Privatization in the international petroleum industry: the interplay between politics, economics, and reliance.

• Author: Rhea, John E.

INTRODUCTION

Since the discovery of oil, world power brokers have fought over the price, production, and control of the once vast and still vital natural resource, (1) Some allege that the recent occupation of Iraq is motivated by the control over oil supplies in the Persian Gulf. (2) This view suggests that recent military operations in Afghanistan and Iraq are in truth, strategic precursors for the eminent wars to procure oil. (3) Yet, the critical discussion, in this writer's opinion, should contemplate how the world will function without oil and how civilization will come to terms with the fact that fossil fuels as an energy resource are no longer an inexhaustible resource. (4) In the very near future the world will experience an energy crisis and a shock to economic systems much like that experienced in the 1970s and mid-1980s. Only this time, the end of production will not be the result of any unilateral exercise of sovereign power. Instead, the crisis will result from an actual worldwide depletion of fossil fuel resources. Some predict that petroleum (5) resources will peak by the year 2020 (6) and that by the year 2080, petroleum resources will be completely exhausted. (7) The grim reality that crude oil is indeed a finite resource places a real threat to the way of life of developed countries and will drastically impair world economies. Currently, the world consumes over thirty billion barrels of oil per day (bpd). (8) The United States alone consumes approximately ten billion bpd (9) and by 2025, U.S. consumption is expected to balloon to nearly thirty-five billion bpd. (10) As world populations and demand grow at a faster rate than production, the global energy outlook becomes disastrous.

Dr. M. King Hubbert, discussed infra, alerted the world in 1950 that petroleum was a finite resource and that the production of conventional oil would reach its peak between 1970 and 1980. (11) At which point we would have used half of all the recoverable oil that ever existed on our planet. (12) This alarming information has likely been known to previous administrations. Surely the Bush Administration, through the eyes of Vice President, Dick Cheney, is well aware of the impending crisis. (13) For instance, Cheney, a former Halliburton executive, stated during a speech to the International Petroleum Institute in 1999 that: "by the year 2010 we [the world] will need on the order of an additional 50 million bpd." (14) It is further estimated that by 2020 the world will require 120 billion bpd for economic growth. (15) Rather frighteningly, for oil-dependent countries, a mere 10 to 15 percent shortfall between demand and supply can trigger an enormous economic crisis. (16) In short, in apocalyptic fashion, life as we know it will cease as world oil supplies come to an end.

Be clear that there is no feasible replacement for oil. An end to world reliance on fossil fuel based energy in the form of renewable energy or other alternative energy sources is at best a supplement but more realistically a theoretical fantasy. In most cases, oil is required to develop these alternatives to oil. (17) For example, oil is required in the mining and extraction of the hard rock minerals required to develop solar power. (18) Moreover, recovering "oil" from oil shale also requires the use of crude oil to convert the oil shale into a usable product. (19) Additionally, the promise offered by fuel cells is questionable due to limited global reserves of platinum. (20) Thus, despite efforts to develop alternative energy resources, petroleum remains the world's primary source of energy. (21)

In this writer's view, energy companies, heads of states, and the major power brokers of the primary consuming countries, should realize that reliance on oil suppliers with hidden political agendas and narcissistic international policies like those of Saudi Arabia and the Persian Gulf, can no longer be entrusted to bear the sole key to the future of the energy market place.

It is not surprising that, in the last three decades, strategic efforts have commenced to globalize the petroleum industry under the auspices of privatization. Hence, privatization of the international petroleum industry serves as an economic alternative to the power and control exercised by producing nations over this vital commodity. In that sense, by privatizing the petroleum industry, multinationals and importing nations, regained control over the world energy market.

Several theories account for the rationale behind the privatization of the international petroleum industry, most of which propose that the decline in socialist regimes and profit maximization are the driving forces behind energy privatization trends. (22) This writer contends, however, that two political and economic factors drive global petroleum privatization. First, and arguably the most significant driving force behind the privatization of the international petroleum industry, is the need for consuming countries to decrease their reliance on the Organization of Petroleum Exporting Countries (OPEC) (23) and the Middle East. By developing foreign investment activities with Non-OPEC producers, western entities exercise greater control and participation in the market, thereby stabilizing the market, increasing capital revenue, and securing future economic growth. Second, is the economic disparity within the petroleum producing countries, which consists of three sub-factors: the absence of economic diversity, the economic burden of external debt owed by host countries, and primarily, the exclusive economic reliance on petroleum revenue by producing nations.

Historically, the threat to the security of fossil fuel resources, as triggered by the 1973 Saudi-led Oil Embargo, is significant in the analysis of privatization in the international petroleum industry. Additionally, conflicts and unstable government regimes in OPEC member nations are also considerable factors in the surge to develop foreign direct investment (FDI) with non-OPEC producers. This discussion attempts to demonstrate that privatization, in the international petroleum sector, is a necessary vehicle to avoid reliance on OPEC and the Middle East. And as such, it is a reflection of political strategies, aimed at securing rapidly depleting energy resources. And secondly, that privatization is also an economic necessity for producing countries whose excessive reliance on petroleum revenue has left them vulnerable to the very foreign control which many anti-globalists protest.

This discussion begins with an analysis of importing nations' reliance on foreign supplies. Next, a brief historical account of foreign investment in petroleum producing countries follows, which includes the demise of the traditional concessions and the shift of power over price and production. The historical approach serves as insight into current anxieties surrounding reliance on Middle Eastern oil.

Central to this discussion is the impact of the 1973 Oil Embargo and the driving forces behind the modern trend of privatization in the world oil market and the development of the Organization for Economic Co-Operation and Development (OECD) as a response to the formation of OPEC. The totality of which resulted in the shift by consuming countries from reliance on OPEC member countries as a means to economic stability. Finally, this article provides an analysis of the economic disparity and economic reliance on petroleum revenue by host countries, which ultimately makes those nation states more apt to seek foreign direct investment as a means to spark economic growth.

1. PRIVATIZATION: A VEHICLE TO AVOID OPEC RELIANCE

   1. Hubbert Peak Oil

      Since much of this discussion references the end of fossil fuel resources and the political and economic reactions thereof, adequate analysis of the transition from state-owned enterprises to privatization, requires some treatment of the end of the oil age. The Hubbert Peak or Peak Oil, as it is often referred, is a theory developed by geologist, Dr. M. King Hubbert in the 1950S. (24) Hubbert's theory is represented by a bell-shaped curve depicted on a typical linear graph. Hubbert predicted that between the time of the first production of oil in 1860 and the end of oil in 2050, a collision between world supply and world demand would result in a peak of world oil supplies. (25)

      The Hubbert Peak was estimated to occur between 1970 and 1980, whereby, half of all proven reserves of conventional oil would have been used. (26) Hubbert's bell-curve demonstrates that when conventional oil has peaked, the total resources that were ever and will ever be available for production will be known. (27) Once the peak occurs, production will decline until the resource is completely depleted. (28) Although Hubbert's prediction that U.S. reserves would peak in the 1970s proved to be accurate, (29) new geophysical studies estimate that (globally) Peak Oil will more likely occur in 2020. (30)

      The World Energy Outlook estimates that ultimate recoverable reserves are roughly 2.3 trillion barrels. (31) Dr. C.J. Campbell of Petroconsultants estimates that the global ultimate is 1750 Gb. And since there haven't been any significant discoveries in the past two decades, this means that after 2020, production will begin its decline. (32) Hence, for each year that world populations increase, the possibilities of locating new accommodating supplies will become less and less likely. (33)

      Is it possible then, that U.S. military activity in Iraq and Afghanistan is merely a camouflage to ensure security over future energy resources? Several scholars have proposed that the competition for world oil supplies will be carried out through actual war. (34) Such positions support the proposition that American military instillations established during Desert Storm near Saudi Arabia, the present occupation of Afghanistan, near the Caspian Sea, as well as the military presence in...