Political Economy of Oil - Essay Example

Political Economy of Oil Introduction Oil is considered a source of energy that has turned out to be the essential part of our economy. Demand for oil is increasing as we are persistently using this valuable resource. While using these resources we do not acknowledge the fact that oil is a finite resource. The supply of these resources is supposed to be controlled by the economic factors. However, other than the economic factors non-economic and political factors have also played their part in bringing unsteadiness in the oil prices. There are different developments that have affected the political economy of oil. The crises that started with the oil crisis in 1970s extended to Gulf War in the 90s. There are different terrorist threats today that affect oil resources such as oil refineries in Saudi Arabia. The deteriorating law and order situation in Iraq also resulted in fear of disruption of oil supply. There are threats of war with Iran that bring greater fears of volatility in the oil-producing region. These & other such factors have kept oil prices very high and they affect current market scenario. The hope for stability in oil prices is dependent on both political & economic stability. Economic Aspects of Oil Transportation, heating, power generation, the plastics, pharmaceuticals and synthetic fibre industries are the main ways in which oil is consumed. Demand for oil is greater in the developed nations compared to the developing economies. United States of America solely generates a quarter of world oil demand. Asia comes next with Japan having the highest consumption of oil. In Europe no one country can be considered highest oil consuming country instead the demand is evenly generated by all European nations, The demand for oil diminished considerably in Soviet Union after its collapse.US demand for energy is greater and its dependence on oil producing countries is also increasing. The oil supply is mainly provided by large companies operating in countries with large reserves of oil. Countries like UAE, Saudi Arabia, Venezuela, Norway and Kuwait are some of the oil rich countries and are main suppliers of oil to the world. Since supply side of equation plays a crucial role in stabilty of oil markets, the countries producing oil have been trying to stabilize the price of crude oil through production policy. However, the interest of world economy does not lie in bringing stability by production manipulation. Since oil is a resource that depletes with time so its value increases with time as well. A country cannot let go of its future worth or value by increasing its production at the current market price. It is not in the economic interests of such oil producing countries to pursue a production policy incompatible with their own economic interests. Countries like Saudi Arabia have been contributing to the world economy in general and other Western and developed economies like Japan in particular by supplying more oil than it should. For instance Saudi Arabia, of the largest oil producers, increased its production of oil after the oil crises of 1979, resulting in a downward crude-oil price trend in world markets. This manipulation by any country or cartel cannot reap economic benefits in the long run. The market factors should be allowed to play their due role instead of manipulation. There is an increasing trend in demand for crude oil because consumption is greater than the supply. Market economy is the best way to allocate resources. The concept of oil peak suggests that once we reach the stage of peak the economy will be greatly affected. Similarly experts say that world oil reserves will also reach its peak in not so distant future resulting in price hikes and economic recession along with geopolitical repercussions. Oil Situation in USA If we consider the oil peak theory according to which there will be a sharp decline in supply because demand is constantly increasing whereas the speed of finding or exploring new oil sources is not matching that then we come to know that the oil reserves reached its peak fast in the US. Despite being one of the biggest oil producers of the world USA attained its peak in the 1970 because it had the highest consumption for the oil. "The challenge is that energy needed to support future growth will far exceed the amount the United States can produce on its own. Over the next 20 years, growth in U.S. energy consumption increasingly will outpace U.S. energy production, according to the Department of energy" (Burn, 2002). The costs of exploration in US are also high and that is the reason why demand always exceeds the supply for USA. In order to mmet the demand they are trying various measures to reduce their dependency on oil.There are certain factors like efficiency of other energy resources, such as natural gas that are working to curtail oil dependency but still oil is considered a commodity on which the US and its countrymen would depend for years to come. Political Economy of OPEC Principles of supply and demand determine the price of energy supplies such as oil, gas or electricity in a market economy. So when the supply or demand changes, the price of energy can also be changed. Price is generally a market factor but in case of oil the price is controled by the group of oil rich countries that have made a cartel with the name of OPEC (Organization of Petroleum Exporting Countries). The main concern of OPEC's founders was to decide who should bear the burden of adjustment in the international petroleum economy, the producers, the companies or the U.S. government. OPEC can greatly influence the world oil prices. There is quota set by OPEC regarding the output of different oil countries. So when the quota is reduced the oil prices move up because of the decline in supply. Similary an increase in oil output decided by OPEC could also decrease prices because of increase in supply. OPEC does not usually raise the prices too high because the economy of these countries depend on the oil supply. If they increase the price too high, this could result in decrease in demand of oil and increase in demand of other alternate oil sources. We have witnessed some oil crises in the past. The first biggest oil crises was faced in 1973 when OPEC oil export embargo was imposed by many of the major Arab oil-producing states in response to western support of Israel. Again 1979 brought in its wake Iranian revolution and oil crises. Similarly Gulf War has also affected the oil prices. "The question remains, though, why are prices so high If oil producers allowed supply and demand to freely fluctuate, oil's equilibrium price would be significantly lower than it is today. OPEC, which produces about one-third of the world's oil, prevents prices from reaching that equilibrium price by constricting supplies. For the foreseeable future, OPEC won't face any economic impediments to its market manipulations, and oil, therefore, is expected to remain around $30 a barrel in coming months. These oil prices will likely be sustained by the world's steady, relatively inelastic demand for oil" ('The price of oil', 2004). Oil Embargo in 70s Countries rich in oil resources are also the ones with greater wealth and political influence. Certain Arab countries took advantage of their position and imposed embargo against the United States and a few other nations during 1973-1974. Arabs have been demanding Israeli pullout from the Arab territories it occupied in 1967. Arabs tried to put pressure on the United States with oil embargo so it could in turn pressurize Israel. Oil was used as bait for fulfilling the demands. Price of crude oil more than quadrupled on the world market. Even today Israel's right-wing government has support of the US Bush administration. Israel's intentions of confrontation in the region are considered obstacles to security, political development and progress. The likelihood of an embargo like one that happened in 70s is today not possible but a serious conflict of any Arab country with Israel could have serious ramification particularly with respect to oil & its prices. Impact of Crises in the Past OPEC's use of the oil weapons in 1973 had a lasting effect on the political economy of oil. The debt and financial crises of the 80s were closely linked to the huge increase in international oil prices of 1973-74 & 1978-80, which caused major disruptions in every economy in the world. Oil importers had to adjust to lower standards of living and oil exporters had to learn to productively manage massive new avenues. Facing plunges in income that sometimes threatened political stability, many governments in oil importing countries trying to compensate by increasing spending. But this strategy, while perhaps politically expedient in the short run, led to growing budget deficit and could not be sustained economically. The countries that followed this path found themselves in deep crisis. Gulf War in 90s Iraq & Iran region problem dates back to the period of the Islamic revolution in Iran in 1979. Hostilities that started between Iran-Iraq in 1980 ended in Iraqi invasion of Kuwait in 1990. Economies of countries like Kuwait and Iraq got hurt pretty badly. During 1990-1991 the U.S. government also got involved in the Gulf crisis. Structure of Western economies and the lifestyles have been known to be supported by the Gulf oil. United States is more dependent on Middle East oil. US involvement in the region supported the notion that the US is ensuring the supply of oil to the West. Also dominance by any regional power could give control of oil supplies in that particular country which the US and West do not want. Regime of Saddam Hussein was considered to impact the Western world's economy. So, when Saddam tried to take advantage of Kuwaiti oil then US mobilized world body to wage a war over oil. "Saddam Hussein did not understand Washington's ability to act unilaterally and to build an international consensus even with the rest of the Arab world. Above all, Iraq failed to understand the stake that Washington had in making certain that a single government would not control the oil resources of the Gulf. The Gulf War of 1991 was the first war in modern history fought specifically over oil. It serves as a reminder that as long as hydrocarbon resources remain fundamental to economic growth--and as long as there are powerful governments that want to ensure access to hydrocarbon supplies--there will be a commitment to use force to prevent any single government from controlling the market" (Morse, 1999). Iraq War & Oil In the current scenario US seems to be losing its war in Iraq and insurgents are winning this battle. The Iraqi situation today is considered as the most serious risk to the world economy dependent on oil. One view point shows that US is making money and getting benefits out of this war on terror. People at high level are known to have been involved in federal contracts and other financial opportunities. . People have even take names of personal interests of Vice president Dick Cheney However the most famous conspiracy theory doing the rounds is that the US went to war for oil. . "The hidden agenda of the US government in Iraq has been three -- fold. Firstly, to take control of the world's second largest oil reserves, thereby seizing one of the key oil spigots of competitors like Japan, China and the EU. Secondly, to prevent the dollar -- based world oil market from transacting in Euros, something Iran, Iraq and Venezuela were attempting since 2002, when the Euro was launched. Thirdly, the establishment of permanent US military bases in the strategic heart of the world." (Shrivastava, 2006). Despite these benefits the world body considers Iraq an area where USA is not making any headway. Though US have its presence in Iraq but they have been unable to control terrorism and insurgency inside the country. The political decision of going to war for the alleged reason of protecting oil resources and restricting dominance of one or other country in the region seems to be counterproductive due to instability created as a repercussion of war and its poor planning. Importance of Middle East In the Middle East Saudi Arabia, Kuwait, Iraq and Iran are known to have lightest and most valuable reservoirs of oil. Reserves in eastern Saudi Arabia, Kuwait, Iraq and Iran are also easily accessible. Persian Gulf crudes are also very competitive because oil is just under the surface and can be extracted without expensive technological oil rigs. This is the reason why domestic U.S. oil producers come in trouble when world oil prices are low. So, low world oil prices become beneficial for Gulf producers. Hence price fall since 1985 affected U.S. energy industry while giving importance to the oil from Middle East and this is also the reason why US considers this region very important and has long term policies for the region. Most Arabs on the other hand are very skeptical of US role and their long term policies like establishment of democracy. Bilateral relationships with Middle East particularly with regard to trade & commerce have become very important for the US. Reforms at the government level for the establishment of democracy as well as establishment of market forces in the region are the main targets of the US. Establishment of The Middle East Partnership Initiative to support progress and development in the region is also an important step. However, the most complex part of the whole plan to support Middle East lies on the political front. Israel and Palestine conflict is also the main cause of concern in the Middle East region and now Iraq has become a problem area. "If oil-deprived Afghanistan receives so much strategic attention simply because of the geoeconomics and geopolitics of oil, it should come as no surprise that oil-rich locations in the Middle East such as Saudi Arabia, Iraq, UAE and Iran are considered to be of paramount strategic importance by the US policy makers. The loss of control in Iran was a major blow to this strategy. The recalcitrant behavior of Iraq which has the second largest proven reserve of oil and a vast amount of gas has been a thorn on the side of the US strategists since the Gulf War" (Khan, 2003). Some countries like Bahrain, Kuwait, Qatar, Oman and Morocco cheer on the reformist agenda but still other countries demonstrate inflexible opposition to change. The democracy is a hard to see phenomenon in Middle East. It will in all probability take years for Middle East to come to terms with the Western concept of democracy. People at different levels may be ready for change but old regimes are still not ready to let go. A stable Middle East would mean a lot for West and its oil related interests in the region. It is not easy to accomplish the task of bringing peace and prosperity in the Middle East but once it is achieved it would benefit the US most. Terrorism & Threats to Oil 'War on Terror' was started after Americans were attacked on their soil on September 11 in New York's Twin Towers. Terrorism became the main issue of the modern world. Terrorists not only targeted Western countries but they also targeted Western interests in Muslim & Arab or non-Arab countries. Oil rich countries have also become the target of terror. Insurgents are swift in attacking oil refineries and oil pipelines in Iraq. Oil rich Saudi Arabia has also not been spared when it comes to attacking oil interests. Even currently countries like Saudi Arabia face threats from terrorists due to their political decision or their political affiliation. Terrorism is the new aspect in the whole economic and political game of oil making everyone vulnerable. "While oil traders were still risk managing the outage from Ecuador and the Niger Delta, militants in Saudi Arabia attempted to blow up the world's largest oil processing complex in Abqaiq on Feb 24. If they had succeeded, there would have been a double digit increase in the price of crude in 48 hours. It could have also precipitated social anarchy in a land seething with repressed anger against the Al Saud monarchy. Under such a scenario, repair works at Abqaiq would be next to impossible, oil would shoot to above $100 per barrel, and a vortex of violence would spiral to engulf much of the world. Remember, society is only three meals away from anarchy" (Maavak, 2006). Conclusions Today the situation is different from the conditions of the international petroleum industry in the 70s. Over the years, oil has not just affected world trade & economic growth but it has also resulted in regional instability and even armed conflicts. Iraq seized Kuwait and its oil resources and so a modern war over petroleum was fought under U.S. leadership and supported by the United Nations. Persian Gulf is the area where most of the world's oil is located and the world's attention is directed towards this area. US attack on Iraq is also considered as an attempt by West to protect oil resources. The politics on oil is not as blatant today as it was in the 70s but oil is still not a commodity that can be exchanged on the basis of economic rules. Impact of rising oil prices is on the global economy as a whole has been economic in nature but the reasons are not just economic and politics is definitely involved. For example, world's stock markets react to the political instability in the Oil rich region. Politics is surely inseparable from the economy when it comes to the matters related to oil and it seems to remain so in the years to come. References: Burn, T. (2002, December 29). THE ENERGY DEBATE; Domestic Use Grows, but Future Strategy Remains Uncertain. The Washington Times. A01. 'The Price of Oil'. (2004, April 18) The Washington Times. B02. Morse, E. (1999). A New Political Economy of Oil. Journal of International Affairs. Vol: 53. Issue: 1. Shrivastava, A. (2006). The Iraq War is a Huge Success: The Economics of Creative Destruction. Retrieved January 25, 2007 from: Information Clearing House. Website: http://www.informationclearinghouse.info/article14267.htm Maavak, M. (2006, April 21). Peak Oil and the Political Economy Of Terrorism. . Retrieved January 25, 2007 from: Countercurrents.org. Website: http://www.countercurrents.org/po-maavak210406.htm Khan, H. (2003, March 3). The Political Economy of Oil and The War Against Terrorism. Retrieved January 25, 2007 from: Swans. Website: http://www.swans.com/library/art9/hkhan001.html Read More