Missing the Oil Story

Only two articles in the American media since September 11 have tried to describe how Big Oil might benefit from a cleanup of terrorists and other anti-American elements in the Central Asia region.

October 15, 2001  |    

Recently I attended one of those legendary Washington dinner parties, attended by British cosmopolites and Americans in the know. A few courses in, people were gossiping about the Bush family's close and enduring friendship with the Saudi ambassador, Prince Bandar, dean of the diplomatic corps in Washington. By the end of the evening, everyone was talking about how the unfolding events were going to affect the flow of oil out of Central Asia.

I left wondering whether 6,000 Americans might prove to have died in New York for the royal family of Saud, or oil, or both. But I didn't have much more than insider dinner gossip to go on. I get my analysis from the standard all-American news outlets. And they've been too focused on a) anthrax and smallpox, or b) the intricacies of Muslim fanaticism, to throw any reporters at the murky ways in which international oil politics and its big players have a stake in what's unfolding.

A quick Nexis search brought up a raft of interesting leads that would keep me busy for 10 years if the economics of this war was my beat. But only two articles in the American media since September 11 have tried to describe how Big Oil might benefit from a cleanup of terrorists and other anti-American elements in the Central Asia region. One was by James Ridgeway of the Village Voice. The other was by a Hearst writer based in Paris and it was picked up only in the San Francisco Chronicle.

In other words, only the Left is connecting the dots of what the Russians have called "The Great Game" -- how oil underneath the 'stans' fits into the new world order. Here's just a small slice of what ought to provoke deeper research by American reporters with resources and talent.

Start with father Bush. The former president and ex-CIA director is not unemployed these days. He's been globetrotting as a member of Washington's Carlyle Group, a $12 billion private equity firm which employs a motorcade of former ranking Republicans, including Frank Carlucci, Jim Baker and Richard Darman. George Bush senior and colleagues open doors overseas for The Carlyle Group's "access capitalists."

Bush specializes in Asia and has been in and out of Saudi Arabia and Kuwait (countries that revere him thanks to the Gulf War) often on business since his presidency. Baker, the pin-striped midwife of 'Election 2000' was working his network in the 'stans' before the ink was dry on Clinton's first inaugural address. The Bin Laden family (presumably the friendly wing) is also invested in Carlyle. Carlyle's portfolio is heavy in defense and telecommunications firms, although it has other holdings including food and bottling companies.

The Carlyle connection means that George Bush Senior is on the payroll from private interests that have defense business before the government, while his son is president. Hmmm. As Charles Lewis of the Washington-based Center for Public Integrity has put it, "in a really peculiar way, George W. Bush could, some day, benefit financially from his own administration's decisions, through his father's investments. And that to me is a jaw-dropper."

Why can we assume that global businessmen like Bush Senior and Jim Baker care about who runs Afghanistan and NOT just because it's home base for lethal anti-Americans? Because it also happens to be situated in the middle of that perennial vital national interest -- a region with abundant oil. By 2050, Central Asia will account for more than 80 percent of our oil. On September 10, an industry publication, Oil and Gas Journal, reported that Central Asia represents one of the world's last great frontiers for geological survey and analysis, "offering opportunities for investment in the discovery, production, transportation, and refining of enormous quantities of oil and gas resources."

It's assumed we need unimpeded access in the 'stans' for our geologists, construction workers and pipelines if we are going to realize the conservation-free, fossil-fueled future outlined recently by Vice President Cheney. A number of pipeline projects to carry Central Asia's resources west are already under way or have been proposed. They would go through Russia, through the Caucasus or via Turkey and Iran. Each route will be within easy reach of the Taliban's thugs and could be made much safer by an American vanquishment of Muslim terrorism.

There's also lots of oil beneath the turf of our politically precarious newest best friend, Pakistan. "Massive untapped gas reserves are believed to be lying beneath Pakistan's remotest deserts, but they are being held hostage by armed tribal groups demanding a better deal from the central government," reported Agence France Presse just days before September 11.

So many business deals, so much oil, all those big players with powerful connections to the Bush administration. It doesn't add up to a conspiracy theory. But it does mean there is a significant MONEY subtext that the American public ought to know about as "Operation Enduring Freedom" blasts new holes where pipelines might someday be buried.

Understanding the Complexities and Contradictions of the Middle East - THE OIL STORY

Understanding the Complexities and Contradictions of the Middle East
Oil Wealth, Colonial and Neo-Colonial Intervention, and Cheap South Asian Labor
In a recent article titled "MISSING THE OIL STORY" Nina Burleigh who has written for The Washington Post, The Chicago Tribune, and New York magazine tried to explore the connection between the latest US military intervention in Afghanistan with unexploited energy reserves in the region. For instance, she pointed to studies that suggest that by 2050, Central Asia will account for more than 80 percent of our oil. She cited a September 10 report in the Oil and Gas Journal, which reported that Central Asia represents one of the world's last great frontiers for geological survey and analysis, "offering opportunities for investment in the discovery, production, transportation, and refining of enormous quantities of oil and gas resources."

She also suggested that there was lots of oil beneath the turf of the US's "politically precarious newest best friend, Pakistan". According to an Agence France Presse report released just days before September 11, "Massive untapped gas reserves are believed to be lying beneath Pakistan's remotest deserts, but they are being held hostage by armed tribal groups demanding a better deal from the central government."
In an earlier article, Steve Niva (Evergreen State College, Washington) had pointed to how US foreign policy in the Middle East had been driven by it's "interests" in backing and influencing regimes who controlled the massive oil resources of the region. That oil has been a major factor in the politics of the Middle East has been brought out by numerous analysts and scholars of the region.
In fact, the British had recognized the importance of the region's oil wealth as early as 1916 when the British secretly signed the 1916 Sykes-Pikot Agreement with France which called for the division of the Ottoman Empire into a patchwork of states that would be ruled by the British and French. The secret agreement was exposed when the Soviet government retrieved a copy in 1921, but a year earlier, the oil factor had been officially recognized in the 1920 San Remo Treaty. In 1928, the Red Line Agreement was signed, which described the sharing of the oil wealth of former Ottoman territories by the British and French colonial governments, and how percentages of future oil production were to be allocated to British, French and American oil companies. (See: Said Aburish, A Brutal Friendship: The West and the Arab Elite, Indigo, London, 1998)
The desire to control the region's oil wealth led to the creation of artificial states such as Kuwait, and states with mixed Kurdish and Arab populations such as in Syria and Iraq. The arbitrary creation of borders and the installation of unpopular pro-colonial leaders served the purpose of dividing the local populations and ensuring the establishment of impotent client-regimes whose administrations were subservient to colonial interests.
In 1945, when Britain was still a major colonial power, US and British coordination and cooperation were highlighted in the following memo: “Our petroleum policy towards the United Kingdom is predicated on a mutual recognition of a very extensive joint interest and upon control, at least for the moment, of the great bulk of the free petroleum resources of the world... US-UK agreement upon the broad, forward-looking pattern for the development and utilisation of petroleum resources under the control of nationals of the two countries is of the highest strategic and commercial importance.” (See: Memorandum by the Acting Chief of the Petroleum Division, 1 June 1945, FRUS, 1945, Vol. VIII, p. 54)
Two years later, the British government expressly noted that the Middle East was “a vital prize for any power interested in world influence or domination”, since control of the world’s oil reserves also meant control of the world economy. (See: Introductory paper on the Middle East by the UK, undated [1947], FRUS, 1947, Vol. V, p. 569.)
After the second world war, it became impossible to prevent the wave of democratization that swept the colonies, and one by one, the old puppet governments in the region collapsed. Britain and France lost their colonies, but the US stepped in as the new and dominant neo-colonial power in the region. US imperial goals were expressed without mincing any words in a 1953 internal U.S. document: “United States policy is to keep the sources of oil in the Middle East in American hands.” (See: NSC 5401, quoted in Mohammed Heikal,, Cutting the lion’s tail; Suez through Egyptian eyes, Andre Deutsch, London, 1986, p. 38)
In 1958, a secret British document described the principal objectives of Western policy in the Middle East: “The major British and other Western interests in the Persian Gulf [are] (a) to ensure free access for Britain and other Western countries to oil produced in States bordering the Gulf; (b) to ensure the continued availability of that oil on favourable terms and for surplus revenues of Kuwait; (c) to bar the spread of Communism and pseudo-Communism in the area and subsequently to defend the area against the brand of Arab nationalism.” (See: File FO 371/132 779. ‘Future Policy in the Persian Gulf’, 15 January 1958, FO 371/132 778.

The Arab peninsula's oil wealth also led to the cementing of ties between successive Saudi and US governments. US "interests" were exemplified by the quote: “...the defence of Saudi Arabia is vital to the defence of the United States”. Since the 1930s, when oil was discovered in the Arab peninsula, this became one of the key pillars of US foreign policy in the region, and the US government did everything in it's power to maintain the feudal regime of the the house of Al Sa’ud. Operateing without any regard for democratic norms or civil rights for it's citizens or millions of migrant workers that produce most of the nation's wealth, this royal clan which has been propped up since 1943, has also been called the largest family business in the world. Lacking any popular mandate, it has survived largely on the basis of US military strength, and according to some analysts, the US government has pumped in over $33 billion in weapons, military supplies and equipment so as to preserve the authority of this decadent and oppressive monarchy.

The US government (through the CIA) has also been implicated in the coup against the democratically elected, left-leaning government of Dr. Mohammad Mossadeq, which had planned to nationalize Iran’s oil industry. In it's place, the Shah was installed as a result of a covert operation masterminded by the American CIA and British MI6. (See quotes from 'The Federation of American Scientists' in C. M. Woodhouse: Something Ventured, Granada, London, 1982; Roosevelt, Kermit, Countercoup: The struggle for the control of Iran, McGraw Hill, London, 1979.)

Critics of US policy such as Middle East observer and scholar, Mamoun Fandy of Georgetown University’s Center of Contemporary Arab Studies have noted how: “Securing the flow of affordable oil is a cornerstone of U.S. Middle East policy.". Noting that uncritical U.S. support for autocratic Gulf monarchies and their human rights abuses exposes the hypocrisy in American rhetoric about democracy and human rights and "creates the perception among Gulf subjects that their countries are being ruled in the interests of an outside power." (See Mamoun Fandy ‘US Policy in the Middle East’, Foreign Policy In Focus, Vol. 2, No. 4, January 1997.)

It is therefore hardly surprising that anti-war activists are quick to notice the role of controlling the world's oil supplies in US military maneuvers in the region. In an Oct 10 statement issued by Darshan Pal and G. N. Saibaba of the All India Peoples Resistance Forum (AIPRF), there was a suggestion that the US was waging a new war for oil and more military bases in the Middle East. That Germany, France and Japan (who have previously benefited from the deposits of super-profits from the oil-fields of the Middle East) have endorsed the latest US war efforts suggests that this is indeed quite likely.
Vital to the profitability of oil production in the Middle East is the vast and unhindered supply of cheap labor mainly from the South Asian region. While India is the largest supplier of high-technology intellectual workers in the kingdoms of the Persian Gulf, a variety of skilled and unskilled manual workers are provided not only by India and Pakistan, but also by countries such as Nigeria, Egypt and the Sudan in Africa, and by Bangladesh, Sri Lanka, Thailand, Indonesia and the Philippines in Asia. In Saudi Arabia, immigrant workers make up at least 35 percent of the 15 to 64 age population group. In addition to filling many low paid manual jobs, immigrants are estimated to provide 84 percent of doctors, 80 percent of nurses, 55 percent of pharmacists and 25 percent of all teachers. More recently however, the Saudi government has begun to replace expatriate workers with Saudi nationals, and thousands of foreign workers without proper papers have been arrested and deported.
Nevertheless, immigrant workers play a vital role in these economies, not only in Saudi Arabia, but also in the Arab Emirates, Oman, Qatar, Kuwait and Bahrain. In some of these Gulf kingdoms, temporary immigrant workers outnumber citizens by a factor of 2 to 1, or even 3-1. Although the ruling elites in these kingdoms are amongst the richest people on the planet, not all the citizens benefit from the super-profits garnered from the oil industry, and women are often given a raw deal, particularly in Saudi Arabia.
By some accounts, as much of 40 percent of the country’s oil revenues goes straight into the pockets of the ruling family. As a result, poor education and unemployment are increasingly becoming the bane of many of these authoritarian monarchies, as is the repression against local dissent. The complete suppression of the rights of immigrant workers, has of course, been a much older problem.
Secrecy and fear permeate every aspect of the state structure in Saudi Arabia, and most Gulf Kingdoms lack political parties, trades unions, workers safety or immigrant rights advocates, women's groups, or other such democratic organizations. There are no bar associations or organizations that might ensure a fair and independent judicial process. As a result, political and religious opponents of these governments are detained indefinitely without trial or are imprisoned after grossly unfair trials. Torture is endemic, and foreign workers, particularly non-Muslims are most at risk.
With few exceptions, there are stringent controls on media outlets. In Saudi Arabia, the government controls all the domestic radio and TV stations, and closely monitors privately owned print media. No criticism of Islam, the ruling family or the government is tolerated. Forms of punishment are often quite barbaric and include public executions and amputations. Also frequent are private acts of vendetta and rape against less than docile immigrant workers, particularly women.
As the citizenry feels a growing sense of alienation vis-a-vis these highly unpopular and repressive regimes, the US government is now being held responsible for this state of affairs. At the same time, immigrant workers remain completely voiceless and are most oppressed. While there have been several attempts at organizing amongst such workers, state repression and the temporary nature of the work-tenure of most immigrants hinders the formation of lasting organizations that could successfully ameliorate working conditions for the most exploited of these expatriate workers. Temporary contract workers thus pay a very heavy price for the super-profits that are generated in the oil-fields of the Middle East.
Although the nations that export labor to the Middle East benefit from the hard-currency savings repatriated to their home countries, many of these countries suffer more from the high price of energy resources that strangulates the growth of the domestic economy in these countries. Oil-deficit nations, such as India and the Philippines are at a grave disadvantage in this regard. But all capital-poor nations suffer to the extent that the profits from the oil-wealth of the Middle East are deposited in banks in the US, Britain, France, Germany or Japan.
Only a small fraction of this important source of capital finds it's way into the economies of poor countries in Africa or South Asia, and even when it does, such capital investments are laden with onerous and debilitating conditions. South Asian nations are amongst the worst victims, having already suffered two centuries of grueling oppression under British colonial rule. Now they remain capital starved, even as their citizens toil hard to make the oil-rich gulf kingdoms, the richest in the world. They also suffer from the export of the most medieval and repressive versions of Islamic orthodoxy, preventing the people of Pakistan, India and Bangladesh from uniting against what are clearly, common enemies.
As the old colonial powers join hands with the US government in waging new wars in the Middle East, it is crucial that the people of the Middle East, along with their often more oppressed brothers and sisters all across Asia and Africa, refrain from religious extremism and ultra-nationalist sectarianism, but instead, join hands. By understanding the roots of their common oppression, and by uniting in a spirit of mutual respect - they can jointly root out all vestiges of colonial and neo-colonial plunder and pillage that have created enormous tensions and dissatisfaction all across the world.
By encouraging their governments to cooperate with each other instead of competing to become the most loyal lackeys and agents of the US war-machine, the people of the region could usher in an era of peace and progress, putting an end to the social, political and economic misery that has besieged the people of the colonized world for far too long.

Libyan peace could bring oil bonanza

The country could double its crude output if international firms can return to revamp shuttered oil fields.

NEW YORK (CNNMoney) -- If a lasting peace manages to take hold in Libya, in just a few years the country's pre-war production of 1.6 million barrels a day of highly prized light oil could be flowing into the market.

For that to happen, it's likely a huge investment to rebuild the nation's decimated oil, transportation and social infrastructure will need to be made. That means millions, maybe billions, of dollars could be up for grabs for oil service companies like Halliburton (HAL, Fortune 500) and Schlumberger (SLB).

But the real prize lies below ground. The country has proven reserves of billions of barrels of untapped oil, the largest oil reserves in all of Africa. Some hope there's also billions more in undiscovered oil.

Thanks to years of underinvestment by the Gadhafi regime and international sanctions that kept many oil companies out, Libya hasn't developed its oil reserves so that they can produce to their full potential.

With the proper investment, some say Libya could go from a pre-war output of around 1.6 million barrels a day to 3 million barrels a day in ten years time.

"The oil is underground," said Ross Cassidy, a Libyan oil analyst at the energy research firm Wood Mackenzie. "It's a question of having the right conditions above ground that will allow investment."

Libyan oil could take years to come back

The right conditions began to materialize in 2004, when Gadhafi gave up his nuclear weapons program and international sanctions were lifted against Libya.

In short order, dozens of agreements were signed with big European firms like BP (BP) and Shell (RDSA), along with smaller ones like Italy's Eni, France's Total (TOT) and Spain's Repsol. American companies like Occidental (OXY, Fortune 500), ConocoPhillips (COP, Fortune 500), Marathon (MRO, Fortune 500) and Hess (HES, Fortune 500) also got in on the act.

Marathon was the only company to immediately respond to a request for comment.
The company wouldn't say what it though of Libya's long term oil potential, but did say it had expected to produce 50,000 barrels a day in 2011 from Libya before the war started. When it might be able to reenter the country is unclear.
"To speculate on a timeframe for our return would be premature at this point," the company said in a statement. "We are planning as if there will be some damage to our facilities as well as normal issues associated with disuse."
Most of the agreements signed by the international oil companies called for increasing production from the country's existing oil fields, although some effort was put into finding new oil reserves.

That all stopped when war broke out last February.

While work on existing oil fields was progressing before the war started, the promise of vast new discoveries didn't pan out as well as some had hoped -- certainly not on the order of a country like Iraq, which is expected to triple or quadruple its oil output over the next couple of decades.
"Libya fell short of expectations," said Jim Burkhard, managing director of global oil supply at IHS Cambridge Energy Research Associates. "We didn't see the types of discoveries that would lead to very strong growth over the next decade."
Still, Burkhard said reaching three million barrels a day in 10 years "is in the realm of possibility."

0:00 / 2:16 Libya's long road back to oil power

But besides war, there are other obstacles to investing in Libya. Chief among them is the high royalty rate companies must pay to operate there.
Perhaps dispelling the notion in some circles that Western governments went to war in the country to "take Libya's oil," most of the contracts signed with the international oil companies stipulate that 90% of the proceeds generated from new oil production go straight to the national government.
That's not out of line with many other oil exporting countries, but it's much higher than the 50% or so oil companies pay in the United States. If Libya's royalty rate were lower, it's possible oil companies would invest more money there.
The contracts also contain strong provisions requiring the international oil firms to use lots of Libyan labor and materials, a process which could slow oil field development but greatly benefit the broader Libyan economy.
There's some disagreement among analysts if a new Libyan government will review those contracts, lowering the royalty rate or labor requirements in an attempt to entice more foreign investment.
'They weren't offering particularly attractive terms," said Burkhard. "They may reconsider those contracts to make it more attractive to invest."
But Wood Mackenzie's Cassidy says no.
"Every Libyan is fully aware of the importance of the oil sector and will ensure it is developed for the benefit of the Libyan people, just like the Iraqis are doing," he said. Iraq also has a royalty rate that can exceed 90%.
Whatever the outcome with the contracts, the most important thing currently stifling oil production is the ongoing violence in the country, and the damage that may have caused.

The Economic Policy Behind Intervention in Libya Chases Its Own Tail

The Economic Policy Behind Intervention in Libya Chases Its Own Tail

By Marshall Auerback, a hedge fund manager and portfolio strategist. Cross posted from New Deal 2.0

Any intentions of boosting the economy will be obliterated by our spending on military actions.

As my friend Chuck Spinney has noted in an exchange of emails, President Obama’s actions in Libya show that he has caved in to the “humanitarian interventionists” in his administration, as well as British/French/American post-colonial and oil interests. The result: yet another war with a Muslim country that has done nothing to us. Additionally, the fact that we are doing nothing to staunch the Saudi/Bahraini/Yemeni crackdowns smacks of hypocrisy and will hurt us even more on the Arab streets.

We seem to have developed a very basic rule of thumb when it comes to these wars of choice: if an insurgency threatens oil supplies directly or indirectly, we move. If it doesn’t, we don’t. Hence Syria can kill thousands of insurgents (as they did in the early 1980s) and we do nothing. Yemen doesn’t have oil facilities; so we do nothing. In Bahrain we have a huge base and unrest has repercussions for the Shiite part of Saudi Arabia where the oil is. We move via the Saudis. In Libya there is oil. Again, we moved.

Gasoline today is where it was in 2008 when both WTI and brent crude oil were at $126 a barrel. Oil prices are at a level that can now impact demand. And not just by squeezing real incomes, but by depressing the sentiment of US consumers who are still lacking confidence from persistently high unemployment, threats of more downsizing, and falling house prices. The FHFA home price index for January with revisions just fell another full percentage point.

In short, we are out of policy levers to help the economy, especially now that we’ve unilaterally taken the fiscal policy option off the table. All of a sudden War #3 makes sense: We’re in Libya to make sure that the oil keeps flowing, because a high oil price depresses what’s left of consumer demand. In the meantime, as this nugget from The Hill illustrates, we’ve quickly blown through the budget “savings” proposed by the GOP, as we’re spending about $100 million a day in Libya. And oil prices have continued to rise as a consequence of perceived dangers to oil production facilities brought about by the escalation of this conflict.

Naturally, the GOP will look for more savings and the focus will invariably shift to “entitlement reform” led by “responsible, bipartisan” Senators, usually Democrats, such as my state’s own Michael Bennet. He is being applauded by the mainstream media for his “statesmanlike” actions in his efforts to negotiate a budget package that includes possible changes in taxes, discretionary spending and entitlements such as Medicare and Social Security.

In the meantime, defense is surely off the chopping block. We’re using our most sophisticated tomahawk weaponry in this conflict. The new tomahawk apparently is a very sophisticated piece of equipment. It stops over the target; it has an “eye” where it can look the target over, communicate with the command, and then go after the target. Now the courtiers in the Pentagon can go back to their Congressmen and use this as a sign that the American people are getting value for the money in their defense budget. “Look at how sophisticated this stuff is,” they can say. “Look how it’s enhancing our ability to win this war while minimizing American casualties. If you implement stringent defense cutbacks, this is precisely the sort of program that will be endangered.” A total crock, but it will work, as it always does.

So you can forget about defense cuts. This convenient little episode of military gymnastics has taken the defense budget off the chopping block — which is yet more proof that the progressives will never make any progress unless they muster the courage to take on the Military-Industrial-Congressional Complex.

So what’s on the horizon? More cuts in other areas of the budget for sure. The resultant fiscal contraction, if implemented, will put a halt to any incipient recovery, which the war is ostensibly designed to sustain by helping to reduce oil prices.

Do you ever get the feeling that American policy represents nothing more than a dog chasing its tail?

Oil - Coping with change

Oil - Coping with change

With Mossadeq's fate serving as a warning to those who might challenge the international oil companies and their sponsors, the 1950s and 1960s were the golden age of the postwar oil regime. At the peak of their influence in the 1950s, the seven major oil companies controlled over 90 percent of the oil reserves and accounted for almost 90 percent of oil production outside the United States, Mexico, and the centrally planned economies. Moreover, they owned almost 75 percent of world refining capacity and provided around 90 percent of the oil traded in international markets.
Despite these strengths, the system contained the seeds of its own demise. The Iranian crisis demonstrated that threats to Western access to Middle East oil could come from within the region. Although the United States did not rule out the possibility of Soviet military intervention in the Middle East, U.S. threat assessments increasingly focused on the decline of British power, instability within the countries of the region, the anti-Western cast of Middle Eastern nationalism, and turmoil resulting from the Arab-Israeli conflict.
The Suez crisis grew out of the nationalization of the British-and French-owned Suez Canal Company by Egyptian nationalist leader Gamal Abdel Nasser in July 1956. The Suez Canal was an important symbol of the Western presence in the Middle East and a major artery of international trade; two-thirds of the oil that went from the Persian Gulf to western Europe traveled through the canal. Viewing Nasser's action as an intolerable challenge to their position in the region, the British, together with the French, who resented Nasser's support for the Algerian revolution, and the Israelis, who felt threatened by Egyptian support for guerrilla attacks on their territory, developed a complex scheme to recapture control of the canal and topple Nasser through military action.
The plan, which they put into action in late October, depended on U.S. acquiescence and cooperation in supplying them with oil if the canal were closed. The Egyptians closed the canal by sinking ships in it. In addition, Saudi Arabia embargoed oil shipments to Britain and France, and Syria shut down the oil pipeline from Iraq to the Mediterranean. Incensed by his allies' deception, concerned about the impact of their actions on the Western position in the Middle East, and embarrassed by the timing of the attack—just before the U.S. presidential election and in the midst of the Soviet suppression of the Hungarian revolt—President Dwight D. Eisenhower put pressure on the British, French, and Israelis to withdraw. The United States refused to provide Britain and France with oil, blocked British attempts to stave off a run on the pound, and threatened to cut off economic aid to Israel. The pressure worked. Following the withdrawal of Anglo-French forces, the U.S. government and the major oil companies cooperated to supply Europe with oil until the canal was reopened and oil shipments from the Middle East to Europe restored.
In the wake of the Suez crisis, President Eisenhower pledged to protect Middle East states from the Soviet Union and its regional and local allies. In addition, the United States sought to bolster its friends in the region through economic and military assistance. With the exception of Lebanon, where fourteen thousand U.S. troops landed in July 1958 to shore up a pro-Western regime, most of these friends were authoritarian monarchies, demonstrating that despite its rhetoric about democracy, the United States was primarily interested in access to oil. Israel presented the United States with an additional dilemma. On one hand, it was pro-Western and militarily the most powerful country in the region. On the other hand, U.S. support for Israel was a major irritant in relations with the Arab states of the Middle East, including the key oil-producing countries in the Persian Gulf.
The Suez crisis highlighted the growing importance of Middle East oil for western Europe. During the 1950s and the first half of the 1960s, the United States was capable of supplying its oil needs from domestic sources, and Middle East oil went mainly to western Europe and Japan. Some Middle East oil made its way into the United States, and, more importantly, Middle East oil displaced Venezuelan oil from European markets and led to an increase in U.S. oil imports with consequent pressure on prices and high-cost domestic producers.
The question of oil imports presented U.S. policymakers with a strategic dilemma. If what would be needed in an emergency was a rapid increase in production, oil in the ground was of little use, and even proved reserves would not be particularly helpful. The need could only be filled by spare productive capacity. Too high a level of imports would undercut such capacity by driving out all but the lowest cost producers. Moreover, reliance on imports, especially from the Middle East, was risky from a security standpoint because of the chronic instability of the region and its vulnerability to Soviet attack. However, restricting imports and encouraging the increased use of a nonrenewable resource would eventually under-mine the goal of maintaining spare productive capacity and preserving a national defense reserve.
Rising oil imports led to demands by domestic producers and the coal industry for protection against cheaper foreign oil. In contrast, the President's Materials Policy Commission, appointed by President Truman in January 1951 and headed by the chairman of the Columbia Broadcasting System, William S. Paley, had called for a policy of ensuring access to the lowest cost sources of supply wherever located. The commission's report, issued in June 1952, rejected national self-sufficiency in favor of interdependence, arguing that the United States had to be concerned about the needs of its allies for imported raw materials and about the needs of pro-Western less developed countries for markets for their products. Although the commission admitted that self-sufficiency in oil and other vital raw materials was possible, it argued that it would be very expensive, that the controls necessary to make it possible would interfere with trade, that it would undercut the goal of rebuilding and integrating western Europe and Japan under U.S. auspices, and that it would increase instability in the Third World by limiting export earnings.
Nevertheless, after attempts to implement voluntary oil import restrictions failed, the Eisenhower administration, in March 1959, imposed mandatory import quotas, with preferences given to Western Hemisphere sources. Although the Mandatory Oil Import Program (MOIP) seemed to be a victory for advocates of national self-sufficiency, the result, ironically, was to make the United States more dependent on oil imports in the long run because the restrictions meant that increases in U.S. consumption were met mainly by domestic production.
High levels of oil use were built into the U.S. economy in several ways. Following World War II, the U.S. transportation sector was transformed as automobiles, trucks, buses, airplanes, and diesel-powered locomotives replaced steam and electric-powered modes of transportation. Between 1945 and 1973, U.S. car registrations increased from 25 million to over 100 million, and per capita gasoline consumption in the same period skyrocketed as fuel efficiency fell and gas-guzzling car models grew more popular. Neglect of public transportation and dispersed housing patterns fostered by increasing suburbanization further fueled increased automobile use. In addition, the nation's truck population grew from 6 million in 1945 to around 21 million in 1973, and trucks increased their share of intercity freight traffic from 16 percent in 1950 to 21 percent in 1970.
Public policy aided and abetted these changes. Since the early 1930s, the so-called highway lobby had been promoting public expenditures for highway construction. Between 1956 and 1970, the federal government spent approximately $70 billion on highways, as contrasted with less than $1 billion on rail transit.
The dramatic rise in U.S. oil consumption, coupled with a shift in investment to more profitable overseas areas, decimated the U.S. reserve position. By 1965, the U.S. share of world production had fallen to about a quarter and by 1972 to a fifth. The U.S. share of world oil reserves declined even more drastically, from around 46 percent on the eve of World War II to a little more than 6 percent in 1972. With U.S. oil consumption continuing to climb, domestic production was no longer able to meet demand, and oil imports rose from 9 percent of U.S. consumption in 1954 to 36 percent by 1973.
U.S. oil import restrictions also put downward pressure on world oil prices by limiting U.S. demand for foreign oil. Beginning in the mid-1950s, increasing numbers of smaller, mostly U.S.-owned companies challenged the majors' control over the world oil economy by obtaining concessions in Venezuela, the Middle East, and North Africa. Drawn by the lure of high profits, aided by the increasing standardization and diffusion of basic technology and the security provided by the Pax Americana, and unconcerned about reducing the generous profit margins available in international markets, the newcomers cut prices in order to sell their oil. Pressure from the production of these companies, coupled with the reentry of Soviet oil into world markets in the late 1950s, exerted a steady downward pressure on world oil prices.
Declining oil prices led to a resurgence of economic nationalism in the producing countries, whose incomes were reduced. In September 1960, following cuts in posted prices (the price on which government revenues were calculated) by the major oil companies, the oil ministers of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela met in Baghdad and formed the Organization of the Petroleum Exporting Countries. OPEC was able to prevent further declines in posted prices, and a strong increase in world demand in the 1960s allowed the companies to increase production, thereby maintaining their overall level of profits. As new sources of African production entered the market later in the decade, however, market prices resumed their downward trend.
Despite falling prices, the spectacular increases in oil consumption enhanced the position of Middle East oil in the world oil economy. At the same time the U.S. oil position was eroding, the Middle East and North Africa were becoming the center of the world oil industry. By 1972 these areas accounted for 41 percent of world oil production and contained almost twothirds of the world's proved reserves. Reacting to the changing circumstances, the region's oil producers, along with other OPEC members, began to pressure the oil companies to gain control of pricing and production decisions.
The profound political, economic, and strategic consequences of the U.S. involvement in the Vietnam War and the overall course of the Cold War reinforced the geological and economic factors that gave Middle East oil increased importance. By the early 1970s, the Soviet Union had achieved rough strategic parity with the United States, which raised the risks involved in U.S. intervention in the Middle East. Moreover, in the midst of the Vietnam War, the British decided to end their military commitments "east of Suez." To make matters worse, U.S. relations with the Arab oil producers, including Saudi Arabia, were becoming increasingly strained owing to U.S. support for Israel following the 1967 Arab-Israeli war, which left most of Palestine under Israeli control.
When the United States moved to airlift arms to Israel during the 1973 Arab-Israeli War, the Arab members of OPEC imposed an embargo on oil shipments to the United States and the Netherlands and reduced shipments to other countries, depending on their position in the Arab-Israeli dispute. The oil companies carried out the embargo, though they undercut its political purpose by shifting non-Arab oil to the embargoed countries and distributing the cutbacks so that both embargoed and nonembargoed countries had their oil imports cut by about 15 percent. Arab OPEC members unilaterally raised the price of oil by 70 percent in October, and by December the price had quadrupled from its level before the embargo. Although Iran and other non-Arab OPEC members did not join the embargo and cut back production and exports, they were happy to go along with the price increases spurred by the embargo and production cutbacks.
Differences among the United States and its allies on higher oil prices and on the Arab-Israeli conflict undercut attempts at a unified response to the embargo. Although there was some tough talk about military action to regain control of the Middle East oil fields, the reality of the Cold War and fears during the Gulf War of 1991 (later borne out), that use of force would lead to the destruction of the oil fields, prevented such action. U.S. allies, noting that higher international oil prices could provide the United States, which was much less dependent on imported oil than they were, with a means of reversing the decline in its share of world production, doubted the U.S. commitment to lowering oil prices, further complicating a unified response.
The United States sought to salvage the old oil order by organizing the Western consuming nations in a united front against OPEC. In February 1974 the U.S.-initiated Washington Energy Conference laid the groundwork for the establishment later in the year of the International Energy Agency. The IEA called on member states to reduce their reliance on Middle East oil by diversifying their sources of energy and adopting policies promoting reductions in oil consumption.
The United States also moved to shore up its position with the oil-producing countries. In 1969, President Richard Nixon had announced that the United States could no longer intervene directly in all parts of the world, but rather would rely on regional allies, which it would provide with arms and other assistance to carry out their tasks. In the Middle East, the United States looked to Iran and Saudi Arabia as the "twin pillars" of pro-Western stability in the region, and rewarded the two monarchies with almost unlimited access to the latest U.S. military equipment. Between 1970 and 1978, for example, the United States sold Iran over $20 billion worth of military equipment and training. The United States also provided massive military and economic assistance to Israel following the 1973 war, viewing the Jewish state as a strategic asset and counter to Soviet client-states such as Syria and Iraq. Egypt (after 1973) and Turkey also received large amounts of U.S. aid.
The Arab oil embargo had a major economic impact. Higher oil prices intensified the economic problems faced by the United States and the other Western industrial countries in the 1970s, especially inflation, which was now accompanied by stagnation and increased unemployment. Non–oil-producing developing countries were also hit hard as they had to pay higher prices for products from the developed countries as well as for oil. Many countries borrowed large sums from Western banks to cover their costs, a move that contributed to the Third World debt crisis of the 1980s when the United States sharply raised interest rates in late 1979.
In contrast, higher prices enabled the Soviets, who were in the process of developing new oil and gas fields in Siberia, to increase their export earnings. While allowing the Soviets to import large amounts of Western grain and machinery, most of the exports came from new areas east of the Urals, and the cost of developing the necessary transportation infrastructure drained scarce capital from other sectors of the economy. Oil earnings also tended to mask the Soviet Union's increasingly severe economic problems and to reduce incentives for undertaking sorely needed structural reforms. The oil crisis may also have contributed to Soviet decisions to increase their involvement in the Third World in the 1970s, decisions that proved costly not only in terms of resources but also in their negative impact on détente.
The first oil shock also accelerated efforts by oil-producing countries to gain control of their oil industries. While the timing and extent of nationalization differed, most OPEC nations effectively nationalized their oil industries during the 1970s. The equity participation of the international oil companies in OPEC production fell from about 94 percent in 1970 to about 12 percent in 1981. Although they lost control of production and their ability to set prices, the major oil companies received generous compensation. In most cases, the companies maintained access to the oil they had previously owned through long-term contracts and were retained to manage the newly nationalized industries. Moreover, higher oil prices provided the major oil companies with windfall profits, easing the pain of losing formal control of their concessions.
Because it was both a major oil producer as well as the leading oil consumer, higher oil prices posed a dilemma for the United States. On one hand, higher prices could provide U.S. domestic producers with incentives for increased exploration and development, making the nation more self-sufficient in oil. On the other hand, higher prices fed inflation and slowed economic growth. The fact that the oil companies profited from higher oil prices and oil shortages prompted suspicions that the companies had colluded with OPEC to produce such an outcome. These suspicions made it impossible for the U.S. government to remove oil price controls, initially imposed in August 1971 as part of a larger package of wage and price controls. Although lower domestic oil prices lessened the impact of the rise in international oil prices on the U.S. economy, they also encouraged consumption and led to increased demand being met mainly by imported oil. When the second oil shock hit in 1979, the United States was more dependent on oil imports than in 1973.
The overthrow of the shah of Iran in early 1979 provoked this second oil shock, disrupting markets and causing prices to double. The fall of the shah and fears of internal unrest in Saudi Arabia convinced U.S. policymakers that the previous policy of reliance on regional surrogates to guard Western interests in the Middle East was no longer viable. While Israel was useful to counter Soviet clients, too great a reliance on Israel could prove counterproductive by alienating the Arab states. Therefore, the United States began to explore the possibility of introducing U.S. military forces into the region. These plans received a boost from the Soviet intervention in Afghanistan in December 1979, which revived fears of direct Soviet encroachment in the region. In addition, the United States was concerned that Soviet and Cuban involvement in the Horn of Africa, an area in the northeast part of the continent close to the Middle East, could threaten Western access to Middle East oil.
The prospect of losing access to Middle East oil led President James Earl Carter to announce in January 1980 that "an attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such assault will be repelled by any means necessary, including military force." The Carter administration followed up soon thereafter with steps to create the long-discussed rapid deployment forces for possible use in the region. Planned from the time of the collapse of the shah's regime, the move reflected U.S. belief that local forces were not sufficient to protect Western interests in the Middle East from either Soviet aggression or internal instability. The Carter administration also sought to strengthen the "special relationship" between the United States and Saudi Arabia by continuing to sell sophisticated arms to the desert kingdom and by allowing the Saudis to buy massive amounts of U.S. Treasury securities outside normal channels.
The administration of Ronald Reagan (1981–1989) built on these initiatives, forging a foreign oil policy based on market forces and military power. Reagan began by ending oil price controls, allowing U.S. prices to rise to international levels in the hope that this would provide incentives to domestic producers and spur conservation. The Reagan administration continued the buildup of U.S. forces in the Middle East, transforming the Rapid Deployment Force into the Central Command. The Reagan administration also stressed close relations with Saudi Arabia, and worked with the Saudis and other conservative Persian Gulf producers to drive down international oil prices. Lower oil prices would not only help Western consumers but would also cut Soviet oil earnings. Finally, the United States began filling the Strategic Petroleum Reserve (SPR), established in 1977 to reduce the nation's vulnerability to oil supply interruptions. By 1990 the SPR held almost 600 million barrels of oil, somewhere between eighty and ninety days of net oil imports at then prevailing import levels. The other industrial nations also built up similar, and in some cases higher, levels of strategic reserves. Strategic reserves, although expensive to create and maintain, functioned as a substitute for the spare production capacity that the United States had once possessed.
Higher oil prices worked their way through the economies of the Western industrial nations and Japan to encourage significant increases in energy efficiency. The amount of energy required to produce a dollar of real gross national product declined 26 percent between 1972 and 1986. The gains in efficiency in oil use were even more dramatic: by 1990, 40 percent less oil was used in producing a dollar of real GNP than in 1973. As a result, by 1990 oil played a less significant role in the economies of the Western industrial nations than it had before the two oil shocks of the 1970s.
Higher oil prices also encouraged consumers to switch to other energy sources. While the use of coal and nuclear power increased, both turned out to have significant drawbacks, particularly those relating to the environment, and neither addressed the transportation sector, which accounted for the bulk of oil use. Although U.S. automobile fuel efficiency almost doubled between 1970 and 1990, this gain was partly eroded by a 40 percent rise in total motor vehicle use in the same period. In addition, the number of trucks on U.S. roads tripled between 1970 and 1990, and their fuel consumption doubled.
Higher oil prices also encouraged the development of alternative sources of oil. With higher prices and improving technologies of exploration and development, new sources of oil came on line in Alaska, Mexico, the North Sea, and the Soviet Union. U.S. production increased only briefly, however, and soon leveled off at around seven million barrels a day. Middle East oil production, which had accounted for 41 percent of world output in 1973 and 37 percent in 1977, fell to 19 percent by 1985. In 1986, with supply increasing and demand dropping, oil prices collapsed.
The collapse of oil prices provided a boost to Western economies but it also decimated the U.S. domestic oil industry, forcing the closure of high-cost wells. All producers experienced huge declines in export earnings. The Soviet Union was especially hard hit, and the collapse of oil earnings undercut Soviet leader Mikhail Gorbachev's hopes to use oil revenues to cushion the shock of economic reform. By the end of the decade, the Soviet oil industry was suffering from the same problems affecting the nation as a whole, and production and exports declined sharply.
Although lower prices led to increased demand for oil, producers in the Middle East captured most of the increase because they controlled the lowest cost fields. By 1990, oil imports were making up nearly half of U.S. oil supply, around 70 percent of western Europe's oil supply, and over 90 percent of Japan's oil supply; and 25 percent of U.S. imports, 41 percent of western Europe's imports, and 68 percent of Japan's imports originated in the Middle East.
Nevertheless, after rising sharply in the aftermath of the Iraqi invasion of Kuwait in August 1990, oil prices soon returned to preinvasion levels. The IEA contributed to stability by calling on member countries to make simultaneous use of their respective stockpiles. The success of U.S. diplomacy and military forces in the 1991 Gulf War demonstrated that with the end of the Cold War and the resulting retreat of the Soviet Union from a world role, the ability of the United States to intervene in the Middle East had increased significantly.
Low prices prevailed throughout most of the 1990s despite Iraq's exclusion from world oil markets. Russian oil exports recovered owing to Russia's need for export earnings and the drastic drop in domestic demand because of widespread deindustrialization. The Asian financial crisis of 1997 also kept demand down despite China's increasing imports. In the United States, lower oil prices led to increased consumption, as the number of private motor vehicles, especially gas-guzzling sport-utility vehicles and light trucks, continued to climb. By the end of the decade, the fuel efficiency gains of the 1980s had been lost. Rising consumption and OPEC production cuts led to sharp price increases in 2000 and 2001. What happened in the 1990s may foreshadow a pattern whereby lower prices lead to greater consumption which leads to higher prices which lead to lower consumption which leads to lower prices and the repeat of the cycle. Thus, a foreign oil policy based on market forces and military power has its own set of problems.

Read more: Coping with change - Oil

International Oil Transportation

 

International Oil Transportation

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1. Petroleum

Very few commodities have become as vital as petroleum since it can be used as a source of energy as well as a raw material in the manufacturing of plastics and fertilizers. As a commodity of strategic importance, petroleum has for long been the object of geopolitical confrontations. Several contemporary geopolitical events were closely related to oil or had consequences on oil supply and prices. The first event that triggered the geopolitical importance of oil was the decision in 1912 by the British Admiralty to convert warships from coal to oil propulsion because of speed and range advantages. Since Britain had no oil resources, it nationalized the Anglo-Persian Oil Company and committed itself to the protection of this resource in Persia (Iran after 1934).
World War I demonstrated the growing importance of the internal combustion engine (trucks, tanks and planes) on modern military operations. The 1920s were characterized by exploding civilian demand for oil because of motorization as the automobile was becoming a significant mode of transportation. A the same time, the industry quickly became controlled by a few major corporations that became the oil giants of today. The oligopolistic commercial control on the price and the production of oil was first established in 1928 by the Achnacarry Agreements between the "seven sisters", the major oil multinationals of the time.

"Seven Sisters". The seven major oil multinationals which by the early 20th century have achieved dominance over the industry. Five of them were American and the two other were British. The American companies included Exxon (Standard Oil of New Jersey), Mobil (Standard Oil of New York) and Socal (Standard Oil of California which later became Chevron), all of which were the result of the forced breakup of Standard Oil in 1911, and Gulf and Texaco which were created after the discovery of the Spindletop field in Texas in 1901. The British companies were Royal Dutch Shell (a joint venture with the Netherlands) and British Petroleum (BP), whose interest in world oil expanded with the discovery of oil fields in Persia (Iraq) and in the Dutch East Indies (Indonesia). Through mergers and acquisitions the "Seven Sisters" have become four; ExxonMobil, Chevron-Texaco, BP (acquired Amoco and Arco) and Royal Dutch Shell.

These corporations have invested massively in extraction infrastructures, especially in the Middle East and Latin America. They were effectively in control of the world's oil supply and demand with a set of strategies such as fixing quotas, prices and production. However, a nationalization trend started to emerge in many developing countries, sowing the seeds of future oil supply control and shocks. In 1938 Mexico forcefully took control, through expropriation, of its entire oil industry undermining for a while its access to foreign markets but triggering sympathy in many developing countries as a symbol against foreign exploitation of national resources.
World War II revealed to be a conflict strategically dominated by oil as key weapons were armored and air forces. The decision of the United States to establish an oil embargo on Japan in 1941 is one event that triggered the war in the Pacific. Japan's strategic objectives were to secure the resources of Southeast Asia, especially the oil fields of Indonesia, and has planned fast operations to achieve these objectives. The same year, Germany's invasion of the Soviet Union had among its major objectives the securing of the oil fields around Baku in the Caucasus region. Both Germany and Japan failed to establish a secure source of oil, contributing to their defeat in 1945 by strategically more mobile allied forces. Allied nations controlled about 86% of the world's oil supply.
The post World War II era underlined the growing geopolitical importance of the Middle East, as Europe and the United States were importing growing quantities of oil from that region. In 1948 the Ghawar Field was discovered in Saudi Arabia, which accounted for the largest conventional oil field in the world. The supply was shifting rapidly to this region as more oil reserves were discovered. Attempts were made to integrate countries like Iran, Iraq and Saudi Arabia in alliances with Western powers, but a series of geopolitical events, such as the creation of the OPEC and Islamic nationalisms, would complicate access to oil resources.

2. The Geopolitics of Petroleum

In view of the powerful economic control of oil production by Western multinational corporations (the Seven Sisters), several producing countries, most of them in the Middle East, had a goal to gather a greater share of the oil incomes by controlling supply. Venezuela, Iran, Iraq, Saudi Arabia and Kuwait founded the Organization of Petroleum Exporting Countries (OPEC) in 1960 at the Baghdad conference. From its foundation until the beginning of 1970s, the OPEC was unable to increase oil prices. The main reasons were that production was very important in non-member countries and because of the difficulty of OPEC members to agree on a common policy since economic theory clearly underlines that cartels are bound to fail at fixing prices. Consequently, developed countries were confident that the price of petroleum would remain relatively stable. The American Government even predicted in the early 1970s that oil prices might rise to about 5 dollars per barrel by 1980. In such an environment of low petroleum prices and strong economic growth, no developed country had an energy policy and energy waste was common. This situation however changed quickly.
In the 1970s, OPEC countries achieved control over more than 55% of the global oil supply and started to fix production quotas based on the oil reserves of each of its members. Each member began a process of nationalization of their oil industry (Libya, 1971; Iraq, 1972; Iran, 1973; Venezuela, 1975). By 1972, 25% of the ownership of oil operations in OPEC countries is nationalized, a figure that climbed to 51% by 1983. Another objective was to establish co-operation between producers in order to avoid competition that would bring the down the prices. This cartelistic objective was feasible in the context of a growing market demand and the dependency on only a few oil suppliers, but very difficult to maintain in a competitive environment. However, the initial trigger of the surge in oil prices in the 1970s was a monetary event. In 1971 the United States decided to "close the gold window" essentially removing the convertibility of the US dollar in gold. The dollar thus because entirely a fiat currency only backed up by the confidence in the American economy. Strong inflationary pressures thus began, as this event essentially became a "license to print", which quickly percolated into commodity prices, including oil. Between 1970 and 1973, oil prices jumped from $1.80 to $3.29 per barrel as OPEC countries adjusted their price to reflect the American inflationary monetary policy.
The Kippur War between Israel and Egypt (and several other Arabian countries) in 1973 gave OPEC additional reasons to intervene by nationalizing production facilities, reducing production by 25% and imposing export quotas. The goal was to undermine Israel's support, mainly by the United States. Oil became a geopolitical weapon. On October 19 1973, OPEC declared an oil embargo against the United States, which lasted until June 1974. The price of oil consequently climbed to $12 per barrel by the end of 1973, a fourfold increase. In a context of high oil demand, of limited additional capacity in developed countries and of no readily energetic substitutes, OPEC gained the temporary ability to control the price of oil. The market became controlled by supply (oil producers) causing the first oil shock.
Under the control of the OPEC, the price of oil remained high but stable from 1974 to 1978, around $12 per barrel. Developed countries started to worry about the exhaustion of oil reserves and unreliable supply sources but not much was done on this regard. The Iranian revolution of 1979 and the ensuing Iran-Iraq War (1980-1988) caused the second oil shock where the price of oil surged over $35 per barrel, imposing several drastic, but somewhat temporary, measures to lower oil consumption. This resulted in a relocation of energy-consuming industries, in strategies for consuming less energy (such as energy efficient cars and appliances), in relying more on national energy sources (petroleum, coal, natural gas, hydroelectricity, nuclear energy), in building strategic reserves, and in substituting petroleum for other energy sources when possible. It is estimated that about 2 billion barrels are held in strategic reserves around the world, the bulk of it in the United States, Japan and Germany. The Carter Doctrine (1980), stating that the United States would intervene militarily if its oil supply was compromised, is also the outcome of the uncertainties derived from the first and second oil shocks. The military presence of the United States in the Middle East was increased, as the oil of the Persian Gulf was clearly perceived as of foremost importance to national security.
At the end of the 1980s and at the beginning of the 1990s, OPEC countries lost their price-fixing power because of internal problems (economic and geopolitical conflicts between its members) and especially with the arrival of new producers such as Russia, Mexico, Norway, the United Kingdom and Colombia. These new producers were not submitted to OPEC policies and were free to fix their own prices. Mexico, for instance, surpassed Saudi Arabia in 1997 to become the second largest oil exporter to the United States. Latin American countries such as Columbia and Brazil are trying to boost their oil production. Vietnam is exploring offshore fields, as are other Southeast Asian countries, hopeful that there are major reserves under the South China Sea.
From 1982, divergences occurred within OPEC members to fix quotas and prices as competition increased. Furthermore, the share of OPEC dropped from 55% of all the petroleum exported in the 1970s to 42% in 2000, with an all-time low of 30% in 1985. That year, Saudi Arabia lowered its oil price to increase its market share while OPEC members were competing with each other to be allotted larger quotas. A decision was made to allocate quotas in proportion to proven oil reserves, which lead to an array of "creative accounting" practices in the estimation of reserves. Thus, reserves were indexed to fit production needs, leaving doubts about their true extent. For instance, Kuwait's reserves surged from 64 to 92 billion barrels in just one year and without any new discoveries. The reserves of the United Arab Emirates were boosted from 31 to 92 billion barrels. Iran announced that its real reserves were 93 billion barrels, up from 47 billion barrels. The most significant "increase" in oil reserves in 1985 came from Iraq when its reserves went to 100 billion barrels, up from previous figures of 47 billion barrels. Those inflated and possibly non-existent reserve figures remain today. The result of this inflation of reserves and the larger export quotas they permitted was an oil counter-shock that lowered the barrel price under 20 dollars, even reaching a record low of 15 dollars in 1988. The oil market was again a market controlled by the demand.
Abiding to production quotas became a major issue among OPEC members with countries such as Kuwait producing well above quota. This transgression was a motivation, among others, for the invasion of Kuwait by Iraq in 1990, triggering the First Gulf War (1990-1991). The market reacted to these uncertainties and the price of petroleum jumped to $23 per barrel. The United States applied the Carter Doctrine an intervened with a massive military operation, which ousted Iraqi forces of Kuwait. Then an oil embargo on Iraq was established by the United Nations. However, other petroleum-exporting countries were quick to expand their production to replace Iraq's and Kuwait's shortfalls and the price of oil fell to $15 per barrel by the end of the 1990s. Henceforth, OPEC countries only control about 40% of the global oil production. In the current setting OPEC can be considered as a dysfunctional cartel likely bound to failure and be dismantled. Formal price fixing mechanisms, both on the supply and demand sides, commonly fail as there are too many incentives not to abide, particularly if oil prices are high.
The beginning of the 21st century saw increased insecurities in oil supply, political pressures, monetary debasement and military interventions; a third oil shock has unfolded between 2003 and 2008. The Second Gulf War (2003), under the pretense of fighting terrorism and securing weapons of mass destruction (which turned out to be non-existent), saw the American occupation of Iraq. The outcome was a greater control of long term petroleum supply sources but with increasing political instabilities in the Middle East. Oil output from Iraq, which account for the fourth largest reserves on the world, has remained problematic. Additionally, instability in Venezuela (corruption and nationalization) and Nigeria (civil unrest), have stretched the world’s extra capacity thin. Increased demands, mainly from China which has become the world second largest importer, are also stretching global oil supplies. There are numerous challenges facing the global oil industry in terms of additional capacity, refining capacity and its distribution through a system of pipelines and tankers. The systematic debasement of the US dollar by the Federal Reserve is also contributing to higher oil prices through inflationary policies also followed by the European Central Bank. Attempts at mitigating the consequences of an asset inflation phase triggered by accommodating credit creation policies have spilled over the commodity and energy sectors. Unlike the first two oil shocks, the third oil shock was related to unhealthy mix of strained supplies, geopolitical risk and monetary debasement.

3. Petroleum Supply and Demand

The oil industry is oligopolistic both in its supply, demand, control and in its functional and geographical concentration. The demand is controlled by a few very large multinational conglomerates, each having a production and distribution system composed of refineries, storage facilities, distribution centers and at the end of the supply chain, gas stations. The supply is controlled by a few countries where the oil industry is often nationalized or by the OPEC umbrella, which regulates about 37% of the global oil production.
Since the first commercial exploitations in Pennsylvania in 1859, the importance of oil increased significantly in the global economy. In 1920, 95 million tons of oil were produced annually around the world. This number reached 500 million tons by 1950, a billion tons in 1960, and an average annual production around 3 billion tons in the 1990s. This strong growth rests for a very large part on the availability of oil resources and their low cost. Like many other resources, petroleum reserves is subject to variations that are related to new discoveries and what can be economically extracted. Continuous technological innovations in surveying and extraction enabled to discover and economically exploit oil resources in previously inaccessible locations. This notably involves artic and sub artic environmental conditions (e.g. Alaska and Siberia) or offshore locations (e.g. North Sea). The relationships between oil supply and demand are characterized by:

• Reserves. Oil reserves have a high level of concentration, with 64% of proved reserves located in the Middle East. The question remains about how much reserves of oil are available and how much time they would last. Figures about the totality of earth's oil reserves were between 2,100 and 2,800 billion barrels before oil began to be exploited in the 19th century. As of 2001, an estimated 1,020 billion barrels of proved oil reserves were available and 900 billion barrels have been extracted, which represents about a third of all available oil reserves. To this figure, can be added between 200 to 900 billion barrels of oil that potentially remain to be found. Considering these figures, the global oil production should peak around 2005-2010 and then start to decline. This trend is being confirmed by the output of the world's largest oil fields, all which is either in decline or possibly declining, in addition to an ongoing decline in several oil producing regions in the West. On a long-term perspective, the control of OPEC will emerge again since the bulk of oil reserves is located within its jurisdiction. Saudi Arabia alone has about 25% of all the world's oil reserves, putting upward pressures on energy prices. There is however a potential in tapping tar sands (particularly in Canada) to produce oil, but this process is energy intensive and leads to low quality fuels.
• Supply. Oil production has steadily increased in the second half of the 20th century to satisfy a growing demand. On average 81.6 million barrels of crude oil are produced each day (2006 figures), 32% of it in the Middle East, the single most important oil producing region in the world. About 60% of all the oil being produced is already committed and 40% is sold on open markets. More significantly, excess oil production is limited both in capacity and in its geographical origin. 90% of this excess oil production is located in the Persian Gulf with Saudi Arabia, along with accounting for the world's largest oil reserves, being the only major supplier able to provide instant additional capacity if required. Excess production capacity is of high relevance as if a major disruption in other suppliers occurs, the additional capacity can immediately be brought up to maintain the current oil supply level without significant price disruptions. Recent events, namely the conflict in Iraq, nationalization in Venezuela and civil unrest in Nigeria, have increased uncertainty for oil supplies.
• Demand. An average of 83.7 million barrels of petroleum per day were consumed (2006 figures), compared with 31.2 million barrels in 1965. Economic systems, which include industry, housing, energy generation and transportation, became dependant on cheap oil prices, with the United States being the most eloquent example. While the United States ranks as the leading global consumer of oil (20.1 Mb/d), the rapid growth of the Chinese economy in the last decade has propelled China to the second rank of oil consumers (5.5 Mb/d), surpassing Japan (5.3 Mb/d). China accounted for around 40% of the global growth in oil demand in the recent years. Since 52% of all oil is consumed by transportation activities, motorization is one of the driving forces behind the consumption of petroleum. Demand is also characterized by a level of seasonality with heating oil demands in the winter and more gasoline demands in the summer.

There are also concerns that at the same time that global oil production could be leveling off and eventually decline that exports could drop at an higher rate because of growing consumption in oil producing countries. Thus, potentially dwindling supply and growing demand could create multiplying effects. This trend applies well to the United States, China or Indonesia, which from being net exporters of oil have become net importers. For many other cases oil consumption has not changed significantly over time.
An overview of the geography of oil production and consumption thus underlines a strong spatial differentiation between the supply and the demand. Because of geographical and geological factors, where oil is mainly produced is different from where oil is mainly consumed resulting in acute imbalances which are growing rapidly. This can only be overcome by massive oil transportation infrastructures, including pipelines, tankers and storage facilities.

4. Petroleum Transportation

The barrel is the standard unit of measure for oil production and transportation even if it no longer has much reference in reality (steel drums are sometimes used). Its usage has an unusual origin. In the 1860s oil riggers were at a loss about where to store the oil suddenly gushing out of new rigs. Empty whiskey barrels were used as a palliative and a convenient mean to store and move oil for the emerging industry. Barrels have always been a convenient mode in a pre-motorized era since they could handled by hand by rolling them. By 1866, a standard barrel size of 42 US gallons (158.98 liters) was agreed upon. Since then, the volume of international trade in oil increased as a result of world economic growth. The largest oil consumers are the most heavily industrialized countries such as the United States Western Europe and Japan. OECD countries account for about 75% of global crude oil imports. Since oil consumption and production do not happen in the same places, international oil trade is a necessity to compensate the imbalances between supply and demand. Unlike most other countries, a major portion of OPEC’s oil is traded in international markets.
Since the first oil tanker began shipping oil in 1878 in the Caspian Sea, the capacity of the world's maritime tanker fleet has grown substantially. As of 2005, about 2.4 billion tons of petroleum were shipped by maritime transportation, which is roughly 62% of all the petroleum produced. The remaining 38% is either using pipelines (dominantly), trains or trucks. Crude oil alone accounted for 1.86 billion tons. The dominant modes of petroleum transportation are complimentary, notably when the origins or destinations are landlocked or when the distance can be reduced by the use of land routes. The maritime circulation of petroleum follows a set of maritime routes between regions where it is been extracted and regions where it is been refined and consumed. More than 100 million tons of oil are shipped each day by tankers. About half the petroleum shipped is loaded in the Middle East and then shipped to Japan, the United States and Europe. Tankers bound to Japan are using the Strait of Malacca while tankers bound to Europe and the United States will either use the Suez Canal or the Cape of Good Hope, pending the tanker's size and its specific the destination. International oil trade is often correlated with oil prices, as it is the case for the United States.
The world tanker fleet capacity (excluding tankers owned or chartered on long-term basis for military use by governments) was about 280 million deadweight tons in 2002. There are roughly 3,500 tankers available on the international oil transportation market. The cost of hiring a tanker is known as the charter rate. It varies according to the size and characteristics of the tanker, its origin, destination and the availability of ships, although larger ships are preferred due to the economies of scale they confer. About 435 VLCCs account for a third of the oil being carried. Transportation costs account for a small percentage of the total cost of gasoline at the pump. For instance, oil carried from the Middle East to the United States account for about 1 cent per liter at the pump. Transportation costs thus account for about 5 to 10% of the added value of oil. The growth in oil prices since 2000 makes the transport costs an even lower component of the total costs. Tanker ships can also be used as semi-permanent storage tanks. In 1990, about 5% of the world's tanker capacity was being used for oil storage.
Different tanker size are used for different routes, namely for issues of distance and port access constraints. There is thus a specialization of maritime oil transportation in terms of ship size according to markets. VLCCs are mainly used from the Middle East in high volumes (more than 2 million barrels per ship) and over long distances (Europe and Pacific Asia). Shorter journeys are generally serviced by smaller tanker ships such as from Latin America (Venezuela and Mexico) to the United States. Transport costs have a significant impact on market selection. For instance, three quarters of American oil imports are coming from the Atlantic Basin (including Western Africa) with journeys of less than 20 days. Accordingly, the great majority of Asian oil imports are coming from the Middle East, a 3 weeks journey with the halfway location of Singapore being one of the world's largest refining center. In addition, due to environmental and security considerations, single-hulled tankers are gradually phased out to be replaced by double-hulled tankers.