International Oil Crisis - Coursework Example

International Oil Crisis The almost daily fluctuation in the price of oil has been irritating to some, infuriating to others and downright deadly to some segments of the global economy. Some industries are particularly susceptible to global fluctuations in the price of oil and have faced numerous challenges in the age of high oil prices. Historically speaking, high oil prices are nothing new and the oil production market is beset by erratic behaviour and wide fluctuations. Why, and with what effects, were there sharp increases in oil prices in 1973-74 and 1979-81? How have geopolitical factors affected the international oil markets and what have been their effects? What where the policies adopted for combating their effects? Where these policies deemed appropriate or adequate? What role has OPEC played in the wide fluctuations of international oil? Seeking to address these questions and many more with respect to the role of geopolitical affairs on the international oil sector, this essay will explore the Oil Crises of the 20th century (1973 to 1974 and then 1979-81). With an emphasis on international events and the role that that they play in the international supply of oil, we will begin with a quick overview of OPEC and expand our analyses of these two major events (Aldeman 2003). What is OPEC? OPEC, the Organization of Petroleum Exporting Countries, is an international trade cartel composed of 12 oil producing countries. These 12 countries account for two-thirds of the world’s total reserves and close to 40% of the world’s total oil production. Due their significant share of the world oil market, OPEC plays a huge role in global oil production and the determination of oil prices (Mouad 2006; BBC 2008). During the First Oil Crisis, the Arab countries of OPEC established OAPEC, Organization of Arab Petroleum Exporting Countries, an organization which played an important role in the oil shocks of the early 1970s. It is to this event that we now turn as we explore the geopolitical factors which precipitated this international crisis. The First Oil Crisis (1973-74) A Jewish state in the Middle East remains a divisive and controversial subject and the Palestinian-Israeli conflict remains one of the most enduring and complex disputes of modern times. After two major wars, in 1948 and again in 1967, Israel and her neighbors entered into another armed conflict in 1973, this one however, had enormous geopolitical and economic ramifications. On Yom Kippur 1973 – the Day of Atonement, the holiest day of the Jewish year - the concerted armies of Egypt and Syria launched a coordinated surprise assault against Israel. At the same time, the Egyptian army invaded by crossing the Suez Canal while Syrian troops invaded through the Golan Heights. This War lasted three weeks and resulted in neither a victory nor loss for Israel, although the Jewish state managed to maintain its territorial integrity despite the onslaught from hostile neighbors. As a result of this conflict, the 1973 Oil Crisis began with an oil embargo, explicitly stated by OPEC and the dual countries of Syria and Egypt. Announcing the oil embargo in early October 1973, the Arab members of OPEC, along with Egypt and Syria announced their oil embargo in response to what it perceived to be flagrant American support for Israel during what became known as the Yom Kippur War. This was in response to what many in the Arab world perceived to the unrelenting support of the United States toward the state of Israel. These sentiments were exacerbated by events such as Operation Nickel Grass, in which the United States blatantly rearmed Israel during the Yom Kippur War. Although the United States was the initial target of the embargo its scope was later defined to include any county which supported Israel during the War. Using their economic leverage and the ability to wreak havoc on international financial markets, the Arab countries of OPEC used this multilateral organization for political purposes. Seeking to exert pressure on much of the West for its support of Israel during the recent War, but also dating back to 1948 and the establishment of a modern Jewish state in the Middle East, the Arab countries of the OPAC sought to punish the supporters of Israel (Vietor 1984; Bloom 2005). Ramifications of the First Oil Crisis As punishment for their perceived support of Israel during the Yom Kippur War, OPEC cut oil production in October of 1973 and placed an embargo on the supply of crude oil to the West. In addition to this unilateral embargo, price increases followed and the market price for oil jumped four-fold. From a low in 1973 of $3 per barrel, the price of oil jumped to $12 a barrel and kept on increasing. Accordingly, The decision to quadruple prices at the beginning of 1974 was a deliberate political decision taken by OPEC on the embargo’s coat-tails, and later maintained by production restrictions. Indeed the view of the energy crisis as the inevitable result of a developing shortage of energy supplies gave way to a shorter-term political view of global oil supplies (Yarra 2004, pp. 244). Thus, the precipitants and the ramifications of this crisis were political in nature. Although almost the entire Western world was affected by the First Oil Crisis, the United States faced many important repercussions for its support of Israel. These included the rising retail price of gas, price controls, gas rationing and ensuing domestic turmoil as a result of the dependence of the United States consumer on the ready availability of inexpensive gasoline. The First Oil Crisis set the stage for rising oil prices as demand never ceases to outstrip supply. We now turn to the Second Oil Crisis, exploring the antecedents to this event and their ramifications. The Second Oil Crisis (1979-81) The Islamic Republic of Iran is a Middle Eastern country of more than 70 million people and of important geostrategic significance due to its central Eurasian location. Bordering Turkey and Iraq to the west, Afghanistan and Pakistan to the east and Armenia, Azerbaijan and Turkmenistan to the north, Iran, formerly known as Persia until 1935, has been a theocratic Islamic republic since Ayatollah Khomeini’s revolution in 1979. Politically and economically speaking, Iran is a regional power with a large economy, military and extensive regional influence. It is impossible to discuss Iran without mentioning Islam and the important role that Islam plays in Iranian society, particularly since 1979. Iranians are 98% Muslims and Shi’ism is the largest Muslim sect in the country. Accordingly, Shi’a Islam has been articulated as the official voice in Iran for centuries and Iran today is a country in which 89% of the Muslim population self-identifies as Shi’a. The Islamic conquest of ancient Persia – modern day Iran – began in 633 A.D. and precipitated the end of the Sassanid Empire. This conquest also overtook the Zoroastrian religion as the dominant religion in Persia. Iran thus has more than 1,350 years of uninterrupted Islamic influence, dating back to the days of Muhammad. Islam was introduced during the time of the Prophet and remains central to the lives of Iranians today (Yergin 1993; Parra 2004). The Islamic Revolution of 1979 enshrined an Islamic constitution and the establishment of the first modern theocracy in the world. Governed by Islamic principles and the teachings of the late Ayatollah Khomeini, Islam governs all aspects of modern Iranian society. Socially, politically and economically, Iran boasts a society which has embraced Islam as the guiding force for society. The legal system is Islamic, the social code enforces strict adherence to Islamic dress and behavior and the economy blends Islam and market economics. Importantly, the Islamic Revolution significantly upset international oil markets and have a plethora of negative ramifications for the international supply of oil. Now that we have concluded our brief domestic analysis of Iran, we now turn to the geopolitical ramifications of the Khomeini’s Islamic Revolution of 1979 and its effects on the world oil market. Prior to the Iranian Revolution, Iran was the United States’ main alley in the Middle East and the world’s second largest oil producer. Following the Revolution and the subsequent turmoil associated with the violent seizure of political authority in Tehran by a gang of mullahs, the 1979 energy crisis began in earnest. Described by any as the Second Oil Crisis, the energy crisis of 1979 began in the aftermath of revolutionary turmoil which effectively destabilized the Iranian oil sector. Iran, a pariah theocratic Islamic Republic in the eyes of many Western governments, has been sanctioned by the United States as well as other Western powers since the Shah was disposed by Ayatollah Khomeini in 1979. According to the latest figures provided by The Economist magazine, Iran is now the fourth largest oil producer in the world producing 4.3 million barrels per day and also the fourth largest natural gas producer on the planet. The revolution brought intense change to Iran and the geopolitical result was the 1979 oil crisis (Parra 2004). In the aftermath of the Iranian Revolution, the nation’s oil sector was in shambles. Although petrol development and exports were resumed in the wake of the Shah’s departure in 1979, oil exportation was resumed by the clerical regime which replaced the Shah in Tehran. Despite the resumption of oil exports by the new regime soon after it gained political ascendancy, the exports were significantly diminished leading to a wholesale increase in international prices. In order to make up for the losses associated with the decreased productivity emanating from the wells of Iran, OPEC ventured to increase overall productivity. Despite positive steps taken by OPEC to overcome some of the losses associated with the political turmoil in Iran, international panic ensued leading to a list of successive increases in the price of oil. As the prices continued to rise another geopolitical factor, this time occurring in 1981, contributed to a prolonging of the Second Oil Crisis. This event, known as the Iran-Iraq War, would continue for eight straight years and wreak havoc on world oil markets. The 1980 invasion of Iran by Saddam Hussein, presumably over a disputed international boundary in the Shatt-al-Arab waterway, effectively jeopardized the world supply of oil. With two major oil producers engaged in bloody conflict, the supply of international crude dropped significantly and the price of oil subsequently rose. There were a variety of ramifications of these events between 1979 and 1981 and it is to these consequences that we now turn (Tertzakian 2007). Ramifications of the Second Oil Crisis Revolution in oil producing Iran and the ensuing Iran-Iraq War which pitted two of the region’s largest oil producers against one another had a variety of important implications on the domestic American market. As with the First Oil Crisis less than a decade earlier, the United States was in the grip of rising demand and falling supply as international oil prices fluctuated radically and seemed to be on the consistent rise. Energy conservation was promoted, price controls which were in place due to the earlier crisis eight years earlier remained in force and a phased rationing was heavily debated. Widespread panic was indicative of an era in which markets were unstable and energy prices continued to rise. Writing after the invasion of Kuwait in 1990, In many ways the situation in 1978 can be compared with that today - both were spurred by political events in the Gulf leading to a loss of around 10 per cent of non-communist world oil production, first by the Iranian revolution and the virtual absence of Iranian oil from the world market between late December 1978 and mid-March 1979 and today by the boycott of Kuwaiti and Iraqi oil. In both instances, commercial stocks were at relatively high levels at the beginning of the crisis, and increased production from OPEC and elsewhere helped to reduce the actual shortfall in oil supply. And in both cases, much of the replacement crude was heavier than the oil lost (Dargay 1990). As with before, international geopolitical events had a significant and very deleterious impact on the international oil world. Concluding Remarks Events in the Middle East often have international repercussions. As we have shown, the Arab-Israeli War in 1973 had wide ramifications on the international oil sector leading to an embargo on the oil-consuming states of the developed West with a particular desire to hurt the United States. As our analysis of the Iranian Revolution of 1979 has shown, the Second Oil Crisis was precipitated by international revolution and the subsequent invasion of this country by neighboring Iraq. With a significant drop in production, oil prices began to arise and they continue to arise. Despite a fairly steady trajectory of upward growth in oil production for the countries of OPEC over the past decade and a half, the price of oil has fluctuated dramatically. Accordingly, the price of oil reached a high of nearly $69 dollars a barrel in 2006 and remained high at almost $65 a barrel in 2007, a more than 300% increase from approximately $20 a barrel in 1990. In the middle of this past year, oil prices hovered around the $100 mark: the highest ever recorded. As the world becomes smaller and globalization becomes a feature of our daily lives, demand for oil increases and has been steadily increasing over the past twenty years. In line with the increases in demand, the price of oil has also increased, sometimes sharply and almost always in an unpredictable fashion. The ramifications of these sharp increases in the average cost of oil hurt commuters at the pump, consumers who rely on international trade for their goods and services. Fundamentally the events in the Middle East have world-wide implications and consequences with respect to the availability of oil on a global scale. REFERENCES Adelman, MA1993, The Economics of Petroleum Supply: Papers by M.A. Adelman, 1962-1993, MIT Press, Boston. Bloom, M 2005. Dying to Kill: The Allure of Suicide Terror. Columbia University Press, New York. Dargay, J 1990, “Oil Demand: Dependence Or Flexibility?”, The Oxford Institute for Energy Studies, 1-3. Mouawad, J, 2006, OPEC confirms plan to retain production. International Herald Tribune, Accessed May 2, 2010, http://www.iht.com/articles/2006/09/11/business/opec.php “Oil scales new record above $115”, April 16 2008, British Broadcasting Corporation (BBC.com). Accessed May 2, 2010 http://news.bbc.co.uk/2/hi/business/7349852.stm Tertzakian, P 2007, A Thousand Barrels a Second: The Coming Oil Break Point and the Challenges Facing an Energy Dependent World, McGraw-Hill Professional, New York. Parra, FR 2004, Oil Politics: A Modern History of Petroleum, I.B.Tauris, London. Scott R & Bamberger, CS, 2004, IEA, the First 20 Years: The History of the International Energy Agency, 1974-1994, University of Michigan, Detroit. Vietor, RHK 1984, Energy Policy in America Since 1945: A Study of Business-Government Relations, Cambridge University Press, Cambridge “World Oil Prices” WTRG Economics, Accessed May 2, 2010 http://www.wtrg.com/prices.htm Yergin, D 1993, The Prize: The Epic Quest for Oil, Money, and Power, Simon & Schuster, London. Read More