Oil Politics: The West and its desire for energy security since 1950

Table of contents

List of Abbreviations

List of Illustrations

1 Introduction

2 Prologue

3 The strategic importance of oil
3.1 WWI and WWII
3.2 The first Gulf war
3.3 The second Gulf War

4 The other side of the coin: The petro-state

5 Theoretical background
5.1 Classical Realism
5.2 Economic nationalism / Mercantilism
5.3 IR liberalism
5.4 Economic liberalism

6 The importance of state power for Oil
6.1 The Baku–Tbilisi–Ceyhan Pipeline
6.2 Water ways and state power

7 The oil price, the Middle East and international oil companies
7.1 The pre 1973 developments
7.2 The 1973 oil crisis and its aftermath
7.3 The US relations with Iran and Saudi Arabia after
7.4 The IEA and the International Energy Forum
7.5 US import restrictions, the oil price and a ‘competitive’ market

8 The consequences of an ‘Oil-rush’ in the arctic. On the edge of a ‘new Cold War’?

9 Conclusion

Appendix

Oil as a financial commodity

The ‘reversed Midas touch’

Posted Price

OPEC

Map of US client-states in the Arab gulf

Ownership links between major IOCs and major crude-oil producing companies in the Middle East 1966 (percentage of shares held)

Geopolitics and oil price

The End of the Bretton Woods System

OPEC and its role as swinging supplier

Balance of Trade

The Arctic Council

Bibliography

List of Abbreviations

illustration not visible in this excerpt

List of Illustrations

Japanese oil supply routes during WW II

Operation Blue/’Fall Blau’ illustration

Map of the Middle East

Caspian Region Oil Pipelines

World Oil Choke Points

US Navy Bases and Facilities in

Map of the Arctic Region

Map of US client-states in the Arab gulf

Ownership links between major IOCs and major crude-oil producing companies in the Middle East 1966 (percentage of shares held)

Geopolitics and oil price

1 Introduction

This book is going to evaluate the ‘International Political Economy of Oil’ with a special focus on the period after WWII. It is especially going to focus on the ‘West’ and its relations with oil exporting countries and is neither going to evaluate the relation between the different oil exporting countries, such as OPEC itself nor the consequences of the Chinese oil policy, the same accounts for the latest developments of the shale gas/oil revolution in the United States (US) and its potential impact on oil politics. Furthermore, in contrast to the majority of literature, which is dealing with oil politics, this book is not simply going to illustrate the major political incidents that are connected to oil after the end of WWII, but it is going to explain the reasons that made the West react in specific ways, according to IPE and IR theories.

This book will begin by describing why oil is such an essential factor for our everyday life, as well as its strategic value. Following this, this book is going to have a brief look at the ‘Petro State’, in order for the reader to be able to understand both sides of oil politics (the consumer’s as well as the producer’s side). Before this book is going to describe and evaluate the importance of state power for oil, by giving examples from pipeline constructions and the protection of water ways by the ‘West’, it will briefly point out the fundamental assumptions of IR and IPE theories, which this book is going to use in order to evaluate the behaviour of the ‘West’ in oil politics. The theories, which will be given emphasis on are IR and IPE realism as well as IR and IPE liberalism. After describing the necessity of state power for oil, this book will have a closer look at the events, which took place in the Middle East in the early 1950s. The evaluation will include the developments before 1973, including the overthrow of the Iranian government in 1953, as well as the disempowerment of the ‘Western’ oil companies by the newly founded Organisation of Oil Producing Countries (OPEC). In a second paragraph, the 1973 oil crisis and its aftermath will be evaluated, including the reaction of the International Oil Companies (IOCs) to the crisis, as well as the reaction of the ‘Western’ governments. In addition, this book is going to describe the US relations with Iran and Saudi Arabia after 1973 by mainly focusing on the US attempts to stabilise the oil price, including the second oil crisis. This will be followed by a description of the tasks of ‘International Energy Agency’ and the ‘International Energy Forum’ and an evaluation of their work from an IPE/IR perspective. Following this, this book is going to evaluate the US import restrictions for oil in the middle of the last century and will also assess the structure of the oil market from a theoretical perspective. Lastly before the final summary of its findings in the conclusion, the book is going to have a brief look at the latest developments currently taking place in the Arctic from an IR and IPE perspective.

2 Prologue

Since the beginning of the twentieth century, oil has been entwined with security, power and the position of nations (Yergin 2011: 126).

The security of energy is not only about countering a vast number of threats; it is even more about the relations among nations, how these states interact with each other, and how the security of energy has an impact on their overall national security (Yergin 2011: 264-265).

In 1911, Winston Churchill decided to alter the firing of the British navy from coal to oil. This decision, which might seem on the surface quite technically and irrelevant for this book, was going to change the twentieth century fundamentally. By switching from coal to oil, the British Navy was no longer relying on a home-based form of energy for its fleet, which was Welsh coal, but on oil. From that stage on, the Navy had to rely on the distant and insecure oil supplies from Persia. However, the benefits of this source of energy outweighed the disadvantages by far. One century after Churchill’s decision, oil is still central to the security, prosperity and the very nature of civilisation. Since the days of Churchill, his words have remained as present as in 1913 when he was saying that: ‘the safety and certainty in oil was lying in variety of sources and variety alone’ (Yergin 2008: xiii- xiv; Yergin 2011: 265).

Until some alternative source of energy will be found in sufficient scale, oil will keep its far-reaching effects on the global economy; a low oil price is like tax cuts for the economies of oil importing countries. Paying less for home-heating and gasoline has the effect that the consumer has additional money, with which domestic economic growth can be stimulated. Furthermore, a low price is an antidote to inflation, which allows countries to grow faster, with lower interest rates and a minimised risk of inflation and vice versa. Additionally, oil stays a massive generator of wealth, not only for individuals and companies but also for entire nations, as it has been shown in the past. Furthermore, mainly due to the fact that it is co-moving negatively with the US dollars exchange rate, oil became also an important financial commodity^[1] and cheap supply of energy for the home country became a big topic in national elections.

However, oil is not a commodity comparable to cars, planes and other goods. Oil is in most cases always interwoven with ‘national strategies’, global politics and above all power (Yergin 2008: xiii- xvii; Yergin 2011:106). Whoever is in the position to control the outflow of oil is and was in the position to starve his enemies of this vital resource (Parra 2010: 1).

Furthermore, oil became the driving force of economic growth after WWII leaving coal far behind. Today without oil there would practically be no mobility, and without energy in the form of oil to create electricity there would be no ‘Internet age’ (Yergin 2011: 264-266).

However, some advocates may argue that the upcoming of other sources of energy might make the discussion about oil (gas and coal) less relevant. However, even if sources such as nuclear technology, solar power, as well as wind were combined they would not be able to replace the energy, which is currently generated from oil. For example in order to replace oil completely by nuclear energy one would have to build an additional 4,000 1,5 giga-watt nuclear power stations (today the world counts 440). These new reactors would deplete all known uranium reserves within ten years (Downey 2009: 26-27).^[2] In addition, the accident in Fukushima threw a new question mark over the ‘global renaissance’ of nuclear technology, which may have solved some issues in the rising global demand for energy.

To sum up, there is one thing one can be certain about; that in the year and decades to come the world appetite for energy and especially for oil will enormously increase and among it so will the political struggle (Yergin 2011: 2-8).

3 The strategic importance of oil

The history of oil since the time of Churchill is strongly intertwined with security issues. From the ‘western’ point of view, oil has been found in all the wrong places.^[3] The access was in most cases difficult and always far away. Additionally, oil was found almost exclusively in less developed nations, which became increasingly difficult to deal with as they developed politically and economically mostly due to oil revenues (Parra 2010: 293; Chalabi 2010: 2).

3.1 WWI and WWII

In 1914, European nations began the first partly mechanised war. The used vehicles in this conflict, such as planes and especially cars and trucks were more efficient than anybody could have predicted and they pressed into large-scale military service. If it had not been for the ‘taxi fleet’ of Paris, which brought tens of thousand’s of troops to the front, Germany would have most likely conquered huge parts of France if not even defeated it. As a consequence of the strong involvement of vehicles in the war (more then 160.000) in 1918 the US had the highest ever-recorded gasoline price in their history until today, in inflation adjusted terms. After the end of the war the strategic importance of oil became imminent to the world leaders. From that stage on the security of supply became their major strategic objective. This idea is one of the major reasons why three former Ottoman Turkish provinces, which were expected to be rich in oil, were bound together and formed the country today known as Iraq (Yergin 2011: 229-230; Engdahl 2004: 35-44; Yergin 2008: 152-156).

During WWII, oil proved once again its vital significance from a military point of view. During the conflict, the Allies used seven billion barrels of gasoline to win the war, out of which, 85 per cent came form the US. During the conflict, oil proved to be the key to many different issues. Furthermore, it was the main reason for Japan to attack the US after it put de facto an oil embargo on the country. Japan’s fear that a lack of oil would turn its battle ships into nothing more than scarecrows was one if its core arguments to go to war and had a huge influence on the strategy it used. By attacking Pearl Harbour, Japan wanted to ensure the safety of its oil supply routes, which stretched from the Philippines until the Japanese mainland (see illustration below).

Japanese oil supply routes during WW II

illustration not visible in this excerpt

(Map made according to Yergin 2008: 342)

In Europe, Hitler Germany decided to invade Russia not only for ideological reasons, but also with the aim to get a hold on the Russian Caucasus during Operation Blue/‘Fall Blau’. It was also planned that General Erwin Rommel would fight his way through Africa and the Middle East to unite with the other German troops in the Caucasus (please see illustration on the following page).

Operation Blue/’Fall Blau’ illustration

Abbildung in dieser Leseprobe nicht enthalten (Map made according to Yergin 2008: 321)

However, a lack of supply in oil set an end to General Erwin Rommel’s Africa campaign, as well as to the operation ‘Barbarossa’ in Russia and to General George Patton’s sweep through Europe after the landing in the Normandy.

During the war, the interruption of the Allied supply lines was a prime target for German submarines, which were attacking the tankers of the Allies crossing the Atlantic (and almost succeeded). The Allies followed the same strategy and tried to cut off Japan and Germany from their oil supply more successfully- in the Pacific with submarine attacks on Japanese tanker and in Europe by bombing German factories for synthetic fuels.^[4] This led to such a shortage that planes were pulled to the runway by farm animals or did not have enough fuel to start at all. In Japan the shortage in conventional fuel led to the manufacturing of what we call today bio fuels made of potatoes, rice, sugar etc.. After the war had ended the German army had only 11,000t of gasoline left. The situation in Japan was similar. Both countries started a war without oil and lost it to a major extent due to the lack of it. The strategic significance of oil became once again apparent (Yergin 2011: 230-231; Aust and Richter 2011; Yergin 2008: 300-350).

3.2 The first Gulf war

On August 2nd 1990, the Iraqi dictator Saddam Hussein ordered his army to invade his neighbouring country Kuwait (Yergin 2008: xiv). His main aim was not primarily to destroy a neighbouring country but its oil reserves, while other motives were at best secondary. However, the story is not as simple as one might think. In 1990, Iraq had acquired a massive debt due to its war with Iran. This debt was to a large extent financed by Kuwait and Saudi Arabia and Iraq was fighting for its economic survival after the end of the conflict with Iran. However, the low oil price at that time made it very hard for Iraq to reduce its debt and to recover from the long and destructive war with Iran. The reason for the low oil price was seen from the Iraqi government as the result of an overproduction, especially by Kuwait and Abu Dhabi above OPEC quotas. Consequently, the Iraqi government accused the governments of Kuwait and UAE of waging economic warfare against Iraq.^[5]

However, when the tension between the Kuwait and Iraq increased, the USA ambassador in Iraq gave the fatal signal that the US would not intervene in internal Arab affairs, which was seen as a green light by Iraq to invade its neighbouring emirate (Parra 2010: 295-296). The reward for controlling the small country was enormous. The successful and permanent invasion of Kuwait would have meant that Iraq would have become one of the worlds leading oil power by controlling about 10 per cent of the global oil reserves at that time (Parra 2010: 298, 305; Yergin 2011: xiv).^[6]

With its increased resources Iraq would have rivalled Saudi Arabia as the dominant oil power, with a far reaching impact on the Persian Gulf, where the vast majority (2/3) of the world’s ‘conventional’ oil reserves were located at that time. The impact for the rest of the world would have been consequently far reaching as well (Yergin 2011: 10). The power that Iraq would have gained from its new position would have forced the world to pay court to the ambitions of the Iraqi dictator, which would not only have had the oil reserves, but also vast amounts of revenues from oil trade and the fourth largest army by numbers in the world. The consequence would have been a historic shift in the international balance of power (Yergin 2008: xiv: Yergin 2011: 10). However, an intervention was not crystal clear from the beginning, as one might assume, as one adviser to the US president said: ‘We will have to get used to a Kuwait-less word’. But the picture was more alarming then the adviser had guessed. If Iraq could not be removed from Kuwait, how long would it take before it would attack Saudi Arabia and the UAE? These countries would be under a constant threat. This scenario would have had totally unacceptable consequences for Israel and the price of oil.

However, before the fighting started the ‘western’ coalition estimated its losses of around 10,000 to 15,000 soldiers^[7], which shows the huge risk it was willing to take to free Kuwait or better to say the risk it was willing to take to protect Saudi Arabia (Parra 2010: 300-303).^[8] ;^[9] Following this, the war aims were simpler than officially proclaimed: the first aim was to eliminate the threat of Iraq to the UAE and the Saudi Arabian oil reserves, while the second one was to leave Iraq strong enough, in order for it to remain a political unit to counter balance Iran. After the war had ended, the presence of US forces in the Middle East seemed to have appeased the region and to have secured the supply of oil (Yergin 2011: 14; Parra 2010: 302, 311-312).

3.3 The second Gulf War

The reasons for the second Gulf War were vastly different than the ones of the first one. The so called ‘coalition of the willing’, was willing to go to war with Iraq in 2003, contrary to ‘Old Europe’. The reasons for the war were primarily not interlinked with oil at all. The primary factors were: the attacks of September 11, 2001 and its consequences, the threat of WMD, the way that the first war in 1991 had ended, including the persistence of Saddam Hussein’s regime and the way the intelligence services had analysed their data.

After Saddam Hussein was captured and interrogated, he replied to the question, why he had kept the illusion of having WMD – Iran.

Oil did not play the major reason when it came to the Iraq war in 2003. The significance of oil was simply highlighted by the nature of the region; the vast amount of oil in the Middle East and the critical balance of power in the region. However, the potential danger from Iraq in 2003 was not as significant for the region as it had been more then ten years earlier. Furthermore, in 2003, neither the British nor the US government were pursuing a mercantilist 1920s-style ambition to control the Iraqi oil. The real issue was not who owned the oil at the well, but whether it was available for the world market.^[10] It was the idea that a democratic Iraq would become a more reliable supplier of oil and that it could quickly increase its oil production, since the UN sanctions on the country would be abolished.^[11] However, the war was not over as quickly as expected and it cost the US taxpayer a trillion dollars in direct outlays until 2011^[12] (Yergin 2011: 141-149; Klare 2004: 94-105; Chalabi 2010: ch.15).

The other side of the coin: The petro-state

For oil exporting countries a low oil price has opposite effects than the positive ones for oil importing counties, which were described in the prologue. In petro-states oil revenues account for 50 to 90 per cent of the government’s revenues. These ‘easy’ revenues have a huge influence on the states and the society’s structure, the psychology and the motivation of people. In most cases, innovation, entrepreneurship, hard work and the development of a competitive oriented economic growth are the ‘casualties’ of these state systems. The economies of petro-states become inflexible and are loosing the ability to adapt and change. Furthermore, the state apparatus controls most of the economic life from economic growth via micromanagement and grand projects, etc. Additionally, there are two more characteristics that refer to countries, which are rich in resources. One is called the ‘Dutch disease’, named after the negative effects of the ‘new’ gas wealth the Netherlands acquired in the 1960s. As a result of the gas wealth, the national currency became overvalued and exports became relatively more expensive on the world market. This led to the decline of the non-gas related export economy. Furthermore, local businesses started becoming less and less competitive due to an increase in cheaper imports and an increasingly embedded inflation. All these negative effects became known as the ‘Dutch disease’.

The second, even more debilitating illness of the petro-state is a seemingly irrepressible fiscal rigidity, which leads in most cases to excessive government spending irrespective of the macroeconomic situation and became known as ‘the reverses Midas touch’ (Yergin 2011: 107-111).^[13]

Theoretical background

International Political Economy and International Relations developed several theories in order to explain states behaviour. The following paragraph is going to outline the core theoretical assumptions of two IR theories (realism and liberalism) and two IPE theories (Economic nationalism and Economic liberalism). These four approaches are the most common and are able to explain most developments taking place in the field of IPE or IR. However, the arguments supporting why certain developments take place differ according to the perspective one follows.

Theories, such as Marxism, Feminism, Neoliberalism, Constructivism and so on are not thoroughly investigated in this chapter, but are worth mentioning.

3.4 Classical Realism

The tradition of classical realism can be tracked back almost 2,500 years ago to Thucydides and his writings about the Peloponnesian War. However, Niccolò Machiavelli, Carl von Clausewitz and Hans Morgenthau were also some of the most influential scholars in this school, alongside Thucydides.

In the domestic sphere, realists argue that the state is a guarantor for law and order. However, in the international sphere there is no power above the state level. Therefore, realists see the world as an anarchic place, where each state is looking for opportunities to take advantage of one another. Therefore the survival of the state, which is its highest objective, depends on its material capabilities and its alliance with other states, in order to establish a balance of power. In order to survive, each state is trying to gather as much power and unilateral advantage as possible, whereby power has to be always seen relatively in comparison to a or the closest rival and does not only need to be perceived as military power. However, the successful exercise of power requires a sophisticated understanding of the goals, weaknesses and strengths of the allies, opponents, as well as third parties. Furthermore, the struggle for power is seen as a zero sum game, which means that the increase of power of one state is the loss of another. This struggle is seen as eternal, due to the unchanging human nature.

Realists tend to regard history as cyclical, in a sense that states try to build order and escape from an anarchic world. States might be successful in doing so, however, only for a certain period of time, which is always followed by anarchy again.

Many IR scholars agree with Morgenthau’s six principles, which are especially pointing out the following:

The first principle claims that objective laws, which have their roots in human nature, govern society as well as politics. The second one points out that states are exclusively thinking in terms of power. The third principle argues that the motive of power-seeking is an objective category and has universal validity. The forth principle claims that the self-interest of a state is a higher good than socially constructed moral beliefs. Morality cannot be applied to the state only for the individual. The fifth principle assumes that every state has ‘its own’ moral beliefs, which do not have universal validity. The sixth principle points out that realism cannot be judged by the methods of other sciences (Morgenthau 1978: 4-15; Jackson and Sørensen 1999: 76-80; Lebow 2010: 59-68).

Realists also claim that international organisations are mainly shaped by powerful states, according to their will and for their own purposes (O`Brien and Williams 2010: 21- 24; Russett 2010: 110-112).

3.5 Economic nationalism / Mercantilism

In general realist IPE is regarded as a subset of IR realism. According to the assumptions of Thucydides, who saw wealth as a critical source of military strength by pointing out that war would be a matter not so much of arms but of money, which made arms of use (Cohn 2010: 56-57).^[14] However, IPE realism is sharing the basic assumptions of the realist approach from IR, such as the states struggle for power, prestige, and influence. Additionally, it defines wealth as another issue for the struggle between states. Both theories see world politics as a never-ending conflict, aiming to pursue more power, whereby power is measured vis-à-vis other states. Since the participation in the market is potentially seen as negative, economic nationalists are arguing in favour of state control of key economic activities or for state assistance to vital economic sectors.

Therefore, IPE realism, in contrast to IR realism, also focuses on what IR realism defines as ‘low’ politics, which is associated with commercial and financial pre-eminence. Furthermore, IPE realists turn issues in the world of economic affairs into problems of international economic diplomacy and trade wars. This means that nations are solely concerned with their own interest when they engage into international economic negotiations. In this context, economic nationalism is focusing on the importance of power when it comes to the sharpening of the international political economy, in which the state is seen as the main actor. Furthermore, IPE realists argue that the nature of the global political economy reflects only the interests of the most powerful states. Economic nationalists also believe that there is only a limited amount of wealth in the world and that each state has to block the interests of other states in order to protect its power/wealth in a zero-sum game. International organisations are, from this perspective, seen as having their capabilities delegated to them by the state(s), and are therefore relying on them. Furthermore, international institutions are seen as arenas for acting out power relationships, in which the most powerful nations ‘shape’ the rules to ‘fit’ their interest. IPE realism also sees the state as prior to the market and market relations are designed by political power. Nevertheless, it also recognises the importance of actors in the market, such as the role of companies. However, mercantilism subordinates their importance below the level of the nation. In the end, this theory argues that firms are always subject to the dictate of the state and that they are generally viewed with suspicion (O’Brien and Williams 2010: 22, Cohn 2010: 56-57, Ravenhill 2008: 32-34).

3.6 IR liberalism

The most important competitor for the realist approach is the liberal approach, which can be tracked back to Immanuel Kant, John Locke and Hugo Grotius and is seen as an especially ‘western’ theory.

Liberals believe that nations despite their self-interest are capable of cooperation and have the ability to create a harmonious and peaceful society.

Liberals assume that conflicts and wars can be mitigated or overcome, through concerted changes in the domestic as well as the international structure of governance. Scholars, such as Kant, see democratic governments, international law and institutions, as well as economic interdependence, as means to overcome the security dilemma of the international system. The just described ‘Kantian triangle’ is founded on the following assumptions. It is claimed that international organisations (such as the UN or the WTO) are playing a major role as mediators and supervisors between different nations and are stimulating peace. It is also claimed that economically important trade between nations creates incentives to maintain peaceful solutions with each other due to interdependence. Furthermore, trade, and especially free trade, is seen as a win-win situation, from which all participants can benefit from. Additionally, free trade is seen as positive due to the fact that it is preventing wars, which are motivated by the need for resources. Additionally, it is claimed that democratic countries will refrain from using force against each other and are creating a ‘liberal zone of peace’, due to the fact that the elites of a country are accountable for their actions to the people, who generally want peace. Hence the domestic political system is determining a nation’s outside behaviour, which also puts the individual, as well as interests groups into the focus of IR liberals (Russett 2010: 96-110; O`Brien and Williams 2010: 21-24).

3.7 Economic liberalism

Liberal IPE is sharing the basic assumptions of IR liberals and is in most cases just using different arguments/a different perspective (mostly economic arguments/an economic perspective) to point out the same assumptions. Nevertheless, liberalism has the highest influence on the world’s economic system, as we know it today (Cohn 2010: 77).

For liberal scholars IPE is constituted by the search for wealth. Contrary to economic nationalism, liberalism is focusing more on the individual or a wider range of actors from the state, over companies to interest groups. The state is just seen as one of the actors, which are creating the international economy. Furthermore, liberals assume that people and states can cooperate for their mutual benefit and that interaction between entities results in a positive sum game, creating a win-win situation. Hence, liberals are always searching for fields and conditions for cooperation and assume that conflicts are evitable through interdependence. Liberals such as Adam Smith and David Ricardo, are also arguing that free trade is the most beneficial and productive economic system, maximising growth and wealth through comparative advantage and division of labour. Individuals and companies are seen as the key economic actors and as the main source of wealth. Many liberals view the state with hostility and vote for non-interference, since it would bring politics into the field of economics and therefore into the market, which is the centre of economic life. However, most liberals agree on the fact that the market has imperfections, but do not agree on which measures should be taken. Transnational companies are also seen as positive for the home as well as for the host country.

Liberals also argue that economic nationalism, with its protectionist policies, is leading to conflict and that only a liberal approach is beneficial for peace. Liberals also support the idea of self-determination and the use of international organisations for the settling of disputes between countries (O’Brien and Williams 2010: 21-25; 41-45; Ravenhill 2008: 41-47).

With IR liberals, IPE liberals share the assumption of the pluralist nature of the international system and the feasibility of cooperation and interdependence. However, liberal IPE does not consider democracy as an essential factor for its assumptions, since it is primarily focusing on macroeconomic arguments, as Friedrich August von Hayek among others pointed out (Daily Bell, unknown year).

The importance of state power for Oil

For more then one century, oil has been essential to modern economies, while imports have become a matter of economic survival (Parra 2010: 293).

The usual definition of energy security is very simple: the availability of sufficient supplies at reasonable prices. However, there are several dimensions when it comes to the security of oil. Starting from the physical security, which includes the protection of all assets; infrastructure, supply chains, trade routes as well as making provisions for a quick replacement and substitution if necessary. Furthermore, the access to oil itself is crucial as far as the ability that needs to be acquired and the supplies that need to be developed physically, commercially and contractually are concerned. Additionally, energy security is also a system that consists of national policies as well as international institutions, which are designed to respond in a coordinated way to emergencies, dislocations, disruptions as well as helping to uphold the steady flow of supplies, such as the International Energy Agency (IEA) (Yergin 2011: 265-268).

Finally, there is the constant need for investment on behalf of the state or private companies. Therefore, the security of energy requires policies and a business climate, which encourages investment and development to ensure an adequate supply infrastructure in the future. However, for oil exporting nations the question is ‘slightly’ different. These countries are thinking in terms of the security of demand. They are relying on the perspective that there will be a market in the future as a basis on which they can plan investments and are able to plan their budgets (Yergin 2011: 266-267; Yergin 2011: ch. 5).

3.8 The Baku–Tbilisi–Ceyhan Pipeline

Pipelines have the huge advantage of being built within a long time perspective, regarding the delivery of a certain quantity of oil to a specific place and customer.

After the collapse of the Soviet Union, ‘new’ independent sovereign nations came to existence around the Caspian See, which were rich in oil. The development of these resources was inextricably entangled with the ambitions of nations and of course geopolitics (Yergins 2011: 43). However, when it comes to natural resources there are many players in the game, as it usually happens.

The Caspian Sea is not connected to any other ocean or sea. The richest in oil and key state in the region is Azerbaijan on its west shore (please see map on the following page). Azerbaijan is bordering Armenia and Georgia to the West and Russia to the North. In the South of the country is Iran, which has ambitions to be the dominant power in the region. All these states and of course the United States, Britain, Russia and China, as well as Turkey had a dominant role in reshaping the region. The major point of conflict for all these states was on which route and how the Caspian ‘gold’ would be exported to the world market (Yergin 2011: 43-52).

Map of the Middle East

Abbildung in dieser Leseprobe nicht enthalten(geology.com: unknown year)

All the participants in the game had different ambitions. Russia wanted to keep its influence on the countries and called it until the mid 1990s ‘our oil/their oil’. The ‘West’, represented primarily by the only left super power USA along with Great Britain, saw the great chance of diversifying the world markets supply and by doing so, increasing the global energy security. In order to do so, their aim was to prevent Iran from filling the vacuum Russia had left and to prevent the new states from sliding back under exclusive Russian influence.

Iran and Turkey both saw their chances to increase their influence upon the former Soviet Republics. Hereby Azerbaijan was of particular importance to the Iranians due to the fact that Iran has a ‘minority’ of 16 million Azerbaijanis^[15], who were connected to the Azerbaijan population in many cases through family bonds. An open tolerant ‘western’ regime in the country could have challenged the Iranian regime due to the close connection of this ethnic group.

China was also interested in the region during the 1990s due to its rising need for energy imports and its proximity to central Asia.

The objective for the ‘Caspian’ nations was clear, i.e. maintain and consolidate their independence and establish themselves as nation states (Yergin 2011: 47-49; Mammadyarov 2007).^[16] The development of the oil resources could not only bring strongly needed revenues, but also political support and interest in the countries. Oil was as an Azeri put it their strategy, defence and independence. However, when it came to the development of these countries not only politics were essential but also pure economics, such as engineering costs, investment, logistics etc.

After oil companies from seven nations acquired exploration rights (among them Russian, US, Japanese and Europeans) the main question was how to bring the oil to the market. This question was not only of interest for the companies but even more pressing from a political perspective. There were several possible routes to follow, in order to export the crude oil to the world market.

The Russian government wanted to connect the future pipeline with its own pipeline infrastructure, which would have given Russia some degree of leverage and control over the Caspian oil. However, the United States strongly opposed this plan and pushed on every occasion possible for the route that was built eventually. Another option would have been to go through Georgia and to the Black Sea. The Russian and Georgian option both would have included a transport via tanker over the Black See and through the Bosporus. However, these two routes were problematic due to the fact that the narrow Bosporus was already on its limits concerning the shipping traffic.

Nevertheless, there was another route, which would have been the cheapest, fastest and easiest route to construct. In this scenario Azerbaijan would have delivered oil to Iranian refineries in the north of Iran, and Iran would have exported via a swap the same amount/value of oil through its terminals in the Persian Gulf. However, this cheap alternative would not have benefited any government except for the Iranian. It would have given Iran the control over Azerbaijan. Additionally, it would have increased the reliance on the Gulf and would have run contrary to any diversification strategy of the ‘West’. Additionally, it would have given the regime in Tehran additional revenues, which would also have been opposing ‘Western’ interests.

The last, most expensive and complicated option, which was eventually realised, was the option to build a pipeline from Azerbaijan towards Georgia, circling around Armenia^[17] and leading through Turkey to the Mediterranean port of Ceyhan (please see map on the following page). This route was finally constructed^[18] due to the high pressure of the ‘West’ especially the USA and Turkey, despite the fact that Russia obviously opposed it (Yergin 2011: 55-60).^[19]

Caspian Region Oil Pipelines

Abbildung in dieser Leseprobe nicht enthalten

(Peak Oil Optimist 2005)

Today this pipeline is transporting more than 1 per cent of world’s oil supply or more than 1 mbd. During the Georgian – Russian war in 2008, Russia fired more than 50 missiles on the pipeline trying to destroy it. A successful attack would have meant a stronger dependence of Western Europe on Russia, which would have been the only possible provider of infrastructure for the oil export of Azerbaijan (McElroy 2008; Brauer 2001).

This example illustrates, how IPE/IR realist’s approaches to world politics influenced the building of this specific pipeline and pipelines in general.

From a liberal point of view (IR and especially IPE), it would have made sense to build the pipeline through Russia or even Iran. Both liberal schools would have argued that by building the aforementioned pipeline, one would create interdependence between the ‘West’ and the transit countries. The transit countries would have welcomed and/or needed the revenues for their households and the ‘West’ would have needed the oil. These facts would have made a pipeline through both countries very attractive for liberals. IPE liberals would have even favoured the cheaper Iranian version, since it would have been the cheapest and fasted one and according to the ‘rules of the market’ this would have been the solution to support. However, one has to be cautious with IR liberalism because Russia and Iran are/were no democratic states, which is the only form of government IR liberals support, since democracy is essential for their assumptions in order to fulfil the ‘Kantian triangle’.

Realists (IR and IPE) however, evidently differed strongly from the liberal standpoint. Realists would argue that a pipeline through Iran or Russia would have given the states more power, since they were in the position to block the supply of oil to the market. Consequently, concerning these states, the ‘West’ would have lost, on the one hand some degree of power for the benefit of Iran or Russia. On the other hand, by building the pipeline through Georgia one would not only have brought Azerbaijan closer to the west, but also Georgia due to the money the pipeline would have poured into the government’s pockets, which would have meant additional power and influence for the ‘West’ in this region.

IPE realists in this context, contrary to IR realists, would also have taken into consideration the loss of power compared to the reduction in wealth the most expensive route would have cost compared to the Russian and the Iranian route. However, the Iranian route would have been unquestionably out of consideration to any alternative costs for obvious reasons considering the relationship between the USA and the Iranian regime. The Russian solution might seem reasonable from today’s point of view.

Nevertheless, the Cold War had just ended and the future development of the country was not so clear at that time, hence that solution was off the table as well.^{[20] [21]}

The only other solution IPE realists could have agreed with, in contrast to IR realists, would have been to take the rout via Georgia and the Bosporus and not via Turkey, considering the minimised costs. However, since reduced costs would have been beneficial for Azerbaijan only in form of a higher surplus from selling the oil and it would not have been directly beneficial for the ‘West’ itself, there was consequently no reason not to build the safest pipeline.

3.9 Water ways and state power

As history has shown, energy security does not only need to be understood as the security of energy supply itself, but moreover as the protection of the entire supply chain, from the initial production to the final consumer (Yergin 2011: 280). The vulnerabilities of the existing infrastructure take many forms, from outright hostile assault to small events that are able to trigger a massive disruption of the energy market. Very critical in this context are choke points at see routs for the transportation of energy in form of military conflicts, accidents or terrorist attacks.

About 50% of the world’s oil production is transported through these choke points. These choke points of interest in general and in particular are, the Strait of Hormuz (over 23 mil. bpd.), the Malacca Strait (40 mil bpd, 80 per cent of Japan’s and Koreas supply and 40 per cent of Chinas supply), the Bosporus Strait (over 3 mil. bpd), the Bab el-Mandeb Strait (up to 3 mil. bpd), the Suez Chanel (up to 2 mil. bpd) and the Panama Chanel (0.6 mill. bpd). All major navy forces are trying to keep these routes safe and to protect them especially from piracy, such as in the case of the Horn of Africa (Somalia). However, of all these choke points the biggest presence of naval forces is represented by the US, such as the presence of the US Firth Fleet in Bahrain in the Persian Gulf shows, where 60 per cent of the conventional oil reserves are located. For the protection of its oil supplies on these waterways the US are currently spending about $ 50 billion per year. However, this presence does not exist without some bad feelings from states such as China, which on the one hand profits from the protection, but also fears to be cut off from supply in the case of confrontation (Yergin 2011: 282-284, 293, 303; Aust and Richter 2011; YI 2009; globalsecurity.org 2012; González 2012).^[22]

World Oil Choke Points

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(The Lugar Energy Initiative, unknown year)

US Navy Bases and Facilities in 2012

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(Map created according to: NavyAdvancement.com)

This example of the concentration of the US/’Western’ navies along these choke points is another illuminating example for the realist approach the West is following in the context of oil.

Liberal IPE and IR scholars could, on the one hand, argue why it is necessary that the consumer/recipient is protecting the product until its destination and not the producer as it is normally the case, which would save the ‘West’ and especially the US a fortune.^[23] On the other hand, realists see in the control of the sea routes a very strong tool of power since it is enabling the ‘West’/US to starve every enemy of this vital source. IPE realists would argue in the same way, but would evaluate the costs of the huge fleet against the increase of power. They might come to the conclusion that it is not worth spending that much money on waterways and that it might be wiser just to protect certain ones instead of all of them. However, to let any potential rival nation have control of these points would be out of question for IPE realists, as well.^[24]

The oil price, the Middle East and international oil companies

When the security of energy is under discussion, the analysis always returns to the Persian Gulf, which accounts today for more than 60 per cent of the so called ‘conventional’ oil reserves (Yergin 2011: 4-5).

However, in the following chapter, this book will analyse the major political incidents before and after the first oil crisis in 1973. Nevertheless, when one is looking at the policies of the ‘West’ in connection with the Middle East or oil in general, one has to keep in mind that the political circumstances have changed over time and that different legislations and nations followed sometimes different approaches in this context.

Furthermore, the political actions that took place during the 1970s and beginning 1980s always have to be understood under the assumption of the governments of producing and importing countries that oil would become short soon. It was also expected that the Soviet Union would become a net importer of oil shortly. In addition, one has to keep in mind that until 1970 apart from Russia, Canada and the US, next to the OPEC countries, there was no major producer of oil in the world (China was a minor one) (Parra 2010: 6, 114-117; Chalabi 2010: 127).^[25]

3.10 The pre 1973 developments

Since Harry Truman (1945- 1953), U.S. presidents have made the security of the Middle East, and especially the Kingdom of Saudi Arabia and its natural resources a fundamental national interest. Especially when the US turned from an oil exporting country to an importing country in the beginning 1950. Jimmy Carter said in this context that any attempt by outside forces to gain control of the Persian Gulf region, would be seen as an assault on the vital interests of the United States and would be replied by any means necessary, including military force. This threat against an outside aggressor has to be seen in the context that in 1979 the Soviet Union invaded Afghanistan, which was understood as an attempt to expand Russian influence into the Gulf region.^[26] However, in turn of the American guarantee of the safety of the region and especially of the Kingdom of Saudi Arabia, the country tied its long-term security strategy to the US (Yergin 2011: 126- 127).

However, by 1950 all oil companies that were active on a global scale, especially in the Middle East, were of US and Western European origin. Most of these Middle East countries had and still have in some sense a ‘client relationship’ with the USA or Britain.^[27]

The relationship between the host countries of the oil companies, the home countries of these corporations and the oil companies themselves has been and still is until these days in the heart of policies and politics in the international petroleum industry (Parra 2010: 1-2; Chalabi 2010: 2).

The legal basis on which the oil companies worked in the host-countries, have been established well before 1950. Despite the fact that the concessions of the companies were all individual, they had certain points in common.

The oil companies could for example extract as much oil as they wanted for a certain period of time. The companies had to make payments as compensation for their extraction, which included surface taxes, royalties, production taxes and so on and so forth (Parra 2010:6-9; Chalabi 2010: 2).

In the beginning of the 1950s, these concessions changed quite dramatically for the first time. Starting from Venezuela, a 50/50 deal worked its way through the Middle East to split the profit of the posted price^[28] ‘equally’ between the International Oil Companies (IOC) and the host countries. Prior to these changes the host countries sometimes received less then 10 %.

However, the international oil companies started, prior to the nationalisation, to keep the posted price artificially low and to ‘take’ the margin between the ‘real’ price (market price/value) and the posted price. This development finally was one of the major reasons why OPEC^[29] was founded in 1960 and why the nationalisation of the oil industry in the Middle East eventually took place. At the beginning OPEC had the primary objective to guarantee a stable and high price for oil by representing a ‘united front’ against the IOCs, in order to increase the bargaining power of the counties.

Additionally, the host countries realised in the early 1950s that the income taxes the IOCs were paying them were being credited by the origin country of the companies. Therefore, they did not directly affect the companies themselves, but only the origin countries of the companies. This fact was also realised by the US State Department, which was favouring the idea of higher revenues for the oil exporting nations in the Middle East and concluded that higher payments would be desirable and could increase the stability of the local governments. The fact that these additional revenues came into the region without the necessity of any parliamentary approval put further ‘icing on the cake’ (Parra 2010: 15-20; Chalabi 2010: 33, 35).

However, before the foundation of OPEC and the nationalisation of the oil industry took place at the end of the 1960s/beginning 1970s, there was another major incident, which took place in the early 1950s.

In 1951, Iran passed a law and started to nationalise its oil industry. The following 2 years were characterised by the negotiations between the British, US and the Iranian government and AIOC (Anglo Iranian Oil Company)^[30], as well as the World Bank, the Security Council and the International Court of Justice. In August 1953, the Iranian government was overthrown and a new government was formed under Prime Minister Fazallah Zahedi.

However, the motives behind the overthrow and the politics that followed were only to a minor extent directly related to oil, as there was more than enough of it in the Middle East at that time. Nevertheless, it nicely illustrates how the ‘West’ promoted its interests in this part of the world in that specific period.

However, towards the end of 1952 Britain and the United States had accepted the reality of nationalisation and only the marketing of Iranian oil and the compensation for the IOCs were still a subject of discussion.

Nevertheless, ultimately things developed differently. Due to the fact that without AIOC Iran was unable to sell its oil to the world market, it had a huge loss of revenues in the years of 1952 and 1953. As a consequence, the government of Mossadegh, the Iranian leader, appeared more and more volatile and possibly vulnerable to a left-wing, pro Soviet takeover, especially to the US government. For the British government the loss of an important source of sterling oil was the centre of their concerns apart from the Soviet threat. Operation AJAX was launched by the CIA only due to the communist threat, in order to replace the Iranian government of Mossadegh in 1953 (Parra 2010: 22-26, 27; Downey 2009: 11; Engdahl 2004: 95-97).

However, during the time of nationalisation the output of oil in Iran almost dropped to nil, whereas the average Middle East production grew by 12% between 1951 and 1953. After the Shah came back into office, AIOC did not get its monopoly back in the country, but found it self in a consortium with Shell (14% share) and the five US major (Chevron, Exxon, Gulf, Mobil and Texaco (each 8% share) and CFP (8% share). In order to improve the situation of Iran, the US and British government put pressure on the oil companies to ‘buy’ more oil from Iran. However, since the market was controlled by almost one 100% by these companies, they simply reduced the production in other Gulf countries and increased it in Iran, which kept the prices stable.^[31] This behaviour became afterwards a common procedure for ‘Western’ governments, in order to finance its partners in the Middle East, without the need for a debate in their houses of political decision-making^[32] (Parra 2010: 22-30, 46, 71-72, 103).

However, the defeat of Iran by the ‘West’ after the nationalisation in 1951 made the members of OPEC play quite moderately after it was founded (till the beginning 1970s), not looking for any confrontation. Furthermore, as long as the Shah was in office, the ‘West’ tried to use him to have a pro ‘Western’ influence on OPEC as well as Saudi Arabia in some occasions (Parra 2010: 64, 89-96, 103-107). But the Shah had another even more important role. After the withdrawal of the British forces from the East of Suez, he was chosen by the US to fill the power vacuum Britain had left, in order to protect the sphere against any Soviet agitation and influence.^[33] Additionally, the Shah was a useful tool for the ‘West’ because he was quite moderate towards Israel (Parra 138-140).

[...]

^[1] Oil as a financial commodity please see appendix

^[2] numbers refer to 2009

^[3] except for the USA until the end of WWII

^[4] Germany’s only source of fuel after 1944 (Yergin 2008: 300-350)

^[5] Saddam Hussein saw the USA as the main agitator behind it (Parra 2010: 295-296). Additionally, the Iraqi government accused Kuwait to illegally exploit Iraqi oil reserves, by drilling horizontally from Kuwaiti territory for oil on Iraqi territory (Parra 2010: 295-296).

^[6] In addition, a major part of its debt from the war against Iran was held by the Emirate, which was gone too, as a consequence’ of the invasion (Parra 2010: 298, 305; Yergin 2011: xiv).

^[7] Actual casualties were 150 during the operation on the coalitions side, Iraqi casualties are estimated between 85,000 and 200,000 (Parra 2010: 301).

^[8] By comparison during operation ‘Overlord’ on the June 6th 1944 (D-Day), the allied troupes claimed 10,000 casualties and 4,414 deaths (ddaymuseum.co.uk).

^[9] Referring to this the Joint Chief of Staff Powell and General Schwarzkopf said the following: ‘I think we’d go to war over Saudi Arabia, but I doubt we’d go to war over Kuwait’ (Powell), ‘I don’t see us going to war over Kuwait. Saudi Arabia, yes, if we had to; but not Kuwait’ (Schwarzkopf) (Parra 2010: 300-303).

^[10] Oil from Iraq could be purchased on the world market but only to a limited extent and under UN restrictions (Yergin 2011: 141-149; Klare 2004: 94-105).

^[11] A sustainable increase in the Iraqi oil production after the war compared to 2003 did not materialise until 2010 (Fiedler 2012).

^[12] this amount equals roughly the nominal income from oil revenues by all OPEC countries in 2011 (US Energy Information Administration 2012).

^[13] For more details about the ‘reversed Midas touch’ please see appendix.

^[14] Or as Paul Kennedy put it: ‘The historical record suggests that there is a very clear connection in the lung run between an individual Great Powers economic rise and fall and its growth and decline as an important (military) power’ (1988: xxii).

^[15] Iran has a total population of approx. 78 million (CIA World Fact Book 2012).

^[16] Mammadyarov has been Foreign Affairs Minister of Azerbaijan since 2004.

^[17] a rivalling state to Azerbaijan at that time (Yergin 2011: 55-58)

^[18] Later on a gas pipeline followed the same route as the oil pipeline (Yergin 2011: 55-58).

^[19] Two smaller pipelines had been built prior to the main pipeline in 1996 but only in order to get revenues to the country asap and to level the interests between the USA and Russia. One pipeline went through Russia and the other one through Georgia, both were ending at ports at the Black See. The pipeline through Georgia was also important, because the transition fees were helping to stabilise the country and it avoided the conflict area of Chechnya (Yergin 2011: 55-58).

^[20] Or as Madeleine Albright put it at that time: ‘We don’t want to wake up ten years from now and have all of us ask ourselves why in the world we made a mistake and didn’t build that pipeline (the safe one via Turkey) (Yergin 2011: 60). This is strongly reflecting the realist assumption that relatively peaceful times are always followed by conflict, since history is seen as cyclical.

^[21] According to a speech of US Secretary of Defence Robert Gates in 2010 the US Navy is as strong as the following 13 navies combined (Holmes and Yoshihara 2010).

^[22] The correlation of these choke points and the presence of the US navy can be seen on the two maps on the following page.

^[23] Of course the costs for the protection of the waterways would be include in the price in this case. However, all consumers would pay it in that case not manly only the US.

^[24] A solution for example would be, just to control choke points, which are not only related to oil but to global shipping traffic as well, like the Strait of Malacca or the Suez Chanel and to encourage the oil exporting states to protect the Horn of Africa for example in a cooperation with the ‘West’ or on their own.

^[25] For a diagram of the Geopolitical incidents from 1960 till 2008 and the oil price please see appendix.

^[26] This Russian aggression was successfully fought back by insurgents financed and equipped by the USA with the help of Saudi Arabia, where most of the insurgents came from such as Osama bin Laden (Bronson 2006: 8- 10).

^[27] The military expending for the protection of the oil resources in the Persian Gulf accumulated according to ‘The National Defence Council Foundation’ to 52-62 billion p.a. in 2003 (Copulos 2003:ch. 2). For a map of the client state please see appendix.

^[28] For a detailed explanation of the ‘posted price’ please see appendix.

^[29] For a list of all current OPEC member states please see appendix.

^[30] later called BP

^[31] For a detailed illustration of the ownership links between major IOCs and major crude-oil producing companies in the Middle East please see appendix.

^[32] Usually, Iraq was the country suffering most from this practice because its exports were in most cases reduced in favour of others (Parra 2010: 22-30, 46).

^[33] the main aim of the US policy at that time