L’Universite d’Alger / le departement de economie / 04 Mai 2005 The global oil system and the new U.S. policy Thomas W. O’Donnell The University of Michigan

l’Universite d’Alger / le departement de economie / 04 Mai 2005

The global oil systemand

the new U.S. policy

Thomas W. O’DonnellThe University of Michigan

Science, Technology and Society Program, Michigan Center for Theoretical PhysicsResidential College Social Science Program

[email protected], http://www.umich.edu/~twod/courses


Does the U.S. have a global “empire”?

Aspects of American hegemony includes:

• Advanced industry & information technology• Finance & monetary – $US dollar, International Monetary Fund, World Bank, Wall Street, ...• Trade – U.S. dominates WTO (OCM), NAFTA, …• Military – Navy & Air superiority, Army with Informationtechnology, new methods & tactics …• Culture – global English; U.S. music, film, television, …• Science – Biology, physics, information theory, social … • …

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Does the U.S. have a global “empire”?

Aspects of American hegemony includes:

• Advanced industry & information technology • Finance & monetary – $US dollar, International Monetary Fund, World Bank, Wall Street, ...• Trade – U.S. dominates WTO (OCM), NAFTA, …• Military – Navy & Air superiority, Army with Informationtechnology, new methods & tactics …• Culture – global English; U.S. music, film, television, …• Science – Biology, physics, information theory, social … • Energy – Global oil and natural gas

Today’s lecture: “U.S. GLOBAL OIL HEGEMONY POLICY”

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Hegemony [Greek hegemonia , from hegemon, leader.] Herein taken simply as:

• The predominant influence, as of a state, region, or group, over another or others. The American Heritage® Dictionary, 4th Edition ©

2000

• Leadership; preponderant influence or authority; -- usually applied to the relation of a government or state to its

neighbors or confederates. – Lieber Webster's Revised Unabridged Dictionary, © 1996, 1998 MICRA

• The domination of one state over its allies. WordNet 2.0, © 2003 Princeton

N.B., definitions of “hegemony”:

4Respectable topic …


Research program:

We use “official” sources, … are widely accepted:

- Energy Information Agency (EIA) of U.S. Dept. of Energy- International Energy Agency (IEA) of OECD (First World)- E.U. Directorate-General of Energy and Transportation

Also … - White House Energy Report (“Cheney’s Energy Report”)- OPEC- ARAMCO - BP Data- CIA Fact sheets- …

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The facts …


HOW THE GLOBAL OIL SYSTEM WORKS:

- 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 is 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 ENERGY ORGANIZATIONS (IEF, OPEC, IEA, etc.)

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Quess:What is main global source?…


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(Report#:DOE/EIA-0484(2002)

Absolute levels shown

Note:the world ofelectronic-revolutionstilldependson ancient fossilfuels Relative:% projection?


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Oil % constant.Why??

naturalgas up, coaldown

Where are theresources? …

Yet, little relative US ‘dependence’ …


FACTS NEEDED TO UNDERSTAND THE GLOBAL OIL SYSTEM:


- WORLD RESERVES:Where are most of the oil, natural gas reserves?



- 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.)

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PRECONCITIONfor hegemony:

…naturalconcentration

but evenmore so…


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2/3 ofworldreservesfive countries,

three verysmall…

hegemony possible

US M. Eastdependencehas always been low …


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“Oil-price swing states”

Where is the oil?

By: Matt Simmons@ Rice U. conf, 2004.

Source: Professor Steven Dutch, University of Wisconsin - Green Bay.





- WORLD PRODUCTION CAPACITY:Which countries have the technology to pump the most oil? Guess!?



- ABOUT INTERNATIONAL ORGANIZATIONS (OPEC, IEA, IEF, etc.)

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Source: IEA

- Biggestproducers:1.Saudi A.2. U.S.3. Russia4. Iran5 Mexico(1, 2, 3 vary)- Biggestregionally:M. East

- US/Russiapumpfast on small reserves

Much of worldreserves½-depleted,but not ME.- Non-Mideast world pumps at ~max. rate (Hubbert’s Peak: by 1971 US was ½-emptied out)


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Source: IEA

* Saudishuge,yet30-40%spareCapacity< 2003 unique!

*Irannow2nd

* Iraq ‘could’be aSaudiArabia.10-15 yrs + $20-40 billion (ref: US Council on For. Relations, pre-war report ).

coming global production peak exacerbates M. E. concentration


ASIDE: US ‘Dependence’on Mid East?

~50%US oil Imported

US gets ~all Western Hemisphere’soil exports

… only 25% importsfrom Middle East Hence, fractional“dependence” = ½ x ¼ ~ 1/8

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needmeans.topump…


17Source: US DoE

Much of globalreserves½-depleted,but notME.

-Non-Mideastworld pumps at approx.max. rate

Hubbert’s Peak: by 1971 US was ½-emptied out

Hubbert’s ½-depletion peak








- ABOUT INTERNATIONAL ORGANIZATIONS (IEF, IEA, OPEC, etc.)

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ORIGINS of GLOBAL OIL SYSTEMWhat is an “oil-price swing state”? …


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-Oil disruptionsmajor threatto US/OECDeconomies

But, pointhere isto illustratehugerole of ME in market,possibilityof price ‘swingstates


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ShowsSpecial Saudi,Iranian, Iraqi, … ability (esp. since 1980s)spike/dropglobalPrice => OILPRICE SWINGSTATES”

Whyprice~even from1985-2000?

OECDSol’on..

“Oil-price swing states”World Oil Market and Oil Price Chronologies: 1970 – 2003

From the Energy Information Administration

IEA data


Supply disruptions 1970’s, early 80’s.

Urgent need for US / OECD* regain control. Two measures:

1. US (Kissinger) & G-7 responded with cartel of consuming OECD nations: The International Energy Agency (IEA)

- Requires members to keep huge reserves (90 days)

to neutralize Opec producers’ cartel

2. US also planned invasions. (British declassified, Feb, ’04) ______________________

1. Was immediately implemented, highly successful

2. Was consistent policy by Carter, Regan, Bush Sr., Clinton, … till present neo-con occupation

(see esp. David Harvey, The New Imperialism, chapt. 1.)21* OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations)


Kissinger’s role … the planner and organizer of IEA / oil hegemony:

22* OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations)


Kissinger’s role … the planner and organizer of IEA / oil hegemony:

23* OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations)


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1980-90’s: US-dominated IEAVs. OPEC as anantagonistic,subordinatingrelationship.

Kissinger assumptionscorrect: reserves ofIEA consumers’cartel tamed OPEC.

IEA pressuredOPEC to observeUS/IEA pricerange by adjustingpumping rates.

Implied threat:…think what UScould / woulddo militarilyto OPEC / M. Eastover 90+ days if ever cut off oil again?!


How this global system has worked ...

A. Enforcing price by negating OPEC producers’ cartel with counter cartel

Balanced OPEC

Made Saudis de facto US/IEA instrument via acrimonious relationship, hegemonic pressure

- Used “oil price swing states”, esp. Saudis’ ~ 30% spare capacity to generally adjust world price as required.

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How this global system has worked …

B. “Cheap Oil!” key US policy, US as the global cheap-oil pusher

- Price band rationale: - Low enough so alternatives uncompetitive- High enough so productive capacity maintained *

- Cheap oil keeps world addicted - Remakes rivals’ economies in US economy’s image (e.g., EU,

China, India, Japan) - Other / alternative sources more expensive, technically still

problematic. - Price of oil (transportation) enters into all commodities and

services. An objective economic pressure towards oil.

- Other reasons: automobile industry/infrastructure/tech. skills needed for military prowess (China, India); promotes consumer society.

- Cheap oil ensnares all economies, the US cheap-oil pusher also protects and maintains the global system for the addicted

Enforcing price …* Prince Saud repeated this price-band rationale in Wall St. Journal interview, 27 April ‘04 26


US as global cheap-oil pusher / hegemon

But, now hegemony-system has gathering “energy” crisis

… US forced to “reinvent” the system, or lose it

What is this crisis which drives Washington / London?

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Recall:oil’s % forecastedconstant

naturalgas up, coaldown

… 1st-

world efficiencies,butremaindergrowing …

Quess:Where is theexpansion? …


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China demand huge factor … surpassedJapan ’03,& US by 2020

has goneauto-centric; economic& military reasons. …being reduced to historicaldilemma of Japan, Germany

very precariouschoice – must import anyadditional oil!

Middle-class sizes ~determinerelative growth potential

Four aspects to US solution(an oil offensive)…


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1st aspect of solution: Expand old-fashioned US “penetration”

Inhow manycountries does the US havefirst place?

Recall wherethe oilis


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USA

Increasingly U.S.

Unparalleled military-political hegemony over global oil resources

Second aspectof solution:

Yukos/Lukoil crisis 40%Russian state income = oil$. N.B.: Putin’s measures against US ownership, contention w/ US


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Spare capacity

Mitigatedisruption

New: foreigninvestmentsforcedalready,under Clinton

Market% growing

SpecialSaudi role:

2nd aspect:

2nd aspect of solution: Expand pumping capacity & investments everywhere:


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Source: V. Pres. D. Cheny’s White House Energy Report2000

Cheney says:

3rd aspect of solution: New means of transport crucial.


4th aspect of solution. Reinvent IEA-OPEC relationship:

Entirely new level of energy globalization, of market economic-control institutions

- IEA-OPEC began evolving acrimonious relationship into “collusion” of the willing under Clinton’s Sec. of Energy, Bill Richardson.

- Collusion/co-operation - OPEC ‘gave up,’ formed:

1. joint IEF in early-1990s,

2. IEF Permanent Secretariat, May 2003, in Riyadh

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4th aspect of solution. Reinvent IEA-OPEC relationship:

- IEA-OPEC evolving acrimonious “hegemony” relationship into “collusion” of “the willing” hegemony. (WSJ July 29, 2003, p. 1A)

- Finally, OPEC formally ‘gave up’ colluding in joint IEF in 90s, andnow the “standing” IEF Permanent Secretariat, May 2003, in Riyadh

- But, European and Russian consternation: Note: the US dominates the IEA … subordinates EU within it … US is ‘

protector’ (alpha-male) within the IEA developed-states’ cartel:

“Some in the West fear the IEA is getting too close to OPEC. The European Union's energy chief, Loyola de Palacio, is pushing for creation of additional oil stockpiles that Europe could use to drive down prices if it felt this was necessary but the IEA said no. (The IEA -- in keeping with the free-market thinking of its dominant member, the U.S. -- can't use the oil to manage prices.) ‘We need to be masters of our decisions,’ says Gilles Gantelet, a spokesman for Ms. {Loyola de) Palacio. …” (ibid, WSJ. Emphasis Added, T.O’D.)

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New IEF“Permanent Secretariat”

In Riyadh

US, EU, IEA, OPEC and oil majors,

all joined, enthusiastic for this

Its rules, structure and mission are being worked out

Parallel government & corporate tanding committees

Required oil investments require transparency--first step was

unified global data.

This is major new level of energy-globalization. It is a new, global ‘economic-control institution.


Aside: The Wall Street Journal says …

1. Calls OPEC the oil producers’ cartel, and IEA the oil consumers’ cartel.

2. Laments they now “collude” through the new, joint, IEF: the International Energy Forum, -to keep prices in IEA/US dictated range. (Formalizes US ‘arrangement’ with SA.)

Before both Iraq invasions they “colluded” to stabilize prices on threat of IEA-reserverelease, i.e.: MANAGEMENT of global system falls to hegemonic power.

“They're currently at the high end of the cartel's range: about $27 for theOPEC benchmark and $30 for the U.S. standard. …”

“To some on both sides, the message in such volatility (1998 & 2000price swing) was clear: The IEA and OPEC needed to make peace, to avoid future radical fluctuations. Price stability appeals to both consuming nations and producers, because it permits confident business planning. It also averts both the ultra low prices that can stop investment and the ultra high prices

that can fuel alternatives to oil.” (WSJ, ibid. emphasis added -T.O'D.)

3. Avoiding development of alternative fuels is crucial. Like a methadone, alternative fuels might free oil-addicted states from the US pusher, end the whole oil-hegemony game … but why was war launched in 2003 …immediate reasons?

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Mainly about “Central bank of oil” … Saudi Arabia

Crisis in Saudi Arabia pre- and post-9-11 threatened the entire US oil system.

__________•Wolfowitz: US withdrew troops from SA to diminish tensions. This “really best reason” for the war, not the “bureaucratic excuse” of WMD. (Vanity Fair, July 2003). Walter Russell Mead, Sr. Fellow on Foreign Relations, Brookings, says same thing (C-Span, Wash. Journal, 27Aug93) “The ruling family” according to Saudi officials, “could more easily sell potentially unsettling reform if it appears to be less dependent on the Americans” (NYT, Eric Schmidt, “US to Withdraw All Combat Units from Saudi Arabia”, April 30, 2003). Mo Mowlan also says due to S. Arabian instability (Guardian, Op.Cit. T.W.O’Donnell, Agenda, “Why Bush Jr wants war, a crisis about Saudi Arabia” ** Since Iraqi war “Anti-American sentiment is pervasive now … these feelings represent a sea change.” in Saudi Arabia. Saudi American relationship started to take a potentially irreversible plunge with the Sep. 11 attacks…” (NYT, Sarah Kershaw, US-Saudi Ties Frayed Over Mideast Tensions, April 30, 2003)

Why seized Iraq now? 1. Immediate reasons


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Why seized Iraq now? 2. Long-term reasons:

Make Iraq 2nd-largest ``oil-price swing state'‘

- Will take 8-10 years to build up the Iraqi potential to be another Saudi Arabia

- Plan for $40b in modernization/expansion of Iraqi production. SEE

- Does NOT require “democracy”, though would be preferable.… just obedience to US / IEA pumping-rate & price bands


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Restoration of production capacityIEA Reference Scenario

Slow production expansionRapid production expansion

(Source: IEA Energy Investment Conf. late ‘04)

Cum

ulat

ive

Inve

stm

ents

(bi

llion

$U

S)

Production (million barrels/day)

2010

2010

2010

2020

2030 2020

2030

2030

Very similargraphs weremade by:Council onForeign Affairspre-invasioncommission;(included later-occupation official Jas.Garner, …)another by PFC Energy consultant at Rice University(Huston) conference,in talk on “Oil Hegemony”



Crude Production Growth Potential In Iraq Assuming Rapid Negotiation of Investment Terms and Internal Stability

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

200

9

20

10

Oil

Fie

ld P

rod

uct

ion

Cap

aci

ty (

mb

op

d)

P90 Upsteam Capacity

Mean (P50) Upstream CapacityP10 Upstream Capacity

P90 Upstream Capacity (status quo)Mean Upstream Capacity (status quo)

P10 Upstream Capacity (status quo)

Best Case ScenariosThis model assumes that there will be no commercial or logistical constraints on companies. In other words, within 12 to 18 months contracts would be signed and companies would find the necessary equipment to ramp up operations in an aggressive manner

Source: Fareed Mohamedi, Chief Economist, PFC Energy “The Geopolitics of Energyto Energy and Nanotechnology Conference, Houston, Texas May 3, 2003


Conclusions – The Global Oil Hegemony System:

Classic imperialist war/offensive to control the most important resource. Requires oil addiction, which requires cheap oil, which requires expanding world production by 2/3 to offset Chinese demand from driving prices up; which requires massive private investment everywhere. And US didn’t trust Hussein with new $billions and hand on “global spigot.”

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Conclusions – The Global Oil Hegemony System :

Classic imperialist war/offensive to control the most important resource. Requires oil addiction, which requires cheap oil, which requires expanding world production by 2/3 to offset Chinese demand from driving prices up, which requires massive private investment everywhere, and didn’t trust Hussein with new $billions and hand on spigot.

Not mainly for own use, but for hegemony over main US-rival economies: EU, Japan, China (i.e., very oil-poor consuming states). U.S. is the most energy-self-sufficient big power.

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Rationalizes, explains seeming illogical/irrational consequences:- War, misery in producing nations, ignoring depletion of oil- Refusal to fight global warming, pollution, build mass transit,…

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The fight for peace and against wars of aggression should be seen as one with the struggle to defend the global environment*

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The fight for peace and against wars of aggression should be seen as one with the struggle to defend the global environment*

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The end

(No, Iran …)

Documents

L’Universite d’Alger / le departement de economie / 04 Mai 2005 The global oil system and the new U.S. policy Thomas W. O’Donnell The University of Michigan