The Struggle for Oil

As for the struggle for oil, let's start by a quick review of some facts about the oil industry and oil prices to try to understand why corporate America wants to wage war on Iraq at this time.

Fifty-five percent of the world's oil reserves are located in five middle eastern countries that currently produce 28% of the world's oil supply but use an insignificant amount of it for themselves. Detailed reserves and production statistics for the world can be found here.

The Middle East holds the world's largest and most productive oilfields. These giants were easy to find and they require relatively little investment to exploit, consequently the production cost of Middle East oil is the lowest in the world.

This graph shows that more oil was being discovered in the world than what was consumed each year until about 1980 but that since then, we have been consuming our accumulated oil reserves faster than the oil industry has been able to replace them. (Current consumption is around 22 Giga barrels per year while current discoveries are no more than 6 Giga b/Y.)

A reversal of that trend is unlikely, because the biggest and most productive fields being discovered first, the new oilfields that are found get smaller and smaller as the industry matures. Consequently, these new fields are getting more and more expensive to find and produce.

For more than a decade now, it has been cheaper to buy already discovered reserves that are still in the ground or to acquire them through mergers than to discover new fields by outright exploration. Oil companies all know this but they don't publicise it because it would frighten their shareholders and hurt their stock values.

Oil is a non renewable resource. It is obvious that the trend of withdrawing from our reserves more than we replenish will eventually cause the world production to peak and subsequently decline.

This inevitable peak has been known for a long time. An oil production curve showing a peak and a subsequent decline was first used in 1956 by the Shell Oil geologist King Hubbert to predict that US domestic production would peak in 1969 (it did in 1971). Since then, "Hubbert Curves" of world oil production have been published from time to time for by a number of different authors.. This one was published by the Scientific American Magazine in March 1998.

The blue and red curves show how the strong increases of world oil prices imposed by OPEC in 1973 and late 1979 were followed by sharp reductions of Middle East production levels as consumers began to avoid wasting energy and turned to other sources such as natural gas. Fortunately, these oil shocks reduced the world wide growth of demand from about 6 % per annum around 1970 to about half that number since then.

The yellow curve on this graph, taken from a lecture presented by the British geologist Colin Campbell in December 2000, projects that had this high growth rate not been reduced, world oil production would probably have already peaked around 1995 and we would now be on the declining half of the curve.

The graph shows the rapid decline of new discoveries in green and extrapolates a peak of the red production line sometime before 2010. Experts disagree about the date and level of that peak but most geologists and production engineers agree on its inevitability within two or three decades at the latest. (Some economists who focus only on their supply and demand curves and fail to take into account the physical constraints of oil production, tend to be more optimistic but even they admit that an eventual decline is inevitable.)

The pricing of oil needs to be regulated because abandoning the pricing of that commodity to pure market forces tends to produce wild price swings such as those that raged during the first years of the oil industry before the Rockefeller cartel stabilised the US market in the early 1900s. A complex world oil pricing system, that took into account quality and location differentials, was first managed by the Texas Railroad Commission and then by a cartel of international oil companies. The seven major American, British, Dutch and French oil companies (the so-called Seven Sisters) signed an anti-competition accord at Achnacarry in Scotland in 1928 in which, among other things, they pledged not to develop Middle Eastern oil without the participation of the other members (the Red Line Agreement). After World War II, Standard Oil of New Jersey, Mobil, Texaco and Standard Oil of California, broke their pledge and grabbed the Saudi concessions for themselves, freezing out the British and French. The cartel stabilised the world oil pricing system at levels compatible with its own interests but its control of the world petroleum industry weakened when many of the world's major oil reserves were nationalised by sovereign states in the '50s and 60s.

When Iran nationalised the British-owned Anglo-Iranian Oil Company in 1951 because it had refused to share its astronomical profits, Britain and the US organised a world-wide boycott of Iranian oil which brought Iran's economy to the brink of collapse. Then, in 1953, the CIA instigated a coup that installed the Shah as a US puppet with a strong secret police, the SAVAK, trained by the CIA to crush any dissidence. Iran retained the nominal ownership of the National Iranian Oil Company but operational control was exercised by a consortium of American, British and French companies (40%, 40%, 20% respectively).

Realising that the "Seven Sisters" still controlled production rates and prices in spite of the nationalisation of the oilfields, the major third world oil producing countries joined, in 1961, to create the Organisation of Petroleum Exporting Countries (OPEC) to defend their interests. For almost a decade, OPEC was ineffective and competition between its members led to a lowering of the official "posted prices" from around 3 US$/b for Arabian Light to less than 2 $US/b. The real cost of Middle East oil being extremely low, "secret" discounts were granted that further lowered the real prices to levels around 1.10 $US/b in 1969. These real prices were so low that the US had to institute import quotas so as to create an artificial domestic price high enough (around 3.80 $US per barrel) to maintain domestic production and slow the growth of oil imports.

OPEC was finally able to set production quotas in 1969 after Libya interrupted it's production of 500 000 b/d and the pipeline from Iraq to the Mediterranean was blown up removing another 500 000 b/d from the market. Had OPEC not intervened at that time, the real Middle East prices could have fallen still further because the cost of discovering and producing oil from some of the giant oilfields in the Middle East was as little as 10 cents US a barrel.

Control of the world petroleum prices passed from the "Seven Sisters" to OPEC who imposed a small increase in 1970 and two brutal price hikes in 1973 and 1979. There is no doubt that the 1973 and 1979 oil shocks hurt the world economy at that time but they did stimulate exploration and the production of more expensive oil in other parts of the world. However, the US used its considerable influence over some OPEC members to exert a certain degree of indirect control over OPEC quotas and consequently on prices. (The absolutist monarchies of Saudi Arabia, Kuwait, Iran and the Gulf Emirates needed US support against the communist influence that was gaining ground in Egypt and Syria.)

In 1979 however, the US lost one of its major props with the overthrow of the Shah of Iran by the Ayatollah Khomeini who considered the US to be "The Great Satan". The following year, Iraq invaded Iran over the ownership of the delta of the Tigris and Euphrates rivers. After initial Iraqi successes, Iran went on the offensive in 1982 and the war dragged on until 1988. (The US supplied arms to both sides and more than a million lives were lost.) Then, in August 1990, Iraq invaded Kuwait over claims that it was illegally draining the huge Rumaila field straddling their common border and that it was exporting more oil than its OPEC quota. The US intervened to repulse Iraqi forces out of Kuwait fearing that they would take over Saudi Arabia if they were not stopped. The US emerged as the victor of the Gulf War but it had lost its influence over the Iranian and Iraqi voices in OPEC. After the war, it maintained its huge "El Sultan" military base in Saudi Arabia to ensure that the OPEC control of production levels would not be detrimental to its interests.

America's initiatives to control Middle East oil created many enemies. As American influence displaced the British, resentment against British colonialism was transferred to the Americans whose insensitivity to Islamic culture and values made them still more repugnant to the average Muslim in the region. And, as if this were not enough, America's continued support of Israel's increasingly violent aggression against the Palestinian people, identified it as the objective enemy of every Arab and Muslim and justified the title of "Great Satan". Finally, giving lip service to "democracy" and "human rights" was fine for domestic consumption by naive American citizens brainwashed into believing in their own righteousness, but it bred a fierce hatred in the hearts of the victims of the totalitarian regimes that the US supports not only in the Middle East but also in many other parts of the world.

That deep hatred feeds the roots of terrorism identified by General Musharaf in his November 2001 address to the United Nations. The arrogance, hypocrisy and injustice of American foreign policy in the Middle East are the cause of Al Qaeda and the reason why many Muslim Arabs see the terrorists as heroes

The Bush administration has chosen the road of escalation by giving carte blanche to Ariel Sharon instead of imposing an Israeli withdrawal of the occupied territories by threatening to cut off their military and financial support. The Arab Muslims of the Middle East have every reason to believe that Israel and America do not really seek a negotiated peace as they claim.

The Israel-Palestine crisis further deepens with US approval. The desperate message sent by the human sacrifice of suicide bombers in Israel and by Al Qaeda terrorism world wide is falling on deaf ears. The threat of an important reduction of the Middle East oil production is the only weapon left to to the Arab countries to stop the Palestinian genocide. That threat is as real as that of Saddam Hussein's "weapons of mass destruction", but the likelihood that either be used against America is nil as I see it for individuals might be suicidal but regimes never are.

Any sharp modification of Middle East production levels could be catastrophic. A significant reduction of OPEC quotas could hurt the world economy by making prices soar and a sharp increase of production could cause prices to fall to levels low enough to bankrupt most marginal producers everywhere else in the world. The threat that the Arab members of OPEC would use the oil weapon again as they did in 1973 is however only virtual because curtailment of supplies from the Gulf would now be an immediate cause for war.

We are now in the process of crossing the historic peak of world oil production. This graph shows world petroleum production projections drafted by Dr. Colin Campbell for the Geneva based Petroconsultants in 1997. It deserves to be updated but it still usefully illustrates the possible scenarios of the future:

• Low Case: Demand is flat, and production stays level until the world midpoint, when it declines.
• Base Case: Demand rises at 1.5% a year until production reaches the world midpoint when it declines.
• High Case: Demand increases at 3% a year until production reaches a peak at the world midpoint, when the physical limitations of the oilfields cause it to decline.
• Swing Case: As the Base Case, except that, when the swing share exceeds 30%, regular price increases rises curb further demand increases, leading to a production plateau that lasts until the swing producers reach their midpoint.

The flat production plateau in the swing case becomes possible if the unused production potential of the Middle East swing producers is used to extend the peak by compensating the decline in production capacity of other the fields elsewhere in the world. This would however entail considerable investment to fully develop the Middle East oilfields up to their technically optimum production levels. Eventually, when all of the world's oilfields come to be produced at their technically optimum rate, the world production will decline and prices will continue to rise to adjust demand to the available supply. The beginning date of this final slow decline of conventional oil production is unknown but no one disputes that it is only decades away. There is nothing dramatic about this because production of liquid hydrocarbons from unconventional sources such as the tar sands of Canada and Venezuela and from coal liquefaction will become economically feasible as the price of conventional oil increases.

What really matters for the world economy is that these events come about in a gradual, ordered and predictable manner. That implies a strict control of production rates to prevent future price shocks. Presently it is the Organisation of Oil Exporting Countries (OPEC) that exercises that control but that could change if America invades Iraq.

After this brief review of the world oil context, we can return to the field of speculation to try to find a reasonable explanation for the Iraq war.

The Bush administration now intends to escalate the Middle East Crisis one notch further by using the pretext of alleged "weapons of mass destruction" to justify a pre-emptive strike on Iraq before "a mushroom cloud over an American city" proves the validity of the threat. This is obviously bunk and everyone knows it. Nobody believes that deterrence would not work to restrain Saddam Hussein who shows all the traits of a shrewd survivor and none of a kamikaze martyr. Deterrence has worked perfectly during forty years of cold war and it still works now between India and Pakistan in spite of religious fanaticism on both sides. That deterrence would not work in the case of secular Iraq is just not credible.

An imminent threat by the Arab swing producers to reduce their production to support the cause of Palestinian freedom from Israeli occupation could also be a possible justification for a pre-emptive strike but that pretext is not credible either for none of them have the financial reserves they had when they used oil supply as a weapon in 1973.

Giving the credit of some intelligence to the corporate establishment that pulls the strings behind president Bush, there must be some valid, rational motivation for their ardent desire to wage war on Iraq. Americans may be naive and misguided about the Middle East but they are generally well meaning and would not permit the outright plunder of Arab oil. The average American is well meaning, but as far as I can see, the real power is not in the hands of the citizens, most of which don't bother voting anyway. Power is in the hands of the big corporations who have bought the politicians by financing their elections. It is becoming more and more obvious that American elections are little more than a cosmetic ritual that has little effect on the strategic policies chosen by Corporate America.

The only valid objective that I can think of would be to put an end to the control that the members of OPEC have exercised on their own production levels to control world oil prices since 1970, and to transfer that power of decision to a cartel of major transnational petroleum corporations. That centralised control would be of strategic importance mostly during the next two or three decades that it would take to develop and exploit all of the unused production potential of the Middle East oilfields that play a swing role presently. This would make it possible to prolong the duration of the world peak production as per the "swing" scenario mentioned above. It would give the world economies time to adapt to higher prices through more efficient use of energy and time to develop the exploitation of alternate sources such as tar sands and coal of which there are abundant reserves.

It can be argued that an ordered transition to the decline of conventional oil production is in everyone's interest but I don't think that everyone's interest is enough to motivate the major oil companies that I suspect of being behind president Bush's rage to wage war on Iraq. As I see it, it is rather a matter of profits for the regular price increases required to prevent the growth of demand during the prolongation of the world production plateau will generate astronomical profits from the exploitation of the most productive Middle East oilfields whose production costs are minimal.

This is only a speculation but it makes sense. The stakes are high enough to explain the firm determination of the Bush administration (controlled by Corporation America), to do it with or without the approval of the United Nations. France, Germany and Russia are opposed to a new war against Iraq. Is it only for moral considerations of international law or have they realised that it could lead to a take-over of all the Middle East by the Israeli-American axis and that such an outcome would place them in a situation of extreme vulnerability if it succeeded?. The ambivalent British have turned their backs on Europe again to join forces with America in this project. Giving the British prime minister Blair credit for a minimum degree of intelligence, I presume that there must be a valid reason for that choice, other than the fear of Saddam Hussein's "weapons of Mass destruction". Whatever was the carrot, it must have been too big to refuse! Could it be a significant share of the new petroleum cartel for British Petroleum and the restoration of some of the power British oil interests once enjoyed in the Middle East?

That is a momentous objective but I think that anything less than complete control would not justify the enormous risk of destabilising the Middle East. It is difficult to believe that it will be possible this time to limit the war to Iraq without involving Saudi Arabia and Iran at this time when the Israel - Palestine crisis is getting more violent every day as Bush continues to encourage Sharon's excesses. Considered in this light, the destabilisation of the Middle East that a war with Iraq might cause, is not a risk that hopefully might be avoided, it is part of the plan. A regional destabilisation would give US forces the opportunity to take over Iran and Saudi Arabia as well and to impose a military government on the whole region like they did in Japan after WW II. (The choice of a military occupation government would have the advantage of avoiding to have to share the oil profits with corrupt local politicians.)

The complete destabilisation of the Middle East would accentuate the fact that the present borders were artificially created only some 70 years ago which is little compared to the five preceding centuries of control by the Ottoman Empire. A quick review of the history of this region can help imagine the long term effects of today's events. Seen in that context, chaos is not to be avoided, it is to be provoked and exacerbated for it would facilitate rearrangements favourable to the interests of the perpetrators such as, a) the establishment of an "American Zone of Influence" over the oilfields of Saudi Arabia, Kuwait, Iraq and Iran and, b) the creation of a "Greater Israel" that would include include parts of Lebanon, Jordan and Syria in extended "occupied territories" reserved for the establishment of future Jewish settlements destined to oversee Arab populations maintained in poverty and underdevelopment that Israel seems to need to provide cheap labour and to convince "god's chosen people" of their racial superiority.

Some readers might find the above scenario too extreme but that is only because they refuse to see how extreme the situation is presently with the Israeli military occupation of the West Bank and Gaza. If the Israelis can get away with it why couldn't the US establish a military occupation of the Middle East oilfields. Naturally it would be more elegant to do it indirectly by installing local Quisling dictators like it was done in Central America. Actually, that cosmetic nicety would be superfluous considering the overwhelming might of the Israeli-America axis in the region. And, besides, the stakes were only a few banana plantations in Central America while, in the Middle East it is oil, the lifeblood of modern economies, that is at stake!

As a catholic sinner might say, "If you have to go to hell for one mortal sin why not get your money's worth and go for ten?". Or better still for a hundred if you can get away with it!

I hope that I am wrong, but it looks as if the great American ideal of democracy is fast becoming the American nightmare of military power in the hands of US transnational corporations. It is frightening. Will the US overrun Canada for our oil sands if we don't do their bidding once the Middle East oilfields are dry?

The scenario outlined above of seizing the Middle East oilfields so that an American cartel could decide on their levels of production in such a manner as to extend the peak of world production and thus ensure an ordered transition to declining world oil production levels must be condemned as outright imperialism. There would be strong resistance to the regular price increases that would be required to curb demand and extend the peak of conventional oil production but it must be recognised that such a plan aims a rational objective that might turn out to have been in everyone's interest if carried out optimally.

The worst scenario imaginable would be for the American invader to hand over control of the oilfields to selected American and British oil companies that would invest to increase production rapidly so as to cause prices to fall. This would be equivalent to plunder. It would put us in the "high case" mentioned above. It would provide short term benefits to consumers but it would allow the brutal transition to declining production levels of conventional oil to occur before non-conventional sources can be tapped.

What is most terrifying is the enormous power that is being concentrated in the anonymous hands of a gang of gigantic corporations whose agents (Bush, Cheney, Rumsfelt, Ashcroft, etc.) manipulate public opinion and lie about their real intentions to the people they are supposed to represent.

As I am naturally an optimist, I like to think that something will happen to prevent the worst from occurring.

 

(October 2002)

The following websites provide more detailed information about the facts, events and speculations outlined above.