Politics 177 (Spring 2004): America and the World

Week 8: Petropolitics

5/18: Elixer of Industrialism, Prisoner of Politics

O. Summary of the high points of Daniel Yergin's The Prize

1. The early organization of the oil industry emerged through a combination of state power and market structure: Both fragmentation and consolidation (as seen in Standard Oil) were a consequence of the largely unregulated capitalism during the last half of the 19th century and the particular political economy of American industry at the time.

2. When the domestic monopoly power of Standard began to threaten the American state, it was broken up: As a single company, Standard was able to intervene in politics and control markets to an excessive degree.  Progressivism sought to establish countervailing power to the size and inefficiency of the great trusts of the Gilded Age.

3. The Seven Sisters exercised almost total control over world oil production and markets: After World War I, state power came to be articulated through the oligopolistic structure of the oil industry.  This continued until the early 1970s.

4. The energy crisis of the 1970s destroyed the integrated structure of the oil industry and undermined its links to state power: After 1973, the oil industry began to focus more on costs and profits than on control of supply and markets.  OPEC exercised such control for a few years, but eventually lost it.  As a result, the United States lost its political  leverage over oil.

5. American alliances and deployments in the Middle East represent an effort to regain some degree of political control: This is based on the notion that carrots and sticks can induce particular forms of market behavior, favorable to American economic interests.  But the United States cannot really affect internal politics, for fear of undermining allies such as Egypt or Saudi Arabia.  Hence, there are limits to political control.

6. It would make economic and strategic sense to reduce our dependence on oil, especially from the Persian Gulf: This, however, would require sizable increases in energy prices and taxes, since the cost of oil would drop as a result of lower American demand, and that would make alternatives uneconomic.  Congress and the Executive are quite unlikely to do this.

I. The contradictory faces of petroleum

1. Oil is an economic commodity: As a commodity, bought and sold in markets, oil is subject to the vagaries of supply and demand.  When demand exceeds supply, prices tend to rise.  This attracts producers who seek new supplies and bring them to market.  The absence of any central control over production usually leads supply to exceed demand, often by a considerable amount.  Demand, having been moderated by higher prices, begins to decline.  The combination results in a price collapse, as well as bankruptcy and consolidation. 

2. Oil is unevenly distributed around the world: The creation of oil millions of years ago had no relationship to the political borders of the last two centuries.  Consequently, the demand for oil has often been in places far removed from the supply.  This is not a problem so long as markets operate efficiently and are not constrained by borders, but this is an uncommon state of affairs.

3. Oil is a strategic commodity: Since the early 20th century, oil has been an important element in the operation of militaries, strategic planning, and warfighting, as well as being central to the industrial capabilities so central to a strong military.  Oil is a much more convenient and efficient fuel for these purposes than is coal.  But the readilyn available supply of oil has not always been available to those industrial powers seeking strategic security or wishing to expand territorially.

4. How do industrial states ensure access to adequate oil?  Non-capitalist states have tried to exercise direct physical control of oil resources, or to acquire them if lacking.  Capitalist states have had to balance between letting markets operate in order to support civilian and industrial demand while ensuring guaranteed access to oil supplies for military and defensive purposes.  The two objectives have often come into conflict with each other.

II. National power vs. corporate control

1. Oil production and markets were largely developed through the private sector: As seen in Yergin's The Prize, most of the world's oil resources were developed by private corporations.  During the late 1800s and early 1900s, governments had neither the capital nor the wherewithal to search for and develop oil, and the fact that the industry began largely in the United States played a major role in this division of labor.  Oil companies also had the relative freedom to search anywhere in the world for oil, to develop markets around the world, and to repatriate profits to the home country.  So, states were always in the position of having to ensure their strategic needs on the back of a privatized industry.

2. Integrated oil companies were able to control production and its distribution: This allowed them to stabilize supply and maximize profits on a regional basis.  State companies are restricted to their national territories--they can only regulate output; private companies can decide where to produce and where to sell, and they can collaborate to restrict production and direct supplies to particular places.  Until the 1970s, this meant that oil markets were subject to the decisions of the oil majors, although British and American power were important in enabling such behavior.

3. States sought to control production during times of war, disrupting the market system: Markets are problematic during war: states want assured supplies of goods and commodities and want to deny them to the enemy.  The private sector is only interested in getting the highest prices and best deals.  Hence, states have to intervene into the oil supply system in order to ensure their own supplies and deny them to others.  So long as the oil majors felt dependent on the UK and US for maintenance of the political economy under which they operated, they were also subject to state power and punishment.  But markets could not operate freely (if at all) during wars.

4. But state sovereignty also put an obstacle in the way of asserting control: This is seen most clearly in the experience of AIOC in Iran.  During war, one state can occupy another on the basis of claims of "national defense" (even though this might be done illegally).  At other times, the principle of state sovereignty prevented such outright occupation.  In Iran, in the early 1950s, the nationalization of the Anglo-Iranian Oil Company could not be undone through a British invasion (although this was proposed), but could only happen through an internal change in government and a restructuring of the concession.  Similarly, the United States could have invaded the Persian Gulf in 1973-74, claiming "national security," but this would not have gone over well in much of the world.

III. The role of strategic dominance in stabilizing the oil system

1. Both the UK and the US used their military power to structure the political economy of oil markets: Repeatedly, both countries exercised their ability to structure the global political economy of oil through military deployments.  Until 1967, the British based troops throughout the Middle East, supporting various small oil-producing states and warning others.  American support for Saudi Arabia, and various other strategems, were also intended to provide the stability under which oil could be produced and marketed.

2. But neither country exercised full structural dominance, even during the 1950s: Oil-producing countries did receive royalties and were tied into the international economy, but only to a limited degree.  And other countries, such as Egypt and Iraq, were subject to internal coups that destabilized the political economy of oil.  Indeed, the reluctance or inability to discipline the governments of the Middle East meant that one could never be confident that oil crises might not occur.

3. During the 1970s and 1980s, such structural dominance dissipated: OPEC was able to move the market, but it was not able to structure the market or exercise market discipline.  The economic crisis of the 1970s threw into doubt the structure of the international economy as a whole, and gave rise to the fear of U.S. decline.  The oil market went through a free-for-all.

4. It was this arrangement that Saddam Hussein seemed to threaten in 1990: Although Iraq was probably never as great a strategic threat as George Bush Sr. and Dan Yergin made him out to be, he might have acquired influence over the international price of oil, if he could have gained control of swing production (which would have required occupation of Saudi Arabia).  It was the threat of high prices that was most feared; as James Baker once said, the problem was "jobs, jobs, jobs."

IV. Neo-liberal globalization generated a fundamental shift in oil strategy

1. Until about 1980, oil figured centrally in national strategic planning and war-fighting: Corporate integration assured supply and demand but also fostered economic inefficiencies and high internal costs.  Yet, the United States and the oil companies were willing to live with the latter in order to maintain the former.

2.The crises of the 1970s broke the back of the oil majors: Control shifted from the corporations to states, who mostly lacked downstream operations and could not shift production selectively among regions.  The majors and others moved away from production and towards trading and marketing.

3. After 1980, profit-seeking became central to the oil industry: Inevitably, companies did not run "lean and mean" operations.  Many were undervalued relative to their holdings, while others employed many more middle-level people than was really necessary.  Duplication and overlap was considerable.  But the fragmenting of the industry increased competition at all different stages of oil production, refining, distribution and marketing, and each small bit now found it necessary to reduce costs and increase profits.  This is good for economic growth but bad for strategic security and system stability.

4. Today, it is the price of oil that is most important, not its strategic role: Oil is still necessary to war-fighting, but wars are much less oil-intensive.For the U.S., there are sufficient alternative sources to supply military needs. But prices that are too low or too high are economically-disruptive. Hence, the ability to influence markets unduly becomes the central threat.

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5/20: Oil eyes and gas gauges

I. Does oil matter and why?

1. The First Gulf War: After Iraq invaded Kuwait, President Bush (Senior) was goosed by Margaret Thatcher and announced "This will not stand."  The principle of sovereignty was at stake, and the United States would be in the forefront of protecting that principle.  But, according to James Baker, there were three reasons for going to war:  "Jobs, jobs, jobs!"  Oil mattered and matters for the effect its price has on the economy.

2. Price spikes and oil gluts: Yet, there is no way to maintain an international market in oil and achieve the price stability that seems desirable.  Long-term higher prices will lead to an increase in supply, to conservation and, perhaps, a shift toward alternatives, all of which will depress demand and cause the price to drop.  Long-term low prices will have the opposite effect. 

3. Privatization of oil might be one mechanism for controlling the market: Part of the Bush Administration's agenda might involve the reprivatization of oil.  That would allow companies to collude in terms of production, distribution and marketing, under the benign hegemony of Washington.  Prices could be stabilized and slowly increased and production ramped up to meet growing global demand.  But there is a wild card in all of this.

4. Oil futures: Sometime during the next couple of decades, global oil production will begin to decline.  Known reserves total around one trillion barrels, and there might be another 250-500 billion to be found.  But, at a consumption rate of 20 billion barrels per year, extraction from existing reservoirs will become more difficult and more costly.  We could try to anticipate the end of oil, but it would be an expensive proposition to invest in alternatives so long as oil is relatively cheap.  We could respond with intensive conservation when prices do begin to rise, but that is likely to cause considerable social disruption and discontent.  Or, we could try to gain control of the major oil provinces, which might well lead to constant war.

And, now, backward in time...

II. Oiling the New World Order

1. The First Gulf War appeared as a break from the Cold War: The coalition assembled to oust Iraq from Kuwait was a step in the direction of collective security, which had been the objective of the founders of the United Nations.  It was on this basis that President Bush called for a "New World Order," although it seemed fairly evident that it would be an order based on American desires.  In retrospect, however, it begins to appear as though that war was one of the last of its types rather than something new.

2. The Bush Administration was not willing, at that point, to take on "regime change": The standard argument is that Washington feared the geopolitical consequences of invading Iraq, that it might break up and the pieces absorbed by its neighbors.  The failure to go all the way to Baghdad lay the basis, of course, for the neo-conservative attack on Bush senior.  George Bush was not averse to regime change, as seen in Panama, or to state-building, as seen in Somalia, but Iraq appeared to be too big a project.

3. The Clinton Administration did not prioritize Saddam Hussein as a target: It should not be forgotten that a low-level war against Iraq was waged by the U.S. and UK throughout the 1990s, and that sanctions would, it was hoped, eventually lead to a coup against Hussein.  But the Clintonites had other things on their plate, and were unsure how to deal with those problems.  Moreover, after 1994, Congress was at war with the President, which made foreign policy Clinton's only real arena of relatively free action, but subject to constant attack by Republicans.

4. The most important foreign policy problem appeared to be a rise in internal warfare, undisciplined by the Cold War: Somalia, Yugoslavia, Haiti, Rwanda, West Africa, Sudan, Afghanistan, the Middle East.  Somalia came as a shock, of course, since the intervention collapsed so quickly.  Cruise missiles and bombers were useful only for sending messages--at least until the NATO attack on Serbia.  The U.S. military found itself being deployed for purposes of peace-making, peace-keeping and social work, in Bosnia and elsewhere.  This was not something for which it had been configured or prepared, and neither the Joint Chiefs or Congress were very happy about it.

III. GLobalization and the American Mission

1. The Clinton Administration was far more interested in "growing the economy": Whereas the first Bush Administration was full of Cold Warriors who saw the world in terms of military balances, the Clinton Administration was full of public policy folk who were domestically-oriented and more concerned about democracy and prosperity, at home and abroad.  Given that it was a recession that contributed to George Bush's loss in 1992 (with an assist from Ross Perot), the economy seemed more important than strategy.  But, there were a lot of people who had made their careers on the back of strategic analysis, and a lot of businesses who benefited from the same.  They kept asking: "What's the strategy, Kenneth?"  and were not happy with what was forthcoming.

2. The "Washington Consensus" became the new foreign policy mantra: With the end of Soviet hegemony in Eastern Europe and the collapse of the USSR, democracy appeared to be spreading, the triumph of liberalism meant the "end of history" (according to Francis Fukuyama"), and capitalism was the only game in town.  Hence, the phrase: "promote enlargement" of the blessed circle of democracy and capitalism  This was to be done through the neo-liberal formula which, it was argued, would lead to economic growth, prosperity, and contentment with the new political system.  In this way, the American Mission would be fulfilled.

3. Free trade and financial liberalization were key: Although both NAFTA and the WTO had emerged during the Bush Administration, Bill Clinton treated regarded them as his own.  These institutions were central to economic and political enlargement, regardless of the undesirable effects they might have on the global distribution of wealth and resources or the effects in developing countries.  The system was perfect. Therefore, those difficulties that arose as countries tried to hew to the new rules were attributable not to structural causes, or the policies of industrialized countries, but to incompetent and venal governments and greedy and corrupt individuals. 

4. But not everything went smoothly: The 1994 Mexican peso crisis and 1997 Asian financial crisis both put this system to the test.  In both cases, the U.S. had to intervene to prop up shaky economies.  In other instances, unregulated financial speculation threatened to undermine the global economy, as in the case of Long Term Capital Management, and the U.S. Treasury had to bail out the firm.  Finally, of course, the Clinton Boom came to an end with the Dot Com bust. 

III. A Struggle for Strategy

1. At the beginning of the Clinton Administration, the Pentagon went through a "Bottom-up Review": The idea was to match resources to threats, and to eliminate those parts of the military that no longer seemed useful.  The question that was never really answered was: what were the threats?  And which threats had to be addressed? There were many, but how to assess which ones were serious?  The services were not interested in seeing resources taken away, and the politicians were not interested in seeing defense operations in their districts closed down, so not a lot of progress was made along these lines.

2. Sometime during the early 1990s, the "Revolution in Military Affairs" appeared: The RMA was (and is) based on the notion that advances in electronics, surveillance, data processing and communication can facilitate control of the battlefield in the way that microprocessors and robots can enable a few people to control assembly lines.  Capital replaces labor, in other words.  This means less reliance on fallible people, fewer casualties in war, and a major RD&D initiative worth hundreds of billions.  Control of outer space was also central to the RMA because it makes possible a global panopticon as well as a launching platform.

3. But the RMA runs counter to the interests of the general and admirals: They oversee BIG STUFF and REAL WARS, and lots of people are under them and they've worked long and hard to get where they are.  The RMA is predicated on a "lean and mean" military, with many fewer people and less heavy equipment and non-traditional war-fighting and who knows what else.  By contrast, the younger officers and desk jockeys see the RMA as their chance to move up, as the old guys retire or get fired (cf. General Shinseki who was fired for questioning whether the number of troops committed to Iraq was sufficient). The invasion of Iraq has raised serious questions about the viability of the RMA as the basis for strategy.

4. But what is the strategy that justifies the RMA?  The two-war strategy looked just like the First Gulf War: lots of men and materiel, lots of bloodshed and deaths, lots of ruined and destroyed equipment.  The asymmetric warfare strategy seemed more likely to involve urban and guerilla warfare, and that is more akin to police work than soldiering.  The strategy problem has not yet been fully solved, even though the invasion of Iraq has taxed the conventional capacity of the Army.  And the RMA does not help much with peacemaking, peacekeeping and social work.

More on this over the next two weeks.