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9 April 2002
The
Oil Crisis: Palestine,
Iraq, Saudi Arabia
INTRODUCTION
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.
IRAQ CUTS
OFF OIL
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Zionist entity’s armed forces have unconditionally withdrawn from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)
SAUDI
ARABIA: THE OIL DETERRENT
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)
PUNISHING
OVERPRODUCERS
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)
SAUDI
ARABIA VERSUS RUSSIA
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)
MAKING
UP THE IRAQI DEFICIT
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.
WAR AND
OIL AND RECESSION
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)
WAR ON
IRAQ COULD TRIGGER OIL SHOCK
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)
DOMINATING
ENERGY RESOURCES
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)
CONCLUSION
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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