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Geoffrey Kemp

The Nixon Center, Washington, DC

1997

Foreword by Lionel H. Olmer

Executive Summary

Part I: The New Energy Equation

The Growing Demand for Energy

Assessing the Threats to Energy Supplies

The Enduring Importance of the Persian Gulf

The Caspian Basin: A New Treasure Trove?

Part II: Regional Geopolitics: Linkages and Dilemmas

The Persian Gulf: The Domestic Agenda

The Struggle for the Caspian Basin

Conclusions: The Need for a Coordinated Western Policy

Appendices

I. Energy Needs of the Major Asian Countries

II. Acronyms and Abbreviations

Notes

Acknowledgements

World demand for energy continues to grow propelled in part by the booming economies of Asia. As geological exploration and new extraction technologies become more sophisticated, it is clear the world is well endowed with fossil fuels -- coal, oil and natural gas. The problems of getting new energy to market are primarily economic and political. For the foreseeable future, the importance of greater Middle East oil and natural gas supplies will increase, and the Persian Gulf will continue to be the most significant repository for reasonably priced energy. One of the most promising alternative energy sources is the adjacent Caspian Basin.

Both the Gulf and the Caspian remain areas of unresolved and dangerous conflict involving the external powers, arms proliferation, and ethnic and religious hatreds that go back centuries. From the American point of view, the most important unresolved conflicts concern Iran and Iraq. However, the countries to the north, from Turkey through the Caucasus and into Central Asia, are also potential powder kegs. The wars in the Caucasus, including continued instability in Chechnya, the confrontation over Nagorno-Karabakh between Azerbaijan and Armenia, the unresolved conflicts in Georgia with the Abkhaz separatist region and continued fighting between warring factions in Afghanistan, indicate the insecurity of the region and the dangers of depending on any one country for energy supplies.

Yet because of the expected untapped energy resources of the region, the local players and the key external powers realize that if political conflicts can be resolved, an economic bonanza could transform the region. Investment opportunities in Iraq and Iran would run into billions of dollars and Azerbaijan, Kazakstan and Turkmenistan could, in different ways, become new Kuwaits. How this wealth will be spent and whether it will lead to parallel easing of tensions with neighbors remains uncertain. What is clear is that in the absence of conflict resolution, much of the energy from the Caspian may never reach market, and as long as the conflicts with Iraq and Iran continue, oil and gas exports from the Gulf will be primarily dependent on the GCC countries, which, in turn, could be threatened by renewed hostility.

The world therefore faces the coincidence of increasing demand for energy and growing dependency on dangerous, unstable regions. Furthermore, the new patterns of Asian demand will invariably mean that different Asian countries will establish their own political and economic ties with the Persian Gulf and Caspian Basin countries. In the long run this could undercut American and Russian efforts to dominate the two regions. For while the United States remains the preeminent military power, its capacity to orchestrate an international coalition similar to the one that ejected Saddam Hussein's forces from Kuwait in 1991 is increasingly in doubt. Russia faces an equally awesome task of trying to control the Caucasus and Central Asia and monopolize the access routes for oil and gas.

In the Gulf, the preferred US strategy must be to work for the ouster of Saddam Hussein and to reach some modus vivendi with the regime in Iran. United States strategic and economic interests would be immeasurably served if the conflict with Iran were resolved. Although this will not happen until Iran changes its behavior, especially with regard to terrorism and the development of weapons of mass destruction, a more constructive and less rhetorical American policy is needed, if only to forge a consensus with our closest allies in Europe and Japan without whose cooperation the policy of dual containment is doomed. In this regard it is most important to avoid a bitter dispute with the European Union over U.S. sanctions laws that penalize foreign companies who invest in Iran's energy sector and U.S. complaints that Europe will never use economic leverage against Iran, no matter how bad its behavior. The United States has a major long term interest in securing energy routes from the Caspian Basin through Iran, and indeed all adjacent states, and ultimately seeing Iraq and Iran fully develop their oil and gas resources for one basic reason -- maximum access and production in the region will help to ensure that future energy demand can be met at moderate prices. Furthermore, if the benefits from increased energy production are shared in a relatively equitable manner, political accommodation and hence stability could be attainable.

To achieve these ends the United States will have to work more closely with its western allies in both the Caspian and the Persian Gulf. It must also find a way to adjust to Russian and Asian interests without provoking them. This will require a more coherent and clearly articulated U.S. strategy that acknowledges the importance of the issues and the linkages between these two critical regions. In particular it is desirable that the United States, Japan and Europe establish a more coordinated energy policy with the emerging Asian countries. This could best be undertaken by expanding membership of the International Energy Agency beyond its current Organization for Economic Cooperation and Development framework.