Crude oil geopolitics

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Introduction to oil geopolitics.

  1. Crude oil shocks
    1. First oil shock
    2. Second oil shock
    3. Third oil shock
    4. Effects on world economy
    5. Alternatives of importing countries
  2. Oil geopolitics
    1. Fields control
    2. Straits control
    3. Countries instability
    4. Producing countries
    5. Consuming countries
    6. Supply security
    7. IOC to NOC
    8. United States: over power on the defensive
    9. China : interception
    10. Environmental organizations
  3. Oil pollution
    1. Drilling
    2. Transport
    3. Consumption
    4. Technological evolutions

Crude oil shocks:

A crude oil shock arises when a brutal modification in oil supply is noted, associating quote increase and production loss.

1973: First oil shock:

The first oil shock is due to the mass increase of quotes operated by OPEC oil cartel to compensate the effects of dollar meltdown, further to its delisting compared to gold quote and its floating at the beginning of the years 1970. The war with Israel was the pretext to a mass increase in prices and to a production quotas restriction. This increase damaged sensibly the effects of the world cyclical slowing-down which had started at this period.

1979: Second oil shock::

The second oil shock happened in 1979. Under the conjugated effects of Iranian revolution and of Iran-Iraq war, oil quote multiplied by 2.7 between mid-year 1978 and 1981.

2008: Third oil shock:

Contrary to the first and second oil shocks, where quotes were multiplied by three in a few months and in one time due to a detailed event (action of producing countries for the first one, war for the second one making the offer lower down, the third shock is characterized by a very high but progressive increase from 2003 to 2007, then a very high increase during the first six months of 2008, bound to a demand increase, supply stagnation and speculation. Finally, this involves in the financial crisis we met recently.

oil price shocks chocs petroliers cours petrole

Effects of oil shocks on world economy:

The brutal increase in oil quotes has an inflationary effect by affecting at first jobs directly related to fuels.

correlation inflation crude oil price petrole ipc cpi

Developing countries suffer from this type of crisis, their economy suffers a lot, this results in famines, panic movements and manifestations and sometimes civil wars. Developing countries get destabilized because they do not have yet the required resources to offset the lack of energy because they diversify just a little. Developed countries, excluding sectors directly bound to oil (as vehicles) bear the shock better (which generally does not last long). They meet a movement of highly profitable investments in other sectors of the industry, more secure, and a policy more or less deflationary and protective, in order to limit and counterbalance the unbalance of their balance of payments. So, the company balance sheet becomes more or less affected according to the sector. As for the consumer, its purchase power is reduced, what dispatches on all sectors. However, at the time of the third oil shock, developing countries started to consider other alternatives to oil because it is not necessary to be a medium to guess that future shocks will take place in the medium-term, due to supply scarcity and to demand increase. In effect, out of the electricity production which tends to generalize via nuclear power stations, fuels of vehicle sector tend to evolve under various forms called “clean” aiming at avoiding a fourth violent oil shock.

Alternatives of importing countries:

Biofuels, by the developed countries, are the reply to the problem of oil quotes. Their energy resources being well diversified, the transport sector is the last one to be really hit by an oil shock. This reply is temporary. Biofuels are not as “bio” as it is said. In effect, to produce biofuel, oil is needed : genuine paradox. Moreover, these fuels lead to other environmental problems, to the image of the increase in acidity of lands due to special treatments of vegetables to make biofuel (without talking about its future distillation). Briefly, this reply allows to absorb the shock better without avoiding it yet. Today, there is no other alternative to oil (in terms of energy/quote rate).

Oil geopolitics:

Fields control:

Oil fields control is the first oil geopolitical stake. Consuming countries control by force producing countries.

For example, Ajax Operation in 1953 in Iran:

Ajax Operation (officially TP-AJAX) was a secret operation led by United Kingdom and the United States in 1953, operated by CIA, in order to put an end to the nationalist politics of Iranian First Minister, Mohammad Mossadegh, and consolidate Chah power, Mohammed Reza Pahlavi, in order to preserve occidental interests in Iranian oil field mining. During Bill Clinton administration in 2000, further to a report published, Madeleine Albright, State Secretary, officially recognized the United States part in the organization and the financial support of 1953 coup. Barack Obama is the first president to recognize the involvement of his government and to offer his apologies in a speech to the Muslims on 4th June 2009. “During Cold war, the United States played a part in the reversal of an Iranian democratically elected government”.

Straits control:

The strategic policy of straits crossed by oil tankers constitutes the second stake : that of oil transport. Almost 20 % world commerce, including 40 % oil exports, goes through Ormuz strait. Today, we cannot imagine that this strait gets closed. Adjacent countries (Iran, Oman, United Arab Emirates and Saudi Arabia) are within one of most coveted regions in the planet.

detroit ormuz strait

The Fifth American Fleet is permanently anchored over there. Another source of tension is Malacca strait. Suez strait has already been a source of tension too. We can also mention Panama canal in another geopolitical extent.

Threat on straits may be military but also terrorist or even piracy which is growing more and more.

Countries instability: Transparency rate

The first countries, the transparency of which is very high, are mostly Scandinavian, followed by G 20 States mainly. Then, logically, developing countries come. The last ones are Black African countries and States having unsteady country politics. Something makes me disappointed : Russia position, 145th rank. Considered as having a great potential (namely energy but also as the biggest country in the world, and being a member of G20, with 12th rank GDP in world classification), we can note by this study that, if Russia does not have a better rank, compared to China or Brazil (India also), it is certainly due to corruption which corrupts this continent-country.

Here is the classification of most countries noted compared to their degree of corruption by Transparency International.

world classification corruption perceptions index

Main producing countries:

Saudi Arabia (13 %)
USA (11 %)
Russia (8%)
Iran (5 %)
Mexico (5 %)
Venezuela (5 %)
China (5 %)
Norway (4 %)
Iraq (4 %)
England (4 %)
United Arab Emirates (3 %)

pays producteurs producing countries

Now, concerning reserves, the geography is quite different.

Countries having greatest oil proved reserves:

66 % world reserves are in Middle East
25 % in Saudi Arabia
11 % in Iraq
9 % in United Arab Emirates
9 % Kuwait
8.5 % in Iran

reserves moyen orient middle east

These countries may obviously influence supply strongly. This was noticed during 1973 and 1979 oil shocks. So, we understand better the inducement of Gulf War in Kuwait (UNO intervention to prevent Iraq, which already held 11 % world oil reserves, from holding 20 %.

As per official sources, there will be enough oil reserves. And when we will not need them any longer (when new energy will replace it), there will still be some. Sheikh Ahmed Zaki Yamani, the former Saudi oil Minister (1962-1986) said : “The Stone Age did not stop by lack of stone”.

1973 oil shock caused a reduction of oil consumption for these countries, i.e. we need less oil for industrial activities, whilst gas and nuclear energy replaced oil to produce electricity (namely in France and in Japan).

In industrialized countries, 5 % oil is used to make electricity, whilst 54 % are used in transports. So, this shows that the real oil dependence concerns transports.

This explains that more and more governments offer an attractive taxation to hybrid vehicles operating with biodiesel or other “bio” type fuels and that oil companies tend to diversify into this way to satisfy the so-called commitments of Kyoto protocol. Some countries are precursors on this subject, mainly Brazil, but this tends to become widespread.

Consuming countries:

Concerning consumption, they are obviously countries belonging to OECD. The majority of OECD keeps a slow decreasing policy, compared to China, the transport sector of which carries on drawing consumption upwards. China lacks of infrastructures, particularly Rail infrastructures, and a major part of transport is ensured by road : fuel consumption accompanies its industrial performance. The United States are always running on wrong tracks, such as hydrogen track, and finally they have no clear objective in terms of energy consumption. Let us note that China should consume 20 % world oil production in 2020.

World figures:

country crude oil consumption

world crude oil consumption

Supplies evolution:

In 1973, Middle East is the main supplier of consumers which are USA, Western Europe and Japan. Today, the flow Middle East – Orient – Asia extended to China and South East Asia which knew an important economical development on these last two decades. The flow Middle East – USA has slightly reduced, buying more and more from West Africa and from their neighbors, such as Venezuela, Mexico and of course Canada. Europe is less dependent from Middle East. It has diversified its suppliers by importing oil from Libya, Algeria, Russia and of course Nord Sea (Norway). Japan is widely dependent from Middle East, but now it turns to Indonesia and Malaysia, and also to Siberia. Concerning China, it pursues the way of diversification. It purchased fields, namely in Kazakhstan and also purchases oil from Siberia.

gisements petrole terre mer onshore offshore

Supply security:

Example : United States/Saudi Arabia.

Most Saudi fields are located in Hassa, along Persian Gulf.

In 1951 Saudi Arabia contracted a strategic alliance with the United States. For the USA, this alliance is both a political and economical strategy.

It is a political strategy because Saudi Arabia (driven by Saoud Dynasty) is considered as a stability factor in Persian Gulf region, as it is the guardian of Mecca and Medina, both biggest holy places of the Muslims.

It is an economical strategy because Saudi Arabia holds 25 % world oil reserves. It is the main OPEC member. It may adjust supply to demand faster than any other country and the national company, Saoudi Aramco, controls totally production and distribution.

Note that Texan and Alaska oil mining costs much more than Saudi Arabian. So, the USA have interest in keeping Saudi Arabia as an ally.

This alliance Saudi Arabia/United States has been strongly criticized since September 11, 2001. The proximity with US Taliban regime as from 1996 corresponded obviously to energy calculations, and this far before attacks in the US by the so-called Talibans. Hence the obvious war in Afghanistan in 2003.

National companies:

National companies (NOC) were before watched with a condescending smile by IOC, they existed mainly to “count barrels”. All this deeply changed, and Aramco makes part of giants not only concerning reserves but also concerning technology and logistics. Petrobras has just made a series of impressive discoveries offshore Brazil, under extreme drilling conditions for our time. So, even technology is no longer the privilege of ancient Powers.

In 2008, the main three world oil importers are the United States, China (net importer since 1996 and second world consumer since the second trimester 2003) and Japan (second consumer till 2003). China imports, in particular, grow by 9 %/year and China consumes already 20 % energy from OECD countries. Practically never mentioned in oil sector during the 20th century, in 2009 China is far before all the other countries in the world in terms of speeding up of its oil demand.

The table hereunder shows oil consumptions and productions (millions barrels per day, 2008) of countries classified by military expenses (in billions dollars, in 2009).

From that point of view, the US power seems to be overwhelming : with military expenses higher than the amount of the following six, which themselves belong to very distinct geopolitical families, this country has means of its ambitions, any ambition.

oil consumption production military expenses

The United States, over power on the defensive:

When it appeared that 15 out of 19 terrorists having caused the attacks dated September11, 2001, as well as their presumed instigator, were Saudi citizens, the long and fruitful relationship took a quite different turn. With delay, the United States decide to evacuate their Saudi Arabia bases. And with delay the United States tempt to fight against China irruption on the African scene, with Africom creation in 2007. They hardly find an efficient end to onerous occupancies in Afghanistan and in Iraq, as well as a new geopolitical representation. Concerning at least two fronts, relationships with China and economy control, the over power presents an unusual embarrassment.

In May 2005, Chinese National Offshore Oil Company (CNOOC) makes an offer of repayment concerning Unocal, higher than that of Texaco. The United States take all kinds of dilatory measures, including vote a measure obliging to a four-month delay to authorize the decision making. In August, CNOOC abandons and Texaco takes Unocal, at a lower price than the last offer from CNOOC. If this affair is lived by CNOOC as a failure, it shows China power run-up, economical and political, and the United States obliged to follow methods distant from liberalism.

Till 1971, what was good for oil companies was also good for the United States and what was good for the United States was good for OECD.

As from 1973, OECD starts to be different, both at a political level (neutrality in the Middle East) and at a societal level (search for any oil consumption).

As from 2001, the United States pay a more and more elevated price for their oil domination, and even George W. Bush complains of the dependence of his country on oil (“The USA is addicted to oil”).

China appointment with history:

China used to export oil until 1992, on that date it became a net importer, and its consumption increases by 15 % per year since 2001. It has become the second world consumer, its PIB grows in an average of 10 % per year since 1980. It is also the first world market for car industry. China, last entered on the operation scene, and free from military capabilities, acts essentially by diplomacy and bi-lateral relations with more and more visible success : takeover some Kazakhs oil companies are success stories with an obvious potential.

Chine pib china gdp

Confrontation in Sudan between the United States and China is indicative : China sets up there under difficult conditions and the United States can only launch a media campaign without being able to oppose themselves on the spot. End 2009, China attacks Nigeria. The question is more serious because Nigeria is the first African producer and the third supplier of the United States.

Chinese supply starts at 30 billion dollars for 49 % fields presently mined by Shell, Chevron and Exxon Mobil.

In 2009, China signed a series of commercial agreements with Burma. It is going to build an oil pipeline which will link Yunnan to the Occidental coast of Burma. The oil pipeline will be fed by oil from Middle East, what will by-pass Malacca strait and open up Yunnan.

China appetite is not limited to oil. Considered as “the factory of the world”, its raw materials requirement of any kind is general.

China disposes of the greatest reserve in dollars of the history : over 2000 billion dollars in 2009. With a historically weak dollar, this stock becomes a double-bladed weapon.

China, more and more considered as an industrial and financial viable partner, forecasts to diversify the use of its currencies, with the creation of a Sovereign fund, but also the use of other reserve currencies.

The confrontation China-USA announced for decades takes place now, with a strong opposition between the regular deficit of the United States (60 % GDP) and the quasi-structural surplus of China which finances it in major part. China GDP grows far faster than the rest of the world, it represented 13 % American GDP in 2000, compared to 28 % in 2009.

While the economical weight has since long moved to the East Hemisphere, this latter starts to exist at the geopolitical level, with the creation of Shanghai Cooperation Organization (SCO) in 2001.

In 2010, China takes advantage from legitimate worries felt by western companies towards the high ecological print linked to Canada bitumen sands mining, to set up in North America. The Canadian government approves two projects amounting to 1.9 billion Canadian dollars, in which PetroChina takes the majority and announces that other projects are pending. Canada is in 2010 one of the first two oil suppliers of the United States.

USA China deficit

Environmental organizations:

Since a few years, we note organisms searching to stem the market, namely those who deal with environmental questions and those dealing with technological evolutions.

At last, the recent will of some car makers of promoting electrical vehicles makes forecast also the decoupling between oil companies and manufacturers.

Oil pollution:

Oil pollution is now a geopolitical item. A great number of autochthonous populations fight against Majors to prevent from building infrastructures or, when these already exist, they commit piracy actions, involving in diplomatic and civil conflicts.

Furthermore, the rapid rise of environmental lobby is badly considered by emerging countries which need largely oil, China comes first, to ensure their development and their competitiveness on an international scale.

Let us consider pollution questions at the stage of prospection, mining, transport and consumption.

Pollution during drilling:

Oil drilling may threaten environment. This is the case in Arctic zone.

pollution extraction arctique drilling artic area zone

In Nigeria, we noted that mining in Niger delta polluted lands cultivated by farmers. In the gulf of Guinea, offshore oil platforms dismantling are not carried out following the environmental standards.

Pollution during transport:

Oil transports are a real risk for the environment.

As well concerning pipelines, which may pollute soils and ground waters by leaking, due to inadequate maintenance (it is the case in Siberia)

Oil represents 40 % world traffic of goods and oil spills are frequent.

transport pipelines oleoducs world monde

as sea transport:

slick slicks marees noires world monde

And let us speak about degassing offshore. This happens less often but does happen.

Pollution due to consumption:

Oil is responsible for 40 % industrial carbon dioxide emissions throughout the world.

In spite of that, projections show that oil demand will not drop before at least 2030 due to demands from industrialized countries and mainly emerging countries.

Technological evolutions:

Great oil companies diversify their activities and invest in renewable energy, such as Royal Dutch Shell in the wind-energy sector. This energy also attracts other countries, such as Egypt, a part of Cairo electricity of which is produced thanks for windmills located along the Red Sea.

We might also talk about hydrogen fuel cell, tidal power plants or also the clean coal sector, biofuel such as ethanol (their production cost being higher than that of oil), and so on.

A more detailed record about renewable energy, greenhouse gas and global warming is available in the main menu of energy.

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