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With its rapidly reducing dependence on Middle Eastern oil, the U.S. has little reason to stay on in the region — a looming problem for India

In coming years, India will become evermore dependent on oil from an evermore troubled region.

“Ten years from now”, the man who founded OPEC told a young graduate student during a 1976 interview, “twenty years from now, you will see: oil will bring us ruin”. India's strategic community ought to reflect on those words: little-noticed but seismic shifts in oil geopolitics mean the country is staring at a strategic challenge of a magnitude it is utterly unprepared for.

From a peak of more than five billion barrels in 2005, the United States' crude oil and refined products imports fell to 4.14 billion barrels last year [See Table 1]. Imports from Saudi Arabia and the volatile Persian Gulf have been in slow but steady decline for years. In 2011, over 23 per cent of all U.S. crude oil and refined products came from Canada — over twice as much as from Saudi Arabia, six times as much as Iraq and 20 times as much as Libya. If a $7-billion pipeline linking Canada's oilfields to refiners in the U.S. passes environmental hurdles, the country could even end up being a net exporter of oil.

In time, the U.S. might draw back from the Middle East on this receding tide of oil — a nightmare for India and other growing Asian powers. Ever since 1947, the U.S. has used guns and cash to impose order across the Middle East. Now, India could be left needing evermore oil from a region that is ever-less stable. India, like China, has watched helplessly as Western-led policies in the Middle East have led oil-producing Iraq and Libya into quasi-anarchy. Iran's nuclear programme could, conceivably, spark-off murderous regional confrontation.

Emerging, oil-thirsty Asia, the United States Energy Information Administration has estimated, will be consuming some 33.6 million barrels per day [mpd] of oil by 2025 — more than double its demand at the turn of the century. It won't be able to get it, though, without order in the Middle East. For India, there is another peril. Indian policies on Pakistan have long rested on the assumption that the U.S. would push its troublesome ally away from the brink. The reason the U.S. locked itself into an alliance with Pakistan in the first place, though, was to protect the Persian Gulf and Saudi Arabia — and the future, could care less about regional security.

The unstable petro-state

OPEC's founder, Juan Peréz Alfonzo, had warned of oil's exceptionally toxic political properties back in 1976: “we are drowning”, he famously said, “in the Devil's Excrement”. The petro-states on which growing economies like India rely to fuel their search for prosperity, he had realised, simply cannot be stable. In the mid-1970s, when Mr. Alfonzo had made his dark prophecy about ruin to scholar Terry Lynn Karl, the corrosive character of the Devil's Excrement was little understood. Instead, it appeared to have made the ruler of every petro-state a Midas. The Shah of Iran promised his people a “great civilisation”; Carlos Andrés Pérez, Venezuela's President, imagined a future where “Americans will be driving cars built by our workers in our modern factories”.

In a seminal 1999 article, since fleshed out by other economists, Dr. Karl explained why the souring of the dream could not just be attributed to mismanagement or corruption. Instead of building infrastructure and industries, she noted, the cash available drove petro-states' rulers to establish patronage networks that ensured the survival of their regimes. There were no incentives to engage in economic reforms, and easy cash killed entrepreneurship. In time, generous handouts led entire “polities to develop an addiction to petrodollars”.

Few took oil-pessimists seriously — in spite of the clear warning signs that emerged from the 1979 revolution in Iran. From the outside, Libya's economy grew at six per cent in 2007, winning it applause from the World Bank. Bahrain has a per-capita income not dissimilar to New Zealand. Egypt grew at 4.7 per cent in 2007. Bahrain and Libya built their future by pumping the seemingly exhaustible pool of cash from the ground beneath their feet. Tunisia, Egypt and Yemen exported their own inexhaustible pool of low-wage workers to the petro-states.

But the growth rates masked a less happy reality: the apparent prosperity didn't drive industrialisation or generate productive jobs. Half the population in the arc of nations running from Nigeria to Pakistan is less than 25 years old, but unemployment is at record levels.

The petro paradox

There's a simple reason why the world's economy is powered by such a politically toxic fuel. Bizarre as it might sound at a time when petrol costs Indians well over Rs.70 a litre, the Devil's Excrement is relatively cheap [See Table 2]. From 1946 to 1973, the price of crude in the U.S. stood at just over $20 per barrel, measured at 2012 prices. In the wake of OPEC's efforts to ramp up oil prices, and the Iranian revolution, it surged to over $100. Then, the data show, oil prices again hovered around the pre-1973 historical average until 2001, when 9/11 ushered in a new era of war. But even now, crude oil is cheaper in real terms than in 1980.

Even more important is this: incomes in the U.S., the world's largest consumer of oil, have risen faster than oil prices. In 1929, an average American would have had to pay 1.49 per cent of her or his annual income of $84.90 to buy a barrel of crude oil, which then sold for $1.27. Fifty years later, in the wake of the Iranian revolution, oil prices soared to $31.61. But the annual earning of the average American had risen even more sharply, to $7,956. That meant that a barrel of oil would cost them just 0.39 per cent of their earnings — a quarter of what it did in 1929. In 2008, oil prices soared to $96.91. The average American earned $35,931 that year, which means a barrel of oil would cost them 0.26 per cent of their earnings. Now, consumers in the world's great economies are paying more than ever for oil — but those who sell it aren't prospering, either. Barring Norway, the world's largest oil exporters are now poorer, relative to the world's great economies, than they were five decades ago. “The conclusion must be,” the commentator Amir Taheri wrote in 2006, “that those who buy oil get rich and those who sell it do not.”

Big oil and great power

For geostrategic experts, though, it has long been clear that cheap oil comes at a high price. Ever since 1947, the U.S. purchased stability in the Middle East by funding client regimes, and setting up a string of bases stretching from the Persian Gulf to Turkey. In the next six years, though, U.S. defence spending will decline by as much as $477 billion — a consequence of wrenching economic pressures which also means there may be less to spend on propping up pliant governments. Given the country's declining interest in Middle East oil, there will also be less and less reason to do so.

There is no doubt the U.S. will remain the most significant military force on the planet for decades: its military spending accounts for 43 per cent of global military expenditure, against China's estimated 7.3 per cent and Russia's 3.6 per cent. The U.S. has 11 aircraft carriers to the rest of the world's eight — and its air power is a generation ahead of the competition. However, the cuts will mean U.S. resources will be more narrowly focused: targeting potential Chinese expansion in the Pacific, and using intelligence-led operations to contain terrorism-related threats. The days of grand expeditionary warfare in the Middle East are at an end.

India can't say it wasn't warned: for years now, the U.S. has been doing so. In his 2006 State of the Union address, President George W. Bush set America on a new course towards oil independence. “America is addicted to oil,” he warned. He vowed to “make our dependence on Middle Eastern oil a thing of the past.” Few paid attention, because past Presidents like Jimmy Carter had said much the same thing, to little avail — but the figures show it is now happening.

“Persian oil,” as Franklin D. Roosevelt said to a British diplomat in 1944, “is yours. We share the oil of Iraq and Kuwait. As for Saudi Arabian oil, it's ours.” To that end, the West propped up tyrannies — giving birth to a host of political obscenities.

India, China and the other Asian powers whose future prosperity depends on access to the Devil's Excrement are the future inheritors of the disorder western withdrawal will leave behind. They must begin to together prepare for the fallout, or together pay the price.

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