GEOG 102 Population Resources and the Environment

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

1 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 this lucrative market.

1 Context ■ 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 1970 s, OPEC was unable to increase oil prices. • Production was very important in non-member countries.

1 OPEC Countries Algeria Venezuela Ecuador Nigeria Iraq Iran Libya. Saudi Arabia Gabon Indonesia OPEC Country Former member of OPEC Kuwait Qatar United Arab Emirates

1 Context • 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.

2 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 1990 s. • 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.

2 The Economic Importance of Petroleum ■ 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.

2 Share of OPEC and the Persian Gulf in the World Oil Production, 1972 -1997

1 World Energy Consumption, 1990 -2020

2 World Crude Oil Production, 1980 -1998 (in 1, 000 barrels per day)

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

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

2 World Oil Production and Estimated Resources, 19002100 (in billions of barrels)

2 Estimates of Ultimate Oil Resources (billions of barrels)

2 World Crude Oil Reserves, 1999

2 Major Crude Oil Reserves, 1999 (billions of barrels)

2 The Economic Importance of Petroleum ■ 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.

2 Major Oil Shipping Routes Middle East North America Latin America Africa Western Europe Former Soviet Union Pacific Asia

3 The First Oil Shock ■ Control • In the 1970 s, 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 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.

3 The First 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 market controlled by oil producers.

3 The Second Oil Shock ■ The 1970 s and early 1980 s • The price of oil remained high but stable over the 1970 s, 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.

3 The Second Oil Shock • 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.

4 The Oil Countershock ■ A changing scene • At the end of the 1980 s and at the beginning of the 1990 s, OPEC countries lost their price-fixing power. • Internal problems (economic and geopolitical conflicts between its members). • New producers such as Russia, Mexico, Norway, England 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.

4 The Oil Countershock • 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 1970 s 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

4 The Oil Countershock ■ 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.

4 The Oil Countershock ■ Aftermath of the Gulf War • The price of oil fell to 25 dollars per barrel by the mid 1990 s. • 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 1990 s, the price of petroleum increased. • Oil reserves are in the Middle East.

4 Real Price of Oil, 1914 -1995 and Major Disruptions in World Oil Supply

4 Petroleum Imports and Oil Price, USA, 1960 -1996

4 United States Strategic Petroleum Reserves, 19771999

4 Gasoline Prices, 1978 -2000 U. S. , Germany, Japan (constant 1995 dollars per gallon)

4 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.

4 Cost of Gasoline, United States, 1999

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

World Gas Reserves, 2000

Natural Gas Reserves and Production, 2003