An excerpt from The Colder War: How the Global Energy Trade Slipped from America’s Grasp
Vladimir Putin, power and the politics of oil: An excerpt from Marin Katusa’s new – and essential – book
Amid the many competing conspiracy theories surrounding the recent plunge in oil prices, the notion that Saudi Arabia is driving down the price of crude in order to punish Russia is a popular one. Russia needs oil prices at or above $100 a barrel in order to keep its budget in balance, and it’s been suggested that Saudi Arabia is more than happy to keep it well below that level in order to punish Russia for supporting regional rivals like Iran and Syria. But while the geopolitical currents in the Middle East tend to defy such a simplistic analysis, recent history (and commentary) indicates that there’s some merit to the idea.
That’s why Marin Katusa’s recent book is so timely – and why we’re sharing an excerpt with you here in the pages of Alberta Oil. Katusa, who’s the chief energy strategist at Casey Research, believes that there’s a second Cold War underway, and that it’s being driven – again – by Russia’s ambitions for global influence. He says that if the Putin regime is successful, it could reshape the global energy market and the force it exerts on national budgets, strategies and outcomes, much to the West’s detriment.
The Great Game
It has been known as the “Great Game” since Rudyard Kipling introduced the term in 1901, in his novel Kim. For some historians, the “Great Game” refers simply to the British and Russian empires’ nearly century-long joust for supremacy in Central Asia. Both considered the region critical for their goals elsewhere. For others, though (and I count myself among them), the Great Game in Central Asia never ended. The build-out of the Soviet Union was another round in the contest, which continued into the Cold War. Today it is central to the Colder War, which is only now coming to be recognized for what it is.
A player has been replaced, with the United States taking over Britain’s role. But what hasn’t changed in two centuries is that Russia remains a pivotal figure in the geopolitical maneuvering that stretches in a grand arc from Europe through the Middle East to Central Asia. Back in the old days, while the United States was busy expanding from sea to shining sea, the British were wrestling to maintain their position as the dominant global power – and, more important, to preserve the pound sterling as the world’s reserve currency.
Control of international commerce wields enormous power. So does control of the world’s reserve currency. It can dictate terms of trade; it can move the price of commodities in distant markets; it can extract a fee when money passes from one hand to another. For a long time, the country holding that control was Britain, which prospered enormously. Then, after the devastation of World War II, the baton passed to the United States, where it has resided ever since.
The British Empire was always a shaky proposition. Its very implausibility added to the celebration of every victory. That such a small country should hold sway over such a large part of the planet seems all but inexplicable today. The British did manage it, of course, but building an empire is one thing; holding on to it is another project entirely. To succeed, you have to deal with the discontent of the people you rule while continually facing down countries that covet what you have.
India was called “the jewel in Britain’s crown,” and British policy in Asia during the nineteenth century was concerned chiefly with expanding and strengthening Britain’s grip on the subcontinent. The chief threat to that goal, from the British point of view, was Russia.
Russia had been expanding for centuries, even before Czar Peter the Great – the historical figure with whom Vladimir Putin most closely identifies – proclaimed Russia an empire in 1721. The expansion proceeded southward and eastward during the seventeenth and eighteenth centuries, and by the nineteenth century Russia had swallowed up most of present-day Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan.
Britain feared that Russia was knocking at India’s door and would try to grab the territory and its wealth. Thus the British invaded Tibet and fought two tribal wars in Afghanistan solely to establish buffer zones against the advancing Russian bear. The Great Game was afoot. Though usually thought of in terms of territory, it also was about money and the ways in which it could be manipulated. The twentieth century added what proved to be the most important of those ways by far: access to and control of the energy sources upon which the world now depends.
Those sources include natural gas and uranium. But the one that matters most is oil. Oil has become the primary expression of wealth in the world. It finances economies and funds political regimes. It props up the standard of living wherever it is plentiful. Once used primarily as a cheap substitute for whale oil in street lamps, it now is the fuel for most transportation and much electricity generation, and is the feedstock for plastics and most other organic chemicals. There is little in modern life that does not depend on oil for either its production or its delivery. Crayons, heart valves, medicines, pesticides, toy airplanes and real airplanes, all come to you from an oil well.
And it’s not just tangible goods. Oil is the underpinning of the global financial structure. It separates the rich from the poor. That – not just its use in cars and jet engines – is why it is the planet’s most sought-after commodity. Control oil and you control money. That’s how you become a dominant player in the new Great Game – the one that Putin has been playing so masterfully in his attempt to engineer the demise of the dollar.
As the carnage of World War II was winding down, two things had become clear: The Allies were going to win, and after the war the United States would be the economic strongman. It had all the best cards to play. For three weeks in July 1944, with the end of hostilities in Europe still nine months away, it started playing them. At that time, 730 delegates from all 44 allied governments gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference – now simply referred to as the Bretton Woods Conference. They came to design the financial structure of the postwar world.
At the end of the conference, all present signed an agreement with two key monetary provisions.
To promote ease of international trade and to help fund postwar reconstruction, each member state agreed to maintain a fixed exchange rate for its currency versus the U.S. dollar (and, by implication, fixed exchange rates versus all other participating currencies). To that end, each signatory pledged to buy and sell U.S. dollars as needed to keep its currency within one per cent of its agreed-upon exchange rate.
The United States, for its part, assured the solidity of the arrangement by pledging to deliver gold, at a price of $35 per ounce, to any foreigner who chose to tender its dollars (although this was later modified to honor redemptions only by foreign central banks). Because at the time the U.S. Treasury had an abundance of gold (a result of the deflationary Great Depression and then wartime trade surpluses and capital flight), it was an easy promise to make.
The Bretton Woods Agreement placed the United States at the center of international finance. Its allies may not have liked the new way of things, but in truth, they had little choice in the matter if they wanted to rebuild their countries. In signing, they ushered in the dollar’s golden age, when it became the world’s reserve currency.
The promise of gold redeemability was honored for 27 years. It ended when U.S. trade deficits and creeping price inflation undermined confidence that the U.S. government would be able to live up to its promise much longer. To keep the open-market price of gold from rising more than pennies above $35, the United States and its partners in the London Gold Pool had to sell larger and larger quantities of the metal. That couldn’t go on forever. In 1967, France withdrew from the effort and added the insult of repatriating the gold it had been storing with the Federal Reserve Bank of New York. Yellow bars flew to Paris.
The U.S. government continued to sell gold, in increasing quantities, to keep the open-market price near $35. But eventually, that had to stop. So, on August 15, 1971, President Richard Nixon “closed the gold window,” ending the convertibility of dollars into gold by anyone, and eliminating the need for further sales to suppress the open-market price. To cover his real motive, he referred to the default on America’s pledge as a measure to stop “international money speculators.”
The dollar was still the world’s reserve currency, but it had become fiat money. And since other major currencies were convertible only into dollars, they too became fiat money. With narrow exceptions, all the world’s currencies were untethered from gold. The new regime allowed governments to pull unlimited currency units from thin air. Inflation became a fact of life everywhere, including in the United States. Since 1971, money creation by an unfettered Federal Reserve has cost the dollar nearly 80 per cent of its purchasing power.
Thank You, Mr. Nixon
With gold no longer part of the system, something had to be done to maintain the dollar’s preeminence as the world’s reserve currency. Washington might have sought to ease the country’s trade deficit (the counterpart of which is a buildup of dollars in foreign hands). But that would have required a slowdown in the printing of new dollars. So, of course, it didn’t take that approach. Quite the opposite. It sought a way to gain a grip on the global financial system that would be so strong it would protect the dollar’s status as the world’s reserve currency even as the flood of new fiat dollars continued.
The power to pass off ever more units of the world’s reserve currency made everything produced outside the United States both cheap and plentiful for U.S. consumers. A failure to keep that system running would mean a drop in Americans’ living standards and political death for whoever got the blame. Conveniently, an opportunity for protecting the dollar’s status was ready and waiting. It came from a commodity far more important to the world economy than gold: oil. Though rightly disdained for much of what he did, Richard Nixon underwrote his country’s dominance for decades to come by devising the petrodollar system.
After closing the gold window, Nixon dispatched Secretary of State Henry Kissinger to Saudi Arabia to offer the ruling House of Saud a four-part deal. The U.S. government would provide military protection for Saudi Arabia and its oil fields. It would sell the Saudis any weapons they needed. It would guarantee protection from Israel and any other Middle Eastern state, such as Shi’ite Iran, that might attempt to destabilize the Sunni kingdom. And it would secure the Saud family’s place as rulers of the country in perpetuity.
That last point was the clincher. In return, the Saudis would do two things. They would make oil sales in U.S. dollars only. And they would invest their surplus oil proceeds in U.S. Treasuries.
Saudi Arabia was (and remains) a sparsely populated country with enormous riches. It is stuck in a historical twilight zone between the Dark Ages and the modern world. It sits in a bad neighborhood, where religious differences readily evolve into imperatives for slaughter. It faces a pair of much larger and inherently stronger neighbors that are waiting for a chance to eat it. No surprise that its rulers felt vulnerable and welcomed a powerful protector.
To the ruling family, Kissinger’s proposition was a sweet deal. Saudi Arabia signed on in 1974, and as Nixon and Kissinger had calculated, the other members of OPEC quickly fell in line. By 1975, all of them had embraced the petrodollar system.
It was a brilliant maneuver. The world’s demand for U.S. dollars would soar with the world’s increasing demand for oil. For the United States, the new “dollars for oil” setup was even better than the Bretton Woods “dollars for gold” system. There was no pesky redemption promise, so it imposed no constraint on the creation of more and more dollars to pay for imports.
It was quite a feat, and with knock-on effects. Everyone needed oil. Since it could be purchased only in dollars, countries needed to stockpile them, which meant more demand for currency units that the Federal Reserve could produce at zero cost. Nixon’s petrodollar system kept the United States at the top of the global economic heap for decades. But the Great Game wasn’t over. At the beginning of the twenty-first century, on the eastern fringe of Europe, a master player was at work, rebuilding his shattered country and preparing it to return to the playing field.