In March of 1999 the Organization of the Petroleum Exporting Countries (OPEC) decided to cut oil supplies as a means of raising its members’ revenues. The high growth in global production, the conservation and diversification of energy sources, and large-scale rationalization and closure of old energy-intensive industries in developed countries had created a glut in oil markets.
After having slid for years, oil prices dropped 50 percent in 1998, when they hit a low of $10 and averaged $13 a barrel. This left producer countries struggling with large budget deficits and indebtedness. Living standards and expectations, raised after the price rises of the 1970s, were in jeopardy. Only by creating an artificial shortage of oil did OPEC members believe that they could push prices up to a level of around $25. Having failed in their previous attempt to limit production, they knew they had to succeed this time.
They did. Economists warned about the consequences for the global economy of oil prices rising above $30 a barrel for a sustained period. Within 12 months, they had surpassed that level. Five years later, the price is over $50 and gloomy industry analyists are speculating on it hitting $100. The driving forces behind current rising prices, however, are not those that prompted the increase of 1999-2000.
The main factor pushing prices up today is soaring demand, not producer constraints on oil output. Without a determined global conservation effort, the threats of an economic crash and growing friction—both between consumer states and between consumers and producers—are bound to be fundamental elements of international relations over the coming years.
Expanding oil production to meet demand is not a solution, and would only ease the shortfall temporarily: reserves are being depleted three times faster than new oil sources are being discovered, and most older, more easily exploited fields have passed their peak output.
The problem was bound to arise sooner or later: oil is finite, and so is human prudence when it comes to taking care of the future. It arises now in an acute form because of sharply rising energy consumption in developing countries, particularly China and India.
China alone accounted for a third of extra global demand in 2004. According to the International Energy Agency, China’s oil consumption is expected to grow to over 10 million barrels a day over the next 15 years, and India’s will grow by 30 percent over the next five years. (See “The Beginning of the End,” by John Vidal, in the UK’s The Guardian Weekly, April 29-May 5, 2005.)
The main factor pushing prices up today is soaring demand, not producer constraints.
The consequences for the Middle East, as well as for the rest of the world, are far-reaching. Some have argued that one of the reasons behind the invasion of Iraq was Washington’s desire to control the world’s second largest oil reserves—not so much to commandeer them for itself, but to use them as a means to exert pressure upon an oil-thirsty China.
Meanwhile, Chinese and Indian companies have been seeking out possible sources of energy supply and signing exploration contracts. Western companies, already having taken the plum oil resources, are casting around what is left, which explains why they are becoming involved in deals with countries that are in Washington’s bad books (and, in some cases, most other states’ too), as well as going into the less thoroughly developed area of natural gas.
OVL, an Indian company, has three concessions in Sudan, including one it took over after the Canadian company Talisman Energy pulled out of the Greater Nile Petroleum Operating Company (GNPOC) in response to lobbying by human rights groups. OVL is building a $1.2 billion refinery in Port Sudan and a 460-mile pipeline from Khartoum. The Indian Oil Corporation has won a bid for a big stake in Libya’s Gulf of Sirte. India is negotiating to buy from Iran $40 billion worth of natural gas, which it would like to import via a pipeline through Pakistan, if the improvement in relations between the two states permits. (See “India Works Hard to Secure Oil Supplies,” by Yogi Aggarwal, in Singapore’s Business Times of Feb. 25,2005.)
The China National Petroleum Company holds a 40 percent share of Sudan’s GNPOC (in which Malaysia’s state-owned Petronas also has an interest) and a stake in three Sudanese oilfields. China and Iran signed a $70 billion oil and gas deal in October 2004—their largest so far—and Iran is already China’s second largest source of oil after Saudi Arabia. China’s other suppliers include Vietnam, Indonesia, Russia, Angola and even Iraq, although the current level of imports is only 4 million barrels a month. Last year Beijing signed protocols on oil and gas exploration with Egypt and Algeria and agreed to a deal to buy oil from the central African state of Gabon.
Difficulties for Washington
These moves create difficulties for Washington’s present policies in the Middle East. The Bush administration sees the warming of its relations with India in recent years as a very positive development, while, despite a temporary rapprochement following 9/11, treating China as a threat to be contained. It is rather difficult for the White House to signal criticism of China’s involvement in Sudan (bodies such as the Heritage Foundation are more direct) and ignore the parallel Indian role. The administration’s displeasure at China’s opposition to any threat of the use of force against Iran over its nuclear program has been made plain. China’s attitude has been ascribed to its need for Iranian oil and gas, but Beijing’s attitude differs little from that of Washington’s allies in Europe, with which the White House does not want to damage relations following the bruising falling out over Iraq.
The big losers from the energy shortage are likely to be the world’s poor nations. Between them, the U.S., Western Europe and Japan—the old industrial centers—and the rising economies of Asia are driving up prices to levels that most of sub-Saharan Africa and countries such as Yemen and Bangladesh will not be able to afford.
Something needs to be done—quickly.
John Gee is a free-lance journalist based in Singapore, and author of Unequal Conflict: the Palestinians and Israel, available from the AET Book Club.