LOCATION OF KEY OIL OUTLETS DUE BIGGER ROLE IN U.S. STRATEGY

G. Henry, M. Schuler
Center for Strategic and International Studies
Washington, D.C.

In attempting to identify America's vital interests in the Persian Gulf, President Bush has emphasized that we cannot permit one man, Saddam Hussein, to control-through annexation of intimidation-that region's vital oil supply valves. That formulation reflects four underlying assumptions, two of which are entirely valid and two of which are highly dubious.

The formulation is correct in emphasizing the importance of the region's oil valves:

America's principal interest-some would say "only" interest-in the area arises out of Middle Eastern domination of world oil trade. Prior to the crisis, the 15 exporters of the Middle East and North Africa accounted for over half of the world's imports; over three quarters of the world's unutilized production capacity; and over two thirds of the world's recoverable reserves.
The principal threat to American interests is, therefore, the risk that such domination will be used to impose an unexpected oil price shock. While that risk is, of course, economic-rising inflation, reduced economic growth, greater unemployment, stock market collapse, dollar devaluation, limited interest rate flexibility, increased bankruptcies-it is so pervasive as to threaten the fundamental underpinnings of American power.

Although the formulation is correct in emphasizing the American interests and risks associated with the location of the world's most important oil valves, it ventures onto much more shaky ground when it focuses upon the identity of the individual/regime that controls those valves. Such focus reflects two additional assumptions:

It assumes that fragmentation of control over Middle Eastern oil valves will serve as a barrier to oil price shocks; and,
It assumes that preserving "friendly" control over those valves will provide additional insurance against such price shocks.

QUESTIONS OF CONTROL

While Iraq's domination of additional valves on the oil-rich Arabian Peninsula would certainly alter the strategic, political, and military balance within the region, it is much less clear that the consolidation of such control in unfriendly hands would heighten the risk of oil shocks within a wider international context. In fact, analysis of the oil situation during the 1970s demonstrates that both fragmentation and "friendly" (but insecure) control of the valves have been the direct cause of several price spikes.

The first oil spike, a doubling of world oil prices between 1969 and 1971, was caused by fragmented producer governments competing to "one-up" their neighbors.
It began in Libya when Muammar Qadhafi celebrated the first anniversary of his Sept. 1, 1969, coup d'etat by forcing the multinational oil companies to accept price increases that were unprecedented in their day.
Instead of accepting that Libya had a very special set of claims arising out of the quality and location of its oil, rival exporters-radicals and moderates alike-refused to be upstaged by a 28 year old army lieutenant who knew nothing about oil markets and imposed unilateral increases of their own. Because oil production and pricing decisions were fragmented, each government was inspired-or goaded-to use his neighbor's new price floor as a springboard to leap ever higher.
By January 1971, this price "leap frogging" or "ratcheting" had gotten so far out of hand that President Nixon, with the support of most western governments and virtually all of the world's oil companies operating in the Middle East, urged the Shah of Iran to assert leadership over the Persian Gulf producing countries to establish a collective price. The Shah ultimately secured the support of his Saudi, Kuwaiti, and Iraqi neighbors for a new five year contract at a price which doubled world oil costs but soon failed to satisfy exporters. Still, anything seemed preferable to open-ended "leap frogging."
The second oil spike, a quadrupling of oil prices between September 1973 and January 1974, was initiated by Saudi King Feisal, a strong leader and staunch friend of the United States who had repeatedly denied the utility of using oil policy as a potential weapon in the Arab-Israeli conflict. Fearful that the Saudi army would mutiny if he failed to use the kingdom's oil leverage after outbreak of the October 1973 war, King Feisal abandoned his convictions and decreed that Saudi production be progressively reduced on a schedule that ultimately removed over 2 million b/d from world oil markets (27% of Saudi Arabia's September 1973 production).

Taking their lead from Feisal, other Arab leaders-with the ironic exception of Iraq's Saddam Hussein-followed suit, removing a total of about 4.5 million b/d during the December peak of the pressure campaign.

Although non-Arab producers, principally Iran and Venezuela, made up for some of that loss, panic exaggerated the physical shortage, causing a four-fold increase in oil prices.

So much for the presumed advantages of friendly control!

These experiences of the 1970s should prompt us to ask whether we are attaching too much importance to the transient identity of the valve master when the more enduring problem is the location of the valves. If so, preservation of the Houses of Saud and Sabah and elimination of Saddam Hussein-whether political or physical-will not long guarantee the world's access to secure supplies of Middle Eastern oil at predictable prices.

MIDDLE EAST TENSIONS

While a dispassionate political observer may wish it to be otherwise, he cannot ignore the fact that the Middle East is plagued by tensions:

The Palestinians are thoroughly radicalized by the intransigence of Israel's Likud politicians.
Neither the feudal monarchies nor the oppressive dictatorships enjoy the stability of an institutionalized popular mandate or political participation.
Ethnic, cultural, religious, racial, sectarian, regional, and tribal strains abound.
Income disparities are enormous on both the national and individual levels.
Financial corruption, political arrogance, and bureaucratic inertia are endemic.
Many millions are turning inward to Islam after decades of frustration in searching outward for identity in culturally inapplicable political-economic systems of non-Muslim heritage.
Mass opinion has been turned against the United States by Washington's perceived links to Israel, to narrowly based regimes, and to economic exploitation.
Disputes over imperialist-imposed boundaries abound: Qatar vs. Bahrain, Abu Dhabi vs. Oman, Yemen vs. Saudi Arabia.

Those Middle Eastern tensions have-singly or collectively-reached the explosion point on numerous occasions over the past 20 years, thereby triggering regional assassinations and world-wide terrorism; full scale wars between Arabs and Israelis and between Arabs and Persians; illegal occupations of Kuwait, Lebanon, and Palestine's West Bank; military coups and popular revolutions; producer embargoes and consumer boycotts; transport interdiction; and production sabotage. Given that extensive record, we are undoubtedly fortunate that the number of significant oil price spikes has been limited to "only" four.

THE MILITARY FACTOR

As we attempt to assess the future of oil exports from the Middle East, we must ask if the offensive use of American military power-or even just the defensive deployment of massive American ground forces-can avoid exacerbating those tensions. If not, the U.S. strategy may maintain the status quo for the short term ... but contribute to instability in the long term!

If this analysis is valid, the United States must pursue a two path energy strategy:

We must try to reduce the growth of oil imports by encouraging the development of a full range of domestic energy alternatives, including efficiency investments, natural gas substitution, research and development, clean coal technology, nuclear power, frontier exploration, and enhanced oil recovery.
Because it will be impossible in the medium term-and exceedingly difficult even in the long term-to reverse the rising import trend, we must also encourage the development of oil and refined product export capacity in the Western Hemisphere, especially the huge bitumen reserves in Venezuela.

Pursuing either of these paths will, of course, incur some level of financial burden, environmental impact, and human exposure, but it is inconceivable that a realistic assessment of the related costs and risks will not conclude that they are far more manageable than the staggering budgetary costs and casualty risks of sending a quarter of a million service personnel to the Middle East for a confrontation of uncertain duration and ferocity.