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Charles Hugh Smith

Charles Hugh Smith

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global…

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Oil and Empire: The Great Game of Geopolitics

The Great Game is afoot and no matter how we may disapprove of the Global Empire, we would be wise not to discount the cards it alone holds.

Geopolitics is not called The Great Game without reason. The game of dominating the world's resources, nation-states and alliances is like a combination of Go and chess, with the threat of military conquest or defeat always hovering over the statecraft and financial game.

I am going to present a number of statements and speculations here, most of which are at odds with the status quo thinking. I present them not to be contrarian but because they seem self-evident.

As I have noted here before, the value of "hard power" (military dominance) and "soft power" (cultural, financial, diplomatic) cannot be assessed until you don't have any.

That establishes a conundrum: one must maintain these quite different forms of global power without knowing if the cost is justified, until the moment arrives when others would pay ten times over to hold what you have in hand.

If that moment never arrives, it may be because you maintained an overwhelming advantage. Wars are launched when one side perceives a rough balance has been achieved; no nation is so suicidal that it chooses to attack a far superior power.

While I don't approve of the American Global Empire, I respect the intelligence and drive of those tasked with maintaining and expanding it--and they number in the millions.

There is only one nation-state which can project hard power: the U.S. A missile is not power-projection, because it exerts control over nothing; it is deterrence or threat, but not power that can be projected. Only aircraft carrier groups and the ability to transport an army by sea and air to any locale in the world is power projection.

The U.S. has 11 carrier groups, China has zero. The U.S. has the ability to transport a small army by air, China does not. The U.S. has the sealift capability to transport a large army by sea. China does not, and neither does Russia or the E.U.

Power projection is far more costly than defensive Armed Forces, and the U.S. is the only great power with true power projection because it alone has hegemony over the world's reserve currency. The U.S. skims a stupendous arbitrage profit from creating dollars and exporting them in exchange for real goods.

China and other aspiring great powers must actually make real profits. Just to put costs in context: China's huge $1.8 trillion in foreign reserves would cover the costs of global power projection for about two years.

We should also stipulate that an aircraft carrier alone is simply a sitting duck; it projects nothing but vulnerability. It is a carrier group which projects power, and that requires an enormous infrastructure: a small fleet of other vessels, satellite communications, anti-submarine capabilities, global bases to refuel/ reprovision, and so on.

When two carrier groups steam offshore, they are the largest air force in the world save a very few. The U.S. could trim its 11 carrier groups to 8 or 9 and still have the only large-scale, globally decisive 8 or 9 carrier groups in existence.

The same infrastructure is required to airlift or sealift troops: you need AWACS aircraft, global communications, global bases, and so on.

Why is all this important? because when push comes to shove, there is only nation which can project hard power in a meaningful, decisive manner: the U.S. Bankrupt, wounded, in decline, however you wish to characterize the U.S., it holds decisive dominance in hard power. And as long as the world accepts dollar hegemony, then the U.S. can afford its Empire.

As noted above: the true value of hard power cannot assessed until you don't have any.

When Canada and Australia impose restrictions on the export of natural resources to nations such as China--a move I fully expect by 2015--then exactly what is China going to do in retaliation? Virtually all of China's exports can be duplicated elsewhere. There are only three essentials (four counting fertile soil), what I call the FEW essentials: food, energy and water.

China's ability to export any of these is limited. Indeed, it is importing vast quantities of oil and food right now, even before global weather turns truly nasty.

The only leverage China really has on the global stage is its stash of rare-earth metals. As for that leverage: you can rest assured that DARPA (Defense Advanced Research Projects Agency) has long been funding research efforts to replace the rare-earth metals with other materials. In the meantime, mines will be reopened or other potential sources explored.

China is busy buying up Africa, which carries a number of ironies that have yet to unfold. To buy up other nations' assets is the essence of Neoliberal Global Capitalism, and in playing within that system China is now vulnerable to the same nationalist and revolutionary forces as those opposing U.S. domination.

The other irony is the "revolutionary" forces which I fully expect to take power in many African nations by 2015 will expropriate Chinese properties just as they will expropriate any other colonial powers' "property." And the Chinese will be powerless to reverse those expropriations; they possess neither the hard power to conquer and re-install pliant kleptocracies nor the soft power to do so by other means.

I doubt that any nation has that power now.

The only resource of any import (pun intended) is oil. Water, you either have within your borders or you don't, and those sharing a river will find conflicts becoming more likely with each passing year. Ditto soil--if yours has blown away in duststorms, you can't import enough to make a difference. And unless you have the ability to enforce your will via power projection, then buying up other nations' farmland is only a "solution" until they need it themselves.

Those who believe nationalism is no longer a force will be surprised in the coming decade how scarcity can fuel a fiery, unquenchable nationalism.

The supremely nationalist Chinese will come to understand nationalism from the other end: from that point of view, they are just another colonial power jockeying for someone else's wealth.

There are ironies galore in China's pride in surpassing the U.S. in auto production-- China produced 17 million vehicles last year to America's 13 million. The irony of course is that China's dependence on oil only deepens with every additional car on its roadways.

Both China and the U.S. have plentiful coal, but gasifying coal or even scrubbing the sulfur from it is costly. Having plentiful costly energy is not the same as having plentiful cheap energy, and oil remains the ultimate transportable energy and chemical feedstock.

Here is a map of the last great reserves of oil on the planet: the Mideast. Note that by some peculiar coincidence, the U.S. occupies the very heart of the oil reserves and the nation which lies between China and the oil.

Middle East Map

If you want to control or influence the Mideast, then by all means take the center, Iraq; and if you want to extend your influence all the way to China, Pakistan, Russia and India, then take Afghanistan, too.

A cursory glance at the map offers a staggering array of strategic advantages to controlling or influencing Iraq and Afghanistan. Even to an amateur these pop off the map:

you divide troublemakers Syria and Iran, collaborators despite Syria being Sunni and Iran being Shi'ite.
-  you sit astride two great rivers in a parched landscape.
-  you can easily project military power into Turkey, Saudi Arabia, Syria, Iran, Jordan and Kuwait, and threaten Russia's southern flank and Egypt.
-  you can also fill the airwaves of all these surrounding nations with disruptive ideas/propaganda like freedom of the press, individual liberty, economic opportunity, etc.-- dangerous ideas to the surrounding kleptocracies/oligarchies.
-  you sandwich Iran between Afghanistan and Iraq.
-  your land forces are within easy range of air support from the US Navy in the Persian Gulf, Arabian Sea and the Mediterranean Sea, not to mention long-range air power from bases in Europe, Diego Garcia and the U.S. mainland.
-  Afghanistan is central to "the Stans" and shares a small border with China.
-  even if you do nothing, you unsettle everyone around you because you hold the strategic aces of location, power projection, etc.

We know about the oil, but what else is in play strategically? It's about the oil, of course, but beyond that observation lies a wealth of other factors, such as denying that oil to others who you might want to influence. Just choke off the Straits of Hormuz and a world of leverage suddenly opens up.

The general assumption is that the U.S. is vulnerable to Iran shutting that chokepoint, but what happens if Iranian tankers bound for China get stopped? Who gets hurt then? Certainly not the U.S. The chokepoints work in all kinds of directions.

As I have often noted here, disrupting production and control works both ways, too. The U.S. needn't "control" Iraq; all it need do is disrupt anyone else's grand ambitions or access to the oil. Disruption is cheaper and easier than control, as the Taliban discovered in 2001 when their control of Afghanistan was fatally disrupted by homegrown resistance.

In other words: all the U.S. need do is deny others access to the oil. So China has Sudan, and the U.S. controls access to the Mideast and 80% of the world's remaining oil reserves. Which position would you choose?

Here are my geopolitical predictions. I could ramble on for pages, so let's cut to the chase.

1. As I have described many times, I expect oil to plummet to $25/barrel at some point in 2011-13 as the global economy implodes. Demand will crash and kleptocracies everywhere will pump more in a desperate attempt to keep their welfare states afloat. I call this the "Oil Head-Fake." Apparently a few other analysts are of the same mind.

2. This dramatic decline in oil revenues will trigger regime change in Venezuela, Iran and all other nations which are dependent on oil revenues for the maintenance of their welfare state/Armed Forces/Political Elites.

In effect, all the U.S. needs to do is either wait for this crash in oil prices, or nudge the Saudis into creating the crash with overproduction. The Saudis (Sunni) fear the Iranians (Shi'ite) and would not be sorry to see regime change in Iran.

3. Capital restrictions will become commonplace, as nations awaken to the fact that their sovereignty and control of their own assets will be lost if they allow uncontrolled flows of capital in and out of their economy.
4. That means the clock is ticking on the U.S. dollar hegemony. Capital controls are the first step in controlling foreign exchange. Either an alternative global reserve currency will be established, or nations will institute dual-currency trading: one value for real trade, another value for foreign exchange.


5. Until the U.S. loses its currency hegemony, it can outbid any other great power for any resource. The U.S. funds its Empire by selling its bonds (debt) to those who have traded goods for our dollars. Thus the cost of the Empire is largely borne by other nations as the U.S. exports inflation and its currency in exchange for cheap goods and resources.
Until China gains an equivalent advantage, then it will have to bid for resources with earned income. That means they will lose any competition for resources because their apparently substantial wealth (a few trillion dollars in reserves) is modest compared to what the U.S. can create/print.

6. Capital controls will be followed by resource controls. The export of energy, food and minerals will be controlled. The excuses given won't matter; there will be no alternative. Governments which let their own populaces starve in order to ship food overseas will be overthrown by whatever means are necessary. As Bob Marley observed, "a hungry mob is an angry mob." That's how Bastilles get torn down, brick by brick, by enraged, hungry mobs.

7. The clock is ticking on China's moment in the sun. As its costs of commodities and food skyrockets, its citizens' restive ambitions are thwarted by the limits facing all consuming nations, and its aging populace catches up with it, then China's resources will be stretched too thin to construct a Grand Empire with decisive hard and soft power.

Perhaps if Mao hadn't struck down an entire generation in the Cultural Revolution and China had started integrating its economy and ambitions 20 years earlier, that hard and soft power might have been assembled. But now it is too late; there are too many demands on China's financial resources, and its stash of $2 trillion foreign reserves looks modest compared to the demands of Empire and a populace of 1.2 billion people with expectations raised to the sky.

China's bellicose worldview that it has been the center of the world for the past 5,000 years and that dominance is its proper role is winning few friends. Its dependence on domestic credit bubbles, corruption, short-cuts and stolen intellectual property will dramatically shorten the time it has to create a sustainable domestic energy supply.

Would it be wiser for the U.S. to invest the trillions spent on controlling Mideast oil on domestic alternatives? Undoubtedly. But the wealth generated by oil far outstrips the wealth of alternatives, and until that profit flow reverses then the status quo in the U.S. will pursue Oil and Empire until the U.S. economy and dollar are no longer able to support an Empire.

Would China be wiser to pour its energies and wealth into sustainable energy? Yes, but its status quo is too wedded to corruption, easy credit, coal and delusions of global grandeur to make the kind of commitment needed to develop clean energy on the scale China needs to continue industrializing.

When competition between the U.S. and China comes up, I always ask this to settle the core issues quickly: Which nation's Power Elites have made sure their children have green cards and homes in Vancouver and/or Los Angeles?

If the U.S. Power Elites had secured Chinese citizenship for their beloved children and purchased properties in Beijing, then that would be proof that the leadership of the Empire had lost faith in the Empire's durability and future.

But it is the other way round: it is China's leadership which has moved its capital and offspring to Canada and the U.S. Indeed, having citizenship or green cards for one's children is proof of membership in the Chinese Elite.

Don't bother asking for verification of this; it is a deep, dark secret because of what it says about China, just like the secret organic farms which feed the Chinese Elites.

As much as I see the U.S. Global Empire as a tragic waste of wealth and resources, I also see very clearly that all the Empire needs to do to continue its dominance is:

1. Stop destroying the dollar with the Fed's idiotic, self-destructive Quantitative Easing.

2. Wait for the global demand for oil to decline, and then push the Saudis to increase supply, driving prices down to the point that the enemies of the U.S. and Saudi Arabia implode for domestic reasons.

3. Wait for China's inherent contradictions to fully bloom.

In other words: don't do anything foolish, just stand aside and let everyone else implode as their own reliance on ever-expanding credit and the U.S. dollar hegemony brings them to their knees.

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global finance, stocks and political economy. He has written six novels and Weblogs & New Media: Marketing in Crisis and just released Survival+: Structuring Prosperity for Yourself and the Nation.

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  • Anonymous on October 25 2010 said:
    The oil price prediction in this article is absurd, and the same goes for a number of other things. A former teacher at West Point called the two wars the US is engaged in "stupid", though in reality they are worse than that. All the talk about the American navy in this harangue is superfluous, and instead of squandering billions on silly postering in and around the Gulf, American governments should concentrate on improving the quality of life in the US. Similarly, American voters should concentrate of eleting governments with that intention.Where food and natural resources are concerned, the author should look at a map. Gas and oil pipelines have been constructed from Russia to China, and more will follow. Agriculturally, Russia can supply what China needs, and Chinese industry can supply what Russia needs.
  • Anonymous on October 25 2010 said:
    Actually, the author displays a number of surprisingly keen insights in this short piece. It may be a bad idea for the US to become entrenched in self-destructive third world nations such as Iraq and Afghanistan, but as long as the US is the sole superpower of the world, it needs to keep a finger on the pulse of things. The best way to do that is to "be there."Is China a "Potemkin Economy" as the author suggests? Perhaps. It is certainly worth keeping the possibility in mind. And if it is true, it casts future demand for oil and commodities in a distinctly different light than conventionally seen.What about oil prices? Could they actually go down as far as suggested. Of course they could, under certain circumstances. A sudden collapse in demand is the first thing that comes to mind.No one actually knows what will happen. But the range of possibilities is much wider than conventional thinkers can comprehend.
  • Anonymous on October 26 2010 said:
    If the US wants to keep a finger on what Alfonso calls "the pulse of things", they should do something about the dope and pornography that have transformed the structure of American society over the last three or four decades. Sailing up and down the Gulf is an expensive distraction.Incidentally, I'm completely behind the US having a large military. The larger the better, assuming that it makes economic and sociological sense.

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