Is it the oil, stupid?

Cyrus BinaTo say that oil figures prominently in the Middle East is to state the obvious. However, does this mean that the politics of imperialism in the region should be solely or mainly explained through attempts to gain control over oilfields and pipelines? That has certainly been the approach of much of the left in Britain and elsewhere. Noted US-based academic Cyrus Bina, author of The economics of the oil crisis, disagrees with such crude simplifications. Having studied the oil industry, international relations and global economics for many years, he has developed a sophisticated Marxist theory of the oil crisis, oil rent, and monopoly and competition in the oil industry. Here, in this short, representative, article, first published in 2004, he makes a convincing case that the US under George W Bush was not concerned with obtaining direct control over oilfields.1 With the ongoing US-UK campaign to impose tougher sanctions on Iran, including its huge oil industry, plans for regime change brought about from above and, failing that, a devastating military strike, the left urgently needs to correct past mistakes. Cyrus Bina is about to embark on a speaking tour of Britain that will include meetings in Manchester, Glasgow and London. In particular he will be addressing the November 28 annual general meeting of Hands Off the People of Iran

Saddam Hussein was an ideal enemy and Iraq was an easy target. Iraq had already lost nearly two thirds of its forces and more than 80% of its infrastructure and civil society in the 1990-91 Gulf War and, if that was not enough, it was subjected to frequent American and British bombings, along with nearly 12 years of stringent sanctions. The war against a weak symbolic enemy seemed inevitable.2

In the May 12 2003 issue of The Nation, there appeared a tiny piece entitled, ‘It’s the oil, stupid’, by Michael T Klare, who – like much of the majority of the popular left – is obsessed with oil in connection with the deceitful invasion of Iraq by the Bush administration.

To be sure, the motivation of the Cheney-Wolfowitz gang and the impeachable actions of the president himself all point in the direction of personal gain. Similarly, the fact of the transfer of tens of billions of dollars from the public coffers to the willing hands of a handful of favourite companies that were readily chosen as the beneficiary of this destructive creation is beyond dispute. Yet, to be worthy of analysis, one needs to be brave enough to go beyond surface phenomena in order to grasp the complexities associated with deeper epochal understanding of this bizarre tragedy.

Writers like Klare and George Caffentzis (the latter, incidentally, holds that oil is a “metaphysical” commodity) should realise that their oil scenario, firstly, ignores the analytical periodisation of oil history into: (a) the cartelisation of oil; (b) the transitional period of 1950-72; and (c) the globalisation of the entire oil industry since the mid-1970s. Secondly, it overlooks the distinction between ‘administrative pricing’ and value theoretic price formation. Thirdly, it neglects the nature of property relations, formation of differential oil rents, and character of the Organisation of Oil-Exporting Countries (Opec) in the (post-1974) globalisation of oil. Fourthly, it discounts the pivotal role of the least productive US oilfields that is key to the worldwide pricing of oil. Fifthly, it fails to recognise that Opec prices are constrained by worldwide competitive spot (oil) prices, and thus Opec oil rents are subject to global competition. And finally their oil scenario fails to realise that the unqualified usage of words, such as ‘access’, ‘dependency’ and ‘control’, in the context of a globalised oil industry, is anachronistic.3

Hegemony and mediation

The concept of hegemony is indivisible and ‘organic’ in respect to its constituent economic, political and ideological counterparts. And it is due to the consensual internal dynamics and intrinsic ideological power of the whole that one can exert minimal external and antagonistic power projection. This, in a broad measure, defines hegemony and its relevance to international relations, for instance, during the rise and fall of Pax Americana (1945-79). Gramsci, nevertheless, focuses on the “organic intellectuals” and examines their relationship with the “world of production” mediated through the complex intricacies of “civil society” and “political society”.4

Hegemony, in my view, has four characteristics. It must be: (a) organically consensual; (b) internally driven; (c) historically endowed; and (d) institutionally mediating. The focus here is upon the rise and fall of Pax Americana, a historically specific inter-state transnational system that rose after 1945 and fell in the late 1970s. The matter of hegemony and hegemonic structure is the mutual characteristic of the system as a whole, and not a separate property of the hegemon. Therefore, given the demise of Pax Americana, the claim of American hegemony remains baseless.

The epochal measure of hegemony

In order to see the concrete manifestation of hegemony in the then-ascendant Pax Americana,5 one has to focus on the application of the (tripartite) ‘doctrine of global containment’ after World War II. This doctrine embodied: (a) the containment of the Soviet Union; (b) the containment of democratic/nationalist movements in the ‘third world’; and (c) the containment, cooption and moulding of the social, political and intellectual atmosphere in the United States.6

The example of the first containment is the forceful confinement of the Soviets behind the ‘iron curtain’ and imposition of cold war. The cold war was a multidimensional hegemonic phenomenon, spanning the economy, polity and the entire realm of culture and ideology worldwide.

Evidence of the second type of containment is the declaration of an anti-colonial policy, on the one hand, and subversion of the democratic national movements in the ‘third world’, on the other. This doctrine often led to covert campaigns and coup d’etats that brought a number of dictatorial regimes to power whose contradictory material existence and discursive mirror image have, nevertheless, become an embodiment of Pax Americana itself.7 At the same time, America’s deliberate attempt at the speedy economic transformation of these social formations – for instance, via the introduction and forceful implementation of universal land reform programmes – has led to their hasty inclusion within the capitalist sphere of transnational exploitation and transnational markets.

Finally, the third containment strategy was implemented in terms of US domestic thought control and marginalisation of independent and militant institutions and labour unions within America’s ‘civil society’. Thus, historically, the American state smashed the militant labour unions and political and professional institutions of the left in order to universalise a ‘hegemonic model’ of intellectual emulation that shifted the entire American political spectrum significantly to the reactionary right. McCarthyism was just the tip of the iceberg in this regard.8 Here, underpinning social relations, on the one hand, and the mediating economic, political and ideological institutions, on the other hand, have reflected the measure of hegemony embedded in this system.

At a more concrete level, since the 1970s, it is through the particular historical relationship of state and the manifold social, political and economic integration and disintegration vis-à-vis transnational capital that the US-dominated hierarchy of Pax Americana and thus American hegemony has come to an end. Yet during the ‘golden age’, Soviet containment had its own manifold objectives that proved successful. The containment of democracy and independence in the third world chunk of Pax Americana had, nonetheless, left some degree of formal national sovereignty. And post-war containment of people’s political thought and action in US domestic ‘civil society’ had not led to the establishment of a police state with arbitrary, pre-emptive and systemic totalitarian objectives, if not practices.

In December 2001, the Bush administration unveiled its ‘National strategy to combat weapons of mass destruction’.9 The Bush administration used the unfortunate events of September 11 2001 as a convenient cover in order to advance toward its ‘permanent war’ policy.10 This was a formal annunciation of the Doctrine of pre-emption, a fundamental policy break from the Doctrine of containment, as follows:

“An effective strategy for countering WMD [weapons of mass destruction], including their use and further proliferation, is an integral component of the national security strategy of the United States of America. As with the war on terrorism [ie, invasion of Afghanistan, etc], our strategy for homeland security, and our new concept of deterrence, the US approach to combat WMD represents a fundamental change from the past ….

“Because deterrence may not succeed, and because of the potentially devastating consequences of WMD use against our forces and civilian population, US military forces and appropriate civilian agencies must have the capability to defend against WMD-armed adversaries, including in appropriate cases through pre-emptive measures. This requires capabilities to detect and destroy an adversary’s WMD assets before these weapons are used” (emphasis added).11

The mismeasure of ‘blood for oil’

Institutionally, the traditional petroleum cartels must be viewed as a precursor to, and not a substitute for, the highly developed contemporary global oil market. Today’s oil sector is globally structured and competitive.12

Here, contrary to the bourgeois reading of the term, competition is neither perfect nor imperfect. It rather reflects the coercive aspect of concentration and centralisation of capital in the oil industry. Yet, the myth of the war-for-oil scenario is hard to resist.

On the right, in an interview, James Schlesinger remarked: “The United States [Bush, the father] has gone to war now, and the American people presume this will lead to a secure oil supply. As a society we have made a choice to secure access to oil by military means. The alternative is to become independent to a large degree of that secure access.”13 On the left, Michael Klare declared: “Two key concerns underlie the administration’s [Bush, the son] thinking: First, the United States is becoming dangerously dependent on imported petroleum to meet its daily energy requirements, and second, Iraq possesses the world’s largest reserves of untapped petroleum after Saudi Arabia.”14

Thus, the positions of the right and the left on the cause of these wars are remarkably identical. The question is, why? Is it because of the correctness of rightwing neoclassical theory in revealing the universal truth? Or is it because of the fallacious economic ideology that is uncritically accepted by the theoryless and clueless left?

Finally, the Indian leftist electronic journal Aspects of India’s economy devoted its entire December 2002 double-issue to ‘What is behind the invasion of Iraq’.15 The authors conclude, among other things, that the attempted conversion of oil revenues from the US dollar to the euro prompted the invasion of Iraq by United States. As Krugman pointed out in a short note, any possible shift from the US dollar to the euro on the part of Opec will result in a “small change”.16

However, the fly-by-night authors do not lose any opportunity to grasp this straw in the midst of dreadful confusion. The globalisation of oil since the mid-1970s has rendered the sui generis categories of ‘access’ and ‘dependency’ meaningless.17 Based on my value-theoretic framework, I distinguish between what is ‘organic’ and what is ‘conjectural’ in the pricing of oil. To be sure, the price of production of the highly explored oilfields within the US lower 48 states is the global centre of gravity of oil prices everywhere. As a result, in competition, the more productive oilfields in the world are potentially able to collect additional profits in terms of oil rents.

Let us look at a simple exercise, attempting the calculation of the value of all Iraqi proven oil reserves in today’s prices.18 Given the Iraqi proven oil reserves of nearly 110 billion barrels, in two separate assumptions, let us assume two alternative production schedules of 2.5 and 5 million daily barrels, as follows:

If the rate of utilisation of these reserves, ceteris paribus, will be set at 2.5 and 5 million average daily barrels, these oil reserves would be exhausted within nearly 120 years and 60 years, respectively. Accordingly, our respective annual production schedules are:
1. (2.5 x 365 = 912.5) 912.5 million annual barrels
2. (5 x 365 = 1,825) 1,825 million annual barrels.

Assuming $20 per barrel for the price of Iraqi oil (viz the 1990s average market price) and about $10 for the Persian Gulf differential oil rent.19

Let us further assume:
1. an 8% real discount rate;
2. a 3% annual inflation rate;
3. a 3% annual growth rate of addition to the proven reserves.

Scenario 1

1. The assumption of 2.5 million daily barrels: Given an annual production volume of 912.5 million barrels within 120 years and $10 of differential oil rent per barrel, the value of differential oil rents for 120 years is as follows:
912.5 million x 120 = 109.5 billion barrels
109.5 billion x $10 = $1.095 trillion

Given an 8% annual discount rate, a 3% annual rate inflation and a 3% annual growth rate of addition to proven reserves, we have applicable rate of discount of 8%. Thus, the present value of $1.095 trillion at 8% discount rate to be received in a lump sum after 120 years is $106.8 million.

2. The assumption of five million daily barrels: Given an annual production volume of 1,825 million barrels within 60 years and a $10 differential oil rent per barrel, the value of differential oil rents at the end of 60 years is as follows:
1,825 million x 60 = 109.5 billion barrels
109.5 billion x $10 = $1.095 trillion

Given an 8% annual discount rate, a 3% annual rate inflation and a 3% annual growth rate of addition to the proven reserves, we would have applicable rate of discount of 8%. Thus, present value of $1.095 trillion at 8% discount rate to be received in lump sum after 60 years is $10.81 billion.

Based upon the second, much larger figure of the two, the price tag for differential oil rents in Iraq is slightly less than $11 billion. Now, let us assume that the Iraqi oil reserves are underestimated: say, that they are five times the reported figures. Thus, ceteris paribus, one would arrive at $11 billion x 5 = $55 billion. Now, let us double our reasonable figure of $10 for differential rent per barrel. Again, we would never arrive at a figure much larger than $110 billion for the present value of all differential oil rents to be paid to the Iraqis. In other words, the ‘Iraqi oil price tag’ does not exceed $110 billion to be received in lump sum at the end of the period. This is indeed chump change, given the staggering costs associated with prosecuting the war and the unanticipated financial and incalculable human costs of the occupation of Iraq.

Scenario 2

Let us further assume that the proceeds from differential oil rents in Iraq will be received on an annual basis: say, for 55 years. In other words, assume that the Bush administration and its future successors are able to invent a pill that tranquillises not only the people of Iraq, but also the people of the entire world in order to calmly and comfortably steal the Iraqi oil rents for 55 years, till 2058. Now we need to calculate the summation of the present value of annuitised annual Iraqi oil rents for the period of 55 years. This scenario is more realistic, since the payments of oil rents are made on an annual basis. Again, for the sake of argument, we have chosen a much larger average figure of 5 million daily barrels, assuming a very optimistic production schedule:
5 million x 365 = 1.825 billion annual barrels
1.825 billion x $10 = $18.25 billion

The present value of $18.250 billion annual payment, to be paid for 55 consecutive years is equal to $224.8 billion.

According to the Nordhaus estimates, the direct and indirect costs of forceful occupation of Iraq would range somewhere between $120 billion and $1.6 trillion over a 10-year period.20 Should my estimated value of Iraqi oil warrant such a huge undertaking? As we can see, the reductionist view of ‘no blood for oil’ is hardly an answer to the complex objective forces that – despite the misleading intention of new US foreign policy – are underlying the upheavals of present global polity. Rather such misleading intention, and prior and subsequent actions on the part of the US government, are readily explicable by the underlying epochal forces that so irreversibly led to America’s loss of hegemony, on the one hand, and American refusal to accept it gracefully, on the other hand.

This is the main and real cause of the new world disorder rather than this ad hoc ‘oil scenario’ that the popular left harps on about.

Notes

  1. This article originally appeared in Union for Radical Political Economics Newsletter of spring 2004. See www.urpe.org/index.html
  2. See, for instance, a neo-conservative view by Kenneth Adelman: ‘Cakewalk in Iraq’, The Washington Post February 13 2002.
  3. For theoretical underpinnings see C Bina The economics of the oil crisis New York 1985.
  4. A Gramsci The prison notebooks New York1971, p161.
  5. See R Steel Pax Americana New York 1977.
  6. See GF Kennan Memoirs: 1925-1950 Boston 1967.
  7. The 1953 and 1954 CIA coups against Mossadegh and Arbenz are but the two prime examples.
  8. See MB Levin Political hysteria in America: the democratic capacity for repression New York 1971.
  9. One has to distinguish between epochal and temporal reflections of the Bush administration.
  10. The Wolfowitz-Berle neo-conservative project of permanent war, particularly for ‘redrawing’ the map of the Middle East, was formulated long before September 11 2001.
  11. White House The national security strategy of the United States of America September 17 2002, pp1,3.
  12. Here competition is defined in Marxian terms.
  13. J Schlesinger, interview: ‘Will war yield oil security?’ Challenge March-April 1991.
  14. MT Klare, ‘Oiling the wheels of war’ The Nation October 7 2002. As a corollary, the ‘necessity’ of oil exploration from Alaska’s wildlife can also be justified by such arguments.
  15. ‘Behind the invasion of Iraq’ Aspects of India’s economy No33-34, December 2002.
  16. See P Krugman, ‘Nothing for money’, March 14 2003: www.wwsprinceton.edu/~pkrugman/oildollar.html
  17. MT Klare, ‘Oiling the wheels of war’ The Nation October 7 2002.
  18. This is a rough exercise just for the sake of illustration and approximation of the order of magnitude of Iraqi oil rents. One or two points in the discount rate or inflation rate would not make a significant difference in the basic argument. The figure of $224.8 billion is for 55 consecutive years. If the occupation of Iraq is assumed to be for a 10-year period or so, then a fraction of this figure will be relevant, which in turn will be even much smaller in magnitude than the commonly estimated cost of US war and occupation of Iraq.
  19. See C Bina The economics of the oil crisis New York 1985.
  20. WD Nordhaus, ‘Iraq: the economic consequences of war’ New York Review of Books Vol 49 (19), December 5 2002.
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2 responses to “Is it the oil, stupid?

  1. Sry for commenting off topic … which Word Press template are you using? Looks awesome!!

  2. oxfordcommunists

    We are using the Cutline theme. Glad you like it.

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