Oil geopolitics


In September 2000, Stratfor noted that oil's strategic importance in energy-efficient economies had declined over the preceding three decades. As oil's importance changes across the globe, relations between oil producers and consumers and among consumers will evolve as well. Two tiers of consumer groups comprise the relationships between consumers and producers. The first tier is comprised of information and technology-based economies, such as the United States, the United Kingdom, Canada and Australia. The second tier includes the continental European states, Japan, Brazil and the developing economies of Asia, which are vulnerable to energy costs. The first tier is nearly self-sufficient in oil, with the exception of the United States, and has made significant progress in the last 20 years in overall energy efficiency. Oil producers will lose some of their political leverage as first tier countries depend less on oil imports.

Any structural change in oil markets reverberates throughout the world, creating clear-cut winners and losers, and in 2014 oil was the most geopolitically important commodity. Countries that consume large amounts of energy were able to cope with oil prices above $100 per barrel between the beginning of 2011 and mid-2014 while most of the developed world attempted to emerge from financial and debt crises. The US recorded the largest increase in oil production in the world, becoming the first country ever to increase average annual production by at least 1 million barrels per day for three consecutive years.

In 2015, the situation changed. Russia’s oil production in September hit a new record for the post-Soviet era, at 10.74 million barrels a day (mbd), according to Rusmininfo. Output was up by 0.4 percent compared to August. The previous best performance was recorded in March at 10.71 (mbd).

On Sunday Oct. 5, the world’s largest crude exporter, Saudi Arabia, announced big cuts in November oil sales to Asia and the US, claiming that it wanted its production to stay competitive with rival suppliers. In a list of official prices sent to customers, state-owned Saudi Aramco cut the price of light crude deliveries to its main market, Asia, by $1.70 a barrel. The company also cut its prices for heavy oil by $2 a barrel to the Far East and by 30 cents a barrel to the US.

This slash in the oil price were followed by cuts which were implemented last month by Iran, Iraq and other Middle Eastern countries.

OPEC’s kingpin Saudi Arabia is the main stumbling block for the cartel. Last month OPEC, which is expected to boost crude production despite the glut in the global oil market, said it might cut output. However, a change of policy isn’t possible without key producer Saudi’s approval, and the Kingdom has consistently been refusing to cut output.

Global oil prices fell to their lowest level in six years amid a global supply glut, plunging to below $50 per barrel in September from over $100 last August. On Monday, Brent futures for November were trading 54 cents higher at $48.67. Futures for US West Texas Intermediate (WTI) were also up 51 cents at $46.05.

A sustained period of lower oil prices could provide some relief to these countries. Major oil producers, on the other hand, grew accustomed to high oil prices in the 2000s and early 2010s, often using them to underpin their national budgets. Sustained low oil prices are causing these oil producers to rethink their spending. However, we start our analysis by summarizing the history of petro-politics in order to better understand the roles and interests of its key players.

The early history of oil

The useful properties of oil have been known since ancient times. Oil coming to the surface was called “naft” by Iranians, “neft” by Turks, naphta by Greeks, and the Romans called it “bitumen”. Later the word “petroleum” emerged as a fusion between two words: the Greek word “petros” (stone) and the Latin word “oleum” (oil).

In about 4,000 BC, the ancient Egyptians, who inhabited Mesopotamia, and the inhabitants of the Middle East collected oil floating atop the surface of water. It was used to build homes, construct ships, for lighting, and in embalming. In the 7th century BC "Greek fire", one of the most feared and revered weapons of the Middle Ages, was invented. It could not be put out with any water or sand. Although modern scholars believe that it consisted of oil, tar, saltpeter, sulfur and rosin, its secret was lost with the fall of Constantinople.

In the Middle Ages, oil was actively used in medicine. In the middle of the 19th century in the US, a refined oil called "Seneca Oil" or "butter mountain" was proposed as a remedy for headaches, toothaches, deafness, rheumatism, dropsy, and was recommended for healing wounds on the backs of horses and mules. At first, oil was only collected in places where it appeared on the surface of the Earth. Later people began to dig wells in order to extract oil products.

Industrial oil production, according to most sources, burst into existence on August 27, 1859. This is the day when, for the first time, oil was produced with a fixed flow rate at the Drake Well in northwest Pennsylvania, USA. There, those who had drilled water wells often came up with oil. So, Edwin L. Drake, a former railroad conductor who became an agent of the newly formed Pennsylvania Rock Oil Company of Connecticut, together with George Bissel, a New York lawyer, became the founders of the modern oil industry when they struck oil with a purpose-built wooden derrick.

The news about the discovery of a new way to extract oil by drilling wells spread throughout the town of Titusville and beyond like wildfire, attracting prospectors from around the country. The importance of oil as a raw material for the economy and the war was originally limited to lamps and preferable, from a humanitarian standpoint, to whale oil; however, it grew rapidly in the 20th century. Fleets of locomotives and ocean-going ships switched from dirty coal to 'clean' diesel engines everywhere, but there was more to come as horses gave way to automobiles. The number of vehicles produced and sold amounted to tens of millions, and gas stations - tens of thousands. With electrification came power plants, which consumed more and more oil.

There were several main places where oil was produced at the beginning of the 20th century: over 60% came from the US, while the rest originated in Russia, Canada, Venezuela, Indonesia, Romania and Austria-Hungary.

In the struggle for the expanding market, several kerosene giants had grown: Standard Oil, the Netherlands-based company Royal Dutch (which controlled oil production in Indonesia), and the British company Shell, which first took over the Russian experience in oil transport - tankers, and through this was able to oust the Rockefeller company in the world market. In 1907, Royal Dutch and Shell merged, but then the dual power failed.

In 1908 oil fields were discovered in Iran, and the market obtained a major new player – the Anglo-Persian Oil Company (in 1954 renamed British Petroleum). Meanwhile, in the United States, John D. Rockefeller had come to dominate the market by monopolizing the refining industry; the unprecedented wealth and power of the oil baron and Standard Oil Company had come at the cost of dozens of smaller competitors, many of whom were left penniless. Rivals were shut out of the industry, as Standard Oil not only controlled all the refineries, but established secret arrangements with all the major railroads. For many, this represented a new, Darwinian face of capitalism which was incompatible with American and Judo-Christian conceptions of good business and had the potential to threaten the social fabric of the republic. A courageous journalist, Ida Tarbell, took on Standard Oil with a scathing series of articles condemning Rockefeller. Her work contributed to a wellspring of anti-monopoly sentiment, and in 1911, the United States began an anti-trust process by which Standard Oil was subdivided into 38 independent companies.

By the end of the 1920s, the world's major players had changed – alongside Royal Dutch Shell and British Petroleum, the luckier fragments of the Rockefeller empire had made names for themselves: Chevron, Exxon and Mobil, as well as post-Rockefeller companies which had arisen and become wealthy in the oil fields of Texas: Gulf Oil and Texaco.

The 1920s were a period of struggle for the control of new fields and markets. In 1928, in the Scottish city of Achnacarry, three of the world's largest oil companies – Royal Dutch Shell, the Anglo-Persian Oil Company and Chevron – signed an agreement which defined joint activity to control oil production and preserve the market share of the existing players in the industry. Soon they were joined by Mobil, Exxon, Gulf Oil and Texaco. These formed the “Achnacarry cartel”, which in the 50's became known by the name “Seven Sisters” – in the manner of the Italian Mafia. For nearly 40 years, the group was in full control of the oil market, defining the rules of the game and the pricing environment.

The Sisters were also interlocked with eight of the largest banks. They controlled 70% of the US coal supply, which was used by the Germans during World War II to make pollution-free synthetic fuel. Their philosophy was if you “mine it now, it's coal; if you mine it later, it will be like gold.”

Today the Seven Sisters have become Five. In 1984, Chevron bought and merged with Gulf Oil. Also in 1984, Texaco bought Getty Oil; however, because Getty had already agreed in principle to a deal with Pennzoil, Pennzoil turned around and sued Texaco for breach of contract, and won an award of $10.3 billion, which placed Texaco on the precipice of bankruptcy. After that Pennzoil agreed to a payment of $3 billion to settle the matter, which forced Texaco to sell off many important assets, such as refineries that were sold to the Saudis. Texaco was no longer a viable member of the cartel. While the power of Texaco diminished, British Petroleum's increased in 1987, with the purchase of the remaining 45% of Sohio (Standard Oil of Ohio), that they didn't already own.

The Second World War finally identified the paramount importance of oil. When in 1940 the German tank crews within a matter of days defeated the French army, it was clear that now wars would not only be won by men and equipment; fuel was a primary concern. The Battle of Britain's dogfights couldn't have been won by the British without 100 octane US aviation fuel, which put the British fighters on par with the Luftwaffe. Coal was still the main energy resource in general, but oil was more important for the war. Without it, victory was absolutely impossible: Hitler had hoped that by taking Stalingrad he would secure access to the Soviet Union's Azeri oilfields. Additionally, allied bombing had destroyed Germany's synthetic fuel-making and oil refining capabilities. This bombing, in turn, was only possible because the Luftwaffe lacked the fuel to fight the Allies in the air.

In describing why Germany lost the war, General Lieutenant Adolf Galland, a Luftwaffe general and flying ace who served throughout the Second World War in Europe said, "In my opinion, it was the Allied bombing of our oil industries that had the greatest effect on the German war potential. Even our supplies for training new airmen were severely curtailed--we had plenty of planes from the autumn of 1944 on, and there were enough pilots up to the end of that year, but lack of petrol didn't permit the expansion of proper training to the air force as a whole." Ultimately, in World War II, a coalition of countries that had access to oil resources defeated a coalition of countries with very limited access to them.

The oil crisis of the 1970s

The period from 1967 to 1979 was a hard time with respect to energy issues since problems in the Middle East caused a lot of trouble for oil-importing countries. At that time, the consumption of oil by the US and other Western countries was steadily increasing. Correspondingly, their dependence on external supplies was also rising, which eventually led to a crisis. The essence of the crisis was the fact that oil prices in the US and some European countries were quadrupled due to an embargo imposed by Arab oil producers in the wake of the the Yom Kippur War. As a result, a lot of problems arose in consumers’ lives, the automotive industry, the labour-market and oil-importing economies, altering international relations.

There is an opinion that the crisis was caused by the interrelation of three factors: the balance of supply and demand in the international economy, the political situation on an international scale, and political situation at the regional level of the Middle East . Apart from these general factors, there was an immediate cause of the crisis – namely, the Yom Kippur war. Since 1948, when the United Nations General Assembly voted to partition Palestine into independent Arab and Jewish states, a series of local attacks took place on that territory that soon developed into full-scale conflicts. The Yom Kippur War that began in early October 1973 was the fourth Arab-Israeli conflict. The Soviet Union supported Egypt and Syria, while the USA began to resupply Israel. In order to boycott the United States and punish them in response to their decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations, the members of the Organization of Arab Petroleum Exporting Countries (OAPEC) made a decision to reduce petroleum production and proclaimed an embargo on oil shipments to the US. Moreover, the embargo was also extended to US allies that supported Israel, including the Netherlands, Portugal, and South Africa. The embargo both banned petroleum exports to the aforementioned countries and introduced cuts in oil production. The embargo did not end until the Syrian-Israeli disengagement in March 1974. However, even after that oil prices remained high, and the effects of the energy crisis lingered throughout the decade. As a result, a decades-old pricing system was largely destabilized.


The Organization of Petroleum Exporting Countries (OPEC) was created at the Baghdad Conference in Iraq in September 1960. There were five founding members of the organization: Venezuela, Saudi Arabia, Kuwait, Iraq and Iran. Later these states were joined by eight other countries: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, and Gabon. Ecuador and Gabon, however, withdrew from the organization in 1990s.

OPEC was the brainchild Venezuela’s Energy and Mines minister Juan Pablo Perez Alfonzo, who decided to create an opposition power to the Seven Sisters, the Seven Anglo-American oil companies which controlled the petroleum industry at that time. As the global oil market tightened in the beginning of the 1970s, OPEC gained more chances to implement their political and economic ambitions. This was most acutely realized in the 1973-1974 oil embargo. Due to the embargo, oil prices in the Western countries jumped from about $3.00 a barrel before the war to $11.65. It was an immediate effect of OPEC's policy of restriction, but there was a prolonged effect as well. So, as a result of the 1973 “oil shock”, the economies of many Western countries underwent a traumatic economic decade of 'stagflation' (economic stagnation coupled with price inflation). Moreover, the crisis marked the beginning of a new era in international relations. Third World states realized that they could use their natural resources, specifically oil, as a weapon in both political and economic situations. As President Jimmy Carter stated, the oil situation in the 70’s was “the moral equivalent of war.”

Shale oil and shale gas

The beginning of the 21st century has been marked with attempts to find alternative sources of energy. Some believe the “shale revolution” is an American invention aimed at driving Russia out of the world energy market. Its promoters claim that shale oil reserves and natural gas production can secure energy independence for the US and other countries going forward. Oil shale refers to “any sedimentary rock containing various amounts of solid organic material that yields petroleum products, along with a variety of solid by-products” . Oil shale can be processed to generate oil similar to oil pumped from conventional oil wells; however, this process is more complicated and expensive than conventional oil recovery.

The 1970s energy crisis stimulated interest in the development of better oil shale technology. Relatively large-scale production of oil shale was initiated in the United States by George Mitchell and Tom Ward in the 1980s. The first large-scale production of oil shale was started by the Devon Energy company in the beginning of the 2000s. On of the main difficulties related to oil shale and gas is the specific and costly technology required for their extraction from the layers of earth. Moreover, unlike “black” oil and “blue” gas that are usually simultaneously produced, shale oil and gas have separate basins. This also raises the cost of shale energy products. Due to this, it is hard for them to compete with conventional sources of oil and gas. One more problem is gas composition: as for the shale one, there is a bigger share of nitrogen that is just ballast. So, a special technology is required to clear the gas mixture, meaning that additional expenses are inevitable.

Currently, the US is the only country which produces shale oil and gas on an industrial scale, although shale oil and gas reserves exist in other parts of the world – for example, in Australia, India, China, Canada. Not too long ago, shale gas reserves were explored in Poland and some work was started there by the American drilling corporations. But soon it was decided that these reserves were not suitable for commercial development so the work was stopped.

Despite the fact that some experts insist on the view that shale oil and gas production will not substitute “common” energy products because of the high production cost, the possibility that some substantial changes will occur in this sphere should not be excluded. Thus, it should be also taken into consideration that several large nations have begun to evaluate and test the production potential of shale formations located in their countries. Argentina, Australia, China, England, Mexico, Russia, Saudi Arabia, and Turkey have begun exploration or expressed interest in their shale formations.

As a matter of fact, today we can see the ongoing global struggling for new oil fields. The Arctic oil fields have become the subject of trade in politics. Recently, U.S. President Barack Obama has allowed the activity of oil giant Shell in the Chukchi sea between Chukotka and Alaska. Some years ago, Russia was criticized by and a wider audience for drilling oil off the Russian Arctic coast. Activists of the organizations under the slogan “Save the Arctic!” attacked the platform Prirazlomnaya in the Barents Sea on August 24, 2012. It was one of the most prominent political provocations in the global competition for oil treasure.

According to statistics, over the past ten years the Middle East has accounted for the most new construction. In these areas, oil reserves have increased by half. Second place in the development of oil deposits is shared by Canada and southern North America. In all the likelihood, these regions will continue to be the strongest in the future of the industry.

The Oil market in the U.S.

The outlook for oil production in the U.S. seems negative now. Recent production increases came exclusively from the Gulf of Mexico, where output jumped by 147,000 barrels per day.

Without the Gulf of Mexico, U.S. output would have dropped by another 53,000 barrels per day in July from a month earlier. And in the key shale states, which are garnering much attention as U.S. output adjusts to lower prices amid constant costs, the production drops continue. Texas lost 12,000 barrels per day, North Dakota lost 3,000 barrels per day, and Oklahoma lost 17,000 barrels per day. Only Colorado saw a modest increase in production. Still, even when leaving out the gains in the Gulf of Mexico, a decline of 53,000 barrels per day is a slower decline than the 115,000 barrels per day lost between May and June.

ExxonMobil has announced its decision to sell its troubled Torrance refinery in Southern California next week.

A slew of regulatory news from Washington DC also came out last week. The Obama administration released new rules on ozone emissions from industrial sources, lowering limits to 70 parts per billion (ppb) from the current 75 ppb set under former President George W. Bush in 2008. The limits were criticized by the industry, but the EPA decided on the softest approach being considered, with many expecting the agency to issue tighter limits. The EPA says the regulations will cost the industry $3.9 billion by forcing companies to install scrubbers, but claims it will prevent hundreds of thousands of childhood asthma attacks each year by reducing toxic emissions.

Separately, a U.S. District Court shot down a rule from the Department of the Interior that sought to set standards on hydraulic fracturing. The judge said the Department of the Interior lacked the authority to regulate fracking. The rules intended to put standards on well casing and other drilling techniques, as well as require operators to disclose the chemicals used in their fracking processes. The Department is weighing whether or not to appeal the judge’s decision.
The U.S. Senate Banking Committee passed legislation to repeal the ban on oil exports, as efforts in both houses of Congress gain steam. The oil export debate appears to be hardening along partisan lines, with President Obama coming out against any efforts to lift the ban.

All these factors are signs that Washington's foreign policy may change and must be monitored, especially in dealing with oil-rich regions.

Other actors

While Venezuela is suffering from U.S. sanctions, Petrobras, Brazil's scandalized state-owned oil firm, has announced its plans to raise fuel prices across the country, as it struggles with sky-high debt and a widening corruption investigation. Petrobras will raise gasoline prices by 6 percent and diesel prices by 4 percent at its downstream assets. It is unclear how that will trickle down to the price at the pump. The move comes after a November 2014 decision to hike prices by 3 percent for gasoline and 5 percent for diesel. Petrobras has to sell fuel at a regulated price, as the government tries to keep prices affordable for consumers. However, that saddles the company with debt as it takes in less revenue than it otherwise would have if it could sell its product at market rates. Petrobras also has to import fuels because of shortages, and the plummeting value of the country’s currency has made imports much more expensive. The company had over $100 billion in debt as of June 30, an increase of 18 percent since the end of 2014.

Tensions are heating up in the Middle East as Russia has begun conducting air strikes on targets in Syria. Russian President Vladimir Putin says Russia is targeting ISIS, but the U.S. is sceptical, suggesting Russia is merely trying to prop up Syrian President Bashar al-Assad by striking his rebel opponents. The involvement of Russia and increasing international attention on the ceaseless conflict in Syria aren't directly affecting oil markets at this point, but are worth keeping an eye on.

Meanwhile, ISIS attacks in Libya could have a much more direct impact. On October 1, ISIS militants attacked one of Libya’s main oil ports, Es Sider. The port is under the control of the recognized government and has been closed since December 2014, preventing Libya from reviving oil exports.

The current effort of Russia in Syria and Iraq (by request) to combat ISIS will stabilize oil prices. Also, we need to consider Iran’s interests in the region and increase the sale of oil to Asia, where expanding economies need more energy resources.