[PDF]Energy Superpower And Money Khashayar Naimi خشایار نعیمی

Knergy


SuperPower
And Money


Khashayar Naimi


Content


Energy superpowetr------------------------------------------------------------ 1
1973 oil crisis------------------------------------------------------------------- 3
1973-74 stock market crash------------------------------------------------- 12
1980s oil glut------------------------------------------------------------------ 21
Energy security---------------------------------------------------------------- 25
Petroleum politics------------------------------------------------------------- 30
Project Independence--------------------------------------------------------- 38
Current Trends and Issues in the Global Oil Markets-------------------- 39
The United States as a Global Oil Supplier-------------------------------- 42
Key Strategic Issues in Policy Choices------------------------------------- 45
Economy of Saudi Arabia---------------------------------------------------- 49
Coal------------------------------------------------------------------------------ 63
Oil-------------------------------------------------------------------------------- 72
Natural gas---------------------------------------------------------------------- 74


Uranium ------------------------------------------------------------------------- 92


Energy superpower


An energy superpower is a nation that supplies large amounts of

energy resources (crude oil, natural gas, coal, uranium, etc.) to a significant number of
other states, and therefore has the potential to influence world markets to gain a
political or economic advantage. It is used to describe Russia, and has been used with
other countries, such as Saudi Arabia, Canada, Venezuela, and Iran. The United

States is said to be a potential energy superpower because of its large shale

gas reserves.


Energy superpower status might be exercised, for example, by significantly
influencing the price on global markets, or by withholding supplies. The status of
"energy superpower" should not be confused with that of "superpower".


Russia's reserves of natural gas have helped give it the title of energy
superpower. However, this status has been called into question by some. As Vladimir
Milov, of the Carnegie Endowment for International Peace, says :


The "energy superpower" concept is an illusion with no basis in reality. Perhaps most
dangerously, it doesn’t recognize the mutual dependence between Russia and energy
consumers. Because of political conflicts and declining production, future supply
disruptions to Europe are likely. As a result, European gas companies may likely
someday demand elimination of the take-or-pay conditions in their Russian contracts.
This would threaten Gazprom’s ability to borrow. Putin’s attempt to use energy to
increase Russian influence could backfire in the long run.


According to Manik Talwani, a geophysicist at Rice University, there are two
countries that are most likely to join Saudi Arabia in attaining the status of oil
superpower: Venezuela and Canada. Citing their enormous potential reserves (1.2
trillion potential barrels for Venezuela and 1.75 trillion for Canada's oil sands),
Talwani believes that they have the reserves to become energy superpowers in the
next few decades as oil production declines elsewhere. However, as Talwani notes,
both need US$100 billion or more to increase their production levels up to those of
true energy superpowers.


In 2007, al-Qaeda announced a new strategy for fighting the United States. Rather
than only targeting U.S. interests directly in an attempt to cripple it, al-Qaeda
considers cutting off the supply of energy to the U.S. to be a high priority. As reported


after a failed 2006 attempt in Saudi Arabia: "A major supply disruption would send
energy prices soaring. Had the Abqaigq attack been successful — guards fired on cars
driven by the bombers, detonating the explosives inside — some experts say oil prices
would have likely broken all records. A catastrophic hit could bring transportation and
other parts of the U.S. and world economies to a standstill."


1973 oil crisis


The 1973 oil crisis began in October 1973 when the members of the Organization of
Arab Petroleum Exporting Countries proclaimed an oil embargo. The embargo was
targeted at nations perceived as supporting Israel during the Yom Kippur War. The
initial nations targeted were Canada, Japan, the Netherlands, the United Kingdom and
the United States with the embargo also later extended

to Portugal, Rhodesia and South Africa. By the end of the embargo in March

1974, the price of oil had risen from US$3 per barrel to nearly $12 globally; US prices
were significantly higher. The embargo caused an oil crisis, or "shock", with many
short- and long-term effects on global politics and the global economy. It was later
called the "first oil shock", followed by the 1979 oil crisis, termed the "second oil
shock."


The embargo was a response to American involvement in the 1973 Yom Kippur War.
Six days after Egypt and Syria launched a surprise military campaign against Israel,
the US supplied Israel with arms. In response to this, the Organization of Arab
Petroleum Exporting Countries (OAPEC, consisting of the Arab members

of OPEC plus Egypt and Syria) announced an oil embargo against Canada, Japan,

the Netherlands, the United Kingdom and the United States.


The crisis had a major impact on international relations and created a rift

within NATO. Some European nations and Japan sought to disassociate themselves
from United States foreign policy in the Middle East to avoid being targeted by the
boycott. Arab oil producers linked any future policy changes to peace between the
belligerents. To address this, the Nixon Administration began multilateral negotiations
with the combatants. They arranged for Israel to pull back from the Sinai

Peninsula and the Golan Heights. By January 18, 1974, US Secretary of State Henry
Kissinger had negotiated an Israeli troop withdrawal from parts of the Sinai Peninsula.
The promise of a negotiated settlement between Israel and Syria was enough to
convince Arab oil producers to lift the embargo in March 1974.


Independently, OAPEC members agreed to use their leverage over the world price-
setting mechanism for oil to stabilize their incomes by raising world oil prices after
the recent failure of negotiations with Western oil companies.


The embargo occurred at a time of rising petroleum consumption by industrialized
countries and coincided with a sharp increase in oil imports by the world's largest oil
consumer, the United States. In the aftermath, targeted countries initiated a wide
variety of policies to contain their future dependency.


The 1973 "oil price shock", with the accompanying 1973-74 stock market crash, was
regarded as the first discrete event since the Great Depression to have a persistent
effect on the US economy.


The embargo's success demonstrated Saudi Arabia's diplomatic and economic power.
It was the largest oil exporter and a politically and religiously conservative kingdom.


US oil production decline


In 1970, US oil production started to decline, exacerbating the embargo's impact.
Following this, Nixon named James E. Akins as US Ambassador to Saudi Arabia to
audit US production capacity. The confidential results were alarming—no spare
capacity was available and production could only decrease.


The oil embargo had little effect on overall supply, according to Akins.


The Organization of the Petroleum Exporting Countries (OPEC), which then
comprised 12 countries, including Iran, seven Arab countries

(Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United Arab Emirates),

plus Venezuela, Indonesia, Nigeria and Ecuador, was formed at a Baghdad conference
on September 14, 1960. OPEC was organized to resist pressure by the "Seven Sisters"
(seven large, Western oil companies) to reduce oil prices.


At first, OPEC operated as an informal bargaining unit for resource-rich third-

world countries. OPEC confined its activities to gaining a larger share of the profits
generated by oil companies and greater control over member production levels. In the
early 1970s it began to exert economic and political strength; the oil companies and
importing nations suddenly faced a unified exporter bloc.


On August 15, 1971, the United States unilaterally pulled out of the Bretton Woods
Accord. The US abandoned the Gold Exchange Standard whereby the value of

the dollar had been pegged to the price of gold and all other currencies were pegged to
the dollar, whose value was left to "float" (rise and fall according to market demand).
Shortly thereafter, Britain followed, floating the pound sterling. The other


industrialized nations followed suit with their respective currencies. Anticipating that
currency values would fluctuate unpredictably for a time, the industrialized nations
increased their reserves (by expanding their money supplies) in amounts far greater
than before. The result was a depreciation of the dollar and other industrialized
nations’ currencies. Because oil was priced in dollars, oil producers’ real income
decreased. In September 1971, OPEC issued a joint communiqué stating that, from
then on, they would price oil in terms of a fixed amount of gold.


This contributed to the "Oil Shock". After 1971, OPEC was slow to readjust prices to
reflect this depreciation. From 1947 to 1967, the dollar price of oil had risen by less
than two percent per year. Until the oil shock, the price had also remained fairly stable
versus other currencies and commodities. OPEC ministers had not developed
institutional mechanisms to update prices in sync with changing market conditions, so
their real incomes lagged. The substantial price increases of 1973-1974 largely
returned their prices and corresponding incomes to Bretton Woods levels in terms of
commodities such as gold.


On October 6, 1973, Syria and Egypt, with support from other Arab nations, launched
a surprise attack on Israel, on Yom Kippur. This renewal of hostilities in the Arab—
Israeli conflict released the underlying economic pressure on oil prices. At the time,
Iran was the world's second-largest oil exporter and a close US ally. Weeks later,

the Shah of Iran said in an interview: "Of course [the price of oil] is going to rise...
Certainly! And how!... You've [Western nations] increased the price of the wheat you
sell us by 300 percent, and the same for sugar and cement... You buy our crude oil and
sell it back to us, refined as petrochemicals, at a hundred times the price you've paid
us... It's only fair that, from now on, you should pay more for oil. Let's say ten times
more."


On October 12, 1973, US president Richard Nixon authorized Operation Nickel
Grass, a strategic airlift to deliver weapons and supplies to Israel, after the Soviet
Union began sending arms to Syria and Egypt.


In response to American aid to Israel, on October 16, 1973, OPEC raised the posted
price of oil by 70%, to $5.11 a barrel. The following day, oil ministers agreed to the
embargo, a cut in production by five percent from September's output and to continue
to cut production in five percent monthly increments until their economic and political
objectives were met. On October 19, Nixon requested Congress to appropriate

$2.2 billion in emergency aid to Israel, including $1.5 billion in outright

grants. George Lenczowski notes, "Military supplies did not exhaust Nixon's
eagerness to prevent Israel's collapse... This [$2.2 billion] decision triggered a
collective OPEC response." Libya immediately announced it would embargo oil
shipments to the United States. Saudi Arabia and the other Arab oil-producing states


joined the embargo on October 20, 1973. At their Kuwait meeting, OAPEC
proclaimed the embargo that curbed exports to various countries and blocked all oil
deliveries to the US as a "principal hostile country".


Price increases were also imposed greatly. Since short-term oil demand is inelastic,
immediate demand falls little when the price rises. Thus, market prices rose from $3
per barrel to $12 per barrel to reduce demand to the new, lower level of supply. The
world financial system, which was already under pressure from the Bretton Woods
breakdown, was set on a path of recessions and inflation that persisted until the early
1980s, with oil prices remaining elevated until 1986.


Over the long term, the oil embargo changed the nature of policy in the West towards
increased exploration, alternative energy research, energy conservation and more
restrictive monetary policy to better fight inflation.


Chronology


e January 1973—The 1973-74 stock market crash commences as a result of
inflation pressure and the collapsing monetary system.

e« August 23, 1973—In preparation for the Yom Kippur War, Saudi
king Faisal and Egyptian president Anwar Sadat meet in Riyadh and secretly
negotiate an accord whereby the Arabs will use the "oil weapon" as part of the
military conflict.

¢ October 6—Egypt and Syria attack Israeli-occupied lands in the Sinai
Peninsula and Golan Heights on Yom Kippur, starting the 1973 Arab-Israeli
War.

e Night of October 8—Israel goes on full nuclear alert. Kissinger is notified on
the morning of October 9. United States begins to resupply Israel.

e October 8-10O—OPEC negotiations with major oil companies to revise the
1971 Tehran price agreement fail.

e October 12—The United States initiates Operation Nickel Grass, a strategic
airlift to provide replacement weapons and supplies to Israel. This followed
similar Soviet moves to supply the Arab side.

e October 16—Saudi Arabia, Iran, Iraq, Abu Dhabi, Kuwait and Qatar raise
posted prices by 17% to $3.65 per barrel and announce production cuts.

e October 17—OAPEC oil ministers agree to use oil to influence the West's
support of Israel. They recommended an embargo against non-complying states
and mandated export cuts.

¢ October 19—Nixon requests Congress to appropriate $2.2 billion in emergency
aid to Israel, which triggers a collective Arab response. Libya immediately


proclaims an embargo on oil exports to the US. Saudi Arabia and other Arab
oil-producing states follow the next day.

e October 26—The Yom Kippur War ends.

e November 5—Arab producers announce a 25% output cut. A further 5% cut is
threatened.

e November 23—The Arab embargo is extended to Portugal, Rhodesia and South
Africa.

e November 27—Nixon signs the Emergency Petroleum Allocation
Act authorizing price, production, allocation and marketing controls.

e December 9—Arab oil ministers agree to another five percent production cut
for non-friendly countries in January 1974.

e December 25—Arab oil ministers cancel the January output cut. Saudi oil
minister Ahmed Zaki Yamani promises a ten percent OPEC production rise.

e January 7-9, 1974—OPEC decides to freeze prices until April 1.

e January 18—Israel signs a withdrawal agreement to pull back to the east side of
the Suez Canal.

e February 11—Kissinger unveils the Project Independence plan for US energy
independence.

e February 12—14—Progress in Arab-Israeli disengagement triggers discussion of
oil strategy among the heads of state of Algeria, Egypt, Syria and Saudi Arabia.

e March 5—Israel withdraws the last of its troops from the west side of the Suez


Canal.
e March 17—Arab oil ministers, with the exception of Libya, announce the end
of the US embargo.


e May 31—Diplomacy by Kissinger produces a disengagement agreement on the
Syrian front.
e December 1974—The 1973-74 stock market crash ends.


The effects of the embargo were immediate. OPEC forced oil companies to increase
payments drastically. The price of oil quadrupled by 1974 to nearly US$12
per barrel (75 US$/m+?).


This price increase had a dramatic effect on oil exporting nations, for the countries of
the Middle East who had long been dominated by the industrial powers seen to have
taken control of a vital commodity. The oil-exporting nations began to accumulate
vast wealth.


Some of the income was dispensed in the form of aid to other underdeveloped nations
whose economies had been caught between higher oil prices and lower prices for their
own export commodities, amid shrinking Western demand. Much went for arms


purchases that exacerbated political tensions, particularly in the Middle East. Saudi
Arabia spent over 100 billion dollars in the ensuing decades for helping spread its
fundamentalist interpretation of Islam, known as Wahhabism, throughout the world,
via religious charities such al-Haramain Foundation, which often also distributed
funds to violent Sunni extremist groups such as Al-Qaeda and the Taliban.


Control of oil became known as the "oil weapon." It came in the form of an embargo
and production cutbacks from the Arab states. The weapon was aimed at the United
States, Great Britain, Canada, Japan and the Netherlands. These target governments
perceived that the intent was to push them towards a more pro-Arab

position. Production was eventually cut by 25%. However, the affected countries did
not undertake dramatic policy changes.


In the United States, scholars argue that there already existed a negotiated settlement
based on equality between both parties prior to 1973. The possibility that the Middle
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