[Recent massive hike in the prices of crude oil has sent shock waves around the world. In this brief article, the author has provided historical context to the power rivalry impacting upon the peace and international security and concomitantly he has dealt with the serious implications of oil price rise on the developing economies. While pleading for urgency to resolve outstanding issues, the author emphasizes on the necessity of cooperation between the oil producers and consumers to tackle this issue and save the humanity from the scourge of another conflagration of war, Ed.]
Since the discovery of crude oil as a source of energy, the complexion of international politics has undergone remarkable transformation. In the aftermath of the end of the First World War, the new power configuration of powers that emerged as a sequel to the dissolution of the Turkish hold over vast part of the region what has come to be known as the Middle East, emergence of new geographic entities endowed with vast reserves of crude oil and natural gas created not only new nerve centres of powers but attracted contemporary Great Powers’ attention and soon the region witnessed great power rivalry among the contending powers vying each other for carving out their respective spheres of influence.
As League of Nations had made Britain and France as Mandatory Powers having control over most of the countries of the Middle East after the end of the First World War, the rivalry between Britain and France continued until the events took dramatic turn by the closing part of the 1930s, culminating in the outbreak of the Second World War (1939-1945). The post-Second World War period witnessed enfeebling of the traditional great powers like Britain, France, Italy, Portugal, as well as Germany and emergence of Soviet Union and the United States as new global powers. Emergence of North Atlantic Treaty Organization (NATO), with United States as its leading player, impelled Western European powers to cast their lot with the United States.
The new power configuration after the defeat of the Axis Powers had brought in division of Germany, with East Germany going under the Soviet influence and West Germany under the American influence. Thus the world was divided into two power blocs, East and West. Soviet Union led the East Bloc, which, inter alia, included Bulgaria, Czechoslovakia, Hungary, East Germany and Poland. These countries established Warsaw Treaty Organization (WTO) as a parallel defence body to West Bloc’s NATO. Both Blocs vied each other for winning over newly independent countries in Africa, Asia and Latin America to their respective fold ad offered liberal economic and arms assistance as incentives to hoodwink the countries of the Third World. This rivalry for influence was termed as Cold War between Soviet Union and United states.
In this backdrop, Middle East occupied immense significance because of oil and natural gas reserves. Rapid pace of industrialization, advent of fuel-based military weapons, increased demands for energy etc. spurred the demand for oil and natural gas. Accordingly, Moscow and Washington, along with their respective allies thought it appropriate to take the Cold War rivalry to the Middle East as well. The Arab-Israel conflict, Suez Crisis and fragile situation in Lebanon during the decades of 1950s and 1960s provided ample scope for two super powers to work out their machinations in the region.
The British withdrawal from the East of Suez at the outset of the 1970s had created power vacuum and both super powers tried their level best to avail of the new opportunities. The tense situation in the Middle East with Arab-Israel conflict at the root, use of oil as a weapon by the oil-producing countries of the Middle East in the aftermath of the 1973 Arab-Israel conflict, and unabated growth in the demand for energy increased the strategic significance of the oil-rich countries. The industrialized and developed countries could sustain the shocks of increase in oil prices but the developing countries were adversely affected.
The changes wrought by the end of the Cold War in the form of unification of Germany, dissolution of erstwhile Soviet Union, dismantling of the apartheid regime in South Africa and ushering in of the Post-Cold War era have not mitigated the strategic importance of oil and natural gas. Rather with the emergence of new economic powers like China, India, Brazil, countries of Southeast Asia etc., the demand for oil has increased manifold and so has been the phenomenal increase in the prices of oil and natural gas.
Undoubtedly, increase in oil prices has been a recurring phenomenon, nonetheless recent spurt in global crude oil and natural gas prices has sent warning signals to the rapidly growing economies in particular and other developing economies in general throughout the world. The extraordinary hike in prices has put many countries’ development plans on the hold and the indirect implications on other sectors of the economy involve across-the-board consequences with rising inflation as the emergent outcome.
Oil-producing countries are contemplating at pumping more of their product into world markets, aiming to stem a price surge. Saudi Arabia, the world’s largest oil exporter, has recently called for a summit between producing and consuming countries to figure out what’s happening and what measures to follow. The Saudi government has reportedly informed all oil companies it deals with, as well as countries that consume oil, that it is ready to meet their requirements of additional oil.
Jim Flaherty, Canada’s Federal Finance Minister, expects action on oil prices to be a major topic during this year’s G-8 summit, which is being held in Japan in July 2008. Nevertheless, Flaherty sounded unsure that pressure from the G-8 nations would bring down oil prices. He also noted that oil prices are set by the world market, meaning they are beyond the reach of most governments. Apart from Canada, the Group of Eight includes the U.S., Britain, Russia, Italy, Germany, Japan and France.
Crude prices rose up to $139.12 (U.S.) a barrel at the outset of June 2008, including a one-day record rise of almost $11 on 8 June alone. On 9 June 2008, July futures for light, sweet crude fell $4.19 to $134.35 a barrel, partly because of the Saudi statements. Rising oil prices and the resulting fuel costs have added to the economic woes being experienced by both developed as well as developing economies. According to some energy experts, most producers have little ability to expand output. The exception is Saudi Arabia, which is producing about 9.4 million barrels a day and possesses the capability to augment production by about two million barrels a day, but has not done so.
Viewed in a broad spectrum, there’s no magic solution to bring down oil prices by doing an end-run around the international market. It is widely felt that the sharp increase in prices is mainly the result of very strong global demand and the slow pace of bringing new supplies on line. Governments need to encourage the development of fresh supplies. At the same time, higher prices, if passed through by markets to consumers, should have the effect of reducing demand. Meanwhile, there are more gasoline price increases lurking in the fuel delivery chain, especially if U.S. refiners are able to boost historically low profit margins and pass more of their soaring crude oil costs along to consumers.
According to Fadel Gheit, an analyst with Oppenheimer & Co.: “There is still a very big upside potential to gasoline prices, because refining margins are not anywhere near where they were a year ago. By the middle of July, if oil prices don’t go lower, we are going to see another pop of at least 20 cents.”
In the wake of a global meltdown, the rise of oil prices is a cause for concern. The spiraling oil prices entail the potential of derailing a booming economy if not checked in time. At this juncture, it seems pertinent to raise the question as to why oil prices are soaring like crazy and can there be some respite in the near future or not. According to some experts, the answers in this regard are mostly disturbing. Viewed in a broad perspective, the decline in the dollar rates is just one of the factors that have led to this unprecedented increase in oil prices. A weaker American currency tends to augment the demand for dollar-denominated oil as it becomes cheaper for buyers using stronger currencies.
Some analysts also feel that oil prices are also heading upward because investors are seeking a safe investment for their cash amid fears of rising inflation and a US recession. Political tension in Kenya, Algeria and Pakistan as well as the threat of US sanctions against Iran earlier this year also aggravated the situation. Besides, threats to oil facilities in Nigeria – the world’s eighth largest oil exporter – have also been reportedly instrumental in causing the oil price hike. Militant attacks in Nigeria’s main oil city, Port Harcourt also hit supplies. Nigeria is also likely to witness more violence as peace talks between the government and rebels have failed. These developments can have serious implications for the supply of crude oil from Nigeria in the near future.
Abdullah al-Badri, Secretary General of the Oil Producing Exporting Countries (OPEC) has recently expressed the opinion that the record-high crude prices have nothing to do with supply and demand but rather are caused by speculation and a weak dollar. Asserting that the OPEC would not act on production levels until it was warranted by market fundamentals, al-Badri said: “There is a lot of oil in the market, stocks are very high, about 53 days forward. We are worried because these prices have nothing to do with supply and demand.”
It was reported by the International Energy Agency on May 13 2008 that oil stocks in OECD countries equaled 53.3 days of demand in March 2008, at the same time revising down its forecast for world oil demand growth in 2008 because of record prices and slower economic growth. Cautioning that prices could keep rising due to non-market factors such as a continued decline in the dollar, al-Badri said that the OPEC could see no reason to hold an extraordinary meeting before the next one scheduled for September 2008.
Oil prices crossing $129 per barrel mark have sparked anger from consumer nations that have accused OPEC of gouging, but al-Badri says that the boom in oil prices has lifted commodities prices across the board, which has made it more expensive to pump oil.
Asserting that he is not an advocate of high oil prices, al-Badri has said that the situation ‘is not a bonanza for us’ because higher prices for commodities ranging from food to steel have created new expenses for producer nations. He said: “If you want to produce more oil now, you have to pay more.” Asked if OPEC was considering moving away from the plummeting dollar as a way of stabilizing energy markets, al-Badri said: “It’s not something that happens overnight to move from currency to currency, every country has its own policy.”
In May 2008, the United States House of Representatives passed legislation allowing the US to sue OPEC members for working to set crude prices – though the White House has threatened to veto the measure. Reacting to this, al-Badri said: “It’s their policy and I’m not going to challenge it, but I think this is not the way to handle any problem, problems should be solved with dialogue. You cannot go and just blame OPEC or try to abolish OPEC.”
The effect of last week’s hike in prices of petrol, diesel and cooking gas has already been offset partially as the price of the basket of crude oil that Indian refiners buy surged 6 per cent to $126.96 a barrel on 8 May 2008, the latest day for which data are available. It was $119.81 per barrel on the previous day. While raising fuel prices last week, the Government of India had said that at $125 per barrel (the price of the Indian crude basket then), the country’s oil marketing companies would incur annual revenue losses of Rs 2,45,000 crore on sales.
Apart from India, other developing countries are also feeling the pinch of the oil politics. The ambitious development projects launched by countries like China, India, Brazil, South Africa and others may be hit due to this sudden spurt in oil prices. Leading arms exporting countries like US, Russia, Britain and France may balance their deficit by hiking the prices of weapons supplied to the Gulf countries, but there is no such alternative or option available to the developing countries.
Viewed in a broad spectrum, the oil politics being played by Venezuela and a couple of other countries exporting oil can have serious repercussions for global peace and security. It is worth recalling here that in the aftermath of the 1973 Arab-Israel conflict when some oil producing countries had used oil as a ‘weapon’, the then US Secretary of State Henry Kissinger had warned of setting oil wells ‘on fire’ and recycling of American dollars. The latter strategy was very meticulously implemented by Washington and its ill-effects affected many oil exporting countries. Those developments wielded far-reaching impact on the politics and economy of the most of the countries. Rivalry for having predominant influence over major oil exporting countries still continues between Russia and the United States despite the fact that the Cold War phase has been relegated to the pages of history.
However, problems like Arab-Israel conflict, international terrorism, US occupation of Afghanistan and Iraq in the name of ‘Global war on Terrorism’, spread of small lethal weapons etc. continue to haunt the peace-loving people throughout the globe. Alternate sources of energy have not been found and the terms of the oil producing countries have not met the desired expectations. The growing dependence of the fast developing economies on oil has impelled the necessity of uninterrupted supply of oil through the sea-lanes of communications or SLOCs. Any eventuality of interdiction or intervention to prevent the supply entails every likelihood of conflagration of the situation, thereby threatening international peace and security.
Under these circumstances, it devolves on big powers as well as fast developing economies along with oil producing countries to have a regular dialogue regarding oil pricing as well as the level of crude production to be maintained. While OPEC members should see to it that production level is maintained in consonance with the demand level and prices are kept under reasonable control and disallowed to have a sudden spurt, the lingering problems, particularly the Arab-Israel conflict, should be resolved on priority basis.
Since the White House is awaiting a new incumbent to preside over the administration, it can be hoped that the new Administration will not repeat the follies of the Bush Administration and ensure speedy US withdrawal from Iraq and Afghanistan and hand over these regions to the United Nations to ensure peace and tranquility in these war-torn areas. At the same time, new Administration should also shed the policy of ‘unilateralism’ and preference for ‘multilateralism’ under the aegis of the United Nations. The oil politics should not be permitted to decide the future of mankind because there are other more pressing problems like climate change, hunger, disease which are threatening the very existence of humanity.
Source: Third Concept/July 2008/Vol.22/No.257/P.no.7/
