CONCENTRATION on fluctuations in oil prices has detracted attention from the fundamental changes occurring in world oil and gas markets. Let’s start with President Bush’s inaugural address, in which he promised to support democratic reformers in the Middle East.

“Very brave, Mr President,” America’s Sir Humphrey Appleby might be telling Bush, whose country depends heavily on oil from hardly democratic Saudi Arabia.

The policy shift comes at a time when dependence on imported oil leaves America more vulnerable than ever to changes in world energy markets. Increasingly powerful state-owned players are putting America not only at an increasing economic disadvantage, but at risk of losing a good deal of diplomatic leverage in Asia, Europe and the western hemisphere.

We are witnessing nothing less than the geopoliticalisation of the world’s oil and gas industry. Governments rather than traditional commercial enterprises are taking control. And those governments have interests hostile to America’s.

China is forging closer economic and political ties in the Middle East, and not only because it needs more oil. Its rapidly increasing trade with Iran is not the ordinary buying and selling of profit-driven companies.

China can and, according to reliable sources, does pay not only with cash but with ballistic-missile components and components for nuclear weapons. A new supply of oil and a chance to thumb its nose at the American embargo are an irresistible combination for this emerging superpower.

China is not confining the extension of its influence to the Middle East. The western hemisphere is also in its sights. Canadian prime minister Paul Martin came away from a visit to Beijing with an agreement to co-operate in a wide variety of energy projects, including plans for a pipeline and ports that would allow oil from Alberta’s tar sands to move to Canada’s west coast for export to China, rather than to America.

As always, there was more to the deal than a mere commercial transaction. A joint communiqué by the strategic working group set up by Canada and China had what can only be a shot at America: “Canada and China share the view that the United Nations and other multilateral institutions have an essential role to play in the development of a peaceful, prosperous and sustainable world.”

In Latin America, China is investing $100 billion in a series of energy deals to extend its influence. Most threatening is a $400m investment in Venezuela’s oil and gas industry, strengthening the hand of president Hugo Chávez, who says his country is under “a new US imperialist attack”. Flush with Chinese cash and emboldened by his new friendship, Chávez has suspended the operations of the American companies Conoco Phillips, Harvest Oil and Chevron T exaco, hammering their share prices.

Meanwhile, Vladimir Putin has been developing what columnist Roger Boyes of The Times calls “a new policy instrument” to reassert Russian power. That instrument is “Russian gas and oil-exporting companies that already all but dominate Europe’s energy supplies . . . Gazprom has woven a web of energy dependencies from Turkey to Turkmenistan, from Berlin to Baku.”

According to the International Energy Agency, by 2020 natural gas will account for 62% of Europe’s energy consumption, and Russia will supply two-thirds of that gas.

This has more than commercial consequences. When Gerhard Schröder told a television audience that Putin was a “dyed-in-the-wool democrat”, the German chancellor was indicating he was not prepared to bite the hand that controlled the valves of the pipelines that warmed his country.

Germany already gets 35% of its oil and 40% of its gas from Russia, figures that will increase as it pursues its policy of winding down its nuclear power industry.

Russia also plans to use its ample reserves of oil and gas to extend its influence in Asia. It has agreed to allow Japan to finance an $11.5 billion (some say $18 billion) oil pipeline from eastern Siberia whence oil can be transported to Japan and other Asian nations.

This was no mere commercial transaction: Japan’s prime minister Junichiro Koizumi led the lobbying team that persuaded Putin to select the route that the country favoured. Putin knows how to accumulate IOUs.

Perhaps most important is Russia’s use of oil to cement relations with China. A few weeks ago energy minister Viktor Khristenko visited Beijing amid signs that Russian fuel is starting to warm historically chilly Sino- Russian relations.

Putin has offered China’s National Petroleum Corporation a piece of Yukos, the Russian oil giant that produces 1% of the world’s crude oil, which he effectively renationalised by slapping on a bankrupting demand for back taxes.

Since American companies would have loved to have had a crack at an interest in Yukos, Putin’s decision to freeze them out is widely seen as an expression of his unhappiness with American criticism of his power grabs, as well as an opportunity to cement relations with China, with which Gazprom has already signed agreements to cooperate in oil and gas markets.

So America finds that supplies from Canada, its largest supplier, and Venezuela, which sells it the light, sweet crude oil that its refineries are best equipped to handle, will now be shared with China.

Meanwhile, Russia dominates the European energy market, giving Germany and France still another reason to side with it in any dispute with the United States, just as China can rely on Latin American countries that benefit from its billions of investment to give that some weight in formulating their foreign policies.

Add the emerging relationship of China and Russia, and you have something for American planners to worry about.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

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