The contemporary international political economy of oil presents a puzzle: political instability in regions where oil is found coexists with steadily falling prices. This combination of continuing political conflict and uncertainty in the Middle East (particularly the Gulf), and the continuing slide in the real price of crude oil encourages consideration of relations between world oil markets, Middle East politics and the international role of the United States. To comprehend these relations, one must consider both the political and geopolitical objectives of the states involved and the economic motivations of the key actors in the international oil industry.

The End of the Cold War and the Erosion of US Hegemony

The geopolitics of oil are complex because the objectives of the major states are varied and often contradictory. Until recently, US policy in the oil-rich Middle East has aimed at dual containment of Iraq and Iran, maintenance of the authoritarian regimes of the Arabian Gulf, protection of both domestic and international US oil interests, the continuation of large contracts for the US defense industry and the provision of secure and not-too-expensive crude oil to allies in Western Europe and the Pacific. Dual containment, however, has run into increasing opposition from the European Union and Japan as the latter has supported their own oil companies at the expense of American firms prohibited from action by the US government.

What price of crude satisfies US interests, the Saudi Arabian government and the allies? When conflicts over these and other issues arise, how are they resolved? Is there a price for crude oil which will simultaneously satisfy the core OPEC (Organization of Petroleum Exporting Countries) and Saudi objectives, a price that is: a) low enough so that demand increases with economic growth; b) low enough to deter significant investment in non-OPEC oil and alternative energy sources; and c) high enough to cover the social costs of OPEC states?

In the past, I argued that the US-Saudi relationship centered on an attempt to reconcile these objectives and that the attempt was, on the whole, successful. [1] That argument was based on an identification of common interests between the United States and Saudi Arabia that stemmed from US security guarantees and the downstream integration of Saudi Arabia and the Gulf states into the consumer markets and investment opportunities of the consuming West. In this context, Robert Vitalis’ observations concerning the “closing of the Arabian oil frontier” miss the point. [2] Vitalis argues that the era of the 1940s and 1950s, “when Aramco was in effect the kingdom’s public works agency and oil ministry and America’s private diplomatic and intelligence operation,” has passed, and the influence of the United States over the Saudi regime has diminished accordingly. [3] Regarding direct control, this is correct, as Vitalis avers: “The era of empire…is over for the US in the Gulf…. The overseas Arabian oil resource frontier is closed because that state has secured overarching control inside this zone.” [4] Of course it has.

The long-term objective of US hegemony after World War II was never to achieve political and economic objectives through direct territorial control and influence over other sovereign states; that was always a fallback position necessitated by the opposition to — or the lack of development of — forms of political independence consistent with a liberal worldwide economic order. Where those liberal forms were secure, or where non-liberal domestic forms were prepared to operate internationally within the dominant liberal order, the “market,” armored by the political and military power of the US and its allies, could generally be relied upon to deliver. Yes, the “Pax Americana remains open to continuous challenge and reversal.” [5] However, the argument about US-Saudi relations does not depend on US imperial control over Saudi Arabia, understood either in terms of territorial domination or direct influence over Saudi policy. A shift from a zero-sum direct control (where the powers of the United States and its corporate contractors were exercised at the expense of local states, ruling classes and people), to an indirect, positive-sum arrangement mutually beneficial to the parties involved is precisely the achievement of US hegemony as distinct from empire.

Nevertheless, larger questions relating to the changing nature of US hegemony and the role of oil politics within it remain. It is in this context that one must locate power and influence in the contemporary international political economy of oil. For there is now a very real challenge to US hegemony and the US role as guardian of the West’s oil, although it does not lie primarily in the sands of Arabia. The key geopolitical shift has been the resolution and after-effects of the Cold War. [6] Four implications are especially pertinent: First, it has freed the hand of the US to deploy military power while undermining the domestic and international rationale for doing so; second, it has weakened the position of some Arab states (including important OPEC members, most notably Iraq) opposed to US strategy in the region; third, it has undercut the last remaining material and ideological bases for planned, statist models of development, including those based directly or indirectly on oil rents; and fourth, it has shifted the competition between the United States and its capitalist allies into more strictly “economic” channels, thus complicating US efforts to devise general strategies of geopolitical and economic leadership.

The US’s elevation to sole military superpower status and the enfeeblement of “radical” Arab regimes has certainly allowed the US to deploy military power in the region on an unparalleled scale. Equally, the ascendance of the market and private property is working its way across the Middle East now that the protection afforded to statist models by petroleum rents is falling, which can only be welcomed in Washington. Against these favorable shifts, one has to balance the absence of a clear rationale for intervention and the growing unease of the advanced capitalist allies about US regional strategy. Although it is still too early to judge how far the Cold War magnified the influence of the United States over its capitalist allies in the north and its regional partners in the south, the fallout so far has been considerable. [7]

The Changing Market for Oil

Simultaneous with post-Cold War geopolitical shifts and the attendant reduction of US leadership, there has been a significant evolution of the international oil market. The combination of uncertainty about US strategy in the Middle East and the political future of the Gulf in particular, along with developments in the market, have raised fundamental questions about the future of the industry as a whole as well as the place of OPEC (and the Gulf) within it. This is a difficult area to assess because it depends on both geology and economics and there is little agreement between earth scientists and economists. Broadly speaking, most geologists reckon that with current prices and technology there may be a peak supply of world oil of 70-100 million barrels per day (MBD). It is clear that 5-10 MBD extra capacity could be achieved in the Arabian Gulf and non-OPEC capacity could also be raised by 5-10 MBD. Together these give a potential world capacity of 80-90 MBD by 2000 (in the middle of the range for peak supply defined by the geologists), so the industry as a whole could be maturing. Many economists dispute these claims, arguing instead that technological progress is continually making oil in the ground easier to access, effectively raising the level of reserves available at any given price level, thus weakening the link between economic growth and the demand for oil. Together, these factors may extend the lifetime of the industry into the foreseeable future.

So far, however, neither OPEC governments nor non-OPEC private capital have fully exploited known reserves. The area where the cheapest and most productive reserves lie is, of course, the Gulf and the other Middle East OPEC members. (The Middle East accounts for 65 percent of proven reserves, and OPEC’s reserves-to-production ratio averages nearly 90 years.) Yet, even in the Gulf, the capital needed to increase production is beyond the domestic budgets of most producers, requiring outside financing and technical participation. OPEC believes that the West will have to invest in new capacity since world oil demand has to be met increasingly from OPEC sources. Economically, such a strategy certainly makes sense. The problem is political. As Hartshorn pointed out in the early 1990s:

The capital requirements per daily barrel of output reported for some of the Gulf producers now appear to overlap quite significantly the lower figures in the cost range reported for non-OPEC oil development. In nearly all other areas, private oil companies can get easier terms, including equity interests in production, than in much of OPEC and almost anywhere in Gulf OPEC. They may still consider the other places politically safer, too. [8]

The political risks have since worsened.

The problem confronting US strategy, therefore, is that allies who in the past depended heavily on Gulf oil, and hence on US protection of access to that oil on favorable terms, may start to look elsewhere, undermining any leverage the United States once had and leaving it the protector of the most closed and brittle societies in the region. In part, that is why the recent changes in Iran have proved so destabilizing for US regional strategy and why post-sanctions Iraq presents such difficulties. Lacking the close associations with the Gulf states, and less singlemindedly pursuing military options to the political problems of the region, the European powers (excluding Britain), Japan, and now Russia and China may forge policies substantially independent from those favored by Washington. Specifically, they may seek non-Gulf oil supplies within OPEC and non-OPEC supplies where possible. If the geopolitical and geographical structure of international oil fragments in this manner, what leverage can the United States derive from its friends in the Gulf? By contrast, if the world is driven back to OPEC, and thence to Gulf OPEC (Kuwait, the UAE and Saudi Arabia in particular), then Saudi strategy will continue to play a crucial role. In that case, contra Vitalis, US-Saudi connections will remain important for the nature of the oil market — subject to the present regime holding onto power in Riyadh.

Whither OPEC?

The future of OPEC hinges upon the changes in the world market for oil that have occurred since OPEC’s “rise,” between 1973 and 1986. The oil industry has grown rapidly throughout the twentieth century; between 1913 and 1948 the annual growth rate of production was about 6.5 percent, and from 1948 to 1973 (the post-war boom) the annual growth rate was 7.5 percent. The end of the post-war boom, however, caused a fundamental shift in the pattern of demand. In 1979 production was only 12 percent higher than in 1973 and by 1985 it was 12 percent lower than in 1979. By 1991-1992 production had just recovered to the 1979 level. Since then the industry has seen a steady but lower increase of around two percent annually, falling to just over 1 percent with the recent economic slowdown and the crisis in the Asia-Pacific region. Meanwhile, total energy demand faltered during the recessions of the 1970s and early 1980s and then recovered, currently expanding at an energy-ratio (the amount of energy used per unit of GDP) of less than one-to-one in the OECD bloc, and somewhat more than this in the developing world. Whether the demand for oil will achieve earlier rates of expansion remains a basic yet unanswerable question for the future of the geopolitics of oil.

There is a paradox at the heart of the modern international oil industry: Despite the fact that oil markets have become structurally freer and more transparent since the 1970s, a major imbalance remains between supply (and reserves) and demand. The world demand for oil does not absorb all the supply that is on offer, yet oil prices do not fall far enough so that demand increases to match supply. Moreover, much of the new capacity developed since the 1970s is higher in cost than most of the existing under-utilized capacity, and most of the production “shut-in” (i.e., proven and available reserves which are not being used) during the 1980s and 1990s is of lower operating cost than much of the production taking place elsewhere. Finally, capacity in low-cost regions could be expanded more cheaply than most new post-OPEC developments, yet total capacity in low-cost regions was only about half utilized in the 1980s and early 1990s. [9]

What explains the slowdown of oil expansion? Why does the demand for oil not match the supply? Why has high-cost oil been displacing low-cost supply? For many analysts the story of oil between 1973 and 1986 was the story of the rise and (partial) fall of OPEC. OPEC and the “energy crisis” became synonymous. By artificially restricting supply, OPEC raised the price of crude to such an extent that it was unable to sell even the amount that it wanted. High prices kept high-cost oil outside OPEC in business. The story since 1986, when Saudi Arabia dramatically increased production to lower prices and increase the demand for oil, has been one of perpetual disarray within OPEC as attempts to restrain production have failed and the demand for oil has remained weak.

Certainly, oil price increases in the 1970s and the perceived instability of the main source of supply, the Middle East, reduced the demand for oil and encouraged the search both for greater efficiency of energy use and for alternative sources of supply (whether non-OPEC oil or other fuels). However, energy demand (and energy ratios) were falling in the OECD bloc because of a shift away from energy-intensive manufacturing to services. This trend predated the oil crisis and continued after the fall of the real price of oil in 1986. On the supply side, the key changes since 1973 have had even less to do with OPEC. The two largest changes in supply during the 1970s and 1980s were in the US and Russia: production in the US peaked in 1970, tapered off at a slightly lower level for nearly two decades and then began to fall in the late 1980s. Soviet production continued to grow until the early 1980s, then flattened out. Oil production in the Soviet successor states may now have peaked — at least for the medium term. Together, these two countries accounted for 40 percent of the growth of world oil production in the post-war period. In addition, the largest newcomers to non-OPEC production were in the North Sea — Alaska, Siberia and the new oil provinces of Mexico — all projects that began before 1973. Thus, much more has been going on than the actions of, or within, OPEC. In any case, the price increases in the 1970s were not solely due to OPEC. [10] Finally, as recent events have once again demonstrated, OPEC does not and cannot act as a cartel to rig the oil market. When it attempted to do so in 1982-1985, the result was a signal failure. [11]

Disarray within OPEC is more or less a constant. Even Saudi-Iranian cooperation cannot stabilize the market because no one, not even the Saudis, can afford to drive the price low enough to displace the higher cost producers of oil and other energy sources. As long as higher-cost producers can survive in the market, OPEC (and Saudi Arabia in particular) cannot control the industry. To understand the phenomenon of continuing oversupply in the oil market we must ask why the comparative costs of oil production are not properly reflected in crude oil prices, and why the prices of oil products are not a simple function of crude oil prices and technology. The single most important technical factor influencing the cost of crude oil production is the productivity per well. But the productivity per well is itself a function of price, through the impact of price on the choice of technique. Thus, high-productivity (low-cost) oil will not automatically displace low-productivity (high-cost) oil at prices above the competitive level. Low-cost producers will simply earn larger rents. In addition, since the costs of oil production are considerably smaller than the startup costs (finding oil and sinking a well are costly; running an existing well is cheap), new sources of low-cost oil will not generally displace existing high-cost sources. Even given these facts, one still must ask why low-cost producers do not increase production in order to increase their market share at lower oil prices. The simple answer, noted above, is that they cannot afford to do so. There is also a more subtle strategy at work, however, related to the production decisions of low-cost producers with large reserves and high reserve/production ratios — essentially the Arabian Gulf producers.

Before turning to the politics of Gulf producers, it is important to note that the prices of oil products do not simply reflect the price of crude oil and the technology that turns crude into products. Taxes imposed on both the products of crude oil at the point of sale and the activities of firms that transform crude into products also play a role. This means that rents generated in the oil sector accrue not only to the producers of crude but also to private (generally multinational) firms and governments in the main consuming states. Struggles over the size and the division of rents involve the actions of all three parties — producing states, multinationals and consuming governments — not simply the decisions of producers. Put another way, oil rents may be appropriated at any point in the chain from production to final sale of refined products in the form of producer rents, industry surplus profits and government taxes. This is why some Gulf producers, notably Kuwait and Saudi Arabia, have moved downstream and established a presence in Western (and now Asian) consumer markets. This gives them similar interests in pricing as Western oil firms, as they seek higher value-added for their integrated petroleum concerns, rather than the highest possible prices for crude oil. Financial investments from crude profits further cement this linkage. Moreover, an aggressively low price for crude at the expense of higher-cost (and non-OPEC) producers would probably be met by tariffs to protect “security of supply” and would not be passed on to consumers, since consuming states would likely raise taxes on refined products. (Currently, the relatively high-cost producers of North and Central America — the United States, Canada and Mexico — are producing nearly as much oil as Gulf-OPEC countries.)

And the Gulf?

The global oil market is characterized by structural oversupply. Low-cost producers cannot afford to drive the high-cost suppliers from the market, nor do they have any real incentive to do so. The coincidence of interests between the production and marketing strategies of the Gulf states, multinational oil interests and the governments of the consuming nations constitutes the material basis of US-Saudi relations. With an historically weak growth of demand, at any price significantly above the running costs of the existing high-cost capacity, OPEC has little control over the market and the Saudis have little leverage within OPEC. On the other hand, if and when demand picks up, and as non-OPEC sources diminish, then OPEC and Saudi influence will increase. Whether the Washington-Riyadh axis is still in place when that happens remains to be seen. As the Iranian Revolution demonstrated, no amount of external support can indefinitely maintain a regime that has lost its domestic legitimacy. Thus, rather than the closing of the Arabian frontier to American imperialism so vividly described by Vitalis, it is the broader shifts in geopolitics (the end of the Cold War and the erosion of US hegemony) and the long-term evolution of the oil industry that have — for the moment at least — sidelined the US-Saudi relationship in the political economy of international oil. By the same token, falling production outside OPEC would quickly reinstate the importance of America’s friends in the Gulf, and that is why — for Washington at least — they remain so important.


[1] See American Hegemony and World Oil (Cambridge: Polity Press, 1991), ch. 6.
[2] Robert Vitalis, “The Closing of the Arabian Oil Frontier and the Future of Saudi-American Relations,” Middle East Report 204 (Summer 1997).
[3] Ibid., p.19.
[4] Ibid., p.16.
[5] Ibid., p.20.
[6] Some of this was anticipated in American Hegemony and World Oil but I did not foresee anything like its full effects, and it is probably still too early to do so.
[7] For a thoughtful reflection on these questions, see Ronald Steel, Temptations of a Superpower (Cambridge, MA: Harvard University Press, 1995).
[8] J. E. Hartshorn, Oil Trade: Politics and Prospects (Cambridge: Cambridge University Press, 1993), p. 66.
[9[ For an authoritative analysis of the post-OPEC oil industry through to the early 1990s, see ibid.
[10] For a full analysis, see American Hegemony and World Oil, ch. 4.
[11] For the best account see Ian Skeet, OPEC: Twenty-Five Years of Prices and Politics (Cambridge: Cambridge University Press, 1988). Also helpful on OPEC is Pierre Terzian, OPEC: The Inside Story (London: Zed Press, 1985).

How to cite this article:

Simon Bromley "Oil and the Middle East," Middle East Report 208 (Fall 1998).

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