Geopolitics of Oil
by Saman Sepheri
International Socialist Review,
November / December 2002
"If you want to rule the world you
need to control the oil. All the oil. Anywhere."
Michel Collon, Monopoly
The region that comprises Iraq, Iran,
Kuwait, and Saudi Arabia is at the epicenter of the pending U.S.
war on Iraq. Despite all the rhetoric about weapons of mass destruction,
one glaring fact stands out: These four countries have more proven
oil reserves under their soil than the rest of the world combined.
A quick glance at the Bush administration's
corporate ties reveals close connections to virtually the whole
oil and gas industry. Vice President Dick Cheney was the head
of Halliburton, the world's largest oil services firm. Secretary
of Commerce Don Evans was a partner at Tom Brown, a Denver-based
oil exploration firm. Exxon, the world's largest corporation in
terms of revenue, was second only to scandal-ridden Enron in contributions
to the Republican Party, and National Security Advisor Condeleezza
Rice, the administration's "Russian expert," was on
the board of directors of Chevron-the contractor for the development
of the Caspian's largest oil field and pipeline network in Kazakhstan.
Yet, the coming war with Iraq is less about satiating the U.S.
thirst for oil and lining the pockets of Bush administration cronies-though
it will help do both-than it is about the control of oil.
Oil is the world's most important commodity.
Without oil, today's industrial society would simply be impossible.
Oil and natural gas are the fuel for the engine of modern capitalism,
with Organization for Economic Cooperation and Development (OECD)
nations accounting for two-thirds of all oil consumed in the world.'
Oil and gas are not only the source of
62 percent of the energy used in the world, they are integrated
into the production of many goods and products that we take for
granted. But just as important, every tank, every airplane-from
the B-52 to the stealth bomber-every cruise missile, and most
war ships in the U.S. or any other nation's military arsenal,
rely on oil to wage their terror. In fact, the U.S. Department
of Defense is the consumer of over 80 percent of all the energy
used by the U.S. government.
Overall, oil and gas make up 65 to 70
percent of all the energy consumed by the three largest economies
in the world- the U.S., Japan, and the European Union. And many
of the industrializing countries of the Third World, such as South
Korea, China, Brazil, and Mexico, have seen their oil and gas
First World War: Blood and oil
The importance of oil to modern industrial
society grew rapidly with the proliferation of automobiles in
the early 1900s. But the turning point for oil's importance was
the First World War. By switching the British navy from coal to
oil, British Secretary of the Navy Winston Churchill gave Britain
and its allies a crucial advantage over their enemies. After the
Allied victory, British foreign secretary Lord Curzon stated,
"The Allies floated to victory on a wave of oil"
After the war, the epicenter of oil production
shifted from Texas and the Caribbean basin to the Middle East,
where vast oil reserves were discovered. From that point on, yesterday's
allies-France, Britain, and the U.S.-became competitors in the
carve up of what was to become the greatest prize of the century.
Britain, which already had control of all of Iran's oil (won through
a concession in 1901), emerged initially as the best-placed contender.
Frustrated with the British government's attempt to block every
American company's efforts to obtain concessions in Iran and Iraq,
the president of Standard Oil of New Jersey (now Exxon) complained
that "British domination would be a greater menace to [Standard
Oil of] New Jersey's business than a German victory would have
Second World War: The U.S. becomes top
The U.S. government waged a hard battle
to gain a foothold for U.S. oil companies in the region. But it
was the Second World War that tipped the balance in the race for
oil completely in the favor of the U.S. By the end of the war,
Europe was devastated and Germany was destroyed. France and Great
Britain, the major imperial powers, emerged much weaker from the
war, while the U.S. emerged relatively unscathed and controlling
over half the world's industrial output. This helped the United
States claim the mantle of the dominant power in the West, while
France and Britain became its junior partners.
This change in the pecking order of the
world's imperial powers was reflected in the control of oil resources
after the Second World War. In 1940, the U.S. share of Middle
East oil stood at 10 percent. By 1950, it had jumped to 50 percent.
Some of this was due to new concessions gained by the U.S. However,
the U.S. took over Britain and France's oil holdings, busted up
the British monopoly in Iran, and made France marginal in Iraq.
For example, after Iran's nationalist Prime Minister Mohammad
Mossadeq nationalized the British-controlled Anglo-Iranian Oil
Company (AIOC) operations in 1951, the American CIA organized
a coup to overthrow Mossadeq, replacing him with the Shah, who
became a staunch ally of the U.S. Once Mossadeq was overthrown,
Iranian oil was not returned to the British AIOC. It was divided
up among Exxon, Mobil, Gulf Oil, and other American companies,
which took their share for services rendered by the CIA with AIOC
now holding a minority share of 40 percent.
The freebee and the fix
The United States used the Marshall Plan
(the U.S. aid program to rebuild Europe after the Second World
War, officially known as the Economic Cooperation Administration-
ECA) to take control of European energy markets and to open access
to raw materials in Europe's colonial holdings. Walter Levy, a
Mobil Oil economist, and later the head of the Marshall Plan's
oil division, noted in 1949 that "without ECA American oil
business in Europe would already have been shot to pieces."
Of $ 13 billion in Marshall Plan aid, fully $2 billion was slated
for oil imports, while the Marshall Plan actually "blocked
projects for European crude oil production and helped American
oil companies gain control of Europe's refineries. All this was
done without regard for the effects on domestic employment in
coal or loss of internal self-sufficiency." The net effect
of this aid was that petroleum replaced Europe's domestic coal
as Europe's main source of energy.
The post-war era saw an enormous expansion
in petroleum's share of world energy usage. In 1929, oil and gas
had accounted for 32 percent, and in 1939, on the eve of the war,
it accounted for 45 percent of all energy used in the United States.
But by 1952, petroleum's share had risen to 67 percent and by
the 1970s it had gone up to over 70 percent, where it has remained
until today. Japan and Europe have shown a similar pattern of
growth, with Japan relying on oil and gas for 63 percent of its
energy needs and Europe for 65 to 70 percent today.
Corporate oil giants led by American firms
extracted unbelievable profits from their investments after the
Second World War. In Iran, between 1954 and 1964, Western companies
earned a compounded interest rate of profit of 70 percent per
year!" And in the Middle East as a whole, at the height of
the oil companies' power in 1970, net assets of petroleum industries
valued by the U.S. Commerce Department at $1.5 billion yielded
$1.2 billion in profits-a return of 79 percent. It was no wonder
that in the 1970s, 40 percent of all U.S. investments in developing
countries, and 60 percent of all U.S. profits from developing
countries, were oil related.
The great wealth extracted from Middle
East countries helped oil corporations become massive edifices
that dominated the world economic terrain. By 1973, seven of the
world's 12 largest companies were oil corporations.' Known as
the "Seven Sisters," these oil giants-Exxon, Mobil,
Chevron, Texaco, Gulf, Shell, and BP-have dominated the world
oil industry ever since.
By the mid 1960s, the U.S. had control
of Middle East oil, and U.S. corporations had cornered the world
market and were raking in immense profits. With what turned out
to be two-thirds of the world's oil under its control, what strategy
did the U.S. use to protect its prize?
The U.S. strategy, known as the Nixon
Doctrine relied on building surrogate states in the area, which
would be the executors of U.S. policy and guardians of Middle
East oil. U.S. policy had three pillars in the Middle East: 1)
Saudi Arabia, home to the world's largest oil reserves; 2) Iran,
where the CIA had organized a coup in 1953 to install a U.S. ally,
the Shah, to power; and 3) Israel, formed in 1948 and built as
a colonial settler state based on the expulsion and brutal oppression
of the native Palestinian population. Israel became the biggest
recipient of U.S. aid, and wholly dependent on the U.S. for its
existence. Each state was to perform a different role in the region.
The Saudi state was by and large the creation
of the U.S. oil companies and the United States government. In
the 1920s, Saudi Arabia was a feudal society with different families
ruling various regions. It was forged into a nation in 1932 when
Ibn Saud and his clan defeated the other families and unified
the country, naming it after themselves.
Texaco and Standard Oil of California
(SOCAL-later renamed Chevron) won a concession to drill for oil
in Saudi Arabia in 1936-a mere four years after the country had
been formed. To share the exploration, and marketing of their
new Saudi oil concession, a new company named ARAMCO (Arab American
Oil Company) was formed, which over the next two decades would
become the largest oil producer in the world.
Saudi Arabia at the time had no government
to speak of. There was no state structure, no ministries, no state
budget, or army. Much of what became the Saudi state, in fact,
was created by the United States and ARAMCO. Ghassane Salameh
In return for royalties, the government
had nothing to give ARAMCO, but the signature on the bottom of
the contract-no armed forces to defend the [oil] installations,
no administration, no skilled labor, no educated personnel, no
real infrastructure of any sort, much less a government capable
of regulating the corporate giant at the heart of kingdom. As
a result ARAMCO engaged in not only all aspects of Saudi oil production
but also built housing, airports, schools, dug for water, and
above all invited the U.S. military to install a base near the
oil fields to protect [them].'S
In fact, it was the installation of this
American base in Dharan in 1944, which prompted the Saudi king
to form a ministry of defense.
Whatever may have changed since then,
Saudi Arabia retains certain defining features. With 25 percent
of the world's reserves and the largest oil production facilities
in the world, oil defines the state, and Saudi Arabia is the Mecca
of world oil. The Saudi state functions as a family business-in
effect an extended family endeavor, ruled by the Ibn Saud family.
Oil is the main source of state funding and the majority of the
population is either directly or indirectly dependent on the state
for employment for its livelihood. Finally, the survival of the
state continues to depend on U.S. support, which, paradoxically,
is also a major source of its internal instability.
Saudi Arabia was the economic prize. But
Israel became the main security asset, the watchdog of the region.
Its role was to challenge, check, and if necessary destroy any
challenge to the U.S.-mostly threats from Arab nationalist regimes
had taken power in 1950s and 1960s in
Egypt, Syria, and Iraq. Israel was supported to the tune of $4
to $5 billion in U.S. aid and armed with U.S. weapons. Washington
Senator Henry "Scoop" Jackson summarized the U.S. strategy:
[S]tability as now obtains in the Middle
East is, in my view, largely the result of the strength and Western
orientation of Israel on the Mediterranean and Iran on the Persian
Gulf. These two countries, reliable friends of the United States,
together with Saudi Arabia, have served to inhibit and contain
those irresponsible and radical elements in certain Arab states-such
as Syria, Libya, Lebanon, and Iran, who, were they free to do
so, would pose a grave threat indeed to our principal sources
of petroleum in the Persian Gulf.
Iran, the third pillar of the U.S. strategy,
acted as the policeman of the Gulf. Iran had the population, state
structure, and infrastructure that Saudi Arabia lacked, and the
Shah of Iran, using Iran's oil income, built a formidable military
with one of the world's most up-to-date air forces. Between 1970
and 1978, the U.S. exported over $20 billion worth of arms to
Iran, amounting to what U.S. Representative Gerry Stud of Massachusetts
called, "the most rapid buildup of military power under peacetime
conditions in the history of the world." The Shah himself
was arrogantly blunt about his role stating in 1974: "Without
Iran to defend them the Arab states in the Gulf would be dead."
The 1970s also saw the rise of the Organization
of Petroleum Exporting Countries (OPEC). OPEC was founded in Baghdad
in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, and
was later joined by Qatar, Indonesia, Libya, the United Arab Emirates,
Algeria, and Nigeria. It was originally formed as a way for these
countries to try to negotiate a better share than the 10 to 15
cents on every dollar of immense profits the giant oil multinationals
were making from the marketing and sale of their oil.
But soon, its member countries realized
that they could coordinate the amount of oil exported, not only
to get a larger share of their own oil revenue, but as a means
to control the supply, and therefore the price, of oil. Each country
received a quota, negotiated within OPEC, of how much oil it could
produce. If they would stick to these production quotas, OPEC
countries could manipulate prices. Holding 40 percent of world's
production and a 50 percent share of oil available for export,
OPEC has had a great leverage on oil supplies worldwide.
Moreover, OPEC also controls 90 percent
of the world's excess oil production capacity-with Saudi Arabia
holding more than half of that. While most other producers are
nearly at the maximum of their production capacity, OPEC, limiting
production through its system of quotas, is producing at about
80 percent of its full capacity. OPEC can easily ramp up production,
to make up for shortages, in cases of emergency such as serious
Though the U.S. gets less than a quarter
of its oil from OPEC, OPEC still has great influence on all oil
importers worldwide. Its excess production capacity makes OPEC
(and especially Saudi Arabia) of great strategic importance to
OPEC's presence was especially felt with
the 1973 oil embargo, organized by OPEC's Arab countries as a
protest of Israel's war against Egypt and Syria. The embargo was
organized against Israel, but also against the United States which
was funneling arms and aid to Israel, ensuring an Israeli victory.
During the embargo the price of oil tripled in a matter of weeks,
increasing from $4 a barrel to $ 12 a barrel. However, more importantly
than the increase itself, was the realization by OPEC of its power
over oil markets.
1979: A blow to U.S. imperialism
The United States faced serious problems
in the region by the end of 1970s. It had to contend with OPEC's
control of oil supplies. Real disaster struck, however, when the
Iranian revolution of 1979 overthrew the Shah. The "Policeman
of the Gulf" was gone, replaced by an Islamic regime hostile
to the United States. If the defeat in Vietnam had been a disaster
for America's sense of invincibility and military might, seriously
limiting its ability to commit troops abroad, the 1979 Iranian
revolution struck a blow to U.S. policy in the most strategically
prized region for the United States-the oil producing Persian
The Iranian Revolution toppled the Shah,
one of the three pillars of U.S. policy, a blow from which the
U.S. has yet to fully recover. And in December 1979, the USSR
invaded Afghanistan, adding to Washington's concerns in the region.
Saudi Arabia was also shaken at roughly the same time. A military
coup attempt took place in September 1979, followed in November
by an armed takeover of the Grand Mosque in Mecca, Islam's holiest
site, by those opposed to Saudi family rule, and riots by the
Shiite minority in the oil rich Eastern Province in December.
A glance at two factors underlines the
importance of the loss of Iran and the turbulence in Saudi Arabia.
U.S. aid to Israel doubled in 1980, bolstering Israel after the
loss of the Shah in Iran, and the price of oil tripled-rising
from $12 per barrel to its highest price ever, $35 per barrel
(equal to over $65 per barrel in 2002 dollars). The U.S. sent
massive amounts of arms to Saudi Arabia and the Gulf states, and
urged the formation of Gulf Cooperation Council (GCC) as a way
to coordinate the efforts of Saudi Arabia with the Gulf's weaker
states- Kuwait, Bahrain, Qatar, and the United Arab Emirates-to
build a common front against Iran.
With the loss of the Shah, the U.S. no
longer could rely on surrogates to police the Gulf. So in 1980,
President Jimmy Carter, announced Washington's intention and willingness
to interfere directly in the area under the new Carter Doctrine.
The United States formed its new Rapid Deployment Force (RDF)
with a mission ostensibly to guard against "any attempt by
any outside force to gain control of the Persian Gulf region [which]
will be regarded as an assault on the vital interests of the United
The outbreak of war between Iran and Iraq
in 1980 provided the perfect opportunity for the U.S. to not only
contain Iran and cement its ties to the Gulf States, but to reinsert
its military more fully in the Gulf. The U.S. now set up a string
of bases and command centers in the Gulf states, stationing the
U.S. Fifth Fleet in Bahrain. By 1983, the RDF had been expanded
into Central Command (CENTCOM), now a permanent military presence
in the region, with 17 ships under its command and the authority
to requisition 35,000 troops.
Moreover, with the GCC's help-and Kuwait
and Saudi Arabia footing the bill-Iraq's army under Saddam Hussein
was built up to force a retreat of Iranian forces, which by 1985
looked to be winning the war. Tilting towards Saddam Hussein against
Iran, the U.S. approved and even oversaw the transfer of some
of the chemical and biological weapons and missile technologies
which Bush today is accusing Iraq of having secretly developed.
With U.S. backing, Iran lost the war, and the Iranian threat was
contained. But with Iraq's invasion of Kuwait in 1990, the U.S.
now turned on its erstwhile ally. In a brief and completely one-sided
bombardment and invasion, the U.S. killed at least 200,000 Iraqis-there
is nothing close to an accurate count-many while they were retreating
after the war was lost.
By 1992, the situation in the Gulf had
been stabilized. The Iranian Revolution had been contained, and
Iraq was left decimated and hampered with economic sanctions which
were to kill more than a half million Iraqi children in the next
decade. But regimes hostile to the U.S. were still in power in
Iran and Iraq. Saddam Hussein had been left in power by the U.S.,
which feared an uprising from below would be more damaging and
destabilizing than leaving the Iraqi regime intact, but caged
and weakened. And the Iranian regime, although weakened and now
more accommodating to the West, was still a source of concern
for the U.S. The U.S. now moved from a policy of containment (of
Iran) to that of dual containment (of Iran and Iraq).
Furthermore, Saudi Arabia was facing internal
problems, both economic and political. The Saudi economy, wholly
dependent on oil revenues, was facing serious challenges. Lower
oil prices brought falling revenues and increasing government
debt through the 1990s, and the U.S. military presence and bases
in Saudi Arabia, used to launch the invasion of Iraq, were becoming
a source of public resentment towards the U.S. and Saudi regimes.
The Gulf region may have been temporarily stabilized for U.S.
interests, but it was not by any means permanent.
The U.S. quickly set out to strengthen
its web of security arrangements in the region. The U.S. encouraged
cooperation between Israel and Turkey, who signed military pacts
and engaged in joint military training exercises. In the early
1990s, Turkey become the third largest recipient of U.S. military
aid (behind Israel and Egypt), receiving as much as $700 million
a year, using much of it to buy $2.3 billion worth of arms from
the U.S. in just two years. Turkey's Incirlik air base was modernized
and became home to the U.S. F-16 jets used to bomb Iraqi forces
under the excuse of protecting Iraq's Kurdish minority in Iraq's
northern "no-fly zone." Yet the U.S. has turned a blind
eye when Turkey's F-16 jets, sitting on the same tarmac at Incirlik,
have bombed the bases of the Kurdish minority in Turkey.
"Diversification of oil resources"
became the motto for the United States. Sources other than the
Persian Gulf; from Africa, to the North Sea to Canada, were tapped
to diversify the source of U.S. oil imports. By U.S. calculations,
this would not only cushion the U.S. (albeit temporarily) from
any possible disruption from the Gulf, but just as importantly
it would reduce the market share of OPEC, and therefore weaken
its influence on oil supplies and prices.
OPEC had already lost market share during
the 1973 oil boycott. While the boycott had established OPEC as
the force that had effective control of world oil supplies and
therefore oil prices, it had sent oil consumers to look for sources
of oil other than OPEC's, such as Norway's North Sea, as they
came on line. Under these pressures, OPEC's share, which had been
about 50 percent of total world oil production in 1970, plummeted
to a low of 31 percent by 1985. Since then, OPEC has managed to
recoup some of losses, and raise its share to about 40 percent
in 2000.24 But the push for diversification continues. For example,
after over a decade of letting Africa rot in poverty, there is
again interest and investments in Angola, Chad, and even Sudan
to explore and develop oil resources, while in the Western Hemisphere,
Mexico and Canada are chipping away at OPEC's share.
The Caspian's black gold
The Caspian Sea's oil riches, opened to
Western markets only after the collapse of the Soviet Union in
1991, have shown the greatest promise as a potential alternative
to Persian Gulf oil.
The oil and natural gas reserves in the
former Soviet Union republics of Azerbaijan, Kazakhstan, and Turkmenistan,
are estimated to hold about 70 billion barrels of oil, or three
times the reserves of the United States. Some estimates put the
reserves of oil as high as 200 billion barrels, making this potentially
the second largest oil and gas reserves in the world after the
Gulf. The American Petroleum Institute has called the Caspian
region "the area of greatest resource potential outside of
the Middle East." And Vice President Dick Cheney, while he
was the CEO of Halliburton, stated that "I can't think of
a time while we had a region emerge as suddenly to become as strategically
as significant as the Caspian"
With its oil and gas riches potentially
worth as much as $4 trillion, there has been a frenzied scramble
to get a piece of the Caspian by all major oil companies. Chevron,
Texaco, ExxonMobil, BP-Amoco, Shell, and Unocal have all made
bids for development of Caspian oil. But the competition is not
limited to the oil majors. Japanese and Chinese companies have
taken stakes in the oil consortiums, trying to secure oil shares,
and Iran and Russia have been competing to become the main transport
route for Caspian oil out of the area.
There are however, problems facing the
development of Caspian oil and gas. There has been tension among
the five countries bordering the Caspian over how to divide the
sea. But the biggest problem is transporting its oil and gas to
the world markets. Because the Caspian is actually a lake, pipelines
have to carry its oil and gas to ports or through any number of
nations to reach consumers. These transport routes have been the
source of competition, since these pipelines are not only a source
of revenue, but the transportation routes are of strategic importance.
A number of pipelines have been proposed,
with the cheapest and the most viable passing through Iran or
using Russia's existing pipeline system. The U.S. considers it
strategically imperative to prevent most of the oil from running
through Russian and Iranian pipelines. It has officially announced
its desire to build multiple routes, but in practice the U.S.
has thrown its weight behind the Baku-Ceyhan and Trans-Caspian
pipelines, which will cross the Caspian under the sea and carry
oil and gas to the 'Turkish port of Ceyhan on the Mediterranean.
Given the huge costs involved, major oil companies have balked
at this proposal, questioning whether they can recoup investment
and operation costs.
Only a few years ago, BP-Amoco, the major
player in Azerbaijan, and other oil executives had expressed skepticism
at the economic viability of this pipeline, despite U.S. and Turkish
promises of subsidies. And analysts were suggesting that "the
U.S. policy is built on a false promise to...torpedo major Russian
and Iranian influence in the region-implying a much stronger commitment
to the Caspian states than the U.S. really intends or even is
able to keep."
But the September 11 attacks, and the
U.S. invasion of Afghanistan, have completely changed this. The
U.S. is now firmly planted on both sides of the Caspian. Not only
has the U.S. government signed security pacts with Azerbaijan
and placed troops in Georgia, but it now has bases and troops
on the Eastern Caspian shores, in Kazakhstan, Uzbekistan, and
Turkmenistan. With U.S. troops well in place, the Baku-Ceyhan
pipeline's construction started officially in October, 2002.
The concerns of economic viability however,
are real. If oil prices drop, the Caspian's oil will become less
attractive. And, even though the Caspian may easily contain the
estimated 200 billion barrels of oil, during the past three years
the estimates of proven reserves have actually been reduced from
45 to 10 billion barrels. No doubt, with more exploration, much
more than 10 billion barrels of oil will be found. However, at
the end of the day, there may not be too little oil but too many
pipelines to carry the volume of oil and gas eventually produced
in the Caspian.
The world's energy consumption has increased
by 84 percent since 1970 (from 207 to 382 quadrillion BTUs) and
it is expected to increase by another 60 percent over the next
twenty years. The industrially advanced countries have been using
the lion's share of this energy: The U.S. uses 25 percent of all
the energy consumed in the world, Japan 5 percent, and Western
Europe 18 percent. Today, the U.S. is the biggest consumer of
oil in the world, using 19 million barrels of the 77 million barrels
used in the world daily.
But the rate of increase in energy consumption
has not been uniform across the world. Industrialization and integration
into the new global economy has meant an increase in energy usage
in developing countries at a pace three times that of the U.S.,
Japan, and Western Europe. While the U.S., Western Europe, and
Japan have seen their oil consumption increase by an average of
12 percent, Central and South America have seen an increase of
40 percent since 1990. Developing Asia has seen a 44 percent increase
in energy consumption over the same period, led by South Korea
and India, which have seen their energy grow by an astounding
84 percent and 59 percent, respectively. Energy demand in Latin
America and developing Asian nations is expected to more than
double by 2020. This growth will account for half of the total
growth in energy demand in the world.
The biggest increases are expected to
come from Asia. Asian economies are expected to overtake the United
States as the biggest consumers of energy in the next twenty years.
By 2020, these economies are expected to account for 27 percent
of world energy consumption, while the U.S. is expected to consume
25 percent; Western Europe, 18 percent; Eastern Europe and the
former Soviet Union, 13 percent; and Latin America, 5 percent
of the world totals.
The biggest gains in Asia are expected
to be in China, whose economy doubled in size the 1990s. Over
the next 20 years, energy consumption in China is expected to
grow at a rate four times the rate of the growth in Europe and
the U.S. In less than 10 years China is expected to become the
largest oil consumer in Asia, surpassing Japan as the world's
second largest consumer of oil after the United States. Oil consumption
is expected to increase by 150 percent by 2020, and China's natural
gas usage is estimated to increase by 1,100 percent.
Russia: The new silk road?
The anticipated growth in energy demand
has fueled the entry of new producers into the energy market.
But the biggest entry in the oil markets, after a long hiatus
following the collapse of the USSR, has been Russia. Before the
1991 collapse, the Soviet Union was the largest producer and the
third largest exporter of petroleum in the world. While production
is not at the pre-1989 levels, there is now enough excess production
to resume oil and gas exports.
Two factors have allowed Russia's bounceback:
The stabilization of oil prices (up from $9 per barrel in 1998,
to $28 per barrel today) has made oil exports much more lucrative.
And ironically, Russia's economic collapse has not only reduced
internal demand, but with the devaluation of its currency, has
made investment costs and Russian oil much cheaper.
Russia does not have huge oil reserves-no
more than 45-50 billion barrels. But it is the world's second
largest producer, and has made a serious bid to gain market share.
With oil prices back above OPEC's target of $20 per barrel, the
Russian economy has shown strong growth in the past few years.
Russian gross domestic product has grown by 8.3 percent in 2000
and 5.1 percent in 2001.
The Russian economy is extremely sensitive
to oil prices. With energy accounting for 40 percent of its exports,
fully 90 percent of Russia's GDP growth has been due to oil and
gas. Given Russia's reliance on oil income, it has had an interest
in working with OPEC to stabilize oil prices by limiting production
along with OPEC's production quotas. But, since oil prices had
stabilized at $25 per barrel in early 2002, Russia has refused
to continue any coordinated cuts with OPEC.
Hard up for foreign currency, and weighing
its relations with the U.S. in the aftermath of September 11,
Russia has tried to maximize its profits by winning market share
from OPEC-a plan which fits well with the desire of the U.S. to
diversify its sources of oil and reduce OPEC's control on oil
Despite the show of cooperation between
the U.S. and Russia, however, the September 11 attacks and U.S.
invasion of Afghanistan have seriously undermined Russia's position
and plans in the Caspian region and Central Asia.
But Russia's plans go beyond the Caspian.
Although Russia is a major player in oil, it is natural gas which
is Russia's strong suit. World natural gas reserves are even more
geographically concentrated than oil, with Russia and Iran accounting
for half of the world's reserves. Holding 32 percent of the world's
reserves, Russia is to natural gas what Saudi Arabia is to oil.
While oil is expected to remain the dominant
energy source in the world, natural gas consumption, however,
is expected to grow at a faster rate. In fact, Jeroen van der
Veer, president of Royal Dutch Shell Petroleum, stated that "Increasingly,
the 21st century will be seen as the century of gas." Demand
for natural gas in Korea, Taiwan, China, and India is expected
to triple over the next decade.
And Europe's natural gas needs will rise
rapidly as well, as Europe switches over from oil. Europe already
uses natural gas for 22 percent of its energy needs. Yet, this
share may rise to as much as 60 percent, over the next decade.
Russia is planning to secure its position as an oil and gas supplier
to Europe and East Asia. Russia's largest oil companies, Lukoil
and Yukos, and the state-owned gas giant Gazprom which already
supplies Europe with 25 percent of its natural gas, have been
busy building the infrastructure to ensure their domination of
Russia's biggest investments however,
are in he East. The largest single foreign investment n Russia
has been Exxon-Mobil's $4 billion commitment to develop oil and
gas at Sakhalin Island. Philip Watts, chairman of Shell, the biggest
foreign investor in Russia, has called Sakhalin "the most
ambitious green field project undertaken during my 30 years at
Shell" 40 l Sakhalin, located between Russia and Japan, holds
10 billion barrels of oil and even bigger gas reserves. Yet this
modest amount alone cannot justify the interest. Sakhalin does
provide an easily accessible source of oil and gas for the markets
of China, Korea and Japan. It can serve as the eastern transportation
hub for Russia's oil and vast gas reserves elsewhere, and is an
important part in Russia's bid to become a player as an energy
supplier to the growing markets of developing Asia.
Russian companies have been joined by
such regulars as Shell, Exxon-Mobil, BP, Texaco, Marathon Oil,
Arco, and Halliburton, committing as much as $50 billion to the
Sakhalin project. The proximity of Sakhalin to Eastern markets
has also attracted interest from Japanese and Asian oil companies.
Japan's Mitsui, Mitsubishi, and SODECO own about a 25 percent
share in Sakhalin's projects. And India's ONGC has made major
investments, to meet India's gas needs which are expected to quadruple
in the next 50 years.
For any of these projects to come to fruition,
major investments are needed. Russia's future may be in its natural
gas but it needs oil income now to finance any future plans. Russia
has to balance two contradictory factors: It needs market share
and therefore is willing to increase production to take markets
away from OPEC countries, but it needs oil prices to be high enough
to make its oil exports be profitable.
One solution for Russian oil companies
has been to look for cheap sources of oil-and Iraq has provided
that. With the U.S. sanctions against Iraq in full force, Russian
companies (and French companies to a smaller extent), have made
inroads in Iraq. Russian companies have been a major outlet for
Iraqi oil sold under the United Nation's oil-for-food program-buying
Iraqi oil and then reselling it on the world markets.
But more importantly, while the American
and British oil corporations have been kept out by the U.S. sanctions,
Russian oil companies have signed multi-billion dollar agreements
with the Iraqi government to develop Iraq's vast oil fields.
Lukoil, Russia's largest oil company,
has signed a $20 billion deal to develop the West Qurna field
with a potential 15 billion barrels oil, and Zarubezhneft is closing
on a $90 billion of concession for Bin Umra fields. And the giant
Majnoon field with a potential 30 billion barrels of oil (bigger
than the total proven reserves in the U.S.) is still up for grabs.
Russian President Putin's resistance to a UN-supported resolution
effectively authorizing U.S. military action in Iraq is mainly
to ensure that, with or without Saddam Hussein, Russian oil interests
(as well as Iraqi debts to Russia) will be recognized.
Not quite dead yet
Since the 1991 Gulf War, diversification
of oil resources and containment of threats to U.S. hegemony in
the Middle East have served their purpose, but they have also
created serious tensions and problems-for U.S. allies and foes
alike-which are destabilizing the region. The presence of U.S.
troops and dwindling oil income have undermined key U.S. allies
such as Saudi Arabia, and isolation and economic pressures have
unleashed a reform movement in Iran which could spin out of the
control of the reformers themselves. In addition, the growing
unpopularity of the sanctions, and the continued survival of the
Iraqi regime, remain a thorn in U.S. Middle East policy.
Lower oil prices and decreasing oil income-coupled
with a rising population-have had serious consequences for Saudi
Arabia. This has put enormous strain on the Saudi state/families
ability to maintain the standard of living that most Saudi's have
been used to for years. According to World Bank estimates, Saudi
Arabia's oil dependent Gross Domestic Product (GDP) dropped from
$156.5 billion in 1980 to $125.5 in 1995, a drop of 25 percent.
In the same period, Saudi Arabia's population more than doubled,
growing from 9 million to over 19 million. This translates to
a per capita GDP drop of 62 percent. Per capita income has dropped
by about 60 percent since 1970s oil boom.
These problems are not limited to Saudi
Arabia. Even though a number of Gulf economies have rebounded
since 1990, the same pattern of declining income has been the
rule in much of the Gulf. The Gulf economies have actually shrunk
at a rate of 2.5 percent per year over the 1980s, shrinking twice
as fast as the crisis-ridden African economies.
Saudi's economic difficulties, combined
with the presence of the U.S. military, are fertile ground for
opposition to the Saudi regime. They are also behind the Saudi
cooling of relations with the U.S. and increased cooperation with
Iran, OPEC's second largest oil exporter
after Saudi Arabia, relies on oil for 70 percent of it foreign
exchange income. Yet its production has dropped by 45 percent
since the 1979 revolution. Lack of investment has continued to
take a toll on production numbers, aging wells and field are producing
less, and new discoveries cannot be brought on line. Iran needs
to invest $90 billion just to maintain production volume at current
levels. Unable to internally finance these investments, Iran has
been opening its oil industry to foreign investments for the first
time since 1979.
Just as damaging to Iran's oil income
is the rise in internal energy consumption. Over the past 20 years,
Iran's population has doubled, increasing energy consumption rapidly.
If present trends continue, Iran, today the world's fourth largest
oil exporter will be a net importer of oil in 15 years. This would
be disastrous to the Iranian economy and regime. In spite of U.S.
economic sanctions, Iran has been fairly successful in attracting
major oil companies to develop new oil and gas fields. Today,
Shell, BP, France's TotalFina, Italy's AGIP and ENI, Russian Gazprom,
Malaysia's Petronas, and Japan's Mitsui are involved in various
projects in Iran.
Just as Russia's oil firms have been more
than happy to exploit the vacuum left behind in Iraq's oil production,
U.S. "allies" in Japan and Western Europe have been
keen to use the U.S. absence to form their own independent relations
with Iran and secure their own oil and gas deals, outside of U.S.
Ironically, Saudi Arabia, the product
of American imperial might in the Gulf, and the Iranian regime,
the product of a revolution against that imperial might, are facing
similar problems. Their cooperation is a product of economic necessity,
to stabilize their blood line, and secure income for oil.
Back to the Gulf
New players may have weakened OPEC, but
Persian Gulf producers-and by extension OPEC-still hold all the
advantages in oil production. Gulf oil is the cheapest to produce,
the Gulf's reserves are the biggest in the world, and the Gulf
contains the world's greatest excess production capacity, allowing
it to control oil supplies and prices better.
New discoveries in the Caspian Sea, Africa,
and South America have increased the amount of oil outside of
OPEC's quota system, providing alternative sources for the gargantuan
American oil market as well as other growing markets. But even
bigger discoveries in the Persian Gulf have actually increased
both the Middle East's and OPEC's share of world reserves. In
1980, the Middle East held 55 percent of the world's proven reserves
and OPEC, 66 percent. Today, the Middle East's share has increased
to 69 percent, while OPEC countries
now hold 80 percent of the world's reserves.
And since non-OPEC countries' smaller reserves are being depleted
much faster, their reserves will be depleted in, on average, 15
years; while OPEC's oil is forecast to last for another 80 years.
Gulf oil is also much cheaper to produce,
making it much more profitable. Production costs for Persian Gulf
OPEC nations are about $1.5 per barrel compared to about $4.5
in the U.S., $5.5 in Canada, $7 in the Caspian Sea, and as high
as $10 a barrel in Russia. With worldwide imports from the Gulf
expected to double in the next two decades, there is no way around
the Gulf's domination of oil markets. The Persian Gulf is still
the world's strategic prize.
Iraq: Too many birds with one stone?
The events of September 11 have provided
the Bush gang with the unique opportunity to move from containing
the tensions in the Persian Gulf to resolving them once and for
all in its favor. It now wants to settle its "Iraqi and Iranian
problems," bring Saudi Arabia back into orbit, and roll back
OPEC to its pre-1970s irrelevance. In the words of one recent
Pentagon presentation, Iraq is seen by the U.S. as "the tactical
pivot" for re-molding the Middle East on Israeli-American
In the event of a U.S. invasion, Iraq
would become a vast source of cheap oil under U.S. control which
could be used to undermine OPEC, provide the battering ram to
deal with Iran and Saudi Arabia, and be a lever against Washington's
potential political or economic rivals.
At some 112 billion barrels, Iraq now
has the second largest proven reserves in the world after Saudi
Arabia's 265 billion barrels. And like all other Middle East oil,
Iraqi oil is cheap to produce. Iraq's oil, just like the Saudi's,
is geographically concentrated, with fields containing as much
as 10 to 30 billion barrels in one location. This translates into
low production and exploration costs.
In addition to giving the U.S. Ieverage
over the price of oil, control of Iraqi oil will also be an economic
boon to U.S. oil giants. After the last Gulf war in 1991, there
was a bonanza for American oil companies such as Dick Cheney's
Halliburton, to rebuild Kuwaiti and Saudi oil infrastructure damaged
in the war. The same will be repeated in Iraq. The only question
is how many of the contracts will go to American companies, and
which crumbs will be thrown to the Russian and French companies
to win their acquiescence.
Lower oil prices will tighten the noose
around Iran's ailing oil-dependent economy. Why not let economics
soften up Iran, and make of the job of regime change in evil number
two on Bush's "axis of evil" list easier? The same economic
pressures, combined with enough "diplomatic" persuasion,
could also force Saudi Arabia back under U.S. control.
Iraqi oil could also be a lever against
stronger opponents of the U.S., providing a useful tool to undermine
competitors such as Russia and China, and hampering Russia's bid
to expand its oil development plans. The U.S. can also keep France,
Germany, and Japan, who could pose a threat to its undisputed
dominance, in check. As Asia Times writer Pepe Escobar put it:
"Oil and gas are not the U.S.'s ultimate aim. It's about
control.... If the U.S. controls the sources of energy of its
rivals-Europe, Japan, China, and other nations aspiring to be
more independent-they win."
Saman Sepehri is a member of the International
Socialist Organization in Chicago.