Insight May 5, 2010, 4:08PM EST

Energy's New 'Great Game'

Countries around the globe are racing to lock down energy supplies to ensure economic security. The geopolitical implications are huge

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Energy security has leaped to the top of many investors' minds because of ongoing geopolitical and economic trends. It's a bit like a modern-day version of the 19th century Great Game, when Czarist Russia and the British Empire fought for control and influence in Persia and Central Asia. In the New Great Game, the European Union, Russia, Central Asia, and the Middle East are locked in a high-stakes dance over energy supplies, with the U.S. and China—the two biggest actors of all—jumping in when it suits their needs.

The first and most obvious result of this titanic struggle is a growing wave of energy mergers and acquisitions, both in the U.S. and around the world. The industry has already seen significant consolidation via domestic mergers and cross-border strategic investments. Now, nations are widening their reach. Royal Dutch Shell (RDSA) and PetroChina (SNP) recently announced they would acquire Australian oil and gas exploration company Arrow Energy in a $3.2 billion cash deal. China's Sinopec (SHI) paid $4.65 billion for a 9 percent stake in Syncrude Canada. And MacArthur Coal (MACDF) of Australia reengaged a bid by American coal mining company Peabody Energy (BTU).

China, as the world's second-largest oil consumer, recently overtook the U.S. as the largest buyer of Saudi oil, and its state-backed ventures are aggressively courting targets in Africa, the Middle East, Australasia, and the Americas. American demand for crude oil and petroleum products will average 18.84 million barrels a day this year, while Chinese demand for refined products is projected to jump to 9.12 millions barrels a day, according to figures from the U.S. Energy Dept. and the International Energy Agency. In response to Chinese activity, the Indian government recently set up a state-backed energy consortium with an eye to making strategic acquisitions of overseas energy assets.

What are the geopolitical—and implicitly economic—factors driving these trends?

Turning the Screw

A resurgent Russia is one factor. In a vivid demonstration of the importance of energy security, Russia has in recent years effectively used the threat of switching on and off the natural gas spigot to extract economic concessions from other countries. The targets of Russia's ploy were not just Ukraine and Belarus, both of which sit within its traditional sphere of influence, but also Western Europe.

The recent installation of a more pro-Moscow government in Kyrgyzstan is yet another example of Russian strategic resurgence. Though Kyrgyzstan shares no direct border with Russia proper, it is geographically critical if Russia seeks to exert control in the Fergana Valley, the economic and demographic heart of Central Asia that spans Kyrgyzstan, Uzbekistan, and Tajikistan.

Events surrounding Iran are another factor. Sitting atop the world's second-largest oil and natural gas reserves, Iran exercises significant leverage on the international energy scene. Iran also has an extensive intelligence apparatus—further accentuating its power—with a presence in Iraq (another major energy producer) and in such Gulf states as Oman and Bahrain.