Igor Dekanić

WORLD OIL MARKET AT THE BEGINNING OF THE 21st CENTURY

Abstract

The paper analyzes circumstances on the global oil market towards the beginning of the 21 st

century as a result of market development over the past 25 years. Since the oil price decrease in 1986, oil consumption has been developing, oil trade expanding on international market stocks and consumer impact increasing, with a relatively low oil price. Under such circumstances, a new concentration of American and British oil industry was performed towards the end of 90s, with a simultaneous decrease of the interest in energy preservation and technology of alternative energy sources. After the terrorist attack on USA on September 11, 2001, this brought to a new destabilization of the world oil market, increased impact of geopolitical factors on market circumstances and oil price leap after 2003. Thus, after some twenty years of relative stability and low oil price, global oil market at the beginning of the 21st c. has re-entered the phase of possible energy-related crises, political instability and major disturbances. Such a condition makes the energy-related situation of energy importers rather difficult, especially when it comes to relatively small countries outside of geopolitical integrations, but also makes the need for energy savings topical once again, along with advancing energy efficiency and a more intense use of renewable energy sources.

Key Words: energy, oil, world market, supply – demand, geopolitics

Introduction

The author has over the past about 15 years published two papers on a similar topic in the present journal. The first was "World Oil Market in the 90s", published in issue 7-8 of journal "Nafta" in 1990, while the other was: "The oil market structure and changes towards the year 2000", published in issue 4 of journal "Nafta" from 2000.

It is therefore with a certain pleasure, somewhat improper for scientific modesty, that I am quoting the article from 1990, saying as follows: "Therefore, oil prices in the 90s may be estimated as a probable development within one of the two scenarios – the scenario of easy flow and the scenario of a probable disruption, with ranges as indicated in Figure 9." The indicated oil price leap there was somewhat over $ 30 per barrel, estimated for 1995. Oil prices in the 90s really had a peaceful course and were ranging within the area of around $ 20 per barrel, with a leap to around $ 33 per barrel (stated in current prices), that followed in 1991, during the Gulf War. In that article, I did not predict the price decrease in 1998, at the beginning of major integrations of the American and the British oil industry.

In the article published in 2000, analyzing global changes caused by major mergers among the American and British oil companies, it was stated that the said changes were inevitably caused by both political and strategic interests staging events on major world’s stock markets behind the scene. The article concludes as follows: "It is obvious that the political and strategic impact during the first decade of the new century will be indisputable. ... Upon the

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big wave of integration, the market was able to push oil prices refreshing profits of oil companies, their stockholders benefiting as well." The events that followed more than confirmed these evaluations.

The present article presents an analysis of recent developments on the world oil market, geopolitical development of global political relations and conflicts resulting from an uneven global oil production and consumption distribution, as well as the impact of these global events on energy supply and circumstances in the oil-gas sector of a rather small country like Croatia.

Changes in the World Oil Market Structure

Over the last two decades of the 20th c. the world oil market was following the supply-demand logic. Although oil is a strategic raw material, and the structure of the world market is determined also by political factors, relations on the market itself were based on market mechanisms. The structure of each market is a result of the meeting of supply and demand, which goes also for the oil market: supply and demand occupies a central spot. Unlike other products, oil is marked by a considerable impact of economic, technological and political factors, determining supply and demand and constituting the framework of the economic structure of the market. The first oil shock from 1973/74 caused a nearly quadruple oil price increase. It was the result of a boycott on the part of producing countries, so that the political influence on reduced delivery caused market structure change. The second oil shock from 1979/80 was caused by the Iranian revolution. After these instabilities, the market started acting according to its own rules.

The main novelty on the world oil market of the 80s was intensified business of the stock market in New York, known as the New York Mercantile Exchange (Nymex for short). As of the middle of that century, significant market changes were not started in Vienna, the seat of OPEC-a, or in Houston, the traditional centre of Texas i.e. American oil industry, or again in the Near East, but in the World Trade Center building. Oil became exchange merchandise and was selling well on the spot market, with prices oscillating more and more. Traders and buyers were trying to come up with a mechanism to reduce the risk as much as possible. The buyers would gain the right to purchase oil at a given price, while the producers were able to sell oil even before producing it.

This disrupted OPEC’s rule over oil prices, but also its power in determining prices on the world market. Created was the possibility of reselling one and the same oil cargo several times. The profit was raised by both traders and speculators, while the one who wanted to profit had to make risks by choosing between supply and demand. The prices were being set daily on an open market in a race between buyers and sellers, connected by stock brokers who were using modern communication technology.

The break of OPEC’s monopoly and the passing to market oil price determination in 1986 was caused by excess supply, with the price dropping to $ 10 per barrel. The exporters were craving for buyers, while the traders were determining prices according to the amount they could achieve on a given market. OPEC tried to avoid the breakdown, but the impossibility of a mutual agreement on the reduction of production quotes had an impact on the entire world market. Supply and demand obtained a new meaning in the creation of the oil market

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structure and that was the result. As to why the Arab world was not united in the decisive moment, the answer should be sought on the American continent.

Although the second oil shock from 1980 sent the developed world into recession, its most serious consequences were on the developing countries. During the 70s, the oil producing countries, including USA, raised major income which they invested into commercial banks because money was coning in faster than it could be spent. Commercial banks were loaning the money to the developing countries which were hoping to repay the loans, given a fast economic growth. However, the developing countries responded to the second oil shock by a fast and increased indebting. The result was a "debtor crisis" first occurring in Mexico in 1982 and soon spreading to the rest of the developing world.

The activity of MMF, as an organization making the debtors pay for their loans, was one in a series of elements by which developing countries were forced to pay their debts. Increased inflation caused a change of the economic policy and of the free market economy ruled by the economy of supply. Later this "free market" turned out to be one of the greatest financial speculations making the most money for the American civil engineers, military industry owners and financial speculators, based on tax reductions during Reagan’s administration. This soon lead to the recovery of the American economy, but towards the end of 80s also pushed the developing countries – mostly American debtors – into a long-term economic crisis.

At the turn of the 90s, the market economy elements grew stronger. The oil supply was stable, while the demand, resulting from the economic conjuncture of the USA, Western Europe, Japan, and Southeast Asia, was slowly increasing. A moderate demand increase resulted from a successful energy saving policy in the countries which were at the same time also the largest oil importers. Technological development of developed countries and the creation of post-industrial society resulted in reduced oil consumption in the first half of 80s, reduced oil price in mid 80s and stabilized market situation towards the end of 80s. Oil share in the consumption structure was reduced, but there were still no significant changes, in spite of the announced reduced oil share. Oil production in the USA decreased, which is why the import went up; the American local oil reserves were being consumed relatively quickly and the country‘s dependence on import increased.

Production in countries outside OPEC continued growing, but it was used to cover the increasing own demand, unlike the first half of the 80s when export from the world outside OPEC played a considerable role in the increased market supply and hence price reduction. Production in FSU reached its top in mid 80s, but it began decreasing abruptly with the downfall of the communist system and the disintegration of USSR, altering also the market supply.

Repeated oil demand towards the beginning of 90s managed to stabilize prices, and such a development was favourable for less developed oil-importing countries, which were at the same time heavily indebted. In all countries, economy and individual consumers were able to use larger oil volumes at a reduced price, so that savings enabled increased investments. Thus the world economy was able to develop, opening new workplaces and creating greater income.

Structurally speaking, oligopolic global oil market structure, dominating over some thirty years after the end of WWII, in mid 80s, with increased competition, turned into a structure

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close to imperfect competition. This may be considered a major achievement, whose main cause was the post-industrial development of the largest oil consumers, successful energy saving policy and technological renewal of energy-intensive industrial activities. The established relations shall have a decisive impact on market relations in the decade to come. Besides that, global trends of post-industrial development caused changes in supply and demand. Increase of services in modern post-industrial business making considerably changed the ratio of production sectors in terms of share in the value of gross national product. Prosperity and technological-marketing power of Japan and other East Asian countries has had a growing impact on the moving of the global economy focus from the Atlantic to the Pacific area. Japan and southeastern Asian countries shall to a much larger extent be followed by China and India towards the beginning of the 21st c. but we shall get to this particular issue somewhat later.

The basic developments in Europe, culminating in the creation of an integrated market of merchandise, capital and know-how on the territory of European Union through the uniting of Germany, as a special factor within the context of the Union; the establishment of parliamentary democracy in former communist countries, and high ranking of goals on the part of the European market in terms of quality and sophistication of products and services, have transformed both consumption and market. The fact that the Community later turned into a political union: the European Union, opened some new dilemmas, especially in terms of common European energy strategy and policy, but we shall talk more about it in the second part of the article.

The economic basis for creating a market-social structure in the course of 90s was the growth, development of new activities and technological change. Local market becomes global, while stability is increasingly replaced by dynamics. Reflexions on the oil market are expressed in a moderate consumption growth, geographical and type-related differentiation of energy sources, and further source expansion. Increased natural gas supply from the then Soviet Union, Algeria and North Sea offshore also contributed to a moderate oil demand.

However, the 90s were not spared the turmoil of political events impacting the functioning of the market. Apart from political events, environmental accidents, such as the melting of nuclear core in Chernobyl or oil spill from the Exxon Valdez tanker at the Prince Albert Bay in Alaska, also influenced the oil price. Along with economic, political and technological factors, ecology and environmental concerns became a first rate structural element of the oil market.

Iraqi attack on Kuwait in 1990, incited also by two oil-related issues, left long-term marks on the oil market. Oil business, causing the attack, was based on Kuwait’s exploitation of oil from a reservoir in the borderline area and the low oil income, making it difficult for Iraq to pay off its war debts. A successful invasion would make it possible for Iraq to expand its reserves, increase its power within OPEC and raise both oil price and the income drawn from it. Iraq raised the stakes by attacking Kuwait, for it did not expect the response of the West to be anything more than political and economic.

However, the USA, by creating a relatively unexpected coalition of Western, developing and Arab countries, with the then USSR’s approval and political support, launched a military action. This in turn increased fuel demand, OPEC was still faced with a crisis in production strategy, while decreased offer of both Iraqi and Kuwait oil caused the market prices to increase. Saudi Arabia, having increased its production, once again managed to keep the oil

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prices. Only after several years and several negotiations would the UN approve the sale of Iraqi oil according to the program "Oil in Exchange for Food", lasting – with changeable success and a constant echo of corruption following it – all the way until the American invasion on Iraq in 2003.

A new cycle of instability on the oil market began in January, 1991, when Iraq destroyed Kuwait’s oil plants and fired missiles to Saudi Arabia. However, soon after the "Desert Storm" – the military defeat of the Iraqi army and the chasing of Iraq from Kuwait, the situation on the world oil market once again calmed down, while the prices started decreasing.

At that time, the market was characterized by increased supply; huge oil surplus was generated, so that OPEC decided to cut down production, in order to keep the prices on the existing level. Changes occurred also in some other oil producing countries. Transformation began in the then USSR caused a decrease of the Russian oil export. The prices were varying due to the changes in supply and demand. OPEC’s production reached the highest level in the past decade in 1992. Eleven oil companies founded a consortium in 1995, in order to supply the European continent with Norwegian natural gas.

Towards the middle of that decade, a growing number of American companies were making deals for the exploration and exploitation of Russian oil. In 1995, Venezuela passed a new law clearing and even encouraging foreign participation in the exploration and processing of domestic oil. That same year, Angola also increased its production. The American President Clinton cleared in 1996 the sale of oil from strategic reserves in order to reduce high gasoline price. In July that same year, Gabon left the OPEC, while Exxon made an agreement with Qatar on the development of refinery technology for the conversion of gas into oil products. The following year Qatar was the site of the world’s largest LNG plant, accompanied by the establishment of an international consortium with a project for installing the Caspian oil pipeline.

At the beginning of 1998, the environmentalists welcomed the 50-year moratorium on oil and explorations in the Antarctic, in order to conserve pristine nature. This last clean continent contains 70% of the world’s freshwater. At the same time, announced was a reduced oil production of the OPEC member countries, but also of producers outside OPEC, including Mexico, Oman, Yemen and Norway. In the middle of 1998, oil prices reached the lowest level since the last oil shock, while the cheap oil wave brought along mergers & acquisitions among large oil corporations. Low prices caused the companies to merge, but at the same time started a new consumption increase. Reduced production on several occasions turned out to be a too slow response to the developments on the world oil market, so that the consequences would be long-lasting.

All this has showed that the 90s marked the highest peak of the market domination in the oil business. Those years it seemed that policy had nothing more to look for in the oil business. However, later developments indicate that events on the world oil market still do not have merely market-related causes. The mechanisms of supply and demand as well as market impact do have their own role. However, behind the scene of stock market rush and its occasional panicky reactions, there are also powerful mechanisms of the political determination of events. Oil undoubtedly has a strategic role and the geopolitical motives are still dictating the behaviour of those in power.

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In the period under observation, oil prices were developing in accordance with supply and demand, with the exception of two leaps and one fall. The first price leap occurred in 1990 after Iraqi occupation of Kuwait and a temporary panic created in the stock markets, all the way until the American army performed the "Desert Shield" operation and thus successfully protected oil production and oil fields in Saudi Arabia. Price decrease happened in 1998 as an introduction into major acquisitions and concentrations of American and Anglo-Dutch oil industry. The second price leap was announced for 2001, reaching its full intensity only in 2004, after a new cycle of political instability in the Near East, Al-Qaeda’s attempts in Indonesia and Spain, and the further outburst of war in Iraq.

Figure 1 presents oil price developments as an illustration of the aforementioned analysis of the condition on the world oil market. Figure 1 shows long-term price trend, according to the data supplied by the British oil corporation BP (4).

(ovdje dolazi slika 1)

Globalization and Its Related Processes Towards the End of the 20th C.

According to the described situation, the international oil market was in the course of the last two decades of the 20th c. the scene of a clear process of establishing primacy of trading on stock markets, with a domination of buyers due to a moderate consumption increase and technological development in the most developed countries of the world, at the same time being the greatest energy consumers. Apart from that, oil prices were oscillating on a relatively low level, around $ 20 per barrel, while, under such circumstances, energy saving programs and a more intense development of alternative energy sources, initiated after the second oil shock in the 80s, started loosing power. Under such circumstances, oil consumption started increasing once again, while the geopolitical relations were marked by a stable global domination of the USA.

The period towards the beginning of the 90s was the proof that, in economic terms, we could talk about the domination of supply and demand, but, at the same time, political relations in the world with dominantly multipolar relations were pointing to a multifold interdependence of many countries‘economies on global trends. Globalization actually started in early 90s, with the end of the Cold War, the defeat of communism, and a relatively fast ending of the Gulf crisis in 1991. The world was comprised by a truly global economy. The advance of communication technologies, along with competition and deregulation, have opened the way to a fast reduction in costs and have connected the world into a whole unimaginable only a decade ago.

Globalization refers to globalized business making, globalized market of goods, services, and capital, and dominated by globalized corporations. Large corporations, banks and globalized financial markets enable the turnover and flow of goods, services, and capital all over the world. A globalized corporation does business on the global market, using capital and moving it, along with other resources, from one end of the world to another in order to optimize its development goals, but also with the intent to increase profit as much as possible. Although this is an utterly simplified and somewhat banal definition of globalized business making, it still defines it in a satisfactory manner. Over the past few years, the developed part of the world has also been encountering some resistance to globalization, but the process nevertheless moves on.

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Different phases of global relations have also caused changes of the technological development in some circumstances. In the phase of market stability, with demand dominating, under development was the technology of oil processing, whereas, during the domination of supply, with high prices, the technology of energy conservation and exploration and development of oil and gas reservoirs was developed. In the phase of market oscillation, the advantage was given to technology of exploring natural resources, which is why, with supply dominating, technologies were developed as basis for exploration and development of reservoirs, plus technologies for energy conservation processes. With supply dominating, however, along with exploration technologies, also developed were oil processing technologies.

The notion of globalization is closely linked to multinational companies doing business on the global market. Although multinational companies, especially in the oil industry, appeared back at the beginning of the 20th c., their real expansion in many industrial activities did not happen before the 50s. Their power and advantages were fully recognized towards the end of the previous and the beginning of the present century, owing to political democratization and blossoming of liberal economy; technological development, as well as that of information technology communications, especially the Internet. Many analysts are thus calling the modern world the civilization of globalization and transnational corporations.

The Internet, combined with satellite telecommunications network, impacted the creation of a global information technology support at the beginning of the 21st c. Its role shall mark the basic communication technology for the future. It was only the Internet domination that brought to the globalization of communications to the full extent. Modern man has become a globally mobile creature, and this was made possible by oil. In the 20 th c. oil globalized human communication only to cede this role, towards the beginning of the 20 th c. - to electronic technology, satellite telecommunications and the Internet.

Informatics technology and the Internet are today the main means for the globalization of human communications. However, regardless of this, it is an unquestionable fact that the casings of electronic devices are made of polymers whose feed is oil, and that the wide distribution of these devices is made possible by drive based on oil. Contributing to processes of communications globalization, oil caused the opening of space for new technologies and new activities taking over from it the role of the basic means of communications globalization. Thus oil, electronics and informatics constitute the material basis of the global infrastructure of modern civilization.

Mergers and Acquisition of Companies as an Announcement of Major Changes at the Beginning of the 21st Century

Change in the balance of power on the oil market was created through the purchase of large companies. The first acquisition wave marked the 80s, while the peak of the mergers occurred towards the 90s. Global market restructuring did not pass the oil industry by, while corporate reorganization was performed in all major oil companies. Deregulation within the industrial sector increased competition and resulted in mergers. Restructuring within the oil industry was directed towards coordinating values of corporate reserves of oil and gas with the value of company stocks. Companies with a slow dynamics of reserve restoration were more susceptible to the developments on the market. Apart from overvalued companies, there were

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also those undervalued, so that trading in such companies became the main manner of raising profit, far easier than exploration and processing.

The wave of integrations from the 80s began with Shell’s $ 3.6 billion worth acquisition of Belridge – the Californian oil producer. It was the largest corporate acquisition by that time. The others followed. DuPont acquired Conoco, U.S. Steel acquired Marathon Oil, and Phillips took over General American. Getty Oil, being an independent company, established back in 1930, also found itself the target of the big ones. J. Paul Getty, company founder and one of the best known rich people of the second half of the 20th c. raised quite a considerable capital through oil discoveries in the neutral zone between Kuwait and Saudi Arabia. After his death, due to unrenewed reserves, the company found itself in a position where the value of its stocks was low in comparison to the value of the capital. Getty’s heirs sold the company to Texaco for $ 10.2 billion. Apart from Getty’s company – Gulf Oil, one of the "seven sisters", also became vulnerable in the 80s, due to the stock value decrease. Atlantic Richfield (Arco) intended to take over a part of the company’s businesses, while the Gulf Management, in order to rescue their investors’ capital, announced the sale of the entire company. Chevron was among the interested parties, offering $ 13.2 billion in cash and thus outbidding Arco. The Managerial Board of the Gulf decided that Chevron’s offer was the best resulting in Gulf’s complete integration within Chevron.

Mergers among the big ones continued until the end of the 80s. Royal Dutch/Shell bought off some of its shares, while BP merged with Standard Oil of Ohio. Only Exxon was not included in this integration wave, but, a dozen years later, it was about to feature in the greatest integration in history. Restructuring created a more consolidated oil industry, while the greatest profit of over $ 100 billion was raised by both institutional and individual investors i.e. the share holders themselves.

After tumultuous changes in the 70s, costly oil from 1973 to 1986, price breakdown in 1986 and a decade of relative price stability from 18 to 20 dollars per barrel, with a short exception of a three-month leap during the Gulf War in 1990, the world oil market once again started showing signs of instability towards the end of 90s. It was manifested through oil surplus on the world market and increased supply, which, accompanied by a very mild consumption increase, brought to a pressure towards price reduction in the course of 1997 and a considerable oil cheapening in 1998. After a decade of operation rationalization and corporate restructuring, the largest American and British oil companies established a most rational and efficient business structure. They were ready for major moves and the changes occurred in times of cheap oil and a relatively low market value of oil companies.

These changes were announced by a relatively small-scale purchase of a minor oil company made in May, 1998 by Arco, whose reputation in the oil circles is one of a company with innovative and aggressive management. After that, BP purchased Amoco, the value of the deal amounting to US$ 48 billion. The response was just about to follow. In that same week of November, 1998, several other major integrations were made. Exxon bought the entire basic stock of Mobil for $ 80 billion. It was made by merging the corporations into a new one called Exxon Mobil, with former Exxon shareholders gaining 70%, and former Mobil shareholders 30% share in the basic stock of the new giant.

That same week, Chevron bought "downstream" activities of Texaco in Europe, for the estimated around $ 10 billion. The French Total, as it was published, paid around $ 13 billion for the Belgian Petrofina. During this exciting month and a half at the end of 1998, purchased,

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acquired or cross shared were also several minor American companies, with the acquisition value amounting to between $ one and three billion. At the end of this tumultuous period, in March, 1999, BP also purchased the American company Arco, while the acquisition value was estimated at over $ 25 billion. When Exxon and Mobil confirmed the merger in what was a truly historic deal, it became clear that something very significant was taking place in the oil world. The new giant thus became third in the row of oil reserves owners (following Saudi Arabia and Iran), while the market i.e. stock market value of the new corporation was estimated to around $ 240 billion.

Thus, the second great wave of acquisitions of oil companies was taking place between 11 August 1998, when BP purchased Amoco, and 29 March, 1999, when BP acquired Arco. The total value of integrations over those several months of 1998/99 exceeded $ 170 billion. It was the greatest wave of changes in the American, and even the world oil industry after the famous decomposition of the original Standard Oil back in 1911, due to the transgression of the Anti-monopoly Act, following after the verdict of the USA Supreme Court. Therefore, such moves at the very top of the structure of the oil capital were also accompanied by other changes, primarily in the American, but also in the European oil circles. Among those European, the largest was the purchase of the Belgian company Petrofina on the part of the French CFP, better known under its contemporary commercial name Total.

The merger of Exxon and Mobil brought several superlatives and precedents. Given the estimated value of nearly $ 80 billion, it was the largest purchase of a single corporation in history – the merger exceeding even the largest former acquisitions in the oil industry (Chevron – Gulf and BP – Amoco), but also all other acquisitions, including the former largest integration of Daimler and Crysler. The new corporation Exxon Mobil again became the largest integrated oil company, while it returned among the two or three world’s largest corporations in general. The American capital once again took over the leading role in the oil industry, and, for the first time after the decomposition of the original Standard Oil back in 1911, two among the largest former Rockefeller’s companies merged.

All this was pointing to deeper processes in the change of market structure and oil capital. The total value invested in the change of the market structure of the American oil industry amounted to $ 125 to 140 billion, while 30 to 35 billion was invested in the change of the European oil industry market structure. The end results of such major capital restructuring and their impacts on the change of the global oil industry market structure will enable a complete consideration only in the next few years.

This concentration empowered the three largest integrated oil corporations: Exxon Mobil, Shell and BP. Over the next two years, through a gradual merger of Chevron and Texaco into the corporation Chevron Texaco, they were joined a fourth mega company.

Two of them bring together the largest American oil capital. They are Exxon Mobil and Chevron Texaco. The first is the heir of Standard Oil, and the other of the oil field Spindletop and oil discoveries in Texas. Through the acquisition of American companies Arco and Amoco, BP actually became a British–American company, whereas Shell is maybe the most transnational of them all, with British-Dutch capital prevailing after the corporation’s establishment and growth, with a most powerful American branch. Also, among the European continental companies, empowered was the concentration of TotalFina, a group created through the integration of the largest French and Belgian oil company, somewhat later joined also by Elf.

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It is interesting that, after the wave of integrations, in March, 1999, OPEC through its decision reduced oil production and thus caused the increase of prices which already in the summer of that same year reached first 16, and then 18 dollars per barrel, only to exceed $ 20 already at the beginning of autumn. After a long time and the impossibility to achieve any long-term consensus on production quotas and limitation, OPEC suddenly once again achieved the longed for unity, - as if aided by a discrete yet powerful hand from the “backstage”. It seemed as if it was waiting for the American–British concentration of capital to end, so that it may once again start operating as a cartel. Whether there was any role of the political "hand" of the American administration or some lobbying circles among the power centres of the American capital market is rather difficult to establish, and almost impossible to prove. The fact is that these decisions on production limitation were not criticized by the Americans.

The question is raised of where did the amount of around 200 billion of the stock market capital for the concentration of the stock capital of the American and British-Dutch, and also French-Belgian oil industry come from? A year before there was a crisis on the capital markets in Asia, while, in the summer of 1998, Russian economy had collapsed with a nearly six fold drop of rubble with regard to the American dollar and the European currencies, with the breakdown of the Russian capital market. All this speeded up the moving of the stock capital from Asia and Russia to the American, and – to a lesser extent – also the European capital markets. Capital surplus was thus made on the American stock markets, enabling this major concentration in the oil industry.

In order to grasp the significance of these changes, and especially their impact on the change in the structure of the world oil market, and even on the future market structure, one must analyze the basic geopolitical relations and strategic interests of the major players. The facts characterizing the structure of the world oil market at the end of the 20th c., with supply and demand regulating market relations and geopolitical relations still playing a part in the regulation of the world oil market structure, are that oil consumption at the turn of the 21 st c. was increasing at the rate of around 2% annually.

OPEC approached a 40% share in the world oil production, which, in the course of 1999 and 2000 resulted in new price increase. They were growing at first moderately, and then more and more quickly, in order for – in the course of 2000, on several occasions, for a short period of time – to exceed US$ 30 per barrel. Towards the end of 2000 and the beginning of 2001, it rested at around $ 25 per barrel in the first trimester of 2001. All this brought to a change of basic relations in the structure of the world energy market, including also oil and natural gas, with regard to the state at the beginning of or in mid 90s.

The main oil export goes from Near East towards North America, Europe and Japan, while that of natural gas goes from Russia and North Africa towards Europe. Oil corporations, after restructuring in the 80s and integrations towards the end of 90s, once again control the production-technological and trading-commercial oil industry system. The impact of OPEC is increasing, but its leaders have also learned the lessons from the 70s, so that the Organization today acts based on market mechanisms, avoiding monopolistic behaviour. The gas sector is more regionally oriented, with less globalized relations than oil, with tariff price policy, and similar instruments.

The new major changes in the oil market structure are expected only after a more considerable oil consumption increase in Asia, which would be caused by an intense increase of the economic activities and energy consumption in China and India, while this could follow in the

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second decade of the 21st c. As regards the condition in Europe, an important fact is the entrance of Russian companies on the market. Companies like "Lukoil", "Yukos" or "Sibneft" have for some years now been playing a major role in the oil trade. Recently, they have been increasingly acting as candidates for the purchase of shares in the privatization of state oil companies in the countries of southeastern and eastern Europe.

Concentration of the oil capital towards the end of the 20 th c. seems to have been most carefully planned. It has recreated the group of five major integrated oil corporations capable of controlling developments on the global oil market. These are American corporations Exxon Mobil and Chevron Texaco, the British–American BP, the British–Dutch–American Shell and the French–Belgian Totalling. They control the technology and the main markets of the oil industry. Reserves and production are mostly controlled by the OPEC countries’ companies. Thus was created a certain division of power. Integrated American–British capital controls processing, transportation, marketing and technology of the industry, while the Arab and Russian capital control the processing of oil and gas.

New Politization of the World Oil Market after September 11, 2001

New politization of the world oil market began after the outburst of the war against terrorism. The war against global terrorism usually refers to events started after September 11, 2001, by most shocking attacks on the World Trade Center skyscrapers in New York. That morning, the terrorists launched a carefully planned operation to hijack four passenger aircrafts in the American local air traffic. Two of them flew into the World Trade Center skyscrapers which then collapsed within an hour and a half after the attack; one into the building of the Ministry of Defence, and the fourth into the woods in the state of Pennsylvania, on its way to Washington D.C. Around 3,000 people were killed, some 10,000 wounded, while the victims were also the civilians that came to work that morning or the New York firemen and policemen who rushed to help the people in the hit towers.

The symbol of modern corporate America and global capitalism, the World Trade Centre skyscrapers, and the World Trade Centre network itself, was conceived by David Rockefeller, CEO of the Chase Manhattan Bank, and grandson of John D. Rockefeller. This event without a doubt came as a shock to both USA and the entire world. Many analysts soon said that it has initiated a new global war, that it was the beginning of a conflict between West and Islam, that Huntington and his theory on the conflict of civilizations were right after all, etc.

In the beginning, nobody claimed responsibility for the attack, while it was later established that all the hijackers were American citizens, immigrants from Arab countries. Behind the attack was the misterious Islamic fundamentalist organization named Al Qaida, which translated from the Arabic means – The Base. It was discovered that the leader of Al Qaida, Osama Bin Laden, the son of a rich Arab businessman and a close friend of the Saudi Arabian royal family, educated in USA, who actually spent several years as a guerrilla member in Afghanistan, fighting against Soviet state and communist regime as a part of the guerrilla army there, formerly organized and armed by the CIA. The main ideologist of the organization and the alleged second man of the network responsible for the political platform of the global war against the West was Aiman Al Zawahiri, Egyptian physician, former member of the Egyptian Islamic organization the Fraternity of Muslims.

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All this, along with numerous other pieces of information and indications that were revealed within a year after the attack, showed that it was not merely one in a row of terrorist attacks so numerous in the past century, but in all likelihood the first act of a brand new war and new strategy, without precedent in wars or human history which does not lack terror. After the initial shock, USA was overwhelmed by public rage asking for revenge, the American media called the attack global terrorism, while the American President George W. Bush Jr. announced war against terrorism, immediately joined by NATO and the main American allies, primarily Great Britain and Israel. The attacks in New York and Washington were condemned by the international community, the entire world public, including most Islamic countries, even the leadership of the Palestinians headed by Jaser Arafat. It was interesting to note the silence of the Iraqi President Saddam Hussein and the then ruling Taliban regime in Afghanistan, while in some Palestinian cities and refugee camps, there were outdoor public celebrations.

The attack heavily hit the USA even economically. The direct consequence was the loss of around 250,000 workplaces, decreased stock value and economic recession, reflecting on Europe and the rest of the world. The oil prices soon leaped to somewhat over $ 30 per barrel. The capital markets reacted by reducing trade and decrease of stock market indices, while the prices of gold and oil went up towards the end of 2001 and the beginning of 2002. The index of values of industrial shares of "Dow Jones" right after the attack went down by 14%. Only the military industry stock value went up.

In the months that followed the terrorist attack on the USA, there was a strong political solidarity of the entire world politics and public opinion with the American victims, but also political unity in an efficient combating of global terrorism. Soon after that, the USA mobilized its military power and a few months later, through a military intervention, the American armed forces, supported by several special units of British, Canadian and Australian army, took Afghanistan. The Taliban regime was overthrown, and a new government, loyal to the USA and the West established, while the moderate proamerican politician Hamid Karzai was elected for President. Hoewer, during the taking over of Afghanistan and the overthrowing of the Taliban regime, the main Taliban leaders disappeared, along with the immediate leadership of Al Qaida, and Osama Bin Laden himself.

A year after the twin skyscrapers were demolished on the Manhattan semi-peninsula in New York, the Taliban regime in Afghanistan was overthrown and Afghanistan taken, but the guerrilla anti-American fight was already begun. There were some attempts in Pakistan as well, although the USA strongly supported the Pakistani military government. Besides that, the Taliban leaders, Bin Laden himself and the main Al Qaida leadership disappeared, as if vanished from the face of the earth. However, the tension is still there and increasing. The first wave of anti-Islamic mood in the USA calmed down, but the anti-American mood is now increasing in Arab countries.

This is especially true of the oil-rich countries of the Arabic peninsula, until only recently the main supports of the American policy in the Near East. Through a radical settling of accounts of the Israeli army with the institutions and cities of the Palestinian self-government, their political position has now been rendered even more delicate. Their political elite was in radical Islamic circles even formerly accused of collaborationist policy of co-operation with the West, excessively cheap oil sale and alliance with the USA. The complex relations between Saudi Arabia, Kuwait, Qatar, Bahrain, and other oil-rich countries, by themselves

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owning some 40% of (confirmed) world oil reserves on the one hand, and USA on the other, is now becoming a growingly complicated geopolitical issue for both parties.

All of this was pointing to the conclusion that a new war is being prepared in the Near East. Towards the beginning of 2003, parallely with the complication of relations between USA and Iraq, and an increased war threat, in many cities of Europe, Asia, Australia and North America, there were antiwar protests. Towards the beginning of March, 2003, the political conflict between USA and Great Britain on the one hand and France and Germany on the other also grew stronger, referring to the issue of whether a military intervention requires the authorization of a special decision of the UN Security Council or not. France and Germany, soon joined by the Russian Federation, demanded a special discussion of the Security Council on the military intervention against the Iraqi regime, whereas USA and Great Britain explained that the Iraqi obstruction of the UN inspector’s work is proof that Iraq indeed has at its disposal mass destruction weapons and that it is a sufficient reason for military intervention against that country. Finally, USA completed its military concentration, and, supported by the armed forces of Great Britain, went for a military intervention against Iraq on 20 March, 2003.

The armed forces of USA and Great Britain took three weeks to enter and conquer Bagdad, and soon after all the other cities as well. The regime of Sadam Hussein was overturned, the state hierarchy fell apart, and Iraq went down into a political chaos still not showing any way out for the country’s stabilization. The coalition forces, causing military defeat of the Iraqi army and the regime of Sadam Hussein, were not prepared for occupation of the country. Apart from street robberies, in the north of the country there were also national conflicts between Arab and Kurd population, whereas in the south there were conflicts between the Shiite and the Sunnite Arabs. Towards the beginning of 2004, these interior conflicts turned into a full scale riot against the occupation of Iraq. Allied forces placed under control the oil sources and terminals for crude export. By the middle of 2004, there was no Iraqi political power established nor did the chaotic situation in the country cease. Attempts on American and coalition forces were very frequent, especially in the second half of 2003 and the first half of 2004. In December that same year, the American Special Forces caught Sadam Hussein. However, this did not contribute to the calming of the situation or the political consolidation of the American and allied forces’ occupation of Iraq.

All subsequent searches for chemical weapons brought no result, and so it became quite clear that Iraq had never had them in the first place. The question remains of whether the USA and British intelligence made a mistake or the chemical weapon threat was just an excuse to launch the invasion against Iraq. Today, three years later, this has become quite certain: It was probably really just an excuse to launch the invasion and put the Iraqi oil under control.

The military victory of the USA thus merely opened the main political problems of Iraq, but also of the entire Near East. This impression was only strengthened by carefully planned and precise terrorist attacks that followed in 2003 in Saudi Arabia, Morocco and Israel, and especially the attacks in March 2004 in Spain, revealing that the Al Qaida network was still active. After attempts on several intercity trains in Madrid on 11 March 2004, killing 190, and injuring 1,450 people, it became clear that the war against terrorism is a global conflict and that it was not won by overthrowing the Taliban regime in Afghanistan or that of Sadam Hussein in Iraq, or again by catching the former Iraqi dictator himself.

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After a year, the Al Qaida struck again, this time in Europe. On 7 July 2005, through a series of bomb attacks in the subway and the bus traffic in London, 56 people were killed, around 20 went missing, and some 700 were wounded. After that, London and most part of the Great Britain were placed under full alert. Towards the end of July, those suspected of an unsuccessful second attack were arrested. In the meantime, on 21 July, three bomb explosions in the Egyptian tourist resort Sarm el Sejk killed 88 and wounded over 200 people, with the attacks also organized by Al Qaida. In some countries, the most reliable American allies, such as Great Britain, there were the atmosphere of suspicion and suspense of the formerly indisputable human rights, such as the right to privacy or the untouchable character of the religious communities’ activity. All this revealed the depth of the global crisis caused by the war against terrorism.

In all likelihood, the war in Iraq is truly the real battle of the never openly proclaimed WWIII. The terrorist attack on the USA was its first announcement, the overthrowing of the Taliban regime in Afghanistan its first battle, and the war in Iraq its confirmation. If the causes of the conflict were after 9/11/2001 still unclear, after the intervention in Iraq in 2003 we may safely list oil among them. More precisely, after the war in Iraq, one of the main objectives of the conflict became clear: political control over global energy flows and the areas crucial in this respect. The Near East definitely qualifies as such an area.

At the same time, numerous and co-ordinated terrorist attacks on civil targets in Europe, Africa and Asia reveal how global terrorism has, through its activity, managed relatively easily to jeopardize the inner stability of leading Western countries and thus undermined the stability of the global market and the rule of political democracy. Modern world has thus, along with globalization of market and political power, truly entered the period of global insecurity.

Parallely with the escalation of terrorist activity and the deepening of political crisis in the Near East, there occurred oil price increase on the world market. Oil prices, after a temporary decrease just after the fall of Sadam Hussein’s regime, in March, 2004 exceeded $ 35 per barrel; in October that same year they exceeded the long-term psychological barrier of $ 50 per barrel; in March, 2005 $ 55, and in June that same year $ 60 per barrel. Finally, in September, 2005, after the hit of the "Cathrina" hurricane on southern USA states, temporarily disabling American capacities for oil production and processing, the price of oil went over $ 70 per barrel. Later on, the price dropped, but during the entire winter of 2005/ 2006 it was ranging between $ 60 and 65 per barrel.

Increased Oil Consumption and Price

The world oil market at the beginning of the 21st c. operates as a truly globalized market, i.e. as a sub-system of the overall globalized economy. In this sense act all the classical market mechanisms, from supply and demand to market speculations and political factors. The key trends over the past few years, since 2002 until today, are as follows: Increased demand and complication of the political situation in the near i.e. Middle East.

Oil demand was over the past few years increasing more intensely than decades before. Average oil consumption growth rates over the past around 15 years were ranging on the annual level of 1.5 to 2% only for the total world oil demand in 2004 to go up for around 3.7 % and reach 3.8 billion tons. The largest impact in this sense is that of the USA economy,

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consuming one fourth of total world oil production, producing a third of its own needs, while, in the course of 2004, it consumed almost 3% more than the year before. In Asia, oil consumption in  2004 went up by 5%, with the largest growth rate in China – as much as 15%; in India, the growth rate is 5.5%, while, after a long time, oil consumption in Africa also began to grow at a rate twice higher than the world average. Only Europe still sticks to the 1.8% increase.

Data on oil production and consumption are shown in Figures 2 and 3.

(Ovdje dolaze slike 2 i 3)

Another important factor of the price increase are the geopolitical tensions, escalation of global terrorism and the war against it, and especially the outburst of the guerrilla war in Iraq and increased political tensions in the Near East. Political tensions impact increased unsafety of oil production and global transportation, while the war threat also increases speculations on stock markets, faster stocking of the American strategic reserves, as well as those of the European countries, Japan, and all other countries capable of permitting themselves to hold strategic oil reserves, while all this impacts oil price increase.

Figure 4 shows price developments over the past around 30 years (20). Shown are both nominal and real prices, expressed in permanent dollars, in order to avoid inflation impact and enable a realistic comparison of prices from the beginning of the 21st c. with those from the periods of energy-related crises.

(Ovdje dolazi slika 4)

Energy needs associated with economic growth will undoubtedly cause a further oil demand increase, the highest consumption increase being expected in Africa, the whole of Asia and most parts of South America. We should not forget the increase of "interior" oil consumption in the Near East either, impacting the region’s reduced export capacities, accounting for some 40% of total world oil export. Increased consumption shall exert pressure on the prices, and the estimates indicate the growth of global oil consumption to over 5.5 billion tons around 2020. These are the hard cold facts.

Estimates on the duration of oil reserves are based on the calculation of production from all reserve categories in reservoirs, from those confirmed (from which it is currently being extracted), to those out of balance or unrecoverable and probable. According to the relation of confirmed oil reserves and the current production, it is estimated that oil will last for another 50 years. Increased consumption and explorations halt would reduce this term most drastically. However, price increase leads to increased explorations and confirmation of new reserves. Therefore, new discoveries are also expected, and there shall be oil, only the question is at which price. In this sense we should not disregard the "Oil Peak" problem either, as an expression of global production decrease most certainly exerting additional pressure on future oil price increase. The fact is that we in Croatia tend too often to forget these global trends, thinking that there is no point for small countries to be monitoring the global situation. On the other hand, our experts, expressing excessive technological optimism, believe that solutions will come of themselves. That is why we are always surprised by oil price increases, which has been the case for decades now.

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Increased Oil Consumption and the Issue of Oil Exhaustion, Hubbert’s Curve or the "Oil Peak"

During most of the 20th c. people were acting as if the available volumes of fossil fuels i.e. the so called conventional energy sources were inexhaustible. Only the energy crises of the 70s warned humanity of the fact that the sources of fossil fuels are limited. Apart from that, the impact of expanded energy consumption on global environmental balance of our planet warned humanity of the inevitable and painful fact that our natural resources are actually very much limited. All this brought about a change in the importance of power supply in modern economy of the beginning of the 21st c.

Total energy consumption in the world, energy consumption structure and consumption increase intensity are shown in Figure 5. The structure of global energy consumption started changing after the second energy crisis, towards the beginning of the 80s. However, after the oil price decrease, structural changes were slowed down and everything more or less went back to the pre-70s situation. On global level, this created the necessary preconditions for extending non-rational energy consumption. This was particularly true of the newly industrialized countries of Asia, China and India, repeating in their development the mistakes and non-rational behaviour of North America and Europe from their initial industrialization phase. Conditions are thus created for a latent extension of the cause of global energy problems in the 21st c.

(Ovdje dolazi Slika 5)

In compliance with the development of world energy trends and estimations of some international organizations, it is expected that global energy consumption shall increase by about 60% in the next twenty-year period. The current situation on energy markets is the result of a number of events over the past few years. Global slowing down of the economic growth, caused by a mild recession in the USA, as well as global consequences of the terrorist attacks on the World Trade Center skyscrapers in USA on 9/11/2001 and a number of events in the Near East, marked by a new wave of violence between Israel and the Palestinians, have had a direct impact on the oil price developments. In spite of the said events, most part of the energy consumption increase all over the world is expected in developing countries. This means that the trend from the previous years will also continue in the future, with an even sharper growth curve. It is expected that especially in the countries of Asia, Central and South America, energy consumption shall be doubled in the next two decades, by 4% a year, which would amount to over a half of total global increase.

Reduced economic activities in industrialized countries may have only a short-term impact on the rest of the world, since this means reduced demand for products and services of developing countries. For instance, reduced demand for computer equipment has already pushed into recession major exporters, such as South Korea and Taiwan. However, it is estimated that the energy consumption of the industrialized world shall continue growing over the next two decades as well.

Over the past few years, FSU i.e. the countries created through its disintegration recorded an intense economic development i.e. a positive growth of the gross national income. Oil prices have over the past few years, along with rubble depreciation, helped Russia, a country with the best developed regional economy, to effect a strong economic growth assisted by the industrial sector development. Russia’s improved economic position, as well as that of the rest

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of the FSU in the first years of the 21st c. brought about a continuous growth in the region and it is expected to result in increased energy demand of around 1.8% within the next two decades. Therefore, increased economic activity results in increased energy consumption. Over the past few decades, oil has been the world’s main source of primary energy, so that it is not expected that its share of around 40% in total energy consumption shall be increasing in the future. The share of oil in global energy consumption shall remain approximately the same, since some countries will move from oil to increasing use of natural gas and other energy types, especially for electricity generation. That is why the share of oil in total energy consumption could remain constant owing primarily to the superiority in transportation department, where the largest increase is expected over the next few years. Due to the increase of total energy consumption, as well as that of oil itself, according to estimates of the USA Ministry of Power Supply, the annual oil consumption increase rate over the next 15 years could amount to around 2.2%. Instead of the present 75 billion barrels a day or around 3.7 billion tons a year in 2004, total oil consumption in the world would reach 119 million barrels a day by 2020, which is consistent with the annual consumption of around 5.8 billion tons.

Figures 6 and 7 show a projection of the possible future consumption of energy and oil according to the estimates of the USA Ministry of Power Supply. Figure 6 clearly shows the future impact of developing countries on increased energy consumption, the largest share by far concerning China and India. Figure 7 shows expectations in terms of continental i.e. regional increase of the future oil consumption. It may be seen that an increased oil consumption in Asia is expected, as well as a relatively intense oil consumption increase in the near i.e. the Middle East, the part of the world with the largest oil production.

(Ovdje dolaze slike 6 i 7)

A particularly complex issue is the duration of the present known oil reserves. The existing oil reserves are a result of geological explorations; they constitute a total geological and technological quantitative amount of volumes that may be exhausted given the present technology. However, established oil reserves constitute a result also of the financial policy of companies as well as in a certain way of the policy of the country whose territory is at stake. Estimates on oil duration are based on the calculation of production from all categories of reserves in the reservoirs, from those confirmed (out of which it is currently being obtained), to those out of balance or unrecoverable and those probable. According to the ratio between confirmed oil reserves and current production, it is estimated that there is currently sufficient oil for the next 50 years. Increased consumption and the halt of explorations would drastically reduce this term. However, price increase leads to increased explorations and the confirmation of new reserves. That is why new discoveries are also expected, and there shall be oil, the only question is at which price.

In this sense, we cannot avoid the issue of the exhaustion of total oil reserves. The problem of resource exhaustion has been present in the scientific and expert geological and mining references for a long time now and has become topical as individual largest reservoirs of significant mineral feeds were approaching exhaustion, but has become known to the wider public only with the energy crises towards the beginning of the 70s. It was then that the discussion arose of the possibility to exhaust energy resources within the so called Roman Club, an informal group of scientists from several American and European universities named the Roman Club after the venue of one of their conferences. Participants of the Roman Club have published their research results in the book called "Growth Limits", which in the 70s

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became a world bestseller and incited a wave of considering the limitations posed before the scientific and technological development and mankind in general.

Geologists were most frequently faced with the problem of natural resources limitation and exhaustion, but these analyses were mostly kept within the limits of academic discussions and scientific journals, unknown to a wider public. The first one who became known to a wider public was the American geologist and geophysicist M. King Hubbert, who back in 1969 published estimations of the future global oil production and set the thesis according to which total American and global oil production may be described by a bell-like curve, and that in the 70s the American, while at the beginning of the 21st c. also the entire global oil production will start decreasing. After him, the bell-shaped curve describing the increase, culmination and decrease of oil production in the world was named Hubbert’s curve, while maximum production was named Hubbert’s "peak".

Hubbert calculated that oil production in the USA shall reach its peak towards the beginning of 70s and then start decreasing. This really happened and the greatest oil production in the USA was recorded in 1970, after which a gradual decrease followed. Similar predictions were calculated by Hubbert also for total global production whose peak he predicted somewhere beyond 2000, approximately between 2003 and 2006. After consumption drop in the course of the second half of 70s and the first half of 80s, reduced oil consumption in the USA, Western Europe and Japan and the stagnation of the oil market that followed two decades after the oil crisis from 1979/1980. Hubbert’s curve is somewhat forgotten, while many experts were of the opinion that his estimates were too pessimistic and that new discoveries and development of technology shall impact the making up for exhausted reserves. Such a conviction was only furthered by the price drop in the 90s and the domination of consumption on the world oil market from 1986 all the way to 9/11/2001, end even further, until 2003 and the war in Iraq.

After the crisis escalation in the Near East, the American political influence in the Arab countries was weakening, although the political alliance between USA and Saudi Arabia, as main producer and the largest exporter of oil, remained firm and stable all the way until 9/11/ 2001. In expert circles, the alert was sounded several years before that. Back in 1997, at the peak of the oil cheapening below $ 15 per barrel, the British geologist Colin J. Campbell published the study entitled “The Coming Oil Crisis”, in which he reaffirmed Hubbert’s stand on the upcoming peak of the world oil production, its subsequent decrease and a gradual exhausting of reserves (6). Given the then abundance of oil, no one really responded. Moreover, OPEC had a hard time stabilizing prices and at least approaching them to $ 2, which it managed to do after the agreement on production reduction in 1999, OPEC’s first successful move after nearly 10 years. However, after that, analysts were mostly glorifying the oil market and the world’s stock markets, a few more years went by, the oil consumption was growing, the automobiles were becoming more numerous and more powerful, the political situation in the Near East more and more tense, while, in the expert circles, the advocates of Hubbert’s and Campbell’s estimates, although growingly numerous, were still a minority. In the meantime, in 2001, Cambbell founded the Association for the Study of Peak Oil&Gas. That same year, the American geologist Kenneth S. Deffeyes published the book: "Hubbert’s Peak: The World is Facing Oil Shortage" (8). Figure 8 shows the ratio between the dynamics of discovering new oil reserves in comparison with production.

(Ovdje dolazi slika 8)

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On 9/11/2001, Al Qaida hit the USA and that started a spiral of political confrontations. The author of the book has, together with his co-authors, estimated that the attacks on the USA "have changed the contemporary picture of the world at the beginning of the 21st c.” and that "the attacks on the World Trade Center twin skyscrapers in New York were the first battle of WWIII"(12). The events that followed, from the American overthrowing of the Taliban regime in Afghanistan, the defeat of the peace process in the Near East, to the war in Iraq and a parallel oil demand increase, resulted in a new oil price leap beyond 2003 and the developments which, after 2005, took on the proportions of a new global conflict and energy crisis. Long-term oil demand increase, as well as slowing down of production growth, point to the approaching of Hubbert’s or "Oil Peak ", as an expression of production decrease, bound to exert an additional pressure on future oil price increase.

The problems of energy exhaustion and discussions on the bell-shaped curve of oil exploitation or Hubbert’s Peak are one among the main paradoxes of the modern energy paradigm. The second part of the paradox is increased energy demand as a result of economic and technological development, and especially as a result of transfer of technology and capital into developing countries and an expansive economic growth following it. As a matter of fact, long-term contradiction between economic growth and oil exhaustion is the basic content of modern energy paradigm at the beginning of the 21st c.

Although industrialized countries are consuming more oil products than developing countries, over the next about twenty years, the consumption of industrialized and developing countries could become balanced. Higher oil consumption in the industrialized countries is expected in transportation, where, for the time being, there is no economically competitive alternative to oil, and, in the developing countries, in all consumption sectors. In developing countries, consumption increase is expected in all the segments, from automobile transportation, traffic and energy consumption to electricity generation. Estimates on increased oil production range from increase by one third to half a higher consumption, which means that in 15 years’ time, the world would be consuming between 4.6 and 5.8 billion tons a year. Also expected is a considerable increase of natural gas consumption, most estimates agreeing on the doubling of consumption over the next 15 or 20 years.

Renewable sources have a growingly significant role in the power supply of the 21st c. although oil and gas consumption is so spread that we cannot talk about fossil fuels being in any jeopardy. Energy obtained from renewable sources is still not price-competitive enough that its multifold use could be developed, but its positive environmental properties open the way to an increasingly wider application. We should expect an increase of the energy from renewable sources of over 50%. The present position and a 9 % share in total energy consumption is bound to change. It is the relatively low price of fossil fuels on the very beginning of the 20th c. that presented one of the main obstacles blocking the increase of renewable sources’ share in the energy balance.

Global Energy Paradox at the Beginning of the 21st c.

Oil industry began its global impact as a medium for altered mobility, but also as a strategic factor of modern civilization towards the beginning of the 20 th c. Energy impact was followed by the oil’s role as raw material and its significance in industrial production in the second half

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of the 20th c. Chemicals obtained through the processing of oil and natural gas today to a large extent impact the raw material basis of both petrochemical and the entire chemical industry.

Situation on the world market and oil price developments may be summarized as follows: If the market mechanism impact prevails, price oscillations shall be lesser, with a moderate and long-term price increase parallel with market exhaustion in the main production regions. If the political impact prevails due to political tensions, escalation of global terrorism or an open war in the Near East, greater price leaps are possible, as well as more considerable market disturbances. Under such circumstances, also possible are political conflicts between USA and the leading OPEC members.

Apart from political factors, oil prices are also under the impact of global demand increase, initiated in a special way by high rates of economic growth in China and India. Demand for energy is growing, along with oil demand, whose consumption in 2004 reached 3.8 billion tons and growing. Increase of energy consumption results from free choice on the market, while the change in the direction of more rational energy consumption is usually thrown away due to conflicting interests or too high a price of alternative sources. A good example, illustrating this global irrationality is the conflict about adopting the Kyoto Protocol and throwing away on the part of the USA the environmental or energy-related limitations that would impact lowered competition of the American industry.

After 9/11, 2001, oil and natural gas are growingly impacting politics, and vice versa. Control over energy brings political power. Everyone who reaches for power must also face its political consequences, including the responsibility for negative implications of control over the main courses of oil and gas. According to this, the subtle relation between those who have energy-related impact and those who have oil and gas at their disposal and the political power they have will be the main trial of political strategy of the US, but also of the future mission of the OPEC countries. This will also be the main strategic and conceptual problem of the world oil and gas market in the first half of the 21st c.

Towards the end of the 19th and the beginning of the 20th c. uncontrolled capitalism resulted in exploding industrialization, speeding up mass production creating mass consumption in the market and social sense. This particular period raised in the US a class of tycoons, their companies enabled industrial revolution, while their children and grandchildren became respectable members of the financial and political elite. Towards the end of the 20 th c. there occurred a globalization of market, capital, technology and management, creeping into all pores of social life. Globalized economy breeds global entrepreneurship, and, under such circumstances, companies raise a huge profit, generating new colossal wealth. They join traditional capital in the search for political alliance in the realization of common global goals.

Geopolitical role of oil began in WWI, since war could not be waged without it, let alone be won. After WWII, the main content of oil’s geopolitical role turns into a concept of control over production and wider political surroundings of energy production. Due to such control, the Government of Mosadegh was overthrown in Iran in 1953, the Gulf War waged in 1991, etc. Today, at the beginning of the 21st c. the geopolitical role of oil is not so unambiguous. It is reflected in global political control of the US, but also in the rules of international relations directed by those into whose economic foundations was built the profit made of oil and gas. In modern globalized economy, corporation and corporate world become not only the basis for organizing economy, but also universal economic and social content.

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In globalized world, corporations and public media have a decisive impact on the public opinion. Oil corporations have towards the end of the 20th c. gone into the back of the mind of an average citizen’s reflection about large companies, only to come back again after 9/11, 2001; onto the front pages of newspapers and the in the breaking news of TV reports. A relative anonymity of energy companies at the very beginning of the 21st c. with regard to the period of domination of Standard Oil at the beginning of the 20 th c. or the global presence of the "seven sisters" during the oil shocks of the 70s, could also mean that the geopolitical role of oil is today transformed into a certain infrastructure of the globalization process. However, this global role of oil was fatherly strengthened after 2004, and especially after the leap of oil above $ 60 per barrel in the middle of 2005. The outburst of the so called gas crisis between Russian Federation and Ukraine at the end of 2005 and the realization of the European Union that natural gas may become a first rate weapon just like oil, has opened a new stage of globalization and politization not only of oil, but also of gas.

Power supply was at the beginning of the present century marked by oil price leap, as well as a more pronounced impact of the geopolitical factors on the global market of oil and oil products. Thus the situation in global energy supply was changed with regard to the last decade of the 20th c. After the fall of communism and the end of the Cold War, it seemed that the market would for long be dominated by global energy supply. However, instead of old global ideological oppositions, new ones came up, gradually also becoming global factors of disbalance in global economic and political relations.

Increase of global demand for oil, an intense demographic growth and the fact that the world is desperately dependent on hydrocarbons, directly cause oil price increase, which cannot considerably be moderated by new supply sources, such as the Caspian region or the offshore of southwestern Africa. These points to the fact that the period of cheap oil is gone forever, but also that the world is becoming growingly dependent on the Near East. The way out that the Western forces are trying to find through political and military engagement in the region, only creates even more instability and provides excuses to various terrorist factors for the disturbance of peace, not only in the region but also in the wider sense. Also, just like oil in the 20th c. gas has in the beginning of the 21st c. entered into a more intense globalization. Thus the structure of modern energy market is becoming increasingly globalized, more intensely politicized and subject to both the market and the geopolitical impacts.

At the turn of the 20th c. there was an intense development of the consuming devices using oil products, which contributed to an explosive demand for oil and thus created conditions for the breakthrough of oil industry. Therefore, at the turn of the century, there was a development drive enabling overall development through the development of oil industry, but at the same time creating an additional impulse for a fast oil industry development. Oil industry participated in the creation of modern civilization and thus created the spiral of a speeded up development. All this has strengthened the strategic role of oil in modern world. It is an irrefutable fact that this has improved communication among people, with an intensively increased flow of ideas, people, capital and goods. The main consuming devices of oil products pertaining to modern civilization (automobile, airplane, naval drive on liquid fuels, use of liquid fuels in industrial drives and mobile weapons with the drive on liquid fuels) were developed towards the end of 19th or the beginning of the 20th c. Later advancements in the 20th c. have perfected the drive, increased the speed and the capacity of consuming devices, while this increased even more the need for a more substantial and permanent supply with oil and its products. This process was given a new incentive by the second half of the 20 th c., through its scientific-technological development and informatics technology revolution.

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Over the past few years, two important processes in the energy sector have been developing, which could have a more considerable impact on the future developments in the electricity industry. The first one is increased role of direct foreign investments into developing regions and countries. The second important component is the market opening, characteristic of the past few years. Most developing countries have adopted reforms of energy systems in order to ensure foreign money in electricity generation and distribution, for the modernization of the electricity infrastructure. The wave of reforms has also caught industrialized countries, due to higher competition on the local market, as well as reduction of consumer costs.

The capital flow thus precedes independently of limited energy resources, i.e. independently of the Hubbert’s Peak issue in the production of oil or of any other energy source. Technological and economic development has their own logic and behaviour of the subjects which are its carriers or participants, whereas the availability of natural resources basically follows the logic of Hubbert’s curve. The availability of energy sources depends on total volumes that we have managed to discover through geological, geophysical and other kinds of knowledge, as well as on the part of the total volumes that may be extracted and used through the available technological capabilities. This availability increases as the technological know-how increases, but it cannot go on forever.

Development, and especially economic growth, depends on the increase of energy consumption that we obtain from limited sources, whose extraction is approaching the peak of production capabilities. This is true primarily of oil, while the available volumes of natural gas are such that we could safely say that there is still major potential for production increase. Such a condition of global limitedness of the most expanded energy source, with the need to ensure economic growth, renders energy conservation topical and imposes rational energy use as an absolutely universal request.

Rational energy consumption, conservation of conventional sources and development of renewable energy sources is typical of energy policy in times of crises, as was applied in the 70s and 80s, but not in the past about 15 years, at least not until the new oil price leap beyond 2004. Rational consumption pertains to the type of development policy based on the principles of sustainable development, which the US resists, as the industrially and politically leading country in the world. Such policy was refused by the Russian Federation as well, all the way until Russia’s adoption of the Kyoto Protocol in 2004, while it is to a certain extent avoided by China and India, countries with the highest energy consumption increase. The problem of consumption rationalization and conservation of energy is thus not in the least a simple issue and cannot be reduced merely to the application of modern technology, political aspiration or the willingness of individual countries to adopt such a policy.

On the other hand, the needs of economic growth and technological expansion, as well as further strengthening of globalization processes, also follow the logic and behaviour not taking into account the limited character of natural resources, Hubbert’s curve or the possibility of a soon oil production decrease. Under such circumstances, it is inevitable that policy becomes involved into the basic relations of development, economic growth and energy supply. Political interests, capital and struggle for power, and especially for the control over energy paths, give additional tension to classical political differences, oppositions and conflicts, especially in the Near East. Thus the mathematical logic of Hubbert’s analysis of oil availability, and, by analogy – of other energy sources, as well as the political logic of the struggle for power has formed a paradox at the beginning of the 21st c. which we might call the energy paradox of the modern world. Figure 9 shows one among the possible projections

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of future satisfaction of the needs for energy, very well illustrating also the growing role of natural gas and the global action of the said energy paradox.

(Ovdje dolazi slika 9)

This paradox consists of different components requiring different solutions. Scientific and mathematical logic of resolving the problem of limitedness requires the homogeneity of the world, whereas political logic of resolving topical confrontations and conflicts, especially the complex conflict on the Near East, conditions the increase of unhomogeneity, creation of deep differences and even initial civilization conflicts in the Huntington sense. Economic, political and military power is in the hands of those having less and less energy, whereas they need it for a further political expansion. On the other hand, energy reserves are in the hands of those who would want to limit the present global political power and the globalization process itself. Thus, in the very core of contemporary global political conflict, there is energy, which is the content of the energy paradox of modern civilization.

Human society needs more and more energy for its economic and technological development; all the countries are planning increased energy consumption because the political elite is in one way or another forced to plan economic growth. Thus, on the level of individual political realization i.e. in the politics of any country, the desire for economic growth and increased energy consumption becomes a logical, legal and legitimate cause. At the same time, total resources of our planet are limited and, in individual cases, such as the totally available volumes of conventional profitable oil, they are near their final limits. On the level of a general developmental and global policy and global distribution of natural resources, there are also reasonable and legal objectives. However, realistic political relations are such that few people are really taking care of the reasonable general objectives and long-term development limitations. Short-term needs, interests of the capital and challenges of achieving and maintaining political power are overpowering reasonable long-term objectives of energy conservation. This is the dark side of the modern energy paradox.

Consequences of Oil Price Increase on the Energy Market of European Countries

European countries, especially those Western, have taken the energy crises of the 70s very seriously and changed their energy strategy towards rationalizing energy consumption and technological renewal of the economy. Apart from that, parallel with turning the European Community into European Union, a strategy was developed based on the European Energy Charter, having affirmed the principles of deregulating energy markets and a certain suspension of national energy policies. The basic principles of European energy policy were based on the understanding that the existing condition on the international energy market after all goes in the favour of buyers and importers of energy and hence the main principle of energy policy of Western European countries was the absolutization of the role of energy market with the deregulation and affirmation of the "free approach" to energy markets.

Over around a dozen years at the turn of the 21st c. the European Union had sufficient energy. With some of its own oil and sufficient gas in the North Sea, infrastructure for oil import was developed, with a classical naval import from the Near East, the Russian Federation, and the import of gas from the Russian Federation, from North Africa, and LNG import. European countries have all adopted commitments of the Kyoto Protocol and were the only ones to actually implement it, out of all continents i.e. global regions. Oil price increase beyond 2003

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re-actualized the programs of developing renewable energy sources, especially in the European Union countries. This created the sense of energy abundance and safety lasting all the way until the so called Russian–Ukrainian gas crisis, in the winter of 2005/2006, in which there were reductions of Russian gas supply at the most awkward moment – in the middle of winter and low temperatures. Reductions were very partial and very short, but they managed to shake the foundations of the former European "energy comfort". Apart from the politization of oil supply from the Near East, the supply of Russian gas also gained clear geopolitical properties.

This alarmed the European Union and made it swiftly change its energy policy, investing even greater efforts into the activation of technological programs of renewable sources development, as well as an incentive for the global energy agreement with the Russian Federation. The future will show how these agreements will develop, but, one thing is for sure, the European Union was suddenly faced with the main energy problem, which is the dependence on energy import, and is now most determinate to stimulate renewable sources. (15)

Unlike the European Union countries, transition countries of eastern and southeastern Europe have over the decade of energy affluence towards the end of the 20th c. had many problems, from classic problems of transition and privatization, taking bits of the politically costly, but still cheap Russian energy, to facing the costly European energy infrastructure or a complete lagging behind in energy development. The countries which in 2004 became a part of the European Union still made it under the multinational energy umbrella of the economically powerful Union, while those who remained outside these integrations, such as Ukraine or Croatia, faced the need of a fast questioning and redefinition of their energy strategy.

Smaller countries, like Croatia, are able to monitor these processes and fit their own energy markets into the globalized energy market, respecting its rules. The Republic of Croatia and its energy companies will have to adapt their future energy strategy to the requirements of globalization, preserving national interests in the process and fitting into energy flows of Europe, especially its southern part.

The basic properties of our country’s energy consumption, such as the structure of energy sources, and production and import of main energy sources, are shown in Figures 10, 11 and 12. Their analysis clearly shows the basic requirements, as well as limitations, of a future energy consumption and supply of our country.

(Ovdje dolaze slike 10, 11 i 12)

Croatia was in the past few years developing energy strategy, or, more precisely, they are really the starting bases of an energy strategy, based on which began the reorganization of the energy system (beginnings of privatizing the energy system, establishment of the Croatian Energy Regulation Agency, etc.). However, in the context of deep changes on global energy market which happened in the meantime, oil price increase about to occur and gas price increase, as well as the dilemmas around further privatization of the energy sector presents both in the political sphere and in our public, we do not actually have an energy strategy.

Joining the European Union, we shall be forced to follow its energy strategy. This will include the meeting of all required criteria and rules for energy market, with a further privatization of our energy companies and a probable taking over of some of them by European energy

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companies. Therefore, Croatia actually has at its disposal the time before it joins the European Union in order to, if it feels up to it, develop an "ad hoc" strategy and in the acceding negotiations try to preserve as much as possible out of it – which is an extremely demanding task and nearly a " mission impossible".

Conclusion

Changes in energy at the beginning of the present century result from limited reserves of fossil energy fuels, but also their global distribution. Geopolitical context of the world of oil and gas at the beginning of the 21st c., and especially after the 9/11/ terrorist attacks relies on high insecurity in the closed circle: market – policy – terrorism – oil. The geopolitical role of energents is a complex system of the market and geopolitical monopolies, with a constant instability, due to increased demand of oil and gas, plus political disturbances.

Over the past few years, we have been witnessing growingly expensive oil impacting price increase of all other energy sources, primarily natural gas. Apart from that, global energy market is becoming growingly unstable given the political risks, and especially the deepening of the political crisis in the Near East, prolonged war in Iraq and intensified global terrorism. All this affects both oil price increase as well as that of all other energy sources, plus increased global energy uncertainty. Under such circumstances, relations are energy industries increasingly result from contemporary geopolitical oppositions i.e. fights for globalization on the one hand and opposition to globalization processes on the other. Additional problem is the exhaustion of the present oil reserves i.e. the prospect of a global oil production decrease, along with constant demand growth bringing about also additional pressure on oil price increase as well as that of other energy sources. Thus the world oil market at the beginning of the 21st c. is more uncertain than ever in its history full of uncertainties and crises.

Primary energy consumption in the world is based on oil, and increasingly also on natural gas, taking over a growingly significant role in the immediate future. The outburst of international terrorism, deepening of the political crisis in the Near East and growing politization of natural gas supply have turned energy, and especially oil and gas, into a growingly insecure precondition of any economic and development policy. Increasing politization of oil and gas as well as a great dependence on imported energy creates a turn in the energy strategy that the European Union has already announced. The so far absolutization of the market will – so it appears – be replaced by a kind of joint co-ordination and control of EU multinational mechanisms with regard to ensuring the safety of energy supply, stressing energy efficiency and renewable energy sources in the process.

Croatia must ensure sufficient energy for its development, including an increasing amount of imported energy. Since we are only negotiating a full joining of the European Union, we do not have any advantages or protection of that multilateral mechanism. That is why Croatia must redefine its energy strategy, adapt it to the growingly expensive imported energy, develop diversification of the imported energy sources and ensure as intense as possible a development of energy efficient energy consumption and activation of possibilities for producing the remaining conventional energy, plus the activation of renewable sources as much as possible. Only such a flexible strategy, with a rational management of domestic oil and gas, import diversification and stimulation of renewable sources development, will make it possible to face the challenges of energy uncertainty of the second decade of the 21st c.

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