O.G. Austvik: The War over the Price of Oil - Intl Journal of
Global Energy Issues 1992
Iraq´s invasion of Kuwait on August 2, 1990 was called the
biggest armed robbery in history. From an economic and natural resource
point of view, however, disagreements as to what price policy to pursue
for oil might have been an even more important reason for the invasion.
In the same way vital economic interests, that wanted moderate oil
prices,
were an important reason why the allied forces, led by the U.S., went
to
war against Iraq on January 17, 1991. In view of the importance of the
price of oil for the economies of both oil exporting and importing
countries,
the power to influence this price is of great significance. The more
one-sidedly
dependent a country is on oil in the economy the more important it is
who
has this power. In the Gulf conflict the oil producing and consuming
countries
for which oil is very important, and that also have major military
means,
were the principal actors.
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An economic argument for the war, expressed in the disagreement over
the level of the price of oil, does not exclude explanations that the
conflict
was founded on other motives too. Additional reasons for Iraq´s
invasion
of Kuwait may have been the conflict over the property rights to
Kuwaitian
oil, and the oil field Rumaila, as well as territorial claims and
Saddam
Hussein´s ambitions in international politics. Moreover, pressure
against Israel to promote the interests of the Palestinians might have
played a part. The response of the allies, and in particular the U.S.,
may also be explained by global political and strategic interests, a
wish
to protect Israel and promote stability in the region. In this article,
however, the oil related explanation is discussed
as if
it were
the only reason behind the conflict. In all probability the conflict
was
a result of many of the reasons mentioned above. The absence of one
argument
might have resulted in a different course of events than what was
really
the case. It is up to the reader what importance he or she attaches to
the oil political/economic argument as set forth in this article in
comparison
with other arguments.
Firstly, in this article I will give some arguments why in a
geopolitical
perspective the control of oil reserves & production often can be
seen
as a contest as to who shall decide
the price
of oil. Then, I
shall
discuss how this conflict over the oil price gave rise to Iraq´s
invasion of Kuwait and the subsequent reactions on the part of the
Western
countries and their military intervention. I shall assess what Iraq
might
have achieved if the country had managed to "get away with" its action
against Kuwait, and what the allies may hope to have obtained by
defeating
Iraq. Since the discussion is based on the assumption that the parties
have tried to defend their interests by attempting to influence the
price
of a raw material in an international market, I shall also assess to
what
extent it seems probable that the wishes of the victors have come true:
What price levels can be expected for oil in the short, middle and long
term? How has this been affected by the conflict? Finally, some remarks
will be made on what might be the economic and political interests of
Norway,
now being one of the worlds largest oil exporter, in relation to the
conflict?
THE PRICE OF OIL AS AN INTERNATIONAL PUBLIC GOOD
Nearly 2/3 of the world´s known oil reserves are found in 5
countries
on the Persian Gulf: Saudi-Arabia (25%), the United Arab Emirates
(10%),
Kuwait (9%), Iran (9%) and Iraq (10 %). Still, however, the
Commonwealth
of Independent States (20%) and the U.S. (14%) are the world´s
largest
producers of oil. The five Gulf states represent only about 1/4 of the
world´s total oil production. But they represent almost half of
the
world trade in crude oil. Since globally the price of oil is determined
by the balance between the import demand for and export supply of oil,
this area becomes particularly important for price formation. Due to
the
fact that both production of oil and oil reserves in countries outside
the Gulf states are decreasing, this area is expected gradually to
become
more important for world supply.
The price of crude oil is formed in an interplay between a number of
qualitatively different factors. On the demand side, economic growth,
demand
and price elasticities, the existence or lack of substitutes,
technological
development and the coordination of energy conservation and
diversification
measures, as well as market operations (as carried out by e.g. the
IEA).
On the supply side the reserve base and production horizon of producer
countries, the geographical concentration of resources, the need for
revenues,
domestic and foreign political interests, inelasticity of supply as
well
as
the ability to coordinate production and price policies (e.g. through
the
Organization of Petroleum Exporting Countries, OPEC). Obviously when
the
price is formed in the combination of a number of such qualitatively
different
factors it is obvious that assumptions as to the future price of oil
often
will be relatively uncertain.
In spite of great uncertainty as to which model is preferable there
seems to be general agreement that the supply of oil from the Persian
Gulf
is the most important
single factor
affecting the price. Since
this
price is the same both for producers and consumers, as an international
public good (some would say evil), when adjustments are made for
varying
quality and transport costs, all operators in the oil market are
particularly
conscious of how this area develops.
For importers this means that even if the country from which they
buy
their oil lies in a quite different part of the world than the Middle
East,
they will have to pay the same price as for oil imported from that
region.
Any price rise due to a reduced supply from the Gulf area then, will
result
in a transfer of revenues from the consumers to the producers all over
the world, irrespective of geographical or political position. This
happened
during the previous two price shocks 1973/74 (OPEC I) and 1979/81 (OPEC
II). The most important reasons, thus, for Norway´s high oil
revenues
in the first half of the 1980s were Khomeiny´s assumption of
power
in Iran, the war between Iran and Iraq and the building up of stocks
after
the war due to fears of substantial supply shortages and a continued
rise
in prices. It had little or nothing to do with Norwegian politics.
For oil exporting countries the revenues are of crucial importance
as
to trade balances. Most oil producing countries in the Persian Gulf
depend
on these revenues. Of total exports oil represents 93% for
Saudi-Arabia,
90 % for Kuwait, 89 % for the United Arab Emirates, 94% for Iran and
98%
for Iraq.
When considering the ability of exporting countries to manipulate
the
price of oil, particularly through reduced production, it is a problem
that production reductions also benefit other countries, which
implement
no reductions, became the price is an international public good. Any
producer,
therefore, wants others to carry the costs by increasing the price,
whereas
they themselves want to be free riders in relation to the measures.
Combined
with a disagreement as to which price level is the right one, this is
an
important reason for the endless disagreement within OPEC, between the
countries on the Persian Gulf and also between OPEC and non-OPEC
countries,
such as Norway, over production rules and Quotas.
For an oil importing country´s dependence on oil, the fact
that
it may import small quantities of oil from the Gulf, means less than a
rise in the price of oil if their economy is oil intensive. In 1989,
for
instance, the U.S. imported only 13 per cent of its oil from the Middle
East. For the remaining 87 per cent of their oil imports they have to
pay
a price as high as the one they pay for Middle East oil, whether the
oil
comes from Norway, Alberta, Venezuela, Mexico or Algeria. Also, the
same
price has to be paid for oil produced in the U.S., which represents
about
half the consumption. The vulnerability, therefore, of an oil importing
country as regards the scarcity of oil (in time of peace) can be
defined
as a vulnerability to too high oil prices through a substantial
transfer
of surplus from consumers to producers. Besides, for many countries
this
means a proportional rise in import costs.
Too
high prices
leads
to unemployment, inflation, trade balance deficits and recession, as we
have seen in the wake of the two oil price shocks.
In the same way as some countries want to be free riders in relation
to the measures taken by other countries as regards the supply of oil,
oil importing countries also have an interest in other countries
reducing
their consumption, so that the price of oil can be kept as low as
possible.
This is the germ of a beginning discussion particularly between Japan
and
Western Europe on the one hand and the U.S. on the other, and is seen,
among other things, in the disagreement over excise taxes on petroleum
products. Thus, for the price consumers have to pay and producers
receive,
the crucial factor is the
international portfolio
of measures
regulating
demand and production both in the short and the long term. These
measures
can include taxes, regulations and economic and political negotiations.
Partly, the measures are substitutes for each other, partly they are
complementary
and partly the exclude each other reciprocally. One country that
prevents
the common good (evil), i.e. the price, from moving in a favorable
direction
may have an adversary effect on other countries interests. The
"offended"
country may take action to defend it`s interest. Warfare is the
ultimate
political measure any country can take to reach its economic and
political
goals. In the case of oil, the physical control of oil reserves and
production
may give a country possibilities of influencing the price and thus
being
a measure to be considered in order to defend it`s interests.
THE OIL POLICY PRELUDE TO THE IRAQI INVASION OF KUWAIT.
The Iraqi invasion of Kuwait revealed opposing economic and
political
interests between the producer countries Iraq (and Iran) on the one
hand
and Kuwait (and Saudi-Arabia and the United Arab Emirates) on the
other.
Both from an economic and foreign policy point of view the disagreement
materialized in differences as to the pricing of oil.
After the war against Iran from 1980 to 1988 the Iraqi economy was
on
the verge of a complete collapse. The state, with an orthodox socialist
organization, was functioning very poorly. Debts to western countries
totalled
about USD 20 billion. In addition, Iraq had "borrowed" large amounts
from
its neighbors Kuwait, Saudi-Arabia and the Emirates to finance the war
against Iran. It is assumed that these "loans" amounted to USD 40-50
billion.
Iraqi export earnings has been completely dependent on revenues from
the
oil sector and have had very limited possibilities of any substantial
increase
in its export capacity in the short term. In view of the
country´s
limited access to ports, as well as costly and potentially vulnerable
pipeline
access through Turkey and Saudi-Arabia, a long-term build-up of
capacity
might also turn out to be difficult. In the short and middle term an
increase
in the price of crude oil may have seemed to be the only possibility of
saving the country from economic chaos. In the long term improved
physical
access to reach the world marked would also be important.
The Kuwaitian economy has had a very different structure. The
country
has had large incomes from it`s foreign investments and refineries and
chains of petrol stations (e.g. Q8) in Western countries. Thus, the
country´s
currency revenues have not only depended on the price of crude oil, but
also on the price at which the country has been able to sell its
products
in the market, as well as the return on investments in general. Kuwait
has been more dependent on a Western economy capable of functioning
than
Iraq (and Iran). Countries like Saudi-Arabia and the United Arab
Emirates
have not wanted too high prices either. Instead these three countries
have
increased revenues through increased production.
The role of oil in
foreign politics
is accounted for by on
unstable
security policy in the area. Kuwaitian policy of high prices,
implemented
by means of a s>
Transfer interrupted!
ld have resulted in increased revenues for the neighboring countries
Iraq
and Iran as well. From a Kuwaitian point of view this might finance new
aggression in the Gulf region and towards themselves. High prices, from
the point of view of foreign politics, have not been desirable either
for
Kuwait, Saudi-Arabia or the Emirates. The good relationship of these
countries
with oil importing countries in the West reinforces this view.
The low price policy of these three countries was carried out by
constantly
increasing production, so as to almost eliminate the price effect of an
increased demand for oil. The oil price was kept fairly
stable at a
level of $16-19 per barrel
(1992 value) during the last five years
prior to the invasion of Kuwait. This has been the lowest price level
since
1973.
In the OPEC context this meant an almost continuous violation of
agreed
production quotas, especially on the part of Kuwait and the Emirates.
In
Saddam Hussein´s opinion this low price policy was an aggression
against Iraq, particularly after he had fought the war against the
common
enemy Iran. Given the difficult economic situation his country was in
he
might have felt forced to do something drastic. The option of some
drastic
action, i.e. occupying Kuwait, and possibly parts of Saudi-Arabia as
well,
fitted in well with his geopolitical ambitions. The fact the Iraqi did
not pay much attention to OPEC quotas when the country was able to
increase
oil production, obviously meant very little to Saddam.
Something more than history`s biggest armed robbery....
During 1990, the Iraqi´s frustration at its difficult economic
situation became more and more apparent. At the time of the OPEC
meeting
on May 2 -3 Mr. Aziz, the foreign minister, stated, with over-producing
Kuwait and the United Arab Emirates as his addressees, that "this is a
very serious issue......we warn them against continuing with this
irresponsible
game". In spite of the formal agreement reached at the meeting about
reduced
output the two countries continued their large over-production,
compared
to the quotas, each of them exceeding them by more than 1 million
barrels
per day (mb/d).
Gradually Iraq explicitly blamed Kuwait for the poor state of its
economy.
As late as July 11, Kuwait promised to keep its oil production within
its
OPEC quotas. The market, however, did not react to these signals in the
form of rising prices, based on the experience that such rhetoric had
not
been followed by concrete action on the part of Kuwait over the last
years.
On July 27 Saddam Hussein made a speech in which he indicated the
possibility
of forcing production discipline on the members of the OPEC by means of
unilateral measures. He also marched up troops on the Kuwaitian border
in order to underline the serious nature of the situation. In addition
he put pressure on Kuwait to be released from war debts.
At the OPEC meeting in Vienna, which was taking place at the same
time,
Kuwait again accepted to observe its production quota, which at the
same
time was raised from 1 million barrels a day to 1.5 million barrels a
day.
The compromise price was fixed at $ 21 a barrel. Few expected Saddam
Hussein
to attack Kuwait since to some extent his demands in relation to the
over-producers
had been met. These concessions, however, were obviously not sufficient
for Iraq, or they were too late in an advanced process. Moreover, Iraq
argued that the price of oil ought to be $25 per barrel, while Iran
demanded
$30 per barrel.
The transfer of property rights to Kuwait´s oil resources was
an additional powerful economic argument for Iraq´s invasion.
Based
on the fact that Iraq wanted to take over Kuwaitian oil the invasion
may
very well be looked upon as "the world´s biggest armed robbery".
However, the
price
effect of this "transfer" of property rights
would have a much greater effect on international politics and economy,
besides, it would increase the value of Iraq´s "spoils". This
greatly
contributed to the fact that so many oil consuming countries
immediately
involved themselves in the conflict. These Western countries could
hardly
be said to have felt directly physically threatened by Iraq (as some
Arab
countries, not least Saudi-Arabia, could).
Whether or not Iraq was aware of this crucial link with western
economy
is an interesting question. If they did not attach any great importance
to this connection, the allied reactions may have been a great surprise
to Iraq. If they were aware of this in advance, the invasion may be
looked
upon as a provocation, especially of the West, similar to the use of
the
oil embargo weapon in 1973/74. Still the intensity of the West´s
reactions may have been a surprise to Iraq. The reason for a wish to
provoke
the West may have been a combination of circumstances, such as a wish
to
increase oil revenues by higher prices, as well as north - south
issues.
Iraq, traditionally supported by the Soviet Union, may have thought
that
they would be backed up by Moscow`s in view of the Kremlin`s
traditional
political interest in a global perspective of harming the West through
high prices of crude oil.
THE OIL POLICY PRELUDE TO THE ALLIED MILITARY ACTION
Oil is still the most important single commodity in the
international
economy and one of the most important variables for economic growth and
welfare of consumer countries. In the wake of the previous two oil
price
shocks, thus, large investments have been made in energy conservation
and
diversification to reduce dependence on oil.
After the fall in the price in 1985/86, however, the immediate
incentive
to continue the efforts for a reduction of the consumption of energy
has
been weakened. However, there are great differences between the
policies
pursued by the U.S., Japan and Western Europe. To a large extent
European
OECD countries and Japan have managed to prevent a sharp rise in the
consumption
of oil through fiscal means and other measures. In Japan the
consumption
has turned out to be very stable, whereas Western Europe has lowered
its
consumption by some 2 mb/d since the oil price shock in 1979/81.
The U.S. on the contrary, has allowed market forces to work almost
directly
to the benefit of the consumers. Before the Iraqi invasion of Kuwait
the
price of petrol in the U.S. was USD 0,3 - 0,4 per litre while in Europe
this price was almost USD 1 per litre. The low price has resulted in a
sharp rise in the consumption of oil in the U.S., and consumption is
now
nearly as high as it was during the peak of the late seventies and
prior
to the first oil price shock in 1973/74. On the whole, the energy
policy
pursued in the U.S. over the last decade has been limited to building
up
strategic petroleum stocks to be able to cut off the peak of a more or
less temporary leap in prices.
At the same time domestic American oil production has fallen. After
the fall in prices in 1985/86 the so-called stripper-wells in the US
Mid
West have turned out to be some of the world´s most marginal oil
resources from an economic point of view. The net effect of this has
been
that US oil imports have increased by around 3mb/d over the period 1986
- 1989. This increase in imports represents about half the increase in
exports from the OPEC countries during the same period. The other half
of OPEC exports increases has gone to developing countries and NIC
countries.
Altogether this increased demand for imported oil resulted in a
beginning
pressure for higher oil prices before Iraq´s invasion of Kuwait.
The below figure (to the left) shows how major oil saving measures
during
the seventies have made all western economies less oil intensive over
the
last two decades. These saving measures have been most successful in
Japan
and Western Europe, but also the U.S. has become less dependent on oil.
Over the last few years, however, the development has levelled out for
all these countries.
The problem with which the U.S. is faced, however, is the fact that
historically
the
consumption
of oil per GDP-unit has been considerably
higher
than in other Western countries, even before the first oil price shock.
Consequently, when measuring not only the changes in oil dependency,
but
also the absolute levels, oil consumption per GDP-unit in the U.S. turn
still to be the double of what it is in Japan and Western Europe. There
has also been a strong increase in oil imports per unit of GDP in the
U.S.
over the last few years (the figure to the right), which reflects the
combination
of a high oil intensity in the economy and declining domestic
production.
Before the Gulf crisis in 1990, thus, the U.S. imported about as much
oil
per GDP-unit as it did in 1972.
Will be inserted (delay due to scanning problems
Source: "European Economy, Supplement A no. 10" October 1990
A rise in the price of oil, therefore, will have a much stronger
effect
on the level of costs in the American industry and lead to a stronger
rise
in prices there than with its competitors. Thus, sustained high prices
of oil may result in a weaker competitiveness for the US in relation to
the rest of the OECD countries. The advantage of letting the consumers
enjoy the benefit of low oil prices during the eighties may be turned
into
an economic handicap in the nineties. By means of temporarily low
prices
of oil it is possible to check this problem for the time being. Of
course,
EC countries and Japan suffer from high prices of oil as well. But due
to the fact that their economies are less
oil intensive
the
effects
are smaller, relatively speaking. Besides, economic growth presupposes
a stronger increase in the import of oil (from the Middle East) and
consequently
to a greater aggravation, of the trade balance for the U.S. as compared
with Western Europe and Japan. This illustrates that the way in which
the
EC countries and Japan have adapted to the high price of oil during the
seventies and the first half of the eighties has been a long-term
policy
that has reduced their vulnerability to possible to wish prices shocks
explosions during the nineties more than the U.S. From that point of
view
high prices of oil can be very favorable to oil saving. But such saving
can also be obtained by means of excise taxes which for a consumer
country
normally is preferable to transferring revenues to oil producing
countries.
Rather the domestic treasury should get the rent. In the U.S., however,
it has been politically difficult to pursue a policy with higher taxes
on petroleum products. Low prices of oil over a number of years may
thus
result in increased dependence on oil in the US. In this way economics
(long term) and military (short and long (?) term) to some extent
become
substitute means by which a problem of oil dependency in a consumer
country
can be reduced.
WHAT COULD IRAQ HAVE ACHIEVED BY CONTROLLING KUWAIT?
If Iraq had succeeded in maintaining control of Kuwait and been able
to enter the international oil market again "Great Iraq" would have
increased
its production capacity from about 3.5 to 5.5/6.0 million barrels a
day.
Before the invasion total estimated output in Iraq and Kuwait was a
little
more than 5 million barrels a day. This was nearly as much as
Saudi-Arabia´s
output. Saudi-Arabia, however, had unused capacity for 2 - 3 million
barrels
per day and would in any event have remained the (potentially) biggest
producer in the region. The unused production capacity was used by
Saudi-Arabia
as from the time when the crisis started.
With respect to output, however, the combination of Iraq and Kuwait
would have assumed an important no. 2 position in the oil market. In
addition
Saddam Hussein had a standing army of 1 million men, many of whom had
combat
experience from the war against Iran. The
combination
of an
enhanced
importance for Iraq through an increased market share for oil, with
major
and active military forces could have made Iraq the most powerful
country
in the region.
As regards oil, Iraq, with the control over Kuwait, would have
become
so big that the country might have been able to influence the pricing
of
crude oil. On the whole only Saudi-Arabia has been able to play such a
role alone. Saudi oil policy has been pursued for long-term goals, and
often (but not always) it has been more in keeping with the wishes of
the
Western countries than many other Arab countries have favored. Iraq
would
have been a more anti-western market regulator and this would have
meant
higher prices of oil. Through the strengthened military position, as
well
as a boosted position in the context of oil politics, Saddam might have
been able to put pressure on neighboring countries for a reduced output
of oil in these countries and have had plans of increased production
capacity
in these countries stopped. In a situation of crisis the supply of oil
from Iraq and other countries could have been dramatically reduced.
This
might have implied a possibility of an increased economic-political
pressure
both regionally and internationally.
To some extent this illustrates the dilemma the U.S. (in particular)
found herself in as regards oil politics after Iraq´s invasion of
Kuwait. With Saddam in a strong position in the Middle East, a
geographical
region of crucial importance for the supply and thereby the price of
oil,
it is very likely that this price could have been kept at a higher
level
than before. When Iraq was driven out of Kuwait it was correspondingly
logical for them to destroy the country´s production
installations.
In addition to this "land destruction" argument, the consequence of
such
physical destruction would be a more restrictive oil market, and a hope
that Iraq would be able to reenter the world market at an earlier stage
than would have been the case had the destruction not been carried out.
WHAT HAVE THE ALLIED ACHIEVED BY DEFEATING IRAQ?
Since, on the other hand, the war did not destroy more of the
production
capacity than the installations found in Kuwait and parts of Iraq, a
third
price shock directly caused by the war has been avoided. Due to these
destructions,
however, the market has become relatively strict, which means that it
will
not be able to tolerate a new interruption like this without an
increase
in the price until the capacity in Kuwait, Saudi-Arabia, on Iraq has
been
restored.
The perhaps most important aspect of the allied victory is that it
may
lead to increased Western influence in Saudi-Arabia, the Emirates and
Kuwait.
Production capacity may be increased more than previously planned. This
reinforces the opinion these countries hold (with the exception of
Iraq)
that the reserve situation indicates a long-term production horizon and
low prices. This long-term economic interest and the aspects relating
to
foreign politics will be accepted more easily by the OPEC when one of
its
hawks, namely Iraq, is no longer a military threat.
Power
inside OPEC has also been removed in the direction of
the
"doves" (especially Kuwait, Saudi Arabia and the United Arab Emirates)
and away from the "hawks" (Iraq, Iran, Libya and Algeria). After the
situation
has become stabilized this may result in a low price of oil for many
years
to come unless new dramatic events occur at the Persian Gulf or
anywhere
else, leading to loss of production capacity.
The transfer of surplus between consumers and producers of oil as a
result of a change in the price of oil of for example $10 per barrel is
substantial. Before the war the OECD area as a whole imported about 22
million barrels a day and will thus be able to save some USD 70-80
billion
annually in import expenses only, if the price is kept at $17.50 per
barrel
as compared to $27.50 per barrel. The transfer of revenues from
producers
to consumers (or their treasuries) is even bigger. Whereas the nominal
value effect is highest for Western Europe as regards changes in trade
balances, a price reduction like this will have a smaller effect on the
actual economy in Europe as compared to the U.S., since in the U.S.
more
oil is used per unit produced. Apart from this the former Eastern
European
countries and the developing countries seem to be among those who
"profit"
if the prices are kept at a low level in the time to come.
Isolated, the oil producing countries are the big losers of export
earnings.
For the oil the Middle East producers a price difference of $10 per
barrel
represents a loss in export value of about USD 50 billion. For the
United
Kingdom, who now consumes about as much oil as she produces, these
changes
will mean less. Norway, on the other hand, would have had increased
earnings
by about USD 6-7 billion annually if the oil price had risen by $10 a
barrel.
It is interesting, moreover, to notice that a price of oil at $15 per
barrel
in 1990-value corresponds to about $5 per barrel in 1973-value, which
is
marginally above the actual price at that time; the average price for
the
year 1973 was $4 per barrel.
What then is the probable development of the price of oil after the
war and the allied victory?
PRICE DEVELOPMENT FOR OIL
An alternative to constructing expectations as to the future price
of
oil based on more or less deterministic price forecasts (which have
often
been misleading), is the so-called Scenario Planning method, which
enabled
the oil company Shell largely to predict the oil price shock in
1973/74.
As part of such a method it is useful to fix lower and upper limits for
the price of oil.
The lover limit level is supposed to be stipulated at a level above
the marginal costs of producing oil. This is partly due to the fact
that
alternative energies (such as gas and coal) have higher marginal costs
than oil. A price stipulated lower than the marginal costs of important
alternative energies is not desirable from the consuming countries
point
of view. If so consumption of oil, and thereby the dependence on the
Middle
East, will increase again. Also for producing countries it would be
hazardous
to allow the price to fall too much (e.g. to $5-10 per barrel in
1990-value),
even if this could be desirable in order to increase market shares.
This
can partly be accounted for by the fact that low prices will encourage
consumer countries to increase excise taxes on petroleum and thereby
deprive
the consumer of surplus, without this being transferred to the
producer,
and partly by the fact that it will not lead to any substantial output
reduction outside the OPEC, nor to any particular rise in demand before
the consumer countries will introduce taxes. Again, the important thing
is the portfolio of measures. Even if the U.S., for example, does not
introduce
taxes on petroleum, whereas Western Europe and Japan do, the effect of
the latter may be strong enough to make low prices unprofitable from
the
point of view of procuring market shares.
Even if reservations are made as to the supply side´s ability
to act concertedly it may seem that such a minimum political-economic
price
level is around $15-20 per barrel (in 1992 value). This implies that
even
if prices should fall to for instance $10 per barrel for a certain
period
of time they will be stabilized somewhere at this minimum price level
through
political measures by the dominant exporter of oil.
Correspondingly there is also a upper limit for the price determined
by the price of alternative energies (backstop prices) and ability to
pay
by the purchasing countries. On the basis of various calculations of
prices
for alternative energies and empiricism from the eighties as to the
level
of the price of oil when net demand declined, the maximum limit can be
assumed to be around $30-40 per barrel.
Graph. A window for the price of oil during the
nineties
(1990 value)
Together with the real oil price development over the last 25 years
these price range limits have been included in the below figure to show
as a possible range of price developments during the nineties.
Scenario a in the figure implies that new wars or unforeseen events
that influence the supply of oil occur in not too long a time. Output
loss
beyond Kuwait´s and part of Iraq´s shares might lead to a
rise
in the price of oil for a certain period without other producers being
able to compensate for this loss. If, on the other hand, the price of
oil
is kept at a low level during the next years, without the introduction
of any substantial excise taxes on petroleum products, scenario b
illustrates
a situation with a strong growth in demand. If this is not met by means
of a further extension of production capacity in the Gulf area prices
may
go up. In the figure it is indicated that in this scenario might occur
in the mid/late nineties.
A perception that the oil market can be understood by such an
analysis
indicates that Iraq´s price demand of $25 per barrel (and perhaps
also Iran´s demand for $30 per barrel) before the war started was
not completely unrealistic in relation to the economic tolerance of the
market and the purchasing countries economics. To a large extent the
difference
in price between $25-30 per barrel and $15-20 per barrel will consist
of
a redistribution of revenues from consumer to producer countries,
except
of course, for a gradual reduction in the demand
growth.
If oil consuming countries
can
solve their energy problem
through
military action, like the war in 1990/91, and given the present
dependence
on oil and overall political structure, this might prove cheaper than
paying
high and possible unstable prices for oil. As an illustration, military
presence in the Middle East that might keep the oil price at $17.50 per
barrel as against alternatively $27.50 per barrel, may involve annual
costs
of USD 30-40 billion and still be profitable for the U.S. alone seen in
relation to import costs for oil. If other OECD countries are included,
the military costs may well be the double of this, and still it is
possible
to defend a military presence financially if the alternative is a price
rise of $10 per barrel. In addition the difference in other main
economic
variables, such as growth and inflation as a result of a price rise,
probably
involving figures much higher than these, have to be taken into
account.
Another question is whether in the long term particularly the U.S.
will
be better off by a reduction of its dependence on oil in its economy
and
thereby its economic dependence on the unstable Middle East. A more
peaceful
way of dealing with the energy situation would be to make intensive
efforts
directed at a more efficient and diversified use of energy perhaps in
addition
to the military means. A reduced dependence of oil would reduce the
possibilities
of totalitarian regimes to perform of economic-political blackmail in
the
future.
Towards the end of the war President Bush presented a proposal for a
"New Energy Strategy". With respect to demand the plan contained no
proposals
relating to taxes on petroleum products or any requirements that the
fleet
of cars should be more efficient in its use of oil. Instead the car
manufacturers
are to be encouraged to make cars that use other fuels, such as
ethanol,
methanol, gas, propane, electricity and others. Besides, increased use
of nuclear power is encouraged. Oil import duties to protect domestic
production
were not proposed. Instead it is believed that tax cuts for oil
companies,
increased exploration in the environmentally sensitive Alaskan National
Wildlife Refugee area and the use of technology that will better
utilize
reservoirs, as well as new drilling techniques will increase domestic
output
of oil. The U.S owned part of the Strategic Oil Reserves were planned
to
rise from around 590 million barrels to some 1 billion barrels. The
situation
of stable low prices of oil that has developed after the allies, headed
by the U.S. and Saudi Arabia, won the Gulf war does not seem to
indicate
that the proposed measures will dampen demand and increase domestic
output
as assumed.
THE PEACE ALSO HAS TO BE WON
Whether oil purchasing countries
can
promote their energy
political
interests through military action does not only presuppose that the
war,
but also the peace, has to be won. It
may
turn out to be
politically
difficult to keep forces in the area for a long time, and anti-western
sentiments may grow stronger than ever before. It
may
appear
that
the only possible way of reducing dependency on oil from the Middle
East
in the long term is increased conservation and diversification.
Furthermore, if the low prices that the consumer countries want
should
prevail also the economies of Iran, Libya and Algeria. It will be
interesting
to observe how these countries will behave, faced with an possible
outcome
of the conflict which implies low oil prices and low revenues over a
long
period of time. The possible lack of a stable peace settlement will
"reasonable"
prices, may lead to new conflicts in the future both internationally
and
regionally in the Middle East and the Arab world. For example, it will
have a stronger stabilizing effect politically in the area if Saudi
Arabia
chooses to price its oil in the upper rather than the lower part of the
low price range of $15-20 per barrel.
Russia is also dependent on energy export to earn hard currency. In
the short term low prices of oil mean a loss for Russia. If, however,
the
forecasts of reduced output of oil from Siberia materialize, and the
country
ceases to export oil, and perhaps even becomes a net importer, its
interests
will change more in the direction of the interests of the U.S., i.e. in
the direction of a desire for low prices. Therefore it is not obvious
that
such a low price policy will affect Russia negatively in the long term,
even if it is too soon to be certain about this as yet. As long as
energy,
oil and gas, is the only commodity the country
can
sell to
Western
countries in the foreseeable future it is possible that priority will
still
be given to this sector, even at high domestic costs.
NORWEGIAN INTERESTS
It has already been mentioned that a $10 per barrel price rise of
crude
oil amounts to an annual export value of Norwegian oil of about USD 6-7
billion. In addition, loss through lower export revenues on natural gas
must be taken into account, due to the fact that the price of natural
gas
on the whole varies in relation to the oil price with a time lag. On
the
positive side, however, the fact that non-oil related activities in the
countries will have lower costs, and that the markets for exports other
than petroleum may be improved, must be taken into account. Balancing
these
different interests against each other makes it rather dubious whether
it is in the interest of Norway that oil prices are as low as the U.S.
and Saudi Arabia may wish. The argument that it is in Norway´s
best
interest that oil prices are low, because the extra revenues are not
spend
in a sensible way, might be correct in a limited sense. But then,
rather
than wishing for low prices of oil, one should focus more strongly on
finding
these sensible ways of spending the money instead of "eliminating" the
problem by removing the income.
Considered in a perspective of foreign politics Norway´s
situation
is somewhat different. Norway is part of an international community and
has no interest that the kind of forces that Saddam Hussein represents
assume any considerable influence over international economics and
politics.
Norway has a common interest with our Western allies in stability and a
set of international rules that function. Dictatorships such as that of
Iraq can lead to increased instability and unpredictability in the
international
community, which in itself implies economic inefficiency and loss for
Norway
too.
The ideal outcome of the conflict for Norway, when the conflict was
actually a fact, would perhaps have been (the impossible) that Saddam
Hussein
had managed to obtain some of his price objectives and at the same time
had been thrown out of Kuwait. However, when a "choice" had to be made
there seems to be no difficulty in looking upon the superior political
regards as more important than considerations relating to oil economy.
A number of other oil producing countries with an interest in an even
higher
price of oil than Norway supported similarity the actions, as well.
Norwegian output of oil at present is considerably higher than that
of Kuwait before Iraq´s invasion. In addition, substantial
amounts
of natural gas is exported. The export of oil is expected to increase
in
the years to come, so that Norway will gradually become
one of the
world´s
largest exporters of petroleum.
If one looks upon Saddam Hussein´s motives for the invasion in
the context of a wish to perform "the biggest armed robbery in world
history",
it is in Norway´s interest as an oil producing country that the
world
community reject and fight down such aggression. Moreover, Norway too,
may risk being involved in a global political game in which the wish to
change the level of the price of oil is a central issue, and which
involves
the world´s economic and political great powers. The "greed" that
the latter might possibly show is something that must be taken into
account
in Norwegian international oil policy as well.