Oil and the Middle East: The End of US Hegemony?

Author(s): Simon Bromley

Source: Middle East Report, No. 208, US Foreign Policy in the Middle East: Critical
Assessments (Autumn, 1998), pp. 19-22
Published by: Middle East Research and Information Project (MERIP)
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 these and other issues arise, how are they resolved? Is
there a price for crude oil which will simultaneously sat?
Oil and the Middle East isfy the core OPEC (Organization of Petroleum Export?
ing Countries) and Saudi objectives, a price that is: a)
low enough so that demand increases with economic
The End of US growth; b) low enough to deter significant investment in
Hegemony?
non-OPEC oil and alternative energy sources; and c) high
enough to cover the social costs of OPEC states?
Simon Bromley In the past, I argued that the US-Saudi relationship
centered on an attempt to reconcile these objectives and
that the attempt was, on the whole, successful.1 That ar?
There is now a very real challenge to US hegemony and gument was based on an identification of common inter?
ests between the United States and Saudi Arabia that
the American role as guardian of the West's oil, although stemmed from US security guarantees and the down?
stream integration of Saudi Arabia and the Gulf states
it does not lie primarily in the sands of Arabia. The key into the consumer markets and investment opportuni?
ties of the consuming West. In this context, Robert Vitalis'
shift has been the resolution and after? observations concerning the "closing of the Arabian oil
geopolitical
frontier" miss the point.2 Vitalis argues that the era of
effects of the Cold War. the 1940s and 1950s, "when Aramco was in effect the
kingdom's public works agency and oil ministry and
America's private diplomatic and intelligence operation,"
has passed, and the influence of the United States over
contemporary international political economy of the Saudi
regime has diminished accordingly.3 Regard?
The oil presents a puzzle: political instability in regions
ing direct control, this is correct, as Vitalis avers: "The
where oil is found coexists with steadily falling prices.
era of empire... is over for the US in the Gulf...The over?
This combination of continuing political conflict and un?
seas Arabian oil resource frontier is closed because that
certainty in the Middle East (particularly the Gulf), and state has secured overarching control inside this zone."4
the continuing slide in the real price of crude oil encour?
Of course it has.
ages consideration of relations between world oil mar? The long-term objective of US hegemony after the Sec?
kets, Middle East politics and the international role of ond World War was never to achieve
political and economic
the United States. To comprehend these relations, one
objectives through direct territorial control and influence
must consider both the political and geopolitical objec?
over other sovereign states; that was always a fall-back
tives of the states involved and the economic motivations
position necessitated by the opposition to?or the lack of
of the key actors in the international oil industry.
development of?forms of political independence consis?
tent with a liberal world-wide economic order. Where those
The End of the Cold War and the Erosion liberal forms were secure, or where non-liberal domestic
forms were prepared to operate internationally within the
of US Hegemony
dominant liberal order, the "market," armored by the po?
The geopolitics of oil are complex because the objectives of litical and military power of the US and its allies, could
the major states are varied and often contradictory. Until generally be relied upon to deliver. Yes, the "Pax Ameri?
recently, US policy in the oil-rich Middle East has aimed cana remains open to continuous challenge and reversal."5
at dual containment of Iraq and Iran, maintenance of the However, the argument about US-Saudi relations does not
authoritarian regimes of the Arabian Gulf, protection of depend on US imperial control over Saudi Arabia, under?
both domestic and international US oil interests, the con? stood either in terms of territorial domination or direct
tinuation of large contracts for the US defense industry influence over Saudi policy. A shift from a zero-sum direct
and the provision of secure and not-too-expensive crude control (where the powers of the United States and its
oil to allies in Western Europe and the Pacific. Dual con? corporate contractors were exercised at the expense of lo?
tainment, however, has run into increasing opposition from cal states, ruling classes and people), to an indirect, posi?
the European Union and Japan as the latter has supported tive-sum arrangement mutually beneficial to the parties
their own oil companies at the expense of American firms involved is precisely the achievement of US hegemony as
prohibited from action by the US government. distinct from empire.
What price of crude satisfies US interests, the Saudi Nevertheless, larger questions relating to the chang?
Arabian government and the allies? When conflicts over ing nature of US hegemony and the role of oil politics
within it remain. It is in this context that one must lo?
SimonBromley isa senior inInternational
lecturer Political
Economy at the
Univer? cate power and influence in the contemporary interna?
ofLeeds.
sity Heis theauthorofAmerican
HegemonyandWorld Oil (Cambridge:
Polity tional
1991).
Press, political economy of oil. For there is now a very

Middle East Report ? Fall 1998 19

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real challenge to US hegemony and the US role as guard?
ian of the West's oil, although it does not lie primarily in
the sands of Arabia. The key geopolitical shift has been
the resolution and after-effects of the Cold War.6 Four
implications are especially pertinent: First, it has freed
the hand of the US to deploy military power while under?
mining the domestic and international rationale for do?
ing so; second, it has weakened the position of some Arab
states (including important OPEC members, most nota?
bly Iraq) opposed to US strategy in the region; third, it
has undercut the last remaining material and ideologi?
cal bases for planned, statist models of development, in?
cluding those based directly or indirectly on oil rents; and
fourth, it has shifted the competition between the United
States and its capitalist allies into more strictly "economic"
channels, thus complicating US efforts to devise general
strategies of geopolitical and economic leadership.
The US's elevation to sole military superpower status
and the enfeeblement of "radical" Arab regimes has cer?
tainly allowed the US to deploy military power in the
region on an unparalleled scale. Equally, the ascendance
of the market and private property is working its way
across the Middle East now that the protection afforded
to statist models by petroleum rents is falling, which can
only be welcomed in Washington. Against these favorable
shifts, one has to balance the absence of a clear rationale
for intervention and the growing unease of the advanced
capitalist allies about US regional strategy. Although it
is still too early to judge how far the Cold War magnified
the influence of the United States over its capitalist al?
lies in the North and its regional partners in the South,
the fall-out so far has been considerable.7
The Market for Oil
Changing
Simultaneous with post-Cold War geopolitical shifts and
the attendant reduction of US leadership, there has been
a significant evolution of the international oil market.
The combination of uncertainty about US strategy in the
Middle East and the political future of the Gulf in par?
ticular, along with developments in the market, have
raised fundamental questions about the future of the
industry as a whole as well as the place of OPEC (and
the Gulf) within it. This is a difficult area to assess be?
cause it depends on both geology and economics and there
is little agreement between earth scientists and econo?
mists. Broadly speaking, most geologists reckon that with
current prices and technology there may be a peak sup?
ply of world oil of 70-100 million barrels per day (MBD).
It is clear that 5-10 MBD extra capacity could be achieved
in the Arabian Gulf and non-OPEC capacity could also
be raised by 5-10 MBD. Together these give a potential
world capacity of 80-90 MBD by 2000 (in the middle of
the range for peak supply defined by the geologists), so
the industry as a whole could be maturing. Many econo?
mists dispute these claims, arguing instead that techno?
logical progress is continually making oil in the ground
20
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easier to access, effectively raising the level of reserves
available at any given price level, thus weakening the
link between economic growth and the demand for oil.
Together, these factors may extend the lifetime of the in?
dustry into the foreseeable future.
So far, however, neither OPEC governments nor non-
OPEC private capital have fully exploited known reserves.
The area where the cheapest and most productive reserves
lie is, of course, the Gulf and the other Middle East OPEC
members. (The Middle East accounts for 65 percent of
proven reserves, and OPEC's reserves-to-production ratio
averages nearly 90 years.) Yet, even in the Gulf, the capi?
tal needed to increase production is beyond the domestic
budgets of most producers, requiring outside financing
and technical participation. OPEC believes that the West
will have to invest in new capacity since world oil demand
has to be met increasingly from OPEC sources. Economi?
cally, such a strategy certainly makes sense. The problem
is political. As Hartshorn pointed out in the early 1990s:
The capital requirements per daily barrel of output
reported for some of the Gulf producers now appear
to overlap quite significantly the lower figures in
the cost range reported for non-OPEC oil develop?
ment. In nearly all other areas, private oil compa?
nies can get easier terms, including equity interests
in production, than in much of OPEC and almost
anywhere in Gulf OPEC. They may still consider
the other places politically safer, too.8
The political risks have since worsened.
The problem confronting US strategy, therefore, is that
allies who in the past depended heavily on Gulf oil, and
hence on US protection of access to that oil on favorable
terms, may start to look elsewhere, undermining any le?
verage the United States once had and leaving it the pro?
tector of the most closed and brittle societies in the region.
In part, that is why the recent changes in Iran have
proved so destabilizing for US regional strategy and why
post-sanctions Iraq presents such difficulties. Lacking the
close associations with the Gulf states, and less single-
mindedly pursuing military options to the political prob?
lems of the region, the European powers (excluding
Britain), Japan, and now Russia and China may forge
policies substantially independent from those favored by
Washington. Specifically, they may seek non-Gulf oil sup?
plies within OPEC and non-OPEC supplies where pos?
sible. If the geopolitical and geographical structure of
international oil fragments in this manner, what lever?
age can the United States derive from its friends in the
Gulf? By contrast, if the world is driven back to OPEC,
and thence to Gulf OPEC (Kuwait, the UAE and Saudi
Arabia in particular), then Saudi strategy will continue
to play a crucial role. In that case, contra Vitalis, US-
Saudi connections will remain important for the nature
of the oil market?subject to the present regime holding
onto power in Riyadh.
Middle East Report ? Fall 1998
Whither OPEC?
The future of OPEC hinges upon the changes in the world
market for oil that have occurred since OPEC's "rise,"
between 1973 and 1986. The oil industry has grown rap?
idly throughout the 20th century; between 1913 and 1948
the annual growth rate of production was about 6.5 per?
cent, and from 1948 to 1973 (the post-war boom) the an?
nual growth rate was 7.5 percent. The end of the post-war
boom, however, caused a fundamental shift in the pat?
tern of demand. In 1979 production was only 12 percent
higher than in 1973 and by 1985 it was 12 percent lower
than in 1979. By 1991-92 production had just recovered
to the 1979 level. Since then the industry has seen a
steady but lower increase of around two percent annu?
ally, falling to just over one percent with the recent eco?
nomic slowdown and the crisis in the Asia-Pacific region.
Meanwhile, total energy demand faltered during the re?
cessions of the 1970s and early 1980s and then recov?
ered, currently expanding at an energy-ratio
amount of energy used per unit of GDP) of less than
one-to-one in the OECD bloc, and somewhat more than
this in the developing world. Whether the demand for price of oil in 1986. On the supply side, the key changes
oil will achieve earlier rates of ex?
Table 1
pansion remains a basic yet un?
answerable for the World Oil Production
question
future of the geopolitics of oil. 11111111
There is a paradox at the heart
of the modern international oil in? UnitedStates
dustry: despite the fact that oil Hi
markets have become structurally
Mexico
freer and more transparent since
the 1970s, a major imbalance re?
WBBBB^SSSk
mains between supply (and re?
FormerSoviet Union,excludingRussia
serves) and demand: the world
demand for oil does not absorb all
the supply that is on offer,yet oil
Iraq
prices do not fall far enough so that
demand increases to match supply.
IBBE
Moreover, much of the new capac?
Saudi Arabia
ity developed since the 1970s is
higher in cost than most of the ex? IIIBBIIMB
isting under-utilized capacity, and Rest ofthe Middle East
most of the production "shut-in"
(i.e., proven and available re? HHHHI
serves which are not being used)
Europe
during the 1980s and 1990s is of
lower operating cost than much of
the production taking place else?
Asia Pacific
where. Finally, capacity in low-
cost regions could be expanded
more cheaply than most new post- Total OPEC
OPEC developments, yet total ca?
pacity in low-cost regions was
only about half utilized in the Total
1980s and early 1990s.9
What explains the slowdown of Source:BP Statistical Review ofWorld Energy, 1998.
oil expansion? Why does the demand for oil not match the
supply? Why has high-cost oil been displacing low-cost sup?
ply? For many analysts the story of oil between 1973 and
1986 was the story of the rise and (partial) fall of OPEC.
OPEC and the "energy crisis" became synonymous. By ar?
tificially restricting supply, OPEC raised the price of crude
to such an extent that it was unable to sell even the amount
that it wanted. High prices kept high-cost oil outside OPEC
in business. The story since 1986, when Saudi Arabia dra?
matically increased production to lower prices and increase
the demand for oil, has been one of perpetual disarray
within OPEC as attempts to restrain production have failed
and the demand for oil has remained weak.
Certainly, oil price increases in the 1970s and the per?
ceived instability of the main source of supply, the Middle
East, reduced the demand for oil and encouraged the search
both for greater efficiency of energy use and for alterna?
tive sources of supply (whether non-OPEC oil or other fu?
els). However, energy demand (and energy ratios) were
(the falling in the OECD bloc because of a shift away from en?
ergy-intensive manufacturing to services. This trend pre?
dated the oil crisis and continued after the fall of the real
since 1973 have had even less to
do with OPEC. The two largest
changes in supply during the
1970s and '80s were in the US and
Russia: production in the US
10.9
peaked in 1970, tapered off at a
nils lill.,, slightly lower level for nearly two
!Ill fiIB
decades and then began to fall in
4.9
the late 1980s. Soviet production
continued to grow until the early
1980s, then flattened out. Oil pro?
1.7
duction in the Soviet successor
l^llllllliffl states may now have peaked?at
ilillilllt-lift
least for the medium-term. To?
T7
gether, these two countries ac?
iHiiiii itiiiliii SS counted for 40 percent of the
growth of world oil production in
12.9
the post-war period. In addition,
the largest newcomers to non-
3.7
OPEC production were in the
North Sea?Alaska, Siberia and
rn the new oil provinces of Mexico?
all projects that began before
9.4
1973. Thus, much more has been
li going on than the actions of, or
within, OPEC. In any case, the
10.5
price increases in the 1970s were
iSli not solely due to OPEC.10 Finally,
as recent events have once again
41.5
demonstrated, OPEC does not and
jilli!
cannot act as a cartel to rig the oil
iooJ market. When it attempted to do
so in 1982-1985, the result was a
signal failure.11

Middle East Report ? Fall 1998 21

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 Disarray within OPEC is more or less a constant. Even aggressively low price for crude at the expense of higher-
Saudi-Iranian cooperation cannot stabilize the market cost (and non-OPEC) producers would probably be met
because no one, not even the Saudis, can afford to drive by tariffs to protect "security of supply" and would not
the price low enough to displace the higher cost produc? be passed on to consumers, since consuming states would
ers of oil and other energy sources. As long as higher- likely raise taxes on refined products. (Currently, the
cost producers can survive in the market, OPEC (and relatively high-cost producers of North and Central
Saudi Arabia in particular) cannot control the industry. America?the United States, Canada and Mexico?are
To understand the phenomenon of continuing over-sup? producing nearly as much oil as Gulf-OPEC countries.
ply in the oil market we must ask why the comparative See Table 1.)
costs of oil production are not properly reflected in crude
oil prices, and why the prices of oil products are not a And the Gulf?
simple function of crude oil prices and technology. The
single most important technical factor influencing the The global oil market is characterized by structural over?
cost of crude oil production is the productivity per well. supply. Low-cost producers cannot afford to drive the
But the productivity per well is itself a function of price, high-cost suppliers from the market, nor do they have
through the impact of price on the choice of technique. any real incentive to do so. The coincidence of interests
Thus, high-productivity (low-cost) oil will not automati? between the production and marketing strategies of the
cally displace low-productivity (high-cost) oil at prices Gulf states, multinational oil interests and the govern?
above the competitive level. Low-cost producers will sim? ments of the consuming nations constitutes the material
ply earn larger rents. In addition, since the costs of oil basis of US-Saudi relations. With an historically weak
production are considerably smaller than the start-up growth of demand, at any price significantly above the
costs (finding oil and sinking a well are costly; running running costs of the existing high-cost capacity, OPEC
an existing well is cheap), new sources of low-cost oil will has little control over the market and the Saudis have
not generally displace existing high-cost sources. Even little leverage within OPEC. On the other hand, if and
given these facts, one still must ask why low-cost pro? when demand picks up, and as non-OPEC sources di?
ducers do not increase production in order to increase minish, then OPEC and Saudi influence will increase.
their market share at lower oil prices. The simple an? Whether the Washington-Riyadh axis is still in place
swer, noted above, is that they cannot afford to do so. when that happens remains to be seen. As the Iranian
There is also a more subtle strategy at work, however, Revolution demonstrated, no amount of external support
related to the production decisions of low-cost producers can indefinitely maintain a regime that has lost its do?
with large reserves and high reserve/production ratios? mestic legitimacy. Thus, rather than the closing of the
essentially the Arabian Gulf producers. Arabian frontier to American imperialism so vividly de?
Before turning to the politics of Gulf producers, it is scribed by Vitalis, it is the broader shifts in geopolitics
important to note that the prices of oil products do not (the end of the Cold War and the erosion of US hege?
simply reflect the price of crude oil and the technology mony) and the long-term evolution of the oil industry that
that turns crude into products. Taxes imposed on both have?for the moment at least?side-lined the US-Saudi
the products of crude oil at the point of sale and the relationship in the political economy of international oil.
activities of firms that transform crude into products By the same token, falling production outside OPEC
also play a role. This means that rents generated in the would quickly reinstate the importance of America's
oil sector accrue not only to the producers of crude but friends in the Gulf, and that is why?for Washington at
also to private (generally multinational) firms and gov? least?they remain so important. ?
ernments in the main consuming states. Struggles over
the size and the division of rents involve the actions of Endnotes
all three parties?producing and 1 SeeAmerican Hegemony andWorld Oil(Cambridge: Press,1991),
Polity chapter6.
states, multinationals
2 Robert "TheClosing
Vitalis, oftheArabianOilFrontier andtheFuture ofSaudi-American
consuming governments?not simply the decisions of Relations," MiddleEastReport 204(Summer 1997).
producers. Put another way, oil rents may be appropri? 3 Ibid.,p.19.
ated at any point in the chain from production to final 4 Ibid.,p.16.
sale of refined products in the form of producer-rents, 5 Ibid.,p.20.
6 Someofthiswasanticipated inAmerican Hegemony andWorld OilbutI didnotforesee
industry surplus-profits and government taxes. This is anything likeitsfulleffects,
anditisprobably stilltooearly todoso.
why some Gulf producers, notably Kuwait and Saudi 7 Fora thoughtful reflection onthesequestions, see RonaldSteel,Temptationsofa
Superpower (Cambridge, MA:Harvard UniversityPress,1995).
Arabia, have moved downstream and established a pres?
8 J.E.Hartshorn, OilTrade: PoliticsandProspects (Cambridge:Cambridge University
ence in Western (and now Asian) consumer markets. This Press,1993), p.66.
gives them similar interests in pricing as Western oil 9 Foranauthoritative analysis ofthepost-OPEC oilindustry throughtotheearly1990s,
for their inte? seeibid.
firms, as they seek higher value-added
10Fora fullanalysis, seeAmerican Hegemony andWorld Oil,chapter4.
grated petroleum concerns, rather than the highest pos? 11 Forthebestaccount seeIan Skeet,OPEC:Twenty-five YearsofPricesandPolitics
sible prices for crude oil. Financial investments from (Cambridge: Cambridge UniversityPress,1988).Alsohelpful onOPECisPierre Terzian,
crude profits further cement this linkage. Moreover, an OPEC:TheInsideStory (London: ZedPress,1985).

22 Middle East Report ? Fall 1998

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