US/ OPEC Relationship: The Politics of Oil

1. 1. OIL AND INTERNATIONAL POLITICS OF OPEC COUNTRIES
1.1. INTRODUCTION
Oil and gas is a very rare and valuable resource, hence its huge influence on global
politics has been historically significant and the impact of its major suppliers
relationship with Western countries such as US and EU has become increasingly
critical as the demand for oil grew and the number of suppliers decline as a result of
various factors in the past decade, and without the achievement of the promises of
breakthroughs in alternative energy sources (matitunovic, 2009). Oil plays a crucial
role in the global economy and bilateral relations between oil producing countries
such as Saudi Arabia, Iraq, Iran, Libya and Nigeria with the European Union
countries and United States of America is very significant and fundamental to shaping
international policies and agreements. This relationship have been both positive and
difficult at times, however, with some countries like Saudi, Nigeria having a more
positive outlook to the West than gulf countries like Iraq, Iran Libya.
1.2. THE GOOD AND THE BAD
For example, relations between Saudi Arabia and EU have seen both good and bad
times; however, historically it has been a strong and strategic relationship as a result
of Saudi position in the Gulf region and its oil wealth, and the sales of power,
mechanical and electrical equipments and appliances to Saudi Arabia. It is often
assumed that the US and EU depends on Saudi oil and fuel derivatives, forgetting that
Saudi also depends on US and EU machineries and equipments. Trades statistics
between EU and Saudi Arabia, for example in the past four years shows trade deficits
on the part of Saudi Arabia (ec.europa.eu). Similarly, Nigerian position in global oil
market, African and OPEC as African largest oil producer and OPEC sixth producer
behind Saudi, Irag, Iran, Libya, Kuwait. Nigeria economy is dependent like most
other OPEC countries, but a dynamic market conditions, changing trends of buyers
demands, volatile gulf politics, decreasing US and EU dependence on oil among other
factors mentioned, all contributed to the need for major oil producing countries to
seek economic diversification.
Iran and Iraq on the other hand until recently, Iraq after the West led military removal
of hard-line and anti West President, Saddam Hussein, Iraq was a pariah nation, up
until 2004; Iran like Iraq both exchanges the second and third OPEC quota as largest
oil exporting country behind neighbouring Saudi Arabia. Recently, Iran like Iraq
nurtured covert ambition to destabilise Western countries with threats of nuclear
weapon to build chemical reserves. The outcome and political upheaval of the Iraqi
military expedition in 2004 however meant that Iranian threat to global peace must be
treated with care leading to a US and EU imposed embargo on Iran oil exports. Iran’s
output has been in decline since the end of 2008, Bloomberg data show. The drop
accelerated this year as the U.S. and EU tightened sanctions aimed at curbing the
Islamic republic’s nuclear program. Iran says its atomic projects are for civilian
purposes (Bloomberg, news, 2012).

2. One would have expected that sanction of Iran oil could have harsh effect on global
oil supplies and prices given Iran position as a major oil producer, however, many
factors such as current reduced demand for oil as a result of economic slow down,
increased production of Saudi, US shale oil, resumed Iraq and Libyan productions
have covered the losses form Iran. The lower effect of Iran shortage supply as a result
of the sanctions could easily be traced to enhanced production and stability from Iraq
and Libya, as well as increased Saudi and US production. Therefore, temporarily the
sanctions on Iran are biting hard on the country and appear to have no major effects
on the demand curve or the volatile oil price dynamics.
Thus the sanctions have been effectives in the period, with global supplies rising
about 2.2 per cent. Couple with these factors, the complex fundamentals of oil prices
and increasing demand from China, India; reduced output, under investments in
production capacity among other factors (Matitunovic, 2009). It does not seem that
Iran will have the financial capacity to continue its nuclear program given the
potential negative effects of the sanctions on its economy, and the temporarily non
adverse effect of lack of Iran production supplies on the global oil market price.
1.2.1. ECONOMIC INFLUENCE OF NATURAL RESOURCES
Theorist (Newman (2010) cited Hirschman, 1945, and D'Anieri, 1999) the economic
influence of natural resources often posited that a state can use its economic and
natural resources power against another under certain conditions, such as:
1) The exporting state must have a larger economy than the importing state in
order to survive any economic conflict. By this measure, it is assumed or suggested
that Saudi, Iraq, Iran and other OPEC nations with smaller economies compared to
their larger and more developed US/EU countries is at a disadvantage. The US is
Iran's third largest importer partner, behind China and Russia and its first largest
export partner, followed by Switzerland, China and Russia (trade.ec.europa.eu).
However, the US is Saudi, Iraqi, and Nigeria largest importer. Therefore, US often
have a very strategic interest in the domestic politics of these countries, even when it
is not in the best interest of US/EU citizens. For example, the US led Iraqi military
campaign of 2003/05 was not very popular among the US/EU citizens. Though, there
has been no military campaign against Iran at present. The level of Iranian export and
import with EU shows export at 2.4 and import at 25.5 respectively (stat.wto.org).
Thus, with the recent embargo by US and Europe on trade embargo with Iran, the
country economy is expected to suffer a serious setback.
Sanctions some writers argue do not work, because if it would the sanctioned state
would not allow it to take effect as a threat. Ordinarily, it might appear that because
China, India are major buyers of Iran's oil, it is possible that US and EU oil embargo
might not work. However, considering the influence of European companies in the
shipping and insurance sector, the effect of the embargo has resulted in steep

3. inflation, rising costs of consumers products and loss of revenue; oil constituting over
80per cent of Iran national revenue (Bloomberg, 2012, IEA, 2007).
Saudi on the other hand is a more liberal state politically and despite recent political
upheavals in the gulf region resulting in the removal of many erstwhile long term
serving rulers such as Libyan, Gaddafi. Saudi has remained relatively stable and
production is not much affected by any major internal crisis. It is normally assumed
that EU and US depends on Saudi oil; yet Saudi dependence on EU/ US machineries
and equipments is a critical factor also in the relationship between those countries. It
suggest to me that for the next decade EU/US will have a major stake in Saudi
political outcomes with a guarantee of a more stable oil prices as a result of Saudi
influence in OPEC. Saudi Arabia will continue to play a very active and strategic role
in global oil supplies and its position as a leading OPEC country, and a key western
ally. The below table shows an increase between 2009 to 2011 of Saudi import from
EU as a result of increased trade liberalization and Saudi dependence and investment
on infrastructures.
Table 1 Saudi and EU Trade Information
The demand for oil as a catalyst for the global economy and production has
considerable impact on Saudi Arabia economy and international and bilateral relations
with her major oil importers such as USA and EU, as world number one oil reserves
and OPEC number one producer (www.eia.gov). Demand for alternative energy
sources is growing each day due to a number of factors. For example, increasing use
of fuel products for transport and other consumption by Saudis as a result of
government subsidies; there is also an increasing current trend shift to alternative
energy sources such as ethanol, solar, natural gas etc. A target was set by the Saudi
0
5
10
15
20
25
30
Imports Exports
2009
2010
2011

4. government to achieve reduced energy consumption using oil products by 2020.
Likewise, there is a huge effort by other exporting West nations to reduce their
dependence on oil and its bye products. Oil dependence and especially addiction on
Saudi oil is purported by the public to hamper appropriate bilateral foreign policies,
pose security and serious environmental dangers (www.climateandenergy.org).
Consumers can shift from oil to other energy sources or they can switch to deliveries
from other oil fields. Oil's declining share, combined with energy's declining
importance in the world economy, diminishes the economic impact that oil producers
have on the economy (www.eai.com)..
Though, consumption of oil was predicted to decline as a result of non alternative
energy sources, recent increase in oil prices does not reflect this hypothesis. And the
demand as a result of growing population from Japan, China, India, which are non
major oil producers but big consumers. Over the last four decades (1970 to date)
Saudi Arabia, Nigeria despite recurrent ethnic crisis has consistently remained a major
oil producer in such a manner that if any OPEC nation sneezes the world oil prices
tumble drastically. The public and media sees OPEC dominant role, especially Saudi
in oil export to both US and EU as having an undue advantage on US/EU foreign
policies with OPEC countries such as Saudi (www.eai.com).
However, despite the hypothesis of an imbalance relationship current market trends
suggest that US/EU dependence on OPEC oil is on the decline, even if temporarily.
Cooke (2004) analyzed that factors such as declining oil consumption as a result of
shift in western economies, e.g, United States which has cut its oil consumption by 25
percent using more computers and energy efficient products, and alternative energies
are contributing. Among several factors contributes to this trend, the resource curse
syndrome attributed to instability among major OPEC oil producing countries, such as
Iran, Iraq, Angola, Nigeria, and a high level of poverty among these countries; war
and political crisis in major producers countries like Libya results in production
shortages and a price volatile regime.
Growth of oil in West consumption 1980 to 2013 and increasing sources of alternative
energy in natural gas, solar energy, and nuclear energy are other factors reducing
West countries dependence on OPEC oil. Example of industries seeking substitutes to
oil use is transportation, which currently consumes a significant percentage of global
oil. There are electric cars in commercial sales in Some developed countries,
however, low economies of scale for mass production at high cost prices would
suggest that the market for this products are not yet ripe, therefore promises of
reduced oil dependence might take some time to become a reality
(www.oilprice.com).
That said, the best guess at the moment is that the decline in oil's share of world
energy use and the discovery of new oil fields around the world also contributes to
reduce the ability of oil producers such as Saudi Arabia to solitarily affect influence
prices (www.eai.com). Nevertheless, other factors are contributing to reduction in
OPEC oil influence, such as the resumption of stable production from Iraq; Libya is
also coming on board, Nigeria among other top producing nations.

5. 1.2.1.1. THE ROLE OF OPEC IN THE GLOBAL POLITICS AND
ECONOMY
There have been an increasing non-OPEC oil supplies and relative stable market
prices. Between (2008/2012) non OPEC oil production has relatively been on the
increase. Some experts predicted that non OPEC production will outperform OPEC
output in the next decade on the projections that Canadian shale oil production will
increase (business.financialpost.com), reducing US importation from other countries.
An advance in alternatives energy sources is also a major that will reduce OPEC
political and economic relevance. The production of US oil has experienced
substantial growth in capacity (Bloomberg.com/2012). In addition, increase in
production capacity from West Africa, Iraq, South American countries, and a decrease
in US/ EU consumption will impact negatively on the long run on OPEC production
statistics and world oil position. Another factor that will alter OPEC role in global
politics is the shifts to democratic forms of government in the volatile Gulf region,
which might project a decade of peace in the region, despite Iranian threat of Uranium
enrichment and nuclear weapon acquisition.
Another factor contributing to diminishing OPEC advantage is the use of new
technologies for oil explorations and drilling, thus eroding the power of the OPEC
exporting blocs of countries to influence price. These technologies also oil discoveries
in locations otherwise remotely unfeasible previously. Nigeria is another country with
a positive and stable relation with the West nations. Domestic issues over the years
have seen a serious setback in the countries production capacity, however overall
central government outlook to US/EU has been rather positive. Recently, the country
export to US alone grew to 800,000bpd. However there are market signs that that
figure might decline in the next coming months as a result of US effort to reduce oil
dependence while looking for ways to cut its budget deficit and stimulate economic
growth after the global financial crisis (www.cges.co.uk). Nigeria is Africa largest oil
producer, despite drop in US export as a result of reduction in US consumption,
general shift towards alternative energy and increase in drilling of shale oil, and
increase in America production (www.cges.co.uk).
1.2.1.2. IMPACT ON WESTERN NATIONS
The OPEC countries economy is heavily dependent on the money-spinning oil and
gas sector. Oil and gas is very profitable because of its scarcity and unstable nature of
oil prices most countries relying on it for national income have ceased to design a
more diversified and globally integrated economy as a result, the sector has been a
source of periodic but persistent economic instability (www.cges.co.uk, 2012).
The impact of oil and energy in the last decade have seen a major reappraisal leading
to significant changes in production and OPEC dominant position as major affect on
oil and world energy use have reduced the role of energy in the world economy and

6. the role of oil in the world energy picture. Furthermore, changes in the world's oil
production pattern have undermined the OPEC centrality as the main source of oil for
the West. It may be argued that OPEC country should dramatically increase their oil
output, which suggests the West has little reason to fear another oil price shock like
those of 1973 or 1979-80. At the same time, the OPEC position as the main source of
global reserves remains unchallenged, suggesting that Gulf security may still be a
matter of concern to the West (Newnham, 2010, Klare, 2004)..
The validity of old perceptions regarding Western dependence on OPEC oil are
questionable, as is the notion that the West must protect OPEC oil. Some
commentators argued that the US budget huge sums ($30-60 billion annually) for the
military action within the Gulf oil producing area, while oil exports from the Gulf to
the United States were less than this amount (only approximately $30 billion). Even if
the opinions expressed by these commentators are over-stated, they are worthy of
closer examination by policy makers
.

7. References
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