By Ben Goldson
Having agreed to restrict production in recent years, it appears that the Kingdom of Saudi Arabia and the Russian Federation have been racing to outdo the other in crashing the price of oil.
Having agreed to restrict production in recent years, it appears that the Kingdom of Saudi Arabia and the Russian Federation have been racing to outdo the other in crashing the price of oil. At one point, two decades of increases had been wiped out, with prices regaining some of the lost ground in early March with claims by American President Donald Trump that both sides were working towards reinstating the production cuts. Beyond that however, there has been little more detail, with Russian denials of a supposed phone call between Vladimir Putin and Mohammed bin Salman adding to the confusion.
The turmoil itself stems from a failed meeting of the Organisation of the Petroleum Exporting Countries (OPEC), also attended by “OPEC+” countries such as Russia. In light of stalling demand amidst a coronavirus pandemic and resulting lockdowns in countries such as China, the Saudi delegates called for further limits on oil production, with OPEC members cutting their output by one million barrels per day while outsiders such as Russia committed to half that. In response, their counterparts from the Federation walked out. A day later, Saudi Arabia tore up the OPEC deal, vowing to ramp up production from around ten million barrels per day to around twelve in a reminder of the Kingdom’s unmatchable ability to churn out the black liquid which continues to be the world’s leading energy source. Although Russia can only muster an increase of a mere 300,000 barrels, its oil industry is still judged to be in a better position than that of the United States. Having recently pushed itself into a top exporter off the back of a heavily leveraged shale oil boom, American companies are dependent on prices continuing to grow, or at least remaining stable, as opposed to suddenly collapsing due to geopolitical manoeuvring, which shows no sign of ending soon.
In contrast, petroleum in the United States remains in the private sector, forcing its government into a largely observer role in the events as they are unfolding. The situation is something of a contrast to the mid-20th Century, when the five American companies formed by the breakup of Standard Oil shared much of the world’s oil reserves along with the Anglo-Iranian Oil Company (AIOC) and Royal Dutch Shell. During the early decades of the Cold War however, the grasp of these seven “majors” on the international petroleum market would be slowly wrestled away from them by OPEC and its member nations, who are estimated to hold more than three-quarters of global oil reserves.
According to its official history, the first steps towards the group’s creation were taken in 1949 on the initiative of the Venezuelan government, who invited representatives of Iran, Iraq, Saudi Arabia and Kuwait to discuss working together against the influence of the seven majors. A key OPEC member outside of the Middle East, Venezuela had challenged the status quo early with the Hydrocarbons Law of 1943, which demanded half of the profits generated in what was then the third largest oil exporter in the world. In an era of decolonial nationalism, the profits and power that came with the petroleum trade appealed to governments at the periphery of the global system looking to assert themselves. While some of these countries were nominally independent, the influence of the colonial powers had forced them into signing into unpopular trade agreements heavily in favour of majors such as the AIOC, whose property would be dramatically nationalised in 1951 by Iranian Prime Minister Mohammad Mosaddegh.
Ousted a few years later, in part through the machinations of Western intelligence agencies, Mosaddegh was kept under house arrest for the rest of his life by Shah Reza Pahlavi, who soon reached a new agreement with the majors. Although the Shah was certainly friendlier to their interests, the threat of further turmoil remained, with the downfall of the relatively moderate Mosaddegh potentially driving supporters towards groups such as the pro-Soviet Tudeh Party. The Shah was granted what appeared to be a better deal, similar to that of Venezuela or nearby Saudi Arabia, which remained weighted in favour of the purchasers. At the same time, this was a vital symbolic victory for the Shah, as well as an acceptance by the majors that they could not simply dictate terms any more. At the same time, they had profits to make, working as one to cut their purchasing prices for a barrel of crude by 10% in 1959. In response, representatives of Iran, Kuwait, Saudi Arabia and Venezuela met a year later with their Iraqi hosts in Baghdad for a meeting which saw the founding of OPEC. Soon joined by a range of other countries such as Qatar and Indonesia, they would slowly price the global petroleum trade out of the grasp of foreign executives and their contacts in the intelligence services, a process finally completed in the 1970s.
An early ally of OPEC was Italian civil servant Enrico Mattei, head of the Ente Nazionale Idrocarburi (“National Hydrocarbons Authority”), a state-owned petroleum monopoly. Appointed in 1953, he began offering relatively preferable deals to developing nations eager to develop their own oil industry without having to capitulate to the majors, labelled by Mattei as the “Seven Sisters” in a reference to Greek mythology. Starting with the Nasser government in Egypt, Mattei soon secured exploratory concessions from similar countries, with major wins being the successful courting of Iran in 1957 and a breakthrough agreement with the Soviet Union a few years later. By 1962 however, Mattei was dead, his life cut short by a plane crash. Ruled an accident, rumours of a conspiracy soon proliferated, heightened by the murder of investigating journalist Mauro de Mauro. Whatever the reason for Mattei’s death, the overall momentum of OPEC would not be stopped, with American financier Armand Hammer entering roughly the same space left by the Italian. Having made his wealth in the 1920s handling imports from the Soviet Union, the story went that Hammer was looking to invest in a tax haven and cut a couple of cheques to energy minnow Occidental Petroleum in a last-ditch attempt to explore a site considered to have been tapped out. The drilling revealed otherwise, with similar successes in places such as Libya propelling the company into competition with the Seven Sisters and Hammer into the heights of American society.
At various times in his life a reputed KGB spy, major donor to Richard Nixon and close advisor to Al Gore Sr, Hammer led Occidental until his death in 1990, playing a key role in integrating otherwise hostile elements into the global market. In response to accusations of espionage, Hammer consistently maintained his capitalist credentials, claiming that his highly lucrative deals were helping to bring the world together in a shared material interest. Abroad, the billionaire became known for his citizen diplomacy, unsuccessfully nominated several times for the Nobel Peace Prize by international friends such as Israeli Prime Minister Menachem Begin. His beliefs in the integrationist nature of capitalist globalisation would be challenged however, with the outbreak of war between forces of the multinational Arab League and the State of Israel in 1973. Alongside the war, a recently formed Organisation of Arab Petroleum Exporting Countries imposed an embargo on key supporters of Israel, such as the United States, along with production cuts, which had hiked the price of oil by 400% by the time it was lifted in March 1974. By that point, the war had been over for months, a decisive victory for the Israelis despite the OAPEC embargo. At the same time, the participants had shown what their unity could accomplish, much less the larger OPEC group, with its various state-owned enterprises finally overturning the rule of the Seven Sisters in the coming years.
Amidst its dramatic rise, the question of exactly what OPEC was came into question. Labelled a cartel by critical outsiders, the group itself preferred to be described as a counterweight to the Seven Sisters. Scholarship on the question is also divided, with skeptics of the cartel thesis pointing to the frequent hostilities between its membership. Along with smaller countries quietly producing beyond the agreed upon limits, politics, at both national and international levels, have complicated matters. Outside of the usual squabbles around money and prestige, full-scale war between OPEC members is not unheard of. As early as 1979, the group’s cohesion was disrupted by the downfall of the Shah, followed by a consolidation of power by Islamist figure Ayatollah Khomeini and an invasion by neighbouring Iraq, which soon bogged down into costly stalemate. With peace declared after around a decade of conflict, Iraqi President Saddam Hussein then turned to another OPEC member, Kuwait, charging them with stealing their oil. Unlike his war against the Islamic Republic of Iran, Hussein’s aggression against the Emirate of Kuwait drew a quick response from the United States and its allies, which came back to finish him off during the Iraqi war.
For the unfolding decades, Iran filled the role of regional bogeyman, with Venezuela taking a similar route under Hugo Chavez. Still however, the oil continued to flow. Throughout protests, sanctions and uprisings, production rose sharply, resulting in an unwelcome glut for producers. With prices crashing, OPEC was able to reach an unlikely agreement with Russia to limit supply, a major win for the group. Four years on, however, the deal is in tatters. Oil prices are crashing amidst a wider economic slowdown caused by a runaway pandemic, as the two rival titans of the industry, Saudi Aramco and Rosneft, gear up for a conflict of unknown length. That being said, it clearly has to end at some point, with the national governments ultimately orchestrating events facing a looming deficit in their budgets caused by billion-dollar holes where oil revenue was supposed to go. In contrast, the internal machinations which have brought them to this point are less apparent. For Russia, their initial refusal came after the United States introduced various sanctions, including on Rosneft itself, in response to their continued trading with Venezuela’s own nationalised petroleum company, PDVSA. Now, America’s own oil industry is preparing for its next rounds of loan payments, a potentially grim prospect for the national economy. While Russia’s disregard for the domestic energy sector of its traditional enemy is understandable, Saudi Arabia remains a relative friend to the United States, working closely with the current administration of Donald Trump. At the same time, the two countries have been bound by mutual interest but it’s unclear if this will continue. However, the United States is in a weak position. Built off speculation and a “fracking” extraction method which faces a groundswell of opposition, the shale boom is a prime example of what sets them apart from the other two, particularly in terms of energy policy.
Ben Goldson is a news and current affairs broadcaster at 95bFM radio in Auckland.
Disclaimer: The ideas expressed in this article reflect the author’s views and not necessarily the views of The Big Q.
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