Are we fucked, fucked, totally fucked by our addiction to oil?

A Battle For Oil Could Set the World Aflame
International powers will do everything to protect their access to dwindling resources. We are mad not to have an alternative strategy
by Will Hutton

The £1 litre of petrol is already a reality on some forecourts. Yet the public response has been curiously muted. No threats of national protests or blockaded tanker depots. There's an air of resignation. We've been pulverised into learning our lesson: we can't buck the market with the $70 plus barrel of oil, so there is nothing to do except pay up.

There is nothing like the same mood in the United States. There, petrol crashed through the psychological barrier of $3 a gallon; cheap gas, the sacred right of every free-born America, is no more. In Washington, Republicans and Democrats outbid each other with their respective energy plans, all distancing themselves from the energy policy-free zone of do-nothing George W Bush. The US, after all, has no commitment whatsoever to the idea that states and peoples must supinely accept market verdicts. Markets, it is well understood, are shaped by human hand.

It has a strategic oil reserve built up over years that would give it three months' supply in the event of war or natural disaster and which Bush manipulated last week to try to lower the oil price. It has supported Saudi Arabia through thick and thin. The 281 ships and half-a-million members of the US navy, larger than those of the next 17 naval nations combined, guarantee the security of the country's oil supply. The discourse is so different from ours that it is head-spinning.

Last year, Congress blocked the takeover of energy company Unocal by one of China's two state-owned oil companies because some oil reserves would have passed from US ownership to the Chinese Communist party. Last spring, Democrat Senator Joe Lieberman and Republican Senator Richard Lugar initiated Oil Shockwave, a computerised simulation exercise to show what would happen to the American economy if oil suddenly rose to $100 a barrel. The answer was recession and there was nothing the government could do to avoid it.

It is obvious the US needs to rely less on oil in general and on Middle Eastern oil in particular, a conclusion Bush endorsed in this year's State of Union address. The question is how.

The chief driver of today's higher oil price is China, which is now the world's second largest oil importer after the US and whose demand is growing exponentially. Supply cannot keep up. Although oil experts argue passionately about whether the peak of world oil production is three or 30 years away (with most agreeing around 10), it is clear that there is limited scope to increase oil supply.

More and more of the world's great oil fields are running down. Saudi Arabia's Ghawar field, for example, far and away the world's largest, is officially recognised to be more than half-depleted. Again there is disagreement, with some insiders saying it is 90 per cent used. Time is up for the oil economy.

And, in any circumstance, the proportion of oil supplied from the Middle East will rise from around two-thirds today to more than 80 per cent by 2020. Iran's President Mahmoud Ahmadinejad is right to think Iran holds all the cards. One of the geopolitical consequences of the invasion of Iraq - and why the fight to establish some form of democracy there is now so important - is that world oil supplies will be controlled by Islamic fundamentalists, Shia in Iraq and Iran and Wahhabis in Saudi Arabia.

Oil is transforming world politics. Iran can afford to face down the wrath of the West and be robust about becoming a nuclear power because it has the cast-iron support of China - secured by oil.

In November 2004, Iran gave China the rights to exploit the giant Yadavaran field. Importantly, China plans to bring this oil into China, not across the Indian Ocean and through the Malacca Straits, but by pipeline across central Asia, free from the surveillance of the US fleet. China's attitude to Iran is foretold; it has refused to condemn Sudan over the killings in Darfur since Sudan allowed it to build a 500-mile pipeline to the coast. Ahmadinejad can therefore be 100 per cent certain that China will veto any attempt to win UN approval for military intervention in Iran.

China feels acutely vulnerable over oil. It has no strategic oil reserves and deputy chief of the Chinese General Staff, General Xiong Guangkai, has called for a build-up of both reserves and military capacity and for a fleet to defend its oil tankers. Iran is part of this equation. So is winning control of oil and gas reserves in the East China Sea, where the key is the disputed sovereignty of the uninhabited Senkaku Islands.

In February of last year, Japan formally occupied the islands to back up its sovereignty claim; in April, China replied with an ultimatum to Japan to withdraw and in September sent a naval force to patrol the disputed territory.

So far, China has backed off, but there is no question that it expects at least a compromise settlement that the Japanese, themselves vulnerable over oil, are reluctant to concede. The US has to be careful to keep China onside. It wants that country's support over North Korea and it does not want it confronting Japan over oil, capitalising on America being overstretched in Afghanistan and Iraq. Ahmadinejad has read the runes well.

So has Russia's Vladimir Putin. If Europe and Britain want secure long-term Russian oil and gas supplies, then it had better allow Russian companies the right to buy up European companies and not expect reciprocity. Last week, state-owned Gazprom did a deal with the Germans and Blair ran up the white flag, saying it could buy Centrica, owner of British Gas.

It's a new world. Henry Kissinger thinks that the 21st-century struggle for oil reserves will match the 19th-century fight for colonies. The dangers are obvious. Britain in all this is the doe-eyed Bambi, bleating its faith in market forces in a world of predators. We should urgently slow down the depletion rate of North Sea oil and gas and establish a British strategic reserve and, with that protection, begin determinedly to build an economy that is not dependent on oil and gas. We should get serious about energy efficiency for solid environmental and strategic reasons. We should tax aviation fuel. We must accelerate our investment in renewable energy. We must research how to burn coal cleanly. And we must commission new nuclear reactors.

We have to move on all fronts fast. The case is usually made in terms of climate change, but it is more than that. Unless we confront and change the emerging balance of world power, the consequent oil conflagrations could make the conflicts of the 20th century look tame.

(will.hutton@observer.co.uk)