Buying resources from the rest of the world has been less important in the richly endowed US than in other industrialized countries. Yet US preoccupation with such commerce and its economic costs is now increasing—because of energy needs, because of continuing US demand for strategic but imported minerals, because the commodities to be traded now include such “goods” as clean air and water. US companies build “dirty” refineries in the Caribbean, and Southern California utilities import “clean” low-sulphur oil from Indonesia, while Japan uses coal stripped in US mines, and plans refineries, steel plants, and other polluting factories for coastal areas of South Korea and Taiwan. World crude oil trade is part of this global commerce, and like other public or private commercial endeavors, it is influenced by economic decisions. For the US, as for Europe or Japan, petroleum importing is a matter not only of military vulnerability, but also of costs and prices, of the shape of the domestic economy.
Rich countries face three major threats in importing oil. First, their supplies could be cut off or cut back; second, they could come under diplomatic attack when, for instance, Arab OPEC nations attempt to weaken US and European alliances with Israel; third, their economic and financial institutions could be disrupted as exporting nations acquire huge sums of money. The third threat is seen, at least by world business, as the most alarming; yet each menace is affected by the price of oil, and by the perceived economic and social costs of supplying fuels from alternative sources.
In the case of the first two “political” threats, a strategic objective of oil consuming countries (acting jointly or in mutual hostility) is to exploit differences between more or less amenable oil exporting countries—and the capacity to exploit such divisions may depend on economic and price discrimination, on the willingness to forego cheap oil. (Political intervention to support or set up favorable regimes is also of course to be expected.) The entire oil policy debate has to do with the fact that OPEC, and specifically Middle East oil, was sold in the past at bargain prices. Middle East oil, from Iran, Saudi Arabia, and other countries around the Persian Gulf, has been and remains extremely cheap to develop and produce. It cost, recently, 10 cents a barrel to produce, compared to 82 cents a barrel for Indonesian oil, and $1.31 a barrel for US oil.^8
Middle East oil was also, in the 1950s and part of the 1960s, available at low royalties, barely higher than the royalties and taxes on US crude oil, and much lower than the taxes imposed in the US and Europe on oil consumption. When OPEC was formed, in 1960, producing countries shared oil revenues equally with oil companies. In 1948, according to OPEC statistics, this ratio had favored oil companies by 82 to 18; in 1970, the ratio favored producing countries by 70 to 30. OPEC taxes now account for approximately $1.50 of the $2.00 that a barrel of oil costs in the Middle East, an increase of almost 50 cents a barrel in the last three years of price negotiations.
This past cheapness is a major reason for the pre-eminence of Middle East oil in world reserves—accounting for 65 percent of reserves in noncommunist countries, and 55 percent of all world reserves.9 Middle East oil was convenient—economically, geologically, and to British and American oil companies, politically. Yet the observation of the US Geological Survey, that oil must be sought in the mind, applies to world oil exploration as well as to the US, at least for the next twenty years of oil production, during which physical limits to world production will not yet be of decisive importance.
Oil is being found, and reserves proved, in parts of the world less lavish geologically than Saudi Arabia. Exploration has followed political perceptions. Consuming countries and their oil corporations commit huge amounts of money to oil exploration in producing regions which, although not cheap and convenient, seem politically “stable.” The most enthusiastic of all recent exploration, outside such “industrialized” areas as the North Sea and northern Canada, has been in the potentially amenable and non-Arab OPEC regions of Nigeria, and Indonesia, whose recent bonanza is seen on Wall Street as “extraordinarily fine.” This desire for stability also explains much about the US and Japanese energy expansion into the Soviet Union. As one “American banker” in Hongkong told the Far East Economic Review: “To be frank, the Russians have a triple-A credit rating—which is something very few people have in this area, and you don’t have problems like corruption in Siberia.”
Oil importing countries make themselves more vulnerable to logistical and diplomatic attack to the extent that they are reluctant to accumulate expensive stockpiles of oil and to undertake the economically, socially, and politically much more costly task of developing contingency energy supplies. An OPEC shutdown could only be effective between the short term of perhaps three months, when stockpiles could meet a (reduced) demand for oil, and the time, six to twelve or more months later, when technological ingenuity or military intervention would replace fuel supplies. It could be effective only between the near future, when dependence on “Eastern” oil is still limited at least in the US, and the more remote period when energy importing countries develop permanent substitute fuels. A slowdown or cutback in OPEC supplies is more likely and more menacing than a total shutdown. OPEC countries and particularly the richer ones are justifiably concerned to limit depletion of the oil that is their major national resource. Yet even in the case of a slowdown, the vulnerability of consuming countries would largely depend on economic decisions about the cost of alternative energy resources.
The second, diplomatic, menace is mitigated, evidently, by similar preparations and price adjustments. Japan and the US display sharply different diplomatic attitudes in the Middle East. Until the last few months, they have depended on this region, respectively, for more than 80 percent and less than 5 percent of all their crude oil. Diplomatic threats, including the threat to the US posed by hostility to Israel, cannot reasonably be isolated from economic issues; these include the cost of investment in the fuel-producing regions, the involvement of US or European corporations in OPEC countries, the stability of domestic oil-intensive industries, even the balance of payments constraint, which encourages the US, for example, to export the products of its competitive arms industry to ever more countries in Africa and the Middle East.
The third menace to oil supply, a threatened disruption of financial and economic institutions, is described by Wall Street Journal editorial writers, speaking for the financial world, as the “most serious aspect of the energy ‘crisis.’ ” This menace derives from the fact that advanced oil importing countries pay large sums for the oil they buy—the US alone will probably spend some $15 billion a year in the 1980s. This expenditure would have serious consequences for the US balance of payments, and for the whole complex of economic policy trade-offs. Joseph Alsop has raised the prospect, in this context, of US dollars coming “to resemble confederate greenbacks.” The economic measures needed to prevent payments deficits might involve an expansion of the arms industry and its exports, or a further increase in America’s other major export trade, in agricultural products, which has been repudiated by Nixon’s latest economic policy in the interests of price stability and domestic consumer choice.
More generally, if the money received by oil exporting countries is kept in short-term, liquid investments it will seem to threaten the stability of international financial arrangements, to the extent that states owning such investments will be able and willing to move funds rapidly from one currency or country to another. If the money is invested in long-term projects, advanced countries might lose control of certain domestic industries. Oil exporters may soon take over some refining and marketing operations that the oil corporations now control, or demand that petro-chemical plants and, as Saudi Arabia has suggested, aluminum factories be built in producing countries. Business interests anticipate such investments with mixed fear and relief, as bringing, on the one hand, the terrors of a foreign take-over of Texaco or comparable corporate land-marks, yet on the other, a salutary involvement of oil producing countries in preserving international business stability, as Kuwaiti-owned gas stations become vulnerable, perhaps, to US government expropriation.10
Even the most political of oil problems have to do with the actual price of barrels of oil. The constant menace is that oil exporting countries will, in the words of Professor Adelman of MIT, the American oil “optimist” and scourge of OPEC, “overcharge” consuming countries, will like “a hungry tiger” demand ever more “red meat” by imposing higher taxes. This fear is further complicated by the activities of international oil companies. Business Week, quoting the opinion of Gulf Oil’s “director of economics” that “We have an interest in getting the crude out of the Middle East as fast as we can while there’s still a profit in it,” notes that the new Nixon energy policy in this situation gives “the best of both worlds to the big international oil companies.” Meanwhile oil corporations, simultaneously producers and marketers of petroleum, can be expected to use the excuse of a crude oil crisis, and of notoriously tigerlike OPEC demands, to increase domestic oil product prices by as much as and probably more than the extent of cost increases—a technique used most effectively in Europe by US and foreign-owned companies during the last three years of publicized OPEC negotiations.
It is certain that crude oil prices will continue to rise: OPEC producers hope and intend that their tax component of crude prices will increase until the total cost of “cheap” OPEC oil is as high as the cost of alternative fuels available to oil importing companies. (New domestic fuels, such as oil made from shale rock, or by coal liquefaction, will become “competitive,” according to the National Petroleum Council, when the price of crude oil rises to more than $5 a barrel, from its present price of between $3 and $4 a barrel.) Yet this process of substitution, which Nixon’s energy policies have attempted, halfheartedly, to encourage, will involve domestic conflicts that, for Europe and Japan as for the US, go beyond even the troubles of inflation and economic policy.
Increases in the price of natural or synthetic oil will damage permanently some of the largest US industries, not only truck and auto transportation, but the manufacture of synthetic fibers, and the production of electricity in oil-powered plants. Meanwhile producing alternative fuels would also expose the true national costs of energy use, as Long Island or Osaka is compelled to process its own fuel; or as in a denial of fairness, Colorado’s shale mountains are devastated for the convenience of California, Welsh coal towns for southern England or for western France. If these social costs, or the expense of avoiding them, are accounted for, alternative fuels become yet more expensive than the Petroleum Council expects—and yet more inconvenient relative to foreign oil.
To see the economic basis of oil supply problems is not to deny the catastrophic potential of the conflict over oil. A momentously geopolitical language, predictions of material vulnerability, diplomatic and naval activity around such perennially disputed locations as the Straits of Malacca and the western Indian Ocean, all recall strategic fears described in the late 1930s. Japanese planners are justifiably concerned, for example, about tanker routes, about the Indonesian oil industry, which flourished in the late 1930s, about comparisons between the US oil embargo in 1941 and recent US-Soviet energy deals, about the control of world mineral commerce by foreign, and particularly US, companies.
Now, as in the years before the Second World War, the worst dangers derive from conflict among advanced or oil importing countries—and sometimes from the perception more than from the reality of vulnerability. Former Commerce Secretary Peterson has warned of a “wild and cannibalistic scramble” among industrialized countries, for energy and external earnings. In such a situation, perceptions of a global energy crisis, reaching from today in US service stations to 1990 in Madagascar, seem particularly ominous, a self-fulfilling vision of technological and natural inevitability.
The rivalry of advanced countries, whether expressed in direct military confrontation or through special relationships to oil exporting countries, is a major but not of course the only danger of petroleum conflict. Senator Fulbright is almost alone in the US in warning publicly that “our present policy makers and policy influencers may come to the conclusion that military action is required to secure the oil resources of the Middle East, to secure our exposed jugular.” Yet any military aggression by oil-producing countries would be made possible by US and European arms exports. The US is now planning to supply arms and advisers worth an expected $4.1 billion to Saudi Arabia, Kuwait, and Iran, while such a minor merchant as Britain enjoys a $625 million contract to improve the air force of Saudi Arabia.
One US commentator has described these endeavors as “a second essential pipeline to match the oil pipeline to the US—a pipeline of continuing military equipment, spare parts, and training” (Michael Berlin, in The New York Post, June 1, 1973). The prospect of such a military “presence,” given the evidence of earlier presences, must inspire only the deepest fear and pessimism. For US policy makers this presence supports both open and covert economic needs. It protects diplomatically supplies of oil which are still cheap compared to any domestic substitutes; but it also encourages the export trade in war materials which will become so valuable to the troubled US balance of payments.
Even where geopolitical conditions most recall the menace of 1940, oil commerce still has to do with economic relations. The Second World War itself, while hardly a model for peaceful or long-term industrial adjustments, can provide examples of economic ingenuity in the use of fuels and minerals. Shortages of raw materials damaged the military effort of Nazi Germany only after several years of war. German engineers preserved resources by scrap recycling, conserving alloys, and devising substitutions. They used a Farben method for making oil out of coal, and invented the Lurgi process for coal gasification which now appears as an essential technique in America’s struggle against the energy “crisis” of the 1970s and 1980s.
Whatever direction energy policy takes in the long run, it will face the question of how technological substitutions can be induced, in a situation less urgent than that which the Lurgi company confronted. But policy makers also need to evaluate the economic benefits involved in energy use. They will be forced to discriminate, either consciously or by default, between different industries which consume or waste energy. They will decide how much of the inconvenience of energy conservation should be borne by business and how much by consumers, how much by the rich and how much by the poor. Such questions have been buried in the capitulations and market ideology of recent domestic policy. Yet even if they are not raised they will be answered, in some more or less purposeful fashion.
These difficulties, and the general problem of “equating” distinct costs and benefits, can be seen in the development of alternative fuels, in energy conservation, and in the evaluation of energy use, all of which will be considered in a second article. Some small comfort may be found, perhaps, in long-range industrial trends away from intensive energy use and toward the increased sale of computer processes, or services, or tele-communications. Such trends will at least cast doubt on the view, implicit in present concern to secure energy supplies, by ever more disruptive means, that there is some equivalence between increased energy use and industrial growth, or even between energy use and progress.
(This is the first of two articles.)
Oil reserves are counted in the International Petroleum Encyclopedia, 1972, published by the Oil and Gas Journal.↩
The clamorous outrage which has greeted the prospect of OPEC investment recapitulates many myths of modern business. A basic assumption is that money earned from the sale of natural resources is not really deserved. As one international symposium put it, describing Saudi Arabia, "In the first place, their wealth is not the result of their own labor" (The Changing Balance of Power in the Persian Gulf, American Universities Field Staff, 1972). The oil just lies there in the ground, and nobody worked or sacrificed or accumulated in order to own it. Short term investments raise further prejudices. Oil exporting countries which keep their monetary reserves in liquid, easily accessible form, and move their "rootless stockpile" as currency after currency is devalued, are accused of "childish" caution—while such impeccably rooted dollars as those managed by the treasurers of huge multinational corporations can evade most devaluations in the name of financial responsibility to shareholders.↩
Oil reserves are counted in the International Petroleum Encyclopedia, 1972, published by the Oil and Gas Journal.↩
The clamorous outrage which has greeted the prospect of OPEC investment recapitulates many myths of modern business. A basic assumption is that money earned from the sale of natural resources is not really deserved. As one international symposium put it, describing Saudi Arabia, “In the first place, their wealth is not the result of their own labor” (The Changing Balance of Power in the Persian Gulf, American Universities Field Staff, 1972). The oil just lies there in the ground, and nobody worked or sacrificed or accumulated in order to own it. Short term investments raise further prejudices. Oil exporting countries which keep their monetary reserves in liquid, easily accessible form, and move their “rootless stockpile” as currency after currency is devalued, are accused of “childish” caution—while such impeccably rooted dollars as those managed by the treasurers of huge multinational corporations can evade most devaluations in the name of financial responsibility to shareholders.↩