Oil, Politics, and the Pursuit of Profits

The announcement by Vice President George Bush on April 1 that he was off to see King Fahd of Saudi Arabia in order to firm up crude oil prices jeopardized one of the hoariest myths of the American economy-that global oil prices have been essentially non-political.

President Reagan, in deference to the sanctity of this tenet, rushed to reassure all that his administration remained unswerving in its loyalty to the free market. The administration, he stressed, was delighted by the dramatic downward turn of crude prices-some 60 percent since December 1985. The American consumer, after all, had been taught daily by the instruments of mass persuasion to perceive oil prices as set by the impersonal working of what were known as the laws of supply and demand. Until, of course, the Organization of Petroleum Exporting Countries (OPEC) got its hands on the valves in 1973.

Despite the resulting tempest in the oil barrel, the pricing for the U.S.'s basic source of energy is generally politically determined. Treated as a commodity and hence traded for profit by private corporations and producing nations alike, oil has long been thought of as subject to the free interplay of competitive forces. Yet every step of the flow of oil, from field to gas pump, is governed by essentially political considerations. The modern oil corporation, with assets greater than those of most countries, has functioned as a private government in its global planning and controls. It has maintained basic surveillance over all energy development within the United States. It polices alternative sources of energy to make sure that "competing" fuels are made available to the consumer only with its approval and participation. The illusion invoked here is "technological readiness," whether of shale or solar development. But the clear reality has been protection from the nightmare of competition.

Oil companies have been supported at every stage of these operations by U.S. government intervention. Tax and tariff protection, subsidies, "conservation" laws and other presumably regulatory measures, favored access to the public domain and sympathetic personnel entrenched in the public service, have all worked to buttress U.S. corporations, as have state diplomacy and military actions.

It was not until the early 1970s that OPEC finally succeeded in weakening the multinationals' ability to dictate price and output levels to Third World oil producing nations. The 1973 boycott secured a greater share of crude oil profits as well as raising awareness of how the corporations had played producing states off against each other.

In the West the initial response to spiralling oil prices ranged from fright to anger. How could they do this to us? It was as if the world owed Americans and other industrial people the cheap energy needed for a privileged lifestyle.

In significant respects the energy crisis was essentially a book-keeping operation. There was no real scarcity of crude oil, although small and temporary shortfalls triggered panic in some communities. The demand by producers for greater profits on their crude oil had led the multinationals to shift their own profit expectations to the consumption end of the pipeline. At the same time, the OPEC price hikes increased substantially the worth of reserves held by the corporations. United States import controls, designed to protect higher cost domestic fuel from overseas competition, were then no longer needed, and were removed. Domestic prices soared to meet OPEC levels. Corporate profits followed. Exploration and production were stimulated in Alaska, Mexico, Canada, the North Sea and other non-OPEC regions.

The press and U.S. officialdom have been quick to label OPEC a cartel, a pejorative term rarely applied to private corporations. Orchestrated corporate domination of global production, designed to insure that no more oil reaches the market than necessary to meet effective demand and thus protect artificially-set prices, goes unchallenged.

OPEC leaders understood that their own continued success required effective constraint over production. Yet despite the great financial leap forward and a global redistribution of wealth, the OPEC nations still depended on the technological prowess and the distributive arrangements of the Western oil corporations. They still were not integrated operations involved in and profiting from all the stages of the industry. They still were caught in the Western capitalist system when they recycled their oil dollars as deposits in Western banks and when they called upon Western corporations to modernize their less developed economies. And although essential for its continued control, OPEC was never able to make all its members adhere to effective production quotas-the key to a working cartel. Containing the varied revenue requirements of the individual producer nations, each with different needs within an overall production goal, had been one of the great governing feats of the multinationals during their reign.

Nor had OPEC been able to persuade such "production maximizers" as Mexico and the North Sea producers that less meant more, that it was advantageous to cut production in the face of a downward trend in the demand for crude oil. Thus it increasingly found itself serving as the residual or swing supplier of the world oil market. This left these producers, as the bulletin of the Organization of Arab Petroleum Exporting Countries put it recently, with "the unenviable job of adjusting their output in order to stabilize the price."

Saudi Arabia, the dominant partner, cut its production sharply to keep up prices. But "leakage" from the system continued, with significant amounts of oil from OPEC as well as non-OPEC nations finding its way to the cheaper spot market. In frustration, Saudi Arabia switched tactics. It kept production up so as to regain some of its market share while convincing other nations, through the resulting price fall, of the profitability of setting and maintaining production levels. Saudi production costs are now approximately 50 cents a barrel and their fields operate at perhaps 40 percent of capacity.

Motorists and other users of petroleum are understandably pleased by the price drops, however transitory they suspect such relief may be. Many economists view cheaper energy as a stimulus for development at home and certainly a breather for hardstrapped non-energy producing nations. There is, however, also a fear that this price relief is a prelude to a new steep rise in prices once weaker producers have been driven out of the market. Exploration has been cut back by many corporations and some nations. Meanwhile, marginal producers in the United States are threatened since they no longer enjoy the insulation of what had been high priced foreign oil. Alaska, the Southwestern United States and other producer areas have been forced to adopt austerity measures due to the loss of this major revenue source. Regional banks, with over $60 billion of outstanding oil loans, have been shaken. And there is evidence that foreign producer nations are now moving to buy up American refineries and distribution systems at low prices. This will enable them to become fully integrated operators, functioning in the same fashion as the traditional majors. Once more the specter is raised of a disappearing domestic industry and dependence upon foreign imports.

It was within this context that Bush, also an oilman and a restrainedly eager candidate to succeed his chief, embarked on his pilgrimage to Saudi Arabia. Paying the necessary homage to "free enterprise," he echoed the sentiments of the U.S. Secretary of Energy and segments of the independent producing industry by declaring that the United States could not tolerate "a continued free fall like d parachutist jumping out without a parachute." He therefore promised to encourage the desert king digging with liberated fervor. Instead, the nation witnessed a wave of mergers. For the energy barons had concluded it was cheaper to find hydrocarbons on Wall Street than beneath remote and offshore lands. And takeovers in other industries outside of oil seemed a quicker path for meeting their first obligation-stockholder satisfaction. At the same time, government support for developing synthetic fuels and alternative renewable energy sources was cut back in response to corporate concern about a continued glut in oil. Less dramatically, the administration offered the repeal of a tax on oil production (a so-called windfall profits tax), more lenient regulation and bookkeeping on oil profits, and the lifting of remaining controls on the production of natural gas.

The Bush mission was a diplomatic boost not just for independent oilmen but for the industry as a whole. The multinationals have a cash stake in high priced oil, and have long entertained a deep-seated fear that the Arabs might somehow conspire to lower prices. And although the United States has considerably reduced its reliance on Middle East and OPEC oil during the last decade, the Persian Gulf, like the Mediterranean and the Caribbean, is still portrayed as a vital national interest that must be protected with military force. Not even the Arctic, once seen as a possible setting for cooperative protection and development by the great powers, is immune from the national rivalry of the U.S. and the U.S.S.R. for oil and gas reserves and military installations.

The American fighter bomber assault against Libya also has an oil dimension. The official justification is Colonel Qaddafi's support of terrorism. The latter may well be unbalanced as well as menacing. But he has understood the problems faced by oil-producing nations when dealing with the major corporations and their parent government.

When Qaddafi took office he sought to have Libya's attractive low sulfur oil developed by a number of firms rather than accepting a monopoly contract with one corporation. He insisted that these reserves, perhaps the largest in Africa, be developed immediately and not just staked out for some future date as part of the global reservoir system of the oil multinationals. Qaddafi was also an aggressive claimant for higher payments than either the "free market" or OPEC. A more pliable Libyan government would be a plus for the symbiotic interests of oil and Reagan's foreign policy.

Thus does energy resurface on the front pages. Once more the challenge to the citizen is to make the connections between fragmented issues and events.

Blessed by an extraordinary abundance of alternative resources, Americans have little need to panic. But they have much to learn and consider concerning the workings and costs of their own political economy.

We must consider a public energy policy which would encourage democratic institutions and accountability at home and which will recognize that other people, often with far fewer options, have a moral right to a share in the earth's abundance. There is much to be learned here. The need is not primarily for technological breakthroughs but for viable planning and controls responsive to the people in whose regions these developments take place.

The economy of energy is political in its essence. The challenge now, as before, is to make it more democratically so.

Robert Engler is the author of The Politics of Oil (1961) and also The Brotherhood of Oil (1977). Both are published by The University of Chicago Press and are available in paperback. He teaches political science at the Graduate School of the City University of New York.