Syria: An energy-based proxy war in the making?

By Marin Katusa, Chief Energy Investment Strategist

The Vietnam war wasn't really about Vietnam. Spaniards may have fought in the Spanish Civil War, but the real opponents were elsewhere. US and Soviet machinations in Afghanistan in the late 1970s had little to do with liberating a repressed population.

They were all proxy wars, struggles between superpowers that chose to fight their battles in faraway lands and inflict their collateral damage on other peoples instead of their own.

Each war had a cover. Each time the superpowers of the world got involved - overtly or covertly - to right an arguable wrong. Really though, they were there to fight each other. To weaken each other. To claim moral superiority and political preeminence. And to win the right to use the proxy nation's resources and location to their advantage.

It would be lovely to think such wars are a thing of the past... but another proxy war is rapidly developing.

This one pits the world's biggest oil producer against one of its largest customers. It positions a nation with a stranglehold on European gas supplies against one with newfound gas wealth and dreams of future exports. It involves pipelines and terrorism and sovereignty and religion and contrasting concepts of human rights and political progress.

It is Syria.

In its simplest description, the war in Syria is a civil war, a revolt against a tyrannical dictator who would rather slaughter his own people than relinquish his power.

Of course, it is more than that. Syria is a complicated place and an important player in Middle Eastern and global relations.

First and foremost, Syria is the third arm of the anti-Israel and anti-West Iran-Hezbollah-Syria alliance, a Shia threesome that opposes the set of Sunni-led powers in the Middle East. (Syria's population is dominated by Sunni Muslims, but the country is controlled by the Assad family, who are Shias.)

In addition, Syria buys some $150-million worth of arms from Russia every year and hosts a Russian naval port on its Mediterranean Sea coast. It has been lorded over by the ruthless Assad family for more than 40 years, democracy a forbidden notion. And it is situated at a continental crossroads, between the energy riches of Eurasia and the Middle East and the energy-hungry markets of Europe.

To turn Syria toward the West - even just slightly - would be a huge victory for the West and a major loss for Russia, Iran, Hezbollah, and even China.

This much has been clear since Syrians started rising up against Assad 19 months ago. Less clear has been where Syria's revolt would lead. With the Western public weary of war, economic heavyweights China and Russia vehemently opposed to foreign intervention in Syria, and a US presidential election looming, no one has even proposed the idea of direct action in Syria.

No one has proposed much at all, in fact, because it seemed there was no workable answer.

Then, last week, Turkey started sending shells across the border into Syria. The attack was supposedly in response to Syrian shells that strayed across the border, but Turkey's mortar offensive lasted five days. A few days prior, Turkish politicians approved legislation that allows their forces to conduct military operations in Syria.

Soon after the shelling stopped, Turkish jets intercepted a civilian flight en route from Moscow to Damascus, forcing it to land in Turkey on the pretext that it was carrying Russian military equipment in violation of international law.

Suddenly, after 19 months of speculation, it became clear. Syria will not be a Libya, let alone an Iraq. There will be no direct interventions, no united international action.

But it will be a proxy war.

And the key instigator? Not Iran, nor Israel. The country amping up covert involvement in Syria is none other than the United States. And the reason is energy.

The United States is supporting Syria's freedom fighters and green-lighting Turkey's cross-border clashes with Bashar's fighters because America is increasingly fearful of Russia's growing stranglehold on worldwide energy resources.

At least, that's how I see it. Here's why.

Russia's Energy Stranglehold

Vladimir Putin loves being in control of other countries' energy supplies. Thankfully for him, he found himself the perfect job.

As Russian president, Putin controls roughly 8.5% of the world's oil production and 19% of global natural-gas output. His country is also home to 40% of the world's uranium enrichment capacity and a fair chunk of global uranium resources.

Those are big numbers, and Putin knows it. Since starting his first term as president in 1999, he has worked tirelessly to increase Russian heft in the global energy arena. He invested in Russia's oil fields to reverse production declines and position Russia as one of the world's top producers. He encouraged gas exploration in a push that delineated 1,600 trillion cubic feet (TCF), a full quarter of the world's known resources. And he built new oil and gas pipelines that bypass troublesome countries and access new markets.

(We dedicated an entire issue of the Casey Energy Report to Putin's quest for resource power, a phenomenon we call "Putinization," and it led us to an investment recommendation.)

The announcement last week that Russia will not sign an extension of the Megatons to Megawatts deal (which sees Russian facilities downblend highly enriched uranium from old warheads to generate half of the fuel that feeds US nuclear reactors) is just the latest Putin maneuver aimed at gaining power through resource control. (I will write more about this - and the huge impacts it will have on US and global uranium markets - in a coming Dispatch.)

The United States is finally figuring it out: Putin is basing Russia's foreign relations first and foremost on energy. Why else would Putin be befriending Israel? (The answer is natural gas, as I explained in this August Dispatch.)

Putin's plan is working. With every new gas supply deal, every Arctic oil discovery, every meter of new pipeline laid, Russia gains international leverage in a world starved for energy resources.

Global heft is like the total energy of a contained system - it cannot be created nor destroyed, but can only change form. Russia's growing global influence is sapping significance from other superpowers...including the United States.

Of course, America is now doing what it can to stem this changing tide. Syria is front and center of that effort.

Rippling Ramifications of Regime Change in Syria

Why would a regime change in Syria impact relations between Russia and the world? For many reasons, some very general and others very specific.

The generality is that Russia has supported Bashar al-Assad long and loud. The fact is that an Assad-led Syria serves Russian interests.

As long as Assad is in charge in Syria, the Iran-Syria-Hezbollah alliance will persist. It is this alliance of Shia strongholds that keeps the US-oriented Sunni side of the Middle East in check, a delicate balance that could erupt into riots and wars if disturbed.

Within that balance, the US relies on Sunni Saudi Arabia and Qatar to maintain its profile in the Middle East. However, Saudi is no longer the stalwart of stability it once was (read about Saudi's troubles), and US-Saudi relations have been on a downward slide for several years (in large part because of the demise of the petrodollar).

So that's the generality: A reformed Syria - one that ousted its dictator with Western support and one where the Sunni majority might finally be in control - would give the US an opportunity to create a new Middle Eastern foothold. That is something Putin is dead set against.

As for the specifics: the longer that war rages in Syria, the bigger Putin's head start will be in building yet another pipeline to deepen Europe's reliance on Russian natural gas.

Russia is already working on the South Stream, a gas pipeline from Russia to Italy via the Black Sea, Romania, and Greece that would complement the Nord Stream in locking Europe into reliance on Russian gas. The main competitor to South Stream is the Trans-Anatolian Pipeline (TANAP), which would run across Turkey to connect Europe to Azerbaijan's massive Shah Deniz gas field.

As long as war is raging in Syria and shells are straying across the border into Turkey, TANAP won't see much progress... and Putin will move closer to beating out Azerbaijan in supplying southern Europe with gas.

The US wants Assad to go just as much as Putin wants him to stay. Weakening the Shia threesome of Iran, Syria, and Hezbollah has long been a key American goal. To not just weaken that alliance but to turn one of its members into a Western ally would be as good as seeing Cuba renounce communism.

To justify its Syrian ends, the West has worked hard to portray Russia as a villain, to portray Putin as a dictator siding with the butcher Assad. To do this, the ends are clearly more important than the means.

Take Russia's arms deals with Syria. These contracts go back years and are completely legal. No matter. From the moment Syria's uprising turned into a war, the US has been demonizing Russia for these weapons shipments. Secretary of State Hillary Clinton went so far as to accuse the Russian government of instigating civil war in Syria, by simply delivering weapons that had been contracted a year prior.

But shady arms deals aren't enough - the US needs to add fuel to the fire of American anger over Syria. Enter Turkey's latest moves.

You see, there is no way that Turkey would have shelled Syria without direct (albeit discreet) approval from the United States.

For another, Turkey intercepted that Damascus-bound plane on the same day that US Secretary of Defense Leon Panetta confirmed that a 150-strong US task force had been dispatched to the Jordan-Syrian border to ensure regional security and to "... determine how best to respond to any concerns in that area."

The task force will establish a humanitarian buffer zone within Syrian territory, patrolled by US-backed forces from Jordan. Such a zone has long been considered a means to supply rebel groups in Syria and thereby help push Assad out.

The airline interception and the arrival of US troops in Jordan are precisely the kinds of moves that can stoke tensions and justify aggression. Anytime you put troops in a region, it creates the possibility that some kind of incident could lead to a shooting match and then a full-out war.

The stage is set. To the US public, the poor Syrian rebels are being slaughtered by a tyrannical dictator getting direct support from deep, dark Russia. That means the US government can start directly supporting the rebels - even if the real reason is to secure a new Middle Eastern ally and to weaken Russia on the way.

The war in Syria is a tragedy, with both sides committing terrible atrocities. Unfortunately, Syria's pivotal role in the world's most important energy region means the tragedy is about to get worse. Russia and Iran are deeply invested in Assad; the United States and its Middle Eastern allies would love to see Assad ousted. Regardless of the result, there are a few certainties.

One is that more civilians will undoubtedly die in yet another proxy war between global superpowers.

Another is that control over energy resources is fundamental to national success, which means that oil and gas will continue to drive nations to war. And those wars will drive prices ever higher, as the world grows increasingly desperate to quench its hydrocarbon thirst.

A sad state for Syria, therefore, is yet another reason why oil prices will continue to climb... and properly positioned investors will profit.

Additional Links and Reads
Will Iraq's Energy Boom Postpone Peak Oil Yet Again? (Telegraph)

Iran is aiming to more than double its oil output by the end of the decade, boosting production from 2.6 million to 6 million barrels per day (bpd). By 2035, the country hopes to be pumping 8 million bpd, an achievement that would push the nation past Russia to become the world's second-biggest oil exporter in the world. The push will require $530 billion of new investment, and Iraq would have to overcome a host of major obstacles; but if it succeeds, this flowing faucet of new supply could well postpone peak oil.

US Poised for Boom in Crude Oil Exports (Globe and Mail)

Royal Dutch Shell, BP, and Vitol( the world's largest independent oil-trading house) are among a number of companies that have applied to the US government for export license, marking the onset of a transition that could reshape global energy markets. With production climbing rapidly, the US could soon be exporting substantial volumes of oil for the first time in decades.

US Suspects Iran Was Behind a Wave of Cyberattacks (New York Times)

American intelligence officers are increasingly convinced that Iran was the origin of a serious wave of network attacks that crippled computers across the Saudi oil industry and breached financial institutions in the United States. Closest scrutiny shows that the attack hit Saudi Aramco - the world's largest oil company - in August. US Secretary of Defense Leon Panetta described it as "probably the most destructive attack that the private sector has seen to date."

Used Adult Diapers - The Fuel of Tomorrow, Today! (InventorSpot)

A rapidly aging population is leaving Japan awash with a smelly problem: piles of dirty diapers. With 28 million citizens aged 65 or older, Japan is going through more than 5 billion adult diapers annually. One company, SuperFaiths, is finding a new life for all those nappies - its SFD Recycle System dries, crushes, and sterilizes used diapers before turning the material into pellets for use in stoves and biomass boilers.