17 July 2022 - 09:58
  • News ID: 459495
Shifting Geopolitics of Energy: A New World Energy Order

TEHRAN (Shana) -- Whatever the outcome of war in Ukraine, one thing is for sure. The economic reverberations will be felt and in fact is already affecting the global economy by everyone and in all countries for years to come as the world divides between the West and rapidly reshaping Eurasia. The tectonic shifts and fractures in the world and how sanctions against Russia are likely to reshape and redefine a set of new global geopolitical realities.

Sanctions vs. Protective Tariffs

With a geo-strategically important part of the Eurasian land mass once again in the grip of conflict, the United States government under current administration appears oblivious to the concept of the multipolarity that would surely go a long way to creating a peaceful resolution in Ukraine.

But as Iraq, Syria, Venezuela and Islamic Republic of Iran all illustrate, one of America’s main weapons of choice against adversaries involves the use of sanctions.

Often underestimated among policy- makers and central planners is the fact that serves as protective tariffs on affected countries which are often, though not always forced to become more self-reliant.

In fact the theory of Resilient Economy that was raised and developed by Schumacher in the 1960’s makes reference to the imposition of sanctions against India and China by the United States and Britain in order to prevent setting up iron and steel plants. Schumacher, Swedish economist back then named it under the title or more popularly referred to as small is beautiful. India and China both turned to Russia for developing steel manufacturing plants. In fact Iran had then signed a contract with the Soviet Union to build Iran’s first steel mill in Isfahan.

In a somewhat more recent or relevant case, when America imposed sanctions on European trade with Russia; Denmark and Lithuania dutifully quitted exporting cheese to the country in 2004. This resulted in Russia setting up its own cheese sector and becoming self- reliant in the product.

Nevertheless, with the emergence of World Trade Organization (WTO), commodity trading began to be more financially-based and to be precise fully dollar- oriented. We will deal with this topic; however, it is timely to mention that the notion of protective tariffs imposed by external factors namely sanctions or export quota on a certain country and goods or services seized to function as a supportive element in self-sufficiency and imports substitution. This relates to extreme monetization of the international tradition system.

The narrative goes back to the year 1971 when Richard Nixon did away from Breton Woods and abolished the gold standard system. This enabled America to make dollar the world’s currency and all the global traders relied on dollar as the only medium of transaction and settlement or clearance of accounts. In the 1970’s dissolution of Bretton Woods and gold standard allowed the United States to print money at its own convenience. Domination of dollar led the world economy and geopolitical structure to a new era never seen and experienced before.

Sanctions and World Economy

I would like to make a short reference to my earlier remarks about the notion of sanctions under WTO regime and sanctions prior to that. As mentioned earlier, sanctioned sometimes acted as protective for the sanctioned economies and in fact led some countries to prosper from sanctions, though after an initial period of hardships and scarcity.

With WTO and later much more importantly SWIFT (Society of Worldwide Interbank Financial Telecommunications), that was originally designed against money laundery, every single dollar and dollar denominated currency that is globally transacted must pass via the approval of SWIFT. When the United States imposes a financial sanction against another country, the embargoed country is virtually disconnected from the world in that there’s no SWFT clearance.

However, the imposition of too many sanctions and too frequently, has led to backlash not only by the sanctioned countries but those countries and businesses that suffer from sanctions on other countries. In other words, sanctions come at price. The current sanctions that are imposed on Russia over the recent war in Ukraine is a clear indication of how countries are reluctant to sanction Russia. On the other hand, imposition of frequent and costly sanctions that are politically motivated is now leading the countries, central bankers and think tanks to grope for solutions and alternatives.

Looking back at the events of the last two months or so, we’ve noticed a tendency to move away from a dollar based global economy underwritten by financial assets to commodity-backed currencies. The world economy is facing a dilemma. International financial system is worried and nervous.

We witness a desire to move away from collateral being purely financial in nature to becoming commodity based. It is collateral that underwrites the whole financial system.

New Geophysical Roadmap

The ending of the financially based settlement system is being hastened by geopolitical developments. The West is desperately trying to sanction Russia into economic and political submission as in the case of Iran or Venezuela, but is only succeeding in driving up energy, commodities and food prices. Central banks will have no option but to inflate their currencies to pay for higher prices.

Russia is linking the ruble to commodity prices through a moving gold peg instead. China has already demonstrated an understanding of the West’s inflationary game by having a stockpiled commodities and essential goods even prior to the Ukraine war. Indian rupee is doing the same. India is currently offering its trading partners to feel free to trade in rupee against their own domestic currencies. I would prefer to call this as the New Bretton Woods.

A New Bretton Woods that distance itself from the dollar system that is crippling the world financial system and economy. Iran was among the first countries that declared her determination from dollar based to Rial-based trade relations. Though the conceptual and operational apparatus wasn’t yet ready back in mid- 1990’s neither in Iran nor Iran’s commercial partners.

The new geopolitical road map should address the issue of dollar dominance and US sanctions appetite against any nation that isn’t in the US sphere of interests. United States sanctions by means of institutions such as SWIFT is Weapon of Mass Economic Destruction. This has to be condemned by the United Nations.

The new Bretton Woods must accept and respect individual countries’ national currencies or a basket of currencies as means of global financial transactions. This should specifically be applied to Petro Dollar. Oil market has to be freed from the yoke of dollar domination. United States must end the policy of weapons of mass economic and energy destruction.

Prevalence of US dollar as an international medium of transactions, enables the country to print any quality of money to their advantage. As mentioned above, under the first Bretton Woods right after the First World War, America as the powerful and mighty rich country agreed to support its currency with gold. Once President Nixon discontinued gold standard, dollar posed as the world’s single currency for clearance of all international financial settlements. US debt topped $30 trillion in March 2022. Nearly half of the volume of debt was built up during eight years of Barack Obama’s presidency. Though Covid-19 and pandemic breakout was also instrumental in building debts in the country. This debt has nothing to do with the productivity of the economy and the US Federal Reserves has just printed that money.

Having said that the US economy has begun to experience unprecedented inflation not seen in two and a half decades.

Nord Stream 2: The Game-Changer

Washington was constantly critical of construction of Nord Steam 2. This huge project allowed Russia to carry its natural gas through a 1200 kilometers long pipeline that goes under seabed and hence bypass Ukraine and Poland. Nord Stream 2 together with Nord Steam 1 would allow Russia to supply some 55 percent of European gas consumption. This is an $11 Billion project that took six years to complete. Nord Stream 2 would make Germany, the number one economy of Europe totally dependent on Russia for energy.

Europe is an aging continent relying on exports to survive. Germany’s average age is 56 old. This population structure means that the population isn’t consuming a lot and has to rely on the world market for its excess industrial products. Europe’s economic relations with the US is already marginal except that of finance and high tech sector.

In this context NATO or OSCE lost most of their relevance on both sides of the Atlantic. This sounded less relevant for Trump’s Republican administration but very significant for Atlantic treaty nostalgic Democrats such as President Biden.

Biden was determined to jeopardize Nord Stream 2 by any means.

The pipeline was due to be officially inaugurated on first week of February 2022. Biden administration signaled that wasn’t happy at all and loudly cheered the possibility of engaging Ukraine into NATO alliance. Germany differed with Washington but agreed to delay Nord Stream 2 operations for final safety examinations. I am not a fan of conspiracy theory but United States did all it could, to sabotage the gas pipeline project from Russia to Germany.

Nord Stream 2 meant a lot to Russia and Germany. For Russians, security is first. For the United and Europe, economy comes first. Russia is huge in size but limited access to warm waters. Russian natural gas is supplied to Europe and Germany at one-third of gas prices in North America and South East Asia. The United States currently began to export shale gas and shale oil to Germany and is determined to replace two-thirds of energy market of Europe.

Do you remember when WTI was priced at minus $37 per barrel? America filled up its Strategic Petroleum Reserves (SPR) at that kind of prices. Volume of US SPR approached a billion barrels, not seen since the war in Ex- Yugoslavia when Bill Clinton was president. Now the United States is selling that oil to Europe at $100 plus per barrel.

The war in Ukraine is a gas war. It’s war of energy superpowers for market share during the remaining two to three decades of oil and gas supremacy. Economy First, for America was designed when Trump arrived in the White House. A quote from William Burn, currently America’s chief spy agency, CIA might be interesting. A declining power may be as destructive as a rising power. And now Russia is a declining power and China is a rising power.

Most of us are familiar with the oil diplomacy. We know little about gas diplomacy. Gas diplomacy is a Russian expertise. United States, Canada or in West Asia, Iran and Qatar know little about gas diplomacy. Russia cannot imagine a Germany without Russian gas supply. The US is forcing its own vision of gas diplomacy into Germany and Europe. These countries are now forced to spend three times more for imported gas in order to safeguard US version of democracy. This interpretation of democracy means safeguarding the US global hegemony that is no more relevant.

Before moving to the next topic, it is important to refer to the 24Th of April, French presidential election where President Macron won a second five year as president. France is a political leader of EU. Germany is the economic powerhouse of Europe. France advocates forceful sanctions against Russian oil and gas imports from Russia. Germany objects the notion and criticizes French policy as too much alienated with the US and without consideration for German’s economy and energy needs. With the current administration remaining in office in France, EU integration and future prosperity might be at risk.

On the Russian side, the country’s natural gas is often pumped up to 8 thousand kilometers before reaching the borders of the destination. This gas passes through extremely cold trails. Technically can’t stop moving. Once halted for some days, it can cause damages beyond repair. Russian gas has to be exported and keep moving in the pipelines. That may be one reason that it is supplied cheap. For Russia and Germany, gas trade is a marriage of convenience.

Current debate initiated by the United States is whether Russia is European or Asian or in fact Eurasian. President Biden is in the business of catheterizing Russia as an Asian country and signal to China not to think of invading Taiwan. Geographically Russia is now 90 percent European.

Rethinking Eurasia. Future is Asian

As mentioned earlier, in a multipolar geopolitical landscape, global power is shifting to Asia. West has been the center of world economy, trade, technology and modernity for the last several centuries. Back in 14Th and 15Th centuries, Portugal was the focus of growth and development. Portuguese era was replaced by Spain. Then the Dutch, French and British had their turn one after the other. 20th century was the era of American empire. American hegemony lasted because of its geopolitical and geographical location. It’s too far from the rest of the world. The only time that a country risked to attack America was during the World War 2 when Japan attacked a port in the US shores.

US hegemony is rightfully challenged by Asia and in a wider sense Eurasian land mass. Biggest producers of oil and gas and largest consumers of oil and gas are in Asia. The six critical minerals are all Abundant in Asia. Gas, copper, uranium, lithium, cobalt and rare earth materials are all in Asia. Africa is also rich in those resources but not for own use.

Russia has plans to divert its gas and oil exports to Asia. Though it’s not easy. China is investing heavily on shale gas and renewables. India is more inclined to import energy from Russia. India is in fact the only major economy that has refused to condemn Moscow for Ukraine war and has publicly indicated that has no intention to condemn Russia. It is important to note that India has a pro- western foreign policy and is a member of the QUAD alliance to contain China. India has in fact increased its Russian oil and oil products imports from Russia though at discontented prices.

In the meantime, turning to a different aspect of Asian age namely population Asia has a relatively young population. Average age in Asia is below thirty years old. This means a different production and consumption market economy and pattern. Russia is aging fast, too. In three decades, there won’t be enough Russian to live in the vast country. Europe has aged too but they have designed a well- calculated immigration policy. One reason that Russia ran to war in order to secure access to the Black Sea is aging population, not young enough to fight.

A shift in global geopolitical sphere of influence is evident in economy, trade and political outreach from Western Hemisphere to the East. The only powerful tool that is in the hand of the United States is the financial and monetary device. This is exactly where the US feels the pain and the risk of entering an all-out war and even a nuclear mischief. United States needs a war. US economy is on decline but United States is militarily superior to all other powers; namely China, Russia and EU. This looks as the remaining option for America in case dollar loses its glitters against a world on the threshold of sanctions by the US.

A major problem; however, is how to replace world international money and finance system from dollar. I mean to indicate that there’s no substitute as yet. Ruble, Yuan or Euro and Yen aren’t ready to replace dollar and the global trading system might face the risk of total collapse.

World has lost confidence in US in that the global financial system is now a full- fledged Weapon of Mass Economic Destruction that is even threatening energy security of Europe. Ukraine war has now only hastened the process of a shift from dollar system to a modern monetary system. Emergence of a new Bretton Woods monetary system is appearing on the horizon.

Courtesy of Iran Petroleum

Fereydoun Barkeshli,

energy market analyst

News ID 459495


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