Geog 102 Case Study 9

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GEOG 102 Population, Resources, and the Environment

Professor: Dr. Jean-Paul Rodrigue

Case Study 9 The Geopolitics of Petroleum

1 Context2 The Economic Importance of Petroleum

3 First and Second Oil Shocks4 The Oil Countershock


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11

Context

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 thislucrative market.


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Context

OPEC Venezuela, Iran, Iraq, Saudi Arabia and Kuwait founded the

Organization of Petroleum Exporting Countries (OPEC) in 1960at the Baghdad conference.

Several other oil-producing nations joined thereafter theorganization:

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.

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OPEC Country

Former member ofOPEC

Venezuela

Ecuador

Nigeria

Gabon

Algeria

Libya Saudi Arabia

IraqIran

Indonesia

KuwaitQatarUnited Arab Emirates

OPEC Countries

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Context

Developed countries were confident that the price of petroleumwould remain relatively stable.

The American Government even predicted that the oil pricemight rise to 5 dollars a barrel by 1980.

Environment of low petroleum prices and strong economicgrowth.

No developed country had an energy policy and waste wascommon.

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The Economic Importance of Petroleum

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 oilresources and their low cost.

Economic systems, which include industry, housing, energy

generation and transportation, became dependant on cheap oilprices.

The United States being the most eloquent example.

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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 theproduction.

A spatial differentiation of oil reserves is also observed, the bulkof them, 64%, are located in the Middle East

Estimates in reserves range from 50 to 100 years.

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Share of OPEC and the Persian Gulf in the World Oil

Production, 1972-1997

0%

10%

20%

30%

40%

50%

60%

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

OPEC

Persian Gulf

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World Energy Consumption, 199 -2 2

0

50

100

150

200

250

300

1990 1995 2000 2005 2010 2015 2020

QuadrillionBtu

Developed

Developing

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World Crude Oil Production, 19 -199 (in 1,

barrels per day)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1980 1985 1990 1995 1998

Fa

Eas

and Oceania

Af

ica

Middle Eas

Eas

e

n Eu

ope & Fo

me

U.S.S.R.

Wes

e

n Eu

ope

Cen

al and Sou

h Ame

ica

No

h Ame

ica

22


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World Petroleum Consumption, 19 -199 (in 1,

barrels per day)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1980 1985 1990 1995 1998

a

Eas

and ceania

Af

ica

iddle Eas

Eas

e

n Eu

ope &

o

e

.S.S.

.

es

e

n Eu

ope

en

al and Sou

h A

e

ica

o

h A

e

ica

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WorldOil Balance, 19 -199 (in 1, barrels per

day)

-1 ,

-1 ,

- ,

,

1 ,

1 ,

,

19 19 199 199 199

North A erica

entral and o th A erica

Western rope

astern rope & For er

U. . .R.

Middle ast

A rica

Far ast and Oceania

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WorldOil Production and Estimated esources,

19 -21 (in billions of barrels)

5

1

15

2

25

3

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

2090

2100

ctual

Predicted

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Estimates of ltimate Oil esources (billions of

barrels)

0 500 000 500 000 500 3000

etroconsul 5

La errere 5

OPE 3

asters

8

P, 84

asters ( ), 83

e rin , 8

onoco, 8

Halbout , 8

E , 80

ell,

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World Crude Oil eserves, 1999

6%%

%

%

64%

8%

6% or eri

Ce r l ou eri

Wes er uro e

s er uro e or er

iddle s

ri

r s Oce i

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Major Crude Oil eserves, 1999 (billions of barrels)

1 1

Saudi A abia

I aq

Kuwai

I

an

ni ed A ab E

i a es

ussia

enezuela

hina

exico

Libya

! ige ia

ni ed S a es

Alge ia

! o way

Indonesia

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Costs of oil dependency Wealth is transferred from oil consumers to producers. The economys overall ability to produce is reduced by oils

greater economic scarcity.

When price movements are sudden and drastic, inflation andunemployment cause additional losses of output.

Creates instability.

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33The irst Oil Shock

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 avoidcompetition that would bring the price of oil down.

Feasible in the context of a growing market demand and thedependency 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 from1.80 dollars to 3.01 dollars.


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The irst Oil Shock

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 marketcontrolled by oil producers.

This caused the first oil shock.

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The Second Oil Shock

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.

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The Second Oil Shock

Drastic, but somewhat temporary, measures to lower oilconsumption.

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.

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The Oil Countershock

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 secondlargest oil exporter to the United States, afterVenezuela.

Latin American countries such as Columbia and Brazil are tryingto boost their oil production.

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Vietnam is exploring offshore fields, as are other SoutheastAsian countries, hopeful that there are major reserves under theSouth China Sea.

Divergences

Since 1982, divergences occurred within OPEC members to fixquotas 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.

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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 in1990, which saw the price of petroleum jump to 41$.

7.8% of the worlds oil production was removed (Iraq andKuwait).

Other petroleum-producing countries were quick to expand theirproduction to replace Iraq's and Kuwait's shortfalls. The increase in oil price was short-lived.

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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 oilproduction 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% in2010.

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Real Price of Oil, 191 -199 andMajor Disruptions in

WorldOil Supply

0

10

0

30

0

0

60

191

1918

19 19

6

19

30

19

3

19

38

19 19

6

19

0

19 19

8

19

6

19

66

19

0

19

19

8

19

8

19

86

19

90

19

9

$

per

arrel

0

0

1

1

3

3

illionsof

arrelperday

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Petroleum Imports and Oil Price, SA, 19 -199

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

0

5

10

15

20

25

30

35

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

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U

nitedState

sStrategic

PetroleumR

eserv

19990

100

200

300

400

500

600

1977

1978

1979

1980

19811982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

19941995

1996

o age in illion ofba el )

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A Sound Energy Policy

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.

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Cost of Gasoline, United States, 1999

3 %

36%

13%

14%

C de Oil

ede al and State a es

efinin costs and ofits

ist i tion, etaila etin costs and ofits

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Natural Gas Production, 19 -199 (trillion BTUs)

0

10

20

30

40

50

60

70

80

90

1980 1985 1990 1995 1998

" entral and # outh$

%

erica

$ &

rica

'

iddle(

as t

Far(

as t and ) ceania

0 es tern(

urope

(

as tern

(

urope1

For

%

er2 3 # 3 # 3

4

3

5

orth$

%

erica

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World Gas Reserves, 2

0 10 20 30 40 50 60 70 80 90

Russ ia

6 7an

Saudi A 7 abia

Uni8 ed S8 a 8 es

UAE

Tu7 kmenis 8 an

No7 9

ay

6 7aq

Alge 7 ia

@ enezA ela

6 ndonesia

Aus8 7

alia

B a 8 a 7

Nige 7 ia

C 7azil

Res 8 o D Wo 7 ld


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Geog 102 Case Study 9

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