The Oil Crisis To Come

The echoes of the Middle East-wide revolt are about to be felt worldwide.

By Rob Prince | 2011-04-01 13:00:00

As I write, the Egyptian authorities have fired on and killed protesters in Cairo; in Tunisia angry crowds will not be satisfied until all members of the former Ben Ali regime step down. In Bahrain, Iraq, Oman, and Yemen the voice of the people gets louder, more insistent, to sweep away the old. In Algeria the regime braces itself for the next round of social explosions, knowing that it has done little since the end of that country’s cruel civil war to improve socio-economic conditions. In Libya, Gadaffi and his sons commit war crimes in an attempt to hold on to that country’s oil wealth. Meanwhile U.S. warships move into position off Crete, within easy striking distance of Libya. The pressures to intervene militarily are growing, originating from America’s ultra-right (Lieberman, Bolton, Wolfowitz—the gang that brought us the wars in Iraq and Afghanistan). Then there is Saudi Arabia…

And the price of gasoline continues to climb. It will continue to cut into the anemic global (and US) economic recovery, will aggravate the Third World debt crisis, now entering its fourth decade, and will produce more political eruptions throughout the Middle East, contributing to what has been called “The Second Arab Awakening.” US and/or NATO military intervention will only further destabilize and polarize the region, intensifying these tendencies.

It would be amusing to note the nearly complete uselessness of the global US military machine in addressing these problems, were the emerging situation not so serious. Drones, special forces, black box political operations, pathetically assembled “counter-insurgency” programs, assassination teams, the extensive use of torture—that wondrous collection of medieval military and repressive techniques so much a part of contemporary U.S. foreign policy these days—have long proven their inhumanity. They are also more and more ineffective in addressing the global energy crisis.

Looking at not-so-long-term trends, Michael T. Klare, a careful and prescient observer of global energy policy, predicts that the current region-wide revolt in the Middle East will change the global energy situation forever, that the days of relatively cheap oil are over and that the global economy is in for hard times. As the Middle East social uprising moves from the periphery nearer to the Saudi-Kuwaiti-Iraqi-Iranian oil producing centre, the stakes for US Middle East policy get higher, US willingness “to tolerate” the democratic changes whose song the Obama administration (finally) is singing becomes shaky.

At the heart of Klare’s argument—pretty rock-solid—are the following assumptions:

Despite some efforts to use alternative energy sources, the global economy’s appetite for oil is growing and supplies, including new sources of oil, are not keeping up with demand. Oil markets are tight and small production losses, regardless of the cause (war, weather, accidents) can cause major disruptions and price hikes;
Despite all efforts to diversify its oil requirements, the world will likely be more dependent on Middle East oil in the future. As a result, the Middle East and Africa probably will be more militarized by the US—rather than less. Just the opposite of what is needed;
The neo-conservative effort to privatize the Iraqi oil industry, and increase its production, has failed—or at least failed to produce the results that US neo-conservatives predicted after the publication of the Cheney Report—a blueprint for US energy policy to this day, despite the change in administrations;
The Saudis will find it more difficult to be “oil supplier of last resort” when oil supplies become tighter, as is happening with the cut in Libyan production. Caught between domestic pressures for development and insatiable global needs, the Saudi government will be pressed to use its crude oil to satisfy domestic needs, diverting some production from world markets (or else face internal revolt).

Klare’s reflections on the prospects for Saudi oil production are of special interest, as Saudi Arabia has aided the United States and other core countries of the global economy repeatedly over the years. It has done so either by increasing production when global oil supplies were tightening or, as in 2008 when there was consensus among OPEC producers to cut production, by refusing to do so to maintain higher price levels.

Kissinger’s Deal with the Saudis

Although Saudi Arabia has played such a role almost from the outset of its oil producing days, this “understanding” that Saudi Arabia would soften oil price increases took a more formal form in the aftermath of the October 1973 Middle East War. At that time, then US Secretary of State Henry Kissinger, fresh from having helped direct the September 1973 overthrow of Salvador Allende’s socialist-oriented government in Chile, engineered an agreement with the Saudis which has held until this day.

Although it is rarely discussed, the degree to which this arrangement has benefited the United States and its European and Japanese allies can hardly be overstated. US-Saudi relations have been one of the key pillars, if not the key pillar,on which US Middle East policy is constructed.

In exchange for acceding to dramatic price increases of crude oil from the oil-producing countries, the United States demanded long term structural concessions from the Saudis. For the past 38 years the US has gotten them. They include:

A Saudi promise “never again” to initiate or participate in an oil producer embargo like the one that took place during the October 1973 Yom Kippur War, which temporarily crippled the global economy;
To re-invest much of the windfall profits from higher oil prices into Western financial institutions (buying US Treasury bonds to boost support for the dollar and investing in the stock market). This resulted, among other things, in the revival of London as a major financial centre, partially compensating Britain for the loss of its colonial empire and control of Middle East oil. It tied British foreign policy to the United States in almost an incestuous embrace;
A commitment by the Saudis to recycle to the US and other Western powers some of its petrodollars by buying arms. The recent mammoth $60 billion Saudi arms purchase of US weapons—the largest such deal ever—suggests the enduring nature of that commitment;
Likewise a commitment to give priority to Western (again mostly US) construction companies in Saudi mega-development and oil field technology projects so that Western companies could benefit from the oil-profit construction boom.

This Saudi-US agreement became a blueprint for relations between most Middle East oil producers and the world’s core industrialized countries. A great deal of the oil profits in oil producing countries were thus recycled back to the United States and European countries with financial, construction, arms manufacturers, and real estate sectors benefiting from the arrangement.

US consumers of energy and countries that produce foodstuffs and raw materials got clobbered by these arrangements, but that didn’t seem to matter. Other factors were at play, but the higher oil prices that poor countries had to pay contributed to the exploding Third World debt crisis. Likewise, the inflation that hit richer countries resulted at the end of the post-war era in significant wage increases. Finally, unemployment rates in industrialized countries, relatively low until then, began to climb and have never really recovered.

Double Global Oil Production

The problem the US faces, as Klare puts it, has several aspects.

First and foremost, the energy policy articulated by the 2001 Cheney Report is in dire straits or has essentially failed.

That policy can be summed up as follows: For the global economy to remain relatively stable, global production must double by 2025. As there are no particular new bonanza finds that could possibly achieve that goal as demand grows, a crash policy of technical improvement of existing oil fields is in order. A political problem arises: State-run oil industries haven’t the political will to make these changes. They will resist efforts that increase supply to such a degree that prices will fall. Nor do they have the capital to make the innovations, even if they so desired.

The Cheney Report concludes that the only way this increase in production can take place is through the massive infusion—perhaps as much as several trillion dollars worth—of private capital. But private capital will not invest in energy unless the terms are to their liking, which means a greater share of oil profits coming their way at the expense of the oil-producing nations. This requires “de-nationalizing” or privatizing many state-owned Middle East oil resources. It is also based upon a myth: that the private oil sector is more efficient than the state-owned sector and that it alone can deliver the technical improvements necessary to double the output.

While “weapons of mass destruction” and Saddam Hussein’s undemocratic rule were the pretexts for the 2003 invasion of Iraq, the more salient reasons flow from the Cheney Report: to seize Iraq and its oil industry, privatize it, and encourage foreign oil companies to invest in its modernization to double production. Indeed, the invasion of Iraq was the first concrete example of the Cheney Report in action. To date, the invasion and restructuring of Iraq’s oil industry has failed to deliver on these promised results. After seven years, Iraqi oil production is barely approaching its pre-2003 US-led invasion levels.

Will Saudi Arabia Erupt?

Which brings us back to the question of the Saudis.

The Saudi royal family is in trouble as the Middle East protests close in on its borders from all sides. The Saudi royal family will crack down on any protests that erupt—even more fiercely than Gadaffi has done in Libya. Still, beyond the immediate social turbulence, several factors could come into play.

There are calls for protests in Saudi Arabia on March 12, 13. These calls have been condemned by Saudi religious authorities as “un-Islamic;”
Even more worrisome: the events in Bahrain with its Shi’ite majority trouble the Saudis, as do the events in Yemen. Bahrain lies just to Saudi Arabia’s east and Yemen to its south. In both countries the Shi’ites are protesting. The Houthi Shi’ite uprising in Yemen’s northern regions has been going on for more than five years. The Saudis fear a spillover effect in their eastern provinces, site of the largest Saudi oil reserves and the country’s greatest concentration of Shi’ites—the kingdom’s oppressed religious minority;
While currently Saudi Arabia has the ability to increase its production to make up for possible losses in global supply due to events elsewhere in the region (like Libya), its reserves are not infinite and it is probably unable to produce much more than 10 million barrels a day (up from the current 8.5 mb/d). The days when the kingdom could compensate for production shortfalls elsewhere in the region (or world) will sooner or later come to an end. It cannot increase production forever;
Perhaps the most interesting point that Klare makes is his projection about how much more domestic oil the Saudi royal family will use in the future to offer economic concessions to the people as a means of maintaining political control. This suggests that the Saudi contribution to the global supply may decrease, rather than increase—to say nothing of doubling.

The overall crisis that is affecting the entire Middle East will hit the Saudis too. And what has not been said openly is that it will create major crises for the United States and the global economy in the period ahead.

While its oil wealth is undeniable—the Saudis are sitting on $400 billion in oil profits right now—they are plagued with problems similar to those which triggered the current Arab Awakening throughout the region. Then there is the ultra-conservative nature of the regime itself, unresponsive to social or cultural reform. The corruption of the Saudi royal family makes the abuses of a Ben Ali or Mubarak look like child’s play. It is a country without a constitution in which dissent is not tolerated. While the Saudi government has provided decent education and health care programs to its subjects (hard to call them citizens without a constitution), it faces a crisis of youth unemployment not unlike that which brought down the Egyptian and Tunisian leaders.

These factors suggest that the global energy crisis will deepen. The US military build-up in the region will be helpless to counter these trends. Despite 30 years of vapid claims of working towards “energy independence” (we first heard these calls during Jimmy Carter’s presidency in 1978-79), the US has hardly invested in alternative energy sources. While recycling and other private conservation methods have become popular, industrial waste and deregulation of energy production continue unabated.

Count on the price of oil going up. And that is just the beginning…

Rob Prince teaches at the University of Denver and once served as a Peace Corps volunteer in Tunisia.