Saturday, March 27, 2004

The price of gasoline 

Just to show the economic impact of oil prices the Christian Science Monitor in an article today stated that for every 1 cent increase in the price of gasoline U.S motorists have to spend $1 billion per year more to purchase it. Whenever you discuss money with respect to oil you are always talking about BIG amounts of money.


Who is the bastard who did this? 

Here are world oil prices (per barrel) for the past 12 years:

1992 $18.11

1993 $16.17

1994 $15.41

1995 $17.15

1996 $20.60

1997 $18.55

1998 $12.09

Hugo Chavez takes office.

1999 $17.27

2000 $27.68

2001 $21.99

2002 $23.63

2003 $27.68

As can clearly be seen oil prices have increased significantly since Chavez became president of Venezuela. In fact within two years of his taking office the price of oil had more than doubled! And given that oil is now selling for over $30 per barrel it has virtually tripled during his tenure.

So next time that you wonder why the U.S. government wants so desperately to get rid of Chavez remember the above table. The U.S. is certainly doing all that it can to undermine Chavez. But it is not because Venezuela is not a democracy - Chavez has been elected twice by overwhelming margins. It is not because Venezuela is not free - Venezuela is one of the most free countries on the planet. It is not because Venezuela sponsors terrorism - Venezuela has nothing to do with any terrorist organizations.

Its the oil - stupid.


You're kidding - the invasion of Iraq and oil are related? 

No I'm not kidding. Obviously they are related.

I doubt there are many well informed people in the world who really believe that the U.S. went into Iraq to "make the world safe for democracy". But admittedly the idea that invading Iraq is related to oil is a contentious point and pro-war propaganda machine goes to great lengths to deny any linkage.

The reality is that there is more than one reason why the U.S. invaded Iraq. A few of the reasons are: to support Israel by overthrowing one of its stronger adversaries, to send a message to all potential foes that the U.S. will act forcefully against anyone who opposes it, and yes even for the president of the U.S. to pursue a personal vendetta.

But it is also clear that controlling Iraq's enormous oil reserves was probably the single most important reason for the invasion. Iraq had always been one of the worlds largest producers of light sweet crude (the kind that can most easily be refined into gasoline). However, after the 1991 Gulf War an embargo was placed on Iraq so that only a very limited amount of oil could be exported from Iraq. This served to significantly reduce the amount of oil on the world market.

For a while the impact of this was not noticeable. The reason is that the Soviet Union collapsed in the early 90s and its oil production flooded world markets thereby keeping prices low. However, as worldwide demand increased, and as a revitelized OPEC cut back on production, prices increased significantly. The United States, as the worlds largest importer of oil, was particularly hard hit by rising oil prices.

So how does this all lead back to Iraq? Simple, if OPEC could increase prices so significantly by decreasing oil production then the U.S could decrease prices if it could find a way to increase oil production. So where was there a very large pool of underutilized oil? You guessed it, Iraq. If the U.S could control Iraq's oil it could flood the world market with millions of barrels of oil every day and get prices to drop from $30/barrel to $10/barrel or less. And that would save the U.S. economy hundreds of billions of dollars every year. So now that the U.S. could no longer count on Venezuela to be a quota buster (thanks to Hugo Chavez - see the previous post) it would take over OPEC country and forcibly turn it into a quota buster.

One common retort to this by the pro-war propagandists is: "If all we really wanted was for there to be more oil floating around in the world then we would simply have lifted the sanctions against Saddam Hussein's regime and let him sell more oil - but we didn't do that"

The response to that is the world is never so simple. Yes, the U.S. wanted more oil on world markets but at the same time it did not want more oil revenue going to the existing Iraqi government. The regime of Saddam Hussein was very hostile to the U.S. and Israel and although the U.S. wanted oil it certainly didn't want to do anything that would strengthen or benefit the Hussein regime. Further, Hussein believed in OPEC and certainly would have always followed a policy of restraining production to keep prices high. Hence, letting Hussein export more oil would not have fully resolved the United States problem and it would have created new problems of its own.

Inexorably, the U.S. would driven to try to gain control of Iraq's oil for itself. And so far nearly 600 Americans have given their lives and U.S. taxpayers have shelled out tens of billions of dollars for that oil lust.


What does Hugo Chavez have to do with oil? 

What does oil have to do with what is going on in Venezuela?

The short answer is a lot.

The less short answer is Venezuela is one of the world's largest producers of oil and as such is a key player in international oil markets. It is also one of the largest suppliers of oil to the United States and its proven reserves are enormous.

For a long period of time Venezuela had a very nationalistic oil policy. It was a founding member of the Organization of Petroleum Exporting Countries. In the mid 1970s it nationalized its oil industry taking control away from the foreign oil companies of Exxon and Shell. It had an assertively pro-producer policy of defending prices, ie it sought to boost prices by restricting production. This policy had significant benefits for Venezuela as oil revenues soared and the people of Venezuela saw their standard of living increase.

In the late 1980s and early 1990s this changed dramatically. The Venezuelan state oil company which was formed after its nationalization, Petroleos de Venezuela SA, or PDVSA, started to become more autonomous and be run not in the interest of the Venezuelan nation but in the interest of the small number of technocrats running it. That is, instead of trying to maximize income for the Venezuelan state, as state owned industries are supposed to do, it tried to increase its own size so as to provide more and higher paying jobs for the technocrats running it.

There are also a couple of key facts regarding the executives running PDVSA in the 80s and 90s that need to be kept in mind. First, these executives were the same people who had been employed by Exxon and Shell in Venezuela prior to the nationalization of the oil industry. This meant that these executives had personal loyalties not to Venezuela but to the large oil companies of the West. Secondly, many of the PDVSA executives actually had separate private businesses in the oil industry. Hence, they had a direct financial interest pursuing oil policies that benefited their own private companies rather than trying to maximize revenues for the Venezuelan nation.

The end result of this was that in the 80s and 90s Venezuela pursued an oil policy which was really more in the interest of consumer nations than producer nations. That is, they wanted to produce large quantities of oil even if that meant the per barrel price of oil collapsed. Further, they saw there interests as being intertwined with the interests of the United States. On numerous occasions Venezuela went out of its way to make sure its oil policies accommodated the U.S.

Perhaps the most clear example of this is in 1990. After the invasion of Kuwait when oil prices spiked Venezuela, rather than reaping the benefits of higher prices, maximized production and released oil from its reserves, to keep prices low. In fact, throughout this period Venezuela consistently boosted production and became known within OPEC as a quota buster by virtue of it always exceeding its OPEC quota. In fact, the executives of PDVSA sought to take Venezuela out of that organization.

Enter Hugo Chavez, the current president of Venezuela who was elected in 1998 and re-elected in 2000. Among his major actions was to effect a 180 degree change in Venezuelan oil policy. Instead of a policy geared to accommodating the US and oil executives by maximizing production Venezuela would now pursue a policy of maximizing revenues by cutting back on production to boost prices. Instead of being a quota buster Venezuela now rallied OPEC to strictly enforce quotas and seek higher prices.

This policy proved spectacularly successful for Venezuela as the price for a barrel of Venezuelan oil went from $8 per barrel to over $20 per barrel. The additional billions of dollars of oil income were used by the Chavez government to fund its ambitious social programs. So far, so good - for Venezuela.

However, all of this created quite a consternation within the U.S. for obvious reasons. As a net importer of oil higher oil prices are an anathema to the U.S. government. So the actions of Hugo Chavez put him on a collision course with the U.S. government.

This brief background raises many points which will have to be detailed in other posts. However, it does show how oil is central to the conflict between the U.S. government and the current Venezuelan government.


So why this Blog? 

This new blog "Oil Wars" will give ongoing news, analysis, and commentary regarding events in two countries where a liquid hydrocarbon, aka "oil", is the prime driver of current events.

In todays "post-industrial" world where information is transmitted around the world at the speed of light it is easy to overlook the importance of oil. However, almost nothing in the industrialized world would function without it. The entire transportation system is completely dependent on oil. Without it most workers could not arrive at their jobs, no materials could be transported to factories where they are needed, and no goods could be sent to market. Without oil there would be no lubricants, no jetting to distant shores for vacations, and no trips down to highway to visit grandparents or friends. Modern society would not exist as we know it without oil.

Like the water we drink, the food we eat, and the air we breath it is easy to overlook its importance because most of us are used to it always being available at moderate prices. But as anyone who remembers the Arab oil boycott of the early 1970's can attest to when oil isn't available everything changes dramatically. Shortages of oil dramatically increase prices throughout the economy, lower the standard of living and make every day tasks difficult.

While many of us may have forgotten this the United States government has not. It is for this reason that is spends billions of dollars to stockpile oil throughout the country. It is why it spends billions more dollars along with much blood making sure that the U.S. has uninterrupted access to inexpensive oil. And it is for that reason that the U.S. is deeply involved in the events transpiring in both Iraq and Venezuela.


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