GEOG 102 – Population, Resources, and the Environment

Professor: Dr. Jean-Paul Rodrigue

Case Study 9 – The Geopolitics of Petroleum

1 – Context
2 – The Economic Importance of Petroleum
3 – First and Second Oil Shocks
4 – The Oil Countershock
 Context
1
■ The Seven Sisters
• Petroleum has for long been the object of geopolitical
confrontations.
• The ability to fix the price and the production of oil was first
established in 1928 by the Achnacarry Agreements.
• Between the “seven sisters” forming an oil oligopoly.
• Major oil multinationals (Exxon, Texaco, British Petroleum, Shell, Gulf,
Standard Oil and Mobil Oil).
• Invested massively in extraction infrastructures, especially in the Middle
East.
• Several producing countries, most of them in the Third World,
wanted to have a more important share of the incomes of this
lucrative market.
 Context
1
■ OPEC
• Venezuela, Iran, Iraq, Saudi Arabia and Kuwait founded the
Organization of Petroleum Exporting Countries (OPEC) in 1960
at the Baghdad conference.
• Several other oil-producing nations joined thereafter the
organization:
• Qatar (1961), Indonesia (1962), Libya (1969), Algeria (1970), Nigeria
(1971), Ecuador (1973-1992, left the organization in order to avoid
production quotas), The United Arab Emirates (1973) and Gabon (1973-
1994).
• From its foundation until the beginning of the 1970s, OPEC was
unable to increase oil prices.
• Production was very important in non-member countries.
• Difficulty of OPEC members to agree on a common policy.
 OPEC Countries
1

Iraq
Algeria Iran

Venezuela Libya Saudi Arabia

Nigeria
Ecuador Gabon
Indonesia
OPEC Country Kuwait
Former member of Qatar
OPEC United Arab Emirates
 Context
1
• Developed countries were confident that the price of petroleum
would remain relatively stable.
• The American Government even predicted that the oil price might
rise to 5 dollars a barrel by 1980.
• Environment of low petroleum prices and strong economic
growth.
• No developed country had an energy policy and waste was
common.
 The Economic Importance of Petroleum
2
■ Context
• First commercial exploitations in Pennsylvania in 1859.
• Importance of oil increased significantly in the global economy.
• In 1920, 95 million tons were produced annually.
• Number reached 500 million tons by 1950.
• A billion tons in 1960.
• Average annual production around 3 billion tons in the 1990s.
• Strong growth rests for a very large part on the availability of oil
resources and their low cost.
• Economic systems, which include industry, housing, energy
generation and transportation, became dependant on cheap oil
prices.
• The United States being the most eloquent example.
 The Economic Importance of Petroleum
2
■ The relationships between oil supply and demand
• A spatial differentiation of supply and demand.
• This can only be overcome by oil transportation.
• 42% of the oil production was controlled by OPEC in 1997.
• Countries not being OPEC members contributed to 58% of the
production.
• A spatial differentiation of oil reserves is also observed, the bulk
of them, 64%, are located in the Middle East
• Estimates in reserves range from 50 to 100 years.
 Share of OPEC and the Persian Gulf in the World Oil
2 Production, 1972-1997

60%
OPEC
50% Persian Gulf

40%

30%

20%

10%

0%
1 World Energy Consumption, 1990-2020

300

250

200
Quadrillion Btu

150

100

50 Developed
Developing

0
1990 1995 2000 2005 2010 2015 2020
 World Crude Oil Production, 1980-1998 (in 1,000
2 barrels per day)
70,000

60,000
Far East and Oceania

50,000 Africa

40,000 Middle East

Eastern Europe & Former

30,000
U.S.S.R.
Western Europe
20,000
Central and South America
10,000
North America

0
1980 1985 1990 1995 1998
 World Petroleum Consumption, 1980-1998 (in 1,000
2 barrels per day)

80,000

70,000 Far East and Oceania

60,000 Africa

50,000 Middle East

Eastern Europe & Former

40,000
U.S.S.R.
Western Europe
30,000
Central and South America
20,000
North America
10,000

0
1980 1985 1990 1995 1998
 World Oil Balance, 1980-1998 (in 1,000 barrels per
2 day)

20,000

15,000 North America

Central and South America

10,000
Western Europe
5,000
Eastern Europe & Former
U.S.S.R.
0 Middle East
1980 1985 1990 1995 1998
-5,000 Africa

Far East and Oceania

-10,000

-15,000
 World Oil Production and Estimated Resources,
2 1900-2100 (in billions of barrels)

30
Actual
25 Predicted

20

15

10

0
 Estimates of Ultimate Oil Resources (billions of
2 barrels)
Shell, 1979
WEC, 1980
Halbouty, 1981
Conoco, 1981
Nehring, 1982
Masters (USGS), 1983
BP, 1984
USGS, 1987
Masters, 1991
OPEC, 1993
Laherrere, 1995
Petroconsul., 1995

0 500 1000 1500 2000 2500 3000

 World Crude Oil Reserves, 1999
2
6% 6% North America
8% 7%
2%
Central & South America
7%
Western Europe

Eastern Europe & Former

U.S.S.R.
Middle East

Africa

Far East & Oceania

64%
 Major Crude Oil Reserves, 1999 (billions of barrels)
2
0 50 100 150 200 250 300

Saudi Arabia
Iraq
Kuwait
Iran
United Arab Emirates
Russia
Venezuela
China
Mexico
Libya
Nigeria
United States
Algeria
Norway
Indonesia
 The Economic Importance of Petroleum
2
■ Costs of oil dependency
• Wealth is transferred from oil consumers to producers.
• The economy’s overall ability to produce is reduced by oil’s
greater economic scarcity.
• When price movements are sudden and drastic, inflation and
unemployment cause additional losses of output.
• Creates instability.
 Major Oil Shipping Routes
2

Middle East
North America
Latin America
Africa
Western Europe
Former Soviet Union
Pacific Asia
 The First Oil Shock
3
■ Control
• In the 1970s, OPEC countries achieved control over more than
55% of the oil supply.
• Started to fix production quotas.
• Establish co-operation between producers in order to avoid
competition that would bring the price of oil down.
• Feasible in the context of a growing market demand and the
dependency on only a few oil suppliers.
• Very difficult to maintain in a competitive environment.
• Between 1970 and 1973, the price of the oil barrel passed from
1.80 dollars to 3.01 dollars.
 The First Oil Shock
3
■ The Kippur War of 1973
• Between Israel and Egypt (and several other Arabian countries).
• OPEC intervened by nationalizing production facilities, reducing
production by 25% and imposing export quotas.
• OPEC imposed quotas on countries supporting Israel.
• The price of oil consequently reached 11.65 dollars per barrel at
the end of the same year.
• High oil demand, the limited capacity of developed countries to
supply oil and no readily energetic substitutes.
• OPEC gained the ability to control the price of oil with a market
controlled by oil producers.
• This caused the first oil shock.
 The Second Oil Shock
3
■ The 1970s and early 1980s
• The price of oil remained high but stable over the 1970s, around
20 dollars per barrel.
• Developed countries started to worry about the exhaustion of oil
reserves and unreliable supply sources.
• Instability in two major oil producers, Iran and Iraq.
• The Iranian revolution of 1979.
• Iran-Iraq War of 1979-1980, because Iran was trying to export
the Islamic revolution to Iraq.
• Removed 8% of the world oil supply.
• Caused the second oil shock where the price of oil went over 35
dollars per barrel.
 The Second Oil Shock
3
• Drastic, but somewhat temporary, measures to lower oil
consumption.
• Relocation of energy-consuming industries.
• Consuming less energy in a more efficiently manner.
• Relying on national energy sources (petroleum, coal, natural gas,
hydroelectricity, nuclear energy.
• Substituting petroleum for other energy sources when possible.
 The Oil Countershock
4
■ A changing scene
• At the end of the 1980s and at the beginning of the 1990s, OPEC
countries lost their price-fixing power.
• Internal problems (economic and geopolitical conflicts between
its members).
• New producers such as Russia, Mexico, Norway, England and
Colombia.
• Not constrained by OPEC policies and were free to fix their own prices.
• Mexico surpassed Saudi Arabia in 1997 to become the second
largest oil exporter to the United States, after Venezuela.
• Latin American countries such as Columbia and Brazil are trying
to boost their oil production.
 The Oil Countershock
4
• Vietnam is exploring offshore fields, as are other Southeast
Asian countries, hopeful that there are major reserves under the
South China Sea.
■ Divergences
• Since 1982, divergences occurred within OPEC members to fix
quotas and prices as competition increased.
• The share of OPEC dropped from 55% of all the petroleum
exported in the 1970s to 41% in 1992.
• All-time low of 30% in 1985.
• That year Saudi Arabia lowered the price of its oil to increase its market
share.
• Oil counter-shock that lowered the price of the barrel under 20
dollars, even reaching a record of 15 dollars in 1988.
• The oil market was again a market controlled by the demand.
 The Oil Countershock
4
■ The Gulf War
• Respecting production quotas became a major issue among
OPEC members.
• Countries such as Kuwait producing well above quota.
• This event was a motivation for the invasion of Kuwait by Iraq in
1990, which saw the price of petroleum jump to 41$.
• 7.8% of the world’s oil production was removed (Iraq and
Kuwait).
• Other petroleum-producing countries were quick to expand their
production to replace Iraq's and Kuwait's shortfalls.
• The increase in oil price was short-lived.
 The Oil Countershock
4
■ Aftermath of the Gulf War
• The price of oil fell to 25 dollars per barrel by the mid 1990s.
• By 1998, the price of petroleum went under 10 dollars per barrel.
• Rendering several producing regions temporarily unprofitable.
• OPEC countries only control about 42% of the global oil
production and are so in a weak position to fix prices.
■ Reemergence
• At the end of the 1990s, the price of petroleum increased.
• Oil reserves are in the Middle East.
• Share of OPEC expected to climb to 48% in 2005 and 52% in
2010.
 Real Price of Oil, 1914-1995 and Major Disruptions in
4 World Oil Supply
60 5

4.5
50
4

3.5

Billions of barrel per day

40
3
$ per barrel

30 2.5

2
20
1.5

1
10
0.5

0 0
 Petroleum Imports and Oil Price, USA, 1960-1996
4
25,000,000 35

30
20,000,000
25

15,000,000
20

15
10,000,000

10
5,000,000
5

0 0

Petroleum Imports (BBtu) Domestic Price per Barrel ($)

 Storage (in millions of barrels)
4

0
100
200
300
400
500
600
1999

1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
0
20
40
60
80

-40
-20
100
120
140
United States Strategic Petroleum Reserves, 1977-

Fill Rate (in millions of barrels per year)

 Gasoline Prices, 1978-2000 U.S., Germany, Japan
4 (constant 1995 dollars per gallon)
5
4.5
4
3.5
3
2.5
2
1.5
1 US
0.5 Germany
Japan
0
1979

1984

1988

1990

1994

1996
1978

1980
1981
1982
1983

1985
1986
1987

1989

1991
1992
1993

1995

1997
1998
1999
2000
 A Sound Energy Policy
4
■ Safe supply sources
• Low diversity of energy sources.
• Foreign sources.
• Dependence on oil.
• Keeping natural resources for future use.
• Low oil prices instead of an energy policy.
■ Reasonable prices
• Economies of scale.
• Waste involves less profits.
• Market forces and profit margins.
■ Low environmental consequences
• Lobbying against environmental legislation.
 Cost of Gasoline, United States, 1999
4
14%

Crude Oil
37%
13%
Federal and State Taxes

Refining costs and profits

Distribution, retail &

marketing costs and profits

36%
3 Natural Gas Production, 1980-1998 (trillion BTUs)

90

80 Central and South America

70 Africa
60
Middle East
50
Far East and Oceania
40
Western Europe
30
Eastern Europe & Former
20 U.S.S.R.
North America
10

0
1980 1985 1990 1995 1998
 World Gas Reserves, 2000

Rest of World
Brazil
Nigeria
Qatar
Australia
Indonesia
Venezuela
Algeria
Iraq
Norway
Turkmenistan
UAE
United States
Saudi Arabia
Iran
Russia

0 10 20 30 40 50 60 70 80 90
 Natural Gas Reserves and Production, 2003

40%
Reserves
35%
Production
30%

25%

20%

15%

10%

5%

0%
North Central & S. Western Eastern Middle East Africa Asia &
America America Europe Europe & Oceania
FSU