Oil and the Persian Gulf crisis

OIL AND THE PERSIAN GULF CRISIS

It is well known by now that the CIA directed the overthrow of the Mossadeq government in Iran after it dared to nationalize the oil industry in the early 1950s. But is is less well known that when a military group overthrew the feudal monarchy in Iraq in the summer of 1958 and the entire Middle East was in ferment, the landings of U.S. troops in Lebanon and British paratroopers in Jordan were really targeted at Iraq. The New York Herald Tribune reported that the U.S. government gave "strong consideration" the "military intervention to undo the coup in Iraq." According to the New York Times, U.S. and British leasers jointly decided that "Intervention will not be extended to Iraq as long as the revolutionary government in Iraq respects Western oil interest." In 1963, the Iraqi government was toppled by a coup after threatening to nationalize some oil. The Paris weekly L'Express flatly declared that "the iraqi coup was inspired by the CIA."

In the last twenty years, U.S. oil production has dropped significantly and imports have climbed sharply. In 1970, the United States produced about 20 percent of the world's oil supply, and imported only about 12 percent of its domestic consuption. Today, it produces only about 10 percent of the world's oil and imports about half its consuption. In addition, direct control of oil by U.S. companies greatly weakened with the rise of OPEC after 1973, when most oil producing properties in the third world were nationalized. U.S. control of oil in the third world is now much more indirect, a function of control of key technology and markets, as well as of overall U.S. economic and military power. The virtually compete failure in the last two decades either to reduce demand sharply by energy conservation or to expand such renewable energy resources as solar power has heightened the dependence of the U.S. economy on oil.

Oil was, of course, the key factor which precipitated the Iraqi invasion of Kuwait. The London-based Petroleum Economist, which has no sympathy for Iraq, noted last September:

Although debt compiled during its war with Iran has done much to devastate the Iraqi economy, the slackness of world oil prices--in no small part due to the perpetual problem of OPEC over-production--has contributed to the persistence of Iraq's economic problem. The current Iraqi government budget is characterised by its open austerity measures, import substitutions and an order to all government departments to cut their numbers of staff by 50 percent. In 1988 alone, Iraq gross domestic product fell by some 10 percent ....In stark contrast, the Kuwaiti economic picture in teh past year has been particularly comfortable. Kuwaiti oil revenues in the first three quarters on 1989 were up some 60 percent over the same period in 1988....this income has been accued on the ability consistently to produced and market oil greatly in excess of its OPEC quota, without redress from other member nations.

While the oil situation may have been the underlying cause of the Iraqi invasion, there has also been discussion about whether U.S. diplomacy was intended to lure Iraq into an invasion or mistakenly sent signals to the Iraqi government that the United States would not oppose an invasion of Kuwait. Without being privy to U.S. ruling circles it is not possible to know definitively the answer. But in the period after the Iraqi invsion and prior to the U.S. bombardment of Iraq, when oil markets were panicked, President Bush refused to release crude oil supplies from the Strategic Petroleum Reserve, which had been stockpiled for just such a contingency, or take other actions to calm oil markets. In contrast, the day after the U.S. bombed Iraq, the president announced he would release emergency stockpiles to calm the situation in the oil markets and overnight the price of oil fell by one-third. In short, the administration's actions kept prices volatile as a sign that sanctions were not working, and then, in an Orwellian way, associated war with peaceful oil markets.

Before the U.S. bombardment began current oil prices were inflated and volatile as aresult of speculation, which had previously played a negligible role. Historically, crude oil has been traded among oil companies and prices were based on long-term supply contracts. In the early 1970s, the spot market, which covers one-time shipments of oil, accounted for less than 5 percent of the world oil trade, and futures markets for later delivery of oil did not even exist. Now, by contrast, daily spot and futures trading can amount to eighth times total world oil consumption. Litle wonder that a long-time oil industry operator, Leon Hess, chairman of Amerada Hess, testified to a Congressional committee investigating skyrocketing oil prices that "there is not a supply problem on crude oil," and concluded, "I'm an old man, but I'd bet my life that if the Merc [Mercantile Exchange] were not in operation, there'd be ample oil at reasonable prices all over the world without this [price] volatility."

Before the U.S. bombing began, oil for delivery six months later and beyond was priced at a relatively low level--$23 to $25 per barrel--compared to the wildly fluctuating current price of $30 to $40 per barrel. Oil speculators apparently agreed that there would not be a serious disruption of supply or demand in the medium term. This assumption undoubtedly rested in part on the availability of emergency stockpiles in case of war.

The reassertion of the old Anglo-American oil imperialism which prevailed in the Persian Gulf region for many years seems to be in line with the goals of the largest international oil companies, for which the Petroleum Economist speaks:

The Iraqi invasion of Kuwait on 2 August, and the political ramificaitons of the landmark western military involvement on Saudi territory, have changed the course of Middle East politics in the most significant manner since the creation of the state of Israel. Moreover, the end of Kuwaiti independence has called into question the efficacy of the entire OPEC system, if not its very existence, and radically altered the political disposition of Middel East oil...

The effects of the western military response to the crrent situation in the Gulf has been to directly internationalise the political disposition of world oil production from OPEC's most important members. Additionally, it has placed the West in the role of primary regional military power in the northern part of the Gulf. (September, 1990)

But, Oil and Gas Journal, which tends to reflect the views of smaller, independent U.S. oil producers, cautioned editorially:

there are huge questions beyond those involving the conflict itself. The petroleum industry must now wonder what happens once the shooting stops....For industry, the dangers are obvious. What may be less obvious is the rapidly diminishing degree to which companies in the future will be able to rely on stability enforced from abroad. The petroleum world--and that includes consumers--has played its western military ace. If this fight lives up to its bloody expectations' who will lead the next defense of the worlds economic sustenance? Not the U.S. A loud minority didn't want to fight to defednd petroleum interests this time. Next time it won't be a minority. And this war, coming as it does at the beginning of a recession and well into a period of fiscal distress, whill be costly. If the next cirsis comes any time soon, the U.S. won't possess the military and financial resources necessary to respond. And if the world's single biggest oil consuming country doesn't respond, no one will." (January 21, 1991).

This kind of ideological split between large and small oil companies also took place during the Vietnam war, when oil was the Nixon Administration's lure to attract U.S. investment in South Vietnam. While major international companies like Shell and Mobil were successfully drawn in, and indeed Mobil was busily drilling offshore on the last day of the war, by that point the Oil and Gas Journal was urging U.S. companies to get out because their presence was giving the industry a bad name. This history may be useful reminder to opponents of the Bush Administration's policy in the Gulf that strange and unpredictable bedfellows may be enlisted with the proper effort.

Michael Tanzer is president of Tanzer Economic Associates, Inc., a New York-based consulting firm specializing in energy and environmental economics. His most recent book is Energy Update: Oil in the Late Twentieth Century (Monthly Review Press, 1985). This paper is based on a talk given in January 1991 at the New York Marxist School.

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