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:

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:

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.

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.

Peace Magazine Apr-Jun 2011

Peace Magazine Apr-Jun 2011, page 8. Some rights reserved.

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