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.
11
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.
11
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.
22
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.
22
Share of OPEC and the Persian Gulf in the World Oil Production, 1972-1997
0%
10%
20%
30%
40%
50%
60%OPEC
Persian Gulf
22
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
Far East and Oceania
Africa
Middle East
Eastern Europe & FormerU.S.S.R.
Western Europe
Central and South America
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
Central and South America
Western Europe
Eastern Europe & FormerU.S.S.R.Middle East
Africa
Far East and Oceania
22
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
22
World Crude Oil Reserves, 1999
6%7%
2%
7%
64%
8%
6% North America
Central & South America
Western Europe
Eastern Europe & FormerU.S.S.R.
Middle East
Africa
Far East & Oceania
22
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
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.
22
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.
33
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.
33
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.
33
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.
44
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 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.
44
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.
44
The Oil Countershock
■ 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.
44
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
44
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
44
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.
44
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
44
Natural Gas Production, 1980-1998 (trillion BTUs)
0
10
20
30
40
50
60
70
80
90
1980 1985 1990 1995 1998
Central and South America
Africa
Middle East
Far East and Oceania
Western Europe
Eastern Europe & FormerU.S.S.R.
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