Global Oil Market Dangers

International intrigues and eventually war — with all its now daily horrors — flow partly from the highly unstable economics of global oil.  Not only has this been true for a long time, it promises to continue that way unless and until some mass movement ends it.  The report of US planning to bomb Iran (see Seymour Hersh’s New Yorker article) is only the latest in a long history worth revisiting for the lessons it teaches.

Across the last century, as every country became increasingly dependent on oil, profits from exploring, producing, transporting, and refining it attracted business attention.  Competition among these businesses eventuated, as usual, in the losers being gobbled up by the winners.  A few international oil giants arrived at an especially powerful — although not unchallenged —  position in the global oil market.  They have tried ever since to manipulate and control, as far as possible, the price of the oil they sell.  They did this partly by strategic locations and timing of their huge investments in exploration, production, transport, and refining.  Sometimes, they coordinated investments and operations among themselves to gain monopoly benefits.  They pressured and often bribed political leaders to make decisions favoring oil profiteering.  While they have done exceedingly well, they could never entirely control the oil market.  Too many other players wielded influence.  Hence that market’s extreme instability.

Businesses who had to buy oil to keep production running resented and fought high oil prices.  Workers who drive from home to job to shopping and who heat their homes with oil sometimes mounted backlashes to high oil prices.  Smaller companies, drawn by oil profits, entered and wedged into the oil market.  Nationalism in oil-rich nations led their leaders to gain some control — often via mass movements — of their oil.  Those leaders then added their market manipulations to those of the giant oil corporations.  Other countries sought to escape their costly dependence on the international oil market for their oil imports.  They cut deals which sometimes undermined cozy arrangements among the oil giants and the oil-rich countries.  Many sought and some found new oil sources which further destabilized the oil market.  Nor was oil immune to the larger social changes over the last century: the recessions, depressions, and inflations; the political revolutions; the rise of the motor vehicle and plastics industries; the mass population movements, the environmental shifts, and so on.

The result was a chaotic volatility of oil prices within a market always manipulated — more or less successfully — by giant corporations and national leaders alternatively cooperating, competing, or doing both at once.  Rising oil prices constrained or destroyed countless efforts at economic, political, and cultural developments across the globe.  Falling prices likewise influenced modern history.  But most of all, the instability imposed huge costs and global inefficiencies that disrupted and distorted economic development for the world’s majority.  Thus, global inequalities grew across the century with oil’s importance.

Consider this brief modern history of the oil market’s wild gyrations.  Between 1947 and 1973, oil prices experienced multiple 20-30 per cent oscillations.  These were caused chiefly by the Korean War, Mossadegh’s effort to nationalize Iranian oil, Eisenhower’s imposition of Import Quotas and then their removal in 1971, the late 1950s recession, and the Vietnam War.  From 1973 to 1981, oil prices tripled — with smaller oscillations along the way — as the Arab embargo responded to the Yom Kippur War, OPEC acquired the ability to control supplies, the Iranian revolution deposed the Shah, and Iraq went to war against Iran.  Beyond these major shapers of oil prices, secondary factors in these years included the opening of North Sea and Alaskan oil sources and President Carter’s phase-out of US oil price controls.  From 1981 to 1998, the world oil price collapsed, again with minor oscillations en route, from roughly $65 to $13 per barrel.  Adjusting these oil prices to constant 2004 dollars makes no significant difference: the oil price collapse was very real.  Crucial to the collapse was the end of the Iran-Iraq war and OPEC supply increases.  Since 1998, it has been OPEC supply shifts (partly shaped by political crises and governmental shifts inside OPEC member states), the massive Russian exports of oil, the oil-absorbing economic booms in China and India, and the US invasion of Iraq (and now also the menacing of Iran) that have combined to first lower (by over 50 per cent) and then triple world oil prices. 

Oil companies — already huge but increasingly integrated, merged, and global across the post-war period — were influential in shaping all of the above political decisions.  Their investment strategies aimed both to take advantage of the wild oil price upswings and to protect themselves against the downswings.  Not least among their strategies was widespread dissemination of arguments picturing the oil companies as merely passive responders to the “free” market and hence without substantial responsibility for that market’s volatility.  Oil-friendly politicians remain key to repeating such arguments, while elaborating them “scientifically” is assigned to “free-market” economists.

The wild volatility of oil prices has had enormous, history-changing social effects and costs.  For example, across Putin’s presidency in Russia, its oil exports rose from $14 billion to $127 billion.  These export revenues helped to offset (for a few Russians) the economic collapse that has afflicted Russia since 1989.  Little mystery surrounds Putin’s domestic policy — keep state controls over Russia’s energy industry — or his foreign policy priority —  secure and expand foreign oil and gas markets.  Russia’s dealings in Central Asia and the Ukraine, its rapprochement with China, and the increasingly tense relations with the US follow.

To take another example, in the 1970s, the US relied on imports for 33 percent of its oil consumption; today that number has nearly doubled.  The US government’s commitment to “oil independence” is at best a reality far in the future.  Nearly 75 per cent of  US oil imports come from five countries: Canada, Mexico, Saudi Arabia, Venezuela, and Nigeria.  The connection of oil interests to NAFTA, the US alliance with Saudi Arabia (9/11 notwithstanding), attempts to overthrow Chavez, policies toward the civil wars in Nigeria, and the intense “US concern” about Mexico’s recent presidential election is an analytical no-brainer.

Deepening global oil dependence interwoven with extreme oil price volatility continues to shape world history in basic and dangerous ways.  Competition to make the most from oil price rises and to protect the most against their declines produces or aggravates serious domestic conflicts (e.g., inside Venezuela, Nigeria, Indonesia, and so on).  Internationally, the current rapid decline in US-Russian relations, a dangerous global competition between China and the US over oil resources, and a US occupation of Iraq (the world’s second largest source of oil) are only some examples.

Because global efforts at reducing oil dependency via production of alternative energy sources or reduction of energy usage are inadequate, oil will continue be a crucially important world commodity.  The current organization of the oil market guarantees continued price volatility.  Economic, political, and military conflicts inside and between nations proliferate as everyone struggles to cope with the oil market’s instabilities.

However, not all oil market players wield equal influence.  Huge profits enable the oil giants and some governments to manipulate markets at others’ expense.  The oil market’s instability has not (yet) mobilized those it damages and endangers.  Each business, country, and indeed each person struggles for individual solutions to (escapes from) the oil market’s effects.  Yet social problems — and that is what the unstable oil market surely is — require social solutions.  Unless the diverse victims of the oil market’s profiteering and instability move, together, to impose such social solutions, their victimization will continue.

Rick WolffRick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002).