Oil industry and global politics – an inevitably explosive mix

February 23, 2007



S. Salgado – Worker in the oil fields set on fire by Iraq in Kuwait, during the 1991 war


“Energy is the life-blood of the world’s economy.”

Abdallah S. Jum’ah, President and CEO, Saudi Aramco

Although the oil (& gas) industry is the fuel of today’s booming and ever integrating world economy, and although it is the world’s biggest industry in value, it is paradoxically the least globalised, in the sense of being driven by cross-border market forces. I have four things to say:

1) Despite wide-ranging privatization and de-regulation in the world in the last 20 years, the oil industry is and remains largely state-controlled or under strong political and government influence.

2) Oil is increasingly used for power politics – domestically and on the international scale. Otherwise, oil compounds international conflicts. Only democratic and clean government can limit the damage.

3) For structural physical and economic reasons, this fundamental oil problem is there to stay. It might even worsen given growing scarcity.

4) Well, the only way out is: less reliance on oil. And that one’s a real challenge.


1) Governments and oil companies

Let’s have a quick glance at state ownership of oil-assets across the world:

  • Saudi Aramco – Saudi Arabia’s monopoly oil producer overseeing 25% of the world’s oil reserves. 100% state-owned since nationalisation of foreign-owned companies in 1980.
  • China’s CNOOC – 100% state-owned, of course.
  • Petroleos de Venezuela (PVDSA) – 100% owned by the “Ministerio del Poder Popular para el Petroleo y la Energia” (literally: “Ministry of Popular Power for Petroleum and Energy”).
  • Statoil – 70.9% owned by the Norwegian state.
  • Gazprom – 51% owned by the Russian government – increased from 38% in 2005. (Here an interesiting article) Gazprom recently seized unilaterally stakes from companies such as Shell in a huge oil extraction project on the Sakhalin Islands (Sakhalin II project), creating a big international uproar.

Beyond formal ownership – oil companies and relations to government:

Even where the government does not have or no longer has any formal stakes in its national oil companies, the oil majors and their affiliates have strong influence over government.

Russia is exactly the border textbook case – the government “only” has a 51% controlling stake. But its chairman Mr Medvedev is also Deputy Prime Minister and is considered one of Putin’s potential successors. And given how Gazprom is used as a leverage for Mr Putin’s power politics at home and in the CIS (former Soviet Union), well there is no doubt that politics is easily hostage to oil interests.

I am not one of those populists who argue that the US invaded Iraq I 2003 to guarantee its oil supplies. However the fact that Dick Cheney, former CEO of Halliburton (not a proper oil company, but service provider to oil companies) was involved in preparing the war; given Halliburton’s role in Iraq post-war “reconstruction”; and given the oil industry’s support for Mr George Bush’s until recently unshakable stance on global warming – utter denial – well, what can you say about oil and politics?

In France, Total and Elf (now merged) were privatized a long time ago. But huge corruption scandals in the 1990s involving board members and politicians, and the company’s involvement in nasty post-colonial politics in some African states revealed entrenched incestuous relationships between government and France’s powerful oil business.

The Norwegian case. It is quite paradoxical – I have never heard any major complaints about Statoil’s behaviour, although it is owned to 2/3 by the government. Democracy and clean government matter more than formal ownership.

2) Oil, power politics and international relations today

The Saudi Arabian case and the Middle East. Saudi Arabia is a long-time ally of the United States. After the 9/11 attacks, Saudi Arabia’s political system and the alliance with the US was seriously questioned, but it seems that worries from Washington have toned down, or are at least no longer displayed officially. Especially since violence in Palestine has surged again, since tensions with Iran (another oil country) have escalated and since Iraq has proven to be a debacle of a scale the war’s staunchest critics and opponents themselves could not have imagined. Iraq, is, of course, the holder of the world’s fourth largest oil reserves. In these tense Middle Eastern times, the US needs an ally in the region.

The Russian case. No need to dwell on the fact that Gazprom is a major foreign policy tool to bully recalcitrant neighbours and former USSR satellites. No need to dwell on the fact that Gazprom is one of the big tools in the current power struggle for the Kremlin in the run-up to Putin’s scheduled succession . Recent state-control of Gazprom (or Gazprom’s control of the state?) and rising authoritarianism go hand-in hand.

The Venezuelan case. Would Hugo not have access to the resources of PVDSA and the revenues allowed by current high oil prices, could he buy some of his Latin American neighbour’s allegiance to his anti-American and anti-capitalist foreign policy?

The Chinese case. Lauded for its relatively low-profile stance on the international arena, China, with its increased prosperity and might and incredible national pride, is raising eyebrows very seriously. Sabre-rattling on Taiwan, its shooting down of a satellite are worrisome symptoms. But what really tends to shock: China is having a very crude oil diplomacy in Africa. Amnesty International condemns: “Uncontrolled arms exports from China continued to fuel massive human rights violations in Sudan. The Chinese government opposed the strengthening of the UN Security Council arms embargo on Sudan”. Yet some say that China is not having any more ambitions than to secure its oil supplies – but why do you need to accompany it all with official diplomacy and send out Hu Jintao, the president himself, to oil-producing African countries…?

3) What drives the oil industry today – structural features of the industry shift the balance of power towards more power for the rogues.

Why oil has recently become such an explosive topic is partially to be explained by its structural features strenghtened by current demand levels.

First feature: growing scarcity and demand. In 2006, oil prices reached there all-time high hovering around $70 per barrel. They subsequently went down again, and now fluctuate around $50. An average level powerful OPEC countries in the 1970s could not have imagined. The world economy has been growing fast in the last years, driving demand for natural resources. The thirst for oil and other natural resources from China, the world’s most populous country that has been growing at around 10% per annum for more than a decade is inexhaustible. India too, the world’s second most populous country, and the world’s second globaliser, contributes to this global thirst for oil. The world’s biggest consumer and importer of oil is also the world’s hegemon: the United States of America.

Second feature: an easily seizable fixed lucrative asset. Indeed, oil is a fixed asset subject to easy predatory seizure by governments. It is easy for governments, especially in former colonies, or humiliated developing countries, or countries which can’t stand the idea of having lost their past might (such as Russia), or populist leaders who like to manipulate poor crowds (Chavez) to seize an asset that can’t run away. No capital flight possible here. From such a government’s perspective, nationalisation is a popular tool to drive foreign-owned companies out of the country – the government can easily use the argument that these oil multinationals are the tools of foreign government imperialist influence. It’s less easy to do that that with foreign software companies – you’ll probably have problems of brain drain and leakage of rich people’s money to foreign accounts…. Oil also requires a lot of very costly fixed capital investments which pay out only very slowly and fix a company long-term to the oil project. Therefore oil is easily subject to what the scholar Shah M Tarzi calls in an article published in 1991 the “obsolescing bargain” (an article not available online called: “Third World Governments and Multinational Corporations: Dynamics of Host’s Bargaining Power” published in International Relations, Vol. X, no.3, May 1991). Tarzi writes:

(In the beginning:)

“Uncertainty about the success of a particular foreign investment project, its final cost, and the desire of a host country to attract investment create a market asymmetry of power favouring the multinational corporations (…)”

(But then:)

“But as uncertainty decreases and the investment projects become successful, the multinational’s initial bargaining advantage begins to erode. Invested fixed capital becomes “sunk”, a hostage to and a source of the host country’s bargaining strength as it acquires jurisdiction over valuable foreign assets (…) Consequently, when the bargaining advantage begins to shift to the host state, the initial agreements that favoured the multinationals are renegotiated (…)


In manufacturing, high technology, and services ventures, the probability of obsolescence is extremely low. Multinational corporations in natural resources, on the other hand are the most vulnerable (…).

Russia today is the textbook case-study for Mr Tarzi’s invaluable findings. In the last 18 months, banks, auto-producers, real estate agents, retailers such as IKEA have invested the Russian market. The government leaves them in peace and even welcomes the move. (It makes the country (feel) richer, therefore it is likely to increase Putin’s popularity…). This despite Gazprom’s growing clout on politics or despite the Yukos affair, or despite the recent Sakhalin-II affair.

4) So, what do we conclude?

Today’s risk of war and conflict are deeply intertwined with oil and energy affairs. Therfore, oil, the fuel of globalisation, might well be the force that could disrupt global peace and prosperity-enhancing globalisation. There was an article in the International Herald Tribune recently (thanks Fredrik), arguing that globalisation can increase the risk of war. This by fostering resentment and unrest on the side of the process’ losers. But how harmful a few riots that could be avoided if governments did a good job at compensating losers and creating more opportunities compared to the risk of a major conflagration, say, in the Middle East! (fuelled by globalisation-resentment, yes, but that’s not the heart of it). There is not only Palestine, there is not only Iraq. There is Iran.There is the nuclear issue in general – Iran (and the fact that Israel, Iran’s major regional foe, has the nuclear bomb), North Korea.

For its physical characteristics, oil is more easily seizable for predatory purposes of malevolent governments. So there are two types of solutions:

  • More democracy, cleanliness, and maket-econormics (private ownership of oil companies) could help avoid creating the explosive mix of oil politics and war. However, this is not likely to happen. Let’s face it. In the current context of high structural demand for oil, governments will increasingly use oil against democracy, government cleanliness and go towards less market-economics (be it Chavez-style “21st-century Socialism”, or tsarist ruthlessness a la Putin), and peace.
  • So the real solution comes from making oneself less dependent on physical resources for energy. This is going to be difficult, slow and not unproblematic either. An article by the FT today shows that the beginnings of an alternative biofuel industry based on ethanol (still modest, given needs, on a global scale) already wreak havoc and pose challenges. These range from rising prices for Mexico’s poor to the risk of further wiping out the rainforest in Brazil. And the recent revival of the nuclear option is also problematic. Could Americans please drop their car-only transport culture and Germans (following Ms Merkel’s recent criticism of Mr Putin’s gas pipeline and neighbourhood gas price policies) please renounce their petrol-consuming Mercedes-Benz and BMWs to begin with?

3 Responses to “Oil industry and global politics – an inevitably explosive mix”

  1. Olawore omokunmi Says:

    I do agree with the argument,oil &gas is the major source of unrest in the world order

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  3. Monica Says:

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