Monday, November 15, 2004

Owing to the fact that oil prices are rocketing beyond imagination, I thought it appropriate to post a (edited) paper I wrote on the so-called energy crisis.



The last fifty years has witnessed numerous conflicts rooted in oil politics. Oil’s finiteness, its role as the main fuel of industry and its concentration in select parts of the globe make for its volatile characteristic as a strategic resource. The quest to secure this resource has led to political and economic interventions where it is most abundant, in the Middle East.

Oil will continue to play a role in geopolitics, and exhaust the energies and preoccupations of the world’s powers as long as it remains the world economy’s main energy source.

The world consumed some 21.34 billion barrels of oil in 1960 (Annual Energy Review 2001 p. 297). This figure almost quadrupled by the turn of the century to 76.02 billion. World projections by the International Energy Agency for the next two decades see a continuation of this upward trend. Estimates of daily consumption by 2025 is a staggering 118.8 million barrels per day (IEO 2003 p. 185).

The figures for increase show a jump of 20 million from 1990-2025 in industrial countries alone. As the developing world proceeds on its path of economic development and industrialization their projected consumption will triple from 17.3 million barrels per day in 1990 to 50.7 million in 2025. See Reference Case Projections, EIA International Energy Outlook 2003 p. 185

These figures indicate enormous stresses on the world’s oil resources. The combined factors of the continued pursuit of the developing countries for industrialization and the sheer growth of world population most assuredly constitute increase in consumption.

But is there really crisis? Does crisis entail running out of this finite commodity? There is plenty of evidence to state otherwise.

Empirical evidence show that the world’s major producers have enough oil to fuel the world economy through the 21st century and beyond should current consumption patterns continue unabated. Wherein lies the problem then? The crisis stems largely from the insecurity of the Arab region, which shall continue to be the world’s largest oil producer. What exacerbate this volatility are the inherent significance of oil in world politics and the attendant interests of the world’s major international players.

Another factor aggravating the crisis is the difficulty of transition from the fossil fuel economy to more viable and sustainable (environment-friendly) alternatives.

Other energy fuels – coal, natural gas, nuclear and renewables – constitute 60% by volume of the world’s resources of commercial energy. No special concern however, attaches to the security of their supply or to their pricing (Fried & Tresize, 1993: 1).

Knowing that there exist other energy resources, this paper focuses on oil as it is not only the relatively cheapest, most preferred fuel of world industries but also owing to the fact of the instability of oil politics. Making ourselves familiar with trends in oil and the concomitant politics of the Middle East not only concerns us as students of international politics but as Filipino consumers. As a developing country with no, as of yet, substantial oil reserves, the fortunes of our economic development lie on our dependence on the Arab region’s exports and the precarious nature of oil markets.

The conditions of our migrant workers in the region should not be our sole concern but the eventual resolution of many of the political conflicts that have historically interrupted oil supplies and triggered price instability. Our motivations should be plain to see, as the consequences of such economic downturns hit us where it hurts the most, in our pockets.

Is There Shortage: The World’s Crude Oil Supply

See World Oil Markets

The table above provides us with the following information:

1. Substantial increase of oil production from Persian Gulf producers.
2. Doubling of oil production by other OPEC.
3. Stagnation of production by exporting industrialized countries.
4. Total world supply in 2025 meets projected world consumption (118.8 million barrels per day).
5. Persian Gulf producers account for almost 1/3 of total world production.

On the question of shortage, it is apparent that we shall not run out of this limited resource any time soon. What should concern us however is that the bulk of redeemable oil reserves still remains in the Persian Gulf. This is compounded by real American business, political and strategic interests in oil, “the US being the world’s largest producer, consumer and importer of energy (Stobaugh & Yergin 1979).”

Centrality of Oil in the World Economy and World Politics

Power struggles staged in the Middle East have significantly altered the fortunes and interests of not only those directly involved in the international oil system such as the oil companies and their governments and producer governments, but of every consumer in the world.
In fact, we may even argue that the hard-hitting impact in oil price increases affects each and every person in the planet remotely needing some form of energy or another.

The latter half of the 20th century is fraught with such struggles, from the two oil crises in the 70’s to the Gulf war in 1991, to the most recent US intervention in Iraq. American military engagement, no matter how quixotically couched in the language of freedom, democracy and the fight against evil, should be properly framed within the context of oil. Such substantial political, economic and financial energies expended by the world superpower luridly demonstrates the utmost significance of this energy source, not only to American interests but to the world economy as a whole.

Oil’s viability as a cheap energy source and American dominance in oil production in the Post World War II era installed the world’s current energy systems. Oil became the preferred fuel of industry and the discovery of vast oil fields in the Middle East fueled the postwar energy boom. Perhaps US oil hegemony, secure in its monopoly, contributed to world oil dependence and non-exploration of other energy sources. Western Europe and Japan, with no significant reserves of their own, showed no hesitance in heavy importation. “Early periods of energy growth had required relatively minor trade in fuels, but in the 50s and 60’s, countries that had virtually no oils of their own showed little hesitancy about shifting to an oil-based economy (Flavin & Jensen, 1995: 35).”

In fact, until the Oil Crisis of 1973, control of oil supply was securely in American hands. Five out of the seven major oil companies (7 Sisters) were American. The US government’s political backing from the very beginning of American oil ventures in the Arab region was palpable from the early 30’s up until today.

In 1945 the National Security Council indicated that “It is in our interest that this vital resource [Saudi Arabian oil] remains in American hands. (Stobaugh, 1979).”
Yet another illustration of government intercession was the American-backed installation of the Shah of Iran, which wrested control of Iranian oil from British Petroleum.

Arab Control: OPEC and the Power Shift

The quadrupling of oil prices from $2.48 to $11.65 per barrel in 1973 (Spero & Hart, 281) was the climax of the struggle for control of oil production from the hands of oil companies to national governments. Factors leading to American decline in dominance are; firstly, significant decrease of domestic production in the US itself (Stobaugh 1979, Fried & Tresize 1993, EIA 1996).

US crude oil and natural gas plant liquids has been declining since the early 1970’s from its 11.3 million barrels per day peak…The decline has occurred mainly because the US is the most mature producing region in the world, with over 3 million oil and gas wells completed since the first was drilled in Pennsylvania in 1859 (p. 67).

See US Crude Oil Imports: Growing Dependence, Energy Information Administration.

Aside from the increasing oil dependence of the OECD on imports, another factor which facilitated the shift was the increasing cooperation of the major exporting countries, then responsible for 80% of the world’s exports. The OPEC was spearheaded by Saudi Arabia, Iraq, Iran, Kuwait and Venezuela in 1960 (Al Sowayegh 1983: 33).

Their intentions in establishing the organization are clear.

The aims of the organization are as follows:

Article 2
A. The principal aim of the Organization shall be the co-ordination and unification of the petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively.

B. The Organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.

C. Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to those investing in the petroleum industry.

Article 3
The Organization shall be guided by the principle of the sovereign equality of its Member Countries. Member Countries shall fulfill, in good faith, the obligations assumed by them in accordance with this Statute.

Article 4
If, as a result of the application of any decision of the organization, sanctions are employed, directly or indirectly, by any interested company or companies against one or more Member Countries, no other Member shall accept any offer of a beneficial treatment, whether in the form of an increase in oil exports or in an improvement in prices, which may be made to it by such interested company or companies with the intention of discouraging the application of the decision of the Organization (, emphasis are my own).

The OPEC has used oil as a policy instrument in the past and it should not hesitate to do so in the future. They are equally aware of oil’s essential role in the world economy. It should not be misconstrued however, that they would unthinkingly raise oil prices without being constrained by market forces considerations. It is in their interest, specially the largest oil producers, to maintain the international economy’s stability as oil revenues are frequently re-invested in international banks located in Europe or North America. In any case, oil will be foremost in the organization and the members’ calculation of interests since for many, oil rents constitute a sizeable source of revenue.

Conclusion: Conditions of Crisis

See Projected Primary Energy Supply, World Energy Outlook 2003.

Alternative sources of energy and technologies are present and are possible candidates to power the world’s needs. But oil should continue to be the main exploitable resource.

Oil supplies and price stability will crucially hinge on Middle East politics. At present, the region continues to be a volatile hotbed of deep rooted conflicts whose resolutions are not foreseeable in the near future. US perceived dependence on Arab Oil contributes to their strategic plans for the Middle East. At the same time interest in Middle East politics should continue and interventions are likely as long as oil interests are at risk.

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