Case Study 9 – The Geopolitics of Petroleum

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 Petroleum3 – First and Second Oil Shocks4 – The Oil Countershock

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 this lucrative market.

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 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

IndonesiaKuwaitQatarUnited Arab Emirates

OPEC Countries11

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.

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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 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.

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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 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.

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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%OPEC

Persian Gulf

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World Energy Consumption, 1990-2020

0

50

100

150

200

250

300

1990 1995 2000 2005 2010 2015 2020

Qua

drill

ion

Btu

DevelopedDeveloping

11

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

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1980 1985 1990 1995 1998

Far East and Oceania

Africa

Middle East

Eastern Europe & FormerU.S.S.R.

Western Europe

Central and South America

North America

22

World Petroleum Consumption, 1980-1998 (in 1,000 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


Africa

Middle East


Western Europe


North America

22

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

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

1980 1985 1990 1995 1998

North America


Western Europe

Eastern Europe & FormerU.S.S.R.Middle East

Africa


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

0

5

10

15

20

25

30

ActualPredicted

22

Estimates of Ultimate Oil Resources (billions of barrels)

0 500 1000 1500 2000 2500 3000

Petroconsul., 1995

Laherrere, 1995

OPEC, 1993

Masters, 1991

USGS, 1987

BP, 1984

Masters (USGS), 1983

Nehring, 1982

Conoco, 1981

Halbouty, 1981

WEC, 1980

Shell, 1979

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World Crude Oil Reserves, 1999

6%7%

2%

7%

64%

8%

6% North America

Central & South America

Western Europe


Middle East

Africa

Far East & Oceania

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Major Crude Oil Reserves, 1999 (billions of barrels)

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

22


■ 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.

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Middle EastNorth AmericaLatin AmericaAfricaWestern EuropeFormer Soviet UnionPacific Asia

Major Oil Shipping Routes22

33 The First 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 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

■ 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.

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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 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.

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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 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.

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• 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.

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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 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.

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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 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.

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

0

10

20

30

40

50

60

$ pe

r bar

rel

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Billi

ons of

bar

rel p

er d

ay

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Petroleum Imports and Oil Price, USA, 1960-1996

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

0

5

10

15

20

25

30

35

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

44

United States Strategic Petroleum Reserves, 1977-1999

0

100

200

300

400

500

60019

77

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Sto

rage

(in

mill

ions

of b

arre

ls)

-40

-20

0

20

40

60

80

100

120

140

Fill

Rat

e (in

mill

ions

of b

arre

ls p

er y

ear)

44

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

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

519

78

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

US

Germany

Japan

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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

37%

36%

13%

14%

Crude Oil

Federal and State Taxes

Refining costs and profits

Distribution, retail &marketing costs and profits

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Natural Gas Production, 1980-1998 (trillion BTUs)

0

10

20

30

40

50

60

70

80

90

1980 1985 1990 1995 1998


Africa

Middle East


Western Europe


North America

33

World Gas Reserves, 2000

0 10 20 30 40 50 60 70 80 90

Russia

Iran

Saudi Arabia

United States

UAE

Turkmenistan

Norway

Iraq

Algeria

Venezuela

Indonesia

Australia

Qatar

Nigeria

Brazil

Rest of World

Natural Gas Reserves and Production, 2003

0%

5%

10%

15%

20%

25%

30%

35%

40%

NorthAmerica

Central & S.America

WesternEurope

EasternEurope &

FSU

Middle East Africa Asia &Oceania

ReservesProduction

Case Study 9 – The Geopolitics of Petroleum

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