Oil - Setting The Scene For Wars - 2
Dawn of A Frenzied Oil Era
Allied forces were closing in on Nazi Germany and victory in Europe was just months away. For a week in early February 1945, U.S. President Franklin Delano Roosevelt met Winston Churchill and Stalin at Yalta to discuss the shape of post-war Europe. The summit ended on February 11, 1945 and Roosevelt departed for a rendezvous at the Great Bitter Lake, a waypoint along the Suez Canal in Egypt, with Saudi Arabia's King Ibn Saud, who sailed from Jeddah aboard an American warship to the meeting with Roosevelt. The two leaders' focus was shaping the future relationship between the United States and the Kingdom of Saudi Arabia. This meeting is considered very significant because just a few years back, a US President would not bother to give an appointment to spare few minutes to the king of a country of nomads. But now the issue was different - in 1939, Standard Oil of California along with Texaco had struck Saudi oil. The companies had agreed a 60 year concession with Ibn Saud covering 440,000 miles, one sixth of the continental US. Now, geologists at the newly formed Saudi-American Oil Company, Aramco, confirmed there was more oil underneath the Saudi sands than in the whole of the United States.
Officially President went to Great Bitter Lake because of oil. He was sailing back from his meeting at Yalta. It was a very dangerous time for him to be deviating from his path. War was not fully over yet and ships were very vulnerable. This explains the importance attached to this meeting. Roosevelt gave King Abdulaziz an airplane. The Americans were interested in the business arrangement and were not interested in culturally rearranging the country the way the British were known to do. They were not a colonial power. That meant an awful lot to the King, one of the only rulers in the area not colonized. He trusted the Americans in that they were unlike the British who were more meddlesome.
King clearly had a good grasp of geopolitics. He understood that the Americans were the up and coming international actors. He was more comfortable working with them in large part because of their lack of a colonial past. For those reasons he allowed the United States to build a base whereas the British had a much harder time getting access to the kingdom.
Thus was held the marriage of West and Middle East. US president Harry S. Truman wrote to the Ibn Saud in 1948, ‘No threat to your Kingdom could occur that would not be a matter of immediate concern to the United States.’ In next six decades, Americans and Saudis would have to confront imperialism, Nasserism, Communism, Baathism, Khomeinism, Islamic militantism, and terrorism but despite all this, the Saudi-American relationship would remain strong as long as oil flowed and Communism was fought.
World war II gave birth to two super powers - US and the Soviet Union and abruptly ended centuries old European domination. The Middle East oil was caught up in this struggle between two emerging super powers. Now if the Western world was going to survive economically, this oil, lying on the western side of the Iron Curtain would have to be protected. This was the foundation on which lay most of the post world war II diplomacies.
Demand for oil, all over the world and more so in US exploded in a post war era. This brought entire Middle East Asia into world focus. These obscure desert kingdoms rose to prominence and power and became craftsmen of world’s destiny.
Mideast (Land of Conflict) Occupies Center Stage
The Middle East is a term used to define a cluster of nations that include the Arab nations of South-West Asia, Israel and Egypt (geographically in Africa). Traditionally, the countries include Bahrain, Iraq, Iran, Israel, Jordan, Palestine, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, UAE and Yemen. The Middle Eastern nations can be divided into two groups. First group consists of rich nations with large petroleum supplies, relatively sparse population and with conservative regimes. Second group is made up of poor countries with little or no petroleum, heavily populated and having socialist governments. Islam is the common factor among all these countries with the singular exception of Israel, the only Jewish state in the world. Lebanon also is a multi-ethnic country, though the Hezbollah would like to transform it into an Islamic nation.
After World War II, Middle Eastern nations achieved independence. Colonial powers exited from the area. Formation of a Jewish state, Israel was an important event in post war Middle Eastern history. Jews had always claimed that Israel was their homeland dating back to thousands of years. But recent history reveals that Jews from all over the world began buying large farmlands from the Arabs in the last decade of 19th century. Israel then was ruled by the Turkish Ottoman empire but the area was won by Britain after World War I. Jews facing persecution in Germany, Russia and other parts of Europe began settling in Israel (then known as Palestine) in large numbers. Trouble between the Jews and the Muslims were a routine affair but with the passage of time as the Jews pressed their claim for a homeland, the rivalry turned into bitter enmity.
After the Holocaust, many of the survivors had no place to go. Many Jews (Zionists) believed that they should have a homeland of their own. They concentrated on the biblical area of Israel. After WWI, the area had become the British mandate of Palestine. When Jewish immigration accelerated, friction was created between Jews and Palestinian Arabs After 1945, Zionists and Palestinian Arabs wanted individual nations and both felt they had claim to Palestine. Britain withdrew in 1947 and the U.N. proposed that the country be partitioned 50/50. A war broke out when the Jews, certain of U.S. and Soviet support, declared their independence and the creation of a new state of Israel on May 14, 1948. When fighting ended in 1949, the Israelis had conquered more territory than had been envisioned in the U.N. plan, and the rest of the territory fell to Egypt and Jordan, rather than forming an independent Palestinian state. Palestinian Arab refugees fled to Lebanon, the West Bank, and the Gaza strip.
Post war Middle East era was marked by the superpowers trying to secure allies due to strategic importance of the area in the Cold War and vital petroleum fields. Middle Eastern Nations would devote large parts of their gross national product to large armies and arms purchases from both the West and the Soviet bloc.
Thanks to oil, the area remains one of the most volatile regions in the world. The region’s history is tainted with skirmishes, conflicts and major wars.
A brief account of post world war major conflicts in middle-east is presented below.
The 1948 Arab-Israeli War
Also known by Israelis as the War of Independence and by Palestinians as al Nakba ("the Catastrophe") was the first in a series of wars fought between the Israel and its Arab neighbors in the long-running Arab-Israeli conflict. The war marked the establishment of the State of Israel, and the exodus of hundreds of thousands of Palestinian Arabs from the territories that would become part of the new state.
1956 Suez War
The Suez Crisis was a military attack on Egypt by Britain, France, and Israel beginning on 29 October 1956. The attack followed Egypt's decision of 26 July 1956 to nationalize the Suez Canal.
In 1952, army officers led a coup d’état against King Faruk and replaced him with President Gamal Abdel Nasser. Nasser became very popular in the Arab world and very unpopular in the West. Nasser nationalized the Suez Canal in 1956, leading to a war with Israel, France, and Great Britain.
Suez canal carried the majority of Middle East oil shipments to Europe even though stewardship of the canal was still controlled by Britain and France. In just a few months in 1955 Nasser successfully scared the hell out of US and Western Europe by turning to the Soviet bloc in search of weapons and raising the prospect that the canal might fall under Communist control.
Britain and France, fearing an economic catastrophe and also furious at the latest demonstration that their colonial power was fading out, took an aggressive step - they decided to invade the Suez to protect the canal. Israel, already looking for an excuse to topple Nasser, volunteered to join. The only ally they neglected to tell was a horrified US, not so much for the attempt to overthrow Nasser, but for the damage caused to Arab diplomacy.
Arab oil nations promptly banned all oil shipments to Britain and France and the US also declined to intervene. The Europeans had to retreat and with them retreated their influence in this oily region, region as volatile and slippery as oil.
1967 Six Day War
The Six-Day War, also known as the 1967 Arab-Israeli War, the Third Arab-Israeli War, Six Days' War, an-Naksah (The Setback), or the June War, was fought between Israel and Arab neighbors Egypt, Jordan, and Syria. The nations of Iraq, Saudi Arabia, Kuwait, and Algeria also contributed troops and arms to the Arab forces.
1970 War of Attrition
The War of Attrition was a limited war fought between the Israeli military and forces of the Egyptian Republic, the USSR and the Palestine Liberation Organization from 1967 to 1970. It was initiated by the Egyptians as a way of recapturing the Sinai from the Israelis, who had been in control of the territory since the mid-1967 "Six-Day War". The hostilities ended with a ceasefire signed between the countries in 1970 with frontiers remaining in the same place as when the war began.
1973 Yom Kippur War
The Yom Kippur War, Ramadan War or October War, also known as the 1973 Arab-Israeli War and the Fourth Arab-Israeli War, was fought from October 6 to October 26, 1973, between Israel and a coalition of Arab states led by Egypt and Syria. The war began with a surprise joint attack by Egypt and Syria on the Jewish holiday of Yom Kippur. Egypt and Syria crossed the cease-fire lines in the Sinai and Golan Heights, respectively, which had been captured by Israel in 1967 during the Six-Day War.
1982 Lebanon War
The 1982 Lebanon War, called by Israel the Operation Peace of the Galilee and later colloquially also known in Israel as the First Lebanon War, began June 6, 1982, when the Israel Defense Forces invaded southern Lebanon. The Government of Israel ordered the invasion as a response to the assassination attempt against Israel's ambassador to the United Kingdom, Shlomo Argov by the Abu Nidal Organization.
1987-1993 First Intifada
The First Intifada (1987 - 1993) (also "war of the stones") was a mass uprising against Israeli military occupation, that began in Jabalia refugee camp and spread to Gaza, the West Bank and East Jerusalem.
Palestinian actions took a number of forms, including civil disobedience, general strikes, boycotts on Israeli products, graffiti, and barricades, but it was the stone-throwing demonstrations by youth against the heavily-armed Israeli Defense Forces that brought the intifada international renown.
Over the course of the first intifada, an estimated 1,100 Palestinians and 160 Israelis were killed in the fighting. Another 1,000 Palestinians were assassinated by their own people as alleged collaborators.
1982-2000 South Lebanon conflict
During the 1982–2000 South Lebanon conflict Hezbollah waged a guerrilla campaign against Israeli forces occupying Southern Lebanon. It ended with Israeli withdrawal in accordance with 1978's United Nations Security Council Resolution . Given that prior Arab Israeli wars were characterized by either Israeli victory or UN-enforced ceasefire, this is often regarded as a success of Hezbollah, which was able to extend its control of Southern Lebanon.
Iran-U.S. Hostage Crisis (1979-1981)
On November 4, 1979, radical Iranian students seized the United States Embassy complex in the Iranian capital of Tehran. The immediate cause of this takeover was the anger many Iranians felt over the U.S. President Jimmy Carter allowing the deposed former ruler of Iran, Shah Reza Pahlavi, to enter the U.S. for medical treatment. In Iran, this was believed to be an opening move leading up an American-backed return to power by the Shah. The crisis which followed this seizure created a near state of war, ruined Jimmy Carter's presidency, and began an environment of hostility between America and Iran which continues to this day.
Ever since oil was discovered there in 1908, Iran had attracted great interest from the West. The British played a dominant role there until World War II, when the Soviet Union joined them in fighting to keep the Germans out. Until 1953, the United States mostly stayed on the sidelines, advocating for an independent Iran under the leadership of the young king, Reza Shah Pahlavi. But that year, fearing that charismatic prime minister Mohammed Mossadegh might be moving Iran closer to Moscow, the CIA directed an operation to oust him and consolidate power under the Shah.
With a steady flow of oil from the ground and military equipment from the U.S., the Shah led Iran into a period of unprecedented prosperity. But growing resentment against an uneven distribution of wealth and the westernizing influence of the United States led to a confrontation with Islamic clergy in 1963. The Shah effectively put down the uprising, sending its leader, an elderly cleric named Ruhollah Khomeini, into exile in Iraq. Though no one knew it at the time, Iran's Islamic revolution had begun.
Though fear of an American-backed return by the Shah was the publicly stated reason, the true cause of the seizure was the long-standing U.S. support for the Shah's government. Reza Pahlavi ruled Iran from 1941 to 1979, with a brief period of exile in 1953 when he fled to Italy due to a power struggle with Prime Minister Mohammed Mossadegh. Because Mossadegh's policies and announcements created concern over access to Iranian oil, oil prices, and possible Soviet influence in Iran, the United States and British intelligence services aided Iranian military officers in a coup to overthrow the Prime Minister. After his return to power, the Shah established a very close alliance with the United States. The U.S. supplied weapons, training, and technical knowledge that aided the Shah in modernizing his country. However, the Shah ruled as a dictator, using SAVAK, his secret police, to terrorize his political enemies. The Shah was opposed by both the Marxist Tudeh Party, and by fundamentalist Islamic leaders who believed his policies and his reliance on the Americans were corrupting Iranian society.
By 1978, unrest against the Shah had escalated into a violent uprising against his authority called the Iranian Revolution or the Islamic Revolution. On January 16, 1979, the Shah fled into exile for a second time, traveling to various countries before finally entering the U.S. for cancer treatments in October, 1979. After the Shah's departure, the Ayatollah Ruholla Khomeini returned from his own exile in France to take power over Iran. Khomeini was a leading member of the Shia Muslim clergy. The Shia are a subset of the Islamic faith, and form the majority of the Iranian population. Vital parts of this Islamic Revolution were propaganda and demonstrations against the United States and against President Jimmy Carter. After the Shah's entry into the U.S., the Ayatollah Khomeini called for anti-American street demonstrations. On November 4, 1979, one such demonstration, organized by Iranian student unions loyal to Khomeini, took place outside the walled compound housing the U.S. Embassy.
Members of these Iranian student unions scaled the walls of the U.S. Embassy on November 4, 1979, taking 63 Americans hostage. Three more U.S. citizens were taken prisoner at the Iranian Foreign Ministry, for a total of 66 hostages. Within three weeks, the hostage-takers released several women and African-Americans, leaving 53. A sick hostage was later released, reducing the number to 52. Throughout their captivity, the hostages were paraded in front of television cameras, often blindfolded or hooded. Though the hostage-takers were not members of the Iranian government or military, their obvious, publicly-stated loyalty to Khomeini and the Islamic government created an international crisis.
Immediate official American reactions involved halting oil exports from Iran, expelling many Iranians living in the U.S., and freezing Iranian government assets and investments. Many Americans called for military action to free the hostages, but the situation became much more complicated when the Soviet Union invaded Iran's neighbor, Afghanistan, in order to crush an Islamic-based rebellion against that nation's Marxist government. President Carter now faced a crisis with oil-rich, but hostile Iran, a new Cold War crisis with the Soviets, and a growing sense in his own country that he was increasingly showing himself to be an ineffective leader.
Partly to counter the criticisms against him, as well as to free the hostages, President Carter ordered a military rescue mission code-named "Operation Eagle Claw." This mission was a total and complete failure resulting in the deaths of eight U.S. military personnel. On April 24, 1980, units of the rescue force landed in the Iranian desert to refuel their aircraft before heading to Tehran. A confusing series of events took place at this refueling point, including failed equipment, and desert sandstorms which reduced visibility. As a result of these problems, the rescue was called off. During the retreat, one of the helicopters collided with a transport airplane, causing an explosion which killed eight members of the rescue mission. Several of the burned American bodies were later part of grisly street demonstrations protesting the abortive U.S. "invasion" of Iran. A second rescue attempt was planned but never implemented, largely due to equipment failure.
On July 27, 1980, the former Shah died. Then, in September, 1980, President Saddam Hussein of Iraq invaded Iran. These two events led the Iranian government to enter into negotiations with the U.S., with Algeria acting as a mediator.
Domestically, the Hostage Crisis ruined President Carter's presidency. Unfortunately for him, the one-year anniversary of the embassy takeover fell on the same day as the United States Presidential election of 1980. Carter lost that election to former California Governor Ronald Reagan, who, though never publicly criticizing Carter over the hostage crisis, promised to rebuild American power and influence in the world.
The negotiations between Iran and the U.S. culminated in a deal that released the hostages and the eight billion dollars worth of frozen Iranian assets. Moments after Ronald Reagan took the oath of office on January 20, 1981, the hostages were allowed to fly out of Iran after 444 days of captivity.
The legacy of this prolonged crisis continue to affect Iranian-U.S. relations over 25 years later. Iran and the U.S. still do not have official diplomatic relations with each other, and both nations hurl hostile accusations at each other over issues such as the American invasion of Iraq and Iranian nuclear research. The June, 2005 election of Mahmoud Ahmadinejad as President of Iran opened up old wounds. Several of the former hostages contend that Ahmadinejad was one of the leaders of the student groups that seized the embassy in 1979. The Iranian government denies he had anything to do with the seizure, but it is another sign that tensions remain over the entire episode.
1980-1988 Iran-Iraq war
The region has witnessed many wars, the biggest being the eight-year war between Iran and Iraq (September 1980 to August 1988). The battle of attrition was fought on the ground and in the air, and Iraq even used chemical weapons.
Iraq started the war by claiming the Shatt al-Arab (a 200 km river formed by the confluence of the Euphrates and the Tigris in the town of al-Qurnah in southern Iraq. Iraq was supported by the kingdoms of Saudi Arabia, UAE and Kuwait. Iran was backed by Syria and Libya.
There were no clear losers or gainers in the war, though both sides gutted many of each other's oil facilities.
It was of great cost in lives and economic damage - more than a million Iraqi and Iranian soldiers as well as civilians are believed to have died in the war with many more injured and wounded.
The Soviet Invasion of Afghanistan (1979-1989)
Afghanistan had remained one of the poorest and least developed nations. Following a cycle of coups and countercoups, Babrak Karmal emerged and was backed by the Soviets. In December 1979, Soviet Union sent 80,000 troops to support the regime. Armed resistance by militant Muslims (Mujahedin) received support & training from U.S. Over a million refugees fled to Pakistan The mountainous terrain was ideal for guerrilla warfare and Soviet forces could not eradicate Afghan opposition The Soviets withdrew in 1988-89.
The Gulf War (1990) - Iraq's Invasion of Kuwait
Iraq invaded the Kuwait (both were friends in the Iran-Iraq war) in August 1990 on a rather flimsy ground. It alleged that Kuwait was drilling oil in manner that sucked oil from under Iraqi territory!
The war however was a short-lived after the US-led coalition backed Kuwait. The war was shown live on the CNN. The troops of many nations, from far and wide fought along side to defeat the Iraqi forces. Among them was the Islamic state of Pakistan. Most Middle East Arab nations fought against Iraq. These included Iraq's allies during the Iran-Iraq war, namely Saudi Arabia and UAE. Others like Syria, Turkey, Oman also were the part of the coalition that helped in driving the Iraqis out of Kuwait. Many non-Arab nations like France, Italy, Libya, Denmark, Canada, New Zealand also fought against the Iraq.
India didn't take part in the war; perhaps thinking that staying neutral was the best option, but it did extend to the USA refueling facilities for its aircrafts. Iraq was made to retreat within a 100 days.
Organization Of Petroleum Exporting Countries (OPEC)
An Icing On The Cake Of Conflict
The Organization of the Petroleum Exporting Countries (OPEC) was created at the Baghdad Conference in Iraq in September 1960. The founding members of the organization were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. These five states were later joined by eight other countries: Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Gabon (1975). Ecuador and Gabon withdrew from the organization in 1992 and 1994, respectively.
The purpose of OPEC, as with any cartel, is to limit/regulate supplies in the hope of keeping prices high. The oil industry has been plagued by production booms and falling prices ever since Colonel Drakes’ discovery of oil in Pennsylvania in 1859. Just as the major oil companies colluded from the 1920’s to the1960’s to prevent prices (and profits) from falling, members of OPEC meet on a regular basis to set production levels in the hope of maintaining prices. The essential nature of oil (no substitutes) coupled with its limited number of suppliers make it the ideal product for cartelization.
The rise of OPEC is tied to a shifting balance of power from the multinational oil companies to the oil producing countries. Lacking exploration skills, production technology, refining capacity, and distribution networks, oil producing countries were unable to challenge the dominance of the oil companies prior to World War II. Although Mexico wrested control of its oil industry from foreigners in 1938, it quickly receded from the lucrative international market due to insufficient capital for investment.
However, about the time of World War II the oil exporting countries began seeking better terms in their oil contracts. In 1943 Venezuela signed the first “fifty-fifty principle” agreement which provided oil producers with a lump sum royalty plus a fifty-fifty split of profits (i.e., selling price minus production cost).
In the late 1940’s Venezuela revised their tax system to capture a greater share of the oil profits. The oil companies responded to this move by shifting oil purchases to countries with cheaper contracts. In response, Venezuela contacted Arab producers and encouraged them to demand similar “fifty-fifty” deals and reform their tax systems. Saudi Arabia, seeing the value of the fifty-fifty contract and understanding the power of acting collectively, quickly demanded and received a similar contract from Aramco.
In 1947, the Iranian Parliament passed a law demanding the termination of previous agreements with Anglo-Iran (referred to as Anglo-Persian prior to 1935 and British Petroleum after 1954). When negotiations failed to lead to a compromise, Iranian Prime Minister Mossadegh nationalized oil operations in May 1951. The collapse of the oil industry pushed the economy into chaos.
Domestic opponents, aided by the American Central Intelligence Agency, were able to topple Mossadegh in 1953. A new British-Iranian agreement was signed the following year. The newly restored Shah of Iran became a pillar of American middle east policy until the Iranian Revolution in 1979.
While world oil demand grew during the 1950s, they were outpaced by the growth in production. The problem was exacerbated by the fact that the “fifty-fifty” deals were based on “posted” prices rather than “market” prices. Given that posted prices were fixed, oil producing countries had an incentive to grant additional concessions to expand oil revenue. Market prices became divorced from their calculations. The increases in supply drove market prices even further down and eroded the profits of the multinational oil companies.
The downward push on prices led to a policy debate in Washington. Although the United States had been a net exporter of oil until 1948, the expansion of cheaply produced oil from the middle east led to rising imports. As prices fell, domestic producers simply could not compete. Moreover, the Eisenhower Administration concluded (as the Japanese had prior to World War II), dependence on foreign oil placed the country’s national security in jeopardy. The U.S. responded with an import quota. The quota kept domestic prices artificially high and represented a net transfer of wealth from American oil consumers to American oil producers. By 1970, the world price of oil was $1.30 and the domestic price (U.S.) of oil was $3.18 (Danielsen 1982, 150).
During its first decade, OPEC was able to halt the free fall in prices. However, it was not able to raise prices as most members had hoped. In general, commodity cartels (such as the tin cartel or the coffee cartel) collapse because there are many substitutes for the product or there are many potential producers of the product. A cartel-inspired rise in coffee prices triggers some consumers to switch to hot tea (i.e.demand falls) and encourages new producers to enter the market (i.e., supply rises). Both the fall in demand and the rise in supply put downward pressure on prices and undermine the cartel’s effectiveness. Cartels also suffer from a “collective action problem.” That is, every member has an incentive to cheat on the cartel by increasing its production. For example, an individual country such as Iran can increase its oil revenues by expanding production as long as all other members stick to their quotas. However, all members have a similar incentive to increase production — i.e., they all want to free ride on the collective good. The incentive to cheat implies that cartels are traditionally short-lived enterprises.
Although the essential nature of oil and the limited number of suppliers worked in OPEC’s favor, the power of the organization remained limited during the first decade for four reasons. First, OPEC’s share of world production was only 28% in 1960. By 1970, this figure would rise to 41%. Second, the fact that the oil reserves in the ground belonged to the multinational corporations (except in Iran) limited the power of the oil producing countries. Third, the oil exporting countries were desperate for revenue to fuel economic development. Fourth, important political divisions existed in the Arab world. The revolutionary government of Nasser repeatedly clashed with the Saudi monarchy. Iraq threatened to invade its neighbor Kuwait (it was deterred by the deployment of British forces). Iran and Saudi Arabia vied for leadership of the Middle East.
The First Oil Shock
OPEC’s fortunes began to shift in the early 1970’s as rising demand for oil began to outstrip production. Moreover, the oil- producing states began demanding further concessions. Muammad al-Qaddafi, after seizing power in military coup in Libya, demanded and received a 20 percent increase in royalties, a “55-45” profit sharing agreement, and tax concessions (Yergin 1991, 580). This move triggered a series of new demands that ratcheted up oil prices and oil-exporting countries’ profits.
As the world oil market tightened, the Arab world became more vocal in calling for use of the oil weapon to achieve their economic and political objectives. This was most acutely realized in the oil embargo during the 1973 October War between Egypt and Israel. Saudi Arabia refused to increase production in order to halt rising prices unless the U.S. backed the Arab position. Arab oil ministers than agreed to an embargo to further their political objectives. Production would be cut by 5 percent per month until the West backed down. States adopting a “friendly” position (from the Arab perspective) would be unaffected. When Nixon publicly proposed a $2.2 billion military aid package for Israel, Arab states began an oil embargo against the United States (later expanded to the Netherlands, Portugal, South Africa, and Rhodesia).
The new official price was agreed among OPEC member countries: $11.65. Oil prices jumped from about $3.00 a barrel before the war to $11.65. The embargo, which did not end until the Syrian-Israeli disengagement was secured, drove the world economy into deep recession. Gross national product in the U.S. declines by 6 percent in the following two years. The Japanese economy shrinks for the first time since the Second World War
The Second Oil Shock
The Second Oil Shock began when the Iranian Revolution and ensuing halt of Iranian petroleum exports had caused panic and speculations in the world oil market. When the Carter administration placed an embargo on the importing of Iranian oil into the United States and froze Iranian assets in response to the hostage taking, Iran counter-attacked by prohibiting the exporting of Iranian oil to any American firm.
Moreover, the outbreak of the war between Iran and Iraq in 1980 shook the oil market as well. In its initial stage, the Iran-Iraq war abruptly removed almost 4 million daily barrels of oil from the world market—15 percent of total OPEC output and 8 percent of free world demand. In 1980 OPEC representatives (with the exception of Saudi Arabia) agreed to set prices at thirty-six dollar a barrel.
However, the impact of the Second Oil Shock turned out to be short-lived. The influence of OPEC appeared to be diminishing as the production by Mexico, Britain, Norway, and other non-OPEC countries and Alaska was continuing to increase. Anxious to increase market share, they were making significant cuts in their official prices. As a result, OPEC’s share of world output quickly fell by 27 percent. Oil revenues for OPEC members plunged after 1981. Saudi Arabia, the largest producer in OPEC, saw its oil revenues plunge from $113.2 billion in 1981 to just $20.0 billion in 1986.
Although the Second Oil Shock sent the developed world into recession, the most serious long run impact of the second shock was in the developing world. During the 1970s, the oil producing states placed a significant portion of their revenue into commercial banks because they simply could not spend the money as fast as it came in. The commercial banks loaned this money to developing countries which hoped to repay the loans with revenue from their rapidly growing economies. However, the developed world responded to the Second Oil Shock by rapidly raising interest rates which deepened the on-going recessions. The developing countries saw exports fall, oil import prices rise, and interest payments skyrocket. The result was the debt crisis which first appeared in Mexico in 1982 and quickly spread throughout the developing world. In the “lost decade” of the 1980’s, years of hard fought economic gains were wiped out. From 1980-88, the real income of American workers fell by 40 percent (Lairson and Skidmore 1993, 277).
The Third Major Price Spike
The third major price spike occurred in 1990-91 when Iraq invaded its fellow OPEC member Kuwait. Iraq had long claimed the territory of Kuwait; in 1961 it appeared Iraq was going to swallow its tiny neighbor until the dispatch of troops by the British. In 1991 the on-going territorial conflict was exacerbated by two oil issues: (1) the continued pumping of oil by Kuwait from a field located under both countries; and (2) low oil revenues for Iraq which made paying off its war debts (to Kuwait and others) difficult. A successful invasion would expand reserves, augment Iraqi power in OPEC, raise oil prices and revenue, and annul war debts to Kuwait.
Iraq gambled that the U.S. response would be political and economic. However, the Iraqi invasion triggered a military response which was supported by an unlikely coalition of western, developing, communist, and Arab states. The sudden removal of two major producers, Kuwait and Iraq, could have sent oil prices through the ceiling. However, Saudi Arabia expanded production by literally millions of barrels per day to keep prices from rising a great deal. Since the war, Iraq’s refusal to comply with United Nations resolutions had resulted in the continuation of an oil embargo.
The Future of OPEC
Oil prices are rapidly rising and are at an all time high. It is clear that demand for oil will continue to rise. Moreover, the lack of major oil finds in the last twenty years implies that supply will grow only slowly, if at all. Unless a cheap alternative source of energy is discovered in the meantime, this combination of effects will create an environment conducive to cartelization.
Current Day Conflicts
War is now incessant and ubiquitous, but its nature has changed. Conflicts are, not so much between nations, but rather between ethnic, linguistic, and religious groups.
Today’s conflicts are not arising from head-on clashes between the great powers, but rather through the escalation of local conflicts sustained by great power involvement. Today's great powers -- led by the United States and China -- are developing or cementing close ties with favored suppliers in the Middle East, Central Asia, and Africa. In many cases, this entails the delivery of large quantities of advanced weaponry, advisors, and military technology -- as the United States has long been doing with Saudi Arabia, Kuwait, and the United Arab Emirates, and China is now doing with Iran and Sudan.
Nor should the possibility of a direct clash over oil and gas between great powers be ruled out. In the East China Sea, for example, China and Japan have both laid claim to an undersea natural gas field that lies in an offshore area also claimed by both of them. In recent months, Chinese and Japanese combat ships and planes deployed in the area have made threatening moves toward one another; so far no shots have been fired, but neither Beijing nor Tokyo have displayed any willingness to compromise on the matter and the risk of escalation is growing with each new encounter.
The likelihood of internal conflict in oil-producing countries is also destined to grow in tandem with the steady rise of energy prices. The higher the price of petroleum, the greater the potential to reap mammoth profits from control of a nation's oil exports -- and so the greater the incentive to seize power in such states or, for those already in power, to prevent the loss of control to a rival clique by any means necessary. Hence the rise of authoritarian petro-regimes in many of the oil-producing countries and the persistence of ethnic conflict between various groups seeking control over state-oil revenues -- a phenomenon notable today in Iraq (where Shiites, Sunnis, and Kurds are battling over the allocation of future oil revenues) and in Nigeria (where competing tribes in the oil-rich Delta region are fighting over measly "development grants" handed out by the major foreign oil firms).
When we reach the point where the world's oil-hungry economies are competing for insufficient supplies of energy, oil will become an even stronger magnet for conflict than it already is.
Oil considerations dominate and guide US foreign policy decisions. Therefore, as a result of this realisation, if one were to entertain some lurking doubts about stated US public policy – democracy, freedom, etc – that could be understandable, after reconsidering US military actions in Afghanistan and Iraq. In contrast and in contradiction to an apparent benign and enlightened foreign policy rhetoric, its militaristic adventures are simply neo-colonial wars.
This numerical phrase, 9/11 and the catch-all phrase “war on terror” have repeatedly been recited and relied on by the Bush administration to justify military action in Afghanistan and Iraq as well as the imposition of other draconian measures on some of its own citizens, e.g. the Patriot Act, and other homeland security measures. However, it has now been clearly demonstrated in all manner of ways, and even by Bush’s belated grudging acknowledgment – that before the US invasion of Iraq there was no training of, or support for terrorists in Iraq; that Iraq was not intent on attacking the US. WMDs (Weapons of Mass Destruction) non-existence speaks volumes about a lying and deceptive US administration. The term “terrorism” has now become a fashionable tool or a tactic that some unscrupulous countries are now using, taking their cue from the US, to crush or suppress any legitimate dissent or opposition within or outside their borders.
Consider these statements: -
“Hussein has not developed any significant capability with respect to weapons of mass destruction. He is unable to project conventional power against his neighbors.”
–Colin Powell on February 24, 2001
“Simply stated, there is no doubt that Saddam Hussein now has weapons of mass destruction,”
–Dick Cheney on August 26, 2002.
“Our conservative estimate is that Iraq today has a stockpile of between 100 and 500 tons of chemical weapons agent. That is enough agent to fill 16,000 battlefield rockets. Even the low end of 100 tons of agent would enable Saddam Hussein to cause mass casualties across more than 100 square miles of
territory, an area nearly five times the size of Manhattan.”
–Colin Powell at the UN on February 5, 2003
“Intelligence leaves no doubt that Iraq continues to possess and conceal lethal weapons.”
–George W. Bush on March 18, 2003
“We are asked to accept Saddam decided to destroy those weapons. I say that such a claim is palpably absurd.”
–Tony Blair, Prime Minister 18 March 2003
“Saddam’s removal is necessary to eradicate the threat from his weapons of mass destruction.”
–Jack Straw, British Foreign Secretary 2 April 2003
“Before people crow about the absence of weapons of mass destruction, I suggest they wait a bit.”
–Tony Blair 28 April, 2003
These facts can not leave any sensible and rational person in doubt about the levels of dishonesty, collusion, fabrication and calculated deception that led the invasion of Iraq in 2003.
Decision makers in the US bombed, invaded, occupied and caused at lowest estimate over 30,000 innocent civilian deaths in Iraq’s oil war. These are the human consequences of the way in which powerful interests pursue the ends of dominance over global oil supplies.
From Cold War Era To Energy War Era
Speaking at a conference named “Summit on Energy Security” in US, the chairman of the US Senate Foreign Relations Committee, Richard Lugar, characterized Venezuela, Iran and Russia as “adversarial regimes” that were using energy supplies as “leverage” in foreign policy.
Lugar said: “We are used to thinking in terms of conventional warfare between nations, but energy is becoming a weapon of choice for those who possess it.”
Senior Russian figures were quick to dismiss Lugar’s admonition as “groundless Russophobia”, but the US administration is already opening new battle fronts against Russia in the energy war.
With rivalry building up over the Caspian pipeline, Russia has been under pressure to find an alternative evacuation route for Kazakh oil. For Greece and Bulgaria too, picking the Russian proposal meant ignoring US entreaties for an alternative US-backed non-Russian pipeline system that was already on the drawing board - an Albania-Macedonia-Bulgaria route for southwestern Europe.
Last year, while visiting Ankara and Athens, US Secretary of State Condoleezza Rice publicly warned Turkey and Greece about any collaboration with Russia that would facilitate Russia’s tight grip on European energy supply. “It is quite clear that one of the [US] concerns is that there could be a monopoly of supply from one source only, from Russia,” Rice said.
Afganistan - Crucial Geostrategic Position
Thus 9/11 could be considered as horrific blowback from the CIA having funded, armed and encouraged Muslim fundamentalist and Taliban regime. However, with about 15 Saudis directly involved in the 9/11 attack the nexus of the attack raises even more questions beyond the assumption that one man stationed in remote Afghanistan, Osama bin Laden, almost unilaterally orchestrated an attack which US intelligence remained ineffective to stop. So Afghanistan and Iraq are essentially oil related military operations pursued by the US in an on-going oil-war,
There is a massive triangle within which the world’s largest supplies of oil and natural gas are to be found. Within the area of this triangle are to be found regions and countries such as:
• The Caspian Sea (with surrounding countries Kazakhstan, Turkmenistan, Iran and Azerbaijan)
• Central Asia (including Kazakhstan, Uzbekistan, Tajikistan, Kyrgyzstan, Turkmenistan, Afghanistan, Pakistan and into China and India)
• The Persian and Arabian Gulf states (Oman, United Arab Emirates, Qatar, Saudi Arabia, Iraq and Iran)
These areas - this triangle of oil and natural gas - hold the world’s greatest reserves of oil and natural gas, which are mirrored, in the global politics of oil.
The US bombed, and has occupied Afghanistan pursuant to a declared policy of pursuing Osama bin Laden. There is a complementary logic of US military occupation of Afghanistan. If the US is to become less dependent on Arab oil, its focus will be the oil and natural gas resources of Central Asia and the Caspian Sea regions. However, access to these alternative supplies of oil requires pipeline routes. Afghanistan’s geographical position serves well, the oil and natural gas pipeline transit requirements for a route from Central Asia to the Arabian Sea. For the US to establish and keep the pipeline functional, Afghanistan will have to be politically tamed. This political taming of Afghanistan translates in military terms to having an occupational force in Afghanistan, effectively for the policing of the pipeline against sabotage and controlling the regime in Kabul to be accommodative to US oil interests. Viewed in this light, one can more realistically understand sustained US military action in Afghanistan. If Turkmenistan and Uzbekistan are to transit natural gas and oil independently of Russia, then stability in Afghanistan is vital from an oil geostrategic perspective. Although Afghanistan has very little oil, its strategic importance resides in being a country central for transit to port. US acceptance of Pakistan’s dictatorship under Musharraf is better understood when one views Pakistan’s location next to the Arabian Sea and Afghanistan’s proximity next to Pakistan – how is the oil to reach port if not through Pakistan? In 2005 Russia briefly disrupted gas supplies via a pipeline transiting gas through Ukraine. This action demonstrates the kind of strategic calculations one would then encounter if significant supplies destined for the US had a reliance on lines that traversed geographical territory that was under Russian or other potentially threatening control.
Lessons Not Learned
Now the attention is focussed on Iran and there is a sudden and unexplained fear that it might develop some objectionable weapons that might pose a threat to someone in the future. North Korea, which already has nuclear weapons and long range missiles - and isn't exactly a friendly place - is not deemed a threat. The cynic can be forgiven for thinking there is some other motive for these military moves: could it be oil?
The Uranium Information Centre in Melbourne, Australia, confirms that there are 31 countries with nuclear power plants. There are a further 7 seeking to acquire nuclear capabilities. The US bellicose position on Iran, in attempting to justify another oil war against Iran would have to be seen in this light. A 32nd country having nuclear capabilities will not be a threat to the US.
The crux of matter here again, is oil.
American Army : Global Oil-Protection Service
It has been argued that oil-protection role is a peculiar feature of the war in Iraq, where petroleum installations are strewn about and the national economy is largely dependent on oil revenues. But Iraq is hardly the only country where American troops are risking their lives on a daily basis to protect the flow of petroleum. In Colombia, Saudi Arabia, and the Republic of Georgia, U.S. personnel are also spending their days and nights protecting pipelines and refineries, or supervising the local forces assigned to this mission. American sailors are now on oil-protection patrol in the Persian Gulf, the Arabian Sea, the South China Sea, and along other sea routes that deliver oil to the United States and its allies. In fact, the American military is increasingly being converted into a global oil-protection service.
China, India Join The Race
In less than a year, India and China have managed to confound analysts around the world by turning their much-vaunted rivalry for the acquisition of oil and gas assets in third countries into a nascent partnership that could alter the basic dynamics of the global energy market. The position of Asia couldn't be more abject. A continent which hosts the world's largest producers and fastest growing consumers of energy is forced to play second fiddle, relying on institutions, trading frameworks and armed forces from outside the region in order to trade with itself. Such a situation makes for unstable politics and bad economics, not to speak of atrocious geography. Central Asia is close to China and Iran but the U.S. has spent the better part of a decade trying to make sure pipelines carrying oil and gas from there only go westward. Gas pipelines connecting Iran to India make financial sense but the threat of U.S. sanctions means this project might not get off the ground. If the 21st century is to be an 'Asian century', Asia’s passivity in the energy sector is slated to end in near future and will thus further exacerbate the race.
While efforts are under way to seal nuclear deals with the US and France to generate electricity, India's efforts to tie up gas resources as another alternative to fossil fuels have gathered momentum.
Following the decision by Myanmar to supply gas to China, India is now making swift maneuvers to ensure that the US$1 billion Myanmar-Bangladesh-India (MBI) gas pipeline materializes. And significantly, India has virtually decided to join the US-backed Turkmenistan-Afghanistan-Pakistan (TAP) pipeline, in part because of the geopolitical difficulties involved in the $7 billion Iran-Pakistan-India (IPI) pipeline that Washington opposes.
Oil & Terrorism - A Strategic Partnership
Terrorist have taken out 25 per cent of Nigeria's sweet crude since late February and the daily joust between Washington and Tehran is providing splendid returns to those who had invested in oil stocks.
Just as things seemed to be calming down in the delta region of Nigeria after a spate of kidnappings and insurgent attacks, the militant group calling itself the Movement for the Emancipation of the Niger Delta — MEND — announced recently to all who would listen that it was planning new violence against oil facilities in the region.
If a rag-tag bunch of militants in Nigeria are accurately reading the tea leaves in an oil-brimmed cup, imagine what Al Qaeda and the pan-global martyrs of terror have in store?
There is a greater lead-filled premium now for oil-related and economic targets.
Terrorists are ready to throw their explosive spanners into the machineries of global trade. They know the drill. There is tremendous potential here to cause pandemonium and cross-border tensions. Targeting energy infrastructures will be far more efficacious and less scornful than the indiscriminate slaughter of civilians.
Economic targets offer the best returns with less risks. Stock markets will be depressed, inflation will set in, bankruptcies will proliferate, and people will starve.
There are Maoist guerillas in Nepal, ethnic insurgents in Burma, Al Qaeda-inspired militants in Islamic nations and assorted purveyors of violence in every nook and corner where there are power plants, ports, retail stores, trading depots, factories, banks and transborder pipelines.
If Iran burns, or if neighboring Iraq descends further into anarchy, expect scattered strikes against oil installations, ports and power plants the world over. There will be more trouble in Nigeria and Ecuador. Hotspots will get hotter with conflicts spreading far and wide.
If Iran gets hit, the anti-American Venezuelan President Chavez may deliberately divert oil supplies to nations like China, depriving the US of 15 per cent of its oil imports.
Oil Discovery - A Curse For Africa
The United States and other developed countries are increasingly turning to West Africa in their scramble for oil, but for Africa the oil boom is like a disease that creates poverty, conflict and corruption.
That’s the diagnosis of Nicholas Shaxson, an Africa expert whose book Poisoned Wells - The Dirty Politics of African Oil tours some of Africa’s poorest and most violent hot-spots.
From simmering conflicts in the Niger Delta to civil war in Angola to rampant corruption in Gabon and Equatorial Guinea, Shaxson contends that these countries are worse off than they were before they struck it rich.
Some countries in Africa draw in more money from oil than they do from foreign aid but tend to get poorer and more violent over time, while their rulers jet off on shopping excursions to Paris.