| New School, NYC GPIA | Economics of Security Workshop | 17 Nov 2006 | The Global Political Economy of Oil & U.S. Persian-Gulf Policy Thomas W. O’Donnell The University of Michigan Center for Middle East and North African Studies Michigan Center for Theoretical Physics Residential College - Social Science Program twod@umich.edu, http://www.TomOD.com twod@umich.edu | TomOD.com 1 Motivation for Oil Study Motivations to study political-economy of oil: 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 twod@umich.edu | TomOD.com 2 Motivation for Oil Study “Hegemony”, “Empire” ? Radical categories of 1960-70s … now mainstream academic and foreign-policy debates Hegemony or Empire? Niall Ferguson From 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. twod@umich.edu | TomOD.com 3 Method 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) twod@umich.edu | TomOD.com 4 Theory Framework 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 twod@umich.edu | TomOD.com 5 Theory Framework for Oil 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 twod@umich.edu | TomOD.com 6 Theory Framework for Oil 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 twod@umich.edu | TomOD.com 7 OUTLINE: I. POLITICAL ECONOMY 1. FACTS of oil sector Geography | Reserves | Technology | Consumption | Price History 2. HISTORY from cartels to globalization Property 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 twod@umich.edu | TomOD.com 8 Oil facts: Demand Absolute levels (Report#:DOE/EIA-0484(2002) Note: Information Revolution hasn’t yet revolutionized energy twod@umich.edu | TomOD.com 9 Oil facts: Demand Oil % constant. Why?? Where are the resources? … twod@umich.edu | TomOD.com 10 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.) twod@umich.edu | TomOD.com 11 Oil facts: Reserves Precondition for hegemony …natural concentration - M.E. tar sands bump more so… twod@umich.edu | TomOD.com 12 Oil facts: Reserves 60+% world reserves Mideast: 90% Persian Gulf Hegemony possible twod@umich.edu | TomOD.com 13 Oil facts: Field distribution by size Reserves Another 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. twod@umich.edu | TomOD.com 14 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.) twod@umich.edu | TomOD.com 15 Oil facts: Production - Biggest producers: 1.Saudi A. 2. U.S. 3. Russia 4. Iran 5 Mexico (1, 2, 3 vary) - M. East biggest region -US / Russia pump fast on small reserves N. Hemisphere ½-depleted, but not ME. - Non-Mideast pumps at ~max. rate (Hubbert’s Peak: US was ½-emptied out by 1971) Source: EIA twod@umich.edu | TomOD.com 16 Oil facts: Production * Saudis huge, yet 30-40% spare capacity < 2003 unique! *Iran now 2nd * Iraq ‘could’ be 2nd Saudi Arabia. 10-15 yrs + $20-40 billion (ref: US Council on For. Relations, pre-war report ). Source: IEA Global-north depletion will exacerbate M. E. concentration 17 twod@umich.edu | TomOD.com Oil facts: U.S. Imports 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 .to pump… twod@umich.edu | TomOD.com 18 OUTLINE: I. POLITICAL ECONOMY 1. FACTS of oil sector Geography | Reserves | Technology | Consumption | Price History | 2. HISTORY: From cartels to globalization Property relations | Security of supply & demand | Volatility | Cartels & control institutions 3. CRISIS Projections | China & India | Productive capacity II. U.S. 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 twod@umich.edu | TomOD.com 19 History: how globalized order was slowly established 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 twod@umich.edu | TomOD.com 20 $ 95 3rd oil shock twod@umich.edu | TomOD.com 21 $ 95 Average IEA Crude Oil Import Price 3rd oil shock $ 50 Projections: DoE EIA Annual Energy Outlook Feb. 2006 twod@umich.edu | TomOD.com 22 First oil shock: Five Phases of the Global Oil Order -1973 Arab OPEC Embargo World Oil Market and Oil Price Chronologies: 1970 – 2005 IEA data 1937–1956 1957 – 1973 1974 – 1986 | Carter | WWII 1947 1951 1967 1986 – 2000 Reagan | Bush | 1979 Oil Shock I Oil Shock II 1990 2001 - Clinton | Bush 1997-98 Oil Shock III twod@umich.edu | TomOD.com 23 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) twod@umich.edu | TomOD.com 24 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 * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations) twod@umich.edu | TomOD.com 25 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 * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations) twod@umich.edu | TomOD.com 26 Kissinger plan worked: strategic reserves (SPR) of IEA countercartel negated embargo weapon Implies threat: … what might US/OECD do militarily over 90+ days if embargo again An added SPR role: … IEA pressured OPEC to observe US/IEA price range by adjusting pumping rates. 1980-90’s: US/OECD’s IEA Vs. OPEC “confrontational” relationship. twod@umich.edu | TomOD.com 27 Kissinger’s role … the planner and organizer of IEA: * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations) twod@umich.edu | TomOD.com 28 Kissinger’s role … the planner and organizer of IEA / oil hegemony: * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations) twod@umich.edu | TomOD.com 29 Second & Third shocks: -1979 – IEA organized Five Phases of the Global Oil Order -Business model … World Oil Market and Oil Price Chronologies: 1970 – 2005 -Spot & Futures mkt -1985 IEA data -Recog’d OPEC 1937–1956 -“New World 1957Order” – 1973 1974 – 1986 1986 – 2000 2001 -Collusion begins: | Carter | Reagan | Bush | Clinton | Bush 1st Price Band slide WWII 1947 1951 1967 1979 Oil Shock I Oil Shock II Oil Shock III Oil Shock I Oil Shock II Oil Shock III 1990 1997-98 1990 1997-98 -- Themes: 1. OIL PRICE SWING STATES” 2. ;US Vs. GB & France 3. US-OECD Vs. OPEC 4. US Surplus till 1970 twod@umich.edu | TomOD.com 30 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 ? ? Source: Brad Bourland, CFA, Chief Economist, Samba. At NY Energy Forum, June 2006 twod@umich.edu | TomOD.com 31 Confrontation Confidence building - New OPEC generation Four Phases of the Global Oil Order - Gulf War coalition - Vienna deal IEF World begins Oil Market and Oil Price Chronologies: 1970 – 2005 - US Sec. Energy Richardson IEA data - 1997-1998 Asian crisis-2000 1937–1956swings 1957 – 1973 1974 – 1986 1986 – 2000 “bad for business” 2001 - 2000 London mtg. price Reagan | Bush | Clinton | Bush - IEF upgrade proposed Osaka| Carter | by Prince Abdullah WWII … then crises 2001 1979 1967 1990 1947 1951 Oil Shock I Oil Shock II - 1997-98 Oil Shock III twod@umich.edu | TomOD.com 32 OUTLINE: I. POLITICAL ECONOMY 1. FACTS of oil sector Geography | Reserves | Technology | Consumption | Price History | 2. HISTORY from cartels to globalization Property relations | Security of supply & demand | Volatility | Cartels & control institutions 3. CRISIS Projections | China & India | Productive capacity II. U.S. 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 twod@umich.edu | TomOD.com 33 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? twod@umich.edu | TomOD.com 34 Crises: 1.1990s- 2001 Saudi crises, in “Central bank of oil”Four Phases of the Global Oil Order World OilMarket and Oil Price Chronologies: 1970 – 2005 2. 2003 Demand up + no cushion data Requires: IEA data - FDI (IEA: “$5 T by 2030) -1937–1956 Better market control (IEFS, JODI, …) – 1986 1957 – 1973 1974 1986 – 2000 2001 - ‘Iraq & Iran online’ but not ‘rogues’ -> Reagan | Bush | Clinton | Bush invasion & confrontation| Carter | Two views: WWII Multilateralism &1967 liberal markets 1979 1990 1947 1997-98 vs. nationalism & empires ? 1951 Oil Shock I Oil Shock II - Oil Shock III twod@umich.edu | TomOD.com 35 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 twod@umich.edu | TomOD.com 36 Recall: oil’s % forecasted constant In spite of 1st--world efficiencies … where is the expansion? … twod@umich.edu | TomOD.com 37 China demand huge factor … surpassed Japan ’03, & US by 2020 has gone auto-centric; economic & military reasons. … being reduced to historical dilemma of Japan, Germany very precarious choice – must import any additional oil! Middle-class sizes ~determine relative growth potential US solution: an oil offensive… twod@umich.edu | TomOD.com 38 Globalized order • IEA + OPEC IEFS, Institutionalized in Riyadh Features: – 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 twod@umich.edu | TomOD.com 39 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. twod@umich.edu | TomOD.com 40 Energy/Oil Basic Facts: Persian-Gulf states’ importance Supply Pumping now mainly from sates with ½depleted reserves … trajectory twod@umich.edu | TomOD.com 41 Energy/Oil Basic Facts: Persian-Gulf states’ importance Supply U.S. & Russia #2 & #3 producers -- unsustainable – Gulf States’ production% will grow What are Iraq/ Iran’s importance to global system? twod@umich.edu | TomOD.com 42 Energy/Oil Basic Facts: Iran’s Importance Supply Iran twod@umich.edu | TomOD.com 43 Energy/Oil Basic Facts: Iran & Iraq’s importance Supply Iran Iraq U.S., E.U., IEA, program for development M.E. oil … twod@umich.edu | TomOD.com 44 Expand pumping capacity / Foreign Direct Investments (FDI) push: Special Gulf role: market % growing From “Cheney Energy Plan”: Spare capacity mitigate disruption Foreign investments already, under Clinton twod@umich.edu | TomOD.com 45 Cumulative Investments (billion $US) Why Iraq (Iran)? Much pressure to develop fields: N.B. 2030 2030 2030 2020 2020 Very similar graphs were made by: Council on Foreign Affairs pre-invasion commission; (included lateroccupation official Jas. Garner, …) 2020 2010 2010 2010 Production (million barrels/day) Restoration of production capacity IEA Reference Scenario Slow production expansion Rapid production expansion 46 (Source:twod@umich.edu IEA Energy Investment Conf. late ‘04) | TomOD.com 46 New directions for pipelines – Now to go south vs. north into FSU Cheney says: Source: V. Pres. D. Cheney’s White House Energy Report 2000 - Iran and Iraq importance … 47 twod@umich.edu | TomOD.com 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) twod@umich.edu | TomOD.com 48 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. twod@umich.edu | TomOD.com 49 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: twod@umich.edu | TomOD.com 50