Crude weaponry

  • ‘Oil is always the answer’

Not that oil is ever not smack at the centre of global politics, but three recent developments serve as a crude reminder of the underground puppeteer’s clout. With US renewing sanctions on Tehran, curbing oil imports from Iran, crude could surge towards $100 once again. Meanwhile, Saudi Arabia that grew so worked up over Canadian questions over human rights activists so as to not only send their ambassador back, but also recall even Saudi students and patients from Canada, has reassured Ottawa that oil supplies won’t be affected.

In our neck of the woods, caretaker minister for maritime affairs and foreign affairs, Abdullah Hussain Haroon, made a bit of a booboo when he got carried away while addressing the FPCCI saying that ExxonMobil is on the verge of extricating oil reserves larger than Kuwait’s near the Iran-Pakistan border. A clarification, of course, ensued.

While the three developments covered a wide range of geopolitical questions, at the heart of the three was oil – more specifically its price. Even though for Pakistan the veracity of the caretaker minister’s outrageous claims would’ve provided solution for all of its fiscal problems – past, present and at the very least short-term future – for the world, discovery of such massive reserves would’ve brought the think-tanks to the drawing board vis-à-vis crude price stability.

This quest of over a century and a half has been chronologically narrated by Robert McNally, an energy consultant and adviser to then President George W Bush, in Crude Volatility: The History and the Future of Boom-Bust Oil Prices. The book is heavily inspired by Daniel Yergin’s work – like pretty much every modern-day scholarly effort – and regularly cites it as well. But while Yergin has covered pretty much every aspect of oil, Crude Volatilityis dedicated in its entirety to the pricing.

The book starts with the Kerosene Era (1859–1911) beginning with the scramble to drain subterranean deposits and the famous analogy of thirsty boys, straws, and limited lemonade. The first successful attempt at monopoly was completely by oil magnate John D Rockefeller and Standard Oil, giving an early glimpse of why not just crude volume but also its transportation has been politicised over the decades since.

The global economic crisis at the end of the naughties saw crude price skyrocket, at it touched $140 in the summer of 2008, after crossing $100 for the very first time in the February of the same year

‘…in 1869 and 1870 Rockefeller, possessing “ceaseless enterprise, ceaseless vigilance, and ceaseless economy,” set about an audacious plan to dominate the entire oil industry. The strategy was based on nearly complete monopolisation of refining and cooperation with, if not direct control of, transportation.’

The next attempt at managing the oil market was the Texas Era [1934-1972], which overlapped with global demand and supply. Similar to how the rise in oil production had in the past increased the use of kerosene for illumination and gasoline for transportation, the increase in supplies from around the world – most notably the US, Russia and the Middle East – further ingrained oil as an inalienable product of the modern day life in the 50s and 60s.

“In the oil market, supply often created or facilitated demand. Both epochal transitions were associated with relative market stability arising from the firm hand of industry, governments, or both on the supply of oil.”

What followed was the decade that truly brought the extent of how oil manipulation can wreak havoc with global economies, as OPEC reshaped the oil word. Similar to how the US Supreme Court pulled the curtain down on the Rockefeller era, OPEC completely dismantled the oil game as it had been known till the start of the 70s.

It began with the 1973 oil embargo, and culminated in the Iranian revolution, as the decade epitomised and formally kick-started a new era of crude politicisation.

“The turnabout forced OPEC to become a real cartel by restricting supply, as founder Pérez Alfonzo had envisaged. The easy days of simply announcing price increases were over. Now, OPEC had to follow in the footsteps of Rockefeller, the TRC, and Seven Sisters by allocating market shares to members, and holding up prices”

The decade that followed saw wars among the OPEC members themselves as Iraq fought Iran and then Kuwait whose sovereignty Baghdad never recognised and considered it its own province. This epitomised the volatility within the oil exporting group, which meant that it never really functioned as a single unit.

The differences ranged from longstanding multi-pronged rivalries which Saudi Arabia and Iran continue to live out, to differences over the policymaking itself. For instance, while Venezuela had desired a cut off of supplies and increase in prices when OPEC was being formulated, Iran wanted maximum oil export.

“Most OPEC countries cheated, producing at their maximum level. Generally, only Saudi Arabia withheld producible oil from the market. But OPEC got lucky as supply outside the organization—in Mexico, the Soviet Union, and the United Kingdom—slipped in the late 1980s.”

Ironically, a major problem for OPEC in the 1990s was dealing with Venezuelan desire to go for all-out production and quotas, in complete contrast to its founding strategy of collective quotas. A decade that was largely dedicated to recovering from the previous decades culminated in a new price band mechanism in March 2000.

With the target range being $22-28, members also agreed to quota adjustment.

‘…quotas would rise by a total of 500 kb/d if prices exceeded $28 for 20 consecutive days, and would be reduced by the same amount of if prices fell below $22 for ten consecutive days. OPEC did not intend for this adjustment factor to work wholly on an “automatic” basis, however.’

The global economic crisis at the end of the naughties saw crude price skyrocket, at it touched $140 in the summer of 2008, after crossing $100 for the very first time in the February of the same year. Meanwhile, Saudi Arabia refused to replicate its role as the swing producer from the 1980s, which meant that oversupply of oil had no one willing to cut production in a bid to stabilise the prices, resulting in the instability of the decade that followed.

Crude Volatility studies market developments throughout oil history through the many forces that determine crude price, including natural, industrial and political factors. And through lessons from history it poses questions about the future – some of which it endeavours to answer – and helps us understand geopolitical developments hogging the news every day.