Petroleum & Politics

1. Introduction

1.1 Background

Since the beginning of the use of oil as source of energy the international politics have been tremendously influenced by different events and conflicts that have taken place over the last five decades. As the global demand for oil is growing faster than the supply the price will increase dramatically in the future and the tension among countries will increase.

The ability of oil exporting countries to apply correct policies to benefit from oil is helping to promote development and reduce poverty.

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1.2 Aims

The purpose of this report is to analyse the evolution of oil over the lasts decades. It focuses on the oil exporting countries examining the importance of oil to reduce poverty and promote development.

Another purpose is to evaluate the possible future confrontation between the two largest oil consumers: China and US. And review the impact of oil on the environment.

1.3 Scope

The report analyses the history of the OPEC focusing on the most important events that have influenced its policies over the past five decades. It also evaluates the development and poverty reduction in three major oil exporting countries: Venezuela, Nigeria and Iran. It examines the different use of policies in these countries to benefit from the oil production.

The report also focuses on the battle for oil that China and US are carrying out and the impact of oil consumption on the environment.

2. Organisation of the Petroleum Exporting Countries

‘The OPEC is a permanent intergovernmental organisation with headquarters in Vienna consisting of currently twelve member countries (Algeria, Angola, Ecuador, Libya, Iran, Iraq, Kuwait, Nigeria, Qatar, Saudi Arabia and United Arab Emirates, Venezuela)’ (OPEC, 2009).

Historically there has been a huge controversy to define the OPEC as a cartel or as an oligopoly. According to Liefman (1977, p.7) cartels are ‘voluntary agreements between associations of independent enterprises of similar type to secure a monopoly of the cartel’. It is possible to argue that in the early 1970’s the OPEC acted as a cartel when its members agreed to control the production of oil in order to increase the price to damage the occidental countries that were supporting Israel in the Israeli-Arab war.

However, as Huettner and Alhajji (2000) explain future conflicts between OPEC countries such as the Iraq- Iran war in 1980 or the invasion of Kuwait by Iraq in 1990 created differences that reduced the cooperation and trust among its members. In this context the organisation became an oligopoly, which was defined by Needham (1969, p.49) as ‘a situation in which the number of producers is small enough for the policy decision of a single seller to affect the other firms noticeably’.

Since its origins back in 1960 the OPEC have had a tremendous power to influence the world economy by adopting pricing policies for oil. According to the EIA (2008) the average oil production of the OPEC members during the 1960’s was approximately 45% of the world total, in the 1970’s it raised to an average of nearly 53%. On October 1973 it declared an oil embargo to the US and Western Europe which lasted until March 1974 (US Department of State, 2009). As a result of the embargo oil prices multiplied by four and inflation and unemployment increased dramatically all around the world.

A new oil crisis took place on the beginning of the 1980’s with the Iranian Revolution and the Iran-Iraq war. As Williams (2007) espouses these conflicts resulted in a new increase of oil prices from US$14 in 1978 to US$35 in 1981.

Williams (2007) argues that the inefficiency of the OPEC to control the prices motivate Western countries to explore new deposits of petroleum and reduce their dependence from the supply of the OPEC.

According to Rodriguez (2009) the decrease of the demand motivated the OPEC members to look for solutions and they decided to impose maximum production quotas in order to stabilize the prices. The quotas did not work at the beginning because all the members wanted to produce more so the OPEC decided to establish new production quotas in relation with the amount of oil reserves of each member. As a result of the quotas the price of oil lowered during the late 1980’s from US$35 to US$20.

Rodriguez (2009) explains that in 1990 Kuwait was producing more than it was allowed according to its quota. Iraq accused Kuwait of steal its oil and invaded it. The US with the support of other Western Countries, Saudi Arabia and Egypt decided to attack Iraq and the First Gulf War started. The main reason why Iraq invaded Kuwait is still unclear. Schuster (2008, p.1 of 6) argues that the FBI agent George Piro who interrogated Saddam Hussein after his capture in 2003 found that Iraq was trying to repay its debts by cutting the production of oil of the OPEC, the lowered production would result in higher prices, but Kuwait was producing beyond its quota and Saddam Hussein decided to attack Kuwait to have control over its oil production.

As Williams (2007) explains after the Gulf War the prices of oil continued growing due to the rapid economic growth of Asia. The OPEC increased its production to meet the increased demand but in 1998 with the Asian crisis the demand fell and the prices went down. As result The OPEC decided to cut its production by a half. In 1999 oil was sold at US$25/barrel.

The second Gulf War in 2003 between US and Iraq resulted in a decrease of the OPEC production of oil and a consequent increase of prices. In addition the Asian economies were again growing very fast and the demand for oil was bigger. On July 2008 oil reached its maximum historical price in US$147 (Aguirre, 2009).

The actual world financial crisis has decreased slightly the demand for oil and prices have dropped but once the crisis is over the demand will continue growing especially with the emergence of economies such as China or India.

It is very probable that in the next years the price of oil will grow to levels that the world has not seen in its history because the OPEC will not be able to increase its production at the same velocity as the demand will increase.

3. Poverty reduction ; development in oil exporting countries

3.1 Venezuela

Venezuela experienced an oil boom during the 1970’s. As Feinman (2006, p. 1 of 3) explains the oil industry was nationalised and massive social welfare programs were launched to increase the access to education and health care and to raise the standards of living of the population. However the oil boom finished in the 1980’s and the social welfare programs which were previously implemented became untenable. The economy went through two decades of economic stagnation and poverty increased.

Since Hugo Chavez assumed the presidency of Venezuela in 1999 the country has significantly reduced poverty levels. Weisbrot (2008) estimated the rate of poverty in Venezuela in 1999 in 50% and the rate of extreme poverty in 19.9%. Eight years later in 2007 the poverty rate was reduced to 33.1% while extreme poverty fell to 9.1%. In addition Weisbrot (2008) stated that ‘access to health care and education has been greatly expanded.’

Despite that the policies used by the Chavez Administration, which included expropriations and constant verbal attacks to the US, have been criticised by western countries no one can argue that Venezuela’s economy has become stronger and poverty has been reduced. According to the IMF the GDP of Venezuela has grown an average of 15.18% over the last decade, the highest growth in Latin America, and the income per capita has increased from US$4.132, 33 in 1999 to US$11.288, 33 in 2008.

In addition Weisbrot, Ray and Sandoval (2009) espouse that the gini coefficient has fallen from 48.1% in 1999 to 41% in 2008 which shows that inequality has been also reduced significantly.

Today Venezuela represents a good example of a country that can promote development with the benefits of oil. The country will have to demonstrate if it is able to maintain in the future the development achieved over the last decade.

3.2 Nigeria

With a population estimated in 149 millions (CIA Factbook, 2009) Nigeria has the largest population in Africa. As Marinho (n.d.) explains since Nigeria obtained its independence of Great Britain in 1960 the country has experienced a dramatic period of civil wars and military interventions that has extended until 1999. Today the political instability is still very high, in part due to the confrontation between its population which is half Muslim and half Christian. The political instability and high levels of corruption have made it very difficult for the successive Governments to apply correct policies.

According to the CIA Factbook (2009) Nigeria produces 2.166.000 barrels of oil per day which as O’Neil (2007) stated ‘account for 95% of the country’s export earnings’.

All the oil exported by Nigeria is produced by foreign companies (Africa News Update, 2007). This show how influent the oil companies are in the policies adopted by the Government. Because their particular interests are different, the oil companies want to produce more and cheaper while the government want them to pay more and invest in social programs, the corruption levels are disproportionate.

Ebimomi and Odueme (2009, p. 1 of 3) espouse that in 1977 Nigeria created the Nigerian National Petroleum Corporation (NNPC) to regulate the market of oil and negotiate with the oil companies that operate in the country. The oil companies have to pay a 60% of their revenue to the NNPC.

According to the IMF the rate of poverty in Nigeria in 1980 was 27% and rose to 70% in 1990. The poverty has slightly decreased since the country become committed to achieve the MDGS. In 2004 the poverty rate decrease to 54% and since then it has decrease 5% annually until 2008 (UNDP, 2009).

The UNDP also estimates that the presence of HIV among Nigerians has decreased from 5.4% in 2001 to 4.1% in 2004; literacy rate of the population between 14-25 years old grew from 76.2% in 2004 to 80.2% in 2005; the most difficult goal to achieve is child mortality due to the poor conditions of child care and low maternal education.

If the MDGS can help Nigeria to decrease the instability and improve the live conditions of its population it would be possible in the long term to solve the major problem Nigeria has to face: Dependence on foreign oil companies. This can be achieved by nationalisations in the oil industry but to do so it is required a Government which can operate in an environment of low political instability in order to apply correct economic policies.

3.3 Iran

After the Iranian Revolution in 1979 Iran became an Islamic Republic. Since then its relations with Western countries have deteriorated significantly.

In recent years Iran has been criticised worldwide by the international community for its nuclear program. Sahimi (2003) explains that the program was started in the 1950’s with the support of US and Western Europe and was stopped in 1978 with the beginning of the Iranian Revolution. In 2003 Iran confirmed that the program was reactivated and said that the purpose was to produce nuclear energy in order to be more efficient in terms of energy. However the fact that Iran is one of the biggest oil producers in the world with 3.196 barrels produced per day (CIA Factbook, 2009) and the threat launched by its president Mahmoud Ahmadinejad to erase Israel from the map activated the alarms in the Occidental World. Every nation in the world has the right to develop a nuclear program if it does not put on risk the security of other nations. In the case of Iran a nuclear program can help the country to grow and develop much faster but it is important to take into account that with this program Iran could produce nuclear weapons and if this happens both Iran and the OPEC would become a real threat for Occident as they can adopt more aggressive policies on oil and affect the global economy.

The UNDP argues that Iran is one of the countries better positioned to achieve the MDGS by 2015. The country is relative advanced in access to health care and education. However the country needs to do more efforts to decrease the inequality between rich and poor. The gini coefficient in Iran was estimated in 2006 in 44.5% (CIA Factbook).

The major problems that the Iranian economy faces are inflation and unemployment which were estimated in 2008 in 28% and 12.5% respectively

(CIA Factbook) and are result of wrong macroeconomic policies applied by the Government and the international sanctions due to the controversial nuclear program.

4. China and US: The battle for oil

Nowadays China has become the second largest consumer of oil in the world (EIA, 2009). With a population estimated in 1.3 billion people and an average growth of 8-10% in terms of GDP over the past ten years (ADB, 2009) the demand for oil is growing so fast that the government needs to apply regular shortages of petrol (Chan, 2008).

According to the EIA 53% of the oil consumed in China in 2008 was imported. By 2012 it will be 66%, with such a big increase China must find new sources of supply to continue growing in the future.

Countries like Iran or Venezuela prefer to negotiate and supply oil to China rather than US or Europe because of the tense diplomatic relations they keep with Occident. In addition the power of China in the Security Council of the UN and its right of veto makes it an attractive customer for oil exporting countries.

Kurlantzick, Shinn and Pei (2006) explain that another important advantage that China offers when it negotiates oil deals is the guarantee of not interfere on the politics of the selling country. On the contrary, the US and European countries impose conditions such as respect for transparency or the use of oil revenue to reduce poverty. Oil exporting countries prefer to negotiate with China because it does not put pressure on the terms of the deal.

The US is the largest consumer of oil in the world and every year it absorbs 25% of the world’s oil production (EIA, 2009). As China’s consumption of energy increases the competence between both countries for the cultural hegemony of the world rises. In 2005 the China National Offshore Oil Corporation (CNOOC) tried without success to takeover the oil company Unocal, one of the biggest American oil companies. Barboza and Sorkin (2005, p.1 of 3) define the attempt as ‘the latest symbol of China’s growing economic power and of the soaring ambitions of its corporate giants, particularly when it comes to the energy resources it needs desperately to continue feeding its rapid growth.’

The attempt of China trying to buy production capacity of oil in the US demonstrates the power of the Asian Giant but also increases the tension between both countries. If there are global shortages of oil in the future as consequence of the growing demand and China decides to keep for itself the production capacity bought in US the situation will be extremely dangerous in terms of global security. The confrontation for the global hegemony will become a confrontation for supervivence.

In recent years China has significantly increased its militar presence in the Indic Ocean where as Rabinowitz (2009) states 80% of the Chinese oil imports pass through. For China is extremely important to ensure the control on the routes of its oil in case of future global crisis or confrontation and the Indic Ocean is an strategic enclave.

To avoid the future confrontation between China and US there would be two ways: Intensify International politics and strategic alliances in order to avoid protectionism or find new sources of energy.

5. Oil & environment

According to the EIA (2009) the main damage caused to the environment by oil is the carbon dioxide emissions emitted by cars and planes which contribute to accelerate global warming. To decrease the emissions cars companies are being required to produce more environmental friendly vehicles able to consume less gasoline. In addition new fuels like bio-diesel are becoming popular. However the production of bio-fuels brings new challenges as it competes directly with the production of food increasing its price.

Another serious problem is the oil spilled into the Ocean which harms wildlife. The most efficient way to transport oil is by sea and to minimise risks is convenient that oil boats are checked regularly. In addition drilling in the oceans to extract oil produces water pollution and may disturb land and ocean habitats.

6. Conclusion

The successive conflicts among the oil exporting countries have reduced the ability of the OPEC to control the pricing policies on oil. It is very probable that in the future the prices of oil will grow to levels never seen before due to the increasing demand which is growing faster than the supply.

While some oil exporting countries like Venezuela or Iran have applied correct policies to promote development and reduce poverty with the benefits of their oil exports other countries like Nigeria have not been able to do so due to the political instability and low levels of education and healthcare conditions.

The fact that the demand of oil will increase dramatically in the future and the production capacity is limited makes very possible a future confrontation between the two largest oil consumers: China and US. To avoid the confrontation it will be necessary to intensify international politics and strategic alliances in order to avoid protectionism and explore new sources of energy to reduce the dependence on oil.

The carbon dioxide emissions produced by the consumption of oil are contributing significantly to increase global warming, the use of alternatives such as bio-fuels brings new challenges as they compete with food and increase its price.