| New School, NYC GPIA | Economics of Security Workshop | 17 Nov 2006 |

The Global
Political Economy of
Oil
&
U.S. Persian-Gulf
Policy

Thomas W. ODonnell

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

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

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.

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)

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

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

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

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

Oil facts:
Demand

Absolute
levels

Note:
Information
Revolution
hasnt yet
revolutionized
energy

(Report#:DOE/EIA-0484(2002)

Oil facts:
Demand

Oil %
constant.
Why??

Where are the

resources?

1. FACTS of oil sector

- WORLD ENERGY USE:
What portion of the worlds 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.)

Oil facts:
Reserves
Precondition for hegemony natural concentration - M.E.

tar sands
bump

more so

Oil facts:
Reserves

60+%
world
reserves
Mideast:
90%
Persian Gulf
Hegemony
possible

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.

1. FACTS of oil sector

- WORLD ENERGY USE:
What portion of the worlds 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.)

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
-depleted,

but not ME.

- Non-Mideast pumps at ~max. rate (Hubberts Peak: US was -emptied out by 1971)

Source: EIA

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

Oil facts:
U.S.
Imports
ASIDE: US Dependenceon Mid East?
~ 60% US oil Imported
U.S. gets all Western Hemispheres oil
From Mideast: 2000: 21%,
2005: 17% (10-12% of total demand)
Hence, U.S. fractional dependence very low

means
.to
pump

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

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

$ 95

3rd oil shock

$ 95

Average IEA Crude Oil Import Price

3rd oil shock

$ 50

Projections:
DoE EIA Annual
Energy Outlook
Feb. 2006

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

19371956

1957 1973

1974 1986
| Carter |

WWII
1947
1951

1967

1986 2000

Reagan

| Bush |

1979

Oil Shock I

Oil Shock II

1990

Oil Shock III

2001 -

Clinton

1997-98

Bush

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.
- Hubberts Peak for US 48 states.
Role of U.S. state organizationally (from FDRs 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)

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)

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.

3. Develop new N. Hemisphere oil

* OECD: Organization of Economic Cooperation and Development (AKA the First World nations)

(Yergin)

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.

1980-90s:
US/OECDs IEA
Vs. OPEC
confrontational
relationship.

Kissingers role the planner and organizer of IEA:

* OECD: Organization of Economic Cooperation and Development (AKA the First World nations)

Kissingers role the planner and organizer of IEA / oil hegemony:

* OECD: Organization of Economic Cooperation and Development (AKA the First World nations)

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
-Recogd OPEC
19371956
-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

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

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
19371956swings
bad
for business
1957
1973
1974 1986
1986 2000
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

Oil Shock III

1997-98

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

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?

Crises:
1.1990s- 2001 Saudi crises, in
Four Phases of the Global Oil Order
Central bank of oil
World
OilMarket
and Oil Price Chronologies: 1970 2005
2. 2003 Demand up + no
cushion
data
Requires:
IEA data
- FDI (IEA: $5 T by 2030)
-19371956
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

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

Recall:
oils %
forecasted
constant
In spite of
1st--world
efficiencies

where is the
expansion?

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

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

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 baathists (13 yrs)
FDI from Iran clerics (11 yrs now)

Political-economic basis:
Growth in Persian-Gulf importance
Eliminate high absorbers behavior

Implementation

Iraq War
U.S.-Iran crisis
open Caspian for investment
FSU pipelines to go south, etc.

WHY?

Energy/Oil
Basic Facts:

Persian-Gulf states importance

Supply

Pumping now
mainly from
sates with depleted reserves
trajectory

Energy/Oil
Basic Facts:

Persian-Gulf states importance

Supply

U.S. & Russia

#2 & #3 producers
-- unsustainable
Gulf States
production%
will grow

What are
Iraq/ Irans
importance
to global system?

Energy/Oil
Basic Facts:

Irans Importance

Supply

Iran

Energy/Oil
Basic Facts:

Iran & Iraqs importance

Supply

Iran

Iraq

U.S., E.U.,
IEA, program
for development
M.E. oil

Expand pumping capacity / Foreign Direct Investments (FDI) push:

From Cheney Energy Plan:

Special
Gulf role:
market
%
growing

Spare
capacity
mitigate
disruption
Foreign
investments
already,
under
Clinton

Cumulative Investments (billion $US)

Why Iraq (Iran)? Much pressure to develop fields:

N.B.

2030
2030
2030

2020

2020

2020

Very similar
graphs were
made by:
Council on
Foreign
Affairs
pre-invasion
commission;
(included
lateroccupation
official Jas.
Garner, )

2010
2010

2010

Production (million barrels/day)

Restoration of production capacity
IEA Reference Scenario

Slow production expansion

Rapid production expansion

46

(Source: IEA Energy Investment Conf. late 04)

New directions for pipelines Now to go south vs. north into FSU
Cheney says:

Source: V. Pres. D. Cheneys

White House Energy Report
2000
- Iran and Iraq importance

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 Saddams demise)

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 baath from 1991.

Would use oil against Saudi, Kuwaiti, UAE royals, new Iraqi state,
disrupting U.S. regional hegemony.

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: