From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Sun May 16 2004 - 12:40:52 EDT
based on outdated cartel theory of oil pricing. See Cyrus's and Hans Singer and Kunibert Raffer's criticisms. rb http://epw.org.in/showArticles.php?root=2004&leaf=05&filename=7150&filetype=htmlEPW Commentary May 8, 2004 Theatres of Oil Wars Wanted: An OPIC The world oil market has long been at the mercy of the cartel led by Saudi Arabia, in connivance with the US. It will be rendered extremely vulnerable in the event of a worsening of the Iraq situation that engulfs the entire region. The oil market is overdue for structural reform, and Arabia needs moderation and stability in oil prices. Ranjit Sau In 1918, the Ottoman sultanate was finally defeated and much of its territory was partitioned between the victorious British and French empires. The Arabic-speaking Fertile Crescent was divided into three new entities, with new names and frontiers: Iraq, Palestine and Syria. Soon, Lebanon was carved out from a part of Syria, as was Jordan from a slice of Palestine. The Arabian peninsula, consisting of largely barren and inaccessible deserts and mountains at that time, was thought not worth the trouble of taking over by the British or the French; its rulers were allowed to retain a precarious and limited independence under the protection of a 1915 treaty with the British. In 1933, the Standard Oil Company of California signed an agreement with Saudi Arabia. Within two years, the company began extraction and export of oil. After a brief interruption caused by the second world war, it resumed work. With the oil money, Saudi Arabia transformed its lifestyle and external relations. Today, Saudi Arabia is the world's largest supplier of oil. It holds full one quarter of the world's proven reserves. In fact, more awesome is its spare production capacity, which is currently equivalent to 30 per cent of the country's actual production of oil and is carefully nurtured as a potential weapon. This spare capacity is greater than the total exports of all other oil-exporting countries, except Russia. Should a country dare the kingdom by raising its own output beyond a certain level, the Saudi spare capacity would be unleashed to force the price down, which the rival can hardly withstand. It can destroy exports from countries challenging Saudi Arabia's market share. This has happened twice recently. In 1985, Riyadh successfully waged a price war designed to force other oil producers to stop 'free-riding' on the Saudi policy of limited supply, that is, taking advantage of the artificially-kept high prices. That policy warned that those states had to cooperate with the kingdom by reining in production enough to allow Saudi Arabia to produce the lowest level it targeted. Oil prices fell by more than half within a few months, and the Saudi market share, lost in the preceding four years, was regained. Then, in the 1990s, OPEC member Venezuela challenged the kingdom by deciding to maximise its production. In retaliation, Riyadh induced the oil price collapse of 1998. It had to suffer a painful drop in income, but the main goals were achieved: Saudi Arabia reasserted its OPEC leadership, re-established itself as the prime supplier of oil to the US, and induced non-OPEC producers Mexico and Norway to support OPEC's revenue-maximising strategy. At first sight, it might appear that the balance has changed lately. Russia now produces as much as does Saudi Arabia. The Caspian republics to its south - mainly Kazakhstan and Azerbaijan - have at various points been hailed as the 'New Persian Gulf'. And technological advances are making it cost-effective to extract oil off the coast of West Africa and the Gulf Coast of the US. Extent of Domination But the optimism quickly fades upon examination. For starters, much of the newly extracted oil will simply replace declining output from the existing fields. Overall non-OPEC production will begin to decline some time this decade, even after all the new supply is brought on stream. And drawing oil from the ocean depths is still much more expensive than pumping it from the ground. While the Saudi Arabian oil could be profitably sold at about three dollars per barrel, deep-water oil must fetch at least five times as much. As long as the Persian Gulf states' 600 billion-plus barrels of proven reserves (262 billion barrels in Saudi Arabia alone) give them control over the vast majority of the world's discovered oil - and few now believe there are any major oil 'provinces' still waiting to be found - Saudi Arabia's position in the oil market would hold. Meanwhile, the US remains the largest single consumer of oil in the world. Its own proven reserves of oil measure only about one-tenth of Saudi Arabia's, but its daily volume of extraction is almost of the same order as the latter's. That means the US is rapidly depleting its meagre internal resource base. Domestic supply is falling and imports are rising fast. The US's annual average imports of petroleum and its products during the four years ending in 2003 rose by as much as 57 per cent over those of the previous four years. Saudi Arabia has the distinction of being the single largest source of US oil imports, and it offers the US a preferential discount of one dollar a barrel that is not available to the countries of Europe and east Asia. This amounts to a subsidy to US consumers of more than $600 million a year. Iraq has the second largest proven reserves of oil in the world, while vast tracts in the southern deserts of the country are yet to be fully explored. Its oil production has been seriously disrupted. Iraq is burning; no one knows when the fire would subside. The situation in its neighbour, to the south-east, Saudi Arabia, is equally a matter of concern. King Fahd bin Abdel-Aziz al-Saud, who acceded to the throne in 1982, heads a council of ministers, but after suffering a stroke in 1995, he granted more responsibility to Crown Prince Abdullah. The question of succession is getting murkier with controversy. A land of 6,000 princes and an equally impressive number of respected imams, Saudi Arabia is awaiting in suspense a sharp turn of events. It is being visited by extremists. In the aftermath of multiple bombings in Riyadh on May 12, 2003, the future looks grim. The world oil market is dominated by two countries - Saudi Arabia the supplier and US the purchaser - leaving the other countries to individually fend for themselves. This arrangement cannot possibly bear the next shock. The borders of countries in the west Asia were drawn by the former colonial powers, with greater attention to imperial demands than to local disposition; those are as fluid as ever, permitting easy crossing. Any conflagration in Iraq and Saudi Arabia is most likely to assume a full-scale regional dimension. The oil market will be hit directly. The inter- national community is not prepared for it. Rentier Production Modes Sponsored by the UNDP Regional Bureau of Arab States, jointly with the Arab Fund for Economic and Social Development, the first two issues of the Arab Human Development Report (AHDR) were published in 2002 and 2003 respectively. Prepared by independent teams of Arab scholars, the reports call for building a 'knowledge society' in Arabia. "Knowledge consists of data, information, instructions, and ideas, or the sum total of symbolic structures possessed by individual human beings or by society at large. These symbolic structures guide individual and institutional human behaviour in all walks of life and in all spheres of public and private activity." A knowledge society, envisaged by the AHDR is to be organised around the dissemination and production of knowledge and its efficient utilisation in all societal activities - the economy, civil society, politics and private life - where knowledge plays a paramount role in shaping social structures and in changing the occupations and lifestyles of its citizens as the knowledge content of their daily lives intensifies steadily. But the pervasive oil economy is seen as an obstacle in the way to such a society. The post-1973 oil boom in the Arab region, it says, destroyed the values and social incentives that could have promoted knowledge and skill. With the spread of negative values in that period, creative abilities were neglected, and knowledge lost its attraction. The social standing of scientists, educated people in general and intellectuals in particular fell. Education became incapable of providing the poor with the tools and abilities they need for social mobility. Social value was measured by money and fortune, regardless of how those riches were amassed. Proprietorship and possession replaced knowledge and intellectualism. Worst of all, the values of independence, freedom and the importance of a critical mind - values with which people can actively exercise choice and lead conscious lives - were buried. The aftershock of this collapse continues to weaken and undermine Arab societal awareness today. As a result, indifference, political apathy and a sense of futility are becoming dangerously common among broad segments of the populace. Arab citizens are increasingly pushed away from effecting changes or taking decisions in the interest of their countries. "Class structure strongly influences the knowledge system," writes the AHDR (2003:140). A necessary social condition for supporting knowledge development is the presence of a sizeable middle class, able to appreciate and cultivate various forms of knowledge. But the middle class in Arab countries is dwindling under the pressure of poverty and uneven distribution of income and wealth. One of the dominant features of the production pattern prevailing in Arab countries is high dependence on the depletion of raw materials, chiefly oil, and reliance on external rents. In such rentier modes of production, economic returns do not usually accrue from hard work and high productivity, particularly in political systems that constrain freedoms and do not encourage people to be industrious. AHDR proposes economic growth with knowledge-intensive industries. But there is an elemental problem here: the enormous oil wealth keeps the exchange rates of Arab currencies too overvalued to let non-oil industries flourish - a phenomenon known in economics literature as the Dutch Disease, named after the effects of discovery of natural gas in the Netherlands in the 1960s, when that windfall bonanza drove up the exchange rate of its currency hurting manufacturing industries and agriculture. So, on two counts - one, in order to tighten the purse strings of oil-oligarchs, and two, to maintain exchange rates conducive to non-oil industrialisation - Arabia requires moderation and stability in oil prices. In Iraq, insurgents have opened yet another front by attacking the oil port of Basra. Nobody knows when peace will return to that country. With porous borders all around, the entire region is susceptible to being engulfed in the flames of insurgency. The world oil market will be extremely vulnerable under the circumstances. The international community does not seem to be prepared to meet such a contingency. Besides, the oil market is long overdue for structural reform; it cannot be left any more to the mercy of a cartel led by Saudi Arabia, in tune with the US. It is high time to set up an Organisation of Petroleum Importing Countries (OPIC). © Copyright 2001 The Economic and Political Weekly. All rights reserved.
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