Oil: a globalized product

Case study

Manuel Compagnon

Lycée Jean-Baptiste Dumas - Alès

I) A growing demand Oil is both an energy and a raw material for chemistry.

Since the second industrialisation, in the end of the XIXth century, it became a strategic raw material.

After WWII, industrialized countries, and especially the USA, got accustomed to a cheap and abundant oil.

The production seemed to be able to grow indefinitly.

In the middle of the 70’s, industrialised countries became aware of their dependence on oil, and new energies have been increasing, like gas or nuclear energy.

But even if it was slower, the growth of the demand of oil has been continuing.

Why ?

There are mainly two reasons for this continuing growth :

-first, globalization means more flows, and more flows means more transports, which need oil. 60 % of the oil is used by transports !

-then, globalization means more industrialized countries (eg. China), whose industry needs energy and raw materials, and where the middle class and mass consumption are rising.

But what about production ?

Production has been growing slowly since the 80’s, and is stagnating since 2005. Why ?

-extracting oil is getting more and more expensive, while oil is getting rare -producers (including OPEC (Organization of the Petroleum Exporting Countries) members) want to spare their oil instead of selling it too cheap

Anyway, as a fossile energy, oil will be over one day. « Peak oil » could happen from 2015 onwards…

What are the consequences of such a situation ?

So, if the production stagnates while the demand is growing, it creates tenses and prices are increasing…

II) The global oil system

How could you describe this map ?

The map of the global oil system shows that there are production areas and consumption areas.

Among the production areas, we can see : -the importance of the Middle East, (which should continue, with 61 % of proven oil reserves) -some big oil producers (Russia, the USA) -many others important oil producers, whose number increases while oil exploration discovers new oil fields.

Logically, consumption areas are mainly industrialized or emerging countries.

So we can see huge oil flows between production and consumption areas. Oil remains the most transported product (in weight).

2/3 of the oil is transported by supertankers (here in Ras Tanura, Saudi Arabia). Pipelines are important too.

Oil prices depend on demand and supply, and are mainly set in two places :

-NYMEX (NY Mercantile Exchange, which is a stock market (photo))

-ICE (IntercontinentalExchange, which is a forward market based in London)

III) Geopolitcal and geoeconomic issues

• Oil and money : economical issues

For producing countries, oil is a huge source of income, especially since the beginning of the XXIst century because prices have been increasing strongly.

Oil producers invest their money into sovereign wealth funds. These funds make profit or advertisement thanks to foreign investments (e.g. Qatar which bought the PSG).

Here is a page taken from the site of one of the seven funds of the Arab United Emirates

This money can be very helpful for the economy of the country : for example, Norway uses this money to pay pensions to retired workers. But many countries are not able to use this money efficiently, which is wasted without any profit for the population, such as in Russia.

Oil companies are some of the biggest TNCs in the world, and are still very profitable :

In fact, 7 of the 10 biggest TNCs are oil companies !

• Oil and geostrategy: political issues

Many political events, and even wars, are linked to oil :

-some civil wars are linked to oil, like the Nigerian civil war, between 1967 and 1970 : the Ibos wanted to be independent, but their territory was full of oil and Nigeria refused (pay attention to the fact that the Ibos were supported by France and Israel, while Nigeria was supported by the USSR and the UK…and that at least 1 million people died !).

For the same reasons, China will never let neither Tibet nor Xinjiang be free !

-industrialized countries want to secure their oil supply : that’s the main reason of the Gulf Wars (the USA considered Saddam Hussein a threat for Kuwait and Saudi Arabia (1990), and finally as someone not enough reliable (2003)…).

The US 5th fleet is in charge in controlling this part of the world, which includes the strait of Hormuz.

That’s also the reason why France helped rebels in Libya recently, and is so worried about Mali… Did you really think that it was (only) for human rights… ?

-oil needs to be transported, and controlling the routes makes you rich and powerful

Comment on this map :

For example, the oil extracted from countries around the Caspian Sea, can take a Russian, a Turkish or an Iranian route… Western TNCs invested a lot of money to support the Turkish project, because Turkey is more reliable.

What are these cartoons about?

-The rising of China is a major political challenge. China needs oil, and is a strong competitor of the USA: investments in Nigeria, partnership with Iran, Myanmar, … and even investments in Canada, where western TNCs were hesitating about exploiting oil shale !

Conclusion :

Oil is a good example of a globalized product, and shows well that globalization includes both economical and political issues.