Geopolitics

Oil Security

I was going to write about “the” energy security complex. By that I mean I was going to talk about the security implications of the supply of oil and gas to the world-economy. I have realized that this is folly. It became clear to me that one must distinguish between what I shall call the oil security complex and the natural gas security complex. As security structures they not only have different dynamics but are also structurally distinct. Due to the peculiarities of the production and transportation of natural gas, the natural gas complex is sub-system dominant. In particular, it is the inter-regional level that is dominant: the dynamics between the Western European great power RSC on the one hand, and the post-Soviet RSC and the Maghreb sub-complex on the other. It is thus a purely Eurasian phenomena. Natural gas is plentiful and is used primarily for generating electricity. In nuclear power plants and coal-fired ones there are competitive substitutes for natural gas. Therefore, it is not nearly as valuable a strategic commodity as oil and does not figure much at all in the system-level calculus. Oil, however, is a different story altogether.

The oil security complex

To get some idea of the distribution of deposits, here is a illuminating map. Note that off-shore deposits and deposits in the United States and sub-Saharan Africa are missing. Presumably the data was concerned with foreign oil and compiled before Angolan and Nigerian deposits were proven. Picture a few Libyan sized blobs in sub-Saharan Africa and the United States and we have a fairly accurate model.

Around 85 million barrels of oil are produced on the planet every day. The Persian Gulf accounts for a third of this production. Russia and the Caspian sea region account for a sixth. Another sixth is accounted for by OPEC producers outside the Gulf: Libya and Algeria in the Maghreb, Nigeria and Angola in sub-Saharan Africa, and Venezuela et cetera. The remaining third is accounted for by Canada, United States, Mexico and an assortment of others. Major consumers are the United States, EU, Japan, China, and increasingly India and the fast growing economies of the Pacific littoral.

The grand chessboard

My central thesis is this: The oil security complex is system-level dominant. In English: the game is completely dominated by great powers and regional rivalries of the sort that regional security complex theory is concerned with, are only important in as much as they shape the way in which great powers penetrate the different regional theaters in peacetime. In the event of a major great power conflict, such lower level dynamics would be completely suppressed and the various oil rich regions would be overlaid or outright conquered by the system-level players.

Parenthetically, we should note that a major goal of the Nazi military effort on the eastern front was to capture the oil-rich Caspian sea region (back then the big prize was Baku). Despite conquering almost all of Europe, Hitler lacked access to oil supplies necessary to keep his menacing military machine humming. To this end he launched the summer offensive of 1942 and almost reached his prize. Stalin redeployed troops from Siberia once it was clear that Japan was not going to attack it. The tide turned with Soviet victory in the battle of Stalingrad in February 1943. The United States did not enter the fight against Hitler on the continent and open a second front–despite repeated pleas from Stalin–till June 1944. At this point the Russians had pushed Hitler almost all the way back. The Normandy landings were undertaken to contain the Soviet menace, not to defeat Hitler. This point is worth emphasizing because standard history textbooks still peddle American propaganda.        

The essential structure of the oil security complex is best visualized by the following schematic picture I drew using a cool iPad app called paper. I have marked out the system-level players and the major known oil deposits. One can see the major deposits in the Americas, Maghreb, sub-Saharan Africa, Persian Gulf, Central Asia, Siberia, and central Russia. Excluded from the picture are deposits internal to the players, so no blobs for the North sea, California, Texas or Western China. Schematically, the flows connect the three regions to their peripheries. The New World has a largely independent structure, both because of transport costs and the fact that there are substantial oil deposits in the Americas. The biggest producers are Canada, Venezuela, United States, and Mexico. Since the overwhelming bulk of the consumers are in the United States, Canada and Mexico export a substantial proportion of their output to the United States. Due to the sheer size of the US market even Venezuela–despite the rhetoric–does exactly that. Furthermore, North America is a centered RSC with the security dynamics completely and permanently suppressed by the presence of the colossus. Whence, the United States does not face insecurity of energy supply, certainly nothing like Eurasian powers. It does face the threat of another oil price shock. We will come to that shortly.

  

The world-economy is decidedly tripolar: North America, Western Europe, and the Far East have competitive market sizes, industrial infrastructure, and capital (although the last is skewed towards the Atlantic). On the other hand, the international security order is decidedly unipolar. This is crucial to maintenance of American hegemony and the continuation of the current cycle of accumulation. The principal problem of US grand-strategy is to perpetuate unipolarity in the security sphere in the face of this tripolarity of the world-economy.

The solution–consistently followed for the past seventy years–has been to control the Persian Gulf on which the other two poles of the world-economy depend so critically for their energy. Washington has maintained itself as the dominant regional power and excluded other system-level players from the Gulf. A major structural reason for system-level bipolarity in the period 1945-89 was that the Soviet Union had abundant oil of its own and was never dependent on energy from regions controlled by the United States. This grand-strategy is usually expressed in polite company as: United States is committed to prevent the emergence of a regional hegemon in the Persian Gulf. According to a study by the RAND corporation, between 12-15% of US military spending is spent on protecting the Persian Gulf. With about 21 million barrels flowing daily out of the Gulf and military spending upwards of $700 billion, that comes to about $12 a barrel. This has almost nothing to do with ensuring oil supply to the US economy and everything to do with US grand-strategy. The direct cost to US taxpayers is a hundred billion dollars a year. There are other US interests at stake of course: maintaining the health of the world-economy by ensuring reliable supplies and price stability. Before I go into that, let me present a brief history of the Persian Gulf regional security complex. [Read the original article for a more fleshed out version.]

The Persian Gulf was under British protection till 1971. Iran under the Shah was the primary US client and the clear regional hegemon during the 1970s. The Islamic revolution profoundly changed the regional security order. The chaos briefly catapulted Iraq to the top of the regional power hierarchy. The Islamic regime called for revolution everywhere in the Islamic world, thereby making explicit, the implicit threat of a grassroots revolt against the status quo. This threatened both Iraq and Saudi Arabia (as well as the smaller Arab states on the Gulf littoral who sought Saudi protection and coalesced to form the GCC in 1981). Saddam calculated that Iran would be too strong to take on after it had recovered. The United States and the Saudis backed him in his attack on the nascent republic. He failed to consolidate his initial gains, and after the tide turned in 1982, it was realized that the longer the war dragged on the higher the likelihood of an outright Iraqi defeat. The threat of that brought the United States–for the first time–to intervene militarily in the region with the naval deployment and re-flagging operation of ’87-88. This finally brought the belligerents to sue for peace and end the war.

Saddam found Iraq losing out to both Iran and Saudi Arabia because of their oil endowment and the arms race that had began in earnest with the oil price revolution. He needed more billions of dollars in oil revenue to compete in the regional military balance. With the same oil endowment as Iraq itself and no military deterrent, Kuwait was a fat prize with ready made territorial disputes with Iraq. Saddam started threatening to invade Kuwait. When Saddam checked with the American ambassador, she said she “did not have specific instructions about the American response”. US thought he wanted a couple of fields and islands, as did the Kuwaitis incidentally. However, Saddam annexed all of Kuwait. Now, if he were allowed to consolidate his control over Kuwait’s hundred billion barrels of oil, it would have made Iraq the regional hegemon and upset the balance of power in the Gulf. Washington told him that unconditional withdrawal is the only option. He tried to negotiate but the Bush administration had quickly decided on the use of force. This decision was made to establish credibility: that the United States would intervene militarily to reverse any change to the regional security order.

That war brought a permanent and substantial military footprint of the United States into the Persian Gulf, and ever since then, the regional military balance of power (Iran, Iraq, and Saudi Arabia in the system 1971-91) has been overlaid by the system level. Then the American invasion in 2003 destroyed what had been an important pole in the regional security balance. This was a radical departure of American policy in the Gulf. The commitment to maintaining the status quo was replaced by one aimed at transforming the regional order. In any event, the United States military footprint has increased dramatically. Saudi Arabia has also greatly increased military spending but Iran has wisely refused to compete in the regional military balance. This latter fact provides us good evidence that the Gulf regional security complex is now system-level dominant.

Price stability 

Iraq invaded Kuwait on August 2, 1990. The ensuing US-led war in the Persian Gulf took off 4 million barrels a day (mbd) of Iraqi and Kuwaiti production off the market. Saudi Arabia ramped up production from 5.6mbd in 1989 to 8.8mbd in 1991. Other producers also expanded output and helped stabilized the price of crude at tolerable levels. 

1989 1990 1991 1992
Iraq 2,945 2,064 302 421
Kuwait 1,878 1,234 191 1,084
UAE 1,990 2,252 2,531 2,410
Saudi Arabia 5,555 7,019 8,790 9,036
Total 12,367 12,569 11,814 12,952
World 65,519 66,436 66,339 66,55

[The data for these two is from the EIA and is in thousands of barrels a day (tbd)]. When the Bush administration decided on its ill-considered move to invade Iraq, the Saudis obliged by sharply increasing production in the lead up to the war: 

2002 2003 2004 2005
Iraq 2,040 1,318 2,021 1,889
Kuwait 2,030 2,268 2,515 2,672
Saudi Arabia 8,810 10,077 10,496 11,096
UAE 2,387 2,661 2,767 2,845

Saudi Arabia is practically the only producer with excess capacity, and serves as the “swing producer”. It maintains around 2mbd of idle capacity. According to the Wall Street Journal, the traditional US-Saudi security arrangement is based on the understanding that the kingdom works to stabilize global oil prices while the White House protects the ruling family’s dynasty”. It has fulfilled this role since 1980 in the aftermath of the Islamic revolution in Iran that drove the House of Saud (further) into American protection. The size of the Saudi endowment–decidedly more than a quarter-of-a-trillion barrels–and the commitment of the ruling family to play this role ensure that it will continue to fulfill its side of the bargain. As of now, there is no one else:

There are certainly other producers who could potentially replace Saudi Arabia in this role but that would require tens of billions of dollars worth of investment in expanding production capacity (more about this in a bit). These are basically the producers with a hundred billion barrels or more in proven reserves (see below). Even though Russia doesn’t make the cut, we should make note of the fact that it has suffered from substantial underinvestment–especially in upstream sector (exploration and extraction)–and its reserves are quite likely to climb.

Why is the price of oil so high?

Now, everyone knows that demand growth in China and India is bidding up the price of crude. This is certainly true. Price variations are due to a multitude of factors. In the short run, these are demand side factors and supply disruptions or the threat thereof. Since capacity cannot be increased in the short run (the lag is in years), the price of crude fluctuates around a level which is more or less fixed by existing capacity. It is the latter that we shall investigate. Let us start with the Persian Gulf.

At first sight it would appear that the Gulf cannot possibly be suffering from underinvestment. This view is completely wrong. The Ba’ath regime which came to power in Iraq in the sixties had a patchy relationship with oil companies and international investors. There was very little investment then and even less after the wave of nationalization and the oil price revolution. War with Iran during the 1980s actually reduced Iraqi capacity and Iraqi production did not reach the level of 1980 (2.5mbd) till the very end of the conflict in 1988 (2.7mbd). After the invasion of Kuwait and the subsequent US-led assault further eroded capacity. Sanctions in the 1990s kept investment at nearly zero throughout the decade and output hovered under 600tbd till 1997 when the sanctions were partially lifted under pressure from humanitarian groups concerned about the effect on the populace. The United States invaded again in 2003 and the civil war that followed ensured that there was very little investment. However, American occupation opened up the space for trans-national energy companies to sign deals with Baghdad and the autonomous Kurdish authority in the north. The Anbar awakening and the subsequent relative stabilization of the security situation in Iraq was followed by some investment and output is now soaring to record levels of 2.5mbd. Iraq is hoping to increase capacity to 10mbd in the next five years. Oil executives reckon a capacity of 6-10mbd can be achieved in a decade. This will bring substantial new capacity to the market and ease the pressure on the price of crude.

The story in Iran is similar. It was the fight over profits from the oil sector between the Mosaddegh government and the Anglo-Persian Oil Company (now BP) that prompted the CIA coup that brought the Shah to power. Even under the Shah, the relationship with Western companies was lukewarm and there was not much investment. The aftermath of the Islamic revolution saw major capital flight, and the war with Iraq (1980-88) saw some erosion of Iranian capacity. Investment in Iran has been lackluster ever since. With the current US sanctions strangling Iran, there has been underinvestment for decades. The prospects for substantial investments in the current decade to bring forth an expansion of Iranian production capacity can be ruled out without a radical change in US policy.

Substantial deposits in Angola and Nigeria were found only in the 1990s. These places suffer from war and tremendous instability. However, the Chinese have been showering them with assistance in a bid to secure oil supplies. They have made some inroads. The discovery of these deposits prompted the United States to create the Africa command (AFRICOM). Whether these efforts to exploit these virgin resources will be successful in the long run is uncertain. Major investments and capacity expansion are highly unlikely in the medium term.

Baku was the site of one of the first major oil fields. For some reason the Soviet Union concentrated on developing the Siberian deposits to the relative neglect of this region. After the collapse of the Soviet empire, Western oil companies pounced on the opportunity. Major deals were signed but there has been much disappointment with the initial wild-eyed speculation giving way to the sober realization of the limited (though still substantial) extent of the deposits. Still, the Caspian sea region has seen substantial investment following the color revolutions. These have gone mostly to Azerbaijan, even though Kazakhstan has much bigger oil deposits. This is again due to the relative instability of the latter. In any case, this region is being developed and should add to the diversity of supply for Western Europe, reducing the latter’s dependence on Russia and the Persian Gulf. The mantra is oil security lies in diversity of supply. The European powers are also extremely concerned about the stability of their oil suppliers. This may be one reason why they were so eager to intervene in Libya.  

Russia has also suffered from underinvestment following its collapse in 1989. It took a decade and the Putin counter-revolution for the former superpower to get its house in order. In the early days after the fall of the Soviet Union, rights to major oil fields were sold for a song to politically connected insiders, creating overnight billionaires. This has led to a backlash and since Putin’s ascent has been followed by a reinforcement of the State’s primacy over oil resources. Since the arrest of the oil baron Khodorkovsky, relations between private investors and Moscow have cooled. The debacle with BP points to further troubles. The state owned giants Lukoil and Rosneft are incompetent and Russia’s production capacity has failed to grow per expectations.

The situation in Venezuela is similar. The state-owned oil giant PDVSA has to spend at least 10 percent of its annual investment budget on social programs. In the 1990s, Venezuela opened its oil industry to limited private investment and allowed foreign companies to manage specific oil fields. In 2006, Chavez declared that the government would increase its ownership shares in such ventures from 40% to 60%, something he called “re-nationalization”. Then PDVSA lost a $5 billion line of credit in October 2008 at the beginning of the financial crises. There is substantial uncertainty among investors over property rights. Along with uncertainly about US policy vis-a-vis Venezuela, it’s unlikely that substantial new capacity expansion will be coming online in Venezuela.

With zero uncertainty in the centered RSC in North America, production is booming and capacity is expanding in Canada, Mexico, and the United States. But it is all being sucked in by the million Hummers on American roads putting little downward pressure on the price of crude.

So, oil is not selling for a hundred dollars a barrel because its running out. If one looks closely at the numbers, it’s hard to avoid the conclusion that there is potentially enough supply to accommodate increasing Asian demand at a stable price. The problem is rather instability and geopolitics.

[I have ignored some major issues related to oil security: the role of OPEC, the related issue of climate change, major choke points, and the protection of sea lanes (see map below) et cetera. This is not because they are unimportant, but only because there is good coverage elsewhere. The Policy Tensor is not a substitute for general reading.]

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5 thoughts on “Oil Security

  1. Thank you for a brilliant article. The historical background and information on the different oil extracting countries are very useful and made me realize that the problem is a lot more complicated than I previously thought. However, I disagree with your conclusion that the oil price variations are due solely to instability and geopolitics.

    This system is very complex and the factors affecting the price of oil are diverse, and they include the fact that we have reached a peak in global oil extraction around 2005. As of 2009, only 14 out of the top 54 oil extracting nations were increasing their rate of oil extraction (http://www.theoildrum.com/node/5576 using data from the 2009 edition of the BP Statistical Review of World Energy), whereas the remaining 40 have either peaked or have a stable oil output.

    While some of this may be due to geopolitics and price manipulations, it is also explained by the fact that we have a finite amount of oil, hence the rate of extraction follows a bell curve no matter the technology we use and the amount of money we throw at it.

    Therefore, it is hard for me to see how we can \”accommodate increasing Asian demand at a stable price\”, especially when that demand grows exponentially. There will come a point (and we may have already reached it) when demand for oil will exceed supply which will cause chaos in the price of oil.

  2. I didn’t claim that geopolitical factors explain all price variations. They certainly don’t. Most price fluctuations are short term and due to demand changes and supply disruptions (or the threat of disruptions). This variation takes place in the context of a fixed given capacity–which determines the level around which such variations occur. It is the latter which I was trying to explain.

    And Matthew, I used to be a peak-oil enthusiast as well. The problem is that the data just doesn’t match up. For instance, in the link you just posted: Iran, Kuwait, Iraq, Venezuela, Russia, Nigeria, and Ecuador are listed as having peaked. The truth is that they are either growing, or suffering from underinvestment and can see substantial capacity expansion. And they account for a large chunk of proven reserves (see chart above). Their “peaks” are not the natural peaks of the theory.

    We are decades from a serious tryst between finite resources and growth in demand. There is a distinct possibility that growth in Asia will taper off to rich world levels and improvements in efficiency will allow that to be accommodated without seriously undermining the world-economy.

    Thanks for your appreciation. Do you live in Montreal?

    • This data comes from BP, could it be inaccurate?

      I think there can be confusions that arise because data sometimes includes substitute liquids such as natural gas, tar sands, ethanol, etc… Now these are much more expensive to extract and their energy return is much lower. To compare them with crude oil is confusing.

      A few things make me think that we are already at peak oil. World discoveries peaked 40 years ago, which approximately corresponds to the time between a peak in discoveries and a peak of extraction. The EROEI of the new discoveries is a lot lower, indeed these new discoveries are in the arctic, or very deep under water, or they are tar sands…

      Oil is a finite resource, hence increasing efficiency can only delay the peak for a few years and quicken depletion.

      “Efficiency is the straightest path to hell.” wrote James Howard Kunstler.

      Furthermore, the price of oil has been very chaotic since 2005. It went from ~30 dollars a barrel to 147 USD/b in 2007. The crash then destroyed demand, bringing it back down to its previous price. And it hiked again and so on. It seems we are at the bumpy plateau as described by peak oil experts. Every time the economy does well, the price of oil goes up, but expensive oil naturally slows down the economy which destroys demand, so the price goes back down, which in turn stimulates the economy. This can only be the case because supply of oil cannot keep up with demand when the economy recovers.

      What do you think?

      By the way, have you seen this film : http://crisisofcivilization.com/watch/ ?
      It links the themes of peak oil, terrorism, ecological disasters and financial meltdown. It is very interesting! although the intro is a little weird (heads up! 🙂 ).

  3. There is no doubt that global oil production will peak at some point. The question is when. And do not discount efficiency. It is our best strategy to manage the transition to natural gas and eventually to renewable sources of energy for transportation. I didn’t address this seriously cause I was interested in the security and geopolitical aspects of oil supply. That issue is not going anywhere. And if you are right and we cannot increase production in the next decade or two, it will exacerbate the security problem. Furthermore, if we move away from unipolarity–as many predict–that is a perfect recipe for a system wide conflict. The stakes couldn’t be higher.

  4. Pingback: Energy security and geopolitics – The Bestem Network

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