Thomas W. O’Donnell The University of Michigan Center for Middle East and North African Studies

[email protected] | TomOD.com1

Thomas W. O’DonnellThe University of Michigan

Center for Middle East and North African StudiesMichigan Center for Theoretical PhysicsResidential College - Social Science Program

[email protected], http://www.TomOD.com

| New School, NYC GPIA | Economics of Security Workshop | 17 Nov 2006 |

The Global Political Economy of

Oil &

U.S. Persian-Gulf Policy


Motivationfor

Oil Study

Lots of theories:

- Interests & empires vs. multilateralism & liberal markets* ?

- New “Great-Power Rivalry” & “Great Game” a la WW I ? - “Resource Wars” (mercantilism) ? - One global capitalist class ? - “Peak Oil” & “End-of-Oil” ? - Rentier states or new internal markets ?

- Global warming & environment ? - Oil & Iraq War ? - Oil & Iran crisis ? - Political-Economic Basis for U.S. Persian-Gulf Policy

* E.U. Commission Green Paper, March 2006 Central question: hegemony / U.S. role

Motivations to study political-economy of oil:


Hegemony or Empire?Niall FergusonFrom Foreign Affairs, September/October 2003

Two Hegemonies: Britain 1846-1914 and the United States 1941-2001. Patrick Karl O'Brien & Armand Clesse. Aldershot, U.K.: Asghate, 2002, 365 $84.95

Summary: Did the United Kingdom's influence in its heyday match the United States' today? Two Hegemonies provides an answer; but "empire" might be the better word.

Niall Ferguson is Herzog Professor of History at the Stern School of Business, New York University, and a Senior Research Fellow of Jesus College, Oxford. He is the author of Empire: The Rise and Demise of the British World Order and the Lessons for Global Power.

“Hegemony”, “Empire” ?

Radical categories of 1960-70s …now mainstream academic and foreign-policy debates

Motivation for

Oil Study


Theoretical framework:

Two aspects in study of ‘oil order’:

1. In itself (economics, market, reserves, technology, …)• Actors: IOCs, Independents, NOCs, states• Market-control institutions & practices

2. In relation to other things• Domestic: Transportation & energy infrastructure, lobbies, …• Geo-Strategy: Oil hegemony brings hegemony-in-general

Corollary: States’ & companies’ interests are simultaneously:• Complementary (too often seen in vulgar-economic, voluntarist way)

• Contradictory (this often missed)

Method for

Oil Study


Political-Economy - Generally: - Oil markets (natural resource, generating rents) have two major issues:

• Inherent volatility• Security of supplies

- Market-control institutions and practices - Used to limit competition; regulate production levels and prices; - insure more consistent profitability, reliability- Forms of control have to be consistent with:

• Existing property relations• Existing technology, communication, transport • Role of state vs. enterprises

The Old Oil Order (1890s-1970s)

The NewGlobalized Oil Order

TheoryFramework

forOil Study


The Old Oil Order (1890s-1970s)- 2nd Industrial Revolution, Mass Production Era, Monopoly-Capitalist Era

• Vertically integrated international oil companies (majors)• Contained volatility of market within • Limited competition to ends of companies

• point of sale• finding oil fields

• Owned ‘concessions’• Standardization, efficiency, quality control

• Cartel agreements to control supplies, control price• U.S. held global surplus – the swing producer

• Used to enforce concessions and prices, for war time, etc.• U.S. energy czar, allocation and price controls• Broke up Standard Oil

The NewGlobalized Oil Order

TheoryFramework

forOil Study


The NewGlobalized Oil Order (1980s …)• Security

• IEA SPRs• Global-north oil• Supply cushion

• Volatility• Price bands• Saudi swing state• Futures market

• Role of states• U.S. Hegemon, OECD / IEA counter-cartel, IEF(S), …

• Role of force

TheoryFramework

forOil Study


I. POLITICAL ECONOMY

1. FACTS of oil sectorGeography | Reserves | Technology | Consumption | Price History

2. HISTORY from cartels to globalizationProperty relations | Security of supply & demand | Volatility | Cartels &

control institutions

3. CRISIS ?Projections | China & India | Productive capacity

II. U.S. PERSIAN-GULF & GEO-STRATEGY

4. THE GLOBALIZED OIL ORDER allies & “rogues”U.S. v. E.U. | Four aims of U.S. policy in Persian Gulf | Oil, war and global warming

OUTLINE:


(Report#:DOE/EIA-0484(2002)

Absolute levels

Note:InformationRevolutionhasn’t yetrevolutionizedenergy

Oil facts:

Demand


Oil % constant.

Why??Where are theresources? …

Oil facts:

Demand


1. FACTS of oil sector

- WORLD ENERGY USE:What portion of the world’s energy is coal, natural gas, oil, nuclear, renewables?What regions of the world consume this energy---now and in the future?

- WORLD RESERVES:Where are most of the oil, natural gas reserves?

- WORLD PRODUCTION CAPACITY:Which countries have the technology to pump the most oil?

- WORLD SUPPLY & PRICE:How have global supply and price varied? Which countries have controlled the supply? (Can anyone?)

- ABOUT US:Domestic consumption, domestic sources, imports, dependence vs. independence, …US has the most oil-centric and auto-centric economy (least sustainable), biggest oil user!

- Facts about international organizations (IEF, IEA, OPEC, etc.)


Precondition for hegemony …natural concentration - M.E.

more so…

Oil facts:

Reserves

tar sands bump


60+%worldreservesMideast:

90% Persian Gulf

Hegemony possible

Oil facts:

Reserves


Field distribution by sizeAnother form of concentration: Gulf oil mostly in “super giants” / “elephantine” fields

By: Matt Simmons@ Rice U. conf, 2004.

Source: Professor Steven Dutch, University of Wisconsin - Green Bay.

Oil facts:

Reserves


1. FACTS of oil sector

- WORLD ENERGY USE:What portion of the world’s energy is coal, natural gas, oil, nuclear, renewables?What regions of the world consume this energy---now and in the future?

- WORLD RESERVES:Where are most of the oil, natural gas reserves?

- WORLD PRODUCTION CAPACITY:Which countries have the technology to pump the most oil?

- WORLD SUPPLY & PRICE:How have global supply and price varied? Which countries have controlled the supply? (Can anyone?)

- ABOUT THE US:Domestic consumption, domestic sources, imports, dependence vs. independence, …US has the most oil-centric and auto-centric economy (least sustainable), biggest oil user!

- ABOUT INTERNATIONAL ORGANIZATIONS (OPEC, IEA, IEF, etc.)


Source: EIA

- Biggestproducers:1.Saudi A.2. U.S.3. Russia4. Iran5 Mexico(1, 2, 3 vary)

- M. East biggest region

-US / Russiapump fast on small reserves

N. Hemisphere½-depleted,but not ME.- Non-Mideast pumps at ~max. rate (Hubbert’s Peak: US was ½-emptied out by 1971)

Oil facts:

Production


Source: IEA

* Saudishuge,yet30-40%sparecapacity< 2003 unique!

*Irannow2nd

* Iraq ‘could’be 2nd

SaudiArabia.10-15 yrs + $20-40 billion (ref: US Council on For. Relations, pre-war report ).

Global-north depletion willexacerbate M. E. concentration

Oil facts:

Production


ASIDE: US ‘Dependence’on Mid East?

~ 60% US oil Imported

U.S. gets all Western Hemisphere’s oil

From Mideast: 2000: 21%, 2005: 17% (10-12% of total demand)

Hence, U.S. fractional “dependence” very low

means.topump…

Oil facts: U.S.

Imports



1. FACTS of oil sectorGeography | Reserves | Technology | Consumption | Price History |

2. HISTORY: From cartels to globalizationProperty relations | Security of supply & demand | Volatility | Cartels & control institutions

3. CRISISProjections | China & India | Productive capacity

II. U.S. GEO-STRATEGY


OUTLINE:


The NewGlobalized Oil Order (1980s - …)• Security

• IEA SPRs• Global-north oil• Supply cushion

• Volatility• Price bands• Saudi swing state• Futures market

• Role of states• U.S. Hegemon, OECD / IEA counter-cartel, IEF(S), …

• Role of force

History:howglobalizedorder wasslowlyestablished


3rd oil shock

$ 95


3rd oil shock

Average IEA Crude Oil Import Price

Projections:DoE EIA AnnualEnergy OutlookFeb. 2006

$ 95

$ 50


Five Phases of the Global Oil OrderWorld Oil Market and Oil Price Chronologies: 1970 – 2005

IEA data

1937–1956 1957 – 1973 1974 – 1986 1986 – 2000

WWII 1947 1951

1967

Oil Shock I Oil Shock II Oil Shock III

1979 1990

| Carter | Reagan | Bush | Clinton | Bush

2001 -

1997-98

First oil shock:

-1973 Arab OPEC Embargo


OIL SHOCK 1973/1974

- Previous embargoes never worked when US opposed (WWII, 1956, 1967) Role of U.S. surplus was key

- Texas Railway Commission- West Texas as “Saudi Arabia” of pre-1971 era.

- Hubbert’s Peak for US 48 states.Role of U.S. state organizationally (from FDR’s oil board/ H. Ickes)

- Prices rise over 4x- OPEC states enforced nationalization of “concessions”

Ended colonial vestige in property rights- - Undermined vertically integrated monopolist enterprises - - Undermined Great Cartel (more later)

* OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations)


OIL SHOCK 1973 - Urgent need for US / OECD* regain control.

Kissinger proposed two U.S./OECD measures:

1. Invasions to seize MENA oil fields .British declassified, Feb, ’04

Later: 1980 U.S. abandon Nixon Doctrine for Carter Doctrine. Reagan, Bush Sr., Clinton begin stationing

U.S. troops & material / bases … today



OIL SHOCK 1973 - Urgent need for US / OECD* regain control.

Kissinger proposed two U.S./OECD measures:

1. Invasions to seize MENA oil fields .British declassified, Feb, ’04

2. Counter-cartel of consuming nations: “change the objective conditions” Kissinger

International Energy Agency (IEA) Members keep 90-day Strategic Petroleum Reserves (SPR)

See

Immediately implemented, highly successful for embargo nullification … but organization lagged.

OECD policy: let Inflation eroded price gradually. (Yergin)

3. Develop new N. Hemisphere oil



1980-90’s: US/OECD’s IEAVs. OPEC“confrontational”relationship.

Kissinger plan worked: strategicreserves (SPR) ofIEA counter-cartel negatedembargo weapon Implies threat:… what mightUS/OECDdo militarily over 90+ days if embargoagain

An added SPR role:… IEA pressuredOPEC to observeUS/IEA pricerange by adjustingpumping rates.


Kissinger’s role … the planner and organizer of IEA:



Kissinger’s role … the planner and organizer of IEA / oil hegemony:



IEA data

1937–1956 1957 – 1973 1974 – 1986 1986 – 2000

WWII 1947 1951

1967


Themes:1. OIL PRICE SWINGSTATES”2. ;US Vs. GB & France3. US-OECD Vs. OPEC4. US Surplus till 1970

1979

1990| Carter | Reagan | Bush | Clinton | Bush

2001 -

1997-98

World Oil Market and Oil Price Chronologies: 1970 – 2005

IEA data

1937–1956 1957 – 1973 1974 – 1986 1986 – 2000

WWII 1947 1951

1967


1979 1990


2001 --

1997-98

Second & Third shocks:-1979 – IEA organized

-Business model …-Spot & Futures mkt

-1985-Recog’d OPEC-“New World Order”

-Collusion begins: 1st Price Band slide

Five Phases of the Global Oil Order


Source: Brad Bourland, CFA, Chief Economist, Samba. At NY Energy Forum, June 2006

Two IEA-OPEC price-band agreements:

- 1986: $17 (+/- ~4) G H W Bush & King negotiated

- 2000: $27 (+/- ~5) Sec. Richardson / London mtg.

- 2006: ?? third agreement ? ?

?


Four Phases of the Global Oil OrderWorld Oil Market and Oil Price Chronologies: 1970 – 2005

IEA data

1937–1956 1957 – 1973 1974 – 1986 1986 – 2000

WWII 1947 1951

1967


1979 1990


2001 -

1997-98

Confrontation Confidence building - New OPEC generation - Gulf War coalition - Vienna deal IEF begins - US Sec. Energy Richardson - 1997-1998 Asian crisis-2000

swings “bad for business” - 2000 London mtg. price - IEF upgrade proposed Osaka

by Prince Abdullah… then crises 2001



1. FACTS of oil sectorGeography | Reserves | Technology | Consumption | Price History |

2. HISTORY from cartels to globalizationProperty relations | Security of supply & demand | Volatility | Cartels & control institutions

3. CRISISProjections | China & India | Productive capacity

II. U.S. GEO-STRATEGY


OUTLINE:


The new, globalized system is facing

a potential “energy” crises

U.S., IEA, OPEC et al forced

to “reinvent” the system, or lose it

What are these crises which drive Washington, London et al?


Four Phases of the Global Oil OrderWorld Oil Market and Oil Price Chronologies: 1970 – 2005

IEA data

1937–1956 1957 – 1973 1974 – 1986 1986 – 2000

WWII 1947 1951

1967


1979 1990


2001 -

1997-98

Crises: 1.1990s- 2001 Saudi crises, in “Central bank of oil” 2. 2003 Demand up + no cushion data

Requires: - FDI (IEA: “$5 T by 2030) - Better market control (IEFS, JODI, …) - ‘Iraq & Iran online’ but not ‘rogues’ ->

invasion & confrontationTwo views:Multilateralism & liberal markets vs. nationalism & empires ?


Globalized order

New characteristics:– Demand-crisis & low buffer threatens “cheap oil”

• Demand up 60% between 2001-2030

– Requires huge oil investments (e.g., ‘Cheney’ Plan) $5T, mainly in nationalized Middle East oil

– “Consumer-Producer Dialogue.” Economic-control Institution (Bush Sr. / Clinton / Richardson)

data


Recall:oil’s % forecastedconstant

In spite of1st--world efficiencies …

where is theexpansion? …


China demand huge factor … surpassedJapan ’03,& US by 2020

has goneauto-centric; economic& military reasons. …being reduced to historicaldilemma of Japan, Germany

very precariouschoice – must import anyadditional oil!

Middle-class sizes ~determinerelative growth potential

US solution:an oil offensive…


Globalized order

• IEA + OPEC IEFS, Institutionalized in RiyadhFeatures:– Parallel standing Secretariats (ministers & majors)– Market information (JODI) in tight-market volatility– Transparency of proven reserves, cost, production rates, …– New MENA, perhaps Mexico, FDI laws.– Global meetings, 92 energy secretaries


U.S. Persian-Gulf Policy:

– Multi-lateral order, fungible oil, open market, FDI, …– No ‘rogue’ oil states

– Historical high absorbers

– Persian-Gulf States as protectorates• Sanctions on

– FDI from ba’athists (13 yrs)– FDI from Iran clerics (11 yrs now)

• Political-economic basis:– Growth in Persian-Gulf importance– Eliminate high absorbers’ behavior WHY?

– Implementation• Iraq War• U.S.-Iran crisis• open Caspian for investment• FSU pipelines to go south, etc.


Pumping now mainly from sates with ½-depleted reserves… trajectory

Energy/Oil Basic Facts:

Supply

Persian-Gulf states’ importance



Supply

Persian-Gulf states’ importance

U.S. & Russia #2 & #3 producers-- unsustainable –

Gulf States’ production%

will grow

What are Iraq/ Iran’simportanceto global system?


Iran


Supply

Iran’s Importance


Iran Iraq


Supply

Iran & Iraq’s importance

U.S., E.U.,IEA, programfor developmentM.E. oil …


Spare capacity

mitigatedisruption

Foreigninvestmentsalready,under Clinton

market% growing

SpecialGulf role:

Expand pumping capacity / Foreign Direct Investments (FDI) push:

From “Cheney Energy Plan”:


Why Iraq (Iran)? Much pressure to develop fields:

Restoration of production capacityIEA Reference Scenario

Slow production expansionRapid production expansion

(Source: IEA Energy Investment Conf. late ‘04)

Cum

ulat

ive

Inve

stm

ents

(bi

llion

$U

S)

Production (million barrels/day)

2010

2010

2010

2020

2030 2020

2030

2030

Very similargraphs weremade by:Council onForeign Affairspre-invasioncommission;(included later-occupation official Jas.Garner, …)

2020

N.B.


Source: V. Pres. D. Cheney’s White House Energy Report2000- Iran and Iraq importance …

Cheney says:

New directions for pipelines – Now to go south vs. north into FSU


Political-Economy of U.S. Iraq (& Iran) policy:

• Persian-Gulf oil importance will continually rise

• U.S. must remain the Persian-Gulf hegemon

• Regional hegemony brings global hegemony-in-general • That is. over rivals (E.U. & China examples)• Not, about U.S. home market – wants oil fungible• Not merely about U.S. IOCs – trumped by geo-strategy

Iranian clerical regime now most significant threat to this U.S. Gulf hegemony (with Saddam’s demise)


U.S. strategic assessment on Iran:

- If Iran were allowed to absorb some $30 to 50 billions in FDI, clerical regime would become rich and powerful actors in the Region and OPEC.

- Same U.S. assessment of Iraqi ba’ath from 1991.

- Would use oil against Saudi, Kuwaiti, UAE royals, new Iraqi state, disrupting U.S. regional hegemony.


U.S. strategic assessment on Iran:

Hence, block with sanctions… but sanctions not sustainable (e.g., Iraq ).

Hence, regime change:- Iran & Iraq as U.S. protectorates as rest of Gulf

- Then permit to become oil-rich too

Implementation:

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Thomas W. O’Donnell The University of Michigan Center for Middle East and North African Studies

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