High Oil Prices and the International System
By: Stratfor.comMay 7, 2008
Oil passed $120 per barrel today, which depending on how you measure it, means that it is about 20 percent higher than the highs reached in the late 1970s and early 1980s. In other words, this is getting serious. It is not the intensifying discussion of gasoline prices that we hear, but rather the impact that the price of oil is beginning to have on the global system. If oil prices continue at this level or rise, there will be long-term shifts in how the international system works.

One of these shifts is already obvious. The nations of the Arabian Peninsula have accumulated a tremendous amount of cash. Most other oil producers use surplus money from energy sales largely for internal purposes. Nigeria and Venezuela, for example, are not about to become international investors. The situation in Arabia is different. Those economies can't possibly absorb the money that is pouring in. Therefore the money-petrodollars, as we used to call them when we were young-is available for investment around the world. Much of that is coming into the United States in various flows, helping to stabilize equity markets, for example. But as in the 1970s, economic power translates into political influence-and the Arabian influence on a wide range of countries and issues will increase dramatically. The countries of the Arabian Peninsula will once again become the primary source of large-scale finance.

In the 1970s, one of the consequences of Arabian oil was the creation of a bulwark against left-wing radical Arab movements. The money was used to immunize Arabian regimes-and others-from the radicals' attacks. Whether the money will be deployed the same way against radical Islamist groups remains to be seen. But this much is certain: The Saudi regime, which had been under heavy internal pressure a few years ago, now has the ability to buy the loyalty of dissident tribes and factions.

The losers will be those countries that chose to industrialize most intensely. High oil prices have had less impact on the United States this time around than in the 1970s because of deindustrialization. Service industries like massage parlors and software companies use less energy than steel mills. The countries that have adopted industrialism, by contrast, are extremely vulnerable to high oil prices. And China, of course, has industrialized the most intensely. The higher the proportion of industrial plant, the more each dollar rise in the price of oil hurts. Under pressure from high food prices as well as oil, the Chinese economy faces the choice of raising prices on export goods and losing market share, or subsidizing exports even more than it does now. That is the short-term solution, but it is unsustainable in the long term.

Russia, which exports energy and uses the proceeds to modernize its energy industry, selectively acquire global assets and build new businesses in Russia, is using these high energy prices to reposition itself economically. And with that repositioning, it is acting more assertive geopolitically. Recent events in Georgia indicate the Russians are prepared to increase their pressure. The Russians also apparently have built financial reserves in case energy prices drop. The surge in energy prices has put Russia in a position to make a serious move to regain its position as a regional power.

These are critically important shifts to watch. The rise in oil prices is reordering the international system in decisive ways, just as it did in the 1970s. Oddly, the deindustrialized world is least affected. The winners in the industrial world are affected the most-and those countries without any industry at all, but with lots of energy reserves, are the big winners.

Oil prices may fall. One theory holds that as the United States moves out of the subprime crisis the dollar will rise, and that will chip away at the price of oil. As the price of oil starts to fall, speculators would thus be squeezed out and the fall would become more rapid. That may be the case-or oil may go to $150 per barrel for all we know. But we do know this: So long as oil stays above about $70 per barrel, the Arabian Peninsula will hold the whip hand in the financial world, China will be squeezed and the Russians will get stronger. And the United States and Europe will be the least affected, unless they fail to reposition themselves in the new order.

Stratfor is a private intelligence company delivering in-depth analysis, assessments and forecasts on global geopolitical, economic, security and public policy issues. A variety of subscription-based access, free intelligence reports and confidential consulting are available for individuals and corporations.

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