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As prices hit the roof, oil wars will keep burning

Oil prices are back in the headlines and likely to stay there, as the world's global energy crosses new thresholds of increased demand, clashing politics and threats of terrorism.

Once oil and politics mix, bets on price stability go off the charts. Forty dollars per barrel may be a record high, but not the end of the ride.

Even before the most recent terrorist attacks in Yanbu and Al Khobar oil centres in Saudi Arabia, sabotage severely disrupted oil exports from Iraq for more than a year now depriving world markets of more than a million barrels of oil a day.

The targeting of oil facilities in the world's most crucial oil power, Saudi Arabia, has significantly increased oil prices, not so much because it has hampered oil exports there, but merely by raising such a prospect.

This is how precariously balanced the world's energy markets are. In effect there is a $5 per barrel "fear premium" tacked to the current price and that reaches to touch everyone.

For example it costs the average American housewife $80 to fill her Sports Utility Vehicle, those giant comfortable cars Americans are so fond of. Once you get there, oil is no longer an economic issue. It affects jobs, the economy and the pocket book of American voters.

There is a time-tested political verity in Washington D.C. Once the price of oil crosses $30 per barrel it enters the Oval Office of the White House as a political issue. Given the choice between smaller cars and less pay, Americans tend to prefer bigger cars more pay and a new president who can make it happen.

Huo-ho – we are there. The price of oil now may very well decide who the next president of the United States will be. Indeed it may decide the condition of the American economy which affects the whole world as we approach election season.

The bigger issue is that this time around there is not much anyone can do about it. The new situation is part of a sea change in the world of global energy. Worldwide demand for oil is rising from new industrial powers. Big oil companies have not found any significant sources of oil and natural gas in the past decade. And, the political climate in the Gulf region, where two-thirds of the world's oil and gas reside is turbulent, to put it mildly, and decidedly anti-American.

In Saudi Arabia, Al Qaida terrorists are chasing and killing American and western oil expatiates who are essential to the running of the industry.

In Iraq, pipelines are being blown up daily. And copycats are sure to follow on this as once the notion of attacking oil facilities in introduced there is no stopping it.

Terrorism aside, the oncoming of two huge new consumers of oil onto world markets - China and India – is a major new development. Last year 40 per cent of the total rise of world oil consumption came from China alone.

The world's most populous country is a formidable industrial power with a juggernaut economy growing at rates exceeding nine per cent a year. That could add one per cent or more to world's oil consumption which hovers around 83 million barrels a day. India is close behind as its one billion plus population is growing richer and achieving higher standards of industry and living. That means more cars, more electricity and more oil consumption. In less than 10 years China will surpass the United States as the world's largest consumer of oil. That carries geopolitical consequences. Which raised the question: Who's Afraid of the United States? Already most Gulf oil producers are looking east toward Asia.

China, after all is a superpower with weapons and political clout. As is the European Union, another big comer on the energy scene. As the enlarged Union with countries like Poland, the Slav republics and others begin to grow their economies, they will need more oil too.

Hence the notion of the new oil wars. There is simply not enough of it. And there is, for the next two decades at least, no substitute to it. Solar power, fuel cells and hybrid engines-all are still in their infancy.

Oil will have to move to $50 a barrel or higher to push venture capitalists to look further into substitutes.

One way to manage things is a better dialogue between consumers and producers, but that has been aborted by a unilaterist, aggressive militaristic policy adopted by the American administration of George W. Bush and the neoconservatives around him who attempted to grab oil by power in Iraq and even spoke of occupying Saudi oil fields.

Clearly this will not induce good will from Saudi Arabia or the Organisation of Petroleum Exporting Countries, Opec, which is meeting Monday in Beirut.

Opec cannot do much now as its 11 members, even those who like the US, are pumping all the oil they can from their fields. Whatever Saudi Arabia will add, a million barrels a day or so, will be merely compensating for Iraq's missing oil.

In the end, oil is not just another commodity as coffee, cocoa or orange juice which responds simply to supply and demand. It is a "strategic" commodity governed by politics, the economic needs of the countries producing it, which are high, and the price paid for it, which can depress world economy if it is too high. This is a very difficult mix. The sort of china shop where bulls should not be allowed. So, fasten your seat belts.

Youssef M. Ibrahim , a former Middle East correspondent for the New York Times and Energy Editor of the Wall Street Journal, is Managing Director of the Dubai-based Strategic Energy Investment Group. He can be contacted at ymibrahim@gulfnews.com

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