Energy

An essential overview of global energy (1969-2015)

Energy has not always been a central item in the political agenda. Back in 1969 the US rejected a decade of oil at $1/barrel, offered by the Shah of Iran; in 1971 oil was not even discussed when President Nixon and Saudi Arabia’s King met.1 True, oil was important but the idea that oil prices would rocket up was not in the minds of politicians. The world felt relative secure about its ability to procure oil at reasonable prices.2

This all changed in the 70s, starting as a result of the 1973 oil embargo. This background will touch upon the most important events and trends since then.

OPEC versus the “Seven Sisters”

Considered by some to be willing to go to almost any extent in their bid for global domination,3 before 1960 oil markets were dominated by a cartel of international oil companies (IOCs) known as the “Seven Sisters” – Royal Dutch Shell, Standard Oil Co. and the Anglo-Persian oil Company, Exxon, Shell, BP, Mobil, Texaco, Gulf and Chevron. Growing dissatisfaction with this IOC-driven system led to the creation of the Organization of the Petroleum Exporting Countries (OPEC) in 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, later joined by Qatar, Libya, United Arab Emirates, Algeria, Nigeria, Angola, Gabon, Ecuador (membership interrupted between 1992 and 2007) and Indonesia (membership suspended in 2009).4

OPEC’s goal since then has been to advocate for a fairer system for the countries that produce the oil. However, it took over a decade for it to gain relevance in the international arena, a decade marked by rivalry and competitive strategies between the OPEC and the Seven Sisters. Two events in particular can be considered to have given the final blow that tilted the balance in favor of the OPEC. As described in OPEC’s website,5 the first of these events was the ‘Declaratory Statement of Petroleum Policy in Member Countries’ signed by OPEC members in 1968, which placed emphasis on describing the usage of natural resources for development as an inalienable right of its members. Membership to the OPEC increased by ten in the following year. The second event can be summarised to one person: Muammar al-Qaddafi. As explained by Graetz, an expert in the field of energy, after his pleas for better crude prices were ignored by the Seven Sisters Qadaffi decided to cut the production of a smaller oil company operating in Lybian territory (Occidental Petroleum). Exxon refused to make up for Occidental Petroleum’s shortfall, which forced the former to give in to Qadaffi’s demands and eventually led to a 50/50 profit split between oil companies and the Lybian state.6

The rest of the story follows naturally. Other OPEC members acted alike and gained concessions. However, these concessions were not enough and by then OPEC members held the strongest negotiating position.

1973 Oil Embargo

In 1973 the OPEC countries imposed an oil embargo against the United States and some of its allies in response to the support for Israel during the Yom Kippur War – also known as the 1973 Arab-Israeli War. Instated in October 17th, the OPEC banned any nation that supported Israel from buying any of the oil it imported.7 This meant specifically the United States and Netherlands but it was later extended to include Portugal, Rhodesia and South Africa.8 The embargo also contemplated 5% monthly production cuts that have been described as intended to ensure that other countries did not resell oil to those embargoed9 and to add political pressure in favour of the OPEC’s demands.10 Back then Iran was a strong partner for the US, to the extent that it continued to produce and export oil throughout the embargo.11

The implementation of the embargo was messy and often confusing. It has been noted for example that Canada spent a month trying to determine whether it was included or not12in the list of embargoed countries. Yet, it had a deeply damaging effect in the world’s economy, particularly in the United States. First and foremost, global prices of oil quadrupled in just three months – from $3/barrel to $12.13 Second and not least important, chaos emerged in the United States, where consumers queued in front of gas stations for fear of shortages.14

It is hard to say whether the embargo was successful or not. On the one hand, none of the demands made by the OPEC were met.15 However, the embargo did result in severe macro economic challenges16 that highlighted the importance of OPEC countries in the global arena. Similarly, the embargo had a deep effect in the minds of politicians, who gave energy a higher place in the political agenda. Perhaps best put by President Jimmy Carter in 1979:

We remember when the phrase “sound as a dollar” was an expression of absolute dependability, until 10 years of inflation began to shrink our dollar and our savings. We believed that our Nation’s resources were limitless until 1973, when we had to face a growing dependence on foreign oil.17

Iranian Revolution (1979 Oil Crisis)

Though Iran and the United States had been strong allies in regard to energy, everything changed in January of 1979 when the Shah of Iran was forced to flee the country.18 This came after years of growing opposition and strikes organized by Ayatollah Khomeini against the Shah. Though Khomeini gained power in February 1979, the long-lasting impact of the strikes and the disorganization that followed the change of government brought the Iranian oil industry to its knees.19 As a result, Iran’s contribution to the world oil markets diminished, which led to generalized panic alike to that seen in 1973 (and in many ways due to it).

It does needs to be considered that although events in Iran did put a strain to the markets, it has also been noted that there was some level of mismanagement within the US Department of Energy that fostered, or in the very least allowed, the crisis.20 Similarly, the full crisis cannot be blamed solely on the events that took place between 1978 and 1979. On the contrary, as explained by two energy experts, prices held until April of 1979 when it became obvious that the new Iranian regime was not going to take a friendly approach to the US, an event exacerbated the following year by Saudi Arabia’s decision to also cut production.21  As a result of the crisis oil prices soared. In April of 1980 the oil price reached $103.76/barrel, the highest historical price until March of 2008.22

1986 Oil Price Collapse & Persian Gulf War

Though the impact of the Iranian crisis were profound, particularly for US car manufacturers,23 oil prices came down after 1980. In between 1981 and 1985 this reduction was gradual, converging to the $60/barrel level. In 1986 however, oil prices plummeted and remained along the $20-$40 per barrel for the most part of the period up to the Persian Gulf War. This sudden drop in prices has been attributed to Saudi Arabia’s decision to increase production in a big to gain a higher share of the market.24 It was not until Iraq invaded Kuwait in 1990 – and thereby started the Persian Gulf War – that the world saw a new spike in oil prices. However, the situation returned to normal by 1991 after other players in the region increased their production to offset for the loss of Iraqi oil,25 remaining [mostly] under $40/barrel until 2003.

North-South Shift in Consumption

Perhaps the most important event (or in this case trend) in the last 30 years is the shift of consumption from the developed world into the developing world – in particular the BRICS. This has been demonstrated by the fact that as per 2010 50% of the global growth in consumption came from non-OECD countries, compared to 20% in 1990.26 This trend is also expected to remain stable for the foreseeable future. In fact, the total share of the market that developing nations are forecasted to consume by 2040 stands at 65%.27 A deeply concerning characteristic of this shift in consumption is that it has also been a shift toward less efficient energy usage due to the structural realities of developing countries. This can be seen from the fact that non-OECD energy consumption growth is higher than economic growth and the fact that non-OECD countries require of 3.4 barrels of oil to produce what OECD countries could produce with 1.1 barrels.28 As a result, carbon emissions growth in developing countries is also accelerating at dangerous rates.29

2008 Financial Crisis

In 2008 the world was hit by an economic downturn that some economists have referred to as the worst financial crisis since the Great Depression.30 Triggered by the burst of the until-then-thriving US Housing Bubble, the crisis led to widespread repercussions across all productive sectors of society. Energy was not an exception to this “crash & burn” dynamic. “In the five years prior to the summer of 2008, oil prices rose by 370 percent, traded coal by 460 percent, and natural gas by 120 percent” and yet in the span of two years (2007-2009) oil prices moved violently from the $100/barrel level to over $140/barrel and down to barely over $45/barrel – a nightmare price roller coaster.31 The most evident effect of the financial crisis was that investment in energy projects slowed down.32 There is also evidence that the financial crisis affected the patterns of investment in renewable energy projects as well, placing a higher burden of finance on small players.33

West African “Swing” Oil

One of the most interesting regions with regard to modern oil politics is West Africa. To an extent this derives from the fact that there is indeed a lot of oil in the region, West African oil accounts for about 6% of the world production34 and it has been noted to have over 7% of the world’s gas reserves.35 Yet, the main reason for the region’s importance is not its size-to-market region but the fact that it has become an alternative for US’ dependency on the Middle East. To the dismay of many, by 2004 the US imported more oil from West Africa than it did from the Middle East.36 The region’s involvement in world energy markets has of course brought a lot of money into the region and the hopes are that the regional players use this money to further the development of the region. At the same time however, the fragility of the states in the region means that price volatility in oil markets translates into very high levels of internal political risk across West Africa.37

Unconventional Resources

There has been interest in finding alternative energy sources ever since the first energy crisis back in 1973. This is true both about the need for additional partners such as West Africa (or the Arctic38 and even the Antarctic39) as about the need of different technological solutions. Hydro, nuclear, solar and wind power make for the most common attempts to diversify technologies.

Controversies about which of these renewable sources is the best alternative remain. For example, nuclear power is considered to be an excellent environmental solution by some40 but others decry it as environmentally novice.41 This has led to interesting paradoxes such as the fact that although renewables are promoted as a solution to global warming, some use renewables to replace nuclear power whilst holding constant the share of fossil fuels.42 Yet, if you change an entire economy to a more expensive source of energy the products of said economy will have higher prices and thereby their competitivity could fall. On the other hand, it has also been noted that the world may be over-valuing oil in a way that is creating the next economic bubble43 as investors may be pouring money into oil based on the not-necessarily-reasonable assumption that countries will not act on climate change. Even hydro has ran into criticism, both due to the fact that some argue that it is not as environmentally friendly as the world thought44 it was but also due to their numerous impacts to local indigenous populations and geographies.45

Most recently, natural gas has been given more attention as a viable and low cost alternative to oil that also happens to contaminate less than oil46 – which is not the same as being environmental but perhaps enough. The interest in gas is particularly high in the US, where gas is presented to the public as a “clean energy” solution by the Environmental Protection Agency.47 However, some argue that the US’ hopes for a gas-driven future are unrealistic due to the fact that affordable production is only possible of a relatively small share of the total gas reserves in the country.48 Much less common alternatives have also been studied. For example increasing attention is being given to methane hydrates.49 Likewise, even the oil industry has found alternative methods to extract oil as for example deepwater drilling50 and oil sands51 (particularly in Canada52 but also in Nigeria53).

2014 Oil Price Slump

Partly due to Saudi Arabia’s decision to not cut production despite of the fact that the world oil markets were oversupplied, oil prices saw a sharp decrease in between the last couple months of 2014 and January 2015.54 Saudi Arabia’s decision looked to put pressure on other players in the energy market who, as oppose to them, cannot bear the economic impact of sustained low prices. The lowest price up until the point of writing this background was of $41.50/barrel on January 13th of 2015. Some believe the prices can fall even lower once full storage capacity is reached,55 others believe that prices will stabilize.56 Amidst general fears that the global economy is slowing down yet again,57 some fear that extremely low oil prices could in fact trigger yet another global economic crisis.58

Image credits: Oil Pump Jacks in the US. Source: Richard Masoner / Cyclelicious via Flickr. License: CC BY-SA 2.0.

  1. Graetz, 2012.
  2. Oil prices used throughout article based on historical oil prices by Macrotrends.
  3. AlJazeera, 2013.
  4. OPEC.
  5. OPEC.
  6. Graetz, 2012.
  7. History.
  8. Rogers, 1974.
  9. Licklider, 1988
  10. History.
  11. NPR, 2013.
  12. Licklider, 1988
  13. History.
  14. US Dept. of State.
  15. Licklider, 1988
  16. CSIS, 2013.
  17. The Carter Center.
  18. BBC.
  19. Phillips, 1979.
  20. Verleger, 1979.
  21. Gholz & Press, 2010.
  22. Mouawad, 2008.
  23. Sawyers, 2013.
  24. Gately, 1986.
  25. Gholz & Press, 2010.
  26. Rühl, 2010.
  27. Peterson, 2013.
  28. Rühl, 2010.
  29. New Climate Economy, 2014.
  30. Reuters, 2009.
  31. Rühl, 2010.
  32. IEA, 2009.
  33. UNEP, 2009.
  34. Raphael & Stokes, 2011.
  35. Katsouris, n.d.
  36. Raphael & Stokes, 2011.
  37. McGroarty & Hinshaw, 2015.
  38. WWF.
  39. Teller, 2014.
  40. Go Green.
  41. Greenpeace.
  42. Karnitschnig, 2014.
  43. Carrington, 2013.
  44. Graham-Rowe, 2005.
  45. Business-ethics.com.
  46. Miller, 2015.
  47. EPA.
  48. Inman, 2014.
  49. Anderson, 2014.
  50. Faucon, 2013.
  51. Canadian Association of Petroleum Producers.
  52. TheEconomist, 2014.
  53. Chindo, Naibbi & Abdullahi, 2014.
  54. NBXmain, 2015.
  55. Financial Post, 2015.
  56. CNBC, 2015.
  57. Withnall, 2014.
  58. Critchlow, 2014.