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Briefings & Documents Menu / Anti-war Briefings Menu / Briefing 16

9 April 2002

The Oil Crisis: Palestine, Iraq, Saudi Arabia


The conflict in Israel/Palestine and the threat of war against Iraq have been sending reverberations throughout the Middle East, and have affected the price and now the supply of oil. The impact on the world economy remains to be seen. There is a danger of triggering a world recession. Whether or not there is a recession, a major conflict is developing between Russia and Saudi Arabia for supremacy in the world oil market.


On 5 Apr. 2002, Iranian supreme leader Ayatollah Ali Khamenei called for a symbolic one-month oil embargo against countries which support Israel, in order to protest against Israel’s brutal reoccupation of Palestinian areas. On Monday 8 Apr., Iraq announced it was stopping its UN-permitted oil sales for 30 days, ‘or until the Zionist entity’s armed forces have unconditionally withdrawn from the Palestinian territories.’ Ali Rodriguez, secretary-general of the Organisation of Petroleum Exporting Countries (OPEC), ‘warned that Iraq’s action, coupled with labour trouble that cut Venezuelan oil exports, could provoke an oil crisis.’ (Financial Times, 9 Apr., p. 1)

Joe Stanislaw, president of Cambridge Energy Research, said: ‘The psychological impact of this cannot be underestimated. It adds to the fear and uncertainty in the market and unless someone makes up the shortfall prices could be heading to $30 a barrel.’ Iraq exports 2 million barrels of oil a day, about 4 per cent of internationally-traded supplies. It is the sixth largest oil supplier to the United States. ‘The two key questions are: who will join Iraq, and who will compensate for the fall in supplies’, said Leo Drollas, chief economist at the Centre for Global Energy Studies. (Financial Times, 9 Apr., p. 6)

As for who might join Iraq, at the time of writing Libya and Iran were considering joining the boycott. (Guardian, 9 Apr., p. 4) But ‘Saudi Arabia, the world’s largest oil producer, is known to oppose the use of oil for political gains’, while Kuwait immediately ‘made it clear it would not support Iraq.’ (Financial Times, 9 Apr., p. 1) Even for Iran, which supplies no oil to the US, one London analyst suggested that, ‘They’re too commercially astute to join Iraq with prices as high as they are.’ (FT, 9 Apr. p. 34)


Traditionally, Saudi Arabia has taken on the role of making up supplies in the event of a shortfall in the oil market. Saudi Arabia has 261 billion barrels of proven oil reserves - 25 per cent of the world’s known oil supplies, over 40 percent of those in the Middle East. Saudi oil policy has been governed by the desire to keep oil prices high enough to maximise oil earnings and to extend the life of its reserves, but not so high that prices stifle demand and consumer nations are encouraged to develop other sources of energy supply. Keeping prices ‘high enough’ requires cooperation from other oil producers. ‘Preventing oil prices from rising too high requires keeping enough spare production capacity to use in an emergency.’ Currently Saudi production is running at 7.4 million barrels a day (mbd). Riyadh has ‘close to 3 mbd of spare capacity.’ This is usually enough ‘to entirely displace the production of another large oil-exporting country if supply is disrupted or a producer tries to reduce output to increase prices.’ ‘Saudi spare capacity is the energy equivalent of nuclear weapons, a powerful deterrent against those who try to challenge Saudi leadership and Saudi goals.’ (Foreign Affairs, Mar. 2002, pp. 18, 19)


The ruthlessness of Saudi policy is described in a recent article by Edward

Morse, former US Deputy Assistant Secretary of State for International Energy Policy (1979-81), and James Richard, portfolio manager at an investment fund active in Eastern Europe, Russia and Central Asia: in 1985 and in the late 1990s, Saudi Arabia punished ‘overproducing’ oil exporting countries by flooding the market with oil, bringing prices crashing down and reducing everybody’s oil revenues, until rival oil exporters were willing to accept Saudi domination. (Foreign Affairs, Mar. 2002, p. 20)

In the latter case, OPEC member Venezuela was producing so much oil it was overtaking Saudi Arabia as number one supplier to the United States. (Currently, Riyadh supplies 1.7 mbd to the US. This oil is sold to the US at a discount of $1 per barrel. ‘That discount translates into a subsidy to US consumers of $620m per year.’ This is the price Saudi Arabia pays to be recognised as the United States’ main oil supplier.) ‘When diplomacy failed, Saudi Arabia raised its production by close to 1 mbd and induced the oil price collapse of 1998’. Riyadh re-established itself as the main supplier to the US. (p. 21)

The events of 1985 and 1996 ‘demonstrated that the kingdom will accept those low prices so long as it suffers less than its targets do.’ (Foreign Affairs, Mar. 2002, p. 20)


According to Morse and Richard, ‘The Saudi-engineered price collapse of 1985-86 led to the implosion of the Soviet oil industry - which, in turn, hastened the Soviet Union’s demise.’ (Foreign Affairs, Mar. 2002, p. 29) Before the disintegration of the Soviet system, Soviet oil production reached 12.5 mbd, ‘the largest amount of oil ever produced by a single country, representing one-fifth of global production... one-third more than Saudi Arabia’s peak share at the end of 2000.’ (Foreign Affairs, Mar. 2002, p. 17)

Recently, as the Russian economy has stabilised somewhat, privatised Russian oil companies have been rebuilding and reasserting themselves on the world market. ‘For each of the past two years, Russia has quietly but persistently increased its annual oil output at a rate of nearly half a million barrels a day., the largest single increment of increased output of any country in the world.’ ‘If the concrete plans of Russian and Central Asian oil companies and their international partners come to fruition, total CIS [Commonwealth of Independent States] exports from the former Soviet Union could equal Saudi exports within four years.’ Moscow sees the opportunity, post-11 September, to ‘displace OPEC as the key energy supplier to the West’. Economically, this would integrate Russia into the West, and, politically, its ‘energy resources can be used to buttress Moscow’s goal of becoming a key partner of the United States.’ (Foreign Affairs, Mar. 2002, pp. 16, 17, 24)

According to Morse and Richard, the stage is set for a ‘contest for energy dominance between the world’s two largest oil exporters, Saudi Arabia and Russia.’ (p. 16) If Saudi Arabia wishes to block the development of Russian/Central Asian oil production capacities, it would have to engage in an even harsher war than in 1985 or the late 1990s: a sustained price war to block Russian and CIS oil development ‘might require oil at $10 a barrel for two years or more.’ (Foreign Affairs, Mar. 2002, p. 31)


Returning to the present crisis, because of strong pro-Palestinian feeling in the region, ‘It’s hard to see how Saudi Arabi could increase output officially, either within or outside OPEC, to help’ overcome the effects of the Iraqi cut-off, according to Leo Drollas of the Centre for Global Energy Studies. If any OPEC member is going to make up the shortfall, a London analyst suggested ‘they will do so collectively’ to ‘take the focus off individual members’. Meanwhile, ‘Russia and Norway said yesterday they would reconsider their export strategies if oil prices remained high.’ (FT, 9 Apr., pp. 6, 34)

There are also national and international oil stocks held by consumer nations which could be used. During the 1991 Gulf War, the International Energy Agency made 2.5 mbd available, ‘slighly more than the 2 million barrels that Iraq currently exports.’ (Independent, 9 Apr., p. 21) However, with up to a year to go until the United States plans to go to war with Iraq, few consumers will wish to be drawing on their reserves too hastily.


Oil prices rose 35 per cent during Mar. 2002. (Sunday Telegraph, 7 Apr., Business, p. 4) Prices are now roughly the same as they were before 11 September, around $26 per barrel of Brent crude oil (this oil is the international benchmark; there are many different types of oil which are more or less expensive than Brent crude). According to Chakib Khelil, Algeria’s energy minister, speaking in mid-March, the price then [$24.48 pb] included a premium of $3 a barrel because of the geopolitical tensions’, mainly around Iraq. (Independent, 16 Mar., p. 19) After the Iraqi cut-off, oil jumped $1.01 pb, to $27 pb.

There are two scenarios: oil prices ‘high’, but below $30 pb, and oil prices over $40. Opinion is divided over the effects on the world economy of staying at the current, sub-$30 level. Larry Elliott of the Guardian notes that ‘periods of high oil prices mean an initial surge of inflation followed by recession’: ‘It happened in 1973. It happened in 1979. It happened in 1990. And it could well be happening again.’ (18 Mar., p. 23)

On the other hand, Roger Bootle, the well-known City economist, suggests that current prices are not a serious threat: the dire effects of higher oil prices ‘were largely caused, not by the direct impact of higher oil, but rather by the passing on of this impact through a spiral of higher wages and prices that ultimately brought both havoc and high interest rates.’ This is unlikely now (with prices as they are) because there is more substitution for oil, service industries (which use less energy) are more important, and inflation is more under control, than in the past. (Sunday Telegraph, 7 Apr., Business, p. 4)


Alan Blinder, former vice chair of the US Federal Reserve: ‘I can’t imagine that somebody isn’t telling George Bush that one possible consequence of a real shooting war in Iraq could be a spike in the price of oil and a return to recession in the US... a real spike to $40 or $50 a barrel would have the potential, indeed the likelihood, of derailing the whole world recovery.’ The FT warns that in the event of war and the loss of Iraqi oil, ‘increased supply from other countries would take time to come on stream, and speculation is bound to send oil higher in the short term at least... Even a fairly short-lived price leap could have a serious economic impact.’ (FT, 16 Mar. 2002, p. 12)

In 1990, the Federal Reserve might have been able to prevent recession in the US if it had not been for high oil prices (over $40 pb) caused by the oncoming war on Iraq. ‘Mr Bush’s determination to overthrow Mr Saddam looks like determination to complete his father’s unfinished business. His fear must be that he might reproduce the recession that led to his father’s ejection from office.’ There is a ‘potentially irreconcilable conflict between foreign and economic policy’. (FT, 16 Mar. 2002, p. 12)


Noam Chomsky once remarked that it has been Axiom One of international affairs since WWII that the United States should control the energy resources of the Middle East.

Observer columnist Nick Cohen has rightly pointed out that this commitment does not derive primarily from the need to assure oil supplies to the US (the US only imports 25 per cent of its oil from the Middle East). He quotes the Pentagon ‘Defence Planning Guidance’ prepared by Paul Wolfowitz (now influential Under Secretary for Defence) for Dick Cheney (now Vice President) during the Bush Sr presidency: the US intervenes in the Middle East to ‘discourage’ ‘advanced industrial nations from challenging our leadership’; it is important to deter ‘potential competitors from even aspiring to a larger regional or global role’. Cohen translates: if Europe, Japan and China, ‘which have a far greater dependence on Gulf oil... move in and protect their interests... in the long term they would grow into powers which would challenge [US] authority’. (Observer, 7 Apr., p. 29)

True, but incomplete. As Chomsky points out, ‘the goal was [and is] to ensure that the enormous profits from the energy system flow primarily to the United States, its British client, and their energy corporations, not to the people of the region, and that oil prices stay within the range most beneficial to the corporate economy, neither too high nor too low’, as well as ‘to dominate the world system’ by controlling the oil imports of US economic competitors (US planner George Kennan proprosed holding ‘veto power’ over Japanese military and economic policies by such means in 1949). (World Orders Old and New, Ch. 3) The flow of oil profits, not the supply of oil itself, is the prize to be controlled.

The main danger has always been the indigenous population of the oil-producing nations who often develop the ‘radical nationalist’ idea that the resources located in their countries should be used for their own development rather than for the benefit of US- and UK-based transnational corporations. Israel functions as a "strategic asset" helping the US to contain Arab nationalism, and therefore benefits from US aid and diplomatic protection for its state terrorist activities. (Chomsky, The Fateful Triangle, Ch. 2)


The fate of the Palestinians and the Iraqis, now intertwined, are linked to the health of the world economy, and possibly to a looming clash between Saudi Arabia, and Russia. Much may depend on the Saudi peace plan, proposed in part to counter Saudi association with bin Laden and 11 September. ‘Now, in one stroke, we’ve gone from being a country that harbours extremism to a peacemaker,’ one Saudi told Newsweek. (11 Mar., p. 23) The key decision maker is President Bush, whose main interests are acquiring Arab acquiescence and cooperation for his war on Iraq, completing ‘unfinished business’ by removing Saddam Hussein, and securing his own re-election, but who may instead trigger catastrophe for Palestine and Iraq, world recession and electoral defeat for himself.

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