
part of the oil-producing regimes around the globe and the specter of forced 
renegotiations of PSAs (production sharing agreements) and cancellations of 
operating licenses. 

What applies to production acreage also applies to exploration acreage, and 
access to and control over both are being massively forfeited by the West and 
its oil majors. Foreign investment in energy-producing enterprises and 
acreage is being severely restricted as a result, and this ensures 
strategically tight global supply, further exacerbating the mounting energy 
security misfortunes of the West. This is because in the absence of abundant 
global supply the West has no viable means to counteract the locking up of 
increasing amounts of the global supply by Russia's new model. 

Attack on dollar dominance
As if these developments were not bad enough for Western strategic energy 
security, another key development has arisen, one that gravely threatens not 
only to diminish further the energy security of the West, but also in effect 
to put an end to its global economic and geopolitical dominance by credibly 
threatening to crash the US dollar. 

This additional key development is the planned and actual proliferation of 
new oil/gas market exchanges denominated in currencies other than US dollars. 

The new Russian-led concept of "international" energy security and its new 
model for the global market do not consist merely of long-term supply 
contracts alone. Planned oil- and gas-market exchanges are being set up not 
to bolster the current London and New York exchanges, but to stand separate 
and distinct from, to compete with, them to rival the US-led order. 

The new exchanges are either being originally set up to settle transactions 
in currencies other than the US dollar, or they are being created with the 
sophistication and autonomy to enable them to switch from US dollars to 
virtually any other desired currency (or to multiple currencies) when 
developments might warrant such a switch. 

That fact implies the draining of significant portions of the one global 
dollar-denominated pool of oil to fill the new pools denominated in other 
currencies, thereby fragmenting from the current global pool (and from the 
US-led order itself) significant portions of the global supply to fill the 
new pools. Such fragmentation will in effect put an end to the current order, 
which has dominated for barely two decades. 

The new Shanghai Petroleum Exchange settles transactions in the Chinese 
currency, the yuan. Russia's new St Petersburg exchange, slated to come 
online next year, will settle transactions in the ruble. According to Russian 
Economy Minister German Gref, Russian products will be offered on the New 
York exchange until the St Petersburg exchange is operational, at which time 
Russian products will be shifted out of the New York exchange to the Russian 
exchange. 

Qatar's new Energy City concept with its integrated IMEX (International 
Mercantile Exchange), which India has recently joined with the planned 
creation of a satellite Energy City/IMEX complex in Mumbai, will apparently 
settle transactions initially in the US dollar, with the capability to switch 
to other currencies. The IMEX is a fully autonomous system predominantly 
designed and intended to capture the rising energy markets in the East. 

Prudently, Arab oil and gas exporters are leveraging IMEX to work to achieve 
full autonomy as respects market and exchange operations and product pricing 
and delivery, foreseeing the day when having their operations constrained 
almost completely under the aegis of the Anglo-US market arrangement and the 
US dollar no longer serves their strategic interests. 

The logical question at this juncture is whether these new exchanges can 
successfully compete any time soon with those in New York and London. 
Assuming those creating the new exchanges do not lose their nerve and back 
down from establishing them as working, autonomous entities, as Iran 
apparently has backed down from its planned oil bourse denominated in the 
euro, the answer to that question is fundamentally the same as asking whether 
there exists enough global supply margin for importing nations to be able to 
ignore the new exchanges. 

In the very tight global supply situation we find ourselves locked into, 
importing nations will have little choice but to go wherever oil and gas are 
available to fill their needs. If the new exchanges rob significant portions 
of oil from the current one global pool as is planned, then the new exchanges 
will not need to be concerned about adequate consumer interest, support and 
devotion.
 
And global producers are assuredly going to do all that is needed to keep the 
global supply tight and the price of oil elevated to avoid a global oil glut 
and a price collapse. Continued tight supply will help to ensure the success 
of the new exchanges. 

Furthermore, the fact that the West's oil majors have lost control of all but 
9% or 10% of reserves means that state-controlled oil companies can reroute 
any amount of product they wish from the New York-London exchanges to any of 
the new exchanges. This will provide a more than sufficient supply to 
guarantee the success of the new exchanges, and the US can do nothing to stop 
it. 

As this happens, the prospect of a targeted embargo of the West is revived. 
Producers will be able to restrict the amount of oil they sell on the 
London-New York exchanges, or cease selling there altogether, because they 
will have viable, even preferred, alternative exchanges. That will seriously 
endanger the amount of supplies accessible to the West and will radically 
drive up the price of oil on the dollar-denominated exchanges. But because 
all of the new and planned exchanges will have their own non-dollar pricing 
mechanisms, the undesirable price volatility will tend to be confined to the 
dollar-denominated exchanges. 

What happens to the US dollar as the new exchanges become operational and 
begin to be successful? The exit from the dollar as the international 
currency will have begun in earnest. But that exit will not be to one 
currency, but simultaneously to the several currencies that are the 
denomination currencies of all the successful new oil and gas market 
exchanges. 

The dollar will begin to weaken as its international support and devotion 
wanes, or even sinks. As the dollar weakens, the price in dollars for 
everything the US imports will skyrocket, adding a powerful inflationary hit 
to the US economy. Along with the impending US recession, that will further 
weaken the dollar and likely its decline, or outright collapse, will feed on 
itself. 

As the dollar weakens and energy price volatility increases on the New 
York-London exchanges, producers will have further powerful incentive to 
switch their product offering to the non-dollar-denominated exchanges, where 
there will be greater stability and where they will not be forced to take 
payment for their products in the increasingly undesirable weakened dollar. 

The profound risks to the West as respects its ability then to secure access 
to sufficient energy resources should be self-evident. Left with a severely 
shrunken dollar-denominated pool of oil and gas, a pool that virtually only 
the West draws from, the viability of a potential targeted embargo will have 
increased exponentially. 

The globe's producers will be fully able to "throttle" the economies of the 
West by virtue of controlling how much of their oil and gas they sell into 
the dollar-denominated pool. This represents the nightmare scenario for the 
US. 

Perhaps the most disturbing aspect of this analysis is the fact that it is 
not based on any hypothetical conspiracy theory, but rather on solid economic 
and market principles and the increasingly ominous warnings of experts and 
informed leaders. 

Additionally, the key developments that are already pushing the world order 
to the eventuality described here, that of a full exploitation of the West's 
Achilles' heel by Russia and its global partners leading to a loss of the US 
global position of economic and geopolitical dominance, are already well 
established. 

Russia, in conceiving the new model of "international" energy security and a 
new global energy order, and in winning increasing numbers of key converts 
and adherents to its model, thereby defines and draws the circle of 
international energy security. Those inside the circle will achieve Russia's 
definition of "energy security", but those left outside will be left with 
little if any energy security by any definition. 


W Joseph Stroupe is author of the new book Russian Rubicon: Impending 
Checkmate of the West and editor of Global Events Magazine, online at 
www.GeoStrategyMap.com.


--- On Tue, 12/9/08, bob ford <bobford79 AT yahoo.com> wrote:

From: bob ford <bobford79 AT yahoo.com>
Subject: Re: [Homestead] Go ld -- feel free to ignore
To: cayadopi AT yahoo.com, homestead AT lists.ibiblio.org
Date: Tuesday, December 9, 2008, 10:15 AM

I don't agree.  There is conjecture both ways.  The saudis (at least the
royals in control) exist at our pleasure.  They could make the same deal with
Russia, but I don't see it being in their best interest.  Russia already
control s so much oil, I believe an oil monoply like some are describing will
quickly move from an economic war to actual war.  

-----------------------------------------------------------------------





>From Bunjov AT aol.com  Tue Dec  9 11:33:49 2008
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>I realize that I'm just being nosey and obnoxious at this point,   and you
>can just tell me to f-off, but why do doctors and check-ups  influence your
>decisions? I'm anti-doctor, and believe that we each know  our health and
our
>bodies better than they do.

The list has been so bizzy, bizzy the last several days! As usual, I've  just
been hangin' back and absorbing 'stuff'...

But I can't let the 'anti-doctor' comment pass by. So glad to meet  another!

I can't begin to recount how many times I've been prescribed conflicting
medications...by the same physician - sitting right there in front of me,
consulting his dog-eared edition of the PDR...

Last time around, it took them four days - in a hospital bed - and 7
(seven!) drugs to finally figure out that my gall bladder and I need to part  
company.

Pleeze!

Two of those prescriptions, in conjunction, are 'known to cause early onset
dementia'. Maybe I wrote this before? Sometimes memory does not serve (the
result, no doubt, of listening to too many doctors) <g>

Sandy
Mid-Mojave


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