Oil's Vital New Power

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Those new energy-fueled tastes are turning Baku into a boomtown, despite widespread poverty in the rest of the country. Regular Azeris, who have an average cash income of $1,140 a year, are reeling from inflation (tomatoes have recently doubled in price). But much of Baku is upbeat and partying. "There's a mood that Azerbaijan is now sustainable," says Foreign Minister Elmar Mammadyarov. BP's operation has brought in thousands of oil workers and businesspeople, mostly British, who pack nightclubs with names like Le Chevalier and Le Mirage to dance with local women dressed in spiked boots and miniskirts. Baku's billboards announce this season's store openings, including Harry Winston, Cartier and Giorgio Armani. Others offer 18.7% interest at the Bank of Baku. One evening, I watched a fashion show to open the new store of Escada, the German luxury label. Baku's rich sipped California Merlot, while models flown in from Moscow walked the makeshift runway. There are 300 apartment buildings currently under construction in Baku and 250 others have recently opened, says Elnur Asadov, a real estate agent who guides me around a new three-story mansion with an indoor swimming pool and sauna. "People buy apartments when the ground is broken and sell when the building is up," he says. "That way they can double their money."

The U.S. sees its alliance with a republic of just 8.4 million people--about the same population as New York City--as key to securing energy supplies at a time when China and the rest of Asia are competing for new sources. The Caspian, which is largely unexplored, probably accounts for 7% of the world's oil reserves, and the oil flowing through the new West-bound pipeline still represents a mere 1% of global supply. But ultimately some of the gas from Khazakstan and Turkmenistan's much larger natural-gas fields across the Caspian from Baku could flow through BP's pipelines, turning to the West rather than to Asia. "The pipeline is changing the strategic map in a very major way," says a senior State Department official.

A glance at the map shows why: Azerbaijan is sandwiched between two energy giants--Iran to the south and Russia to the north--allies and old U.S. foes whose reserves will last decades. The U.S. has three interests in Azerbaijan: securing energy, spreading democracy and fighting terrorism. Vafa Guluzadeh, a former adviser to President Heydar Aliyev, whose decade-long rule over Azerbaijan ended in 2003 when he maneuvered his son Ilham's succession, remembers translating a phone call from President Bill Clinton to his boss in 1994. "Clinton said, 'Mr President, we need to diversify the oil pipelines. We need a new route.' It was all a very strategic plan," says Guluzadeh, sipping coffee in Baku's Park Hyatt, where Western and Asian businesspeople fill the $250-a-night rooms.

Thirteen years later, Azerbaijan is one of the few Muslim countries to fight in Iraq alongside American soldiers. The U.S. has financed two radar stations in Azerbaijan, one a few miles from the Iranian border. U.S. Navy SEALs have trained teams to guard the Caspian's underwater pipelines, and U.S. Customs agents have overseen border and airport security systems. With Baku just a couple of hours' drive from Iran, "Azerbaijan could be the world's only secular country with a Shi'ite majority," says the State Department official.