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2005

Ernani Teixeira Torres Filho




The Role of Oil in the Geopolitics of the United States




Introduction

By the end of the 19
th
Century, kerosene took the place of the oil from the sperm
whale as the main fuel for illumination. From then on, petroleum refined products have
always been important items of mass consumption. After the 2nd World War, gasoline and
diesel engines took the black gold to the position of the main energy source of the world.
Nowadays, petroleum sets in motion all means of ground, sea as well as air transportation.
Particularly, as Winston Churchill
1
discovered in the beginning of 20th Century, petroleum
is the most efficient fuel for the Armed Forces.

Historically, it was its military importance, not economic, that brought oil into the
center of international geopolitics. All started in July 1911, when a German naval vessel
menaced the harbor of Agadir in French Morocco
2
. This incident convinced Churchill that
a war between Great Britain and Germany was inevitable. Simultaneously, it made clear
that the British leadership in the sea would require, as other countries were doing, the
conversion of the British navy, then powered by coal a mineral abounding in Great
Britain to petroleum at that time produced basically in U.S. or in exotic, distant and
politically unreliable countries
3
. Warships fueled by oil reached greater speed and were
more efficient in terms of space and manpower.

Along with the conversion of its navy, Great Britain took another strategic decision.
In order to guarantee steady and cheap petroleum supply to its new oil-powered vessels,
the British government bought the control of a petroleum company, which lately took the
name of British Petroleum. British admirals did not trust a market that was controlled by
few American companies and Shell, a largely British stockholding company, but
effectively controlled by Dutchmen.
4


The 1
st
World War battles (1914-1919) confirmed the military importance of oil.
Vehicles powered by gasoline or diesel engines substituted horses and trains powered by
coal. The defense of Paris, in September 1914, was made by French troops transported
from the city to the war front by taxis. In the 2
nd
World War (1939-1945), petroleum

*
Phd in Economics by UFRJ and Economist at BNDES

Thanks to the comments of Maria da Conceio Tavares and Jos Lus Fiori.
1
Before being Prime Minister, Churchill was the First Lord of the British Admiralship, the most important
civil position in the British Navy.
2
Due to the Agadir incident, German, that also had colonial interests in Marroco, obtained from British and
French territorial compensations in other parts of Africa.
3
Since today, the main petroleum sources are located in USA or in exotic, distant or politically instable
regions (Russia, Middle East, Venezuela, Africa, etc).
4
The history made clear that British admirals were right in suspecting from Shells loyalty; in spite of
supporting England during the 1
st
World War, its founder and main manager for decades, the Dutch Henri
Deterding, when retired from the presidency of the company, in the 1930s, supported the German nazi
movement.
Ernani Teixeira Torres Filho
2
achieved an even greater strategic relevance. One of the most important military issues
both in the Pacific as well as in Europe was to assure steady oil supplies to the battlefields.
The surprise attack to Pearl Harbor in 1941 was an immediate Japanese reaction to the
petroleum embargo imposed by the United States, Japans main traditional supplier
5
. After
the destruction of the American fleet in the Pacific Ocean, Japan was free to occupy the
rich oil fields of Indonesia, then a Dutch colony, without running the risk to suffer an
immediate American retaliation. In a similar way, the German invasion of Soviet Union
and North Africa aimed at the oil fields of Caucasus and Iran. Petroleum shortages were
one of the main factors that refrained Japanese and German machines of war, while the
abundance of American oil paved the way for victory of the Allies.

At the end of the 2
nd
World War, American strategists had clear that petroleum
would play as important role in the rearrangement of post-war international relations
system. According to Klare (2001),

[At the end of the 2
nd
World War] access to petroleum was considered by American
strategists something particularly important because it was essential for the Allied
victory over the Axis. The nuclear explosions in Hiroshima and Nagasaki were
important because they marked the end of the conflict but petroleum was the fuel for
the armies that defeated German and Japan. Petroleum powered the ships, tanks and
airplanes that were decisive for the Allied advantage over its opponents that could
not count on secure oil sources. For this reason, the idea that the access to huge
petroleum sources would be critical for the American success in any eventual future
conflicts was spread out.

In the following decades, petroleum had always been a main issue in almost all-
important international crises. The Cold War started in 1946, as a consequence of the
Anglo-American ultimatum to the Soviet Union to withdraw their troops from North Iran,
an important oil production area. In 1956, the failure of the British, French and Israeli
attempt to retake the Suez Canal the main route of the Arab oil to Europe set the end of
the European colonial world, the rise of the Arab nationalism, and the fall of Great Britain
as a major player in the petroleum political arena. The Arab-Israeli wars, the Oil Shocks of
1973 and 1979, Iranian Revolution, the conflict between Iran and Iraq, and the most recent
crisis in the Middle East which started with the Iraqi invasion of Kuwait in 1991 and
continues through the American occupation of Iraq are all important events related to the
control of oil producing regions, routes of distribution and reserves.

Petroleum was also responsible for some of the main chapters of the history of
modern capitalism. It is the most scattered of all commodities. The dissemination of cars,
aircrafts, ships and trains powered by gasoline or diesel around the world is associated with
physical integration of an increasingly urban and international economy. The black gold
became the main source of energy due to the existence of large reserves, low production
costs and enormous economic advantages related to using oil as transportation fuel.
Petroleum made possible the rise of large companies; some of them are among the most

5
At the end of the 1930s, the USA provided around 75% of the oil that was consumed in Japan and
American exports to that country were only suspended indirectly (Japanese government funds in the
U.S.mere freezed), in July 25th, 1941, four years after Chinas invasion and only after the complete
occupation of Indochina.. See Yergin, 1992.
O Papel do Petrleo na Geopoltica Americana

3
sophisticated and emblematic of the world
6
. Due to their size and experience, oil
companies deal with investments of billions of dollars and long pay back periods, which
can reach decades. They command a huge mass of financial resources that migrate
throughout the world from decaying areas to new fields.

Nowadays, it is not unusual to hear that oil has lost most of its strategic value. It is
said to be one among many commodities
7
, which are traded in deep spot, future and
derivative markets. The fact that oil is traded trough flexible price a market is not,
nevertheless, a sufficient condition to support this statement. It is, to say less, an
exaggeration. From the point of view of the industrialized countries, and of the U.S. in
particular, petroleum was, is and will continue to be a main issue of national security, not
only in terms of steady and warranted supply in the long run, but as well as in terms of
current supply.

The purpose of this chapter is to analyze the role of oil in the American geopolitics,
from the end of 2
nd
World War on. It has been divided in three sections, according to the
three different models of the oil market along those decades. From 1945 to 1973, its main
characteristics were the consolidation of the American political hegemony in the Middle
East and the leadership of the large American petroleum companies in the market. From
1973 to 1985, the market became very unstable. There was a lack of economic as well as
political leadership as a consequence of the end of the Bretton Woods international
monetary system and of the American defeat in Vietnam. From 1985 on, a new economic
order was implemented in the international petroleum market, based on its integration to
the new international financial order (financialization
8
), within a global political
environment characterized by the recovery of the American hegemony
9
.


The Post-War Petroleum Market (1945-1973).

The golden period of growth of the international economy, from 1953 to 1973,
was, powered by oil. Petroleum became the main source of energy, taking the position
withheld by coal since the beginning of the Industrial Revolution. Europe, Japan and even
the U.S. were, until 1950, economies that were mainly powered by coal. This change in the
energy paradigm was due to different factors, such as: cheaper prices, less damage to the
environment and growing motorization. Another reason for the more intense use of oil
was political. Governments and industries realized that it was a way to weaken the
powerful and active coalmines workers unions. As a consequence, petroleum demand
grew at annual rates over 7% for almost three decades. In 1945, international demand was
more than 7.1 million barrels per day. In 1974, the world burnt 55.9 million of barrels per
day, almost 8 times more. Petroleum, at that time, had already become the international big
business that we know nowadays.

6
According to Fortune 500 Magazine, Global 2000 Edition Fortune (2001) the biggest company in the
world in terms of sales was Exxon, while Shell and BP were the 6th and the 7th bigger, by the same criteria.
7
A commodity can be defined as a fungible and generic good which can be sold at a price defined at a
competitive centralized market; the definition is also used, as we do here, for a market where goods are
modernly traded in spot, future and derivative markets and prices are determined basically by supply and
demand.
8
The term financialization was created by Braga (1997) to deal with the global pattern of valorization and
competition that (operates) under the domination of the financial logic that was preponderant on the
international economy more clearly after de eighties.
9
Tavares (1997).
Ernani Teixeira Torres Filho
4
This growth in oil demand was mainly supplied by non-US sources (see Graph I).
Between 1948 and 1972, American production increased from 5.5 millions to 9.5 millions
barrels per day while the American share in world supply decreased from 64% to 22%. The
gap left by the Americans was fulfilled by Middle East. In the same period, oil production
from this region increased more than 10 times, from 1.8 million to 18.5 millions barrels per
day and the petroleum reserves of non-communist countries grew even faster, about nine
times. As a result, in spite of the rapid growth of demand, petroleum price had a permanent
negative trend. In other words, the world was swimming in oil.

GRAPH I



The stability of the petroleum market during the golden age of the fifties and
sixties was based in three institutional pillars. The first one was the 1940s agreements
among the big companies, which fixed the rules of their joint operations in the Middle
East. The second was the concession contracts between this oil companies and national
governments
10
. These agreements guaranteed to the oil companies control over production,
sales price, and, the most important, determined the rule of results distribution, at that time
fixed in 50% for each companies and national governments. Those contracts made
available the financial resources necessary for the development of new fields investments
that required huge amounts of capital , for green field refineries and for the expansion of
distribution chains. The third pillar of the post-war oil market was the role of the U.S. as
the last resource supplier, thanks to the great spare capacity of oil in its territory.

The military and political security of the Middle East was an Anglo-American joint
venture. Britain was the old colonial power that, at the beginning of the 19
th
Century, had
eliminated the pirates and made peace among local sheiks. The decline of Ottoman Empire

10
The only Middle East relevant oil producer that abandoned the concession system before the end of the
1960s was Iran, in 1954, but operating contracts were given to Anglo-American companies.
O Papel do Petrleo na Geopoltica Americana

5
during the 1
st
World War allowed the expansion of the British influence from the Persian
Gulf to Mesopotamia, Arabic Peninsula and, in Mediterranean, Palestine. British presence
in Egypt dated from the 19
th
Century, due to the strategic importance of the Suez Canal.

The U.S. presence in Persian Gulf was consolidated after the 2
nd
World War. It was
a consequence, on one hand, of the existence of American companies that directly
controlled part of the huge petroleum reserves of the region. On the other hand, it was a
response to the local governments invitations as they were interested in weakening British
imperial influence over their countries. It was the promising strategic value of Saudi
reserves that led the American President Franklin Roosevelt, to meet, in 1945, king Ibn
Saud of Saudi Arabia, in his way back from Yalta Conference in Iran. The meeting sealed
an alliance that still lasts, in spite of occasional moments of burst. The anti-British feelings
of the Arabs and the interest in the American security umbrella guaranteed exclusivity of
the Saudi concessions to American big firms - Jersey (Exxon), Socony (Mobil), Texaco e
Socal (Chevron) that until now operate in Saudi fields.

The way the U.S. stepped in Iran is also illustrative example of the political
transition, which took place in the Middle East after the 2
nd
World War. Modern Iran was
founded in the frontier between the Russian and the British empires. Iranian petroleum
fields were developed by BP, a British state owned company at that time. During the 2
nd

World War, Americans and British deposed the Shah because of his close relations with
Nazi Germany. Iran was also the stage for the first important conflict of the Cold War. In
1946, Soviets were summoned by British and Americans to retreat their troops from the
north region of the country a petroleum production area. In 1950, in the beginning of the
Korean War, fire exchange in the frontier between Iranian and Soviet forces led the U.S. to
make contingent plans to defend Iran from a Russian invasion. The country, at that time,
produced 40% of the oil of the Middle East.

After WWII, the control of Iran became a much important issue for the British
government. Oil imports from Iran were paid in sterling pounds and not in American
dollars that were extremely scarce. Besides that, the amount of taxes received by the
British government from Iranian operations, not taking the dividends into account, were
than what the Iranian government got in royalties. As a consequence, the decolonization
process in Iran was focused in the issue of nationalization of petroleum reserves. The
Iranian nationalization was implemented in 1954. The Mexican example was taken as an
inspiration
11
. The subsequent defeat of the nationalist government of Mossadegh, in the
middle of an attempt to put down the Shah, was one of the remarkable events of the Cold
War. Americans, British and Soviets were directly involved in the episode. Even after
Mossadeghs defeat, oilfields were not given back to BP nor conceded to other foreign
companies. A new agreement was settled: oil production and reserves were to be owned
by a state owned Iranian company while the operation of the fields and the distribution
were to be let to a consortium of some big firms, mostly American. The Iranians saw the
strong presence of American capital in their oil fields, as a guarantee against British
colonial past.

The first attack against of the postwar economic order of the oil market came from
the companies excluded from the 1940s agreements. They were after a share of their own
of the production of the Middle East. An important player in this disruptive process was

11
Mexico was the second country, after the Soviet Union in 1920, that nationalized, in 1937, its oil fields.
Ernani Teixeira Torres Filho
6
the Italian government, by means of ENI, a state owned company. Enrico Mattei, president
of ENI, offered an agreement to some governments of the region, Iran in particular, in
which 25% of the net results would go to ENI and the remaining 75% to the producing
country. The negative reaction of big Anglo-American companies to the Italian initiative
was so strong that Mattei charged them with cartel formation, calling them the Seven
Sisters
12
. Soon, Japanese as well as American independent companies followed ENIs
behavior. Newcomers were definitely contesting the first and the second pillar of the
international oil market.

The second attack came from the Soviet Union. Soviets have historically been a
large oil producer and exporter. After the 2
nd
World War, Soviet oil only returned to the
international market in 1955. Between 1955 and 1960, Soviet production had doubled, due
to the production of new areas. USSR rapidly became the second world producer,
resuming the position Russia occupied in the beginning of the 20
th
Century. Some
American strategists interpreted this as an aggressive economic movement in the context of
the Cold War. In 1958, exports from Soviet Union were a main source of price instability.

Due to excess supply, prices started to decrease. Initially, the negative impact of the
adjustment hit the oil companies. Payments to the exporting countries were calculated
according to an official price that did not take into account the discounts that were being
offered in the market. As a result, extraordinary profits and losses only affected the results
of the concessionaires. Nevertheless, the negative impact on the companies substantially
increased after 1959, when the United States decided to protect domestic producers by
imposing quotas for imported oil. Outside U.S., petroleum prices dropped even more.

Facing an international prices collapse, big oil companies tried to reduce the official
prices, in an attempt to pass trough part of their losses. In the beginning of 1959, BP cut its
price in 10%, what caused a negative reaction on exporting countries. In August 1960,
Jersey (Exxon) followed BP pace and reduced its oil price by 7%. As a response, 5
countries Venezuela, Saudi Arabia, Iran, Iraq and Kuwait that represented 80% of
world oil exports decided to found, in September 1960, the Organization of Petroleum
Exporting Countries (OPEC), on the intent to support the international petroleum price.

The model of operation of OPEC was based in the experience of the Texas Railroad
Commission (TRC). Between 1931 and 1971, this American agency regulated oil supply in
the state of Texas
13
. State intervention at the beginning of the 1930s was a consequence of
the desperate economic situation of Texan producers. The market, already depressed by an
excess supply since the 1920s, became even worse after the economic downturn of 1929.
The final collapse started in the beginning of 1931, when a giant field was discovered in
East Texas. Few months later, a barrel of Texan oil, which was traded at US$ 1.85 in 1926,
reached the low of US$ 0.15. TRC was in charge of determining production quotas for the
various petroleum companies, as an attempt to raise the minimum price of the barrel to

12
The group called the "Seven Sisters" was formed by 4 American companies operating in Saudi Arabia
through ARAMCO - Jersey (Exxon), Socony-Vacuum (Mobil), Standard of California (Chevron) and Texaco
- besides Gulf (American), Shell (Anglo-Dutch) and BP (British) that they operated jointly in Kuwait.

13
Before the Texas Railroad Commission and other American state agencies, the price of the American oil
was subjected to the regulation of Standard Oil, a private trust that was judicially dissolved in 1911.
O Papel do Petrleo na Geopoltica Americana

7
US$ 1. The example of TRC, the American main regulator of petroleum prices, was soon
followed by other American states.
14


Juan Pablo Perez Alfonso, a Venezuelan that was exiled in U.S. in the beginning of
the 1950s, had studied the operating model that TRC successfully adopted. After the end
of the military dictatorship in his country, Peres Alfonso became the new Ministry of
Mines and Hydrocarbons. In this new position, he went back to Washington, in 1959, to try
increase the imports quotas for the Venezuelan petroleum, which were very restrictive.
Almost 40% of all Venezuelan oil was exported to America. Besides, Mexico and Canada
were not subjected to the same limitations, under the argument that they were important for
the American national security. Initially, Venezuelans proposed an inter-American
agreement that, similar to what was set for other commodities, fixed imports quotas for
each country instead of letting the American importers decide from which country they
would buy. After all, Venezuela supplied oil to the U.S. during the 2
nd
World War in a
regular basis and the Mexicans had nationalized American petroleum companies.

In a short while, Peres Alfonso figured out that, for the American Administration,
petroleum did not deserve the same treatment that was given to coffee or sugar and that a
common frontier made a lot difference in terms of the American security policy.
Washington did not even formally answer his propositions. Frustrated, he looked for new
alliances in Cairo, where a meeting of the ministries of Arab oil exporting countries was
taking place. These ministries were at that time particularly irritated with the recent
initiative of BP to pass through their losses following the international prices decline. At
the beginning of the meeting, Arab countries were against the Venezuelan suggestion to
found a new international organization to protect the interests of exporting nations, as TRC
has been doing for almost three decades in the U.S. Nevertheless, the news that Jersey
(Exxon) had just reduced its prices without negotiating with any country was bad enough
to build the consensus around the need of OPEC.

In its first years, the achievements of OPEC were timid. The economic scenerio
was not propitious for great advances. Exports to the U.S. were subjected to a quota
regime, Soviet oil overflowed the market, Arab countries were military rivals and
concessionary firms were the owners of the exporting countries oil. Even though, there
were two important achievements. Oil companies, before making important decisions
about petroleum, started to ask the opinion of individual local governments, avoiding the
intermediation of OPEC. Besides, they did not have the courage anymore to change the
prices that were taken into account in order to calculate the exporting countries income.

The last of the three economic pillars of the oil market the American position as
last resource supplier ruined along the 1960s. The excess supply scenario, usual since
the 1930s, was gradually overcome by growth of international demand. At that time, the
generalization of the American manufacturing and consuming system around the world,
based on petroleum, was peaking. In 1970, U.S. oil production reached its historical
record: 11.3 millions barrels per day (bpd). In the following year, TRC eliminated the
restrictions to oil production in Texas. Two years later, the imports quota system was
abolished. The American spare capacity, that reached, in the beginning of the 1960s, 4

14
In the American state of Oklahoma, since 1915 the Comission of Trade already had the power to regulate
petroleum production aiming to sustain minimum prices.
Ernani Teixeira Torres Filho
8
millions bpd compared to a global demand of 20 millions, was reduced to less than 1
million in 1972, compared to a global demand global of 44 millions bpd
15
.

In this context, the U.S., in 1968, officially informed its European allies that they
could no longer rely on the American oil reserves in times of crisis. This news caused
surprise and concern. The first embargo imposed by Middle East countries during the 1967
Six Day War had occurred less then a year ago. In this opportunity, the American supply
was crucial to force Arab countries to step back. At the same time, the British government,
facing another balance of payments crisis, made official, during the same year, its decision
to definitely withdraw all troops located East of Suez, as a measure to cut the fiscal
deficit. British determination was not, as a matter of fact, motivated by reduction of
disbursements. These military expenses amounted only 12 millions a year. For London,
the increasing nationalism in the Middle East dissuaded the maintenance of military forces
in the area
16
. The last British troops returned to Great Britain in November 1971, leaving
behind a dangerous power gap in a region that produced 32% of the oil consumed in the
capitalist world and that detained 58% of the global reserves. From the 21 million barrels
per day increase in the oil demand in the 1960s, more than 13 millions came from the
Middle East.

The U.S., that has become an important petroleum importer, was worried about
the exit of British troops. However, ahead of the outcry of the public opinion against the
military evolvement of U.S. in the Vietnam, Washington refrained from being directly
involved in the Middle East security. At that time, following the Nixon Doctrine, these
matters should be left to a friendly local power. According to the American point of
view, Iran was the best option to succeed Great Britain. The ambition of the Shah and his
personal relations with the President and the American establishment assured his position
as the head of police in the region.

The final stroke in the post-war international order of the oil market was the wave
of revisions in concession contracts in the Middle East in the beginning of the seventies
1970. The initiatives of Italian, Japanese and American independent companies opened the
way to new concessions contracts that did not follow the fifty-fifty principle. The first time
an old contract had its distribution clause redrafted was in September of 1970 The new
Libyan government, leaded by Qaddafi, won a 55% increase in the participation of his
country, threatening an independent American company with the menace of
nationalization.

The lack of an immediate reaction to the Libyan initiative by other petroleum firms
and by Western governments led other countries to compete with each other for a greater
participation in the existing concession contracts. In order to deal with this insurrection,
big companies, with the support of the American Administration, opened negotiations
through OPEC with the production countries, avoiding a company-by-company deal. The
result was the 1971 Teheran Agreement, which settled the generalization of the 55% to
45% rule of participation and a general hike of US$ 0.35 in the petroleum barrel price. In
exchange, producer countries agreed to freeze demand for price increase for 5 years.

This new Agreement did not last long. Due to the instability of the international
monetary system, exporting countries opened new negotiations, demanding compensations

15
Yergin (1992: 567) and Graph I.
16
Yergin (1992: 566).
O Papel do Petrleo na Geopoltica Americana

9
for the dollar devaluations. This dispute for better prices led to a new type of demand: the
direct participation or either, the right of the producer country to buy part of the rights on
its oil reserves. This was the most radical change in the market status quo since the
beginning of the century. Direct participation was a euphemism. The real intention of the
countries of the OPEC was to follow the nationalization path of Russia, Mexico and Iran. It
was also a strategy, basically defended by Saudis, to avoid the direct competition among
producing countries for the consuming markets
17
.

As a matter of fact, some countries such as Algeria, Libya, Iraq and Venezuela
decided immediately for a complete nationalization. Saudi Arabia and Kuwait negotiated
governments participation, which would soon reach 51%.
18
Iran, that already was the
owner of its oil, transfer its field operations to its state owned company.

The nationalizations destroyed the last of the three economic pillars of the postwar
economic order: the stability of the concession contracts that guaranteed to the companies
the power to set production and prices. Even though, the market, during the next months,
continued to work with little instability, as by inertia.. In 1973, global spare capacity
reached only 500.000 bpd, about 1% of the Western world demand. As a consequence of
the new Arab-Israel War of October of 1973, the market collapsed and the international
price tripled. It was the end of an era in the history of the petroleum industry.


From the American-Saudi-Iranian Condominium to Chaos (1973-1985).

The reduction of the spare capacity, due to a strong demand, led oil prices to double
between 1970 and 1973. This fact intensified a public debate on the possibility of an
energy crisis. In a short time, the situation turned into panic. In August 1973, Japanese,
European and American independent companies made a simultaneous attempt to increase
inventories, adding an additional pressure to a market that was already suffering from a
supply restriction.

Hence, for the first time in more than 20 years, market prices were higher than
official prices - that were uses in the calculation of the local governments incomes.
19
. In
practical terms, those windfall gains were going to increase the profits of the companies.
To make the situation worse, the dollar had been devaluated twice, suddenly reducing the
real value of the financial assets held by Arab countries that were very exposed to the
American currency, such as Saudi Arabia. In a currency devaluation context, it was more
rational to let oil under earth than to accumulate financial assets. The reaction of the
exporting countries was immediate. Kuwait and Libya imposed quantitative restrictions to
their exports. The implementation of this kind of measure was also discussed in Saudi
Arabia.
Simultaneously, Arab countries allied with the American big companies started
to pressure Washington to change its policy of supporting Israel. The king of Saudi Arabia,
usually a very discreet man, declared to the American television that: We have no wish to

17
Defending the strategy of participation against nationalization, the Sheik Yamani, Petroleum Minister of
Saudi Arabia, stated, in 1969, that if we become operators and traders of our own oil, we will face a
competitive run that will result in a dramatic collapse of price structure. (Yergin, 1992: 583).
18
The complete nationalization was accomplished few years after the First Petroleum Shock.
19
The increase in official prices, due to American inflation, were well below what was practiced in the spot
market.
Ernani Teixeira Torres Filho
10
restrict out oil exports to the United Sates in any way, (but) Americas complete support to
Zionism and against the Arabs makes it extremely difficult for us to continue to supply the
United Sates with oil, or even to remain friends with the United States.
20


Despite the Arab leaders statements to the press and the Soviet information that the
situation in Middle East was close to a new conflict, the U.S. ignored all advices. They
were caught by surprise in October 6th, 1973, when Egypt and Syria jointly attacked Israel.
As a consequence of the direct American support to Tel-Aviv, Arab countries imposed an
oil embargo to Western countries and broke up talks with the companies.
21
From this
moment on, Arabs started to autonomously fix the prices of their petroleum. Immediately,
they imposed a 70% hike, equalizing the official price to the open market price of US$
5.12 per barrel. Production cuts led to panic and to a new round of negotiations. In
December 1973, oil barrel was traded at US$ 11.65 per barrel; four times the price that was
observed three months before (see Graph II). Differently from the 1967 embargo, this time
Arab countries were facing an increase in their incomes, despite the production cut. From
this moment on, Saudi Arabia took U.S. position as last resource supplier of the market.

GRAPH II


Source: Energy Information Administration, Department of Energy of the United States (2003).
Obs: Official price of Saudi Light Oil until january 1974 and acquisiton cost of oil

American reaction to the embargo was restricted to political actions. They were
after support from other countries to resume oil shipment as soon as possible. Saudi
reaction was positive but they made clear that the success of the American initiative
depended on the position of other Arab leaders, and in particular on the Egyptian President,
Anwar Sadat. After the closing of the agreement between U.S. and Egypt, the embargo was

20
(Yergin, 1992: 596-597).
21
In the same day the October War was beginning, a meeting among countries and companies was held in
OPECs headquarter in Viena, in which exporters were asking for a 100% hike in prices- around more than
US$ 3 per barrel.
O Papel do Petrleo na Geopoltica Americana

11
officially suspended in March 1974. From then on, the world would never be the same.
The oil bomb was successfully put in action. The political weight of companies and
countries in the definition of the destiny of the market has definitely changed. The system
of alliances between the countries of the Middle East and the hegemon, the United States,
from this moment on, would be based in new principles.

Once the fright of 1973-1974 was over, it seemed that a new economic order in the
oil market had already been established. Differently from the past, the administration of
supply conditions - prices and quantities - had been transferred from the hands of large
companies to exporting countries, through their trust, OPEC. Concessions were replaced
by long-term commercial contracts fixing prices and quantities that aimed to balance
supply and demand within each company. Simultaneously, the United States would
guarantee the security of the Middle East by means of bilateral military agreements with
the four most important countries of the region: Iran, Saudi Arabia, Egypt and Israel. The
Americans would play the role of protector the region from its external enemies,
particularly the Soviets, and also of arbiter of local conflicts
22
. After a long period of
turbulence, the major players were optimistic. They expected a scenario of business as
usual, with the difference that oil prices would be set at higher levels.

History showed that reality moved towards a different path. The 1973 Oil Shock
marked the end of the post-war golden period. Developed economies were facing a
stagflation period, characterized low growth and high inflation rates. Developing countries
were suffering from structural external disequilibria that were being financed by
international private banks. Under the pressure of price hike and global recession, oil
demand began to grow at lower rates. Besides that, the high current account surplus which
exporting countries initially thought as permanent vanished in less than five years. For the
OPEC countries, the US$ 67 billion surplus of 1974 decreased to a US$ 2 billion deficit in
1978.

The political and economic instability of the second half of the 1990s did not make
possible the consolidation of a stable order based on the agreements of 1974. As a matter
of fact, the rivalry among the main exporter countries refrain OPEC from operating as a
cartel. It was only a forum where the two most relevant players Iran and Saudi Arabia -
were always arguing against each other. From the Shah point of view, the 1973 Oil Shock
his masterpiece. High prices of oil opened up the possibility for his country to become the
fifth largest industrial economy of the world, following the path of the post-war economic
miracles. For the Iranians, oil price should be as high as possible in the short run in order
to generate funds for his industrialization program. The Saudis had a different perspective.
Their country had a small population that was subjected to a traditional regime, opposed to
modernization. In fact, Saudi Arabia main strategic concern was the problem that high oil
prices could generate to importing countries and to the international economy. Saudis were
also worried with the military relation between U.S. and Iran. The Shah, in spite of his high
oil prices policy, was allowed to buy any kind of American weapon, even the most
modern, except for nuclear ones. In mid 1970s, Iran was the destiny of almost half of the
American exports of weaponry.

Despite those frictions, it seemed that the new American Administration, under
President Carter) that took power in 1977, was well managing to consolidate the oil market

22
The Soviets, that became Egypts partners during Nasser period, were expelled by Anwar Sadat..
Ernani Teixeira Torres Filho
12
economic order left by Nixon and Kissinger. The Shah, at that time, was worried with the
negative effects of the large flows of petrodollar on Iranian economy. Therefore, he
adopted a more moderate attitude towards the price hike issue. He has also become under
pressure of the new American Administration on the issue of human rights. Due to the
more tolerant position of the Shah, the American Administration continued the policy of
massive sales of weapons for Iran. From the American point of view, Iran and Saudi
Arabia, that jointly controlled 48% of OPECs production, backed by explicit American
support, were powerful enough to determine the trend of oil prices in the international
market. Until then, this arrangement, although precarious, refrained petroleum price hikes
to two events: in 1975, to US$ 11.46 per barrel and, in 1977, to US$ 12.70 (Graph II). The
Iranian full commitment to price stability was supposed to be an important step ahead
towards the consolidation of Nixon-Kissinger strategy as the new economic order of the oil
market in the long run.

Washington, however, had no idea of how politically fragile the Shah was. In 1978,
U.S. was taken by surprise by the rapid and irreversible deterioration of the political
environment in Iran. In January 1979, the Shah had to leave Teheran, running away from a
revolutionary wave that took the Shia radical clergy in to power, under the leadership of
Ayatollah Khomeini. The Iranian Revolution definitely buried any possibility of a stable
economic order of the oil market based on a American-Iranian-Saudi condominium.

The Iranian Revolution launched the oil international market into chaos. Iranians
immediately cut their oil production, what caused a 4 millions bpd reduction in world
supply. Saudi Arabia and other producers increased their exports in more than 2 millions
bpd, in an attempt to compensate. At first site, the situation in the oil market seemed under
control. For a market of 50 million bpd, the effective impact of a net reduction of 2 million
bpd was less than 5% of the total demand. In spite of that, prices exploded, from US$ 13
per barrel to US$ 34 (see Graph II). The world, which was already terrified by the events
in Iran, was once again in panic.

The traditionalist and anti-American character of the Iranian Revolution launched
doubts on the political sustainability of other oil exporters. After all, Muslim
fundamentalism was also an emergent political force in other countries such as Saudi
Arabia, Egypt or even Algeria. In this context, the industrialized countries, particularly the
U.S., seemed unable to support the stability of the market. At the same time, the large
companies have completely lost control over the oil production in the Middle East due to
nationalizations. The concession contracts have been replaced by commercial long-term
agreements that were now being denounced due to force majeure reasons. Oil companies
used this clause as an excuse not to supply their clients because of Iranian oil lack. At the
same time, producing countries did the same in order to suspend contracted supplies and
increase prices de facto.

Market conventions vanished due to the lack of oil. In practical terms, all petroleum
buyers integrated companies, independent refiners and distributors were trying to
protect themselves, simultaneously increasing their inventories. This herd effect built to
an excess demand of 5 millions bpd, 10% of the global market, instead of the 2 millions
originally expected. In this context, the spot market, which until then was not important,
came to play an important role in fixing market prices. OPEC could not do much in this
chaotic environment. Formally, the Organization freed the country members to charge the
price that seemed fair according to the circumstances.
O Papel do Petrleo na Geopoltica Americana

13

Saudi Arabia was the only member of OPEC to support a price stabilization
strategy by means of a joint operation of the exporter countries in order to deal with the
crisis. From the Saudi perspective, the Organization should not be interested in price hikes
because it could stimulate new competitors, the substitution of oil for other energy
resources and even a more rational use of oil, which could cause a decrease in demand. As
a result, the Persian Gulf oil would again only be just a marginal supplier of the market.
Once defeated within OPEC, Saudis announced they would keep their official prices and
would reduce their production to the normal level of 8.5 million bpd, as the Iranian
production was already flowing to the market.

In November 1979, the Shah went to the U.S. for a health treatment and, as a result,
in Teheran, the local American Embassy was invaded. American employees were kept as
hostages. As a consequence, American image as hegemon was deeply hurt and Carters
inability to deal with the situation was negatively affecting his close coming reelection. ,
After a failed attempt of American troops to rescue them, hostages were released in say the
day the new American president, Ronald Reagan, took office.

Meanwhile, a new war in the Middle East between Iran and Iraq, in September
1980, seemed to be the start of a third oil shock. Soon after the beginning of the conflict, 4
million bpd were out of the market. The price of the Arab light oil peaked to its historical
record of US$ 42 per barrel. At this time, however, the reaction of the market was
different. Panic was now avoided due to: high inventory levels, coordination among the
industrialized countries, increase in supply from other sources North Sea and Alaska
and mainly the vision that petroleum demand was in a descendent path. In October 1981, it
was the last time OPEC increased prices in one decade.

A new market environment was overcoming chaos. Oil demand was already
decreasing. The main structural factor affecting demand was the success of the energy
conservation policies of the seventies. Oil efficiency between 1973 and 1985 was up 32%
in the U.S. and 51% in Japan. A steep change in the American monetary policy was also
affecting negatively oil demand. In order to fight the inflationary pressures in the U.S., the
Federal Reserve increased interest rates to 21.5% per year, the maximum level ever. That
led the American economy to its worst recession in the post-War period. The interest rates
shock forced other economies to adjust to the recessive context. Simultaneously, it
launched developing countries the main dynamic force in the international demand
growth into a severe economic crisis. As a result, the demand of the non-communist
countries was reduced to 45.7 millions bpd in 1983, 6 millions less than in 1979.

From the supply side of the oil market, countries of OPEC were facing competition
from new oil exporters (see Graph III). The share of the Organization in the non-comunist
market decreased from almost 65% to less than 50% in 5 years. New fields were coming in
to operation on the British side of the North Sea. Soviet Union was also increasing its
exports. All this additional oil was being sold at the spot market.

Soon, prices in the spot were lower than the official prices of OPEC. In the first
moment, the Organization compensated the downward trend of prices by cutting
production. In March 1982, the maximum limit was fixed in 18 millions bpd, with quotas
for all the members, except for Saudi Arabia, that was responsible for automatically
adjusting sales to keep the official price stable. This was a substantial change in the scene.
Ernani Teixeira Torres Filho
14
In 1979, OPEC set a maximum production limit of 31 millions of barrels. It was a 13
million bpd cut. It seemed that, finally, the dream of Peres Alfonso was becoming real.
OPEC was, at last, working as a cartel, operating in a similar way as TRC did in the U.S. in
the past.


GRAPH III

Participation of the Main Producers in the World Oil Supply
(1965-2002)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
9
6
5
1
9
6
7
1
9
6
9
1
9
7
1
1
9
7
3
1
9
7
5
1
9
7
7
1
9
7
9
1
9
8
1
1
9
8
3
1
9
8
5
1
9
8
7
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
1
U.S.A.
EX-SOVIET UNION
SAUDI ARABIA
REST OF THE WORLD
VENEZUELA
IRAN
IRAQ
IRAK
KUWAIT

Source: BP (2003)


In spite of these measures, the struggle between the members of OPEC and the
outside producers continued. The main competitor of the Organization was Great Britain,
because of the oil of the North Sea. In 1983, it was the Britain - not Algeria, Libya or
Nigeria - that in several moments, leaded price reductions. OPEC was forced to
continuously fix lower prices and production quotas. The decrease in the income of the
exporting countries led them to a situation fiscal as well balance of payments crisis. The
fight for quotas among the Organization member became a critic issue. In spite of the Iran-
Iraq war, the world was again swimming in oil.

In this excess supply environment, changes in economic order the market took
place rapidly. The loss of reserves because of nationalization and the fragility of long-term
supply contracts made the large companies give up their old strategy of balancing supply
and demand within each company. They still controlled refining and distribution but
bought oil on the spot market. The deregulation of the American domestic market
reinforced this strategy. The old regulations, which for many decades restricted the
integration between the American and the international oil market, have been already
eliminated by 1981. The United States was the largest consumer and produced 25% of the
world supply. The American market was huge and stable enough to set the basis of a new
economic order for the international market, based on flexible markets.


O Papel do Petrleo na Geopoltica Americana

15
The next step was the institutionalization of future markets. The Nymex
23
started its
operations with oil futures in March 1983. Soon, companies and financial institutions were
actively trading oil related assets in the Nymex. Other consequence of the liberalization of
the American market and its financialization
24
was the wave of mergers and acquisitions.

Price decreasing in a liberalized environment hurt many companies. Smaller ones
went bankrupted. Debt rollovers with banks became a common issue. The financial
problems of the oil market evolved into a bank crisis as the one that took place in Texas.
American authorities had to intervene in order to avoid a major economic problem. The
collapse of Continental Illinois, the 7
th
American bank, caused by its exposure to the
energy sector, brought the financial crisis of the oil market to the front pages of
newspapers. Continental was nationalized and this avoided its complete failure but the
panic led to the suspension of new financial operations to oil companies and to a reduction
in the market value of their shares
.
While firms and banks exposed to oil assets were facing a crisis, the same was true
for some highly indebted exporting countries, such as Mexico. Its external debt was
concentrated in a few big American banks. At that time, the exposure of nine largest
money center banks of the U.S. to Mexico reached 44% of their net assets. The exposure of
these same banks to Latin-American countries was even worse; it reached 250% of their
net assets. Financial problems in Mexican would affect the credit in the whole Latin
American region and consequently the stability of the American banking system. The 1982
Mexican moratorium broke out the greatest crisis in the external debt of the continent. This
was the beginning of the economic lost decade in Latin America.

The Mexican external debt problem was just a part of the financial restraint oil
exporting countries were facing. Saudi Arabia was no longer able to adjust its production
to sustain the price OPEC fixed. The cost of this strategy was beyond Saudis financial
capacity. The kingdoms revenues decreased from US$ 119 billion in 1981 to US$ 36
billion in 1984. The worst, however, was the cost in terms of market share. In the summer
of 1985, Saudi oil production was lower than British. (Graph III).


The Flexible Oil Market and the American Military Umbrella over the Middle East

As a consequence of the failure of OPECs 1982 agreements, Saudi Arabia decided
in 1985 to radically change its strategy. Instead of varying production in order to sustain an
official price, production would be settled, independently of the market price. Official
prices were abolished and the contracts with the Saudis adopted the netback principle.
Prices would float according to the spot market, less a pre-established margin
25
. Other
members of the Organization soon followed the Saudis. Prices would no longer be
determined by OPEC, but would float according to the contracts traded on the spot and
future markets. Independent producers Great Britain in particular would no more be
able to benefit as free riders from the OPECs price stabilization policy. A collapse in

23
New York Mercantile Exchange.
24
Braga, 1991 e 1997.
25
The netback pricing is a system in which the supply price of a good - crude oil - is determined based on
the final demand price the refined products (gasoline, diesel, fuel oil, etc) less a margin which pays for
the costs throughout the productive chain transportation, reselling, distribution and refine.

Ernani Teixeira Torres Filho
16
prices would then on affect them more than the Arab countries. Saudi Arabia was and
still is the lower cost producer in the world.

In few weeks, international prices collapsed. The barrel of the West Texas
Intermediate fell from a peak of US$ 31.75 in November 1985, to less than US$ 11.50 in
April 1986. As a result, independent countries agreed to open negotiations with OPEC. It
was the beginning of a new era of the oil market, based on flexible prices. Again, there was
a leader among the big producers: Saudi Arabia.

The main disadvantage of a flexible price system is volatility. Oil is a long term and
strategic industry. Therefore, large price fluctuations in the short term should be avoided.
This was the reason why the Saudis resisted so long joining the flexible market. At the end,
they had to accept that oil was just following the path of exchange and interest rate as well
as other important markets where prices were already flexible and very volatile. Even the
value of the US dollar the currency of the oil market was floating against the Japanese
as well as European currencies. In order to control volatility, OPEC, under the leadership
of Saudi Arabia, would play an important regulatory role in the new economic order.
The Organization would fix a price band and manage production quotas to its members
accordingly, in order to balance oil output and demand in the international market.

The perspective of low oil prices in the long run worried producers as well as
consumer nations. U.S. took the first step to press Saudi Arabia to fight the deflationary
spiral. Despite the non-interventionist rhetoric of the Reagan Administration, the American
Vice-President, George Bush was an oilman and a politician from Texas. Before leaving
for an official trip to Middle East in April 1986, Bush declared: I happen to believe, and
always have, that a strong domestic U.S. (oil) industry is in the national security interests,
vital interests of this country
26
. The U.S. was the worlds largest oil producer at the time
after the Soviet Union. All American petroleum industry chain from service companies
to banks and state governments was suffering more than the Saudis from low
international prices. American oil producers marginal costs were very high compared to
the Gulf countries. In a meeting in Ryad, Bush alerted Saudi officials that U.S., Japan and
the European countries would take the low prices of oil as an opportunity to increase taxes
on imported oil. The need to stabilize the oil prices in the international market was than an
urgent task.

Following the American advice, Saudis persuaded other OPEC countries - which
were also facing a shortage on their revenues to join them on collective effort to stabilize
the price of oil. Saudi Arabia refused to bare alone the cost of adjusting production to the
demand level. OPEC countries as well as independents would have to act together, cutting
production according to their market share. All members, including countries at war, as
Iran and Iraq, participated in the Saudi initiative. The next step was to bring the
independent producers into this new agreement. Soviet Union promptly accepted the
invitation. Soviets were, at the time, facing a severe shortage of hard currency.
Gorbachevs Perestroika was under pressure by the low price of oil. No oil country could
afford to compete with Saudi Arabia.

Once the producers reached an agreement on how to regulate the market, the only
important issue still to be fixed was the price target. The value of US$ 18.00 per barrel was

26
Yergin, 1992: 756
O Papel do Petrleo na Geopoltica Americana

17
a consensus among producer as well as consumer countries. It was, on one hand, low
enough to stimulate economic growth and the recovery of the demand for oil. On the other
hand, it was high enough to guarantee a fair income for the producer countries, particularly
the Americans. Therefore the political pressures towards increasing import taxes on oil in
industrialized countries would vanish. The new agreement was set on December 1986, at
an OPEC Meeting. The price of US$ 18 a barrel would be the ceiling of the market and
US$ 15 the floor. Whenever market prices reach any of those two limits, production quotas
would be increased or decreased, accordingly. OPECs oil price band resembles the
exchange rate band set by the Central Banks to guide their intervention in exchange rate
markets under what is called the dirty floating system.

The 1986 Agreement set a new era in the oil market. All the regional markets were
integrated under the netback price system. Prices would then on float on a very stable
pattern. Transactions between producers and consumers were set in a multilateral and no
more bilateral - way, after many spot, future and derivative contracts.

Although the economic determinants of the new order of the oil market were
already set, there was still missing the issue of the political and military fragility of the
Middle East countries. The oil market would never be stable if this problem was not
addressed. The solution was to transfer to the U.S. the direct responsibility in that matter.
Due to the end of the Soviet Union, American hegemony was incontestable. U.S. signed
bilateral military agreements with Saudi Arabia, Gulf Emirates, Egypt and Israel. The next
step was to establish permanent American military troops in the region in order to fill the
vacuum left by the withdrawal of British soldiers in the early 70s. This time, the phantom
of the Vietnam War was not frightening American public opinion any more.

The first opportunity came when Iraq, at war with Iran, menaced oil tankers from
third parties in the Persian Gulf. Kuwait immediately asked for American protection.
Kuwaiti oil tankers started to use the American flag and to be escorted by the American
vessels. In a few months the American Fleet was permanently patrolling the Gulf waters.
The second opportunity was the invasion of Kuwait by Iraqi troops in August 1990. The
permanent conquest of Kuwait would give Saddam Hussein control over 20% of the world
oil production as well as reserves. His power would increase dramatically in the Arab
world. There was also the possibility of an Iraqi move against Saudi Arabia, a much more
valuable asset. The reaction to the invasion united all Arab countries against Saddam
Hussein under the leadership of the new American president, George Bush.

The immediate consequence of the invasion was that 4 million barrels a day went
out of the market. The future price of oil increased to US40.00 a barrel, twice as much as
in the recent past. Other exporters increased their production to fill the gap. Saudis alone
increased exports in 3 million barrels a day. Prices started to come down.

In January 1991, a coalition of 33 countries, under American leadership, attacked
Iraqi forces. The price of the oil barrel fell below US$ 20. At the end of February, Iraq
signed a ceasefire. Differently form Vietnam and Lebanon, the loss of American lives were
minimum. After the Iraq-Kuwait episode, the market came back to business as usual.
There was still the need to repair the damages left by Saddam Hussein. Fires left by the
Iraqis before the withdrawal were consuming about 6 million bpd. Moreover, oil exports
from Iraq came under direct control of the Unites Nations. The system of regulation of
market implemented in 1986 had been reinforced by theses events. The American
Ernani Teixeira Torres Filho
18
leadership in the Middle East was even stronger. New permanent bases have been already
established in Saudi territory.

Between 1992 and 1998, the oil market went back to normality. Prices floated
within OPEC band. Global demand resumed growth at a rate of 1.4% a year, as a
consequence of the increase of oil consumption in the Asian countries. In 1996, the market
was again short of spare capacity. In the mean time, Venezuela, defying the leadership of
Saudi Arabia, disregarded its quotas and retook the position of main exporter for the
American market, in detriment of the Saudis. Simultaneously, as prices had reached the
upper limit of the band, OPEC decided, in December of 1997, to increase production
quotas. They didnt realize that a severe economic crisis was already on its way in the
Asia-Pacific region. Beside, 1 million of bpd of Iraqi oil would be again flowing in to the
market throughout 1998. The result was an increase in inventories and a decrease in
prices. The imported crude oil in the United States fell from an average of US$ 23.22 a
barrel in December of 1996 to US$ 9.39 in December of 1998 (to see Graph II). Russia
was, again, one of the main victims of the price collapse. Moscow was already in fragile
financial situation. The massive loss of hard currency from oil exports started a new
economic crisis. As a result, the ruble had to be devalued sharply.

The oil price collapse set in motion a wave of mergers and acquisitions in the oil
market. The first important operation involved the purchase of Amoco by BP, in August
of 1998. Soon after that, it was the turn of Exxon and Mobil, BP-Amoco and ARC, and
Total-Fina and Elf. Texaco and Chevron, and Conoco and Philips followed them. This
movement of centralization of the capital was also due to some other factors. Managerial
and technological innovations had cut costs along the previous decade. Between 1980 and
1992, the direct employment in the 8 bigger companies had been reduced from 800.000 to
300.000 jobs. Simultaneously, the cost of new discoveries had fallen from more than US$
20 per barrel equivalent in 1979-1981 to less than US$ 5 in 1993-1995. The cost of
production had been reduced from US$ 7.20 to US$ 4.10 a barrel along the second half of
the eighties. These gains were unevenly distributed and were reflected in the market value
of the companies. They had been greater in the larger and more capitalized companies,
which commanded the wave of M&A. Finally, high liquidity and the speculative bubble in
the Stock Exchange had raised substantially the market value of the oil companies, what
made it extremely attractive to controller to sell their shares.

As a reaction to the price collapse, OPEC carried two production cuts: 3.2 million
bpd in 1998 and 2.1 million more in March of 2000. At that time, Asia had resumed
growth and, consequently, the oil demand was increasing, but production quotas were not
raised. The goal of the oil exporting countries was to keep the price of the barrel around
US$ 25, in a strategy to recover part of the losses of 1998. The suppliers were still facing
some spare capacity, but this would not last much longer. Any bad news or unexpected
event could launch spot prices over US$ 30 or US$ 40 for barrel. When the Venezuelan
oil company PDVSA - went on strike on January 2003 and cut exports to the U.S., prices
went up but only reached US$ 32 as the gap was filled by new production from Mexico
and the Middle East. This time, the price impact was relatively small as the Venezuelan
strike was already being expected by the American intelligence and by the large oil
companies.

The next major event that hit the oil market was totally unexpected: the attacks on
the World Trade Center in New York in September 11, 2001. One of its effects was to
O Papel do Petrleo na Geopoltica Americana

19
increase the concern of U.S. Administration with its energy security, particularly with
increasingly dependence on the Middle East oil. The new American security policy would
take more easily the possibility of a military intervention against unfriendly regimes in the
region. Until then, it was argued that the market mechanisms were working well, so the
only issue of military concern was the security of pipelines and governments. According to
Johnson (2004), one of the main reasons for the existence of more than the 725 American
bases around the world is the increasing American dependence on foreign oil:

"Many garrisons are in foreign countries to defend oil leases from competitors or
to provide police protection to oil pipelines, although (the American government)
invariably claim to be doing something completely unrelated - fighting the" war on
terrorism "or the" war on drugs ", or training foreign soldiers, or engaging in some
form of "humanitarian" intervention. (There are) some cases in which the oil is the
only plausible explanation for acquiring more bases. In these cases, the government
(American) has produced elaborate cover stories for what amounts to the use of
public resources and the armed forces to advance private capitalist interests. The
invasion of Afghanistan and the rapid expansion of bases into Central and the
Southwestern Asia are among best examples (...)."
27


In this in scenario, direct military intervention could be considered a necessary evil.
Each player must fulfill its role. OPEC, led for Saudi Arabia, should try to guarantee the
balance between supply and demand, within a band of prices. Oil companies should
support the expansion of supply in the long run. The American government would
guarantee the security of the markets and its main players. The invasion and occupation of
Iraq by American troops from March of 2003 is a step beyond in this perspective. It is not
tolerable anymore that a strategic asset for U.S. - in the case the Iraqi oil - remained under
control of a regime that contests, violates or disturbs the international order.


Perspectives

The 1973 Oil Shock set the end of the period of rapid growth of the
international oil market. Since 1979, demand had grown less than 0.9% a year, a rate 10
times lower than the one achieved in the postwar period. In 2003, the world consumption
reached 79.2 million bpd, only 23.1% more than the 64.3 million consumed in 1979.

In spite of relative stagnation of the global market after 1973, the regional
distribution of the market changed a lot. In U.S., Europe and Japan, which together
consumed 70% of all the oil produced in 1974, demand did not grow much. This was due
to factors such as low rates of economic growth, technological innovations and successful
programs of rationalization of the energy use. The reduction of the market was extremely
severe in the countries that succeeded Soviet Union. The economic crisis caused by "pro-
market reforms reduced local demand from 8.5 million bpd in 1980 to 3.4 million in
2002. In Latin America and in Asia-Pacific, the situation was completely different. Oil
demand growth rates surpassed 6% a year during the nineties. The Chinese market, for
example, more than doubled, increasing from 2.2 million in 1990 to 5.3 million bpd in
2002.


27
Johnson 2004 167,168
Ernani Teixeira Torres Filho
20
From the point of view of supply, there was also a geographical change of the
market. New areas came in to production, such as the British and Norwegian fields of the
North Sea. The Soviet Union and the United States, two traditional leading countries, lost
participation as a consequence of reducing production to the countries of the Middle East,
particularly of Saudi Arabia.

Saudi participation in world production was 11.8% in 2002. This figure by
itself does not justify the strategic importance reached by this country in the oil market.
The power of Saudi Arabia originates from three other sources. The first one is its great
participation in the world reserves. Nowadays, proved reserves are capable of supplying
the current worldwide demand for 40 years - a very comfortable situation. However, the
regional distribution of these reserves is very asymmetrical. At the end of 2002, 65.2% of
the worlds proven reserves were located in the Middle East, out of which 25 basis points
in Saudi territory.

The second important source of power of the Saudis is their control over most
of the worlds spare capacity. This position in the oil market guaranteed to Saudi Arabia
the position of "last recourse supplier". Among the members of OPEC, the spare capacity
in 2002 was estimated from 7.3 to 7.8 million bpd, out of which 2.6 to 3.1 million bpd
were Saudis. It might seems too low for a market that produced at that time 75 million bpd,
but is a amount sufficient enough to change, in short run, the balance of the international
market and, consequently, prices.

The third advantage of the Saudis is the low cost of production of its oil, less
than US$ 2 a barrel, while the Venezuelan oil heavy, of very low quality, can cost up to 5
times more and the Russian up to 3 times more. This cost gap is very important to sustain
lasting market disputes. In long-term scenarios of low price, the Saudis suffer less than
their competitors - all heavily dependent on oil exports to finance fiscal and external
accounts. Those three factors explain the leadership of Saudi Arabia in OPEC and in the
oil market. Between 1985 and 1997, international prices floated between US$15 and
US$20 per barrel during two-thirds of the period (to see Graph II). The only moment of
greater frightening was the invasion of Kuwait by Iraq in 1991.

Among developed countries, the most important challenge in the long-term,
particularly for its strategic consequences, is the increase on the external dependence of the
United States. In 2002, 53% of the oil consumed in America was imported and the
perspectives are that in 2020, 62% will come from overseas. Due to transportation costs,
the main oil suppliers for the United States are and will be located in the Western
Hemisphere and Africa. But, as the flexible market operates totally integrated, its strategic
center is the Persian Gulf. From this perspective, American military presence is important
to guarantee the status quo in these countries and to enforce U.S. interests in the region.

This scenario might change, but not much, if exports from Russia increase.
Russia has a great potential of new production in the short run. This could be used as a
political bargain with U.S. and, in particular, with the Europe, because of the geographic
proximity. Russia may try to use its oil and its natural gas to bargain close closer relations
with Europe or even to apply full candidacy to the European Union. In this last hypothesis,
not much probable, it would affect the American hegemonic position in the long period. As
Henry Kissinger wrote in the conclusion of his book, Diplomacy: "It is in no countrys
interest that Germany and Russia should fixate on each other as either principal partners or
O Papel do Petrleo na Geopoltica Americana

21
principal adversaries. If hey become too close, they raise fears of condominium; if they
quarrel, they involve Europe in escalating of crises ".
28


If economic growth in Asia-Pacific continues, Russia may become an
interesting gas and oil supplier to China and Japan, as a mean to reduce the high exposure
of these countries to Arab suppliers. China, Japan and Russia may reach an agreement to
develop energy resources of Siberia. The Chinese economy, according to recent
projections may also lead large impacts on the oil market. Chinese demand tends to
increase quickly while domestic supply will be kept at the current levels. Consequently,
China will have to play a larger role in the oil market, as others world powers do. China
are already taken steps to increase relations with countries that came out of the old Soviet
Union, especially those located close to its border. This will certainly imply in a bigger
Chinese presence in the political arena of the Caspian Sea as well as in the Middle East. .
Again, an approach between the Russians and China and, even though, Japan may also to
generate fear or distress in many countries, particularly the United States.


Conclusions

After the end of the Second World War, the oil market went through three different
phases, each one related to a specific market order (See the Summary Table at the end). In
the first one (1945-1973), the large Anglo-American companies were at the center of the
decision making process. The "7 Sisters" set steady prices, balanced supply and demand
within their companies and controlled all the different chains of the oil industry, from the
well to the station. Decisions and actions were supported by concession contracts with the
government of the exporting countries, and by inter-company agreements, which fixed
rigid geographic areas for exploration activities. Those contracts almost eliminated direct
competition among them in exploration and production activities. Demand was growing
fast, at 7% a year, and supply was structurally excessive since the 1920s. The global
security of the market was managed by an Anglo-American condominium. Great Britain,
the old colonial power, had direct responsibility for domestic and external security of the
countries of the Middle East. British military troops were permanently based in the region.
America was the "last recourse supplier " of the oil market. The U.S. had the responsibility
for guaranteeing not only its own energy security, but also Western Europes.

In the second phase (1973-1982), the oil market stagnated due to high prices of oil
and to the recession of the world economy. Oil companies had many of their large fields
nationalized by the governments of the producing countries. They had kept, however,
control over refining and distribution. In the beginning, the companies balanced supply and
demand by means of fragile long-term contracts with exporting countries, which
predetermined prices and quantities. Those contracts, however, did not last long, due to the
lack of spare capacity and the succession of crises in the international economy and in the
Middle East. The prices and the supply were very instable. Saudi Arabia succeeded the
U.S. as the " last recourse supplier ". Saudis disputed the market leadership, initially with
Iran, and later, with Soviet Union. Due to attempts of OPEC to fix prices, Saudis lost
market-share to independent countries. Competition was back to the market. Global
demand was falling and more production was coming out from new regions, like the North
Sea, at lower prices. After the withdrawal of the British troops, Iran and Saudi Arabia took

28
Kissinger,1994, 882
Ernani Teixeira Torres Filho
22
the charge of the security of the Persian Gulf, supported by bilateral military agreements
with the United States. This alliance, however, collapsed after the Iranian Revolution
(1979).

The third phase (1985 to-day) is characterized by sluggish demand and relatively
low spare capacity, mostly concentrated in Saudi Arabia. Prices are flexible and float
according to thousands of contracts in the spot and future markets, based on the netback
pricing system. Relations between oil companies and exporting countries are multilateral
and flexible. Oil companies are much less integrated than in the past. This new flexible oil
market was initiated in U.S., in the beginning of the decade, after the deregulation set by
the Reagan Administration. It was completed after Saudi Arabia had won a "price war"
against other members of OPEC and the independent competitors. OPEC, after some
American incentive, took charge of the short term fine-tuning of the market setting
production quotas and a price band. The security of the Persian Gulf is now directly in the
hands of the United States. It took two decades for the U.S. to fill with its own troops the
gap left by the withdrawal of the British soldiers.

There is a relation among each of the three different orders of the oil market and the
mutations of the American hegemony after 1945. Until 1973, the international scenery was
characterized by complete - although increasingly contested - hegemony of the United
States. The Western world subdued to the military and economic power of U.S., in the
context of Cold War against the Soviet Union. The fixed dollar money-standard was strong
enough to entitle long term contracts in the oil market, despite the problem of excessive
supply. In the mean time, due to the decolonization process supported by Washington,
American petroleum companies invaded oil-rich countries, which until then were
exclusive British or European monopolies.

The disruption of fixed-price market was due to the increasing plea of the American
hegemony. Meanwhile the dollar was being devalued and the American army defeated in
Vietnam; the oil companies were forced to turn their concessions back to the national
governments. America could not guarantee the energy security of Europe any more and
prices began to increase, despite long-term contracts. The end of the post-war oil market
order was abrupt but in a certain way could be anticipated by the end of the excess supply
conditions, which were effective since the twenties. The 1973 Oil Shock was a
consequence as well as one of the causes of the disruption of the international order. That
is why it is considered a landmark of the end of the "golden period " of the capitalist
system in the 20th Century.

The U.S. was not able to settle immediately a new order for the oil market. This led
to a period of a great instability. In the oil market, the weakness of the dollar and the
scarcity of production destroyed any possibility of stable relationships between companies
and exporting countries long-term fixed prices and quantities. At the same time, the
attempt to supply the military vacuum left by the withdrawal of the British troops from the
Persian Gulf by a local gendarmerie had a brief and surprising end with the rise of the
Ayatollahs to the power in Teheran, in 1979.

A new stable economic order of the oil market could only be achieved in the middle
of the 1980s. At that time, the dollar has recovered its position as the dominant
international currency and the interest rate, exchange rates and most commodity markets
were already operating under flexible rules. Oil market integration to global
O Papel do Petrleo na Geopoltica Americana

23
financialization the process begun in U.S., the main consumer and one of the great
producers. In spite of pre-determined quantities and prices, the contracts started to reflect
volatile expectations in an uncertain environment. The principle of netback, later accepted
by Saudi Arabia and the OPEC, submitted the producers to the short term prices of as well
as to curves of future prices, based in expectations of global performance and liquidity of
the global economy, under American leadership. The cartel of the exporting countries,
under Saudi leadership, is the manager of the oil supply in order to guarantee that the price
of the "black gold" was kept within predetermined bands.

Since then, the new flexible order of the oil market following the pattern of other
markets - has been extremely resistant to crises and now is one of the most important
pillars of the American power. Except for one small problem during the Gulf War, the only
serious event was the abrupt collapse in the demand as a consequence of the exchange rate
crisis in Asia in the second half of the nineties. More recently, in the first months of 2004,
the OPEC band was left behind by a huge and unexpected increase in the global demand.
There was also as increase of risk in the supply side, due to the threats to Saudi Arabia and
of the increasing plea on the American military occupation of Iraq. As the dollar recently
depreciated compared to other convertible currencies and the spare capacity of the sector is
limited in the short run, there are pressures to review the band to an upper level for the
second time since its creation in middle of the eighties.

In spite of the relative supply restriction in the first months of 2004, the
perspectives of medium and long run growth of the oil demand is mediocre, when
compared to the postwar period. On the other hand, the possibility of a technological
substitution of the oil, as the main combustible of the transportation system, is remote in a
period of at least two decades. In this context, the current flexible system of the oil market,
even with the increasing external dependence of the U.S., will continue to prevail in the
next future.

It is possible, however, that the prices would become more volatile as a result of the
increasing political fragility of the Middle East, both in the internal and external fronts.
The way that the U.S. is dealing with the crisis in Afghanistan, Palestine and Iraq indicates
that the hegemonic power chose the direct confrontation - or, at least, the threat of direct
confrontation - as a means to guarantee the domestic and external security of the Persian
Gulf region. This kind of behavior has already caused dramatic answers, such as the
destruction of the World Trade Center in New York, in 2001.

This strategy, based on multiple military interventions, will hardly be able to
sustain to a steady order for the Middle East region and, consequently, the oil market. It
will probably be another blowback" in the American external policy. In particular, the
Saudi-American relations could suffer and this could make it difficult to retake the
coordinated action between the two countries that prevailed in the last two decades. The
Palestinian-Israeli conflict, besides undermining the legitimacy of the American presence
in the Middle East, causes important erosion in the basis of the political regimes of the
Arab countries, particularly for the Saudis. The Palestinian question, together with the
presence of American bases in Saudi Arabia, was part of the argument used by Al-Qaeda,
to justify the terrorist acts of 11 of September of 2001.

In any way, the maintenance of the current economic order of the oil market will
heavily depend on the capacity of U.S. to support the dollar as the currency of the
Ernani Teixeira Torres Filho
24
international trade and capital transactions. From this point of view, there is no sign, in a
reasonable period of time, that the dollar would have any competitor in its international
role.

Thus, one can expect that the oil market will maintain, in the near future, two
relevant characteristics. On one hand, it will always be a locus that reverberates disruptions
in the international order - economic or political-military. Any deeper disruption could
become worse by restrictions in oil supply. In this case, oil market could become an
amplifying factor of these disruptions. For limited periods of time, it can even become an
autonomous element of disorder, if interests that are contrary to the Americans` use it as an
instrument of pressure.


SUMARY TABLE

Characteristics of the Economic Orders of the Post-War Oil Market

Basic
Characteristics
Consolidation of
American Hegemony
(1945-73)
American-Iranian-Saudi
Condominium,
(1973-1985)
Flexible Market
(1985-2002)
Market Trend Rapid Growth Stagnation Low Growth
Price Formation Stable and fixed by
major oil companies
Unstable and fixed by
exporter countries
Floating prices within a
band managed by OPEC,
under Saudi leadership
Spare Capacity Structurally excessive Very restricted Restricted
Main Support
Agreements used by
the Market
Inter-company
agreements on
exclusive areas of
Exploration and
Production and
Concession Contracts
with local government
Long-term supply
contracts between
countries and companies,
setting prices and
quantities
Flexible markets,
multilateral relationships
through spot, future and
derivative markets
Market Balance By company,
integrating from the
well to the station
By companies vertically
integrated, by means of
long-term supply
contracts
De-integration of
Companies and
Commoditization
Last Resource
Supplier
United States Saudi Arabia Saudi Arabia
Domestic and
External Security of
the Persian Gulf
Anglo-American
condominium, British
troops permanently
based
Bilateral Agreements
between U.S. and
regional powers, Iran as
head of police until
1979
American responsibility,
American troops
permanently based from
1991 on
O Papel do Petrleo na Geopoltica Americana

25


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