Role of Governments in the Global Oil Economy - Coursework Example

Role of Governments in the Global Oil Economy Industry Oil industry can be both a curse and boon on the global economy. The disastrous impact that oil can have on the economy has been proved after the price shocks in the 1970s. It goes without saying that oil plays a major role in the modern life. Considering this, it can be said that oil is the lifeblood of global economy and will always remain so. While rising oil price can put a dent in the economy with growing inflation, on the other hand more investments on oil fields to increase production would mean less spending on other industrial sectors. This paper explores the role of governments in shaping the global oil economy. Oil industry Constant discovery of new oil fields is necessary to avoid depletion of current reserves; however this is challenging from both economic and business perspectives. For instance, in Canada the oil reserves are difficult to correctly measure because of technological difficulties leading to high cost involvement. On the other hand, oil reserves in Alberta which are now considered second largest oil reservoir were considered as non-economical to develop in past decades (Inkpen, 2012, p.2). One of the most important aspects of oil industry is that rich and poor nations alike are consumers of oil. However, since oil is location-specific therefore only a specific number of nations are major oil producers of the world. Over the last decades, the developed nations have become leading importers of oil which has resulted in severe geographical and political issues. Oil industry is one sector which has experienced large scale government interventions and regulations ranging from taxation to control over production. OPEC “represents government intervention on a global scale” (Inkpen, 2012, p.4). For five years Saudi Arabia which is OPEC’s largest producer country controlled price by reducing production during phases of excessive supply and increased production during phases of low supply. It could afford because of low population and excessive production. Thus Saudi Arabia along with other OPEC members strived to maximize their oil revenues in the short run (Spero & Hart, 2009, pp.346-347). OPEC’s goal is to sustain the bargaining power on oil producing countries by controlling price. The idea is to ensure smooth distribution of oil to consumers, producers getting their regular profits and investors earning fair returns. However, OPEC’s capacity to fulfill its mission is controversial since increasing oil prices in the 1980s resulted in storing up of oil by producing countries and new exploration in non-OPEC countries (Inkpen, 2012, p.4). It is the extractive industry, which means acquiring raw material from natural resources is the initial stage of global economy. However, every natural resource is defined as such by potential consumers which in turn is framed by both “socio-cultural and political construction” (Dicken, 2010, p.244). This definition is born from adequate demand, appropriate technology and ownership rights. Since many resources like oil, copper etc. are not renewable and are fixed in quantity, therefore uncontrolled consumption can lead to scarcity of such resources in future. One particular characteristic of natural resources is that they are location-specific which means they are to be extracted from particular regions although they can be refined in other countries. In both cases, there is involvement of high expenses related to extraction and transportation. Since 1975, the Middle Eastern countries were the principle producers of oil but in later decades oil fields have been discovered in other countries thereby altering global oil map. Technology is one major challenge of extractive industry other than and marketing difficulties. Each aspect involves high costs since human use of oil resources begin from easily accessible areas. Therefore, with passage of time finding new resources in inaccessible areas can be extremely costly, and also marketing of oil can be involve high expenses because of market remoteness. Since oil extraction is location-specific therefore governments play a big role in shaping the oil economy. Moreover, major oil fields are located in poor nations which becomes added burden for the high cost involvement from extraction, procession to distribution. Several approaches have been adopted to tackle the problem. Firstly, there is OPEC that maintains collaboration between oil production countries to limit production to control its price. Secondly, oil industry is largely dependent on FDI. Kazakhstan is a good example how power can shift over time. In 1991, US entered into agreement with Kazakhstan when the latter was inexperienced in complex political bargaining. In future years, Kazakhstan learnt the regulatory measures of oil industry and began to renegotiate with foreign companies by implementing strict rules regarding VAT exemptions, contract cancellation on non-compliance of rules, export duty and environmental provisions. Although this indicates a state-firm rivalry, the strategic importance attached to extractive industry also leads to state-state rivalry. For instance, America attempts to sustain much of extractive resources for own advantage while imports some of them for other needs. For the latter case, America strives to control foreign located resources through state or private investments (Dicken, 2010, pp.254-260). Oil and war The United States has always strived for control over oil producing countries and the flow of oil across the world. The vast production of oil in the Middle Eastern countries has provided the region with global powers since the beginning of the twentieth century. This situation has specifically attracted America and the bonding has become even stronger since 1930s when huge amount of oil was found on the Eastern shores of Saudi Arabia. After WWII a meeting between President Roosevelt and the founding monarch of Saudi Arabia. ended with an arrangement that Saudi Arabia would become oil supply to the world market under America’s patronage. In the following decades, providing security to this region remained America’s primary concern. From late 1970s onwards, oil passed freely from the Gulf region but the region remained fraught with revolutions and never ending wars; thus America’s promise of security remained elusive since this would mean direct interference from the nation. Although apparently it was 9/11 terrorist attacks that led America to invade Iraq in 2003, it is not to be undermined that the war was an outcome of long strategic thinking. In the Middle East, oil has always been a contributor of war and America’s involvement became inevitable because of the nation’s outlook towards oil. America’s ambition, from initial stage, was to bring Gulf countries would be under its control. Jimmy Carter’s warning in 1980 that “United States would use any means necessary, including military force to safeguard its vital interests in the Gulf” was proven true in the later decades (Jones, 2010, p.210). Since 2006, US and British government have been persuading the Iraqi government to pass an oil law “legalizing the return of the foreign multinationals—tossed out of the country in the 1970s—to run the oil sector” (Muttit, 2012). The law did not get accepted by the Iraqi Parliament which induced American President Bush to send 30,000 troops into Iraq which was already immersed in civil wars. America even threatened Iraqi Prime Minister Maliki of withdrawing support if the law is not passed within September 2007. The trouble began when many Iraqi oil professionals and civil groups rejected the law claiming that oil sector is a public sector and its profits cannot be enjoyed by foreign companies. When the law remained unimplemented after the deadline, the victory made the Iraqis view the diminishing power of the US as a result of which US influence on Iraq began to decline (Muttit, 2012). The relation between oil scarcity and war has been accepted in the context that massive oil price fluctuations can disturb the power relations between nations. The impact is more in selected regions due to oil’s location-specific aspect. Studies have proved that countries which are dependent on oil exports and countries which have abundance of oil – both are conflict prone. Moreover, location of oil fields is another factor to be considered. Oil fields in conflict prone regions within a country can result in large number of deaths than oil fields in peaceful regions in the same country (Le Billon & Cervantes, 2009, p.837). Fluctuations in oil production and price can wreck the investments made by oil companies in politically sensitive regions and this can lead to conflicts. However, many conflicts occur in the context of oversupply of oil rather than its scarcity. Also, increasing oil price can lead to military victories that end conflicts. Hence, relating oil scarcity to conflicts is more controversial than being politically correct (Le Billon & Cervantes, 2009, p.842). Nature Oil industry affects the environment negatively in several ways. Environment ruination occurs mainly through oil spills, blowouts, hydrocarbon emissions and gas flaring. Between 1970 and 2000, Nigeria had 4800 oil spills, and 12% of total global gas flares in 2002. Moreover, construction of pipelines increases the risks of destroying species. Oil explosions and associated pollution can negatively affect traditional livelihood. Oil companies are subjected to stringent codes regarding environmental laws and are liable to make huge compensations to aggrieved communities. For this reason, in oil producing countries like Nigeria transnational companies continue cases in courts for 10 to 15 years. Most of the time oil spills remain unrecorded and environmental laws are hardly effective. Oil companies practically hold half-hearted approach towards the adverse impact of their activities on the environment (Watts, 2005, p.388). Conclusion Oil industry will always be the driving force of global economy. Its location-specific aspect is one major reason between oil producing countries and consumers countries. In spite of America and Britain’s effort to control the Gulf region, the oil producing countries will have an added advantage due to their abundant supply. References Dicken, P., 2010. Global Shift: Mapping the Changing Contours of the World Economy. 6th ed. London: SAGE Publications Inkpen, A., 2010. The Global Oil and Gas Industry – 2010. Energy, pp.1-17 Jones, T.C., 2012. America, oil, and war in the Middle East. Journal of American History, Vol.99, No.1, pp.208-218 Le Billon, P. & Cervantes, A., 2009. Oil Prices, Scarcity, and Geographies of War. Annals of the Association of American Geographers, Vol.99, No.5, pp.836-844 Muttit, G., 2012. Mission Accomplished for Big Oil? The Nation, [online] Available at: http://www.thenation.com/article/169530/mission-accomplished-big-oil# [Accessed April 26, 2014] Spero, J.E. & Hart, J.A., 2009. The Politics of International Economic Relations. 7th ed. Boston: Cengage Learning Watts, M.J., 2005. Righteous Oil? Human Rights, the Oil Complex, and Corporate Social Responsibility. Annual Review of Environment & Resources, Vol.30, No.1, pp.373-407 Read More