1. twod@umich.edu | TomOD.com 1 Thomas W. O’Donnell The University of Michigan Center for Middle East and North African Studies Michigan Center for Theoretical Physics Residential College - Social Science Program twod@umich.edutwod@umich.edu, http://www.TomOD.comhttp://www.TomOD.com | New School, NYC GPIA | Economics of Security Workshop | 17 Nov 2006 | The Global Political Economy of Oil & U.S. Persian-Gulf Policy

2. twod@umich.edu | TomOD.com 2 Motivation for Oil Study Lots of theories: - Interests & empires vs. multilateralism & liberal markets * ? - New “Great-Power Rivalry” & “Great Game” a la WW I ? - “Resource Wars” (mercantilism) ? - One global capitalist class ? - “Peak Oil” & “End-of-Oil” ? - Rentier states or new internal markets ? - Global warming & environment ? - Oil & Iraq War ? - Oil & Iran crisis ? - Political-Economic Basis for U.S. Persian-Gulf Policy * E.U. Commission Green Paper, March 2006 Central question: hegemony / U.S. role  Motivations to study political-economy of oil:

3. twod@umich.edu | TomOD.com 3 Hegemony or Empire? Niall Ferguson From Foreign Affairs, September/October 2003 Two Hegemonies: Britain 1846-1914 and the United States 1941-2001. Patrick Karl O'Brien & Armand Clesse. Aldershot, U.K.: Asghate, 2002, 365 $84.95 Summary: Did the United Kingdom's influence in its heyday match the United States' today? Two Hegemonies provides an answer; but "empire" might be the better word. Niall Ferguson is Herzog Professor of History at the Stern School of Business, New York University, and a Senior Research Fellow of Jesus College, Oxford. He is the author of Empire: The Rise and Demise of the British World Order and the Lessons for Global Power. “Hegemony”, “Empire” ? Radical categories of 1960-70s … now mainstream academic and foreign-policy debates Motivation for Oil Study

4. twod@umich.edu | TomOD.com 4 Theoretical framework: Two aspects in study of ‘oil order’: 1.In itself (economics, market, reserves, technology, …) Actors: IOCs, Independents, NOCs, states Market-control institutions & practices 2.In relation to other things Domestic: Transportation & energy infrastructure, lobbies, … Geo-Strategy: Oil hegemony brings hegemony-in-general Corollary: States’ & companies’ interests are simultaneously: Complementary (too often seen in vulgar-economic, voluntarist way) Contradictory (this often missed) Method for Oil Study

5. twod@umich.edu | TomOD.com 5 Political-Economy - Generally: - Oil markets (natural resource, generating rents) have two major issues: Inherent volatility Security of supplies - Market-control institutions and practices -Used to limit competition; regulate production levels and prices; -insure more consistent profitability, reliability - Forms of control have to be consistent with: Existing property relations Existing technology, communication, transport Role of state vs. enterprises The Old Oil Order (1890s-1970s) The NewGlobalized Oil Order Theory Framework for Oil Study

6. twod@umich.edu | TomOD.com 6 The Old Oil Order (1890s-1970s) - 2 nd Industrial Revolution, Mass Production Era, Monopoly-Capitalist Era Vertically integrated international oil companies (majors) Contained volatility of market within Limited competition to ends of companies point of sale finding oil fields Owned ‘concessions’ Standardization, efficiency, quality control Cartel agreements to control supplies, control price U.S. held global surplus – the swing producer Used to enforce concessions and prices, for war time, etc. U.S. energy czar, allocation and price controls Broke up Standard Oil The NewGlobalized Oil Order Theory Framework for Oil Study

7. twod@umich.edu | TomOD.com 7 The NewGlobalized Oil Order (1980s …) Security IEA SPRs Global-north oil Supply cushion Volatility Price bands Saudi swing state Futures market Role of states U.S. Hegemon, OECD / IEA counter-cartel, IEF(S), … Role of force Theory Framework for Oil Study

8. twod@umich.edu | TomOD.com 8 I. POLITICAL ECONOMY 1.FACTS of oil sector Geography | Reserves | Technology | Consumption | Price History 2.HISTORY from cartels to globalization Property relations | Security of supply & demand | Volatility | Cartels & control institutions 3.CRISIS ? Projections | China & India | Productive capacity II. U.S. PERSIAN-GULF & GEO-STRATEGY 4.THE GLOBALIZED OIL ORDER allies & “rogues” U.S. v. E.U. | Four aims of U.S. policy in Persian Gulf | Oil, war and global warming OUTLINE:

9. twod@umich.edu | TomOD.com 9 (Report#:DOE/EIA-0484(2002) Absolute levels Note: Information Revolution hasn’t yet revolutionized energy Oil facts: Demand

10. twod@umich.edu | TomOD.com 10 Oil % constant. Why?? Where are the resources? … Oil facts: Demand

11. twod@umich.edu | TomOD.com 11 1. FACTS of oil sector - 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 are 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 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.)

12. twod@umich.edu | TomOD.com 12 Precondition for hegemony …natural concentration - M.E. more so… Oil facts: Reserves tar sands bump

13. twod@umich.edu | TomOD.com 13 60+% world reserves Mideast: 90% Persian Gulf Hegemony possible Oil facts: Reserves

14. twod@umich.edu | TomOD.com 14 Field distribution by size Another form of concentration: Gulf oil mostly in “super giants” / “elephantine” fields By: Matt Simmons@ Rice U. conf, 2004. Source: Professor Steven Dutch, University of Wisconsin - Green Bay. Oil facts: Reserves

15. twod@umich.edu | TomOD.com 15 1. FACTS of oil sector - 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 are 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 ORGANIZATIONS (OPEC, IEA, IEF, etc.)

16. twod@umich.edu | TomOD.com 16 Source: EIA - Biggest producers: 1.Saudi A. 2. U.S. 3. Russia 4. Iran 5 Mexico (1, 2, 3 vary) - M. East biggest region -US / Russia pump fast on small reserves N. Hemisphere ½-depleted, but not ME. - Non-Mideast pumps at ~max. rate (Hubbert’s Peak: US was ½-emptied out by 1971 ) Oil facts: Production

17. twod@umich.edu | TomOD.com 17 Source: IEA * Saudis huge, yet 30-40% spare capacity < 2003 unique! *Iran now 2 nd * Iraq ‘could’ be 2 nd Saudi Arabia. 10-15 yrs + $20-40 billion (ref: US Council on For. Relations, pre-war report ). Global-north depletion will exacerbate M. E. concentration Oil facts: Production

18. twod@umich.edu | TomOD.com 18 ASIDE: US ‘Dependence’on Mid East? ~ 60% US oil Imported U.S. gets all Western Hemisphere’s oil From Mideast: 2000: 21%, 2005: 17% (10-12% of total demand) Hence, U.S. fractional “dependence” very low means.to pump… Oil facts: U.S. Imports

19. twod@umich.edu | TomOD.com 19 I. POLITICAL ECONOMY 1.FACTS of oil sector Geography | Reserves | Technology | Consumption | Price History | 2.HISTORY: From cartels to globalization Property relations | Security of supply & demand | Volatility | Cartels & control institutions 3.CRISIS Projections | China & India | Productive capacity II. U.S. GEO-STRATEGY 4.THE GLOBALIZED OIL ORDER allies & “rogues” U.S. v. E.U. | Four aims of U.S. policy in Persian Gulf | Oil, war and global warming OUTLINE:

20. twod@umich.edu | TomOD.com 20 The NewGlobalized Oil Order (1980s - …) Security IEA SPRs Global-north oil Supply cushion Volatility Price bands Saudi swing state Futures market Role of states U.S. Hegemon, OECD / IEA counter-cartel, IEF(S), … Role of force History: how globalized order was slowly established

21. twod@umich.edu | TomOD.com 21 3 rd oil shock $ 95

22. twod@umich.edu | TomOD.com 22 3 rd oil shock Average IEA Crude Oil Import Price Projections: DoE EIA Annual Energy Outlook Feb. 2006 $ 95 $ 50

23. twod@umich.edu | TomOD.com 23 Five Phases of the Global Oil Order World Oil Market and Oil Price Chronologies: 1970 – 2005 IEA data 1937–1956 1957 – 19731974 – 19861986 – 2000 WWII 1947 1951 1967 Oil Shock IOil Shock IIOil Shock III 1979 1990 | Carter | Reagan | Bush | Clinton | Bush 2001 - 1997-98 First oil shock: -1973 Arab OPEC Embargo

24. twod@umich.edu | TomOD.com 24 OIL SHOCK 1973/1974 - Previous embargoes never worked when US opposed (WWII, 1956, 1967) Role of U.S. surplus was key - Texas Railway Commission - West Texas as “Saudi Arabia” of pre-1971 era. - Hubbert’s Peak for US 48 states. Role of U.S. state organizationally (from FDR’s oil board/ H. Ickes) - Prices rise over 4x - OPEC states enforced nationalization of “concessions” Ended colonial vestige in property rights - - Undermined vertically integrated monopolist enterprises - - Undermined Great Cartel (more later) * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations)

25. twod@umich.edu | TomOD.com 25 OIL SHOCK 1973 - Urgent need for US / OECD* regain control. Kissinger proposed two U.S./OECD measures: 1. Invasions to seize MENA oil fields. British declassified, Feb, ’04 Later: 1980 U.S. abandon Nixon Doctrine for Carter Doctrine. Reagan, Bush Sr., Clinton begin stationing U.S. troops & material / bases … today  * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations)

26. twod@umich.edu | TomOD.com 26 OIL SHOCK 1973 - Urgent need for US / OECD* regain control. Kissinger proposed two U.S./OECD measures: 1. Invasions to seize MENA oil fields. British declassified, Feb, ’04 2. Counter-cartel of consuming nations: “change the objective conditions” Kissinger International Energy Agency (IEA) Members keep 90-day Strategic Petroleum Reserves (SPR) See  Immediately implemented, highly successful for embargo nullification … but organization lagged. OECD policy: let Inflation eroded price gradually. (Yergin) 3. Develop new N. Hemisphere oil * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations)

27. twod@umich.edu | TomOD.com 27 1980-90’s: US/OECD’s IEA Vs. OPEC “confrontational” relationship. Kissinger plan worked: strategic reserves (SPR) of IEA counter- cartel negated embargo weapon Implies threat: … what might US/OECD do militarily over 90+ days if embargo again An added SPR role: … IEA pressured OPEC to observe US/IEA price range by adjusting pumping rates.

28. twod@umich.edu | TomOD.com 28 Kissinger’s role … the planner and organizer of IEA: * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations)

29. twod@umich.edu | TomOD.com 29 Kissinger’s role … the planner and organizer of IEA / oil hegemony: * OECD: Organization of Economic Cooperation and Development (AKA the “First World” nations)

30. twod@umich.edu | TomOD.com 30 IEA data 1937–1956 1957 – 19731974 – 19861986 – 2000 WWII 1947 1951 1967 Oil Shock IOil Shock IIOil Shock III Themes: 1. OIL PRICE SWING STATES” 2. ;US Vs. GB & France 3. US-OECD Vs. OPEC 4. US Surplus till 1970 1979 1990 | Carter | Reagan | Bush | Clinton | Bush 2001 - 1997-98 World Oil Market and Oil Price Chronologies: 1970 – 2005 IEA data 1937–1956 1957 – 19731974 – 19861986 – 2000 WWII 1947 1951 1967 Oil Shock IOil Shock IIOil Shock III 1979 1990 | Carter | Reagan | Bush | Clinton | Bush 2001 -- 1997-98 Second & Third shocks: -1979 – IEA organized -Business model … -Spot & Futures mkt -1985 -Recog’d OPEC -“New World Order” -Collusion begins: 1 st Price Band slide  Five Phases of the Global Oil Order

31. twod@umich.edu | TomOD.com 31 Source: Brad Bourland, CFA, Chief Economist, Samba. At NY Energy Forum, June 2006 Two IEA-OPEC price-band agreements: - 1986: $17 (+/- ~4) G H W Bush & King negotiated - 2000: $27 (+/- ~5) Sec. Richardson / London mtg. - 2006: ?? third agreement ? ? ?

32. twod@umich.edu | TomOD.com 32 Four Phases of the Global Oil Order World Oil Market and Oil Price Chronologies: 1970 – 2005 IEA data 1937–1956 1957 – 19731974 – 19861986 – 2000 WWII 1947 1951 1967 Oil Shock IOil Shock IIOil Shock III 1979 1990 | Carter | Reagan | Bush | Clinton | Bush 2001 - 1997-98 Confrontation  Confidence building - New OPEC generation - Gulf War coalition - Vienna deal  IEF begins - US Sec. Energy Richardson - 1997-1998 Asian crisis-2000 swings “bad for business” - 2000 London mtg. price - IEF upgrade proposed Osaka by Prince Abdullah … then crises 2001

33. twod@umich.edu | TomOD.com 33 I. POLITICAL ECONOMY 1.FACTS of oil sector Geography | Reserves | Technology | Consumption | Price History | 2.HISTORY from cartels to globalization Property relations | Security of supply & demand | Volatility | Cartels & control institutions 3.CRISIS Projections | China & India | Productive capacity II. U.S. GEO-STRATEGY 4.THE GLOBALIZED OIL ORDER allies & “rogues” U.S. v. E.U. | Four aims of U.S. policy in Persian Gulf | Oil, war and global warming OUTLINE:

34. twod@umich.edu | TomOD.com 34 The new, globalized system is facing a potential “energy” crises U.S., IEA, OPEC et al forced to “reinvent” the system, or lose it What are these crises which drive Washington, London et al?

35. twod@umich.edu | TomOD.com 35 Four Phases of the Global Oil Order World Oil Market and Oil Price Chronologies: 1970 – 2005 IEA data 1937–1956 1957 – 19731974 – 19861986 – 2000 WWII 1947 1951 1967 Oil Shock IOil Shock IIOil Shock III 1979 1990 | Carter | Reagan | Bush | Clinton | Bush 2001 - 1997-98 Crises: 1.1990s- 2001 Saudi crises, in “Central bank of oil” 2. 2003 Demand up + no cushion  data Requires: - FDI (IEA: “$5 T by 2030) - Better market control (IEFS, JODI, …) - ‘Iraq & Iran online’ but not ‘rogues’ -> invasion & confrontation Two views: Multilateralism & liberal markets vs. nationalism & empires ?

36. twod@umich.edu | TomOD.com 36 Globalized order New characteristics: –Demand-crisis & low buffer threatens “cheap oil” Demand up 60% between 2001-2030 –Requires huge oil investments (e.g., ‘Cheney’ Plan) $5T, mainly in nationalized Middle East oil –“Consumer-Producer Dialogue.” Economic-control Institution (Bush Sr. / Clinton / Richardson) data 

37. twod@umich.edu | TomOD.com 37 Recall: oil’s % forecasted constant In spite of 1 st-- world efficiencies … where is the expansion? …

38. twod@umich.edu | TomOD.com 38 China demand huge factor … surpassed Japan ’03, & US by 2020 has gone auto-centric; economic & military reasons. … being reduced to historical dilemma of Japan, Germany very precarious choice – must import any additional oil! Middle-class sizes ~determine relative growth potential US solution: an oil offensive…

39. twod@umich.edu | TomOD.com 39 Globalized order IEA + OPEC  IEFS, Institutionalized in Riyadh Features: –Parallel standing Secretariats (ministers & majors) –Market information (JODI) in tight-market volatility –Transparency of proven reserves, cost, production rates, … –New MENA, perhaps Mexico, FDI laws. –Global meetings, 92 energy secretaries

40. twod@umich.edu | TomOD.com 40 U.S. Persian-Gulf Policy: –Multi-lateral order, fungible oil, open market, FDI, … –No ‘rogue’ oil states –Historical high absorbers –Persian-Gulf States as protectorates Sanctions on –FDI from ba’athists (13 yrs) –FDI from Iran clerics (11 yrs now) Political-economic basis: –Growth in Persian-Gulf importance –Eliminate high absorbers’ behavior WHY?  –Implementation Iraq War U.S.-Iran crisis open Caspian for investment FSU pipelines to go south, etc.

41. twod@umich.edu | TomOD.com 41 Pumping now mainly from sates with ½- depleted reserves … trajectory Energy/Oil Basic Facts: Supply Persian-Gulf states’ importance

42. twod@umich.edu | TomOD.com 42 Energy/Oil Basic Facts: Supply Persian-Gulf states’ importance U.S. & Russia #2 & #3 producers -- unsustainable – Gulf States’ production% will grow What are Iraq/ Iran’s importance to global system?

43. twod@umich.edu | TomOD.com 43 Iran Energy/Oil Basic Facts: Supply Iran’s Importance

44. twod@umich.edu | TomOD.com 44 Iran Iraq Energy/Oil Basic Facts: Supply Iran & Iraq’s importance U.S., E.U., IEA, program for development M.E. oil …

45. twod@umich.edu | TomOD.com 45 Spare capacity mitigate disruption Foreign investments already, under Clinton market % growing Special Gulf role: Expand pumping capacity / Foreign Direct Investments (FDI) push: From “Cheney Energy Plan”:

46. twod@umich.edu | TomOD.com 46 Why Iraq (Iran)? Much pressure to develop fields: Restoration of production capacity IEA Reference Scenario Slow production expansion Rapid production expansion (Source: IEA Energy Investment Conf. late ‘04) Cumulative Investments (billion $US) Production (million barrels/day) 2010 2020 2030 2020 2030 Very similar graphs were made by: Council on Foreign Affairs pre-invasion commission; (included later- occupation official Jas. Garner, …) 2020 N.B.

47. twod@umich.edu | TomOD.com 47 Source: V. Pres. D. Cheney’s White House Energy Report 2000 - Iran and Iraq importance … Cheney says: New directions for pipelines – Now to go south vs. north into FSU

48. twod@umich.edu | TomOD.com 48 Political-Economy of U.S. Iraq (& Iran) policy: Persian-Gulf oil importance will continually rise U.S. must remain the Persian-Gulf hegemon Regional hegemony brings global hegemony-in-general That is. over rivals (E.U. & China examples) Not, about U.S. home market – wants oil fungible Not merely about U.S. IOCs – trumped by geo-strategy Iranian clerical regime now most significant threat to this U.S. Gulf hegemony (with Saddam’s demise)

49. twod@umich.edu | TomOD.com 49 U.S. strategic assessment on Iran: -If Iran were allowed to absorb some $30 to 50 billions in FDI, clerical regime would become rich and powerful actors in the Region and OPEC. -Same U.S. assessment of Iraqi ba’ath from 1991. -Would use oil against Saudi, Kuwaiti, UAE royals, new Iraqi state, disrupting U.S. regional hegemony.

50. twod@umich.edu | TomOD.com 50 U.S. strategic assessment on Iran: Hence, block with sanctions … but sanctions not sustainable (e.g., Iraq ). Hence, regime change: - Iran & Iraq as U.S. protectorates as rest of Gulf - Then permit to become oil-rich too Implementation: