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Thomas W. O’Donnell The University of Michigan Center for Middle East and North African Studies

| New School, NYC GPIA | Economics of Security Workshop | 17 Nov 2006 |. The Global Political Economy of Oil & U.S. Persian-Gulf Policy. Thomas W. O’Donnell The University of Michigan Center for Middle East and North African Studies Michigan Center for Theoretical Physics

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Thomas W. O’Donnell The University of Michigan Center for Middle East and North African Studies

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  1. | New School, NYC GPIA | Economics of Security Workshop | 17 Nov 2006 | The Global Political Economy of Oil & U.S. Persian-Gulf Policy Thomas W. O’Donnell The University of Michigan Center for Middle East and North African Studies Michigan Center for Theoretical Physics Residential College - Social Science Program twod@umich.edu, http://www.TomOD.com twod@umich.edu | TomOD.com

  2. Motivation for Oil Study Motivations to study political-economy of oil: • Lots of theories: • - Interests & empires vs. multilateralism & liberal markets* ? • - New “Great-Power Rivalry” & “Great Game” a la WW I ? • - “Resource Wars” (mercantilism) ? • - One global capitalist class ? • - “Peak Oil” & “End-of-Oil” ? • - Rentier states or new internal markets ? • - Global warming & environment ? • - Oil & Iraq War ? • - Oil & Iran crisis ? • - Political-Economic Basis for U.S. Persian-Gulf Policy • * E.U. Commission Green Paper, March 2006 Central question: hegemony / U.S. role  twod@umich.edu | TomOD.com

  3. Motivation for Oil Study “Hegemony”, “Empire” ? Radical categories of 1960-70s … now mainstream academic and foreign-policy debates Hegemony or Empire?Niall FergusonFrom Foreign Affairs, September/October 2003Two Hegemonies: Britain 1846-1914 and the United States 1941-2001. Patrick Karl O'Brien & Armand Clesse. Aldershot, U.K.: Asghate, 2002, 365 $84.95Summary: Did the United Kingdom's influence in its heyday match the United States' today? Two Hegemonies provides an answer; but "empire" might be the better word.Niall Ferguson is Herzog Professor of History at the Stern School of Business, New York University, and a Senior Research Fellow of Jesus College, Oxford. He is the author of Empire: The Rise and Demise of the British World Order and the Lessons for Global Power. twod@umich.edu | TomOD.com

  4. Method for Oil Study • Theoretical framework: • Two aspects in study of ‘oil order’: • In itself (economics, market, reserves, technology, …) • Actors: IOCs, Independents, NOCs, states • Market-control institutions & practices • In relation to other things • Domestic: Transportation & energy infrastructure, lobbies, … • Geo-Strategy: Oil hegemony brings hegemony-in-general • Corollary: States’ & companies’ interests are simultaneously: • Complementary (too often seen in vulgar-economic, voluntarist way) • Contradictory (this often missed) twod@umich.edu | TomOD.com

  5. Theory Framework for Oil Study • Political-Economy - Generally: • - Oil markets (natural resource, generating rents) have two major issues: • Inherent volatility • Security of supplies • - Market-control institutions and practices • Used to limit competition; regulate production levels and prices; • insure more consistent profitability, reliability • - Forms of control have to be consistent with: • Existing property relations • Existing technology, communication, transport • Role of state vs. enterprises • The Old Oil Order (1890s-1970s) • The NewGlobalized Oil Order twod@umich.edu | TomOD.com

  6. Theory Framework for Oil Study • The Old Oil Order (1890s-1970s) • - 2nd Industrial Revolution, Mass Production Era, Monopoly-Capitalist Era • Vertically integrated international oil companies (majors) • Contained volatility of market within • Limited competition to ends of companies • point of sale • finding oil fields • Owned ‘concessions’ • Standardization, efficiency, quality control • Cartel agreements to control supplies, control price • U.S. held global surplus – the swing producer • Used to enforce concessions and prices, for war time, etc. • U.S. energy czar, allocation and price controls • Broke up Standard Oil • The NewGlobalized Oil Order twod@umich.edu | TomOD.com

  7. Theory Framework for Oil Study • The NewGlobalized Oil Order (1980s …) • Security • IEA SPRs • Global-north oil • Supply cushion • Volatility • Price bands • Saudi swing state • Futures market • Role of states • U.S. Hegemon, OECD / IEA counter-cartel, IEF(S), … • Role of force twod@umich.edu | TomOD.com

  8. OUTLINE: • I. POLITICAL ECONOMY • FACTS of oil sector • Geography | Reserves | Technology | Consumption | Price History • HISTORY from cartels to globalization • Property relations | Security of supply & demand | Volatility | Cartels & control institutions • CRISIS ? • Projections | China & India | Productive capacity • II. U.S. PERSIAN-GULF & GEO-STRATEGY • THE GLOBALIZED OIL ORDER allies & “rogues” • U.S. v. E.U. | Four aims of U.S. policy in Persian Gulf | Oil, war and global warming twod@umich.edu | TomOD.com

  9. Oil facts: Demand Absolute levels Note: Information Revolution hasn’t yet revolutionized energy (Report#:DOE/EIA-0484(2002) twod@umich.edu | TomOD.com

  10. Oil facts: Demand Oil % constant. Why?? Where are the resources? … twod@umich.edu | TomOD.com

  11. 1. FACTS of oil sector - WORLD ENERGY USE: What portion of the world’s energy is coal, natural gas, oil, nuclear, renewables? What regions of the world consume this energy---now and in the future? - WORLD RESERVES: Where are most of the oil, natural gas reserves? - WORLD PRODUCTION CAPACITY: Which countries have the technology to pump the most oil? - WORLD SUPPLY & PRICE: How have global supply and price varied? Which countries have controlled the supply? (Can anyone?) - ABOUT US: Domestic consumption, domestic sources, imports, dependence vs. independence, … US has the most oil-centric and auto-centric economy (least sustainable), biggest oil user! - Facts about international organizations (IEF, IEA, OPEC, etc.) twod@umich.edu | TomOD.com

  12. Oil facts: Reserves Precondition for hegemony …natural concentration - M.E. tar sands bump more so… twod@umich.edu | TomOD.com

  13. Oil facts: Reserves 60+% world reserves Mideast: 90% Persian Gulf Hegemony possible twod@umich.edu | TomOD.com

  14. Oil facts: Reserves Field distribution by size Another form of concentration: Gulf oil mostly in “super giants” / “elephantine” fields By: Matt Simmons@ Rice U. conf, 2004. Source: Professor Steven Dutch, University of Wisconsin - Green Bay. twod@umich.edu | TomOD.com

  15. 1. FACTS of oil sector - WORLD ENERGY USE: What portion of the world’s energy is coal, natural gas, oil, nuclear, renewables? What regions of the world consume this energy---now and in the future? - WORLD RESERVES: Where are most of the oil, natural gas reserves? - WORLD PRODUCTION CAPACITY: Which countries have the technology to pump the most oil? - WORLD SUPPLY & PRICE: How have global supply and price varied? Which countries have controlled the supply? (Can anyone?) - ABOUT THE US: Domestic consumption, domestic sources, imports, dependence vs. independence, … US has the most oil-centric and auto-centric economy (least sustainable), biggest oil user! - ABOUT INTERNATIONAL ORGANIZATIONS (OPEC, IEA, IEF, etc.) twod@umich.edu | TomOD.com

  16. Oil facts: Production • - Biggest • producers: • 1.Saudi A. • 2. U.S. • 3. Russia • 4. Iran • 5 Mexico • (1, 2, 3 vary) • M. East • biggest region • US / Russia • pump fast • on small • reserves • N. Hemisphere • ½-depleted, • but not ME. • - Non-Mideast pumps at ~max. rate (Hubbert’s Peak: US was ½-emptied out by 1971) Source: EIA twod@umich.edu | TomOD.com

  17. Oil facts: Production * Saudis huge, yet 30-40% spare capacity < 2003 unique! *Iran now 2nd * Iraq ‘could’ be 2nd Saudi Arabia. 10-15 yrs + $20-40 billion (ref: US Council on For. Relations, pre-war report ). Source: IEA Global-north depletion will exacerbate M. E. concentration twod@umich.edu | TomOD.com

  18. Oil facts: U.S. Imports ASIDE: US ‘Dependence’on Mid East? ~ 60% US oil Imported U.S. gets all Western Hemisphere’s oil From Mideast: 2000: 21%, 2005: 17% (10-12% of total demand) Hence,U.S. fractional “dependence” very low means .to pump… twod@umich.edu | TomOD.com

  19. OUTLINE: • I. POLITICAL ECONOMY • FACTS of oil sector • Geography | Reserves | Technology | Consumption | Price History | • HISTORY: From cartels to globalization • Property relations | Security of supply & demand | Volatility | Cartels & control institutions • CRISIS • Projections | China & India | Productive capacity • II. U.S. GEO-STRATEGY • THE GLOBALIZED OIL ORDER allies & “rogues” • U.S. v. E.U. | Four aims of U.S. policy in Persian Gulf | Oil, war and global warming twod@umich.edu | TomOD.com

  20. History: how globalized order was slowly established • The NewGlobalized Oil Order (1980s - …) • Security • IEA SPRs • Global-north oil • Supply cushion • Volatility • Price bands • Saudi swing state • Futures market • Role of states • U.S. Hegemon, OECD / IEA counter-cartel, IEF(S), … • Role of force twod@umich.edu | TomOD.com

  21. $ 95 3rd oil shock twod@umich.edu | TomOD.com

  22. $ 95 Average IEA Crude Oil Import Price 3rd oil shock $ 50 Projections: DoE EIA Annual Energy Outlook Feb. 2006 twod@umich.edu | TomOD.com

  23. First oil shock: • 1973 Arab OPEC Embargo Five Phases of the Global Oil Order World Oil Market and Oil Price Chronologies: 1970 – 2005 IEA data 1957 – 1973 1974 – 1986 1986 – 2000 2001 - 1937–1956 | Carter | Reagan | Bush | Clinton | Bush WWII 1947 1951 1979 1967 1990 1997-98 Oil Shock I Oil Shock II Oil Shock III twod@umich.edu | TomOD.com

  24. OIL SHOCK 1973/1974 • - Previous embargoes never worked when US opposed (WWII, 1956, 1967) Role of U.S. surplus was key • - Texas Railway Commission • - West Texas as “Saudi Arabia” of pre-1971 era. • - Hubbert’s Peak for US 48 states. • Role of U.S. state organizationally (from FDR’s oil board/ H. Ickes) • - Prices rise over 4x • - OPEC states enforced nationalization of “concessions” • Ended colonial vestige in property rights • - Undermined vertically integrated monopolist enterprises • - Undermined Great Cartel (more later) * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations) twod@umich.edu | TomOD.com

  25. OIL SHOCK 1973 - Urgent need for US / OECD* regain control. • Kissinger proposed two U.S./OECD measures: • 1. Invasions to seize MENA oil fields .British declassified, Feb, ’04 • Later: 1980 U.S. abandon Nixon Doctrine for Carter Doctrine. • Reagan, Bush Sr., Clinton begin stationing • U.S. troops & material / bases … today  * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations) twod@umich.edu | TomOD.com

  26. OIL SHOCK 1973 - Urgent need for US / OECD* regain control. • Kissinger proposed two U.S./OECD measures: • 1. Invasions to seize MENA oil fields .British declassified, Feb, ’04 • 2. Counter-cartelof consuming nations: • “change the objective conditions” Kissinger • International Energy Agency (IEA) • Members keep 90-day Strategic Petroleum Reserves (SPR) See  • Immediately implemented, highly successful • for embargo nullification … but organization lagged. • OECD policy: let Inflation eroded price gradually. (Yergin) • 3. Develop new N. Hemisphere oil * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations) twod@umich.edu | TomOD.com

  27. Kissinger plan worked: strategic reserves (SPR) of IEA counter- cartel negated embargo weapon Implies threat: … what might US/OECD do militarily over 90+ days if embargo again An added SPR role: … IEA pressured OPEC to observe US/IEA price range by adjusting pumping rates. 1980-90’s: US/OECD’s IEA Vs. OPEC “confrontational” relationship. twod@umich.edu | TomOD.com

  28. Kissinger’s role … the planner and organizer of IEA: * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations) twod@umich.edu | TomOD.com

  29. Kissinger’s role … the planner and organizer of IEA / oil hegemony: * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations) twod@umich.edu | TomOD.com

  30. Second & Third shocks: • 1979 – IEA organized • Business model … • Spot & Futures mkt • 1985 • Recog’d OPEC • “New World Order” • Collusion begins: • 1st Price Band slide Five Phases of the Global Oil Order World Oil Market and Oil Price Chronologies: 1970 – 2005 IEA data IEA data 1957 – 1973 1957 – 1973 1974 – 1986 1974 – 1986 1986 – 2000 1986 – 2000 2001 - 2001 -- 1937–1956 1937–1956 | Carter | Reagan | Bush | Clinton | Bush | Carter | Reagan | Bush | Clinton | Bush 1990 1997-98 WWII 1947 1951 WWII 1947 1951 1979 1979 1967 1967 1990 1997-98 Oil Shock I Oil Shock II Oil Shock III Oil Shock I Oil Shock II Oil Shock III Themes: 1. OIL PRICE SWING STATES” 2. ;US Vs. GB & France 3. US-OECD Vs. OPEC 4. US Surplus till 1970 twod@umich.edu | TomOD.com

  31. Two IEA-OPEC price-band agreements: - 1986: $17 (+/- ~4) G H W Bush & King negotiated - 2000: $27 (+/- ~5) Sec. Richardson / London mtg. - 2006: ?? third agreement ? ? ? twod@umich.edu | TomOD.com Source: Brad Bourland, CFA, Chief Economist, Samba. At NY Energy Forum, June 2006

  32. Four Phases of the Global Oil Order World Oil Market and Oil Price Chronologies: 1970 – 2005 IEA data 1957 – 1973 1974 – 1986 1986 – 2000 2001 - 1937–1956 | Carter | Reagan | Bush | Clinton | Bush WWII 1947 1951 1979 1967 1990 1997-98 Oil Shock I Oil Shock II Oil Shock III Confrontation  Confidence building - New OPEC generation - Gulf War coalition - Vienna deal  IEF begins - US Sec. Energy Richardson - 1997-1998 Asian crisis-2000 swings “bad for business” - 2000 London mtg. price - IEF upgrade proposed Osaka by Prince Abdullah … then crises 2001 twod@umich.edu | TomOD.com

  33. OUTLINE: • I. POLITICAL ECONOMY • FACTS of oil sector • Geography | Reserves | Technology | Consumption | Price History | • HISTORY from cartels to globalization • Property relations | Security of supply & demand | Volatility | Cartels & control institutions • CRISIS • Projections | China & India | Productive capacity • II. U.S. GEO-STRATEGY • THE GLOBALIZED OIL ORDER allies & “rogues” • U.S. v. E.U. | Four aims of U.S. policy in Persian Gulf | Oil, war and global warming twod@umich.edu | TomOD.com

  34. The new, globalized system is facing a potential “energy” crises U.S., IEA, OPEC et al forced to “reinvent” the system, or lose it What are these crises which drive Washington, London et al? twod@umich.edu | TomOD.com

  35. Four Phases of the Global Oil Order World Oil Market and Oil Price Chronologies: 1970 – 2005 IEA data 1957 – 1973 1974 – 1986 1986 – 2000 2001 - 1937–1956 | Carter | Reagan | Bush | Clinton | Bush WWII 1947 1951 1979 1967 1990 1997-98 Oil Shock I Oil Shock II Oil Shock III Crises: 1.1990s- 2001 Saudi crises, in “Central bank of oil” 2. 2003 Demand up + no cushion  data Requires: - FDI (IEA: “$5 T by 2030) - Better market control (IEFS, JODI, …) - ‘Iraq & Iran online’ but not ‘rogues’ -> invasion & confrontation Two views: Multilateralism & liberal markets vs. nationalism & empires ? twod@umich.edu | TomOD.com

  36. Globalized order New characteristics: • Demand-crisis & low buffer threatens “cheap oil” • Demand up 60% between 2001-2030 • Requires huge oilinvestments (e.g., ‘Cheney’ Plan) $5T, mainly in nationalized Middle East oil • “Consumer-Producer Dialogue.” Economic-control Institution (Bush Sr. / Clinton / Richardson) data  twod@umich.edu | TomOD.com

  37. Recall: oil’s % forecasted constant In spite of 1st--world efficiencies … where is the expansion? … twod@umich.edu | TomOD.com

  38. China demand huge factor … surpassed Japan ’03, & US by 2020 has gone auto-centric; economic & military reasons. … being reduced to historical dilemma of Japan, Germany very precarious choice – must import any additional oil! Middle-class sizes ~determine relative growth potential US solution: an oil offensive… twod@umich.edu | TomOD.com

  39. Globalized order • IEA + OPEC  IEFS, Institutionalized in Riyadh Features: • Parallel standing Secretariats (ministers & majors) • Market information (JODI) in tight-market volatility • Transparency of proven reserves, cost, production rates, … • New MENA, perhaps Mexico, FDI laws. • Global meetings, 92 energy secretaries twod@umich.edu | TomOD.com

  40. U.S. Persian-Gulf Policy: • Multi-lateral order, fungible oil, open market, FDI, … • No ‘rogue’ oil states • Historical high absorbers • Persian-Gulf States as protectorates • Sanctions on • FDI from ba’athists (13 yrs) • FDI from Iran clerics (11 yrs now) • Political-economic basis: • Growth in Persian-Gulf importance • Eliminate high absorbers’ behavior WHY?  • Implementation • Iraq War • U.S.-Iran crisis • open Caspian for investment • FSU pipelines to go south, etc. twod@umich.edu | TomOD.com

  41. Energy/Oil Basic Facts: Supply Persian-Gulf states’ importance Pumping now mainly from sates with ½- depleted reserves … trajectory twod@umich.edu | TomOD.com

  42. Energy/Oil Basic Facts: Supply Persian-Gulf states’ importance U.S. & Russia #2 & #3 producers -- unsustainable – Gulf States’ production% will grow What are Iraq/ Iran’s importance to global system? twod@umich.edu | TomOD.com

  43. Energy/Oil Basic Facts: Supply Iran’s Importance Iran twod@umich.edu | TomOD.com

  44. Energy/Oil Basic Facts: Supply Iran & Iraq’s importance Iraq Iran U.S., E.U., IEA, program for development M.E. oil … twod@umich.edu | TomOD.com

  45. Expand pumping capacity / Foreign Direct Investments (FDI) push: Special Gulf role: From “Cheney Energy Plan”: market % growing Spare capacity mitigate disruption Foreign investments already, under Clinton twod@umich.edu | TomOD.com

  46. Why Iraq (Iran)?Much pressure to develop fields: Very similar graphs were made by: Council on Foreign Affairs pre-invasion commission; (included later- occupation official Jas. Garner, …) 2030 2030 2030 Cumulative Investments (billion $US) 2020 2020 2020 2010 2010 2010 Production (million barrels/day) Slow production expansion Rapid production expansion (Source: IEA Energy Investment Conf. late ‘04) Restoration of production capacity IEA Reference Scenario N.B. 46 twod@umich.edu | TomOD.com

  47. New directions for pipelines – Now to go south vs. north into FSU Cheney says: Source: V. Pres. D. Cheney’s White House Energy Report 2000 - Iran and Iraq importance … twod@umich.edu | TomOD.com

  48. Political-Economy of U.S. Iraq (& Iran) policy: • Persian-Gulf oil importance will continually rise • U.S. must remain the Persian-Gulf hegemon • Regional hegemony brings global hegemony-in-general • That is. over rivals (E.U. & China examples) • Not, about U.S. home market – wants oil fungible • Not merely about U.S. IOCs – trumped by geo-strategy • Iranian clerical regime now most significant threat to • this U.S. Gulf hegemony (with Saddam’s demise) twod@umich.edu | TomOD.com

  49. U.S. strategic assessment on Iran: • If Iran were allowed to absorb some $30 to 50 billions in FDI, clerical regime would become rich and powerful actors in the Region and OPEC. • Same U.S. assessment of Iraqi ba’ath from 1991. • Would use oil against Saudi, Kuwaiti, UAE royals, new Iraqi state, disrupting U.S. regional hegemony. twod@umich.edu | TomOD.com

  50. U.S. strategic assessment on Iran: • Hence, block with sanctions • … but sanctions not sustainable (e.g., Iraq ). • Hence, regime change: • - Iran & Iraq as U.S. protectorates as rest of Gulf • - Then permit to become oil-rich too Implementation: twod@umich.edu | TomOD.com

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