‘Backlash fuels supply problems’ – published by The Telegraph

June 2008

By Daniel Litvin – This article was originally published in The Telegraph on 17 June 2008

Western political leaders are showing themselves to be embarrassingly impotent, at least when it comes to influencing the oil price.

For many months now, as the oil price has soared to ever higher levels, posing ever greater risks to the global economy, Gordon Brown, George Bush and fellow western prime ministers and presidents have pleaded with, menaced and cajoled the nations of Opec, the oil producers cartel, to pump more crude so as to cool the market. Australian PM Kevin Rudd recently suggested the G8 apply a “blowtorch” to Opec – vividly if unsubtly conveying the intensity of western diplomatic pressure on the oil cartel.

But after all this, only Saudi Arabia, Opec’s largest producer, seems willing to budge, and only by several inches: the desert kingdom looks set to announce a modest output boost, potentially at a global oil summit this weekend. News of this on Monday failed to prevent the oil price breaching a fresh record. Meanwhile many other Opec nations have so far turned a deaf ear to western pleading, batting off calls for a major and urgent Opec-wide production increase.

As in the 1970s oil crises, in short, the west once again looks powerless against an Opec apparently willing to let the oil price soar to ever high levels. But the reason this situation has recurred is not simply that of the basic economic supply and demand factors now being endlessly repeated by energy experts in media studios across the globe. Growing oil demand from Asia, declining non-Opec supplies, fears of impending physical supply constraints within Opec, financial speculation, and the simple desire of Opec members to rake in the cash while they can – all these are important factors, but only a part of the picture.

For viewed from a longer term perspective, the current situation also has much to do with politics and in particular the unintended consequences of the way in which western nations and western companies have jointly sought to open up oil-rich nations to foreign oil investment over many decades. As a general rule, the western approach has been to focus on securing deals in the short term, often at the expense of longer-term stability. Undemocratic regimes have often been supported on the basis of their initial friendliness to the western firms.

Internally-driven factors in oil rich countries have played a part in eventual outcomes of course. But the western model of oil engagement has contributed to a striking pattern across the world’s biggest oil producers, from Venezuela to Saudi Arabia to Nigeria: backlash and resentment in varying forms against foreign control of oil and against domestic elites seen to support this; strong popular support for explicit restrictions or bans on investment by western oil firms (the oil sectors of many Opec nations have for this reason long been dominated by state enterprises); and general political instability fuelled by skewed economic development, corruption and other oil-related ills. And all of this has had the perverse effect of limiting rather than encouraging the supply of oil to world markets.

In some countries like Saudi Arabia and Kuwait, regimes are still supposedly friendly towards the west, but dare not allow significant western ownership of oil reserves as this would undermine their internal legitimacy. In other countries such as Iran and Venezuela, politicians and leaders have at various points booted out western oil firms or threatened to restrict exports to the west as part of populist campaigns. Nigeria remains open to foreign oil investment, but local attacks on oil installations have led to cuts in national output.

Iraq, meanwhile, serves as a vivid demonstration that even regime change engineered by the west may not swiftly open up a country to western oil investment. The invasion of Iraq may or may not have been explicitly motivated by oil. But if it was, it hasn’t yet succeeded: the government in Baghdad, sensitive to domestic anti-western sentiment, has yet to sign any major deals with foreign oil firms.

China and India’s current quest for foreign oil resources of their own has added to a new dimension to the issue, but also partly aggravated the problem: in its approach in Sudan, for example, China has adopted some of the worst aspects of the historic western model of resource acquisition. In a similar vein various oil-rich, undemocratic countries in West Africa and Central Africa are now being eagerly courted by both western and Asian powers (and their oil companies) alike.

Without doubt there are growing spots of light in this gloomy picture. The Extractive Industries Transparency Initiative, a global anti-corruption programme, the corporate responsibility efforts of some oil firms, and the work of the International Energy Agency, a forum for collaboration between wealthy nations, are all helping slowly to reform the standard patterns of engagement with oil-rich parts of the world. But it is time now for a radical stepping up of these efforts, for old habits die hard.

Critically, securing foreign oil needs to be understood to be a long-term game: about generating development and stability and supporting open societies in host countries not just wooing their current regimes. The cost of getting this wrong is further oil crises in future decades as these countries once again turn and happily wield their power against those seeking their resources.

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