Theatres of Oil Wars by Ranjit Sau

From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Sun May 16 2004 - 12:40:52 EDT

based on outdated cartel theory of oil pricing. See Cyrus's and Hans
Singer and Kunibert Raffer's  criticisms.
rb Commentary
May 8, 2004

Theatres of Oil Wars

Wanted: An OPIC

The world oil market has long been at the mercy of the cartel led by
Saudi Arabia, in connivance with the US. It will be rendered
extremely vulnerable in the event of a worsening of the Iraq
situation that engulfs the entire region. The oil market is overdue
for structural reform, and Arabia needs moderation and stability in
oil prices.
Ranjit Sau

In 1918, the Ottoman sultanate was finally defeated and much of its
territory was partitioned between the victorious British and French
empires. The Arabic-speaking Fertile Crescent was divided into three
new entities, with new names and frontiers: Iraq, Palestine and
Syria. Soon, Lebanon was carved out from a part of Syria, as was
Jordan from a slice of Palestine.

The Arabian peninsula, consisting of largely barren and inaccessible
deserts and mountains at that time, was thought not worth the trouble
of taking over by the British or the French; its rulers were allowed
to retain a precarious and limited independence under the protection
of a 1915 treaty with the British. In 1933, the Standard Oil Company
of California signed an agreement with Saudi Arabia. Within two
years, the company began extraction and export of oil. After a brief
interruption caused by the second world war, it resumed work. With
the oil money, Saudi Arabia transformed its lifestyle and external

Today, Saudi Arabia is the world's largest supplier of oil. It holds
full one quarter of the world's proven reserves. In fact, more
awesome is its spare production capacity, which is currently
equivalent to 30 per cent of the country's actual production of oil
and is carefully nurtured as a potential weapon. This spare capacity
is greater than the total exports of all other oil-exporting
countries, except Russia. Should a country dare the kingdom by
raising its own output beyond a certain level, the Saudi spare
capacity would be unleashed to force the price down, which the rival
can hardly withstand. It can destroy exports from countries
challenging Saudi Arabia's market share.

This has happened twice recently. In 1985, Riyadh successfully waged
a price war designed to force other oil producers to stop
'free-riding' on the Saudi policy of limited supply, that is, taking
advantage of the artificially-kept high prices. That policy warned
that those states had to cooperate with the kingdom by reining in
production enough to allow Saudi Arabia to produce the lowest level
it targeted. Oil prices fell by more than half within a few months,
and the Saudi market share, lost in the preceding four years, was
regained. Then, in the 1990s, OPEC member Venezuela challenged the
kingdom by deciding to maximise its production. In retaliation,
Riyadh induced the oil price collapse of 1998. It had to suffer a
painful drop in income, but the main goals were achieved: Saudi
Arabia reasserted its OPEC leadership, re-established itself as the
prime supplier of oil to the US, and induced non-OPEC producers
Mexico and Norway to support OPEC's revenue-maximising strategy.

At first sight, it might appear that the balance has changed lately.
Russia now produces as much as does Saudi Arabia. The Caspian
republics to its south - mainly Kazakhstan and Azerbaijan - have at
various points been hailed as the 'New Persian Gulf'. And
technological advances are making it cost-effective to extract oil
off the coast of West Africa and the Gulf Coast of the US.

Extent of Domination

But the optimism quickly fades upon examination. For starters, much
of the newly extracted oil will simply replace declining output from
the existing fields. Overall non-OPEC production will begin to
decline some time this decade, even after all the new supply is
brought on stream. And drawing oil from the ocean depths is still
much more expensive than pumping it from the ground. While the Saudi
Arabian oil could be profitably sold at about three dollars per
barrel, deep-water oil must fetch at least five times as much. As
long as the Persian Gulf states' 600 billion-plus barrels of proven
reserves (262 billion barrels in Saudi Arabia alone) give them
control over the vast majority of the world's discovered oil - and
few now believe there are any major oil 'provinces' still waiting to
be found - Saudi Arabia's position in the oil market would hold.

Meanwhile, the US remains the largest single consumer of oil in the
world. Its own proven reserves of oil measure only about one-tenth of
Saudi Arabia's, but its daily volume of extraction is almost of the
same order as the latter's. That means the US is rapidly depleting
its meagre internal resource base. Domestic supply is falling and
imports are rising fast. The US's annual average imports of petroleum
and its products during the four years ending in 2003 rose by as much
as 57 per cent over those of the previous four years. Saudi Arabia
has the distinction of being the single largest source of US oil
imports, and it offers the US a preferential discount of one dollar a
barrel that is not available to the countries of Europe and east
Asia. This amounts to a subsidy to US consumers of more than $600
million a year.

Iraq has the second largest proven reserves of oil in the world,
while vast tracts in the southern deserts of the country are yet to
be fully explored. Its oil production has been seriously disrupted.
Iraq is burning; no one knows when the fire would subside. The
situation in its neighbour, to the south-east, Saudi Arabia, is
equally a matter of concern. King Fahd bin Abdel-Aziz al-Saud, who
acceded to the throne in 1982, heads a council of ministers, but
after suffering a stroke in 1995, he granted more responsibility to
Crown Prince Abdullah. The question of succession is getting murkier
with controversy. A land of 6,000 princes and an equally impressive
number of respected imams, Saudi Arabia is awaiting in suspense a
sharp turn of events. It is being visited by extremists. In the
aftermath of multiple bombings in Riyadh on May 12, 2003, the future
looks grim.

The world oil market is dominated by two countries - Saudi Arabia the
supplier and US the purchaser - leaving the other countries to
individually fend for themselves. This arrangement cannot possibly
bear the next shock. The borders of countries in the west Asia were
drawn by the former colonial powers, with greater attention to
imperial demands than to local disposition; those are as fluid as
ever, permitting easy crossing. Any conflagration in Iraq and Saudi
Arabia is most likely to assume a full-scale regional dimension. The
oil market will be hit directly. The inter- national community is not
prepared for it.

Rentier Production Modes

Sponsored by the UNDP Regional Bureau of Arab States, jointly with
the Arab Fund for Economic and Social Development, the first two
issues of the Arab Human Development Report (AHDR) were published in
2002 and 2003 respectively. Prepared by independent teams of Arab
scholars, the reports call for building a 'knowledge society' in
Arabia. "Knowledge consists of data, information, instructions, and
ideas, or the sum total of symbolic structures possessed by
individual human beings or by society at large. These symbolic
structures guide individual and institutional human behaviour in all
walks of life and in all spheres of public and private activity." A
knowledge society, envisaged by the AHDR is to be organised around
the dissemination and production of knowledge and its efficient
utilisation in all societal activities - the economy, civil society,
politics and private life - where knowledge plays a paramount role in
shaping social structures and in changing the occupations and
lifestyles of its citizens as the knowledge content of their daily
lives intensifies steadily. But the pervasive oil economy is seen as
an obstacle in the way to such a society. The post-1973 oil boom in
the Arab region, it says, destroyed the values and social incentives
that could have promoted knowledge and skill. With the spread of
negative values in that period, creative abilities were neglected,
and knowledge lost its attraction. The social standing of scientists,
educated people in general and intellectuals in particular fell.
Education became incapable of providing the poor with the tools and
abilities they need for social mobility. Social value was measured by
money and fortune, regardless of how those riches were amassed.
Proprietorship and possession replaced knowledge and intellectualism.
Worst of all, the values of independence, freedom and the importance
of a critical mind - values with which people can actively exercise
choice and lead conscious lives - were buried. The aftershock of this
collapse continues to weaken and undermine Arab societal awareness
today. As a result, indifference, political apathy and a sense of
futility are becoming dangerously common among broad segments of the
populace. Arab citizens are increasingly pushed away from effecting
changes or taking decisions in the interest of their countries.

"Class structure strongly influences the knowledge system," writes
the AHDR (2003:140). A necessary social condition for supporting
knowledge development is the presence of a sizeable middle class,
able to appreciate and cultivate various forms of knowledge. But the
middle class in Arab countries is dwindling under the pressure of
poverty and uneven distribution of income and wealth.

One of the dominant features of the production pattern prevailing in
Arab countries is high dependence on the depletion of raw materials,
chiefly oil, and reliance on external rents. In such rentier modes of
production, economic returns do not usually accrue from hard work and
high productivity, particularly in political systems that constrain
freedoms and do not encourage people to be industrious. AHDR proposes
economic growth with knowledge-intensive industries. But there is an
elemental problem here: the enormous oil wealth keeps the exchange
rates of Arab currencies too overvalued to let non-oil industries
flourish - a phenomenon known in economics literature as the Dutch
Disease, named after the effects of discovery of natural gas in the
Netherlands in the 1960s, when that windfall bonanza drove up the
exchange rate of its currency hurting manufacturing industries and
agriculture. So, on two counts - one, in order to tighten the purse
strings of oil-oligarchs, and two, to maintain exchange rates
conducive to non-oil industrialisation - Arabia requires moderation
and stability in oil prices.

In Iraq, insurgents have opened yet another front by attacking the
oil port of Basra. Nobody knows when peace will return to that
country. With porous borders all around, the entire region is
susceptible to being engulfed in the flames of insurgency. The world
oil market will be extremely vulnerable under the circumstances. The
international community does not seem to be prepared to meet such a
contingency. Besides, the oil market is long overdue for structural
reform; it cannot be left any more to the mercy of a cartel led by
Saudi Arabia, in tune with the US. It is high time to set up an
Organisation of Petroleum Importing Countries (OPIC).

 Copyright 2001 The Economic and Political Weekly. All rights reserved.

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