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The Great Oil Shift

China, not the US, may soon be Saudi Arabia's main energy partner...

OPEC MET in Vienna on Wednesday and agreed to do nothing.

"Unfortunately, we are unable to reach a consensus at this time to reduce or raise our production," said OPEC Secretary General Abdalla Salem el-Badri.

But what, really, was the news? Is OPEC having a domestic dispute? asks Dan Denning in his Daily Reckoning Australia.

"This is one of the worst meetings we ever had in OPEC," said Saudi Arabian oil minister Ali Naimi after the meeting had ended. "We were not able to reach an agreement."

What he didn't mention is the current rotating President of OPEC is Iranian Oil Minister Mohammad Aliabadi. And what he didn't mention is that the dispute reveals two factions in OPEC, a dividing line that goes all the way back to the race for Middle East oil in the 1920s.

The countries that supported the proposed 1.5 million barrel per day increase in OPEC production were Saudi Arabia, Kuwait, Qatar and United Arab Emirates. 

Those countries were all under the protection of either British Imperial interests after the end of World War I, or American (neo-imperial) interests after Standard Oil of California paid Ibn Saud £35,000 in gold for the first oil concession in Saudi Arabia in 1933.

The countries that voted against an increase in Vienna yesterday—Algeria, Angola, Venezuela, Iraq, Iran and Libya—are not entirely out of the British/American sphere of influence (especially Iraq). But the dispute is a lot more understandable when you understand that the members of the Gulf Cooperation Council (the four countries above) have been in a strategic energy alliance with America for the last 78 years.

There could be another explanation, of course—the Sunni-Shia split between Iran and Saudi Arabia. Aliabadi, who used to be the head of Iran's Physical Education Organization (an obvious pre-requisite for leading the country's oil production), was only appointed Oil Minister on June 2nd by Iranian President Mahmoud Ahmadinejad.

Ahmadinejad sacked the previous minister on May 14th and put himself in charge. Iran's highest legal authority, the Guardian Council, deemed Ahmadinejad's move "unlawful", which was basically a rebuke to his authority, albeit a mild one. Maybe Ahmadinejad was hoping to go to Vienna himself and stir things up a bit, disturbing the peace between the world's longest-lived energy partnership (the Saudis and the Americans).

Not being an expert on Islam or contemporary politics in the Middle East, we don't feel qualified to say much about whether there is a Sunni-Shia civil war being fought by Iran and Saudi Arabia, with all the other powers in the regions as proxies (a kind of Middle East Cold War). But it does recall what Abraham Lincoln, quoting from the Book of Matthew, said on the eve of the American Civil War: a house divided itself cannot stand.

OPEC needs to get its house in order so it can ensure a plentiful oil supply to the world's new number one consumer of energy: China. Chinese energy consumption grew by 11.2% last year, according to the 60th annual BP Statistical Review of Energy. Incidentally, BP is the corporate ancestor of the Anglo-Persian Oil Company (APOC).

 APOC was a private company set up to explore for oil in modern-day Iran, but later effectively nationalized by the British Parliament on the eve of World War I. Britain's government bought a 51% stake in APOC in order to guarantee Churchill's navy—which had just switched from coal to oil power—a regular supply of fuel.

But back to the modern fate of oil...and China. China now accounts for 20.3% of total global energy demand. The United States is second, according to BP and the International Energy Agency, at 19%. 

China is the world's largest consumer of coal, at 48%. The US, meanwhile, makes up 21% of global demand for oil, which is about double China's share of global demand. But both countries' energy strategies are changing.

Thanks to the shale-gas boom (and the Second Great Depression, in which oil imports are hard to pay for with a devalued currency) the US is effectively distancing itself from oil and its long-held alliance with the Saudis. The Chinese, for their part, would like to burn a lot less coal and a lot more oil and natural gas.

For the first time since commercial quantities of oil began being produced in the Middle East, the United States may not be the most important energy partner for the Saudis. A Sino-Saudi energy era may well be the future for the energy markets.

Considering a Gold Investment?...

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

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