OIL SHOCK REDUX

Is OPEC the Real Cartel —or the Transnationals?

by Vilosh Vinograd, WW4 Report


At its Vienna summit, the Organization of Petroleum Exporting Countries (OPEC) decided Feb. 1 against pumping more oil—in an open rebuff to Washington at a time when fears of a world economic downturn are adding to concern over rising prices. In defense of its decision, the 13-nation cartel said that global supplies are adequate and that speculation and geopolitical jitters—not oil availability—are setting prices. It also actually cited the impending downturn as a reason to put less oil on the market. "In view of the current situation, coupled with the projected economic slowdown...current OPEC production is sufficient to meet expected demand for the first quarter of the year," read the official statement from the summit.

OPEC president Chakib Khelil of Algeria told reporters that US economic conditions "will probably have some impact on demand." In the prelude to the summit, Iran's oil minister, Gholam Hussein Nozari, told reporters: "we think there should be cutting in production."

President Bush, meanwhile, led the lobbying for an output increase. "Everyone is fully aware that having a reliable and steady and predictable supply of oil is a benefit to the global economy," said White House spokesman Tony Fratto in response to OPEC's announcement. "We hope that they understand that their decisions on oil production have a real impact on the economy," he said.

Including Iraq, which is not under quotas, total OPEC output is estimated at about 31.5 million barrels a day—about 40% of daily world demand, believed to be around 85.5 million barrels. The formal "OPEC-12" (minus Iraq) output ceiling is around 30 million barrels a day. (AP, Feb. 1)

Oil prices hit a symbolically cataclysmic $100 a barrel over the new year, and Bloomberg wrote that the "fastest-growing bet" on the New York Mercantile Exchange in is that the price of crude will double to $200 a barrel by the end of the year.

Petroleum prices have tripled over the last five years, with gasoline prices reaching record heights last summer. But for all the hand-wringing and exhortations to OPEC, these are unprecedentedly good times for the transnational oil companies.

ExxonMobil, the world's largest publicly listed company, has reported a record-breaking $40.6 billion in net profits for 2007—up from $39.5 billion in 2006, which was the largest annual profit for any US company in history. (Money Times, Feb. 3)

Geopolitics, not Geology

The theorists of "Peak Oil" foresee an imminent end to the exorbitant profits and petroleum profligacy on which North American society is predicated. It is true that Exxon's profits in the third quarter last year were 10% lower than the same period a year earlier—which was attributed to rising prices at the gas pump finally taking an impact on consumption.

It is also true that the remaining new fields that the majors are finding are are in hard-to-reach places—like the bottom of the sea, where drilling and pumping costs far more than it does on land.

But the most significant reality is that the oil fields the transnationals do control account for only about 6% of the world's known reserves. State-owned companies such as Saudi Aramco and the National Iranian Oil Company have the rest—and, with oil costs above $90 a barrel, they are increasingly independent of investment from the globe-spanning majors. (SF Chronicle, Feb. 1)

Only 34% of global production is directly controlled by the trans-nationals, and terms for the exploitation of state-owned resources have been getting less favorable for the last generation. As Le Monde Diplomatique noted last March:

Under the traditional concession, companies owned the oil fields. But since the 1970s that model has disappeared outside the United States and a few European countries such as Britain, the Netherlands and Norway. Elsewhere, in Colombia, Thailand and the Gulf, the last contracts that granted concessions before the great wave of nationalisations during the 1970s have ended or are about to end. In Abu Dhabi, the authorities have already notified the majors that three concessions, due to expire in 2014 and 2018, will not be renewed.

And the state oil companies are generally only accepting the trans-nationals as 40% partners. The most significant reversal of this trend would be the Iraq oil law, which would open the country's undeveloped fields (the big majority) to private investment on favorable terms. But, as Le Monde notes, Washington committed a "miscalculation" in thinking it could easily push this through Iraq's parliament: "[T]he US had no difficulty in rewriting the occupied country's constitution to suit itself, but all its attempts to overturn the 1972 law that nationalised oil and revert to a system of concessions have so far failed."

ExxonMobil and ConocoPhillips abandoned their heavy crude oil projects in Venezuela's Orinoco Belt last year rather than cede majority ownership and operating control to the state-owned oil company PDVSA.

In an editorial in its Jan. 5 issue—just as oil was hitting $100 a barrel—The Economist wrote, "Oil keeps getting more expensive—but not because it is running out." Instead, the magazine which is considered sacred guardian of the neoliberal order blamed "peak nationalism."

"Oil is now almost five times more expensive than it was at the beginning of 2002," The Economist noted.

It would be natural to assume that ever increasing price reflects ever greater scarcity. And so it does, in a sense. Booming bits of the world, such as China, India and the Middle East have seen demand for oil grow with their economies. Meanwhile, Western oil firms, in particular, are struggling to produce any more of the stuff than they did two or three years ago. That has left little spare production capacity and, in America at least, dwindling stocks. Every time a tempest brews in the Gulf of Mexico or dark clouds appear on the political horizon in the Middle East, jittery markets have pushed prices higher. This week, it was a cold snap in America and turmoil in Nigeria that helped the price reach three figures.

No wonder, then, that the phrase "peak oil" has been gaining ground even faster than the oil price. With each extra dollar, the conviction grows that the planet has been wrung dry and will never be able to satisfy the thirst of a busy world.

But The Economist places the blame with "geography, not geology."

Yet the fact that not enough oil is coming out of the ground does not mean not enough of it is there... For one thing, oil producers have tied their own hands. During the 1980s and 1990s, when the price was low and so were profits, they pared back hiring and investment to a minimum. Many ancillary firms that built rigs or collected seismic data shut up shop. Now oil firms want to increase their output again, they do not have the staff or equipment they need.

Worse, nowadays, new oil tends to be found in relatively inaccessible spots or in more unwieldy forms. That adds to the cost of extracting oil, because more engineers and more complex machinery are needed to exploit it—but the end of easy oil is a far remove from the jeremiads of peak-oilers. The gooey tar-sands of Canada contain almost as much oil as Saudi Arabia. Eventually, universities will churn out more geologists and shipyards more offshore platforms, though it will take a long time to make up for two decades of underinvestment.

Finally, The Economist cuts to the chase—revealing that the real answer lies in neither geology nor geography, but geopolitics:

The biggest impediment is political. Governments in almost all oil-rich countries, from Ecuador to Kazakhstan, are trying to win a greater share of the industry's bumper profits. That is natural enough, but they often deter private investment or exclude it altogether. The world's oil supply would increase markedly if Exxon Mobil and Royal Dutch Shell had freer access to Russia, Venezuela and Iran. In short, the world is facing not peak oil, but a pinnacle of nationalism.

So The Economist backs up the conventional wisdom that the oil majors want what is best for humanity, that consumer needs are best served by the "free (read: unregulated) market," and that the roots of the crisis lie with efforts by countries in the global south to reclaim sovereign control over the resources under their own soil.

This is, of course, a recipe for endless war. Not only is rolling back the wave of oil nationalizations a long-standing goal of the transnationals and their allies going back at least to the CIA-backed Iranian coup of 1953, but there are pressing geostrategic concerns related to the long-term preservation of US global hegemony.

As far back as 1992, the Pentagon "Defense Planning Guide" drawn up by Paul Wolfowitz and Scooter Libby stated that the US must "discourage advanced industrial nations from challenging our leadership or even aspiring to a larger regional or global role." The oil resources of the Persian Gulf were recognized as critical to this aim: "In the Middle East and Southwest Asia, our overall objective is to remain the predominant outside power in the region and preserve US and Western access to the region's oil."

In this light, the fact that Beijing's national company PetroChina is rapidly gaining on Exxon as the world's largest oil company takes on a significance far beyond mere commercial competition. "Access to oil" ultimately means access to military power, so what is really at issue here is control of oil as a key to global power.

Last November, Defense Secretary Robert Gates, after meeting in Beijing with his counterpart, Gen. Cao Gangchuan, told a news conference he had raised "the uncertainty over China's military modernization and the need for greater transparency to allay international concerns." In its coverage of the meeting, the New York Times precisely echoed the language of the 1992 Defense Planning Guide: "Pentagon officials describe China as a 'peer competitor'..." An analysis on the visit in the newspaper quoted Michael J. Green of the Center for Strategic and International Studies saying, "If you are sitting in the Pentagon, China is a potential peer competitor."

Understand this, and the reckless, criminal adventure in Iraq becomes at least comprehensible. So does the war drive against Iran, whose growing sway over the Shi'ite-dominated Baghdad regime could render the US "victory" in Iraq horrifically Phyrric. So too becomes the mutual Sudan-Chad proxy war—in which a government with PetroChina contracts and one with Exxon contracts sponsor guerilla movements on each others' territory. The destabilization campaign against the Hugo Chávez regime in Venezuela comes into focus as a struggle over ancillary but still globally significant oil reserves in the traditional US "backyard." The popular notion that the West's contest with OPEC is fundamentally about securing low oil prices on behalf of consumers dematerializes like a mirage.

Oil industry insiders understand that there is actually a strong tendency in exactly the other direction. OPEC needs to keep prices under control to assure their dominance of "market share," while Western governments and transnationals need high prices in order to line up the investment and political will to expand production to areas beyond OPEC's control—from Alaska to the Caspian Basin.

The Public Strikes Back?

There are signs of a public backlash to the oil majors' free ride now that the Bush administration enters its endgame. The Foundation for Taxpayer and Consumer Rights is calling for Congressional action to bring unregulated energy markets under public control. "Exxon is making more than $75,000 a minute around the clock on crude oil prices that are at unjustifiable levels," read their press release. "Oil companies have opposed legislation to regulate electronic energy trading, even as they deflect blame by pointing to such markets as the reason for crude oil prices that remain above $90 a barrel... Exxon's $40.6 billion annual profit and Chevron's $17.1 billion come at the cost of an economy tipping into recession... While Exxon makes the largest corporate profit by any corporation, ever, families pay $60 and more for a gas station fill-up and Northeasterners are shelling out more than $2,000 on average for heating oil."

"The 2007 profit of just the three U.S.-based major oil companies comes to $70 billion," said FTCR research director Judy Dugan, research director of the nonprofit, nonpartisan FTCR. "Yet Americans are deeper in consumer debt than ever in large part for high energy costs." (FTCR, Feb. 1)

Tyson Slocum of Public Citizen, wrote in a September 2006 report, "Hot Profits and Global Warming: How Oil Companies Hurt Consumers and the Environment":

The high prices we are now paying are simply feeding oil company profits and are not being invested in sustainable energy solutions. Since January 2005, the largest five oil companies—ExxonMobil, BP, Shell, ChevronTexaco and ConocoPhillips—spent $112 billion buying back their own stock and paying dividends, and have an extra $59.5 billion in cash, while their investment in renewable energy pales in comparison. For example, BP, the so-called renewable energy leader, in 2005 posted $38.4 billion in stock buybacks, dividend payments and cash, but plans to invest two percent of that amount on solar, wind, natural gas and hydrogen energy.

And this despite an aggressive ad campaign emphasizing BP's supposed commitment to renewable energy, a new logo that looks like a pretty green flower, and the dropping of the word "petroleum" from all advertising—except for the catch-phrase "beyond petroleum." Of course, BP remains fundamentally an oil company, and still officially stands for British Petroleum. In fact, Public Citizen finds, the oil majors are doing their best to keep alternativesoff the market:

Under the current market framework, oil companies aren’t making the investments necessary to solve our addiction to oil and never will. With $1 trillion in assets tied up in extracting, refining and marketing oil, their business model will squeeze the last cent of profit out of that sunk capital for as long as possible. The oil industry's significant presence on Capitol Hill ensures that the government does not threaten their monopoly over energy supply through funding of alternatives to oil. For example, energy legislation signed by President Bush in August 2005 provides $5 billion in new financial subsidies to oil companies.

And FTCR's Dugan says the 2007 energy bill didn't do much better, failing to include any provision to recoup some $14 billion in oil company tax subsidies over five years. "The major oil companies' incredible profits, boosted by multibillion-dollar tax subsidies to the industry, are ultimately clobbering taxpayers," she said Dugan. "Given the rising federal debt, today's babies will still be paying the Exxon tab."

Iraq and the GWOT: It's the Oil, Stupid!

Bush may have been sincere in his exhortations to OPEC to boost production and thereby lower prices. High prices may now be costing the administration and its oil industry friends more than is deemed acceptable. But in any case, the fundamental thing at this stage of the game is no longer the price of oil but control of oil. Mohammed Mossadeq's nationalization of Iran's oil in 1952 was the first major assault on Western control of oil. It was turned around with the following year's CIA coup. The 1956 Suez crisis briefly interrupted oil flows from the Middle East and affected prices, but posed no challenge to Western control. The founding of OPEC in 1960 was a first step towards reasserting sovereign control of oil, but the fields still largely remained in private Western hands even if host governments would now dictate production levels in a coordinated manner so as to influence prices.

The 1969 coup d'etat in Libya brought the radical Col. Moammar Qadaffi to power and led to first the nationalization of Libya's oil and then the imposition of production-sharing agreements on terms favorable to the host government. Analyst James Akins writing in Foreign Affairs, the journal of the elite Council on Foreign Relations, called the Libyan demands of 1970 "a flash of lightening in a summer sky." But far worse was yet to come with the October 1973 Arab-Israeli war.

As Israel's tanks rolled into the Sinai, Iraq nationalized the Exxon and Mobil holdings in the Basra oil fields and launched a drive for a full Arab embargo of the US. "Radical" regimes like Iraq and Libya won over "conservative" ones like Saudi Arabia and the Gulf mini-states. The Organization of Arab Petroleum Exporting Countries (OAPEC), an independent body within OPEC, was formed—and the embargo was on. In December, the price shot up to a then-unprecedented $11.65 per barrel (not adjusted for inflation)—an increase of 468% over the price in 1970. For the first time, producing nations had used the "oil weapon" as a lever of influence against the West. The first "oil shock"—then known as the "energy crisis"—was a wake-up call for consumers, governments and transnationals alike.

Then, as now, oil company profits went through the roof. As long lines formed at gas stations across the USA, Exxon's profits went up 29%; Mobil's 22%; and Texaco's 23%. But fearing loss of control, the transnationals pressured the White House to cede to Arab demands. The major shareholders in Aramco (the Saudi-based Arabian American Oil Company, then consisting of Exxon, Mobil, Texaco and Chevron) sent a memorandum to President Nixon warning of dire consequences if the US did not halt aid to Israel.

While demonization of the Arabs was widespread in the US media, the oil companies were also a target of public ire. In 1974, executives were called to testify before the Senate Subcommittee on Investigations, where James Allen, Democrat of Alabama, posed the question: "Would it be improper to ask if the oil companies are enjoying a feast in the midst of famine?" Litigation was also launched against the oil majors, but they had made little progress when OPEC decided to boost production again in 1975, leveling off prices—the war now long over, and maintenance of market share emerging as an imperative in response to Capitol Hill talk of "energy independence."

The US Strategic Reserves and UN International Energy Agency were established in response to the crisis. But these measures failed to prevent the next "oil shock" when the Iranian Revolution toppled the Shah in 1979. The price per barrel more than doubled between 1979 and 1981, and prices at the pump jumped 150%. The combined net earnings of Exxon, Mobil, Chevron, Gulf and Texaco increased by 70% between 1978 and 1979, while 1980 was the most lucrative year in the oil industry's history up to that point. The US and its Gulf allies gave former rival Iraq a "green light" to invade Iran and cut the ayatollahs down to size.

In the Reagan-era Pax Americana, Saudi Arabia and the Gulf states kept the price low so as to undermine the struggling Iranian regime. But now even conservative allies of the West were asserting oil sovereignty. 1980 saw the Saudi regime's nationalization of Aramco—a tipping point in fast-eroding Western control of global oil.

The subsequent generation was one of both retreat and consolidation for the transnationals. Even as their control over global oil contracted, they retrenched their forces internally. The "Seven Sisters" of the 1970s (Exxon, Mobil, Chevron, Gulf, Texaco, BP and Shell, by their contemporary names) are now four, following the mergers of Mobil with Exxon, and Gulf and Texaco with Chevron—or perhaps five, if we consider ConocoPhillips as having joined their ranks.

Oil prices dropped in the weeks after 9-11, even as theories mounted that the US invasion of Afghanistan was aimed at encircling the Caspian Basin oil reserves. But some observers recognized even then that the real struggle was over the Persian Gulf reserves, the most strategic on the planet by far. On Oct. 18, 2001, Michael Klare wrote in The Nation:

The geopolitical dimensions of the war are somewhat hard to discern because the initial fighting is taking place in Afghanistan, a place of little intrinsic interest to the United States, and because our principal adversary, bin Laden, has no apparent interest in material concerns. But this is deceptive, because the true center of the conflict is Saudi Arabia, not Afghanistan (or Palestine), and because bin Laden's ultimate objectives include the imposition of a new Saudi government, which in turn would control the single most valuable geopolitical prize on the face of the earth: Saudi Arabia's vast oil deposits, representing one-fourth of the world's known petroleum reserves.

Klare stated, rather obviously: "A Saudi regime controlled by Osama bin Laden could be expected to sever all ties with US oil companies and to adopt new policies regarding the production of oil and the distribution of the country's oil wealth—moves that would have potentially devastating consequences for the US, and indeed the world, economy. The United States, of course, is fighting to prevent this from happening."

With the invasion of Iraq—which sits on nearly half the Persian Gulf reserves—it was correctly perceived that the struggle for the planet's most critical reserves was truly underway, and the third oil shock arrived. The price has escalated along with the level of insurgent violence ever since. The Great Fear driving the prices ever higher is that the US could lose control of Iraq, the conflagration could generally engulf the Middle East, and that Iran or jihadist elements far more intransigent than Saddam Hussein could emerge as new masters of the Gulf reserves.

An effective anti-war position must entail deconstructing the propaganda of "national security" on the oil question, and breaking with the illusion that elite concerns and consumer concerns coincide. Iraq and its various "sideshows" such as Afghanistan are the battlegrounds in a strategic struggle for control of oil as the foundation of continued US global dominance (or "primacy," in the argot of wonkdom). This struggle will not mean lower oil prices for US citizens—but their sons and daughters dying on foreign shores, fueling Islamist terrorism and hatred of the US in a relentless vicious cycle.

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RESOURCES

Foundation for Taxpayer and Consumer Rights
http://www.consumerwatchdog.org

FTCR press release via
Fox Business, Feb. 1

Public Citizen Energy Program
http://www.citizen.org/cmep

OPEC: No boost in oil output
AP, Feb. 1

Exxon gains from Soaring Oil Prices, beats own Record
Money Times, Feb. 3

Big Oil has trouble finding new fields
San Francisco Chronicle, Feb. 1

The oil price: Peak nationalism
The Economist, Jan. 3

Hydrocarbon Nationalism
by Jean-Pierre Séréni
Le Monde Diplomatique, March 2007

The Geopolitics of War
by Michael Klare
The Nation, Oct. 18, 2001

See also:

IRAQ: EXPOSING THE CORPORATE AGENDA
by Antonia Juhasz, Oil Change International
WW4 Report, November 2007
http://www.ww4report.com/node/4611

PEAK OIL AND NATIONAL SECURITY
A Critique of Energy Alternatives
by George Caffentzis
WW4 Report, September 2005
http://www.ww4report.com/node/1027

From our weblog:

Oil: $200 a barrel by year's end?
WW4 Report, Jan. 27, 2008
http://www.ww4report.com/node/4986

China emerges as "peer competitor" —in race for global oil
WW4 Report, Nov. 8, 2007
http://ww4report.com/node/4649

Consumers get revenge on Exxon ...a little
WW4 Report, Nov 2, 2007
http://ww4report.com/node/4621

Specter of "hydrocarbon nationalism" drives Iraq war
WW4 Report, March 27, 2007
http://ww4report.com/node/3453

Exxon quits Venezuela
WW4 Report, June 27, 2007
http://ww4report.com/node/4136

From our archive:

Petro-oligarchs wage shadow war
WW4 Report, Dec. 22, 2001
http://ww4report.com/static/13.html#shadows2

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Special to World War 4 Report, Feb. 1, 2008
Reprinting permissible with attribution