Emmanuel C. Ogbonna
02212036
His 404 (Presentation)

Question:
Examine


Introduction:
Oil was first discovered in the U.S. in 1859. At the beginning of the 20th century it supplied only 4% of the world’s energy; decades later it became the most important energy source. Today oil supplies about 40% of the world’s energy and 96% of its transportation energy. Since the shift from coal to oil, the world has consumed over 875 billion barrels. Another 1,000 billion barrels of proved and probable reserves remain to be recovered.

Discovery of oil in 1908 at Masjed Soleiman in Iran initiated the quest for oil in the Middle East. The Anglo-Iranian Oil Company (AIOC) was founded in 1909. Today, 66% of global oil reserves are in the hands of Middle Eastern regimes: Saudi Arabia (25%), Iraq (11%), Iran (8%), UAE (9%), Kuwait (9%), and Libya (2%).

The most crucial factor in the politics of the Middle East has been the perennial conflict between the state of Israel and her Arab neighbors. When the British mandate over Palestine ended in 1948 and the state of Israel was declared, the Arab nations decreed that the tiny country would not exist. Led by Egypt, they attacked Israel, after heavy fighting, the UN imposed a ceasefire. The Arabs were armed by the Soviet Union while the Israelis were armed by the western powers. This set the trend for decades of conflict and militarisation of the region.

In 1960, the organization of petroleum exporting countries (OPEC) was formed, till date the majority of its members are Arab nations. The principal aim of the organization, according to its Statute, is the determination of the best means for safeguarding their interests, individually and collectively; devising ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry."

The persistence of the Arab-Israeli conflict finally triggered a response that transformed OPEC from a mere cartel into a formidable political force. After the Six Day War of 1967, the Arab members of OPEC formed a separate, overlapping group, the Organization of Arab Petroleum Exporting Countries, for the purpose of centering policy and exerting pressure on the West over its support of Israel. Egypt and Syria, though not major oil-exporting countries, joined the latter grouping to help articulate its objectives.

OPEC decisions have had considerable influence on international oil prices. For example, in the 1973 energy crisis OPEC refused to ship oil to western countries that had supported Israel in the Yom Kippur War or October War, which they fought against Egypt and Syria. This refusal caused a fourfold increase in the price of oil, which lasted five months, starting on October 17, 1973, and ending on March 18, 1974. OPEC nations then agreed, on January 7, 1975, to raise crude oil prices by 10%. At that time, OPEC nations — including many who had recently nationalized their oil industries — joined the call for a new international economic order to be initiated by coalitions of primary producers. Concluding the First OPEC Summit in Algiers they called for stable and just commodity prices, an international food and agriculture program, technology transfer from North to South, and the democratization of the economic system.

As early as 1950, the Arabs had realized that oil could be used as leverage with the west.
In 1951, Iran nationalized its oil fields initiating the Abadan Crisis. The politics of oil nationalization has involved Western governments using coups and covert actions to prevent foreign regimes from taking control of Western run oil companies in these respective countries. Iran and Venezuela are two important examples. In 1953, Iran’s Premier Mohammed Mossadegh was overthrown by a CIA/MI6 covert action known as Operation Ajax. The goal was to prevent Mossadegh from nationalizing the Anglo-Iranian oil company which later became British Petroleum.

By 1970, the regimes in the region had realized that they could garrote the western economies with their oil. This was stressed by the Shah of Iran, whose nation was the world's second-largest exporter of oil and the closest ally of the United States in the Middle East at the time. "Of course [the world price of oil] is going to rise," the Shah told the New York Times in 1973. "Certainly! And now, you [Western nations] increased the price of wheat you sell us by 300%, and the same for sugar and cement, you buy our crude oil and sell it back to us, refined as petrochemicals, at a hundred times the price you've paid to us. It's only fair that, from now on, you should pay more for oil. Let's say ten times more."

After the 1973 oil embargo, Western Europe and Japan began switching from pro-Israel to more pro-Arab policies (some of which are still in effect today). This change further strained the Western alliance system, for the United States, which imported only 12% of its oil from the Middle East (compared with 80% for the Europeans and over 90% for Japan), remained staunchly committed to its backing of Israel.

A year after the unveiling of the 1973 oil embargo, the nonaligned bloc in the United Nations passed a resolution demanding the creation of a "new international economic order" in which resources, trade, and markets would be distributed more equitably, with the local populations of nations within the global South receiving a greater share of benefits derived from the exploitation of southern resources, and greater respect for the right to self-directed development in the South be afforded by the North.

The regimes of the region have shown a willingness to hang on to their power at all costs. In response to increased funding for alternative fuels, the Saudi Arabian government cut back production thereby boosting global oil prices. However the move was widely seen as a political one, calculated to remind the west of its power. Because reserves in non-Middle East countries are being depleted more rapidly than those of Middle East producers, their overall reserves-to-production ratio -- an indicator of how long proven reserves would last at current production rates -- is much lower (about 15 years for non-Middle East and 80 years for Middle East producers). If production continues at today's rate, many of the largest producers in 2002, such as Russia, Mexico, U.S., Norway, China and Brazil will cease to be relevant players in the oil market in less than two decades. At that point, the Middle East will be the only major reservoir of abundant crude oil. In fact, Middle Eastern producers will have a much bigger piece of the pie than ever before.

With the heavy dependence of the western industrialized nations on Middle Eastern oil, naturally, western governments have maintained strategic military presence in the region. Before the Iraqi invasion, Kuwait and Saudi Arabia were hosting nearly 45,000 United States troops, the US military has always maintained an aircraft carrier in the region to enable it respond to breaking events with speed. The resentment over the presence of American troops in the region has helped spawn anti American sentiments.

In the words of US president George Bush, "It's important for Americans to remember that America imports more than 50 percent of its oil -- more than 10 million barrels a day. And the figure is rising. This dependence on foreign oil is a matter of national security. To put it bluntly, sometimes we rely upon energy sources from countries that don't particularly like us." - George W. Bush, February 25, 2002 (culled from the New York Times)

Tension between the U.S. and China are growing due to increasing Chinese intervention in the Middle East to ensure its own access to oil and Chinese arming of Middle Eastern countries hostile to the U.S. and its allies. In a recent review, the Institute for the Analysis of Global Security arrived at the following conclusions -

- Wealth generated by oil rich Middle Eastern countries will continue to flow into terrorist organizations and organizations promoting radical Islam.

- The U.S. will need to keep increasing American military presence in the region to ensure our access to the remaining oil. This will mean further U.S. embroilment in Middle East conflicts, more anti-American sentiment, and a deepening rift between the West and the Islamic world.

- It is in America’s best interest to preemptively embark on a revolutionary change that will lead us away from oil dependency.

PETRO-DOLLAR WARFARE

The phrase petrodollar warfare refers to a hypothesis that a hidden, driving force of United States foreign policy over recent decades has been the status of the United States dollar as the world's dominant reserve currency and as the currency in which oil is priced. The term was coined by William R. Clark, who has written a book with the same title. The phrase oil currency war is sometimes used with the same meaning.

Most oil sales throughout the world are denominated in United States dollars (USD). Because most countries rely on oil imports, they are forced to maintain large stockpiles of dollars in order to continue imports. This causes demand for USDs to remain high, regardless of economic conditions in the United States. This allows the US government to gain revenues through seignorage and by issuing bonds at lower interest rates than they otherwise would be able to. As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries.

It also means that the price of oil is more stable in the U.S. than anywhere else, since importers do not need to worry about exchange rate fluctuations. Since the U.S. imports a great deal of oil, its markets are heavily reliant on oil and its derivative products (jet fuel, diesel fuel, gasoline, etc.) for their energy needs. The price of oil can be an important political factor; American administrations are quite sensitive to the price of oil.

Political enemies of the United States therefore have some interest in seeing oil denominated in euros or other currencies. In 2000, Iraq converted all its oil transactions under the Oil for Food program to euros. When U.S. invaded Iraq in 2003, it returned oil sales from the euro to the USD. Iran planned to open an oil bourse denominated in euros. It was planned to open on March 20, 2006, but the opening was postponed indefinitely. The postponement was motivated by the ratcheting up of war drums against Iran by the US.

Since currently worldwide oil sales are denominated in U.S. dollars, changes in the value of the dollar against other world currencies affect OPEC's decisions on how much oil to produce. For example, when the dollar falls relative to the other currencies, OPEC-member states receive smaller revenues in other currencies for their oil, causing substantial cuts in their purchasing power. After the introduction of the euro, pre-invasion Iraq decided it wanted to be paid for its oil in euros instead of US dollars causing OPEC to consider changing its oil exchange currency to euros.

Conclusions

Projecting 2001 production levels, by 2020 83% of global oil reserves will be controlled by Middle Eastern regimes. This has informed fears that a handful of Middle East suppliers will regain the influence they had in the 1970s and once again be able to dictate the terms on world oil markets and manipulate oil prices and world politics.

Growing fears about eventual Western energy independence, various security threats, and the absence of a Western rival in the geo-political competition over the Middle-East are leading the Arab states in a more dependent relationship with the West. This is most explicit in Saudi Arabia's consistent policy of price and production moderation in an effort to reduce the chances of Western alienation and the opportunity costs for alternative energy production. The exchange for Western moderation in Arab-Israeli affairs ultimately led to a reshaping of the Middle-Eastern geo-political landscape that was significantly less advantageous than prior to 1973. The Americans are less willing to support the Israelis absolutely and have shown increasing willingness to have a separate state for the Palestinians.

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Nice....incidentally i'm writing a paper on this today