Monday, January 23, 2006

The Stealth Weapon of Global Commerce: Oil

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In discussing the China paradigm this weekend past, reader JohnMc identified an element in the discussion which is often ignored, yet critical to many nations’ infrastructure. JohnMc said “the US has traditionally been the premier developer of oil fields and their maintenance” and he is dead-on in that observation. Oil and technology go hand in hand and need each other at every step. As a result, nations which ostracize themselves from the West, and especially from the United States, do so at direct economic cost.

I mentioned some time ago, that a steady and reliable supply of Oil depends the refineries and distribution system in place to provide it. And I also noted that Oil obeys very real economic laws and scientific pressures. But it is vital to understand as well, that the existence of an oil distribution system can largely be credited to the British and American companies which invested the research and development to find the oil, drill it, process it and get it where it needs to be. Oil does not come out of the ground just anyplace, nor is it ready-for-use when it is first produced. For example, the jet fuel used for commercial airliners around the world, is a pretty exotic concoction, and can only be distilled from certain grades of oil, and under certain refining conditions. It is not generally understood that top-grade jet fuel is not widely produced in any Middle East country, which means that hypothetically, in a crisis the West could deny high-grade jet fuel to a hostile Arab nation, grounding some of its fighter jet fleet even if that Arab nation was a major oil producing nation! While in actual practice such an embargo would be extremely difficult to enforce (in such a scenario, the Arab nation would fall back to kerosene-derived jet fuels, which are easily made but which burn hotter and less efficiently, wearing out engines and reducing range), the fact that the West has control over certain grades of oil products is an important point to remember.

Almost every refinery and drilling installation in the Middle East was designed and built by a British or American company. While some European and Asian companies have been brought on board in the last couple decades, the number and quality of their facilities does not compare favorably with what the UK/USA offers. This is just one reason why a number of countries take pains to keep communication and negotiation open with U.S. oil companies, even when relations are strained with the U.S. government. I know personally of three incidents during the 1970s and 1980s where governments negotiated trade agreements with American companies through their consulates, establishing a de facto liaison with the Commerce Department and doing an end run on the State Department and their own Foreign Ministry. This sort of pragmatic approach cannot be ignored in determining the course of future negotiations.

Just one more card in the deck to think about.

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