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Are They Really Oil Wars?

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It is true that collective supply decisions of oil producing countries can, and sometimes does, affect the competitively determined market price. But a number of important issues need to be considered here.

To begin with, although such supply manipulations obviously affect or influence market-determined prices, they do not determine those prices. In other words, competitive international oil markets determine its price with or without oil producers’ supply manipulations. Such supply managements are, however, designed not to create volatility in energy markets, or chronic oil price hikes. Instead, they are designed to stabilize global oil prices because oil exporting countries prefer stability, predictability and long-term planning for their economic development and industrialization projects. Here is how Cyrus Bina and Minh Vo describe this relationship:

As a result, we conclude that the global oil market is the prime mover [i.e., prime determinant of oil price] and OPEC indeed follows its trajectory accordingly and consistently. . . . When market price (both spot and futures) is falling, OPEC decreases its output; when market price is rising, OPEC attempts to increase its output; and when market price is steady, OPEC keeps its output unchanged. . . . And, this is a kind of oil market we have experienced after the dust settled following the crisis of de-cartelization and globalization of oil industry in the 1970s [18].

Producers’ policy to sometimes curtail or limit the supply of oil, the so-called “limited flow” policy, is designed to raise the actual trading price above the market-determined price in order to keep high-cost U.S. producers in business while leaving low-cost Middle East producers with an above average, or “super,” profit. While for low-cost producers this limited flow policy is largely a matter of making more or less profits, for high-cost U.S. producers it is a matter of survival, of being able to stay in or go out of business—an important but rarely mentioned or acknowledged fact.

A hypothetical numerical example might be helpful here. Suppose that the market-determined, or free-flow, price of oil is $30 per barrel. Further, suppose this price entails an average rate of profit of 10 percent, or $3 per barrel. The word “average” in this context refers to average conditions of production, that is, producers who produce under average conditions of production in terms of productivity and cost of production. This means that producers who produce under better-than-average conditions, that is, low-cost, high productivity producers, will make a profit higher than $3 per barrel while high-cost, low efficiency producers will end up making less than $3 per barrel. This also means that some of the high-cost producers may end up going out of business altogether. Now, if the limited flow policy raises the actual trading price to $35 per barrel, it will raise the profits of all producers accordingly, thereby also keeping in business some high-cost producers that might otherwise have gone out of business.

Furthermore, supply manipulation (in pursuit of price manipulation) is not limited to the oil industry. In today’s economic environment of giant corporations and big businesses, many of the major industries try, and often succeed in controlling supply in order to control price. Take, for example, the automobile industry. Theoretically, automobile producers could flood the market with a huge supply of cars. But that would not be good business as it would lower prices and profits. So, they control supply, just as do oil producers, in order to manipulate price. During the past several decades, the price of automobiles, in real terms, has been going up every year, at least to the tune of inflation. During this period, the industry (and the economy in general) has enjoyed a many-fold increase in labor productivity. Increased labor productivity is supposed to translate into lower costs and, therefore, lower prices. Yet, that has not materialized in the case of this industry—as it has in the case of, for example, pocket calculators or computers.

Another example of price control through supply manipulation is the case of U.S. grain producers. The so-called “set aside” policy that pays farmers not to cultivate part of their land in order to curtail supply and prop up price is not different—nay, it is worse— than OPEC’s policy of supply and/or price manipulation.

It is also necessary to keep in mind that OPEC’s desire to sometimes limit the supply of oil in order to shore up its price is limited by a number of factors. For one thing, the share, and hence the influence, of Middle Eastern oil producers as a percentage of world oil production has steadily declined over time, from almost 40 percent when OPEC was established to about 30 percent today [19]. For another, OPEC members are not unmindful of the fact that inordinately high oil prices can hurt their own long-term interests as this might prompt oil importers to economize on oil consumption and search for alternative sources of energy, thereby limiting producers’ export markets.

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OPEC members also know that inordinately high oil prices could precipitate economic recessions in oil importing countries that would, once again, lower demand for their oil. In addition, high oil prices tend to raise the cost of oil producers’ imports of manufactured products as high energy costs are bound to affect production costs of those manufactured products.

War for Expensive Oil?

Now let us consider the widely-shared view that attributes the U.S. drive to war and military adventures in the oil-rich regions of the Middle East and central Asia to the influence of big oil companies in pursuit of higher oil prices and profits. As noted, this is obviously the opposite of the “war for cheap oil” argument, as it claims that Big Oil tends to instigate war and political tension in the Middle East in order to cause an oil price hike and increase its profits. Like the “war for cheap oil” theory, this claim is not supported by facts. Although the claim has an element of a prima facie reasonableness, that apparently facile credibility rests more on precedent and perception than reality. Part of the perception is due to the exaggerated notion that both President Bush and Vice President Cheney were “oil men” before coming to the White House. But the fact is that George W. Bush was never more than an unsuccessful petty oil prospector and Dick Cheney headed a company, the notorious Halliburton, that sold (and still sells) services to oil companies and the Pentagon.

The larger part of the perception, however, stems from the fact that oil companies do benefit from oil price hikes that result from war and political turbulence in the Middle East. Such benefits are, however, largely incidental. Surely, American oil companies would welcome the spoils of the war (that result from oil price hikes) in Iraq or anywhere else in the world. From the largely incidental oil price hikes that follow war and political convulsion, some observers automatically conclude that, therefore, Big Oil must have been behind the war [20]. But there is no evidence that, at least in the case of the current invasion of Iraq, oil companies pushed for or supported the war.

On the contrary, there is strong evidence that, in fact, oil companies did not welcome the war because they prefer stability and predictability to periodic oil spikes that follow war and political convulsion: “Looking back over the last 20 years, there is plenty of evidence showing the industry’s push for stability and cooperation with Middle Eastern countries and leaders, and the U.S. government’s drive for hegemony works against the oil industry” [21]. As Thierry Desmarest, Chairman and Chief Executive Officer of France’s giant oil company, TotalFinaElf, put it, “A few months of cash generation is not a big deal. Stable, not volatile, prices and a $25 price (per barrel) would be convenient for everyone” [22].

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It is true that for a long time, from the beginning of Middle Eastern oil exploration and discovery in the early twentieth century until the mid-1970s, colonial and/or imperial powers controlled oil either directly or through control of oil producing countries—at times, even by military force. But that pattern of colonial or imperialist exploitation of global markets and resources has changed now. Most of the current theories of imperialism and hegemony that continue invoking that old pattern of Big Oil behavior tend to suffer from an ahistorical perspective. Today, as discussed earlier, even physically occupying and controlling another country’s oil fields will not necessarily be beneficial to oil interests. Not only will military adventures place the operations of current energy projects at jeopardy, but they will also make the future plans precarious and unpredictable. Big Oil interests, of course, know this; and that’s why they did not countenance the war on Iraq: "The big oil companies were not enthusiastic about the Iraqi war," says Fareed Mohamedi of PFC Energy, an energy consultancy firm based in Washington D.C. that advises petroleum firms. "Corporations like Exxon-Mobil and Chevron-Texaco want stability, and this is not what Bush is providing in Iraq and the Gulf region," adds Mohamedi [23].

Big Oil interests also know that not only is war no longer the way to gain access to oil, it is in fact an obstacle to gaining that access. Exclusion of U.S. oil companies from vast oil resources in countries such as Russia, Iran, Venezuela, and a number of central Asian countries due to militaristic U.S. foreign policy is a clear testament to this fact. Many of these countries (including, yes, Iran) would be glad to have major U.S. oil companies invest, explore and extract oil from their rich reserves. Needless to say that U.S. oil companies would be delighted to have access to those oil resources. But U.S. champions of war and militarism have successfully torpedoed such opportunities through their unilateral wars of aggression and their penchant for a Cold War-like international atmosphere.

When Vladimir Putin first became president of Russia he was willing to allow American energy companies to continue with the one-sided contracts they had drawn up during Boris Yeltsin’s presidency. Putin built a seemingly trusting relationship with George Bush who looked into Putin’s soul and liked what he saw. The two leaders grew even closer in the aftermath of the 9/11 attacks on World Trade Centre and the Pentagon—when Russia provided “help for America’s invasion of Afghanistan.” Soon after this generous cooperation, however, “Bush repudiated the anti-ballistic missile treaty in the belief that America could develop the technology for winning a nuclear war. This posed a huge strategic threat to Russia [24].

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Ismael Hossein-zadeh is a professor of economics at Drake University, Des Moines, Iowa. He is the author of the newly published book, The Political Economy of U.S. Militarism His Web page is http://www.cbpa.drake.edu/hossein-zadeh

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According to most independent scientific studies, ... by Clifford Wirth on Tuesday, Sep 9, 2008 at 9:32:30 AM
Ismael Hossein-zadeh claims "that there is no... by Randy Park on Tuesday, Sep 9, 2008 at 12:14:02 PM