The great pipeline opera - By Daniel Freifeld | Foreign Policy

Inside the European pipeline fantasy that became a real-life gas war with Russia.

BY DANIEL FREIFELD | SEPT. / OCT. 2009

When Joschka Fischer's lucrative new job as the "political communications advisor" to a consortium of European energy companies was leaked to a German business publication this summer, there was one comment that stood out. "Welcome to the club," said Gerhard Schröder, an even more highly paid advocate for the other side in Europe's increasingly politicized energy war.

Schröder's remark was short, snide -- and very much to the point. For eight years, the two men had led Germany together, with Schröder ruling as its center-left chancellor and Fischer as his foreign minister. Their long-running partnership had survived a particularly complicated era in post-Cold War Europe, and publicly Fischer had always been supportive, even telling Der Spiegel that Schröder "will go down in the history books as a great chancellor."

But since their coalition government collapsed in 2005, Schröder's controversial work has led to an ever-more-public breach between the former allies. Less than one month before leaving the chancellorship, Schröder used his office to guarantee a $1.4 billion loan (later turned down) for a Kremlin-backed natural gas pipeline that would connect Russia to Germany via the Baltic seabed. Then, just days after stepping down, Schröder accepted a senior post with the pipeline consortium run by Russia's state gas monopoly Gazprom. The deal was a huge scandal inside Germany, where Schröder had already been known for years as Genosse der Bosse -- "comrade of the bosses."

The chancellor's move to the Kremlin energy payroll inspired a wave of alarm in Europe over its potentially dangerous dependence on Russia for natural gas. Moscow supplies about a third of the European Union's gas -- Europe's preferred heating source -- and some of its countries are 100 percent dependent on Russia. What's more, Europe's annual gas consumption is set to rise 40 percent by 2030, further stoking those fears about Russia. Several times in recent years, the Kremlin has abruptly cut off gas deliveries after disputes with key transit countries such as Ukraine, leaving millions of Europeans shivering in the winter cold.

Schröder had been reliably pro-Russia while in office, even famously calling the KGB-spy-turned-president Vladimir Putin a "flawless democrat." Although Fischer did not criticize his boss publicly at the time, more recently he has been openly dismissive. Schröder's idea of Putin as a democrat, Fischer told the Wall Street Journal, "was never my position." Asked later by Der Spiegel what he found "most objectionable" about Schröder's tenure, Fischer replied succinctly: "His position on Russia."

This summer, Fischer made the breach with Schröder official: He signed up with a rival consortium -- energy companies from Turkey, Bulgaria, Romania, Hungary, and Austria that have joined together to build the $11 billion Nabucco natural gas pipeline. Nabucco would bring gas from Middle Eastern and Caspian fields across Turkey's Anatolian plateau, and north into Europe. The pipeline is backed and partly funded by the EU and is strongly supported by the United States. Perhaps most importantly, Nabucco would completely bypass Russia. Such an energy strategy, Fischer has argued, is urgently needed to stop Moscow's "divide-and-conquer politics."

Moscow, not surprisingly, is pulling out all the stops to scuttle the project. It is seducing pliant politicians and resorting to old-fashioned bullying, especially in the states that Nabucco transits. It is acquiring stakes in European energy companies, often through questionable shell companies, that could complicate Nabucco's completion. It is buying up natural gas in Central Asia and the Caspian, even paying up to four times more than in previous years, to deny supplies to Nabucco. And it has proposed a rival pipeline, called South Stream, which would flow from Russia across the Black Sea to Bulgaria and the Balkans and fork, with one spur running west to Italy and the other north to Austria.

ACT ONE

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Eighty percent of natural gas from Russia travels to Europe through Ukraine, but the desire to do something about it only materialized with the gas disputes that broke out between Ukraine and Russia after the 2004 Orange Revolution.

In many ways, Schröder and Fischer personify the intense struggle -- some call it a war -- over Europe's energy future. On one side are those countries most worried about their dependence on Moscow, especially the former communist countries of Central and Eastern Europe. On the other are countries such as Italy and Germany and leaders such as Schröder, who see closer ties with Russia as both a mercantilist opportunity and a strategic imperative. When I caught up with Schröder at a conference in Houston earlier this year, he was quick to brush aside concerns about Moscow. "There is no reason to doubt the reliability of Russia as a partner," Schröder said. "We must be a partner of Russia if we want to share in the vast raw material reserves in Siberia. The alternative for Russia would be to share these reserves with China."

This gas war is especially hard-fought because of the physical nature of the prize itself. Unlike oil, which can be put onto tankers and shipped anywhere, gas is generally moved in pipelines that traverse, and are thus tethered to, geography. Because a pipeline cannot be rerouted, producers and consumers sign long-term agreements that bind one to the politics of the other, as well as to the transit states in between. In this way, today's gas war is a zero-sum conflict similar to the scramble for resources that divided Eurasia in the 19th century. And now, as then, commerce is taking a back seat to politics.

That is what I found when I set out this spring to travel the pipeline routes, encountering along the way a rogue's gallery of cynical politicians, murky middlemen, insistent executives, and innumerable technocrats, each eager to shape the decision. But the real question that will determine Nabucco's future -- a question vividly on display in every country the pipeline will touch -- is whether Europe has the stomach to fight as hard for its interests as Russia does for its own.

Liberetto: Today's gas war is a zero-sum conflict similar to the scramble for resources that divided Eurasia in the 19th century. Planned pipeline Nabucco would carry up to 1.1 trillion cubic feet of natural gas a year from the Caspian Basin to Vienna, traversing many a former Soviet satellite along the way. A competing Russian project, South Stream, would flow from Russia across the Black Sea and ultimately terminate in Italy and Austria.

One evening in 2002 in Vienna, a small group of Austrian energy executives took their colleagues from Turkish, Hungarian, Bulgarian, and Romanian firms to see a rarely performed Verdi opera. It recounted the plight of Jews expelled from Mesopotamia by King Nebuchadnezzar. The officials had spent the day sketching out a plan for a 2,050-mile pipeline that could transport up to 1.1 trillion cubic feet of natural gas every year across their countries and into European markets. The sources of this gas would not be Russia, but Azerbaijan, maybe Iran one day, and with a U.S.-led war against Saddam Hussein looking increasingly likely, possibly the gas fields of northern Iraq. The opera they attended that night was called Nabucco, and that is the name they gave their pipeline.

The original impetus for the project was just business: The Turks and Austrians saw it as a way to get new supplies of gas from the Caspian and Middle East -- not to mention lucrative transit fees for moving it across their territories into Europe. But politics soon entered into it, as Nabucco won early moral support from Russia skeptics in Central and Eastern Europe. They saw the pipeline as a historic opportunity to build a new lifeline to the West while weakening Russia's grip on them. Many worried, as former Estonian Prime Minister Mart Laar wrote, that "Russian leaders regard their energy assets as tools of foreign-policy leverage and envisage a future in which resource competition may be resolved by military means." The main energy firms in Bulgaria, Romania, and Hungary -- all countries that would host Nabucco -- signed on to help build the pipeline.

ACT TWO

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Without Azerbaijan, Nabucco is a non-starter. For the project to be initially viable, Azerbaijan will need to provide 283 billion cubic feet of gas per year, roughly a quarter of the pipeline's capacity.

The big powers of Western Europe, however, were less dependent on Russian gas and far less willing to antagonize Moscow by bringing non-Russian gas into Europe through former Soviet satellites. Italy, under Silvio Berlusconi, and Germany, under both Schröder and his successor Angela Merkel, dragged their feet on Nabucco. France, with its nicely diversified supply of energy, had little appetite for changing the status quo. Together, these countries blocked any effort within the European Union to allocate funding for Nabucco or even make support for the pipeline a common policy. This resistance infuriated the European Union's newest members, and it still rankles. "The EU role has been weak," Mihaly Bayer, Hungary's special representative for Nabucco, told me. "The EU coordinator for Nabucco, Jozias van Aartsen, simultaneously serves as the mayor of The Hague!" Bayer thundered when we talked in his Budapest office. "When I assumed my post, I sent him multiple letters offering my assistance. I even spent two days in The Hague trying to meet with him. He ignored me."

This east-west deadlock held until 2006, when events started to push in Nabucco's favor. The reason had everything to do with Ukraine, which has clashed repeatedly with Russia in recent years.

Eighty percent of natural gas from Russia travels to Europe through Ukraine, across an energy infrastructure built by the Soviet Union after the 1956 Hungarian uprising. The main pipelines converge in Ukraine before fanning out into Eastern Europe, and were key to the Kremlin's strategy of controlling its Warsaw Pact satellites. The route went through Ukraine because Soviet planners never imagined a day when Ukraine would not be ruled by Moscow. But when that day did arrive, on Aug. 24, 1991, Russia's hold on Ukraine did not end. It just grew more complex, and gas remained a central means of control.

How this unfolded was explained to me in Kiev by Bohden Sokolovsky, an energy advisor to Ukrainian President Viktor Yushchenko, over a breakfast of vodka, blintzes, and cigarettes. It all came down to two things, Sokolovsky said, "Otkat and deriban" -- roughly translated, kickbacks and theft. As Soviet assets and state-run energy companies were privatized in Ukraine in the 1990s, apparatchiks and businessmen on both sides of the border concocted elaborate schemes to get in on the action. They manipulated prices and parceled out kickbacks. The deals were "obviously corrupt," recalled a senior advisor to former Ukrainian President Leonid Kuchma. "But it was a great deal for Ukraine."

Many Europeans disliked their dependence on Ukraine. "The very basis of the gas business in Ukraine is graft," Vaclav Bartuska, the Czech Republic's ambassador at large for energy security, told me. But the desire to do something about it only really materialized with the gas disputes that broke out between Ukraine and Russia after the 2004 Orange Revolution. Ukrainian protesters had just successfully contested an election marred by fraud and voter intimidation, ultimately preventing the Kremlin-favored candidate from taking power. Soon after, the new president, Yushchenko, sought to steer Ukraine into a Euro-Atlantic orbit. This was a direct threat to Russia's influence over its main point of entry into European gas markets. So Putin countered that if Ukraine wanted to be a Western country, it would have to pay the far higher Western price for gas. When Kiev refused to pay those higher prices in the winter of 2006, Moscow shut off gas shipments to its neighbor for four days, denying fuel to millions of other Europeans as well.

"It wasn't until the 2006 gas crisis that the rest of Europe actually started to care about what was going on in Ukraine," recalled Bartuska, who mediated yet another dispute between Russia and Ukraine this January. Many more Europeans began to view Russia not as a reliable supplier of gas but as an aggressive petrostate that privileged its political organizations over its commercial obligations.

Almost overnight, support for Nabucco grew dramatically throughout Europe. But the gas shut-offs also added new impetus to Nabucco's Russian-backed rival, South Stream. Whereas Nabucco's supporters saw warning signs in Ukraine about Russian aggression, others saw a corrupt, untrustworthy transit state disrupting Russia's reliable supply of gas. As Dmitry Rogozin, Russia's ambassador to NATO, put it: "It's clear that if Europe wants to have guaranteed natural gas supplies, as well as oil in its pipelines, then it cannot fully rely on its wonderful ally, Mr. Yushchenko." The Italian energy company Eni led the way, signing on to South Stream in 2007.

And then, of course, there is Germany, where Gerhard Schröder is hardly Russia's only friend. At the same Houston conference where I saw Schröder, I attended a small breakfast for energy company officials and experts. At the first mention of transit security, Reinier Zwitserloot, a spry German of about 60, shot up and shouted, "The most reliable transit state is the Baltic!" He went on: "As far as I am concerned, Nabucco is nothing but an opera!" I later learned that Zwitserloot had recently been awarded the Order of Friendship of the Russian Federation, Moscow's highest honor for non-Russian citizens.

In this opera, Turkey has been cast in one of the leading roles. With its indispensable geographic position between the oil and gas reserves of Iraq, Iran, and the Caspian, it is an absolute certainty that Turkey will host major pipelines sooner or later. If Nabucco succeeds, Turkey could be the biggest winner, both economically and geopolitically -- a fact not lost on Russia or Europe. Or Turkey.

Until the gas wars began, Turkey had a weak hand: It had been rebuffed for EU membership and depended on Russia for a majority of its natural gas. But now, with the country's gas demand skyrocketing and Turkish supply contracts with Russia set to expire, Turkey has not been shy in reminding Europe that it has options. "What is important is to gain natural gas," said Taner Yildiz, Turkey's minister of energy. But doing it through Nabucco, he added, "is not obligatory." Turkey's ambassador to the United States has pointedly called the EU "the biggest impediment to progress on Nabucco's development."

When I sat down in late April with Cuneyd Zapsu, a founding member of Turkey's ruling Justice and Development Party and a longtime counselor to Prime Minister Recep Tayyip Erdogan, he was openly frustrated with Europe's wavering about the pipeline. "Turkey has been ready to sign the deal," he told me. "But every time the consortium agrees, [our Nabucco partners] throw a new term in."

Zapsu understands Turkey's delicate but fortuitous position. "Everyone is trying to make Turkey the enemy," he said. But shifting his gaze out the window and down onto the Bosporus where Europe and Asia meet, Zapsu just smiled. "Everyone loves us."

The mood is less one of love than of fear in several other countries where Nabucco would run, as Russia has aggressively stepped up its efforts to block the pipeline. Next door to Turkey in Bulgaria -- the poorest member of the EU and a transit state for both the Nabucco and South Stream pipelines -- Ognyan Minchev, head of the Institute for Regional and International Studies, told me how Moscow threatened the Bulgarians in 2006. Scrap an agreement with Gazprom and sign a new contract with higher prices for Russia and lower transit fees for Bulgaria, they were told, or else the gas would be cut off. "The Bulgarian government is obedient to Russia," Minchev said. "Bulgaria has put the entire energy system in Russian hands."

Further along the Nabucco route, in Hungary, Laszlo Varro has similar fears. At dawn one day in April, the tall Hungarian led his small dog around a hilltop park overlooking Budapest, recounting how the Russian energy giant Surgutneftegaz had recently acquired a decisive stake in the Hungarian energy firm MOL, where Varro is head of strategy. "It is one of the least transparent energy companies -- in Russia," he said. Varro's concern, he explained, is that no one really knows who is behind Surgutneftegaz -- or rather, he quickly added, that "everyone knows who is behind the company since no one knows." Others in Hungary suspect the same, and one major newspaper spelled it out in a recent headline: "Mr. Putin, Declare Yourself."

Surgutneftegaz is run by Vladimir Bogdanov, an oligarch who managed Putin's 2000 presidential campaign in western Siberia. The secretive Surgutneftegaz has offered almost twice the market value for its shares in MOL. Varro and others see a sinister reason for this seemingly illogical behavior: MOL is a Nabucco consortium member, and by buying this stake, Surgutneftegaz can cut off funding for the pipeline and cripple it in Hungary.

Russian firms are making similar acquisitions in Austria, which is the proposed end of the road for both Nabucco and South Stream. Centrex Europe Energy & Gas, an opaque gas trading firm with ties to Gazprom, makes its money buying cheap gas from Russia and reselling it for profit in Austria. The German magazine Stern recently traced Centrex's profits back to a company registered to a phony address at a drab Soviet-style housing block in Russia. And yet, Centrex recently entered into a partnership with Gazprom Germania to take a 20 percent stake in Austria's Baumgarten trading platform and storage facilities, where the two rival pipelines will literally terminate. Considering that Gazprom already holds a 30 percent share in Baumgarten, this means that Russia's state-run energy company now controls half of the most important gas storage and distribution system in central Europe -- and the future terminus of Eurasia's competing southern pipelines.

Not every country in Europe is so concerned about Russia, however. In Serbia, I was installed at the far end of a conference table opposite Mrakic Dusan, the state secretary for energy and mines. After an initial back and forth, Dusan interrupted me. "Where are the hard questions?" he demanded. So I asked him if Serbia is inviting unacceptable risks by signing a partnership with Gazprom. "We have a great contract with Russia," Dusan insisted. I asked him if he worries that Gazprom has an unsound financial and strategic position. "After 2030, only Russia, Qatar, Iran, and Turkmenistan will still have gas. With Russia in control, this 'gas-OPEC' will control world supplies." Dusan rubbed his chin as he spoke, revealing a large fancy watch. I asked where he got it. Smirking, he responded before the translator could finish.

"Putin."

For the last few years, veteran U.S. diplomat Steven Mann, the State Department's coordinator for Eurasian energy diplomacy, watched as Americans and Europeans struggled to turn Nabucco from grandiose idea to gas-delivering reality. But when he finally left the job earlier this year, he told author Steve LeVine to beware "Nabucco hucksterism" -- a condition he defined as occurring when political enthusiasm for an energy deal gets out too far ahead of its commerical viability. "There have been quite a number of officials who know very little about energy who have been charging into the pipeline debate," Mann told LeVine. "Nabucco is a highly desirable project, don't get me wrong. But there are other highly desirable projects besides Nabucco," he added. "And the overriding question for all these projects is, Where's the gas?"

For Nabucco to be initially viable, most energy experts agree, the gas will need to come from the former Soviet state of Azerbaijan -- 283 billion cubic feet of gas per year, to be precise, roughly 25 percent of the pipeline's capacity. Indeed, without Azerbaijan and its major natural gas supplies, Nabucco is a non-starter.

Russia knows this too, so it has been doing everything in its power to deny Nabucco gas from Azerbaijan, buying it to replenish Russia's declining production. In April, Russian President Dmitry Medvedev hosted Azeri President Ilham Aliyev in Moscow to discuss Russian purchases of Azerbaijan's gas. And then in June, they inked an agreement in which Azerbaijan promised to sell Russia up to 500 million cubic feet of gas -- at well over market rate -- from its offshore gas field, Shah Deniz.

If there were still any doubt about how far Russia would go to fight for its interests in the Caucasus, Azerbaijan need only look at Georgia, which is still reeling from Russia's invasion last summer. It is the key transit state between Azerbaijan and Turkey, hosting two pipelines that bring oil and gas from the Caspian to Turkey. By attacking its small neighbor, Russia effectively warned not only Georgia but the whole neighborhood.

But in recent months, Nabucco's European supporters have started to get their acts together, and Azerbaijan has begun to take notice of that, too. In May, the EU signed a deal of its own with Azerbaijan, which committed to building energy and trade links directly with Europe. This was arguably a more valuable agreement than the one Azerbaijan later signed with Gazprom, which offered not money but only vague pledges that may or may not be met.

ACT THREE

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In recent months, Nabucco's European supporters have started to "confound the skeptics," as a top official put it, and it now seems distinctly possible that a pipeline named after Nebuchadnezzar, the ancient ruler of Babylon, might owe its success to Iraq.

Then, on July 13, beneath the crystal chandeliers of an Ankara hotel ballroom, the prime ministers of Turkey, Bulgaria, Romania, Hungary, and Austria signed a Nabucco treaty describing exactly how the pipeline would operate and how tariffs would be calculated. Several days after the announcement that Nabucco had hired Joschka Fischer, who is beloved by many in Turkey for his passionate support for its EU membership, Turkey had dropped a major demand that it had insisted on for months, and the path to the deal was cleared. This was a major breakthrough, and it led Natig Aliyev, Azerbaijan's energy minister, to remark: "I am sure that the project will be realized successfully." When that day comes, Azerbaijan will enjoy both higher prices for its gas and a lifeline to the West.

Also in attendance in Ankara was Iraqi Prime Minister Nuri al-Maliki, whose country looks increasingly likely to play a large role in supplying Nabucco -- possibly larger than that of Azerbaijan. By some estimates, Iraq could provide more than 500 billion cubic feet of natural gas per year by 2014, when Nabucco is expected to be up and running. All of the major players -- Arab Iraqis, Kurdish Iraqis, and the Turks next door -- want to see Iraqi gas heading north through Turkey and into Europe. Recently, a Hungarian and an Austrian energy firm, both Nabucco consortium members, made deals to take 10 percent apiece in the $8 billion Pearl Petroleum gas project in Iraqi Kurdistan. It now seems distinctly possible that a pipeline named after Nebuchadnezzar, the ancient ruler of Babylon, might ultimately owe its success to Iraq.

When Gerhard Schröder signed on with Gazprom in 2005, the smart money in the gas war was on Moscow. Now that picture is changing, if slightly. There is a sense that the Kremlin overplayed its hand both in the gas shut-offs to Ukraine and in the Georgia war last summer. Indeed, U.S. Vice President Joe Biden recently echoed this view of Russia's energy power play. "[Russia's] actions relative to essentially blackmailing a country and a continent on natural gas, what did it produce?" he pointed out. "You've now got an agreement [Nabucco] that no one thought they could have." At the same time, the global recession has hit Russia particularly hard, and Gazprom's profits fell 84 percent in the fourth quarter of 2008, making it Russia's biggest debtor, rather than the world's biggest company, as it once bragged it would become.

And Nabucco's European supporters finally seem to be taking their own side in this fight. They now have a heavyweight rainmaker in Fischer, who is going toe to toe with his old boss Schröder in the struggle for influence in the path of the pipelines. The recent EU agreement with Azerbaijan and the fanfare-laden treaty signing in Turkey are contributing to the sense that Europe is leveling the playing field with Russia. "We have started to confound the skeptics, the unbelievers," European Commission President José Manuel Barroso said in July. "Now that we have an agreement, I believe that this pipeline is inevitable rather than just probable."

And yet, if recent experience teaches anything, it is not to count Russia out, especially when so much is at stake. When I raised this issue with Russian Energy Minster Sergei Shmatko at a meeting in Bulgaria in April, he shot me a threatening glare and cautioned against planning for an energy future without Russia, unless the Europeans were fully prepared to deliver it. "We have an expression in Russia," Shmatko told me. "Don't sell the skin off a bear before you kill it."

Scenes from the violent twilight of oil - By Peter Maass | Foreign Policy

It succors and drowns human life. And for the last eight years, oil -- and the people and places that make it -- was my obsession.

BY PETER MAASS | SEPT. / OCT. 2009

Across the globe, oil is invoked as an agent of destiny. Oil will make you rich, oil will make you poor, oil will bring war, oil will deliver peace, oil will shape our world as much as the glaciers did in the Ice Age.

But how?

Oil is not a machine that can be disassembled or schematized for comprehension. It is a liquid. How do you coax secrets from a liquid? To know a person, you talk to him. To know a country, you visit it. To know a religion, you study sacred texts. Oil defies these norms of interrogation. It is a commodity that is extracted, refined, shipped, and poured into gas tanks with few people seeing it. It has no voice, body, army, or dogma of its own. It is invisible most of the time, but like gravity, it influences everything.

Over the course of eight years, I tried to solve this puzzle by talking with people who worked in the industry, visiting people who were touched by its operations, and taking a look not only at oil fields but the battlefields they have spawned. I met with oilmen in Houston, princes in Riyadh, lobbyists in Washington, roughnecks in Baku, warlords in the Niger Delta, leftists in Caracas, billionaires in Moscow, environmentalists in Quito, generals in Baghdad, traders in Manhattan, wildcatters in Midland, and diplomats in London. If you have conversations with people such as these, the topics you discuss include not just politics and economics but history, geology, geography, chemistry, engineering, physics, climatology, ecology, accounting, law, corruption, culture, psychology, anthropology, greed, envy, disease, ego, and fear. The world of oil is an intellectual as much as a physical space, and my years of journeying took me through a crude world that is as dark and amazing as the liquid that casts a spell on all of us.

NIGERIA

The canoe that carried me into the Niger Delta had an outboard engine that conked out several times before reaching Tombia, which was then the latest target in Nigeria's long-running oil war. Tombia was a shambles, half its homes burned or bombed beyond repair. A dozen survivors came to the creek, and their manner was not warm. They were young men, fighters, some with soiled bandages. Fingers and hands were missing; limbs were swathed in pus-caked gauze. Government forces had attacked Tombia in the brutal way they usually do, with helicopter gunships strafing anything that moved and speedboats disgorging soldiers who shot their way through town. A dozen people were reported killed, and most of the town's population was too frightened to return -- but in any event, there was not much to return to.

The leader of these survivors, whose nickname was Prince, angrily pointed out the town's destruction with the stump of what used to be his right hand. Even the Lutheran cathedral, St. Stephen's, was destroyed. Its timid pastor, living in a shack and shivering from malaria or fear of the bitter youths who now ruled this wasteland, said it had been constructed by British missionaries in 1915. A sign by the church declared in English, "Tombia is dedicated to God. Jesus the King over the land. Holy ghost in charge."

A boy who looked 12 years old and was blind in one eye stood in front of a house that had burned to its concrete foundation. His older brother had been killed, he said, and the town was now dead and his river was dead too, tainted by oil. Because of the pollution, he could not possibly catch enough fish to nourish himself and his dead brother's family. He was angry and hopeless; the result was listlessness. The government, the Army, Royal Dutch/Shell, the warlords, the writer who would leave in a few minutes -- they would not help. His only hope was, it seemed, the Holy Ghost.

I returned to the canoe and it was not long, just an hour or so, before I reached Oro Sangama. Its defining feature was apprehended on first inhalation -- a heavy odor of sewage that had fused with humidity to form a fecal mist. It existed because Sangama's residents relieved themselves in a creek just a few steps from their homes; the creek was dead, or nearly so, as was the sickly jungle around it.

Oro Sangama had another peculiar feature: There was a steady roar around it, like the sound of a giant flamethrower. Across the fetid creek stood a natural gas plant operated by Shell. The village was in the shadow of its largest flare, which shot into the air a plume of fire. As darkness fell, Sangama became illuminated by the flare's reddish glow and remained lit in this fashion until the sun rose in the morning. The Martian light was deadly rather than helpful because the flare spews into the air a cocktail of toxic substances.

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Photo Essay: Scenes from the Violent Twilight of Oil

Oil may be making its long goodbye, but twilight or not, the Oil Age still defines our world.

Soon I was greeted by King Tom Mercy, leader of the local Ijaw community. He wore a T-shirt and a frown. "This is where the oil and gas comes out," he said. "They could give us water, give us light, give us scholarships, give us jobs. We would not quarrel with anyone again. We have tried everything, used lawyers and dialogue, and we see there is no way. The next thing is violence. We don't care if everyone dies; we will burn it."

Aboard his canoe the next day, we moved through mangrove creeks in which there was no screeching of monkeys, no hippos or crocodiles in the water, no butterflies floating in the air. Between the war and the pollution, this was both a dead zone and a killing zone. At some spots, the shoreline was shaved of vegetation and fenced off, to protect flares and pits that burned off excess oil and gas. The earth in these places was, quite literally, on fire.

This journey required, for comprehension, the imagination of a science fiction devotee. We passed a small island known as Little Russia. The origin of its name was not clear, but the island served a distinct purpose -- it was where prostitutes lived, servicing the needs of soldiers and oil workers. On its shore, young women stood in the shade of shacks fronted with empty beer bottles and off-kilter picnic tables. The girls waved.

The smell of oil was strong, even when wells or flares were not visible. Where did it come from? I looked down and saw a film of oil on the river. At a flow station where fluids dripped into the water from a tangle of metal pipes that had the appearance of industrial art, a Shell sign said, "Keep Nigeria Safe and Clean." The canoe stopped in front of six wellheads coated in oil that fell, drop by drop, into the water. If a match was thrown into the river, we would be engulfed in flames.

"How can we expect to catch fish?" King Tom asked.

His anger was no performance.

"Let's go," he ordered.

We soon passed a patrol boat with unsmiling soldiers.

"You see how we live."

HOUSTON

One evening I joined more than a thousand oil executives in a Houston ballroom that was large enough for a jumbo jet or two. The pinstriped diners were served plates of mixed salad, grilled salmon, and chocolate mousse by overworked waiters whose service was as gentle as cowboys heaving bales of hay to livestock. This was the gala evening of an annual oil conference at the Westin hotel. Drawn from across the globe, the men and just a few women in the chandeliered cavern constituted an oilpalooza.

The attraction on this February evening in 2003 was a chemical engineer from South Dakota. Since 1963 he had worked for just one company, eventually becoming its chairman and chief executive. He made everyone else in his hard-bitten industry seem gentle. He was gruff even to members of Congress and scoffed at global warming long after scientists proved it. Greenpeace called him the "Darth Vader of global warming." He was superficially unappealing too, with a misshapen lip, an ample belly, and a set of jowls that cartoonists would judge absurd. But in the oil industry you do not need to be pretty or kind to succeed, and this oilman had succeeded beyond anyone's imagining. Lee Raymond had turned ExxonMobil into the largest and most profitable corporation in the United States. He was rewarded with an astounding $686 million in compensation during his 13-year tenure as chief executive, which breaks down to about $144,000 a day, or more than $6,000 for every hour he worked, slept, ate, or golfed.

But Raymond was nearly unknown outside the environmental lobby that despised him, the financial industry that swooned over him, and the oil industry that feared him (Exxon's executive suite was known as "the God Pod"). Think of the tycoons who are part of the contemporary lexicon -- Gates, Murdoch, Buffett, Jobs -- and realize that absent from their ranks is the man who oversaw one of the most profitable multinationals of the 20th century. I wanted to see him on this evening because he was not just at the highest echelon of his industry's ruling class, but seemed its epitome.

After the mousse plates were cleared, Raymond lumbered onto the ballroom stage. The crowd offered a round of applause that was more akin to a handshake than a hug. In this industry, there was no need to feign love; grudging respect would do. His speech was an industrial mission statement. His listeners, who included ministers, princes, and CEOs, were reminded of how vital their work was, how underappreciated they were, how they must labor harder than ever, how the future will be grander than the already-blessed present. A video screen enlarged Raymond's presence to superhuman proportions. It was part Tony Robbins, part Billy Graham, with a whiff of a mumbling Leonid Brezhnev.

Invoking a sacred industrial purpose, Raymond recited his version of the inspirational commandments of the oil world:

"We all have a tremendous opportunity and a responsibility to improve the quality of life the world over. Virtually nothing is made without our energy and our products.

"Our industry's best years lie ahead, surpassing even the greatest achievements of the century gone by.

"We condemn the violation of human rights in any form and believe our stand on human rights sets a positive example for countries where we operate."

The audience's reaction was ritualized, less a genuine wave of applause than an obligatory simulation. I was reminded that in this brutal business, it was best to save your enthusiasm for crushing a rival rather than congratulating him.

VENEZUELA

Venezuela, which has the world's seventh-largest oil reserves, is a classic example of what economist Joseph Stiglitz calls "a rich country with poor people." Caracas, the capital, is surrounded by coils of barrios; voters from these impoverished areas are the electoral base for President Hugo Chávez, who promises to create true prosperity from the oil riches. I stopped by Miraflores, the presidential palace, to see how Chávez was performing the trick that eluded so many of his predecessors.

The Miraflores event was part of the great game of our times -- the superpower search for steady supplies of energy. China, which didn't import much petroleum until 2000 yet is now the second-largest importer after the United States, was doing whatever it could to win the friends and resources it needed. To woo Caracas, China had just agreed to help launch a communications satellite on favorable terms. In a conference hall at the palace, Chávez was getting ready to break this news to the world. Onstage, several executives from the China Great Wall Industry Corporation sat beside the stout Venezuelan president.

After the Chinese and Venezuelan anthems were sung, Chávez launched into a speech of the sort that is his trademark -- a presidential stream of consciousness. He congratulated the Chinese for being clever at math and saluted their women for being so beautiful. He thanked the Chinese government for training Venezuelans in satellite technology, saying they were teaching Venezuela "how to fly." As a visual aid, he flapped his arms like wings. He added that the Chinese had learned to fly under "the great Mao Zedong," and because Chávez drew inspiration from Mao's one-party, one-truth pedigree, he smiled broadly and exhorted, "Long live the Chinese revolution!"

The Chinese businessmen, as rigorously mercantilist these days as John Rockefeller was in his time, gazed at Chávez. They didn't seem to know whether the desired response was sardonic smiles or clenched fists, but their expressions veered toward the safe harbor of nodding approval. One of them adjusted the volume on his translation headset as Chávez said, "We don't want to earn money out of this. We're not capitalists. This is about the survival of our country and the destruction of capitalism. Capitalists are generating death!"

Yet capitalists are still buying oil from Venezuela, and lots of it; most of Venezuela's oil exports go to the United States. A president can flap his arms in Caracas and hold his nose at the United Nations and promise to remake his nation, but reality is crude in many ways. There is a saying that Venezuela does not have good or bad presidents, just presidents who serve at times of high or low oil prices. Chávez, running for president in 1998 as the main political parties all but collapsed from decrepitude, had the great luck of being elected when oil sold for $12 a barrel. As his presidency began, prices started climbing, on their way to more than $140 by 2008. Venezuelans had seen this before -- presidents who became popular by increasing public spending and who became unpopular when the oil boom ebbed. Chávez's announcement at Miraflores -- indeed, his entire presidency -- had the feel of what Venezuelan scholar Fernando Coronil described as a state limited to "magic performances, not miracles."

Magic can obscure reality but not make it disappear.

SAUDI ARABIA

When our paths crossed, Mohammed Ibrahim Abdul Aziz was 20 years old. He seemed young for his age -- his sparse facial hair gave him the look of a teenager. He had studied at King Saud University in Riyadh but had not been inspired by his teachers and had not been hopeful of finding work after graduation. The paradoxes of Saudi Arabia include the fact that it has oceans of oil but not an economy that offers jobs its citizens want. This is one of the problems of the oil industry: It generates lots of cash but very little work. Mohammed dropped out of school and like many Saudi youths spent his spare time cruising the Internet. When I asked which fundamentalist Web sites he'd visited, Mohammed couldn't remember precisely because there were so many, all extolling the glory of doing battle against infidels.

I met Mohammed in Samarra, Iraq, where he had gone to fight Americans in 2005. He had been captured a few days before our encounter, and he had certainly seen better days. He was wearing a green frock covered in mud and his eyes were bloodshot. He had been interrogated almost nonstop. A soiled bandage was wrapped around his head; he said he was injured when the car he was traveling in, with two members of his insurgent cell, was attacked by Iraqi soldiers. It was just as probable that he had been roughed up but did not want to say so. We talked in an office in a library that had been converted to a detention center. A desk in our midst had bloodstains down its side. From parts of the detention center I was not allowed to visit, I could hear prisoners screaming and retching.

Mohammed's career as a holy warrior had lasted a few weeks. He had no skills to offer the insurgency because he had never fired a weapon or built a bomb, did not know his way around Iraq, and could not even blend into a crowd because his Saudi accent gave him away. When he realized his insurgent cell was led by a man who seemed more interested in stealing cars than killing Americans, he wanted out. His capture came as a relief, which is why he had not been tortured to the edge of death -- he was more than happy to tell everything he knew.

"I made a mistake," Mohammed said. "I just hope I will be allowed to go back to Riyadh. I want to leave."

He would not be going home soon. A U.S. military advisor, dressed in jeans and with a pistol strapped to his thigh, was monitoring my talk with Mohammed. The Iraqi who interpreted, also with a pistol on his hip, was an overweight police official. The Saudi, the American, and the Iraqi in this room were in a deep mess, as were their homelands. There were many reasons, and a core one was evoked when Mohammed ventured a guess as to why Iraq had been invaded.

"The Americans want to control Iraq's resources," he said. "They came here for oil."

Subpriming the pump - By Mahmoud A. El-Gamal and Amy Myers Jaffe | Foreign Policy

Oil wealth used to hurt only those who had it. Now, it's hurting everyone.

BY MAHMOUD A. EL-GAMAL, AMY MYERS JAFFE | SEPT. / OCT. 2009

The resource curse has gone global.

For years, oil wealth was mostly a danger to those, paradoxically, who possessed it. Resource-rich Middle Eastern countries, and their labor-exporting neighbors, failed for decades to invest adequately in their people or to diversify their economies. A massive influx of oil receipts and worker remittances discouraged investment in sectors conducive to steady long-term growth, fostered corruption and patronage, inflated regional real estate and stock markets, and provided irresistible incentives for governments to spend with wasteful, shortsighted abandon.

But today, the Middle East's resource curse is spilling over into the international financial system. Unanticipated petrodollar flows are fueling financial bubbles, financing a Middle Eastern arms race, and damaging the global economy through speculative oil-price feedback loops. All the elements of previous boom-and-bust cycles in the 1970s and 1980s and again in the past decade remain in place.

What's happening is both comfortingly familiar and terrifyingly new. Sudden surges in oil-revenue flows to and from the Middle East -- known as "petrodollar recycling" -- have certainly been a problem before. But in the last few years, they have become critically destabilizing. Today's Great Recession has generally been understood as a story about real estate excesses and regulatory shortcomings. But it's also a cautionary tale about the increasingly pernicious role that oil is playing in the global economy.

Into the middle of this decade, economists' worries were focused on global imbalances between China and the United States. For Harvard University economist Lawrence Summers, now a top White House advisor, the world was caught in the grip of "a balance of financial terror." Deutsche Bank researchers argued that this temporary imbalance, wherein Chinese excess savings financed excess consumption in the United States, constituted nothing less than an informal sequel to the Bretton Woods international financial system, one they thought would be sustainable for a few more years.

But this optimistic analysis overlooked a major piece of the global economic puzzle: oil receipts. Leading into 2006, the capital exiting Saudi Arabia and Kuwait alone matched the funds leaving China (approximately $200 billion per year). For five years, from 2003 to 2008, the Middle East's massive petrodollar outflows, combined with excess liquidity due to low interest rates and a voracious appetite for credit risk, fueled bubbles in global financial markets, including real estate, credit derivatives, and ultimately commodity prices. The investment frenzy pushed markets into what the late economist Hyman Minsky called "Ponzi finance." Unsustainable serial financial bubbles distorted incentives toward the financial sector and away from investments more conducive to long-term economic growth, such as infrastructure and research and development, especially for alternative-energy fuels.

---

In this way, interconnected financial markets have globalized the resource curse, and all countries with relatively open economies and limited capital controls are now exposed to energy-market risks as a result -- even ones as diverse as Britain, Russia, and the United States, which are blessed with their own plentiful supply of fuels. As we saw last year in spectacular fashion, financial contagion feeds back and amplifies demand-driven spikes in oil prices, exacerbating the eventual real-economy slowdown that economist James Hamilton and others have noted.

How did this happen? Capitalist economic systems, as Minsky, Charles Kindleberger, and other economists have argued, are intrinsically unstable. Prolonged periods of economic growth invite growing appetites for risk, as optimism about rising profits and lower rates of bankruptcy lull investors into a false sense of security. Optimism ultimately grows into euphoria, which former U.S. Federal Reserve Chairman Alan Greenspan famously called "irrational exuberance," as investors bid up asset prices with ever increasing leverage. Meanwhile, financial-sector lobbyists convince legislatures to ease or underexpand prudential regulations and "unleash the power of laissez-faire capitalism." Myopically, the seeds for financial disaster are sown.

During boom times, as we saw in the years leading up to 1973 and again after 2002, the rise in oil demand strengthens oil producers, which reap massive profits by intentionally underinvesting in oil-production capacity. Oil prices continue to rise, filling their treasuries with a sudden influx of capital that cannot be absorbed at home. Petrodollars flow out, seeking returns in already inflating financial markets and pushing bubbles to dangerous levels.

As the business cycle turns, the euphoria begins to wane. Investors assess financial risks more accurately. Interest rates rise, further feeding the downswing. The irrational exuberance that amplified the boom quickly reverses course, accelerating the bust. Demand for oil collapses, causing oil prices to crash. Petrodollar flows dry up, hitting financial markets and real-sector growth still harder. Then, reduced liquidity and credit prevent oil exporters from investing sufficiently in productive capacity during the recession, and our story eventually repeats, each time more dramatically than before.

The geopolitical component of this megacycle is equally insidious. As oil-producing countries amass substantial financial reserves, they tend to allocate investment and expenditure disproportionately less to oil-production capacity and more toward areas that benefit the ruling elites. In the Middle East, significant portions of oil receipts have been spent on arms purchases, which protect the ruling class from both external threats and internal challenges -- indirectly, by appeasing military leaders who might pose a threat, and directly, by stifling opposition through robust internal security spending. (Military personnel as a percentage of the labor force is a very high 3 percent in the Middle East and North Africa, and military expenditures as a percentage of GDP are also consistently high, for example 9 percent in Saudi Arabia.)

Oil-importing advanced economies such as France and the United States, which eagerly sell weapons as a means of recycling petrodollars, cannot escape their own complicity in this game. Middle Eastern arms races boost not only the arsenals of national militaries, but also of subnational militias and even terrorist organizations. Iran's long-standing support of Hezbollah, for example, is well documented. The flow of weapons increases geopolitical risks, once again increasing oil prices as fears grow that military conflict or terrorist threats will disrupt supplies. Put bluntly, a little bit of terrorism is good for oil exporters.

And the links between oil and terrorism don't stop there. As oil exporters mimic the consumption behavior of advanced economies during booms, young populations develop highly unrealistic expectations, premised on a sense of entitlement to oil wealth. It's these frustrated expectations that drive youth toward radical and militant ideologies, not poverty per se. In Saudi Arabia, for example, real per capita income in the early 1980s was higher than that of the United States. Saudi nationals were accustomed to free housing, guaranteed incomes, and subsidized electricity and gasoline until low oil prices caused budget cutbacks in the mid-1990s. The Sept. 11, 2001, hijackers, after all, were mainly educated middle-class men. They were undoubtedly influenced by the arguments of Osama bin Laden, who in the 1990s was raging against "the greatest theft in history," arguing that the real price of oil in late 1979 should have persisted for the next two decades.

Needless to say, military spending, distribution of oil rents to favored segments of society, and the resulting culture of consumerism do little to ensure long-term economic development. When oil revenues shrink in the downturn of the cycle, unemployment and reduced rent redistributions feed anger, just when the state's ability to spend on security and population appeasement is waning.

How can we escape the global oil curse? Diversifying and developing Middle Eastern economies to create employment opportunities and absorb occasional petrodollar flows is crucial. Oil exporters also need to think more strategically by investing in oil-production capacity during recessions and amassing aboveground reserves when prices are low to sell when prices are high.

---

A Hole in the Bucket
How petrostates lost big in the Great Recession.
By Veljko Fotak and Bill Megginson

Oil consumers also have long-term options. Large economies such as the United States, Japan, and China can reduce their oil consumption by investing in alternative energy, fuel-efficient technology, and public transportation. They can also wield their strategic oil stockpiles as a cudgel against speculators -- as U.S. President Bill Clinton did with success in the 1990s. During economic downturns, they can restock those reserves to stabilize oil revenues for producers, in the process selling high and buying low. Careful regulation of oil derivatives markets can help to curb harmful speculation.

These sorts of technocratic policy fixes, however, are not nearly enough to address the larger problem. We need high-level international coordination, in part through platforms such as World Trade Organization and G-20 summits. Over the past 50 years, oil importers and exporters have repeatedly sought temporary advantage by treating their mutual relationship as a repeated zero-sum game. Major consuming countries limit access to refining, marketing, and retail fuel outlets and lecture producers on the virtues of free markets when prices are low. In turn, producers invoke nationalism and curb supply when prices are high (while giving the same lectures on the virtues of free markets). Invariably, however, as the cycle has continued to rage on, the resulting gains for one side or the other have been fleeting. Worse, globalization has ensured that economic, geopolitical, and security problems in one part of the world now spill quickly into others, further negating any short-term benefits of myopic self-interest.

Without a change, the next phase of the cycle could be catastrophic. The next banking crisis, for example, might be accompanied by a currency crisis for the U.S. dollar, which has been the linchpin of the international financial system since World War II. Or conventional Middle Eastern arms races could easily turn into unconventional ones, increasing the chances that terrorists will get their hands on weapons of mass destruction.

Today's problems will look trivial in comparison.

It's still the one - By Daniel Yergin | Foreign Policy

Oil's very future is now being seriously questioned, debated, and challenged. The author of an acclaimed history explains why, just as we need more oil than ever, it is changing faster than we can keep up with.

BY DANIEL YERGIN | SEPT. / OCT. 2009

On a still afternoon under a hot Oklahoma sun, neither a cloud nor an ounce of "volatility" was in sight. Anything but. All one saw were the somnolent tanks filled with oil, hundreds of them, spread over the rolling hills, some brand-new, some more than 70 years old, and some holding, inside their silver or rust-orange skins, more than half a million barrels of oil each.

This is Cushing, Oklahoma, the gathering point for the light, sweet crude oil known as West Texas Intermediate -- or just WTI. It is the oil whose price you hear announced every day, as in "WTI closed today at …." Cushing proclaims itself, as the sign says when you ride into town, the "pipeline crossroads of the world." Through it passes the network of pipes that carry oil from Texas and Oklahoma and New Mexico, from Louisiana and the Gulf Coast, and from Canada too, into Cushing's tanks, where buyers take title before moving the oil onward to refineries where it is turned into gasoline, jet fuel, diesel, home heating oil, and all the other products that people actually use.

But that is not what makes Cushing so significant. After all, there are other places in the world through which much more oil flows. Cushing plays a unique role in the new global oil industry because WTI is the preeminent benchmark against which other oils are priced. Every day, billions of "paper barrels" of light, sweet crude are traded on the floor of the New York Mercantile Exchange in lower Manhattan and, in ever increasing volumes, at electron speed around the world, an astonishing virtual commerce that no matter how massive in scale, still connects back somehow to a barrel of oil in Cushing changing owners.

That frenetic daily trading has helped turn oil into something new -- not only a physical commodity critical to the security and economic viability of nations but also a financial asset, part of that great instantaneous exchange of stocks, bonds, currencies, and everything else that makes up the world's financial portfolio. Today, the daily trade in those "paper barrels" -- crude oil futures -- is more than 10 times the world's daily consumption of physical barrels of oil. Add in the trades that take place on other exchanges or outside them entirely, and the ratio may be as much as 30 times greater. And though the oil may flow steadily in and out of Cushing at a stately 4 miles per hour, the global oil market is anything but stable.

---

Oil: The Long Goodbye

An FP Special Report

That's why, as I sat down to work on a new edition of The Prize and considered what had changed since the early 1990s, when I wrote this history of the world's most valuable, and misunderstood, commodity, the word "volatility" kept springing to mind. How could it not? Indeed, when people are talking about volatility, they are often thinking oil. On July 11, 2008, WTI hit $147.27. Exactly a year later, it was $59.87. In between, in December, it fell as low as $32.40. (And don't forget a little more than a decade ago, when it was as low as $10 a barrel and consumers were supposedly going to swim forever in a sea of cheap oil.)

These wild swings don't just affect the "hedgers" (oil producers, airlines, heating oil dealers, etc.) and the "speculators," the financial players. They show up in the changing prices at the gasoline station. They stir political passions and feed consumers' suspicions. Volatility also makes it more difficult to plan future energy investments, whether in oil and gas or in renewable and alternative fuels. And it can have a cataclysmic impact on the world economy. After all, Detroit was knocked flat on its back by what happened at the gasoline pump in 2007 and 2008 even before the credit crisis. The enormous impact of these swings is why British Prime Minister Gordon Brown and French President Nicolas Sarkozy were recently moved to call for a global solution to "destructive volatility." But, they were forced to add, "There are no easy solutions."

This volatility is part of the new age of oil. For though Cushing looks pretty much the same as it did when The Prize came out, the world of oil looks very different. Some talk today about "the end of oil." If so, others reply, we are entering its very long goodbye. One characteristic of this new age is that oil has developed a split personality -- as a physical commodity but also now as a financial asset. Three other defining characteristics of this new age are the globalization of the demand for oil, a vast shift from even a decade ago; the rise of climate change as a political factor shaping decisions on how we will use oil, and how much of it, in the future; and the drive for new technologies that could dramatically affect oil along with the rest of the energy portfolio.

---

The Capital of Oil
A brief history of Cushing, Oklahoma

The cast of characters in the oil business has also grown and changed. Some oil companies have become "supermajors," such as ExxonMobil and Chevron, while others, such as Amoco and ARCO, have just disappeared. "Big oil" no longer means the traditional international oil companies, their logos instantly recognizable from corner gas stations, but rather much larger state-owned companies, which, along with governments, today control more than 80 percent of the world's oil reserves. Fifteen of the world's 20 largest oil companies are now state-owned.

The cast of oil traders has also much expanded. Today's global oil game now includes pension funds, institutional money managers, endowments, and hedge funds, as well as individual investors and day traders. The managers at the pension funds and the university endowments see themselves as engaged in "asset allocation," hedging risks and diversifying to protect retirees' incomes and faculty salaries. But, technically, they too are part of the massive growth in the ranks of the new oil speculators.

With all these changes, the very future of this most vital commodity is now being seriously questioned, debated, and challenged, even as the world will need more of it than ever before. Both the U.S. Department of Energy and the International Energy Agency project that, even accounting for gains in efficiency, global energy use will increase almost 50 percent from 2006 to 2030 -- and that oil will continue to provide 30 percent or more of the world's energy in 2030.

But will it?

From the beginning, oil has been a global industry, going back to 1861 when the first cargo of kerosene was sent from Pennsylvania -- the Saudi Arabia of 19th-century oil -- to Britain. (The potential crew was so fearful that the kerosene would catch fire that they had to be gotten drunk to shanghai them on board.) But that is globalization of supply, a familiar story. What is decisively new is the globalization of demand.

For decades, most of the market -- and the markets that mattered the most -- were in North America, Western Europe, and Japan. That's also where the growth was. At the time of the first Gulf War in 1991, China was still an oil exporter.

But now, the growth is in China, India, other emerging markets, and the Middle East. Between 2000 and 2007, the world's daily oil demand increased by 9.4 million barrels. Almost 85 percent of that growth was in emerging markets. There were many reasons that prices soared all the way to $147.27 last year, ranging from geopolitics to a weak dollar to the impact of financial markets and speculation (in all its manifold meanings). But the starting point was the fundamentals -- the surge in oil demand driven by powerful economic growth in emerging markets. This shift may be even more powerful than people recognize: So far this year, more new cars have been sold in China than in the United States. When economic recovery takes hold again, what happens to oil demand in such emerging countries will be crucial.

The math is clear: More consumers mean more demand, which means more supplies are needed. But what about the politics? There the forecasts are murkier, feeding a new scenario for international tension -- a competition, even a clash, between China and the United States over "scarce" oil resources. This scenario even comes with a well-known historical model -- the rivalry between Britain and "rising" Germany that ended in the disaster of World War I.

This scenario, though compelling reading, does not really accord with the way that the world oil market works. The Chinese are definitely new players, willing and able to pay top dollar to gain access to existing and new oil sources and, lately, also making loans to oil-producing countries to ensure future supplies. With more than $2 trillion in foreign reserves, China certainly has the wherewithal to be in the lending business.

But the global petroleum industry is not a go-it-alone business. Because of the risk and costs of large-scale development, companies tend to work in consortia with other companies. Oil-exporting countries seek to diversify the countries and companies they work with. Inevitably, any country in China's position -- whose demand had grown from 2.5 million barrels per day to 8 million in a decade and a half -- would be worrying about supplies. Such an increase, however, is not a forecast of inevitable strife; it is a message about economic growth and rising standards of living. It would be much more worrying if, in the face of rising demand, Chinese companies were not investing in production both inside China (the source of half of its supply) and outside its borders.

There are potential flash points in this new world of oil. But they will not come from standard commercial competition. Rather, they arise when oil (along with natural gas) gets caught up in larger foreign-policy issues -- most notably today, the potentially explosive crisis over the nuclear ambitions of oil- and gas-rich Iran.

Yet, despite all the talk of an "oil clash" scenario, there seems to be less overall concern than a few years ago and much more discussion about "energy dialogue." The Chinese themselves appear more confident about their increasingly important place in this globalized oil market. Although the risks are still there, the Chinese -- and the Indians right alongside them -- have the same stake as other consumers in an adequately supplied world market that is part of the larger global economy. Disruption of that economy, as the last year has so vividly demonstrated, does not serve their purposes. Why would the Chinese want to get into a confrontation over oil with the United States when the U.S. export market is so central to their economic growth and when the two countries are so financially interdependent?

Not a Threat: Chinese workers at a
construction site in Africa.

Oil is not even the most important energy issue between China and the United States. It is coal. The two countries have the world's largest coal resources, and they are the world's biggest consumers of it. In a carbon-constrained world, they share a strong common interest in finding technological solutions for the emissions released when coal is burned.

And that leads directly to the second defining feature of the new age of oil: climate change. Global warming was already on the agenda when The Prize came out. It was back in 1992 that 154 countries signed the Rio Convention, pledging to dramatically reduce CO₂ concentrations in the atmosphere. But only in recent years has climate change really gained traction as a political issue -- in Europe early in this decade, in the United States around 2005. Whatever the outcome of December's U.N. climate change conference in Copenhagen, carbon regulation is now part of the future of oil. And that means a continuing drive to reduce oil demand.

How does that get done? How does the world at once meet both the challenge of climate change and the challenge of economic growth -- steady expansion in the industrial countries and more dramatic growth in China, India, and other emerging markets as tens of millions of their citizens rise from poverty and buy appliances and cars?

The answer has to be in another defining change -- an emphasis on technology to a degree never before seen. The energy business has always been a technology business. After all, the men who figured out in 1859, exactly 150 years ago, how to drill that first oil well -- Colonel Drake and his New Haven, Conn., investors -- would, in today's lingo, be described as a group of disruptive technology entrepreneurs and venture capitalists. Again and again, in researching oil's history, I was struck by how seemingly insurmountable barriers and obstacles were overcome by technological progress, often unanticipated.

But the focus today on technology -- all across the energy spectrum -- is of unprecedented intensity. In the mid-1990s, I chaired a task force for the U.S. Department of Energy on "strategic energy R&D." Our panel worked very hard for a year and a half and produced what many considered a very worthy report. But there was not all that much follow-through. The Gulf War was over, and the energy problem looked like it had been "solved."

Today, by contrast, the interest in energy technology is enormous. And it will only be further stoked by the substantial increases that are ahead in government support for energy R&D. Much of that spending and effort is aimed at finding alternatives to oil. Yet the challenge is not merely to find alternatives; it is to find alternatives that can be competitive at the massive scale required.

What will those alternatives be? The electric car, which is the hottest energy topic today? Advanced biofuels? Solar systems? New building designs? Massive investment in wind? The evolving smart grid, which can integrate electric cars with the electricity industry? Something else that is hardly on the radar screen yet? Or perhaps a revolution in the internal combustion engine, making it two to three times as efficient as the ones in cars today?

We can make educated guesses. But, in truth, we don't know, and we won't know until we do know. For now, it is clear that the much higher levels of support for innovation -- along with considerable government incentives and subsidies -- will inevitably drive technological change and thus redraw the curve in the future demand for oil.

Indeed, the biggest surprises might come on the demand side, through conservation and improved energy efficiency. The United States is twice as energy efficient as it was in the 1970s. Perhaps we will see a doubling once again. Certainly, energy efficiency has never before received the intense focus and support that it does today.

Just because we have entered this new age of high-velocity change does not mean this story is about the imminent end of oil. Consider the "peak oil" thesis -- shorthand for the presumption that the world has reached the high point of production and is headed for a downward slope. Historically, peak-oil thinking gains attention during times when markets are tight and prices are rising, stoking fears of a permanent shortage. In 2007 and 2008, the belief system built around peak oil helped drive prices to $147.27. (It was actually the fifth time that the world had supposedly "run out" of oil. The first such episode was in the 1880s; the last instance before this most recent time was in the 1970s.)

However, careful examination of the world's resource base -- including my own firm's analysis of more than 800 of the largest oil fields -- indicates that the resource endowment of the planet is sufficient to keep up with demand for decades to come. That, of course, does not mean that the oil will actually make it to consumers. Any number of "aboveground" risks and obstacles can stand in the way, from government policies that restrict access to tax systems to civil conflict to geopolitics to rising costs of exploration and production to uncertainties about demand. As has been the case for decades and decades, the shifting relations between producing and consuming countries, between traditional oil companies and state-owned oil companies, will do much to determine what resources are developed, and when, and thus to define the future of the industry.

There are two further caveats. Many of the new projects will be bigger, more complex, and more expensive. In the 1990s, a "megaproject" might have cost $500 million to $1 billion. Today, the price tag is more like $5 billion to $10 billion. And an increasing part of the new petroleum will come in the form of so-called "unconventional oil" -- from ultradeep waters, Canadian oil sands, and the liquids that are produced with natural gas.

But through all these changes, one constant of the oil market is that it is not constant. The changing balance of supply and demand -- shaped by economics, politics, technologies, consumer tastes, and accidents of all sorts -- will continue to move prices. Economic recovery, expectations thereof, the pent-up demand for "demand," a shift into oil as a "financial asset" -- some combination of these could certainly send oil prices up again, even with the current surplus in the market. Yet, the quest for stability is also a constant for oil, whether in reaction to the boom-and-bust world of northwest Pennsylvania in the late 19th century, the 10-cents-a-barrel world of Texas oil in the 1930s, or the $147.27 barrel of West Texas Intermediate in July 2008.

Certainly, the roller-coaster ride of oil prices over the last couple of years, as oil markets and financial markets have become more integrated, has made volatility a central preoccupation for policymakers who do not want to see their economies whipsawed by huge price swings. Yet without the flexibility and liquidity of markets, there is no effective way to balance supply and demand, no way for consumers and producers to hedge their risks. Nor is there a way to send signals to these consumers and producers about how much oil to use and how much money to invest -- or signals to would-be innovators about tomorrow's opportunities.

One part of the solution is not only enhancement of the already considerable regulation of the financial markets where oil is traded, but also greater transparency and better understanding of who the players are in the rapidly expanding financial oil markets. But regulatory changes cannot eliminate market cycles or repeal the laws of supply and demand in the world's largest organized commodity market. Those cycles may not be much in evidence amid the quiet tanks and rolling hills at Cushing. But they are inescapably part of the global landscape of the new world of oil.

The Associated Press - Muslim groups try to ease fears with accreditation

Image by Koshyk via Flickr

By JEFF KAROUB and DAVID GRANT

DETROIT — As the Islamic holy month of Ramadan winds down, Rami Nashashibi sees a promising fundraising trend for the Chicago charity he runs.

Online donations ranging from $50 to $2,500 to his Inner-City Muslim Action Network have increased over the past weeks as part of an aggressive Ramadan Internet marketing push on the group's Web site and through social networking sites, he said.

But Nashashibi also credits the influx of online donations to his organization becoming one of the nation's first to be accredited by the Better Business Bureau's newest charity wing tailored for Islamic nonprofits.

Those involved in the accreditation program hope it along with the election of President Barack Obama — who has voiced his commitment to work with U.S. Muslims — will allow many Muslim groups to move past the mistrust that has come to define their post-9/11 relationship with the federal government.

After the Sept. 11 terror attacks, Islamic charities came under intense scrutiny in the United States over fears that some had ties to terror groups. The Bush administration shuttered nine Muslim charities, raided six others and froze the assets of one.

The crackdown sent chills through the country's Muslim community as many became fearful about giving to charity, which is called zakat and is one of Islam's five requirements. The American Civil Liberties Union said in a report this summer that some Muslims had stopped donating or limited how much they give out of worry they could be swept up in a federal investigation.

Since then, Islamic organizations have struggled to find ways to erase the cloud of suspicion and ease donors' concerns. Last year, the BBB partnered with Muslim Advocates, a legal organization based in San Francisco, to create the Muslim Charities Accreditation Program, which evaluates nonprofits and trains leaders on compliance with the government's legal and financial rules.

In August right before the start of Ramadan and the Islamic calendar's peak period for donating, Nashashibi's group and two others — the UMMA Community Clinic in Los Angeles and the Islamic Networks Group in San Jose, Calif. — were the first to complete the program's rigorous review.

"Because the Muslim charities have been particularly in the public focus, I think they have a greater interest in demonstrating to the public that they are just like every other charity, they meet standards like everybody else," said H. Art Taylor, president and CEO of the BBB Wise Giving Alliance.

About 17 other Islamic charities are in varying stages of the review process, according to Muslim Advocates. The program's effect on donation levels won't be known until after Ramadan ends, but those involved say it's increased interest and is drawing donors from a wider geographical area.

The 20 standards for accreditation include regular board of director meetings, increased detail and frequency of financial statements and performance assessment of officers.

The key is putting the charities on firm financial and operational footing that leaves no doubt about what they do and how they do it, said Akil Vohra, counsel for the Muslim Charities Accreditation Program.

"The key part of this is transparency," he said. "Donors want to know the same thing: Where is our money going? Where is it being used?"

Nashashibi said one of the challenges has been reconciling anonymous giving, reinforced by a religious and cultural principle that "the best zakat is when the right hand doesn't know what the left hand has given," with the issue of transparent bookkeeping.

"Sometimes that spirit of giving can be perceived to be at odds with the needs, for instance, to list all of your donors in annual reports and all of the financial transparency records," Nashashibi said.

He said his group already performed audits of its books because of contracts with major foundations. But the accreditation process "really helped with putting a little fire under us to usher in an even more intense collection of documents (for review)."

Nashashibi said his community organization hasn't come under government scrutiny and didn't suffer a drop in donations since 9/11. But he said the accreditation has offered "an additional layer of comfort" to donors.

His group seeks to raise $225,000 by Sunday — $30,000 of which it hopes come from online donations — as part of its Ramadan drive called "Grow Your IMAN Campaign."

"What we've seen so far is a broad, diffuse set of donations, particularly online, which could be attributed to the accreditation," said Nashashibi, who is the organization's executive director.

UMMA Community Clinic also has received more online donations. President and Chief Executive Yasser Aman said the accreditation adds "that extra leverage — especially for communities that are not familiar with Muslim institutions or community clinics."

"It's opening the doors to communication," he said of the accreditation.

But while any effort that offers some protection to Muslim charities is worthwhile, it's too early to say if the BBB accreditation will forestall future government scrutiny, said Ibrahim Hooper, spokesman for the Council on American-Islamic Relations.

"Past cases ... seem to be more politically oriented than financially oriented," he said.

On the Net:

• Inner-City Muslim Action Network: http://www.imancentral.org
• UMMA Community Clinic: http://www.ummaclinic.org
• Islamic Networks Group: http://www.ing.org

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• US Treasury Recognizes Start Of Ramadan (cehwiedel.com)

Lebanon’s Shadow Government | Foreign Affairs

Image by moogdroog via Flickr

How Hezbollah Wins by Losing

Mohamad Bazzi
MOHAMAD BAZZI is an adjunct senior fellow for Middle East studies at the Council on Foreign Relations and a journalism professor at New York University.

On July 14, a mysterious explosion rocked the southern Lebanese town of Khirbet Silim, destroying a building. United Nations peacekeepers later claimed that the building was a Hezbollah weapons depot that had accidentally blown up. Hezbollah, a Shiite militia with close ties to Iran, has remained silent about the blast's cause, but the group made clear that it does not appreciate the renewed international attention focused on its arsenal.

Under the Security Council resolution that ended the 2006 war between Israel and Hezbollah, blue-helmeted UN troops are responsible for intercepting illegal weapons shipments and shutting down storage sites south of the Litani River. But when UN troops tried to raid another suspected weapons cache in Khirbet Silim a few days after the explosion, hundreds of villagers surrounded the soldiers, pelted them with rocks, and forced them to withdraw. Peacekeepers fired warning shots in the air as they cleared a path out of town. Ever since, black-capped Hezbollah men have stood guard outside the house.

Since the June 7 Lebanese parliamentary elections, an alluring but simplistic narrative has emerged in the West: because Hezbollah and its allies were defeated at the polls, the militant group would lose some of its luster and a pro-American political coalition would rule Lebanon. In fact, Hezbollah remains the country's dominant military and political force. Moreover, it holds the key to both domestic and external stability -- its actions will determine whether there is another war with Israel or if Lebanon will once again be wracked by internal conflict. By losing the election, Hezbollah also avoided being held accountable by Lebanon's other sects -- without power, there is little responsibility.

Under the Saudi-brokered Taif Accord that ended Lebanon's 15-year civil war, all of the country's militias were disarmed. But Hezbollah was allowed to keep its weapons as a "national resistance" against the Israeli occupation of southern Lebanon, which ended in May 2000. When the Israelis withdrew, many Lebanese asked why Hezbollah did not give up its arms and become a strictly political movement. Hezbollah insisted that because Israel was still occupying a tiny strip of land -- called Shebaa Farms -- at the murky intersection of Israel, Lebanon, and Syria, its mission of resistance was not over. The UN later determined the area to be Syrian, not Lebanese, territory.

The last war began after Hezbollah fighters crossed the border and abducted two Israeli soldiers on July 12, 2006. Hezbollah miscalculated, and Israel launched its most intense attack since its 1982 invasion of Lebanon. The offensive crippled the country's infrastructure, displaced one million people, cut Lebanon off from the world, and killed more than 1,000 Lebanese -- the majority of them civilians. Hezbollah, in turn, fired nearly 4,000 rockets at Israel, killing 43 civilians. During 34 days of fighting, 120 Israeli soldiers were killed, many of them by Hezbollah's potent arsenal of antitank rockets. Throughout the war, the Lebanese army remained on the sidelines. Today, it is still as ill-equipped and ill-trained as it was in 2006, and it is unlikely to be involved if another war breaks out. The main difference now is that the army is deployed in southern Lebanon, alongside 13,000 UN peacekeepers.

In recent weeks, Hezbollah officials have ratcheted up their rhetoric, pledging that they are ready for war with Israel and warning against UN attempts to seek out Hezbollah's weapons and rockets. Hezbollah leaders boast that the group now has an even larger and more potent stash of missiles than it did three years ago. Israeli officials -- who are also escalating their war rhetoric -- estimate Hezbollah's arsenal at between 40,000 and 80,000 rockets.

On August 10, Israeli Prime Minister Benjamin Netanyahu warned that his administration would hold the Lebanese government responsible for any attacks on Israeli targets by Hezbollah. "It should be clear that the Lebanese government, as far as we are concerned, is responsible for every attack -- every attack -- launched from its territory against Israel," Netanyahu told Israel Radio. "It cannot hide and say, 'Well, that's Hezbollah, and we don't control them.'"

Some political leaders and analysts in Lebanon interpreted Netanyahu's comments as a signal that Israel would no longer distinguish between the Lebanese state and Hezbollah, especially while the group has a sizable bloc in parliament and seats in the cabinet. Other Israeli officials have suggested that Israel would retaliate against Lebanon if Hezbollah makes good on its promise to avenge the February 2008 assassination of its military commander, Imad Mughniyah, in Damascus -- an act of revenge that Israel worries could take the form of an attack on Israeli tourists, embassies, or other targets outside Israel.

A few days after Netanyahu's comments, Israeli President Shimon Peres tried to calm tensions by once again drawing a distinction between the Lebanese state and Hezbollah. "There was not in the past nor is there now any reason for Lebanon to be Israel's enemy or for Israel to be Lebanon's enemy," Peres said. But Netanyahu's warning is more representative of the Israeli military and political establishment, which both view Hezbollah as a significant danger.

Despite the increasing threats, neither side has an immediate interest in launching a war. Israel is more concerned about Iran than Hezbollah, although if Israel attacks Iran's nuclear facilities, it is likely that the militia would be part of the Iranian retaliation. Aside from an Iranian-Israeli confrontation, Hezbollah is absorbed in internal Lebanese politics and cannot afford to be seen as instigating another war with Israel. The Shiite group's other main backer, Syria, is trying to improve its relations with Saudi Arabia and the United States, and Damascus would likely frown upon renewed conflict in the region. But the danger of heightened rhetoric and a military buildup is that the situation could get out of control.

Not surprisingly, Hezbollah's response to the Israeli threats has been defiant. At a rally in southern Beirut on August 14, marking the third anniversary of the war's end (what Hezbollah calls its "divine victory"), the group's leader, Hassan Nasrallah, laid out his new military strategy. Speaking from an undisclosed location, he warned Israel, "If you launch another war on south Lebanon, imagining that you can bomb any city or village in Lebanon, I will tell you this: today we are capable of shelling any city or town in your usurping entity." Nasrallah, who appeared on giant television screens before a crowd of tens of thousands, also vowed to order missile strikes on Tel Aviv if Israel bombs Hezbollah's base of support: the southern suburbs of Beirut. This is an important shift, because during the 2006 war, Israel largely avoided bombing central Beirut, and Hezbollah refrained from firing missiles on Tel Aviv.

In his speech, Nasrallah advanced the idea that Hezbollah's weapons buildup and overall military capability is a deterrent to Israel -- trying to convince the Lebanese that a stronger Hezbollah will prevent a war. "You might ask, 'Do we have the power to prevent a war?' I will reply, 'Yes, there is a very real possibility that, if we cooperate with one another as Lebanese, we will be able to prevent Israel from launching a war against Lebanon,'" Nasrallah told the crowd, which included members of most Lebanese political factions. "I stress to you that there will be surprises in any new war with Israel, God willing. By saying this to the Israelis, we can deter and prevent them. Let them think a million times before waging a war on Lebanon. Let them look for other ways to confront us, but not war."

This is a dangerous assumption on Nasrallah's part because the Israelis have shown that they are not willing to live indefinitely with a well-armed Hezbollah. Nasrallah's argument is also intended to justify the arms buildup to the Sunnis and Christians of Lebanon -- who, due to the militia's recent takeover of West Beirut, are far more worried today about Hezbollah's weapons than they were in 2006.

In May 2008, Hezbollah ignited the worst internal fighting since the end of Lebanon's civil war. Huddled at home in front of their televisions during the weeklong battle, the Lebanese relived one of their worst memories: masked gunmen demanding people's identity cards. The image of gunmen stopping civilians at checkpoints to sort -- and often murder -- them on the basis of religion is perhaps the most enduring symbol of the country's civil war. In response to Lebanese Prime Minister Fouad Siniora's orders outlawing Hezbollah's underground fiber-optic communication network and dismissing a Hezbollah-affiliated security chief at the Beirut airport, the militia dispatched hundreds of heavily armed fighters into the largely Sunni areas of West Beirut. They quickly routed Sunni militiamen, seized their political offices, and shut down media outlets owned by the Sunni leader Saad Hariri (son of the assassinated former Prime Minister Rafik Hariri). On May 15, Siniora's government rescinded its orders, Hezbollah pulled its fighters off the streets, and leaders of the two factions headed to Qatar to negotiate under the Arab League's auspices. That led to a deal for a national unity government, which remains in place today and forms the basis of the next cabinet.

But three months after the parliamentary elections, the pro-Western coalition that won the vote is floundering in the morass of Lebanon's peculiar sectarian politics. The coalition chose Saad Hariri as its prime minister-designate, but he struggled for months to form a cabinet and finally withdrew in frustration on September 10. Lebanese President Michel Suleiman will now consult with legislators on naming a new prime minister -- although Hariri could be asked once again. This political vacuum gives Hezbollah free rein to continue building up its military and escalating its rhetoric of war. In the absence of a strong central state, Hezbollah will remain the most powerful force in Lebanon -- and its weapons will guarantee its dominance.

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