Melvin E. Conant
Conant & Associates Ltd.
Washington, D.C.
Whatever the outcome of the crisis with Iraq, win, lose, or draw, Saddam Hussein should be viewed as the latest in a series of Middle East figures whose capacity to make trouble is self-evident but who is also not unique on the Middle East stage; nor is he the last of his kind. By invoking the themes of political reform and of opposition to the intervention of foreign powers in Arab affairs-whatever the reasons for their presence-he has assured himself of a place in Arab history.
Given his character and his acts of aggression, this may be surprising to outsiders. Moreover, were it not for oil, it is altogether possible his containment would have been left to Arabs and other nearby neighbors without the presence of a single soldier from an external power. We need to think more about this phenomenon.
We have long known that for reasons deeply rooted in Middle East history the region is susceptible to sudden and sweeping political changes affecting many peoples-Arabs, Turks, and Iranians. Moreover, the fortunes of these people have, throughout history, been subject to the interests and interventions of foreign powers.
Today is no different as the foreign interest is in access to the prolific oil reserves of the gulf and the Arabian Peninsula. In turn, the essential flow of oil to overseas consumers generates huge and indispensable revenues for oil exporters. The basic interest which links producers and importers is the absolute necessity, for both, of uninterrupted oil delivery.
The requirements of Middle East producers are linked, therefore, inseparably to those of oil importing countries. The former have to produce and sell; the latter have no present alternative but to buy.
The only other issue is the setting of prices reasonable to both interests. Were it not for the geopolitics of oil, the dependence of governments on oil income, the defining of supply prices in commercial terms ought to be relatively simple. It has never been, it is not so today, and it will not be so tomorrow.
AN ONGOING TALE
The geopolitics of the gulf refer to the ancient roots of current rivalries between the peoples of the region, to the ambitions of their leaders, and to their warring for someone else's wealth.
This ongoing tale has pitted the people of the Nile Valley against those in the land between the Tigris and Euphrates, versus the peoples of the Arabian Peninsula, versus those from the Turco-Iranian plateau. The 20th Century discovery of vast quantities of gulf oil changed nothing in these relationships.
So valuable was this oil for heating, lubricating, transportation, and defense that its very indispensability-the requirement for assured supply-brought Britain, France, and the United States into the region to "protect" suppliers and to guarantee their companies' access to the reserves. With the resented intervention of external powers, oil politics became an ever more important factor in the Middle East.
Saddam Hussein sums up for many these political forces: He claims to be determined to sweep away archaic and corrupt regimes, which he insists have enriched themselves to the neglect of their populations and needy Arab brother nations. He has put himself forward as the paramount leader of the gulf Arab nations. He is opposed to the influence of President Mubarak of Egypt and took on Iran in a terrible 8 year war. Finally, he is seen by many Arabs (and Iranians) to have clearly opposed the intervention of the United States and other foreign powers in Arab affairs. In many of these respects, he is seen to be a successor to Gamal Abdul Nasser, Mohammed Mossadegh, and the late Ayatollah Khomeini.
Saddam Hussein is no different. He has sought to expand upon his oil power through ambitious targeting of Kuwait and Saudi Arabia. He remains wary of Iran, which alone could deny him a paramount role over the gulf. He has challenged the role of foreign powers in the region, and he has challenged the legitimacy of those emirates and kings whom he considered archaic leftovers, defended not by themselves but by external powers.
Saddam Hussein portrays himself as the reformer of the profligate spenders of the people's wealth, etc., etc. He has, moreover, proven himself ready to threaten force to increase prices. But, as indicated, he is no newcomer to this role; he is only the latest in a line. Somewhere in the region is a successor.
THE FUNDAMENTALS
The effects of such a leader on world petroleum depend mainly on the fundamentals of supply (in the context of the vital importance of Middle East reserves and production capacities) and of demand at the time he acts.
A situation of tight supply, which he helped create, where production is above 85% of capacity, can invite the use of oil to achieve political targets. But reduced demand-and a surplus of supply-constrains the use of oil politics.
Saddam Hussein saw his moment in history: He desperately needed cash-and Kuwait was nearby with over $100 billion in (foreign) assets. Saddam Hussein needed to make a clear statement of his oil power-and Kuwait had, within reach, some 90 billion bbl to add to Iraq's over 100 billion bbl. He wanted more secure access to the gulf, and Kuwait would provide it.
At some opportune moment, the Ghawar field of Saudi Arabia would be within his reach. He had armed forces superior to anything the Saudis could muster, and Ghawar and Riyadh are less than a day from the Iraqi border.
Then the United States interposed itself, along with other western forces and some Arab nations which are opposed to his ambitions.
We know what happened next, but we must never ignore the fact that in the eyes of Arabs and Iranians, it has been foreign, western intervention which stopped the play. Arabs themselves could not stop Saddam Hussein's forces from their own resources.
One consequence of this crisis will be an increased radicalization of Middle East oil politics. No other outcome should be expected, as the increasing instability of a number of gulf states will make clear. No Arab country is immune to the call from Saddam Hussein for "democratization" and the use of oil wealth for general purposes, and not the enrichment of regimes, and a rejection of dependence on foreign intervention.
The temptation could well increase for the use of oil to achieve national, political goals. This will surely be the case if the Organization of Petroleum Exporting Countries (22 million b/d) and non-OPEC sources (42 million b/d) cannot increase to match the growing worldwide demand for oil.
Tighter markets mean higher prices. If the producers can remain generally united, but the Soviet Union cannot keep up its exports (until recently 4.3 million b/d), then there will be still higher prices. Moreover, if non-OPEC supplies diminish by as much as 1 million b/d by end-1991, post-crisis oil prices will surely rise higher from the pre-crisis level of $15/bbl to a new level approximating $20-22/bbl.
ANOTHER PROSPECT
There is, however, another even more likely post-crisis prospect. It begins with the oil price falling from crisis peaks of around $40/bbl-or whatever further escalation could come from a war-to a low $20s/bbl and then pausing while waiting for the repair of Iraqi and Kuwaiti oil facilities (and any others damaged in a war).
Within months or a year or so, world oil markets could anticipate 4.5 million b/d of additional supplies returning to international trade and perhaps several million barrels more over the next several years, as many producers achieve greater production capacities. None will want to have these idle. None will want to cut back to accommodate restored Iraqi and Kuwaiti crude flows.
There would be greater competition among producers to maintain "market shares" even as prices threaten to fall lower. Saudi Arabia will be key. How will it define its interests and options? Maintain high exports and accept low oil prices to sustain Organization for Economic Cooperation and Development demand and risk Iraqi reprisals? Or count on U.S. defense?
Oil importing governments may make producers' situations even worse. After this latest gulf supply crisis, each will want to emphasize a further diversification of its supplies away from the region. For those few with potential, additional domestic supplies (the United States, Canada, the North Sea, China, and a number of developing countries), governments may create further tax incentives, subsidies of one sort or another, and possibly price supports.
Governments may also mandate alternative fuels (primarily natural gas and environmentally safeguarded coal) and still look for a publicly accepted form of nuclear power. Governments will surely emphasize the search for alternative transportation fuels, which now comprise 35-50% of the oil barrel. Conservation could again be given high and continuing priority. If governments can achieve the same reduction in consumption as during the years 1974-88, when only marginally more oil was consumed at the end of that period than was used at the beginning, another very major reduction in the oil demand growth rate could take place.
All of these quite likely steps to limit oil use would have a major impact on oil's future. The cause of them lies in Middle East politics.
GEOPOLITICAL CHANGE
So great might this impact be that if it were accompanied by longtime, large investments in Orinoco and other Venezuelan reserves, and in Alberta oil sands, with price support policies, and/or pledged shares of OECD markets, the very geopolitics of world oil could begin to change, quite fundamentally, and away from the gulf.
While the unconventional sources are not likely ever to displace Middle East oil, a major effort to exploit hemispheric sources would be a useful "early warning" to gulf producers.
That is for the longer term. Of more immediate interest will be the almost certain effect of very low post-crisis gulf prices. As more and more volumes move into international trade, the result of producers not willing to cut back and from importing governments' intervention, oil demand growth rates will continue to weaken. Perhaps more producers will make additional downstream investments to secure markets for their exports.
This picture of oil supply outdistancing demand could result in long term low prices, turning the international oil market into what it has never been, a largely free market in which commercial, competitive forces determine price. Such a scenario assumes OPEC cannot again be a vital oil force.
What a different oil scene it would be.
We would still have Saddam Husseins from time to time, but they could be regarded as an Arab phenomenon-a regional problem-not of world concern.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
