| 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
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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
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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
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Oil facts:
Demand
Absolute
levels
(Report#:DOE/EIA-0484(2002)
Note:
Information
Revolution
hasn’t yet
revolutionized
energy
twod@umich.edu | TomOD.com
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Oil facts:
Demand
Oil %
constant.
Why??
Where are the
resources? …
twod@umich.edu | TomOD.com
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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
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Oil facts:
Reserves
Precondition for hegemony …natural concentration - M.E.
tar sands
bump
more so…
twod@umich.edu | TomOD.com
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Oil facts:
Reserves
60+%
world
reserves
Mideast:
90%
Persian Gulf
Hegemony
possible
twod@umich.edu | TomOD.com
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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
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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
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Oil facts:
Production
* Saudis
huge,
yet
30-40%
spare
capacity
< 2003
unique!
*Iran
now
2nd
* Iraq
‘could’
be 2nd
Saudi
Arabia.
10-15 yrs
+ $20-40 billion (ref: US Council on For. Relations, pre-war report ).
Source: IEA
Global-north depletion will
exacerbate M. E. concentration 17
twod@umich.edu | TomOD.com
Oil facts:
U.S.
Imports
ASIDE: US ‘Dependence’on Mid East?
~ 60% US oil Imported
U.S. gets all Western Hemisphere’s oil
From Mideast: 2000: 21%,
2005: 17% (10-12% of total demand)
Hence, U.S. fractional “dependence” very low
means
.to
pump…
twod@umich.edu | TomOD.com
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OUTLINE:
I. POLITICAL ECONOMY
1. FACTS of oil sector
Geography | Reserves | Technology | Consumption | Price History |
2. HISTORY: From cartels to globalization
Property relations | Security of supply & demand | Volatility |
Cartels & control institutions
3. CRISIS
Projections | China & India | Productive capacity
II. U.S. GEO-STRATEGY
4. THE GLOBALIZED OIL ORDER allies & “rogues”
U.S. v. E.U. | Four aims of U.S. policy in Persian Gulf | Oil, war and global
warming
twod@umich.edu | TomOD.com
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History:
how
globalized
order was
slowly
established
The NewGlobalized Oil Order (1980s - …)
•
•
•
•
•
•
•
•
•
•
•
Security
IEA SPRs
Global-north oil
Supply cushion
Volatility
Price bands
Saudi swing state
Futures market
Role of states
U.S. Hegemon, OECD / IEA counter-cartel, IEF(S), …
Role of force
twod@umich.edu | TomOD.com
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$ 95
3rd oil shock
twod@umich.edu | TomOD.com
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$ 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
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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
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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
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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
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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
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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
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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
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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
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Crises:
1.1990s- 2001 Saudi crises, in
“Central bank of oil”Four Phases of the Global Oil Order
World
OilMarket
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
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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
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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
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Energy/Oil
Basic Facts:
Persian-Gulf states’ importance
Supply
Pumping now
mainly from
sates with ½depleted reserves
… trajectory
twod@umich.edu | TomOD.com
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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
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Energy/Oil
Basic Facts:
Iran’s Importance
Supply
Iran
twod@umich.edu | TomOD.com
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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
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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
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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
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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:
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