Thursday, March 24, 2011

Oil, scarcity and US foreign policy, A response to Michael Klare's “The collapse of the old oil order”

Klare's article

Modern US and Western foreign policy in the middle east has been going on for at least 60 years. In that time much evidence about it's nature, intention, extent and effectiveness has been observed. Michael Klare's piece references this evidence, but primarily to directly contradict it. There is little evidence that the survival or authoritarian governments in the middle east is necessary, sufficient or even helpful to “the expansion of Western economies after World War II” or the “current affluence of industrialised societies”. If every one of the authoritarian regimes in the middle east were to perish there is no indication that oil production would fall. Indeed it might rise. The interventions in the Middle East are even less helpful to this and were and are generally a hindrance to oil production.

Klare's first historical reference is to Iranian oil and imperial ambitions towards it and machinations about it. Aside from replacing a pro-German with a pro-British shah however none of these developments would have increased Iranian oil production. During WWII Iran would have had little problem selling all it's oil, the only possible interruption to the supply would be if a pro-German Shah refused to sell oil to Britian even if he couldn't transport his whole production to Germany. No doubt up until December 41 he could still sell to Russia. Increasing production was therefore not realistically the goal of British policy, only ensuring that the production was available to them. This is the closest thing in the entire article to a Western power putting a despot in charge to increase oil supply.

Klare then talks about the 1951 coup against Mohammed Mossadeq, prompted by the proposal to steal I mean nationalise the Anglo-Iranian Oil Company. If the Brits thougth nationalisation was so bad for production why did Winston Churchill nationalise the same company (then known as Anglo-Persian Oil Company) in 1914? The simple answer is they didn't, they just didn't want powerful British interests to get ripped off by the Persians. They had less objection when British interests were ripped off by the British government. To what extent the widespread unpopularity of Shah Mohammed Reza Pahlavi impacted oil production isn't addressed in the article so perhaps it's negative effect wasn't significant. What cannot be doubted is that it was a negative effect. A government that is extremely corrupt, unpopular and oppressive doesn't get the best out of it's workers, not even the ones in potentially very lucrative businesses. A less corrupt, more accountable, more popular government would certainly have outproduced Shah Reza, the only question is was the amount significant?

After the Shah was thrown out in 1979 Iranian oil production “never recovered” (his words). Why is that? Is it because the revolutionaries restricted supply? Did they hate the West or getting it's money? Not according to Klare; “To punish Iran’s new leaders, Washington imposed tough trade sanctions, hindering the state oil company’s efforts to obtain foreign technology and assistance. Iranian output plunged to two million barrels per day and, even three decades later, has made it back to only slightly more than four million barrels per day, even though the country possesses the world’s second largest oil reserves after Saudi Arabia.”. So the first time that US and Western policy affects Middle East oil production the result is to cut a countries oil production by 2/3. So much for promoting production. Nor is this an unforeseeable outcome, it hardly takes a genius to see that restricting a Middle East nation to using the technology it [EDIT: cannot] make itself will substantially cut oil production. Iran at the time simply didn't have the skills to substitute for Western know-how, and everyone knew it. They still don't.

Then we come to the Iraq war. Production dropped from 2.8m b/day to 0.5m b/day after the war and sanctions took their toll. Again this is not an unpredictable occurrence, when you bomb somebodies oil fields and then forbid them from trading naturally their production of oil for international markets drops. A policy of refusing to buy oil and preventing others from doing so is not a policy designed to increase oil production or the prosperity that flows from it. This policy was however kept up long after it became clear it's alleged goals (removal of Saddam or destruction of his weapons of mass destruction, which did not exist) would not be achieved. In spite of these efforts production was up to 2.5mbd by 2001.

Another war against Iraq was launched which did increase Iraq oil production, but only because sanctions were lifted in it's wake. Klare uses the claims of Bush officials that after an invasion the privatization of State oil companies and Western investment and technology would life production to support the claim that this was the aim of the invasion. Does he take other Bush claims, such as the claim that they would destroy Saddam's WMDs as seriously? If the US government had seriously wanted to sell oil technology and investment to the Iraqis it would have been as simple as letting them buy it. Yet they went the tremendously expensive route of invading, with all the predictable disruption this causes.

Given the extensive politicisation of the State oil company it was the opposite of surprising they would resist privatisation. Why would a group that got it's highly lucrative jobs from elite friends want to compete in the market? Especially when the beneficiaries killed their former patrons? Obviously such a move would encourage sabotage both of the privatisation itself and of production efficiency. If the Bushrangers could have presented privatisation as a genuine market reform designed to get the most benefits for the Iraqi people (or at least government) from their oil there might have been some public support. However the administration mostly put it's faith into no-bid contracts often with firms of questionable competence (KBR couldn't even construct barracks without dangerous electrical faults). There is no reason to believe that Bush administration aims included greater production, even allowing for their incompetence.

The Iraqi people on the other hand have every reason to promote oil production, provided distribution of rewards is even close to equitable. Unlike Bush administration officials they do not have monetary interests in American oil resources that compete with Iraqi oil.

Klare mentions that Egypt and Jordan guard vital oil pipelines and/or canals, but guard them from who? The only time since WWIII a major oil sea-lane has been threatened that I can remember is when the US and the Iranians went at it for years in the Gulf of Oman. Since as previously mentioned this resulted from US hostility to Iran including sanctions and a proxy war that reduced it's oil output what is the point of “guarding” any of the routes? Why not simply not cause trouble along them? Even assuming there are those who would disrupt the routes for political or monetary gain why should the US or other Western powers pay for the protection as opposed to the oil sellers? They have the most to lose after all. If Western policy was truly aimed at maximising production they would stop angering the “Arab street” with support for Israel thus making disruption of oil supplies by governments and other groups seeking to cash in on anti-western sentiment less likely.

Libyan production is off for obviously reasons and Klare presents this as a serious problem. If so the solution is to back whichever side looks like winning so the revolt is over as soon as possible. Obama did the opposite, and was supported by France and England as well as other countries. Egypt and Tunisia are “expected to restore production, modest in both countries, to pre-rebellion levels soon,” which is the complete opposite of the point of his entire essay. He continues however by saying they “are unlikely to embrace the sorts of major joint ventures with foreign firms that might boost production while diluting local control.”. This he bases on, what? No evidence is given that popular politicians are more adverse to joint ventures than dictators. In Russian joint ventures ground to a halt because the foreigners were getting constantly ripped off by an unaccountable government and it's cronies. This suggests joint ventures are easier with an accountable government, not harder. Again the main problem with joint ventures in the two countries he mentioned as having lower production after becoming more anti-western resulted from WESTERN GOVERNMENT RESTRCTIONS, not native public opinion or policy.

He finishes off the paragraph by saying that Iran and Iraq “exhibit no signs of being able to boost production significantly. Iran is currently under sanctions for alleged misdeeds and Iraq has an ongoing civil war as a result of Western policy. Lack of expanding production in either cannot be blamed on the sort of change that Egypt and Tunisia experienced.

Nor can stagnant production in Saudi Arabia be blamed on such change, which has not occurred. Klare makes it quite clear that “The Saudi royals have expressed reluctance to raise output much above 10 million barrels per day, fearing damage to their remaining fields and so a decline in future income for their many progeny. “. So much for the dictators keeping production up. Klare then asserts that “rising domestic demand is expected to consume an ever-increasing share of Saudi Arabia’s net output”. He only names one person who expects it and that is someone with every reason to push scarcity fears, Khalid al-Falih, CEO of Saudi Aramco, the state-owned oil company. He predicts a 260% increase in domestic oil consumption in 18 years or about 7.4% a year, which would be impressive for a tiger economy, which SA is not. Nevertheless Klare takes this figure as gospel, or at least does not indicate it might be even slightly doubtful.

His pronouncements on Saudi domestic oil consumption are at least based on some evidence. His claim that “no other area is capable of replacing the Middle East as the world’s premier oil exporter“ is based on nothing but ignorance of oil's history. The big players in the oil market were always surprised by the next big field, let alone the general public or the intellectuals. To claim that because you don't know what could replace the Middle East and therefore that nobody knows it and theefore no such field exists goes against everything observed about the oil business for decades. Which is pretty much par for the course with this essay and one's like it.