An Analysis of the International Political Economy of Oil since WWII


Master's Thesis, 2012

70 Pages, Grade: Distinction/ Auszeichnung


Excerpt

Table of contents

List of Abbreviations

List of Illustrations

1 Introduction

2 Prologue

3 The strategic importance of oil
3.1 WWI and WWII
3.2 The first Gulf war
3.3 The second Gulf War

4 The other side of the coin: The petro-state

5 Theoretical background
5.1 Classical Realism
5.2 Economic nationalism / Mercantilism
5.3 IR liberalism
5.4 Economic liberalism

6 The importance of state power for Oil
6.1 The Baku–Tbilisi–Ceyhan Pipeline
6.2 Water ways and state power

7 The oil price, the Middle East and international oil companies
7.1 The pre 1973 developments
7.2 The 1973 oil crisis and its aftermath
7.3 The US relations with Iran and Saudi Arabia after
7.4 The IEA and the International Energy Forum
7.5 US import restrictions, the oil price and a ‘competitive’ market

8 The consequences of an ‘Oil-rush’ in the arctic. At the edge of a ‘new Cold War’?

9 Conclusion

Appendix
Oil as a financial commodity
The ‘reversed Midas touch’
Posted Price
OPEC
Map of US client-states in the Arab gulf
Ownership links between major IOCs and major crude-oil producing in the
Middle East 1966
Geopolitics and oil price
The End of the Bretton Woods System
OPEC and its role as swinging supplier
Balance of Trade
The Arctic Council

Bibliography

List of Abbreviations

illustration not visible in this excerpt

1 Introduction

This dissertation is going to evaluate the ‘International Political Economy of Oil’ with a special focus on the period after WWII. It is especially going to focus on the ‘West’ and its relations with oil exporting countries and is not going to evaluate the relation between the different oil exporting countries, such as OPEC itself or the consequences of the Chinese oil policy. Furthermore, in contrast to the majority of literature, which is dealing with oil politics, this project is not simply going to illustrate the major political incidents that are connected to oil after the end of WWII, but it is going to explain why the ‘West’ reacted in the way it reacted to these incidents, according to IPE and IR theories.

Due to the very limited space of this work it is not possible to engage with the entire history of oil politics. Therefore this project will only highlight major aspects of it. It is also not going to evaluate the latest developments of the shale gas revolution in the United States (US) and its potential impact on oil politics.

The dissertation will begin by describing why oil is such an essential factor for our everyday life, as well as its strategic value. Following this, this dissertations is going to have a brief look at the ‘Petro State’, in order for the reader to be able to understand both sides of oil politics (the consumer’s as well as the producer’s side). Before this piece of work is going to describe and evaluate the importance of state power for oil, by giving examples from pipeline constructions and the protection of water ways by the ‘West’, it will briefly point out the fundamental assumptions of IR and IPE theories, which this dissertation is going to use in order to evaluate the behaviour of the ‘West’ in oil politics. The theories, which will be given emphasis on are IR and IPE realism as well as IR and IPE liberalism. After describing the necessity of state power for oil, this assignment will have a closer look at the events, which took place in the Middle East in the early 1950s. The evaluation will include the developments before 1973, including the overthrow of the Iranian government in 1953, as well as the disempowerment of the ‘Western’ oil companies by the newly founded Organisation of Oil Producing Countries (OPEC). In a second paragraph, the 1973 oil crisis and its aftermath will be evaluated, including the reaction of the International Oil Companies (IOCs) to the crisis, as well as the reaction of the ‘Western’ governments. After this, this dissertation is going to describe the US relations with Iran and Saudi Arabia after 1973 by mainly focusing on the US attempts to stabilise the oil price, including the second oil crisis. This will be followed by a description of the tasks of ‘International Energy Agency’ and the ‘International Energy Forum’ and an evaluation of their work from an IPE/IR perspective. Following this, this assignment is going to evaluate the US import restrictions for oil in the middle of the last century and will also assess the structure of the oil market from a theoretical perspective. Lastly before the final summary of its findings in the conclusion, the dissertation is going to have a brief look at the latest developments currently taking place in the Arctic from an IR and IPE perspective.

2 Prologue

Since the beginning of the twentieth century, oil has been entwined with security, power and the position of nations (Yergin 2011: 126).

The security of energy is not only about countering a vast number of threats; it is even more about the relations among nations, how these states interact with each other, and how the security of energy has an impact on their overall national security (Yergin 2011: 264-265).

In 1911, Winston Churchill decided to alter the firing of the British navy from coal to oil. This decision, which might seem on the surface quite technically and irrelevant to this piece of work, was going to change the twentieth century fundamentally. By switching from coal to oil, the British Navy was no longer relying on a home-based form of energy for its fleet, which was Welsh coal, but on oil. From that stage on, the Navy had to rely on the distant and insecure oil supplies from Persia. However, the benefits of this source of energy outweighed the disadvantages by far. One century after Churchill’s decision, oil is still central to the security, prosperity and the very nature of civilisation. Since the days of Churchill, his words have remained as present as in 1913 when he was saying that: the safety and certainty in oil was lying in variety of sources and variety alone (Yergin 2008: xiii- xiv; Yergin 2011: 265).

Until some alternative source of energy will be found in sufficient scale, oil will keep its far-reaching effects on the global economy; a low oil price is like tax cuts for the economies of oil importing countries. Paying less for home-heating and gasoline has the effect that the consumer has additional money, with which domestic economic growth can be stimulated. Furthermore, a low price is an antidote to inflation, which allows countries to grow faster, with lower interest rates and a minimised risk of inflation and vice versa. Additionally, oil stays a massive generator of wealth, not only for individuals and companies but for entire nations, as it has been shown in the past. Furthermore, mainly due to the fact that it is co-moving negatively with the US dollars exchange rate, oil became also an important financial commodity[1] and cheap supply of energy for the home country became a big topic in national elections.

However, oil is not a commodity comparable to cars, planes and clothes. Oil is in most cases always intertwined with ‘national strategies’, global politics and above all power (Yergin 2008: xiii- xvii; Yergin 2011:106). Whoever is in the position to control the outflow of oil is and was in the position to starve his enemies of this vital resource (Parra 2010: 1).

Furthermore, oil became the driving force of economic growth after WWII leaving coal far behind. Today without oil there would practically be no mobility, and without energy in the form of oil to create electricity there would be no ‘Internet age’ (Yergin 2011: 264-266).

However, some advocates may argue that the upcoming of other sources of energy might make the discussion about oil (gas and coal) less relevant. However, even if sources such as nuclear technology, solar power, as well as wind were combined they would not be able to replace the energy, which is currently generated from oil. For example in order to replace oil completely by nuclear energy one would have to build an additional 4,000 1,5 giga-watt nuclear power stations (today the world counts 440). These new reactors would deplete all known uranium reserves within ten years (Downey 2009: 26-27).[2] In addition, the accident in Fukushima threw a new question mark over the ‘global renaissance’ of nuclear technology, which may have solved some issues in the rising global demand for energy.

To sum up, there is one thing one can be certain about; that in the year and decades to come the world appetite for energy and especially for oil will enormously increase and among it so will the political struggle (Yergin 2011: 2-8).

3 The strategic importance of oil

The history of oil since the time of Churchill is strongly intertwined with security issues. From the ‘western’ point of view, oil has been found in all the wrong places.[3] The access was in most cases difficult and always far away. Additionally, oil was found almost exclusively in less developed nations, which became increasingly difficult to deal with as they developed politically and economically mostly due to oil revenues (Parra 2010: 293; Chalabi 2010: 2).

3.1 WWI and WWII

In 1914, European nations began the first partly mechanized war. The used vehicles in this conflict, such as planes and especially cars and trucks were more efficient than anybody could have predicted and they pressed into large-scale military service. If it had not been for the ‘taxi fleet’ of Paris, which brought tens of thousand’s of troops to the front, Germany would have most likely conquered huge parts of France if not even defeated it. As a consequence of the strong involvement of vehicles in the war (more then 160.000) in 1918 the US had the highest ever-recorded gasoline price in their history until today, in inflation adjusted terms. After the end of the war the strategic importance of oil became imminent to the world leaders. From that stage on the security of supply became their major strategic objective. This idea is one of the major reasons why three former Ottoman Turkish provinces, which were expected to be rich in oil, were bound together and formed the country today known as Iraq (Yergin 2011: 229-230; Engdahl 2004: 35-44; Yergin 2008: 152-156).

During WWII, oil proved once again its vital significance from a military point of view. During the conflict, the Allies used seven billion barrels of gasoline to win the war, out of which, 85 per cent came form the US. During the conflict, oil proved to be the key to many different issues. Furthermore, it was the main reason for Japan to attack the US after it put de facto an oil embargo on the country. Japan’s fear that a lack of oil would turn its battle ships into nothing more than scarecrows was one if its core arguments to go to war and had a huge influence on the strategy it used. By attacking Pearl Harbour, Japan wanted to ensure the safety of its oil supply routes, which stretched from the Philippines until the Japanese mainland (see illustration on the following page).

Japanese oil supply routes during WW II

illustration not visible in this excerpt

(Map made according to Yergin 2008: 342)

In Europe, Hitler Germany decided to invade Russia not only for ideological reasons, but also with the aim to get a hold on the Russian Caucasus during Operation Blue/‘Fall Blau’. It was also planned that General Erwin Rommel would fight his way through Africa and the Middle East to unite with the other German troops in the Caucasus (please see illustration on the next page).

Operation Blue/’Fall Blau’ illustration

illustration not visible in this excerpt(Map made according to Yergin 2008: 321)

However, a lack of supply in oil set an end to General Erwin Rommel’s Africa campaign, as well as to the operation ‘Barbarossa’ in Russia and to General George Patton’s sweep through Europe after the landing in the Normandy.

During the war, the interruption of the Allied supply lines was a prime target for German submarines, which were attacking the tankers of the Allies crossing the Atlantic (and almost succeeded). The Allies followed the same strategy and tried to cut off Japan and Germany from their oil supply more successfully- in the Pacific with submarine attacks on Japanese tanker and in Europe by bombing German factories for synthetic fuels.[4] This led to such a shortage that planes were pulled to the runway by farm animals or did not have enough fuel to start at all. In Japan the shortage in conventional fuel led to the manufacturing of what we call today bio fuels made of potatoes, rice, sugar etc.. After the war had ended the German army had only 11,000t of gasoline left. The situation in Japan was similar. Both countries started a war without oil and lost it to a major extent due to the lack of it. The strategic significance of oil became once again apparent (Yergin 2011: 230-231; Aust and Richter 2011; Yergin 2008: 300-350).

3.2 The first Gulf war

On August 2nd 1990, the Iraqi dictator Saddam Hussein ordered his army to invade his neighbouring country Kuwait (Yergin 2008: xiv). His main aim was not primarily to destroy a neighbouring country but its oil reserves, while other motives were at best secondary. However, the story is not as simple as one might think. In 1990, Iraq had acquired a massive debt due to its war with Iran. This debt was to a large extent financed by Kuwait and Saudi Arabia and Iraq was fighting for its economic survival after the end of the conflict with Iran. However, the low oil price at that time made it very hard for Iraq to reduce its debt and to recover from the long and destructive war with Iran. The reason for the low oil price was seen from the Iraqi government as the result of an overproduction, especially by Kuwait and Abu Dhabi above OPEC quotas. Consequently, the Iraqi government accused the governments of Kuwait and UAE of waging economic warfare against Iraq.[5]

However, when the tension between the Kuwait and Iraq increased, the USA ambassador in Iraq gave the fatal signal that the US would not intervene in internal Arab affairs, which was seen as a green light by Iraq to invade its neighbouring emirate (Parra 2010: 295-296). The reward for controlling the small country was enormous. The successful and permanent invasion of Kuwait would have meant that Iraq would have become one of the worlds leading oil power by controlling about 10 per cent of the global oil reserves at that time (Parra 2010: 298, 305; Yergin 2011: xiv).[6]

With its increased resources Iraq would have rivalled Saudi Arabia as the dominant oil power, with a far reaching impact on the Persian Gulf, where the vast majority (2/3) of the world’s ‘conventional’ oil reserves were located at that time. The impact for the rest of the world would have been consequently far reaching as well (Yergin 2011: 10). The power that Iraq would have gained from its new position would have forced the world to pay court to the ambitions of the Iraqi dictator, which would not only have had the oil reserves, but also vast amounts of revenues from oil trade and the fourth largest army by numbers in the world. The consequence would have been a historic shift in the international balance of power (Yergin 2008: xiv: Yergin 2011: 10). However, an intervention was not crystal clear from the beginning, as one might assume, as one adviser to the US president said: ‘We will have to get used to a Kuwait-less word’. But the picture was more alarming then the adviser had guessed. If Iraq could not be removed from Kuwait, how long would it take before it would attack Saudi Arabia and the UAE? These countries would be under a constant threat. This scenario would have had totally unacceptable consequences for Israel and the price of oil.

However, before the fighting started the ‘western’ coalition estimated its losses of around 10,000 to 15,000 soldiers[7], which shows the huge risk it was willing to take to free Kuwait or better to say the risk it was willing to take to protect Saudi Arabia (Parra 2010: 300-303).[8] ;[9] Following this, the war aims were simpler than officially proclaimed: the first aim was to eliminate the threat of Iraq to the UAE and the Saudi Arabian oil reserves, while the second one was to leave Iraq strong enough, in order for it to remain a political unit to counter balance Iran. After the war had ended, the presence of US forces in the Middle East seemed to have appeased the region and to have secured the supply of oil (Yergin 2011: 14; Parra 2010: 302, 311-312).

3.3 The second Gulf War

The reasons for the second Gulf War were vastly different than the ones of the first one. The so called ‘coalition of the willing’, was willing to go to war with Iraq in 2003, contrary to ‘Old Europe’. The reasons for the war were primarily not interlinked with oil at all. The primary factors were: the attacks of September 11, 2001 and its consequences, the threat of WMD, the way that the first war in 1991 had ended, including the persistence of Saddam Hussein’s regime and the way the intelligence services had analysed their data.

After Saddam Hussein was captured and interrogated, he replied to the question, why he had kept the illusion of having WMD – Iran.

Oil did not play the major reason when it came to the Iraq war in 2003. The significance of oil was simply highlighted by the nature of the region; the vast amount of oil in the Middle East and the critical balance of power in the region. However, the potential danger from Iraq in 2003 was not as significant for the region as it had been more then ten years earlier. Furthermore, in 2003, neither the British nor the US government were pursuing a mercantilist 1920s-style ambition to control the Iraqi oil. The real issue was not who owned the oil at the well, but whether it was available for the world market.[10] It was the idea that a democratic Iraq would become a more reliable supplier of oil and that it could quickly increase its oil production, since the UN sanctions on the country would be abolished.[11] However, the war was not over as quickly as expected and it cost the US taxpayer a trillion dollars in direct outlays until 2011[12] (Yergin 2011: 141-149; Klare 2004: 94-105; Chalabi 2010: ch.15).

4 The other side of the coin: The petro-state

For oil exporting countries a low oil price has opposite effects than the positive ones for oil importing counties, which were described in the prologue. In petro-states oil revenues account for 50 to 90 per cent of the government’s revenues. These ‘easy’ revenues have a huge influence on the states and the society’s structure, the psychology and the motivation of people. In most cases, innovation, entrepreneurship, hard work and the development of a competitive oriented economic growth are the ‘casualties’ of these state systems. The economies of petro-states become inflexible and are loosing the ability to adapt and change. Furthermore, the state apparatus controls most of the economic life from economic growth via micromanagement and grand projects, etc. Additionally, there are two more characteristics that refer to countries, which are rich in resources. One is called the ‘Dutch disease’, named after the negative effects of the ‘new’ gas wealth the Netherlands acquired in the 1960s. As a result of the gas wealth, the national currency became overvalued and exports became relatively more expensive on the world market. This led to the decline of the non-gas related export economy. Furthermore, local businesses started becoming less and less competitive due to an increase in cheaper imports and an increasingly embedded inflation. All these negative effects became known as the ‘Dutch disease’.

The second, even more debilitating illness of the petro-state is a seemingly irrepressible fiscal rigidity, which leads in most cases to excessive government spending irrespective of the macroeconomic situation and became known as ‘the reverses Midas touch’ (Yergin 2011: 107-111).[13]

5 Theoretical background

International Political Economy and International Relations developed several theories in order to explain states behaviour. The following paragraph is going to outline the core theoretical assumptions of two IR theories (realism and liberalism) and two IPE theories (Economic nationalism and Economic liberalism). These four approaches are the most common and are able to explain most developments taking place in the field of IPE or IR. However, the arguments supporting why certain developments take place differ according to the perspective one follows.

Theories, such as Marxism, Feminism, Neoliberalism, Constructivism and so on are not thoroughly investigated in this chapter, but are worth mentioning.

5.1 Classical Realism

The tradition of classical realism can be tracked back almost 2,500 years ago to Thucydides and his writings about the Peloponnesian War. However, Niccolò Machiavelli, Carl von Clausewitz and Hans Morgenthau were also some of the most influential scholars in this school, alongside Thucydides.

In the domestic sphere, realists argue that the state is a guarantor for law and order. However, in the international sphere there is no power above the state level. Therefore, realists see the world as an anarchic place, where each state is looking for opportunities to take advantage of one another. Therefore the survival of the state, which is its highest objective, depends on its material capabilities and its alliance with other states, in order to establish a balance of power. In order to survive, each state is trying to gather as much power and unilateral advantage as possible, whereby power has to be always seen relatively in comparison to a or the closest rival and does not only need to be perceived as military power. However, the successful exercise of power requires a sophisticated understanding of the goals, weaknesses and strengths of the allies, opponents, as well as third parties. Furthermore, the struggle for power is seen as a zero sum game, which means that the increase of power of one state is the loss of another. This struggle is seen as eternal, due to the unchanging human nature.

Realists tend to regard history as cyclical, in a sense that states try to build order and escape from an anarchic world. States might be successful in doing so, however, only for a certain period of time, which is always followed by anarchy again.

Many IR scholars agree with Morgenthau’s six principles, which are especially pointing out the following:

The first principle claims that objective laws, which have their roots in human nature, govern society as well as politics. The second one points out that states are exclusively thinking in terms of power. The third principle argues that the motive of power-seeking is an objective category and has universal validity. The forth principle claims that the self-interest of a state is a higher good than socially constructed moral beliefs. Morality cannot be applied to the state only for the individual. The fifth principle assumes that every state has ‘its own’ moral beliefs, which do not have universal validity. The sixth principle points out that realism cannot be judged by the methods of other sciences (Morgenthau 1978: 4-15; Jackson and Sørensen 1999: 76-80; Lebow 2010: 59-68).

Realists also claim that international organisations are mainly shaped by powerful states, according to their will and for their own purposes (O`Brien and Williams 2010: 21- 24; Russett 2010: 110-112).

5.2 Economic nationalism / Mercantilism

In general realist IPE is regarded as a subset of IR realism. According to the assumptions of Thucydides, who saw wealth as a critical source of military strength by pointing out that war would be a matter not so much of arms but of money, which made arms of use (Cohn 2010: 56-57).[14] However, IPE realism is sharing the basic assumptions of the realist approach from IR, such as the states struggle for power, prestige, and influence. Additionally, it defines wealth as another issue for the struggle between states. Both theories see world politics as a never-ending conflict, aiming to pursue more power, whereby power is measured vis-à-vis other states. Since the participation in the market is potentially seen as negative, economic nationalists are arguing in favour of state control of key economic activities or for state assistance to vital economic sectors.

Therefore, IPE realism, in contrast to IR realism, also focuses on what IR realism defines as ‘low’ politics, which is associated with commercial and financial pre-eminence. Furthermore, IPE realists turn issues in the world of economic affairs into problems of international economic diplomacy and trade wars. This means that nations are solely concerned with their own interest when they engage into international economic negotiations. In this context, economic nationalism is focusing on the importance of power when it comes to the sharpening of the international political economy, in which the state is seen as the main actor. Furthermore, IPE realists argue that the nature of the global political economy reflects only the interests of the most powerful states. Economic nationalists also believe that there is only a limited amount of wealth in the world and that each state has to block the interests of other states in order to protect its power/wealth in a zero-sum game. International organisations are, from this perspective, seen as having their capabilities delegated to them by the state(s), and are therefore relying on them. Furthermore, international institutions are seen as arenas for acting out power relationships, in which the most powerful nations ‘shape’ the rules to ‘fit’ their interest. IPE realism also sees the state as prior to the market and market relations are designed by political power. Nevertheless, it also recognises the importance of actors in the market, such as the role of companies. However, mercantilism subordinates their importance below the level of the nation. In the end, this theory argues that firms are always subject to the dictate of the state and that they are generally viewed with suspicion (O’Brien and Williams 2010: 22, Cohn 2010: 56-57, Ravenhill 2008: 32-34).

5.3 IR liberalism

The most important competitor for the realist approach is the liberal approach, which can be tracked back to Immanuel Kant, John Locke and Hugo Grotius and is seen as an especially ‘western’ theory.

Liberals believe that nations despite their self-interest are capable of cooperation and have the ability to create a harmonious and peaceful society.

Liberals assume that conflicts and wars can be mitigated or overcome, through concerted changes in the domestic as well as the international structure of governance. Scholars, such as Kant, see democratic governments, international law and institutions, as well as economic interdependence, as means to overcome the security dilemma of the international system. The just described ‘Kantian triangle’ is founded on the following assumptions. It is claimed that international organisations (such as the UN or the WTO) are playing a major role as mediators and supervisors between different nations and are stimulating peace. It is also claimed that economically important trade between nations creates incentives to maintain peaceful solutions with each other due to interdependence. Furthermore, trade, and especially free trade, is seen as a win-win situation, from which all participants can benefit from. Additionally, free trade is seen as positive due to the fact that it is preventing wars, which are motivated by the need for resources. Additionally, it is claimed that democratic countries will refrain from using force against each other and are creating a ‘liberal zone of peace’, due to the fact that the elites of a country are accountable for their actions to the people, who generally want peace. Hence the domestic political system is determining a nation’s outside behaviour, which also puts the individual, as well as interests groups into the focus of IR liberals (Russett 2010: 96-110; O`Brien and Williams 2010: 21-24).

5.4 Economic liberalism

Liberal IPE is sharing the basic assumptions of IR liberals and is in most cases just using different arguments/a different perspective (mostly economic arguments/an economic perspective) to point out the same assumptions. Nevertheless, liberalism has the highest influence on the world’s economic system, as we know it today (Cohn 2010: 77).

For liberal scholars IPE is constituted by the search for wealth. Contrary to economic nationalism, liberalism is focusing more on the individual or a wider range of actors from the state, over companies to interest groups. The state is just seen as one of the actors, which are creating the international economy. Furthermore, liberals assume that people and states can cooperate for their mutual benefit and that interaction between entities results in a positive sum game, creating a win-win situation. Hence, liberals are always searching for fields and conditions for cooperation and assume that conflicts are evitable through interdependence. Liberals such as Adam Smith and David Ricardo, are also arguing that free trade is the most beneficial and productive economic system, maximising growth and wealth through comparative advantage and division of labour. Individuals and companies are seen as the key economic actors and as the main source of wealth. Many liberals view the state with hostility and vote for non-interference, since it would bring politics into the field of economics and therefore into the market, which is the centre of economic life. However, most liberals agree on the fact that the market has imperfections, but do not agree on which measures should be taken. Transnational companies are also seen as positive for the home as well as for the host country.

Liberals also argue that economic nationalism, with its protectionist policies, is leading to conflict and that only a liberal approach is beneficial for peace. Liberals also support the idea of self-determination and the use of international organisations for the settling of disputes between countries (O’Brien and Williams 2010: 21-25; 41-45; Ravenhill 2008: 41-47).

With IR liberals, IPE liberals share the assumption of the pluralist nature of the international system and the feasibility of cooperation and interdependence. However, liberal IPE does not consider democracy as an essential factor for its assumptions, since it is primarily focusing on macroeconomic arguments, as Friedrich August von Hayek among others pointed out (Daily Bell, unknown year).

6 The importance of state power for Oil

For more then one century, oil has been essential to modern economies, while imports have become a matter of economic survival (Parra 2010: 293).

The usual definition of energy security is very simple: the availability of sufficient supplies at reasonable prices. However, there are several dimensions when it comes to the security of oil. Starting from the physical security, which includes the protection of all assets; infrastructure, supply chains, trade routes as well as making provisions for a quick replacement and substitution if necessary. Furthermore, the access to oil itself is crucial as far as the ability that needs to be acquired and the supplies that need to be developed physically, commercially and contractually are concerned. Additionally, energy security is also a system that consists of national policies as well as international institutions, which are designed to respond in a coordinated way to emergencies, dislocations, disruptions as well as helping to uphold the steady flow of supplies, such as the International Energy Agency (IEA) (Yergin 2011: 265-268).

Finally, there is the constant need for investment on behalf of the state or private companies. Therefore, the security of energy requires policies and a business climate, which encourages investment and development to ensure an adequate supply infrastructure in the future. However, for oil exporting nations the question is ‘slightly’ different. These countries are thinking in terms of the security of demand. They are relying on the perspective that there will be a market in the future as a basis on which they can plan investments and are able to plan their budgets (Yergin 2011: 266-267; Yergin 2011: ch. 5).

6.1 The Baku–Tbilisi–Ceyhan Pipeline

Pipelines have the huge advantage of being built within a long time perspective, regarding the delivery of a certain quantity of oil to a specific place and customer.

After the collapse of the Soviet Union, ‘new’ independent sovereign nations came to existence around the Caspian See, which were rich in oil. The development of these resources was inextricably entangled with the ambitions of nations and of course geopolitics (Yergins 2011: 43). However, when it comes to natural resources there are many players in the game, as it usually happens.

The Caspian Sea is not connected to any other ocean or sea. The richest in oil and key state in the region is Azerbaijan on its west shore (please see map on the following page). Azerbaijan is bordering Armenia and Georgia to the West and Russia to the North. In the South of the country is Iran, which has ambitions to be the dominant power in the region. All these states and of course the United States, Britain, Russia and China, as well as Turkey had a dominant role in reshaping the region. The major point of conflict for all these states was on which route and how the Caspian ‘gold’ would be exported to the world market (Yergin 2011: 43-52).

Map of the Middle East

illustration not visible in this excerpt(geology.com: unknown year)

All the participants in the game had different ambitions. Russia wanted to keep its influence on the countries and called it until the mid 1990s ‘our oil/their oil’. The ‘West’, represented primarily by the only left super power USA along with Great Britain, saw the great chance of diversifying the world markets supply and by doing so, increasing the global energy security. In order to do so, their aim was to prevent Iran from filling the vacuum Russia had left and to prevent the new states from sliding back under exclusive Russian influence.

Iran and Turkey both saw their chances to increase their influence upon the former Soviet Republics. Hereby Azerbaijan was of particular importance to the Iranians due to the fact that Iran has a ‘minority’ of 16 million Azerbaijanis[15], who were connected to the Azerbaijan population in many cases through family bonds. An open tolerant ‘western’ regime in the country could have challenged the Iranian regime due to the close connection of this ethnic group.

China was also interested in the region during the 1990s due to its rising need for energy imports and its proximity to central Asia.

The objective for the ‘Caspian’ nations was clear, i.e. maintain and consolidate their independence and establish themselves as nation states (Yergin 2011: 47-49; Mammadyarov 2007).[16] The development of the oil resources could not only bring strongly needed revenues, but also political support and interest in the countries. Oil was as an Azeri put it their strategy, defence and independence. However, when it came to the development of these countries not only politics were essential but also pure economics, such as engineering costs, investment, logistics etc.

After oil companies from seven nations acquired exploration rights (among them Russian, US, Japanese and Europeans) the main question was how to bring the oil to the market. This question was not only of interest for the companies but even more pressing from a political perspective. There were several possible routes to follow, in order to export the crude oil to the world market.

The Russian government wanted to connect the future pipeline with its own pipeline infrastructure, which would have given Russia some degree of leverage and control over the Caspian oil. However, the United States strongly opposed this plan and pushed on every occasion possible for the route that was built eventually. Another option would have been to go through Georgia and to the Black Sea. The Russian and Georgian option both would have included a transport via tanker over the Black See and through the Bosporus. However, these two routes were problematic due to the fact that the narrow Bosporus was already on its limits concerning the shipping traffic.

Nevertheless, there was another route, which would have been the cheapest, fastest and easiest route to construct. In this scenario Azerbaijan would have delivered oil to Iranian refineries in the north of Iran, and Iran would have exported via a swap the same amount/value of oil through its terminals in the Persian Gulf. However, this cheap alternative would not have benefited any government except for the Iranian. It would have given Iran the control over Azerbaijan. Additionally, it would have increased the reliance on the Gulf and would have run contrary to any diversification strategy of the ‘West’. Additionally, it would have given the regime in Tehran additional revenues, which would also have been opposing ‘Western’ interests.

The last, most expensive and complicated option, which was eventually realised, was the option to build a pipeline from Azerbaijan towards Georgia, circling around Armenia[17] and leading through Turkey to the Mediterranean port of Ceyhan (please see map on the following page). This route was finally constructed[18] due to the high pressure of the ‘West’ especially the USA and Turkey, despite the fact that Russia obviously opposed it (Yergin 2011: 55-60).[19]

[...]


[1] Oil as a financial commodity please see appendix

[2] numbers refer to 2009

[3] except for the USA until the end of WWII

[4] Germany’s only source of fuel after 1944 (Yergin 2008: 300-350)

[5] Saddam Hussein saw the USA as the main agitator behind it (Parra 2010: 295-296). Additionally, the Iraqi government accused Kuwait to illegally exploit Iraqi oil reserves, by drilling horizontally from Kuwaiti territory for oil on Iraqi territory (Parra 2010: 295-296).

[6] In addition, a major part of its debt from the war against Iran was held by the Emirate, which was gone too, as a consequence’ of the invasion (Parra 2010: 298, 305; Yergin 2011: xiv).

[7] Actual casualties were 150 during the operation on the coalitions side, Iraqi casualties are estimated between 85,000 and 200,000 (Parra 2010: 301).

[8] By comparison during operation ‘Overlord’ on the June 6th 1944 (D-Day), the allied troupes claimed 10,000 casualties and 4,414 deaths (ddaymuseum.co.uk).

[9] Referring to this the Joint Chief of Staff Powell and General Schwarzkopf said the following: ‘I think we’d go to war over Saudi Arabia, but I doubt we’d go to war over Kuwait’ (Powell), ‘I don’t see us going to war over Kuwait. Saudi Arabia, yes, if we had to; but not Kuwait’ (Schwarzkopf) (Parra 2010: 300-303).

[10] Oil from Iraq could be purchased on the world market but only to a limited extent and under UN restrictions (Yergin 2011: 141-149; Klare 2004: 94-105).

[11] A sustainable increase in the Iraqi oil production after the war compared to 2003 did not materialise until 2010 (Fiedler 2012).

[12] this amount equals roughly the nominal income from oil revenues by all OPEC countries in 2011 (US Energy Information Administration 2012).

[13] For more details about the ‘reversed Midas touch’ please see appendix.

[14] Or as Paul Kennedy put it: ‘The historical record suggests that there is a very clear connection in the lung run between an individual Great Powers economic rise and fall and its growth and decline as an important (military) power’ (1988: xxii).

[15] Iran has a total population of approx. 78 million (CIA World Fact Book 2012).

[16] Mammadyarov has been Foreign Affairs Minister of Azerbaijan since 2004.

[17] a rivalling state to Azerbaijan at that time (Yergin 2011: 55-58)

[18] Later on a gas pipeline followed the same route as the oil pipeline (Yergin 2011: 55-58).

[19] Two smaller pipelines had been built prior to the main pipeline in 1996 but only in order to get revenues to the country asap and to level the interests between the USA and Russia. One pipeline went through Russia and the other one through Georgia, both were ending at ports at the Black See. The pipeline through Georgia was also important, because the transition fees were helping to stabilize the country and it avoided the conflict area of Chechnya (Yergin 2011: 55-58).

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Details

Title
An Analysis of the International Political Economy of Oil since WWII
College
Kingston University London
Course
International Relations/ International Political Economy
Grade
Distinction/ Auszeichnung
Author
Year
2012
Pages
70
Catalog Number
V214917
ISBN (eBook)
9783656431114
ISBN (Book)
9783656435273
File size
2342 KB
Language
English
Notes
Comment of Supervisor: "A very detailed and precise discussion of the International Political Economy of Oil after WWII. The research covers a very wide scope geographically and in difficult contexts[...]A very serious attempt is made to integrate material researched in the dissertation with the broad span of relevant IR theory,[...] this integration is successfully accomplished."
Tags
Oil, IPE of Oil, Oil politics, Bretton Woods Oil, Oil rush arctic, oil crisis, peak oil, OPEC, gulf war, International Relations Oil, International Political Economy Oil, Geopolitics and Oil price, petrostate, reversed midas touch
Quote paper
Felix Kruse (Author), 2012, An Analysis of the International Political Economy of Oil since WWII, Munich, GRIN Verlag, https://www.grin.com/document/214917

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