- Email: [email protected]
American-Arab relations: conflict or cooperation?
American- Arab relations: conf ict or cooperation ? Ragaei E! Mallakh
The oil embargo of 1973 appeared to turn the US supply situation into a problem of doomsday proportion. Dr El Mallakh argues that both producing and consuming countries can benefit from increased understanding of their natural economic links and recognition of their interdependence in the world energy market. Dr Ragaei El Mallakh is Professor of Economics and Chairman of African and Middle Eastern Studies at the University of Colorado, Boulder, Colorado, USA, and Director of the International Research Centre for Energy and Economic Development. This article is based on a paper presented to the Ninth Arab Petroleum Congress, Dubai, United Arab Emirates, 10-16 March, 1975.
170
Today's concern with the energy crisis in the USA has focused on (1) Project Independence; (2) security of petroleum supply; (3) pricing; and (4) the accumulation of surplus oil funds. These four issues involve areas of potential conflict or of cooperation. Unfortunately, and maybe up to the present, possibly the greatest single obstacle to reducing tension and diminishing the confusion has been a lack of basic knowledge of the energy situation as it relates to the USA and the Arab world. To a lesser degree, this inadequate understanding is further complicated where the facts may be known but recognition of them is avoided assiduously.
Project Independence As originally outlined in 1973, this project stood counter to the concept of economic interdependence. The drive towards selfsufficiency in energy for the USA was launched without any attention to cost; moreover, the target of energy independence by 1980 was overly ambitious, raising expectations which could not be fulfilled. Tightening of environmental standards for air, water, and nuclear generation pollution as well as strip mining made the target even more difficult to hit. The original Project Independence undermined and delayed the establishment of a producer-consumer dialogue by emphasising the consumer view almost exclusively. Self-sufficiency is valid, especially if it is attainable within tolerable cost limits economic, financial, and environmental. However, in pushing for this solution some in the USA have done so with an attitude which ignores the natural economic links between the USA and the oil-producing nations and a shared interest in economic development by both the industrialised and industrialising countries. The apparent lack of recognition of the need for creating a far-reaching and constructive consumer-producer dialogue stems in large part from the fact that the USA has been accustomed to self-sufficiency, not only in energy but in most other essential raw materials. America was not only the largest petroleum producer and consumer; it has been an exporter, particularly in periods of energy dislocations as during the Second World War, and following the 1956 and 1967 Middle East conflicts. Excessive confidence, a usual by-product of self-sufficiency, can be especially dangerous when a change of approach is required by an alteration in the actual supply and demand forces. This has come as a shock to the USA if only because the American economy is the brightest example of successful competitiveness and the market system. ENERGY POLICY September 1975
American - Arab relations: conflict or cooperation?
Petroleum's share in US energy consumption This background of overconfidence may have contributed to the failure to explain openly the degree of American need for Arab petroleum - a self-deluding exercise. Some oil experts fed and supported the downgrading of US dependence on Middle Eastern petroleum, eg, M.A. Adelman, who judged the share of US imports from the Arab world and specifically Saudi Arabia as insignificant at under 5%. Only weeks before the embargo was instituted in 1973, he was suggesting that for Saudi Arabia to cut back production at that time would cause some short-term consumer problems but would be merely an 'international nuisance. '1 It seems that Adelman's full attention was riveted on the single issue of security of supply without any appraisal of other market functions in such areas as price level. One should recall as well that US Administration estimates, and those of Senator Henry Jackson who claims expertise in energy matters, where also on the order of 5%. In early October of that year, the Administration placed the shortage at about 10%. When finally faced with the cold reality of an Arab oil embargo, President Nixon noted in his energy message of November 7 that the USA was confronted by 'the most acute shortages of energy since World War II,' at least a 1017% shortfall between demand and supply through the winter. 2 Recognition and admission of the actual dependence on Middle East oil slowly edged nearer reality. The reputable trade publication, Petroleum Intelligence Weekly, put the level of imports (crude and product) from Arab sources until the end of November 1973 alone at a staggering three million barrels per day or 17% of total US demand. 3 Furthermore, this level was likely to rise with demand for Middle East oil reaching as high as 15% of total consumption by the end of 1973. It was anticipated that rationing, conservation, and increased domestic output could raise supply by as much as 1.5 million barrels per day or half the then current level of Middle Eastern imports - 8% of total consumption. The October war dashed the long-cherished US Administration hopes that talk of cut-off was bruited only by so-called 'radical' Arab states, and that oil and politics need not mix. That this latter idea was held in connection with Middle Eastern oil is surprising when there is abundant evidence that oil and politics mix domestically within the USA in Texas, Colorado, Alaska, and Louisiana, to cite a few examples. The Federal Energy Administration's Project Independence: A Summary, issued in November 1974, finally admitted that, in addition to the inconvenience caused by car petroleum shortages, the gross national product (GNP) of the USA dropped by $10 000 to $20 000 million during the embargo and unemployment caused by the embargo amounted to 500 000 workers? The report went on:
1Letters to the Editor, The N e w York Times, 10 September 1973. a Petroleum Intelligence Weekly, Special Supplement, 12 November 1973, p. 13. 3 Ibid, 29 October 1973, pp. 1-2. 4 United States, Federal Energy Administration, Project Independence: A Summary (US Government Printing Office, November 1974), p. 18. Slbid, p. 18.
It is true that a few years earlier, an embargo would have had no appreciable domestic effect. On the other hand, if the embargo had been delayed until several years in the future, when petroleum imports would have amounted to 50% of domestic consumption, there would have been no effective means of cushioning the domestic economy from the impact:
It is sufficient to note that for at least the next two decades, the USA will have ever closer and more extensive energy ties with the
ENERGY POLICY September 1975
171
American - Arab relations: conflict or cooperation?
producing countries. While avoiding great detail, the following factors should be kept in mind. First, in order to have avoided a shortage in 1973 even without an embargo, the USA needed an annual increase of 30% in production from Saudi Arabia alone. Second, raising domestic production cannot be effected overnight or at low cost. New offshore production has a lead time of approximately five years and relatively high costs (see Table 3). Opening Alaska's North Slope oil fields hinges on the pipeline, expected to cost at least $6000 million and reaching maximum delivery capacity by about 1980 at the earliest. Shale oil development, apart from serious environmental drawbacks and problems of inadequate water for processing, cannot be commercially available much before 1981. Further, the use of nuclear technology to release natural gas through underground detonations was dealt a sharp reversal through the passage of a referendum in the state of Colorado in the November 1974 general elections where the public voted that no future nuclear blasting of this type could take place without allowing a state-wide vote on each such undertaking. The nuclear energy target in Project Independence is to reduce the lead time from ten to six years to bring nuclear power plants on-stream. Speeding up the process may mean lower safety and pollution standards as well as higher costs. During 1974, there were numerous shutdowns of nuclear plants due to leaks and pollution problems. Expanding coal production faces snags as well: mine safety and strip mining standards, lowering pollution control levels to allow burning of coal of a higher sulphur content, capitalisation requirements, and logistics to get the fuel to major consumption centres. Realistically, petroleum's share in total energy consumption cannot be reduced drastically without sweeping repercussions in the transportation and industrial sectors.
Security of petroleum supply
and Gas Journal, 30 December 1974, p. 94. 7 Ibid, 2 December 1974, p. 23.
e Oil
172
With energy consumption patterns indicating the continued leadership of oil and natural gas, the question is from where the USA will get the needed imports. Canada and Venezuela, the so-called 'secure' Western hemisphere sources, cannot and will not take up the slack. Both have national conservation policies and the latter has decreasing oil reserves. Canada raised its export prices to the USA on natural gas in the late summer of 1974 by 67% and Venezuela has announced production cutbacks recently. Imports from Canada have dropped because Canadian crude, with its $6-50 per barrel export tax, is among the most expensive on the world market, almost priced out of the American marketplace. 6 (See Table 1.) Additionally, in November 1974 Canada's announced curb on oil exports to the USA stunned the American government which has had a habit of viewing Canadian natural resources as something of an extension of its own domestic supply. The reduction is scheduled to drop to 800 000 barrels per day by 1 January 1975, to 650000 barrels per day by mid-1975 and to zero by 1983. 7 The significance of this move is more striking when it is recalled that nearly a quarter of US crude oil imports have normally originated from Canada. Nigeria and Indonesia are still relatively small producers with much lower reserves compared to the Middle East. By 1980, about 40% of US petroleum consumption will come from imports of Middle Eastern and North African oil. ENERGY POLICY September 1975
A m e r i c a n - Arab relations." conflict or cooperation? Table 1. Regional sources of direct US oil imports (in 1000 barrels per day)
Direct source
Source." Petroleum Intelligence Weekly, 30 December 1974, p. 5.
June-Oct. 1974
Arab countries Other eastern hemisphere Canada Other western hemisphere
2 218.3
Total imports
6 674-8
Total demand
16 483.0
% of imports
% of demand
June-Oct. 1973
% of imports
% of demand
1 356,3
20.3
8.2
1 310.6
19.0
7.8
2 194.1 906.3
32.9 13.6
13.3 5-5
1 655.7 1 285.8
24.0 18.7
9.8 7.6
33-2
13-5
2 640.4
38.3
15.6
100.0
40.5
6 892-5
100.0
40.8
--
--
16 873-0
--
-
Table 2. Oil reserves and production for selected countries
Country Algeria Bahrain Canada Ecuador Egypt 3 Gabon Indonesia Iran Iraq Kuwait Libya Mexico Neutral z~ne 4 Nigeria Oman Qatar Saudi Arabia United Arab Emirates 5 USA Venezuela
Source: Oil and Gas Journal, 30 December 1974, pp. 108-109. 1 Does not include Arctic gas. 2 Revised. 3 Does not include occupied Sinai fields. 4 Shared by Kuwait and Saudi Arabia. 5 Abu Dhabi, Dubai, and Sharjah. 6 Does not include the Orinoco heavy oil belt. 7 Includes those countries not given in Table 2: Morocco, Syria, and Tunisia.
8 Ibid, 30 December 1974, p. 4.
Reserves as of January 1 1975 Oil (1000 Gas (109 cu ft) barrels)
Oil production Estimated 1974 % change from (1000 b/d) 1973
7 700 000 336 000 9 400 000 2 500 0002 3 700 000 1 750 000 15000000 66 000 000 35 000 000 72 800 0002 26 600 000 13582000 17 300 000 20 900 000 6 000 000 6 000 000 164 500 000
229 000 6 600 52 5001 5 000 3 500 7 000 15000 330 000 27 500 32 000 26 500 15000 7 500 45 000 2 100 8 000 55 000
888.8 68-0 1 682.0 232-0 118-3 182.0 1 457-0 6 128.0 1 829.3 2 600.0 1 700-0 513.5 485.4 2 300.0 297.0 546.0 8 400-0
--19.2 --2-9 12.5 -42.8 20.1 10-0 0-6 2.0 --7-4 --21-6 17.1 --4.3 15.0 -0.7 5.4 11.7
33 920 000 35 299 839 15 000 0006
203 000 250 000 43 000
2 032.0 8 945.0 3 025-0
37.2 --2.9 -10.0
1 709 064 602 924
46 382.0 19 169.7
2.0 --
Total non-communist world
Total Arab
604 297 189 376 456 450
If one analyses the five-month span of July to October 1973 and 1974 as periods basically free from embargo constraints, one finds a marked decline in direct oil imports from the traditional 'secure' sources of Venezuela and Canada (Western hemisphere) and a rise in imports from Eastern hemisphere sources. Despite efforts by the USA to diversify its sources of supply and although the degree of dependence on Arab oil still falls below that of other Eastern hemisphere sources (such as Iran and Nigeria), both in relative and absolute terms, the reliance on Arab petroleum has been increasing. Hand in hand with the changing American import patterns is the drop in US crude production of some 500 000 barrels per day. A decline of 2.3% in total US demand tended to hold down imports if only for a short while. It is expected that US domestic output will fall another 2 5 0 0 0 0 barrels per day in 1975 which, coupled with an estimated 2% increase in demand for the second half-year, will see imports rising in coming months. 8 The announced US government goal
ENERGY POLICY September 1975
173
American - Arab relations: conflict or cooperation?
of cutting oil imports in 1975 by 1 million barrels per day, given the above projections, seems largely unattainable. A factor reinforcing the direction of future US imports is the question of where the oil reserves lie globally. Table 2 offers the most recent estimates and presents a speaking tableau. For example, the small United Arab Emirates (the producers being Abu Dhabi, Dubai, and Sharjah) has approximately the same oil reserves as the USA although its production - almost wholly destined for export - is less than one-quarter that of the USA. Kuwait, with a population of about one million, has twice the reserves of the USA but produces at a level one-third that of the USA. And Saudi Arabia, the petroleum giant holding reserves five times that of the USA, had an output almost equal to that of the USA in 1974. As is clear from Table 2, Arab producers account for more than half of the total non-communist world reserves. Of the non-communist and non-US reserves from which future imports for the USA could be drawn, over two-thirds lie in Arab countries. Security of supply for US imports will depend accordingly on a growing Arab-American energy relationship. Cooperation in the economic field within a conducive political atmosphere is the best and possibly the only practical option for ensuring security of supply.
Petroleum pricing and inflation
9 The address was given on 21 S e p t e m b e r 1 9 7 4 : see Denver Post, 2 2
September 1974.
174
In the USA during the months since the embargo, a coalescence has been fashioned which includes a doomsday mentality about inflation and oil prices, the use of the embargo as a scapegoat to explain the country's economic problems, and opportunism on the part of a few politicians. For example, in addressing a New York audience, Senator Henry Jackson stated: 'I think the entire industrialised world faces a clear and present danger of economic destruction by the Arab oil cartel. '9 If an oil 'cartel' does in fact exist, then it is OPEC, to which seven Arab nations belong, as well as Ecuador, Gabon, Indonesia, Iran, Nigeria, and Venezuela - all non-Arab states. More than two-thirds of US oil imports come from Venezuela, Canada, and other non-Arab sources. As noted previously, both Venezuela and Canada have supported higher petroleum prices in addition to production cuts and/or limitations on exports to the USA. A long-standing anti-Arab influence on the American press has led to singling out the Arab nations among the oil-producing and exporting countries as villains of the energy and inflation woes. In this vein, portions of the mass media in the USA have fallen into the habit of using the terms 'OPEC' and 'Arab' interchangeably with the result that, by plan or merely chance, the Arabs almost solely bear the onus for the energy crisis and the price levels for petroleum. In fact, the opposite has been the case. It might be helpful to retrace briefly the events of recent months visd-vis oil prices. October 16, 1973 stands out as the date of OPEC's announcement that the price of crude oil produced by its members would be doubled. While this move was given its leading impetus by Iran, the trend toward higher posted prices was discernible in the negotiations which had been pursued between the producing nations and the oil companies for the preceding two years. Since 1970 the producing countries had been confronted by the negative impact of two dollar devaluations and rising inflation in industrial imports as
ENERGY POLICY September 1975
A m e r i c a n - A r a b relations: c o n f l i c t or c o o p e r a t i o n ?
well as in certain imported agricultural products. Not only was the increase substantial, but OPEC had moved unilaterally for the first time. The outbreak of the October war and the Arab embargo with production cutbacks coincided to reinforce the price rise by throwing the prevailing supply and demand out of balance. 1° A rush to buy up the oil left on the market led to a further doubling of the price announced on December 23 by Iran. So in less than three months, from October 16 until January 1, 1974, oil prices had quadrupled over the formerly established level. Since the early days of 1974, the only initiative to reduce oil prices has come from Arab producers as the November 11 decision in that year by Saudi Arabia, the United Arab Emirates, and Qatar. Yet regardless of the actualities in setting the price for oil, Senator Jackson advanced his scapegoat theme by suggesting that economic counter-measures in food be applied by the USA: 'I'm not talking about the non-Arab world. I'm talking about the Arab world.'" Apart from some panic over-reaction, there is growing recognition within the USA that the energy problems, inflation, and dollar outflow can be placed within a rational perspective. On the floor of the US Senate, the following was stated: 1°The sustained negotiations between OPEC and the oil companies and a study of the behaviour of OPEC as a cartel is examined in Shukri Ghanem, 'OPEC: A Cartel or a Group of Competing Nations?" in Ragaei El Mallakh and Carl McGuire, eds, Energy and Development (Boulder, Colorado, the International Research Centre for Energy and Economic Development, 1974), pp. 175-190. 1~Denver Post, 22 September 1974. lz Senator James McClure, Congressional Record (US Government Printing Office), 3 October 1974, p. $18154. 13 Oil and Gas Journal, 25 November 1974, p. 56. 14 Estimate by Robert Baldwin, President, Gulf Energy and Minerals Company, "Oil and Alternate Energy' in El Mallakh and McGuire, Energy and Development, p. 197.
Today, we are trying to say that it is not our fault that we have inflation; it is somebody else's. It must be the oil prices. In our own economy it is less than 1% of the inflation that is the result of the increased energy. We are constantly trying to find someone else to blame for the ills which we have created in our own economy.lZ .
.
.
Despite the OPEC increases, the alternatives to Middle Eastern oil are at least expensive, as seen in Table 3. For example, North Sea oil, always expensive to produce, is even more costly due to runaway inflation. A concrete platform ordered in December 1973 is expected to cost about $88.8 million installed while another of the same design ordered only six months later is estimated to cost $129.6 million, u Synthetic fuels are still above the current OPEC price levels. Liquefied coal or shale oil produced in quantity by about the 1980s would be around the order of $15 per barrel without taking into consideration inflation in the intervening years? 4
Table 3. Minimum prices required to develop new oil for the industrialised world
Source: William D. Witter, Inc, Weekly Research Abstract on Energy, 12 December 1974, 'High Cost of NonMiddle East Oil,' p. 265. 1 Amount of capital required to develop a large oil field expressed in dollars of total capital per daily barrel of output.
Source
Price per barrel
Capital per daily barrel ~
North Sea, UK Old tax structure New tax structure
$ 8-9 13-1~4
$ 7 500 7 500
13-14 12--13
16 000 16 000
8-9
10 000
Synthetics Oil shale Tar sands USA
ENERGY POLICY September 1975
Gulf of Mexico (200 ft. plus)
175
A m e r i c a n - A r a b relations: conflict or cooperation ?
Table 3 illustrates that in addition to oil production capital costs, which have almost doubled in 24 months, another major price variable has been the tax structure in major non-Middle Eastern operating areas. For example, while offshore production in the USA is more expensive than that in the North Sea per unit of output, the American tax structure is more favourable. With the new proposed tax structure on North Sea production, the comparable prices will cease, making this foreign source considerably higher in price than domestic output. It now appears that a significant reduction in Middle Eastern oil prices would severely set back the economic viability of diversification of oil supply in the industrialised nations. It is dangerous to oversimplify the issue of Middle East oil pricing as related to international energy and economic problems. To do so raises the expectation that a single item - Arab oil avarice - if corrected or counteracted would be a panacea. Inflation in the USA burgeoned due to a number of elements, including the more than $130 000 million spent in Vietnam with no positive effect on the wellbeing of the USA and the continuing, heavy American expenditures for armaments and military assistance to a few selected countries. Management of the US money supply by the Federal Reserve has also been first a prod to inflation (allowing an 8% annual increase) followed by an abrupt reversal of that policy (cutting back to a 2% increase) which now tends to feed recession. It is generally understood that energy, and particularly oil, has been severely underpriced for some time. In real terms, the price of petroleum was lower in 1973 than in 1959. To place oil in perspective, it should be recalled that other commodities have increased at an equal or even greater pace. Oil-exporting nations are quick to point out the drastic rise in their own import bills for the industrial products vital to their economic development programme. The prices of major industrial products from 1950 to 1973 rose by almost 475%. With the year 1937 as the base of 100, December 1973 indicated the following commodity prices: 15 Cotton Wheat Coffee
15The index of commodity prices was based on wholesale prices in the USA in 1937 as published in the International Monetary Fund, International Financial Statistics (February 1974).
176
672.1 439.7 621.6
Copper (Nov. 1973) 775.6 Petroleum 452.6 Cacao 785.2
Rice 833.3 Tin 601.4 Newsprint 428-9
Moreover, in recent years other raw material prices have shot up: bauxite increased by almost 500%, steel rose fourfold, phosphates tripled, and gold increased by about five times. In using the above commodities for comparative purposes, one distinction must be drawn - the intrinsic difference between renewable (agricultural) products and wasting assets (finite natural resources). Certain oil producers have 15-20 years of reserves left at their current production rate. These nations cannot be expected to sacrifice their futures, including their own industrial development and the structuring of more self-sustaining balanced economies simply to meet consumer requirements without some sort of trade-off. To individual consumers worldwide who have had to face an abrupt increase in the price of oil products, it should be made clear that the oil nations' $9-$10 per barrel income on crude is but a part of total cost. In consumer nations, per barrel taxes on car petroleum alone are estimated at $5 in the USA, $14 in Japan, and $28 in Western Europe.
ENERGY POLICY September 1975
A m e r i c a n - A r a b relations: c o n f l i c t o r c o o p e r a t i o n ?
A final word on inflation as it strikes the petroleum-exporting countries. Many Arab states, such as Kuwait, the United Arab Emirates, and Saudi Arabia are not only importers of capital goods but of foodstuffs as well and therefore cannot escape the impact of international inflation. Perhaps more importantly, the value of their large holdings of liquid assets (the petro-dollars) will be adversely affected by continuing inflationary pressure. Obviously the oil producers share with the consuming nations the same if not a greater interest in controlling inflation. It is a problem calling for concerted cooperation.
Surplus funds and absorptive capacity A spin-off effect of the increase in petroleum prices since October 1973 has been the accumulation of substantial capital surplus funds by the Arab producing countries. These funds have triggered an upsurge in interest and studies by national and international institutions such as the International Bank for Reconstruction and Development (World Bank), the International Monetary Fund, and the Organisation for Economic Cooperation and Development (OECD) and by private corporations and banks throughout the world. However, it is noteworthy that no serious studies have been conducted on the present and potential absorptive capacity of the Arab countries singly or as a regional unit. Absorptive capacity is a critical factor in determining the level of oil production and throughput: it affects pricing decisions. Accordingly, the varying levels of absorptive capacity are a primary determinant in the energy relationship between consumers and producers. As recently as midNovember 1974, the often repeated view was" The oil producers now enjoy a surplus of $60 billion [$60 x 109] far beyond their payments or development needs and manifestly more than they can invest. Enormous unabsorbed surplus revenues now jeopardize the very functioning of the
internationalmonetary system.16
le US Secretary of State Henry Kissinger, in an address given on 14 November 1974, Chicago, Illinois, Energy Crisis: Strategy for Cooperative Action," publication issued by the Department of State, Bureau of Public Affairs, Office of Media Services, p. 1,
Yet the Arab producers' approximately $40 000 million surplus in 1974 should be viewed in comparative terms; it is half the annual defence budget of the USA and less than half the amount of US foreign investment. The interest in financial surpluses has been motivated not only by the energy crisis but by the desire and actual need to attract accumulated funds to industrialised nations and international agencies as well as to lessen the impact of growing Arab financial influence within the world monetary system. Understandably, the impetus behind this non-Arab world attention to the unprecedented accumulation of funds in the Middle Eastern countries is more geared to its protection and economic interests than towards the economic development of the region which should be a target of the Arab states themselves. The most efficient approach to this latter goal would be a regional perspective. Clearly the surplus funds accumulated at the present time have initiated a new international balance of wealth. Nonetheless, the Arab world, taken as a whole, requires the channelling of this newly acquired financial wealth into developmental economic power. As of 1974, the Arab surplus funds totalled more than $40 000 million, a substantial amount of which could be absorbed at the regional level.
ENERGY POLICY September 1975
177
A m e r i c a n - A r a b relations: c o n f l i c t o r c o o p e r a t i o n ?
As a unit, the Arab countries would have a higher absorptive capacity than if the individual states' capacities were merely totalled, but separately. This result could be attributed to, first, regional projects, particularly in transport, communication, regulation of shared rivers, and complementary features in industries and agriculture, and second, economies of scale to be derived from massive economic enterprises. The most critical characteristic of oil exploitation is that petroleum is a non-renewable asset; direct oil revenue has, therefore, a limited lifespan and accordingly investment in diversified and renewable growth is absolutely essential. As a rough yardstick to regional absorptive potential, it should be kept in mind that the average per capita income in the Arab world is about $700 as compared with the US per capita income of over $4500. In agriculture, the cultivable land, rain-fed or irrigated, could be raised to over 300 million acres instead of the 50 million (15 million acres of which are irrigated) now under cultivation in the Arab world. If such development were attained, income from agriculture in the Arab countries could be increased from $3500 million to about $9500 million (at 1972 prices). Agriculture on a regional basis is capable of absorbing large amounts of capital. 17 Turning to industrialisation in the Arab world, one can distinguish between the oil and non-oil based economies. The apparent line of industrialisation in the oil states is petrochemicals, a capital-intensive industry with considerable potential; hence, conservation of petroleum is a valid if long-term concern. Overall, industry has, to date, played an extremely modest role in the oil-producing countries. In 1971 the total value of Saudi industrial production, excluding oil refining, represented only 1.7% of GNP. Arab oil states as a whole share certain characteristics: often small populations and narrow domestic markets; usually small geographical territories; relatively scanty agricultural sectors, if any; and a paucity of non-oil physical resources and water. The potential is much greater for diversified growth in the non-oil producing Arab countries. These nations have an abundance of labour, more skilled, and basically a more balanced sectoral mix. Industrialisation can still be expanded substantially. The share of industrial production to GNP has reached the highest level in Egypt (23%), followed by Tunisia and Syria (17% each), Lebanon (13%), and Jordan (11%). A regional approach in the Arab world could circumvent the consequences of size and narrowness of the individual domestic markets, facilitating the movement of factors of production in labour, managerial ability, and capital; unfortunately in the past, mobility of capital has not been adequate. Some thought might be given to the possibility of the oil states assisting their Arab neighbours by refinancing those debts outstanding to non-regional powers. Obviously this could expand the absorptive capacity of the region as well as freeing the area from external economic and political pressures. 1~ Greater detail on regional absorptive capacity was studied in Ragaei El
Industrialised nations, particularly the USA, should benefit from a stronger regional approach in the Middle East among the Arab states Arab World and Investment Policies," a as s u c h a n approach would widen the market for industrial paper given to the Conference on Invest- commodities and provide greater political stability in the Middle East. ment Policies of Surplus Funds of Arab Oil Producing Countries sponsored by the Surplus funds have enabled the Arab producers to extend aid to Arab Planning Institute (affiliated to the their less fortunate fellow countries in the developing world. An United Nations)andthe Kuwait Economic accusation which can be heard and read frequently in the USA is Society, 18-21 February 1974, Kuwait, pp. 5-6. exemplified by the statement of Senator Jackson: 'I think we have to Mallakh, "The Absorptive Capacityof the
178
ENERGY POLICY September 1975
A m e r i c a n - A r a b relations: c o n f l i c t o r c o o p e r a t i o n ?
18 Denver Post, 22 September 1974. 19 Okaz Weekly Edition (Jeddah, Saudi
Arabia), 28 December 1974. zo Christian Science Monitor, 15 October 1974 (Western edition). 21 US Department of the Treasury, News, release of 20 September 1974. 'The Financial and Economic Consequences of the Quadrupling of the Price of Oil' (submitted to the Senate Permanent Subcommittee on Investigations in Conjunction with Testimony by Secretary of the Treasury, William E. Simon, 18 September 1974), pp. 4-5. Among the actual transfers during this period was $ 5 0 0 million in purchases of World Bank bonds. ~ T h e s e are: Kuwait Fund for Arab Economic Development, General Authority for the Gulf and South Arabia, Abu Dhabi Fund for Arab Economic Development, Arab Fund for Economic and Social Development, Arab-African Bank, Arab Bank for Industrial and Agricultural Development in Africa, newly created Iraqi and Saudi funds for external aid and financing, the Libyan assistance body, and the Islamic Development Bank. 23 US Department of the Treasury, News, release of 20 September 1974. "The Financial and Economic Consequences of the Quadrupling of the Price of Oil,' p. 4. Secretary Simon went on to note that estimates of investment in Europe through direct placement loans to official or quasiofficial agencies, plus direct purchases of private securities and real estate by the oil-producing countries were of $ 2 0 0 0 million or more. At least $ 3 0 0 0 million could have been invested in the UK in that period.
seriously consider how far we're going to let them [the Arabs] injure the poor in our country and the poor in other countries of the world. '~8 The facts, largely and unfortunately unknown, disprove this assertion. The Arab oil states are massive aid extenders. Kuwait's foreign assistance accounts for almost 8% of its GNP, a proportion over 15 times greater than America's ½%. The same could be said of the United Arab Emirates which has extended by about $2000 million in 1974 in assistance? 9 Saudi Arabia is the world's largest donor to developing countries, exceeding $3000 million a year as compared to the USA's contribution of $2500 million annually, z° It is helpful to recall the relative economic bases of the USA and Saudi economies; the latter's population is about 3% of the former's. It has been estimated that members of OPEC have committed funds, mainly from Arab sources and Iran, to developing countries and multilateral lending institutions reportedly on the order of $15 000 million for 197431 One drawback hindering the maximisation of aid for the recipients and the recognition of what the Arab oil states are doing for the developing world is the confusion caused by the proliferation of aid-extending agencies - ten such bodies now exist, zz In addition, many loans go unannounced. The energy relationship between the USA and the Arab world also involves the flow of Arab investment. The excessive fears sometimes heard that the petro-dollar accumulations will ruin the economic system of the USA and industrialised West are unfounded when analysed. In the first eight months of 1974, about $7000 million was invested in the USA by the oil-producing countries (primarily Arab nations) of which $4000 million went into US government securities, z~ Overlooked is the fact that Arab investment in the USA is reducing the US balance of payments deficit and ends in partially offsetting the oil import bill owed to the major American petroleum suppliers of Canada, Venezuela, and Nigeria- all non-Arab.
Conclusions It seems somewhat odd that one even needs to point out that the energy relationship between the Arab world and the USA will deepen in coming years. First, in the next two to three decades, US energy requirements and Arab petroleum reserves will mesh to fulfil the interests of each party. The USA will import greater amounts of Arab oil since that is the major source from which petroleum will be available, considering Canadian and Venezuelan cutbacks and limitations. Second, the Arab countries, individually and collectively, will increasingly need US technology and capital equipment. Third, the Arab petroleum states need outlets for investment to convert as much of the returns from their wasting asset as possible into renewable forms of revenue. In this respect, there is a mutuality of interest with all nations, especially the world's industrial giant, the USA, in controlling inflation. If anything should have been learned during the past two years, it is that exaggeration solves nothing. No nation wants to be 'blackmailed' by threats of food or oil cut-offs or the use of military intervention. The repetition of catch phrases using such panic terms as 'strangulation' and 'destruction' of economic systems would seem only to make more difficult the path to cooperation and advantageous interdependence but it cannot lessen the need for cooperation. The
ENERGY POLICY September 1975
179
A m e r i c a n - A r a b relations: c o n f l i c t o r c o o p e r a t i o n ?
following areas of cooperation could concomitantly reduce friction and conflict.
see
expansion
and
1. An ongoing dialogue should be established at once between oil producers and consumers on a basis of equality. There should be joint support for such shared interests as energy conservation and development of alternatives to petroleum with studies of the latter undertaken by the Organisation of the Arab Petroleum Exporting Countries (OAPEC). 2. The Arab countries should crystallise their already stated interest in stability of oil prices. In this element, two considerations could be taken concurrently. International inflation is reflected in oil price levels and equally important, changes in the price of petroleum are both of direct and indirect nature because of the energy input in the final cost of innumerable products. 3. No discriminatory arrangements should be imposed either on Arab investments in the USA or on American investments in the Middle East. The relationship should be reciprocal. 24 The change in the direction of investment and investor calls for understanding on both sides; the USA must recognise that it alone is no longer the primary foreign investor worldwide and, in fact, will now become an outlet for such investment itself. The Arab world should understand that such a change will require a bit of getting used to on the part of the USA. 4. It will be unrealistic to think that the mutuality of economic interests will alone decide the extent and nature of the US-Arab energy relationship. A conducive political atmosphere could be created through the prompt implementation of United Nations resolutions on the Middle East question. 5. Unless the economic facts about the importance of Arab oil, the 24A top Arab official recently indicated mutuality of economic interests, and the positive aspects of the recognition of the interdependence and mutuality of interest in both the level of American-Arab energy relationship are disseminated w i t h i n the U S A , oil production and investment. There was judgements could be made on false or shaky premises to the detriment a clear comprehension of the Arab o f the U S A and the world at large. Facing up to the realities of the world's stake in the economic well-being of theUSA;Platt'sOilgram, 3ODecember energy relationship need not be an unpleasant or devastating 1974, p. 1. experience.
180
ENERGY POLICY September 1975
The oil embargo of 1973 appeared to turn the US supply situation into a problem of doomsday proportion. Dr El Mallakh argues that both producing and consuming countries can benefit from increased understanding of their natural economic links and recognition of their interdependence in the world energy market. Dr Ragaei El Mallakh is Professor of Economics and Chairman of African and Middle Eastern Studies at the University of Colorado, Boulder, Colorado, USA, and Director of the International Research Centre for Energy and Economic Development. This article is based on a paper presented to the Ninth Arab Petroleum Congress, Dubai, United Arab Emirates, 10-16 March, 1975.
170
Today's concern with the energy crisis in the USA has focused on (1) Project Independence; (2) security of petroleum supply; (3) pricing; and (4) the accumulation of surplus oil funds. These four issues involve areas of potential conflict or of cooperation. Unfortunately, and maybe up to the present, possibly the greatest single obstacle to reducing tension and diminishing the confusion has been a lack of basic knowledge of the energy situation as it relates to the USA and the Arab world. To a lesser degree, this inadequate understanding is further complicated where the facts may be known but recognition of them is avoided assiduously.
Project Independence As originally outlined in 1973, this project stood counter to the concept of economic interdependence. The drive towards selfsufficiency in energy for the USA was launched without any attention to cost; moreover, the target of energy independence by 1980 was overly ambitious, raising expectations which could not be fulfilled. Tightening of environmental standards for air, water, and nuclear generation pollution as well as strip mining made the target even more difficult to hit. The original Project Independence undermined and delayed the establishment of a producer-consumer dialogue by emphasising the consumer view almost exclusively. Self-sufficiency is valid, especially if it is attainable within tolerable cost limits economic, financial, and environmental. However, in pushing for this solution some in the USA have done so with an attitude which ignores the natural economic links between the USA and the oil-producing nations and a shared interest in economic development by both the industrialised and industrialising countries. The apparent lack of recognition of the need for creating a far-reaching and constructive consumer-producer dialogue stems in large part from the fact that the USA has been accustomed to self-sufficiency, not only in energy but in most other essential raw materials. America was not only the largest petroleum producer and consumer; it has been an exporter, particularly in periods of energy dislocations as during the Second World War, and following the 1956 and 1967 Middle East conflicts. Excessive confidence, a usual by-product of self-sufficiency, can be especially dangerous when a change of approach is required by an alteration in the actual supply and demand forces. This has come as a shock to the USA if only because the American economy is the brightest example of successful competitiveness and the market system. ENERGY POLICY September 1975
American - Arab relations: conflict or cooperation?
Petroleum's share in US energy consumption This background of overconfidence may have contributed to the failure to explain openly the degree of American need for Arab petroleum - a self-deluding exercise. Some oil experts fed and supported the downgrading of US dependence on Middle Eastern petroleum, eg, M.A. Adelman, who judged the share of US imports from the Arab world and specifically Saudi Arabia as insignificant at under 5%. Only weeks before the embargo was instituted in 1973, he was suggesting that for Saudi Arabia to cut back production at that time would cause some short-term consumer problems but would be merely an 'international nuisance. '1 It seems that Adelman's full attention was riveted on the single issue of security of supply without any appraisal of other market functions in such areas as price level. One should recall as well that US Administration estimates, and those of Senator Henry Jackson who claims expertise in energy matters, where also on the order of 5%. In early October of that year, the Administration placed the shortage at about 10%. When finally faced with the cold reality of an Arab oil embargo, President Nixon noted in his energy message of November 7 that the USA was confronted by 'the most acute shortages of energy since World War II,' at least a 1017% shortfall between demand and supply through the winter. 2 Recognition and admission of the actual dependence on Middle East oil slowly edged nearer reality. The reputable trade publication, Petroleum Intelligence Weekly, put the level of imports (crude and product) from Arab sources until the end of November 1973 alone at a staggering three million barrels per day or 17% of total US demand. 3 Furthermore, this level was likely to rise with demand for Middle East oil reaching as high as 15% of total consumption by the end of 1973. It was anticipated that rationing, conservation, and increased domestic output could raise supply by as much as 1.5 million barrels per day or half the then current level of Middle Eastern imports - 8% of total consumption. The October war dashed the long-cherished US Administration hopes that talk of cut-off was bruited only by so-called 'radical' Arab states, and that oil and politics need not mix. That this latter idea was held in connection with Middle Eastern oil is surprising when there is abundant evidence that oil and politics mix domestically within the USA in Texas, Colorado, Alaska, and Louisiana, to cite a few examples. The Federal Energy Administration's Project Independence: A Summary, issued in November 1974, finally admitted that, in addition to the inconvenience caused by car petroleum shortages, the gross national product (GNP) of the USA dropped by $10 000 to $20 000 million during the embargo and unemployment caused by the embargo amounted to 500 000 workers? The report went on:
1Letters to the Editor, The N e w York Times, 10 September 1973. a Petroleum Intelligence Weekly, Special Supplement, 12 November 1973, p. 13. 3 Ibid, 29 October 1973, pp. 1-2. 4 United States, Federal Energy Administration, Project Independence: A Summary (US Government Printing Office, November 1974), p. 18. Slbid, p. 18.
It is true that a few years earlier, an embargo would have had no appreciable domestic effect. On the other hand, if the embargo had been delayed until several years in the future, when petroleum imports would have amounted to 50% of domestic consumption, there would have been no effective means of cushioning the domestic economy from the impact:
It is sufficient to note that for at least the next two decades, the USA will have ever closer and more extensive energy ties with the
ENERGY POLICY September 1975
171
American - Arab relations: conflict or cooperation?
producing countries. While avoiding great detail, the following factors should be kept in mind. First, in order to have avoided a shortage in 1973 even without an embargo, the USA needed an annual increase of 30% in production from Saudi Arabia alone. Second, raising domestic production cannot be effected overnight or at low cost. New offshore production has a lead time of approximately five years and relatively high costs (see Table 3). Opening Alaska's North Slope oil fields hinges on the pipeline, expected to cost at least $6000 million and reaching maximum delivery capacity by about 1980 at the earliest. Shale oil development, apart from serious environmental drawbacks and problems of inadequate water for processing, cannot be commercially available much before 1981. Further, the use of nuclear technology to release natural gas through underground detonations was dealt a sharp reversal through the passage of a referendum in the state of Colorado in the November 1974 general elections where the public voted that no future nuclear blasting of this type could take place without allowing a state-wide vote on each such undertaking. The nuclear energy target in Project Independence is to reduce the lead time from ten to six years to bring nuclear power plants on-stream. Speeding up the process may mean lower safety and pollution standards as well as higher costs. During 1974, there were numerous shutdowns of nuclear plants due to leaks and pollution problems. Expanding coal production faces snags as well: mine safety and strip mining standards, lowering pollution control levels to allow burning of coal of a higher sulphur content, capitalisation requirements, and logistics to get the fuel to major consumption centres. Realistically, petroleum's share in total energy consumption cannot be reduced drastically without sweeping repercussions in the transportation and industrial sectors.
Security of petroleum supply
and Gas Journal, 30 December 1974, p. 94. 7 Ibid, 2 December 1974, p. 23.
e Oil
172
With energy consumption patterns indicating the continued leadership of oil and natural gas, the question is from where the USA will get the needed imports. Canada and Venezuela, the so-called 'secure' Western hemisphere sources, cannot and will not take up the slack. Both have national conservation policies and the latter has decreasing oil reserves. Canada raised its export prices to the USA on natural gas in the late summer of 1974 by 67% and Venezuela has announced production cutbacks recently. Imports from Canada have dropped because Canadian crude, with its $6-50 per barrel export tax, is among the most expensive on the world market, almost priced out of the American marketplace. 6 (See Table 1.) Additionally, in November 1974 Canada's announced curb on oil exports to the USA stunned the American government which has had a habit of viewing Canadian natural resources as something of an extension of its own domestic supply. The reduction is scheduled to drop to 800 000 barrels per day by 1 January 1975, to 650000 barrels per day by mid-1975 and to zero by 1983. 7 The significance of this move is more striking when it is recalled that nearly a quarter of US crude oil imports have normally originated from Canada. Nigeria and Indonesia are still relatively small producers with much lower reserves compared to the Middle East. By 1980, about 40% of US petroleum consumption will come from imports of Middle Eastern and North African oil. ENERGY POLICY September 1975
A m e r i c a n - Arab relations." conflict or cooperation? Table 1. Regional sources of direct US oil imports (in 1000 barrels per day)
Direct source
Source." Petroleum Intelligence Weekly, 30 December 1974, p. 5.
June-Oct. 1974
Arab countries Other eastern hemisphere Canada Other western hemisphere
2 218.3
Total imports
6 674-8
Total demand
16 483.0
% of imports
% of demand
June-Oct. 1973
% of imports
% of demand
1 356,3
20.3
8.2
1 310.6
19.0
7.8
2 194.1 906.3
32.9 13.6
13.3 5-5
1 655.7 1 285.8
24.0 18.7
9.8 7.6
33-2
13-5
2 640.4
38.3
15.6
100.0
40.5
6 892-5
100.0
40.8
--
--
16 873-0
--
-
Table 2. Oil reserves and production for selected countries
Country Algeria Bahrain Canada Ecuador Egypt 3 Gabon Indonesia Iran Iraq Kuwait Libya Mexico Neutral z~ne 4 Nigeria Oman Qatar Saudi Arabia United Arab Emirates 5 USA Venezuela
Source: Oil and Gas Journal, 30 December 1974, pp. 108-109. 1 Does not include Arctic gas. 2 Revised. 3 Does not include occupied Sinai fields. 4 Shared by Kuwait and Saudi Arabia. 5 Abu Dhabi, Dubai, and Sharjah. 6 Does not include the Orinoco heavy oil belt. 7 Includes those countries not given in Table 2: Morocco, Syria, and Tunisia.
8 Ibid, 30 December 1974, p. 4.
Reserves as of January 1 1975 Oil (1000 Gas (109 cu ft) barrels)
Oil production Estimated 1974 % change from (1000 b/d) 1973
7 700 000 336 000 9 400 000 2 500 0002 3 700 000 1 750 000 15000000 66 000 000 35 000 000 72 800 0002 26 600 000 13582000 17 300 000 20 900 000 6 000 000 6 000 000 164 500 000
229 000 6 600 52 5001 5 000 3 500 7 000 15000 330 000 27 500 32 000 26 500 15000 7 500 45 000 2 100 8 000 55 000
888.8 68-0 1 682.0 232-0 118-3 182.0 1 457-0 6 128.0 1 829.3 2 600.0 1 700-0 513.5 485.4 2 300.0 297.0 546.0 8 400-0
--19.2 --2-9 12.5 -42.8 20.1 10-0 0-6 2.0 --7-4 --21-6 17.1 --4.3 15.0 -0.7 5.4 11.7
33 920 000 35 299 839 15 000 0006
203 000 250 000 43 000
2 032.0 8 945.0 3 025-0
37.2 --2.9 -10.0
1 709 064 602 924
46 382.0 19 169.7
2.0 --
Total non-communist world
Total Arab
604 297 189 376 456 450
If one analyses the five-month span of July to October 1973 and 1974 as periods basically free from embargo constraints, one finds a marked decline in direct oil imports from the traditional 'secure' sources of Venezuela and Canada (Western hemisphere) and a rise in imports from Eastern hemisphere sources. Despite efforts by the USA to diversify its sources of supply and although the degree of dependence on Arab oil still falls below that of other Eastern hemisphere sources (such as Iran and Nigeria), both in relative and absolute terms, the reliance on Arab petroleum has been increasing. Hand in hand with the changing American import patterns is the drop in US crude production of some 500 000 barrels per day. A decline of 2.3% in total US demand tended to hold down imports if only for a short while. It is expected that US domestic output will fall another 2 5 0 0 0 0 barrels per day in 1975 which, coupled with an estimated 2% increase in demand for the second half-year, will see imports rising in coming months. 8 The announced US government goal
ENERGY POLICY September 1975
173
American - Arab relations: conflict or cooperation?
of cutting oil imports in 1975 by 1 million barrels per day, given the above projections, seems largely unattainable. A factor reinforcing the direction of future US imports is the question of where the oil reserves lie globally. Table 2 offers the most recent estimates and presents a speaking tableau. For example, the small United Arab Emirates (the producers being Abu Dhabi, Dubai, and Sharjah) has approximately the same oil reserves as the USA although its production - almost wholly destined for export - is less than one-quarter that of the USA. Kuwait, with a population of about one million, has twice the reserves of the USA but produces at a level one-third that of the USA. And Saudi Arabia, the petroleum giant holding reserves five times that of the USA, had an output almost equal to that of the USA in 1974. As is clear from Table 2, Arab producers account for more than half of the total non-communist world reserves. Of the non-communist and non-US reserves from which future imports for the USA could be drawn, over two-thirds lie in Arab countries. Security of supply for US imports will depend accordingly on a growing Arab-American energy relationship. Cooperation in the economic field within a conducive political atmosphere is the best and possibly the only practical option for ensuring security of supply.
Petroleum pricing and inflation
9 The address was given on 21 S e p t e m b e r 1 9 7 4 : see Denver Post, 2 2
September 1974.
174
In the USA during the months since the embargo, a coalescence has been fashioned which includes a doomsday mentality about inflation and oil prices, the use of the embargo as a scapegoat to explain the country's economic problems, and opportunism on the part of a few politicians. For example, in addressing a New York audience, Senator Henry Jackson stated: 'I think the entire industrialised world faces a clear and present danger of economic destruction by the Arab oil cartel. '9 If an oil 'cartel' does in fact exist, then it is OPEC, to which seven Arab nations belong, as well as Ecuador, Gabon, Indonesia, Iran, Nigeria, and Venezuela - all non-Arab states. More than two-thirds of US oil imports come from Venezuela, Canada, and other non-Arab sources. As noted previously, both Venezuela and Canada have supported higher petroleum prices in addition to production cuts and/or limitations on exports to the USA. A long-standing anti-Arab influence on the American press has led to singling out the Arab nations among the oil-producing and exporting countries as villains of the energy and inflation woes. In this vein, portions of the mass media in the USA have fallen into the habit of using the terms 'OPEC' and 'Arab' interchangeably with the result that, by plan or merely chance, the Arabs almost solely bear the onus for the energy crisis and the price levels for petroleum. In fact, the opposite has been the case. It might be helpful to retrace briefly the events of recent months visd-vis oil prices. October 16, 1973 stands out as the date of OPEC's announcement that the price of crude oil produced by its members would be doubled. While this move was given its leading impetus by Iran, the trend toward higher posted prices was discernible in the negotiations which had been pursued between the producing nations and the oil companies for the preceding two years. Since 1970 the producing countries had been confronted by the negative impact of two dollar devaluations and rising inflation in industrial imports as
ENERGY POLICY September 1975
A m e r i c a n - A r a b relations: c o n f l i c t or c o o p e r a t i o n ?
well as in certain imported agricultural products. Not only was the increase substantial, but OPEC had moved unilaterally for the first time. The outbreak of the October war and the Arab embargo with production cutbacks coincided to reinforce the price rise by throwing the prevailing supply and demand out of balance. 1° A rush to buy up the oil left on the market led to a further doubling of the price announced on December 23 by Iran. So in less than three months, from October 16 until January 1, 1974, oil prices had quadrupled over the formerly established level. Since the early days of 1974, the only initiative to reduce oil prices has come from Arab producers as the November 11 decision in that year by Saudi Arabia, the United Arab Emirates, and Qatar. Yet regardless of the actualities in setting the price for oil, Senator Jackson advanced his scapegoat theme by suggesting that economic counter-measures in food be applied by the USA: 'I'm not talking about the non-Arab world. I'm talking about the Arab world.'" Apart from some panic over-reaction, there is growing recognition within the USA that the energy problems, inflation, and dollar outflow can be placed within a rational perspective. On the floor of the US Senate, the following was stated: 1°The sustained negotiations between OPEC and the oil companies and a study of the behaviour of OPEC as a cartel is examined in Shukri Ghanem, 'OPEC: A Cartel or a Group of Competing Nations?" in Ragaei El Mallakh and Carl McGuire, eds, Energy and Development (Boulder, Colorado, the International Research Centre for Energy and Economic Development, 1974), pp. 175-190. 1~Denver Post, 22 September 1974. lz Senator James McClure, Congressional Record (US Government Printing Office), 3 October 1974, p. $18154. 13 Oil and Gas Journal, 25 November 1974, p. 56. 14 Estimate by Robert Baldwin, President, Gulf Energy and Minerals Company, "Oil and Alternate Energy' in El Mallakh and McGuire, Energy and Development, p. 197.
Today, we are trying to say that it is not our fault that we have inflation; it is somebody else's. It must be the oil prices. In our own economy it is less than 1% of the inflation that is the result of the increased energy. We are constantly trying to find someone else to blame for the ills which we have created in our own economy.lZ .
.
.
Despite the OPEC increases, the alternatives to Middle Eastern oil are at least expensive, as seen in Table 3. For example, North Sea oil, always expensive to produce, is even more costly due to runaway inflation. A concrete platform ordered in December 1973 is expected to cost about $88.8 million installed while another of the same design ordered only six months later is estimated to cost $129.6 million, u Synthetic fuels are still above the current OPEC price levels. Liquefied coal or shale oil produced in quantity by about the 1980s would be around the order of $15 per barrel without taking into consideration inflation in the intervening years? 4
Table 3. Minimum prices required to develop new oil for the industrialised world
Source: William D. Witter, Inc, Weekly Research Abstract on Energy, 12 December 1974, 'High Cost of NonMiddle East Oil,' p. 265. 1 Amount of capital required to develop a large oil field expressed in dollars of total capital per daily barrel of output.
Source
Price per barrel
Capital per daily barrel ~
North Sea, UK Old tax structure New tax structure
$ 8-9 13-1~4
$ 7 500 7 500
13-14 12--13
16 000 16 000
8-9
10 000
Synthetics Oil shale Tar sands USA
ENERGY POLICY September 1975
Gulf of Mexico (200 ft. plus)
175
A m e r i c a n - A r a b relations: conflict or cooperation ?
Table 3 illustrates that in addition to oil production capital costs, which have almost doubled in 24 months, another major price variable has been the tax structure in major non-Middle Eastern operating areas. For example, while offshore production in the USA is more expensive than that in the North Sea per unit of output, the American tax structure is more favourable. With the new proposed tax structure on North Sea production, the comparable prices will cease, making this foreign source considerably higher in price than domestic output. It now appears that a significant reduction in Middle Eastern oil prices would severely set back the economic viability of diversification of oil supply in the industrialised nations. It is dangerous to oversimplify the issue of Middle East oil pricing as related to international energy and economic problems. To do so raises the expectation that a single item - Arab oil avarice - if corrected or counteracted would be a panacea. Inflation in the USA burgeoned due to a number of elements, including the more than $130 000 million spent in Vietnam with no positive effect on the wellbeing of the USA and the continuing, heavy American expenditures for armaments and military assistance to a few selected countries. Management of the US money supply by the Federal Reserve has also been first a prod to inflation (allowing an 8% annual increase) followed by an abrupt reversal of that policy (cutting back to a 2% increase) which now tends to feed recession. It is generally understood that energy, and particularly oil, has been severely underpriced for some time. In real terms, the price of petroleum was lower in 1973 than in 1959. To place oil in perspective, it should be recalled that other commodities have increased at an equal or even greater pace. Oil-exporting nations are quick to point out the drastic rise in their own import bills for the industrial products vital to their economic development programme. The prices of major industrial products from 1950 to 1973 rose by almost 475%. With the year 1937 as the base of 100, December 1973 indicated the following commodity prices: 15 Cotton Wheat Coffee
15The index of commodity prices was based on wholesale prices in the USA in 1937 as published in the International Monetary Fund, International Financial Statistics (February 1974).
176
672.1 439.7 621.6
Copper (Nov. 1973) 775.6 Petroleum 452.6 Cacao 785.2
Rice 833.3 Tin 601.4 Newsprint 428-9
Moreover, in recent years other raw material prices have shot up: bauxite increased by almost 500%, steel rose fourfold, phosphates tripled, and gold increased by about five times. In using the above commodities for comparative purposes, one distinction must be drawn - the intrinsic difference between renewable (agricultural) products and wasting assets (finite natural resources). Certain oil producers have 15-20 years of reserves left at their current production rate. These nations cannot be expected to sacrifice their futures, including their own industrial development and the structuring of more self-sustaining balanced economies simply to meet consumer requirements without some sort of trade-off. To individual consumers worldwide who have had to face an abrupt increase in the price of oil products, it should be made clear that the oil nations' $9-$10 per barrel income on crude is but a part of total cost. In consumer nations, per barrel taxes on car petroleum alone are estimated at $5 in the USA, $14 in Japan, and $28 in Western Europe.
ENERGY POLICY September 1975
A m e r i c a n - A r a b relations: c o n f l i c t o r c o o p e r a t i o n ?
A final word on inflation as it strikes the petroleum-exporting countries. Many Arab states, such as Kuwait, the United Arab Emirates, and Saudi Arabia are not only importers of capital goods but of foodstuffs as well and therefore cannot escape the impact of international inflation. Perhaps more importantly, the value of their large holdings of liquid assets (the petro-dollars) will be adversely affected by continuing inflationary pressure. Obviously the oil producers share with the consuming nations the same if not a greater interest in controlling inflation. It is a problem calling for concerted cooperation.
Surplus funds and absorptive capacity A spin-off effect of the increase in petroleum prices since October 1973 has been the accumulation of substantial capital surplus funds by the Arab producing countries. These funds have triggered an upsurge in interest and studies by national and international institutions such as the International Bank for Reconstruction and Development (World Bank), the International Monetary Fund, and the Organisation for Economic Cooperation and Development (OECD) and by private corporations and banks throughout the world. However, it is noteworthy that no serious studies have been conducted on the present and potential absorptive capacity of the Arab countries singly or as a regional unit. Absorptive capacity is a critical factor in determining the level of oil production and throughput: it affects pricing decisions. Accordingly, the varying levels of absorptive capacity are a primary determinant in the energy relationship between consumers and producers. As recently as midNovember 1974, the often repeated view was" The oil producers now enjoy a surplus of $60 billion [$60 x 109] far beyond their payments or development needs and manifestly more than they can invest. Enormous unabsorbed surplus revenues now jeopardize the very functioning of the
internationalmonetary system.16
le US Secretary of State Henry Kissinger, in an address given on 14 November 1974, Chicago, Illinois, Energy Crisis: Strategy for Cooperative Action," publication issued by the Department of State, Bureau of Public Affairs, Office of Media Services, p. 1,
Yet the Arab producers' approximately $40 000 million surplus in 1974 should be viewed in comparative terms; it is half the annual defence budget of the USA and less than half the amount of US foreign investment. The interest in financial surpluses has been motivated not only by the energy crisis but by the desire and actual need to attract accumulated funds to industrialised nations and international agencies as well as to lessen the impact of growing Arab financial influence within the world monetary system. Understandably, the impetus behind this non-Arab world attention to the unprecedented accumulation of funds in the Middle Eastern countries is more geared to its protection and economic interests than towards the economic development of the region which should be a target of the Arab states themselves. The most efficient approach to this latter goal would be a regional perspective. Clearly the surplus funds accumulated at the present time have initiated a new international balance of wealth. Nonetheless, the Arab world, taken as a whole, requires the channelling of this newly acquired financial wealth into developmental economic power. As of 1974, the Arab surplus funds totalled more than $40 000 million, a substantial amount of which could be absorbed at the regional level.
ENERGY POLICY September 1975
177
A m e r i c a n - A r a b relations: c o n f l i c t o r c o o p e r a t i o n ?
As a unit, the Arab countries would have a higher absorptive capacity than if the individual states' capacities were merely totalled, but separately. This result could be attributed to, first, regional projects, particularly in transport, communication, regulation of shared rivers, and complementary features in industries and agriculture, and second, economies of scale to be derived from massive economic enterprises. The most critical characteristic of oil exploitation is that petroleum is a non-renewable asset; direct oil revenue has, therefore, a limited lifespan and accordingly investment in diversified and renewable growth is absolutely essential. As a rough yardstick to regional absorptive potential, it should be kept in mind that the average per capita income in the Arab world is about $700 as compared with the US per capita income of over $4500. In agriculture, the cultivable land, rain-fed or irrigated, could be raised to over 300 million acres instead of the 50 million (15 million acres of which are irrigated) now under cultivation in the Arab world. If such development were attained, income from agriculture in the Arab countries could be increased from $3500 million to about $9500 million (at 1972 prices). Agriculture on a regional basis is capable of absorbing large amounts of capital. 17 Turning to industrialisation in the Arab world, one can distinguish between the oil and non-oil based economies. The apparent line of industrialisation in the oil states is petrochemicals, a capital-intensive industry with considerable potential; hence, conservation of petroleum is a valid if long-term concern. Overall, industry has, to date, played an extremely modest role in the oil-producing countries. In 1971 the total value of Saudi industrial production, excluding oil refining, represented only 1.7% of GNP. Arab oil states as a whole share certain characteristics: often small populations and narrow domestic markets; usually small geographical territories; relatively scanty agricultural sectors, if any; and a paucity of non-oil physical resources and water. The potential is much greater for diversified growth in the non-oil producing Arab countries. These nations have an abundance of labour, more skilled, and basically a more balanced sectoral mix. Industrialisation can still be expanded substantially. The share of industrial production to GNP has reached the highest level in Egypt (23%), followed by Tunisia and Syria (17% each), Lebanon (13%), and Jordan (11%). A regional approach in the Arab world could circumvent the consequences of size and narrowness of the individual domestic markets, facilitating the movement of factors of production in labour, managerial ability, and capital; unfortunately in the past, mobility of capital has not been adequate. Some thought might be given to the possibility of the oil states assisting their Arab neighbours by refinancing those debts outstanding to non-regional powers. Obviously this could expand the absorptive capacity of the region as well as freeing the area from external economic and political pressures. 1~ Greater detail on regional absorptive capacity was studied in Ragaei El
Industrialised nations, particularly the USA, should benefit from a stronger regional approach in the Middle East among the Arab states Arab World and Investment Policies," a as s u c h a n approach would widen the market for industrial paper given to the Conference on Invest- commodities and provide greater political stability in the Middle East. ment Policies of Surplus Funds of Arab Oil Producing Countries sponsored by the Surplus funds have enabled the Arab producers to extend aid to Arab Planning Institute (affiliated to the their less fortunate fellow countries in the developing world. An United Nations)andthe Kuwait Economic accusation which can be heard and read frequently in the USA is Society, 18-21 February 1974, Kuwait, pp. 5-6. exemplified by the statement of Senator Jackson: 'I think we have to Mallakh, "The Absorptive Capacityof the
178
ENERGY POLICY September 1975
A m e r i c a n - A r a b relations: c o n f l i c t o r c o o p e r a t i o n ?
18 Denver Post, 22 September 1974. 19 Okaz Weekly Edition (Jeddah, Saudi
Arabia), 28 December 1974. zo Christian Science Monitor, 15 October 1974 (Western edition). 21 US Department of the Treasury, News, release of 20 September 1974. 'The Financial and Economic Consequences of the Quadrupling of the Price of Oil' (submitted to the Senate Permanent Subcommittee on Investigations in Conjunction with Testimony by Secretary of the Treasury, William E. Simon, 18 September 1974), pp. 4-5. Among the actual transfers during this period was $ 5 0 0 million in purchases of World Bank bonds. ~ T h e s e are: Kuwait Fund for Arab Economic Development, General Authority for the Gulf and South Arabia, Abu Dhabi Fund for Arab Economic Development, Arab Fund for Economic and Social Development, Arab-African Bank, Arab Bank for Industrial and Agricultural Development in Africa, newly created Iraqi and Saudi funds for external aid and financing, the Libyan assistance body, and the Islamic Development Bank. 23 US Department of the Treasury, News, release of 20 September 1974. "The Financial and Economic Consequences of the Quadrupling of the Price of Oil,' p. 4. Secretary Simon went on to note that estimates of investment in Europe through direct placement loans to official or quasiofficial agencies, plus direct purchases of private securities and real estate by the oil-producing countries were of $ 2 0 0 0 million or more. At least $ 3 0 0 0 million could have been invested in the UK in that period.
seriously consider how far we're going to let them [the Arabs] injure the poor in our country and the poor in other countries of the world. '~8 The facts, largely and unfortunately unknown, disprove this assertion. The Arab oil states are massive aid extenders. Kuwait's foreign assistance accounts for almost 8% of its GNP, a proportion over 15 times greater than America's ½%. The same could be said of the United Arab Emirates which has extended by about $2000 million in 1974 in assistance? 9 Saudi Arabia is the world's largest donor to developing countries, exceeding $3000 million a year as compared to the USA's contribution of $2500 million annually, z° It is helpful to recall the relative economic bases of the USA and Saudi economies; the latter's population is about 3% of the former's. It has been estimated that members of OPEC have committed funds, mainly from Arab sources and Iran, to developing countries and multilateral lending institutions reportedly on the order of $15 000 million for 197431 One drawback hindering the maximisation of aid for the recipients and the recognition of what the Arab oil states are doing for the developing world is the confusion caused by the proliferation of aid-extending agencies - ten such bodies now exist, zz In addition, many loans go unannounced. The energy relationship between the USA and the Arab world also involves the flow of Arab investment. The excessive fears sometimes heard that the petro-dollar accumulations will ruin the economic system of the USA and industrialised West are unfounded when analysed. In the first eight months of 1974, about $7000 million was invested in the USA by the oil-producing countries (primarily Arab nations) of which $4000 million went into US government securities, z~ Overlooked is the fact that Arab investment in the USA is reducing the US balance of payments deficit and ends in partially offsetting the oil import bill owed to the major American petroleum suppliers of Canada, Venezuela, and Nigeria- all non-Arab.
Conclusions It seems somewhat odd that one even needs to point out that the energy relationship between the Arab world and the USA will deepen in coming years. First, in the next two to three decades, US energy requirements and Arab petroleum reserves will mesh to fulfil the interests of each party. The USA will import greater amounts of Arab oil since that is the major source from which petroleum will be available, considering Canadian and Venezuelan cutbacks and limitations. Second, the Arab countries, individually and collectively, will increasingly need US technology and capital equipment. Third, the Arab petroleum states need outlets for investment to convert as much of the returns from their wasting asset as possible into renewable forms of revenue. In this respect, there is a mutuality of interest with all nations, especially the world's industrial giant, the USA, in controlling inflation. If anything should have been learned during the past two years, it is that exaggeration solves nothing. No nation wants to be 'blackmailed' by threats of food or oil cut-offs or the use of military intervention. The repetition of catch phrases using such panic terms as 'strangulation' and 'destruction' of economic systems would seem only to make more difficult the path to cooperation and advantageous interdependence but it cannot lessen the need for cooperation. The
ENERGY POLICY September 1975
179
A m e r i c a n - A r a b relations: c o n f l i c t o r c o o p e r a t i o n ?
following areas of cooperation could concomitantly reduce friction and conflict.
see
expansion
and
1. An ongoing dialogue should be established at once between oil producers and consumers on a basis of equality. There should be joint support for such shared interests as energy conservation and development of alternatives to petroleum with studies of the latter undertaken by the Organisation of the Arab Petroleum Exporting Countries (OAPEC). 2. The Arab countries should crystallise their already stated interest in stability of oil prices. In this element, two considerations could be taken concurrently. International inflation is reflected in oil price levels and equally important, changes in the price of petroleum are both of direct and indirect nature because of the energy input in the final cost of innumerable products. 3. No discriminatory arrangements should be imposed either on Arab investments in the USA or on American investments in the Middle East. The relationship should be reciprocal. 24 The change in the direction of investment and investor calls for understanding on both sides; the USA must recognise that it alone is no longer the primary foreign investor worldwide and, in fact, will now become an outlet for such investment itself. The Arab world should understand that such a change will require a bit of getting used to on the part of the USA. 4. It will be unrealistic to think that the mutuality of economic interests will alone decide the extent and nature of the US-Arab energy relationship. A conducive political atmosphere could be created through the prompt implementation of United Nations resolutions on the Middle East question. 5. Unless the economic facts about the importance of Arab oil, the 24A top Arab official recently indicated mutuality of economic interests, and the positive aspects of the recognition of the interdependence and mutuality of interest in both the level of American-Arab energy relationship are disseminated w i t h i n the U S A , oil production and investment. There was judgements could be made on false or shaky premises to the detriment a clear comprehension of the Arab o f the U S A and the world at large. Facing up to the realities of the world's stake in the economic well-being of theUSA;Platt'sOilgram, 3ODecember energy relationship need not be an unpleasant or devastating 1974, p. 1. experience.
180
ENERGY POLICY September 1975