Oil Prices: Always Set by Political Rules

The announcement last month by Vice President George Bush that he was off to Saudi Arabia to see about firming up crude oil prices finally laid to rest one of the hoariest myths of the U.S. economy--that global oil prices have been nonpolitical. President Reagan rushed to reassure all that his Administration retains its free-market loyalties; it was delighted by the dramatic decline in crude prices--some 60% since December, 1985. The U.S. consumer, after all, had been taught that oil prices are set by the laws of supply and demand. Until, of course, Arabs and other less developed people from the Organization of Petroleum Exporting Countries got their hands on the valves in 1973.

Despite the resulting tempest in the oil barrel, the pricing for the basic energy source of the United States is generally politically determined. Oil is treated as a commodity and traded for profit. Yet the flow of oil, from field to gas pump, is governed by political considerations.

The modern oil corporation, with assets greater than most countries, has functioned as a private government in its global planning and controls. It has maintained surveillance over all energy development within the United States. The illusion invoked is “technological readiness,” but the clear meaning has been protection from competition.

At every stage of these operations the multinational has been supported by U.S. government intervention, through tax and tariff protection, subsidies, privileged information, “conservation” laws and favored access to sympathetic personnel in the public service. Not the least of these state-supported services are diplomacy and military actions.

In the early 1970s, after considerable difficulty in challenging the arbitrary pricing of their own resources, OPEC members finally weakened the multinationals’ stranglehold over Third World oil. They gained a greater share of crude oil profits. They also raised awareness among producers of how the corporations had played one against the other. Initial responses in the West to the spiraling oil prices ranged from fright to anger. It was as if the world owed Americans and other industrial nations cheap energy.

In significant respects the energy crisis had been a bookkeeping operation. There was no real scarcity of crude oil. The demand by OPEC for greater return from the sale of crude had led the international corporations to shift their own profit expectations to the consumption end of the pipeline. Meanwhile, the OPEC prices substantially increased the worth of reserves held by the corporations. U.S. import controls, designed to protect higher-cost domestic fuel from overseas competition, were removed. Domestic prices soared to OPEC levels. Corporate profits followed. Exploration and production were stimulated in non-OPEC regions.

American officials and the press have been quick to label OPEC a cartel. This pejorative term had rarely been applied to private firms when they orchestrated global production--to insure that no more oil reached the market than was necessary for demand and thus protect artificially set prices. Yet despite their great financial leap forward and some global redistribution of wealth, the OPEC nations were still not integrated operations, profiting from all stages of the industry. They still were tangled in Western capitalism when they recycled oil dollars as deposits in Western banks. And although critical for continued control, OPEC was never able to make all its members adhere to production quotas--the key to a working cartel. This had been one of the great feats of the multinationals.

Nor had OPEC been able to persuade such “production maximizers” as Mexico and the North Sea producers to cut production in response to lower demand. It increasingly found itself serving as swing supplier. This left OPEC, as the bulletin of the Organization of Arab Petroleum Exporting Countries put it recently, “adjusting their output in order to stabilize the price.”

Saudi Arabia, the dominant partner, had cut production sharply to keep up prices. But “leakage” from the system continued, with oil from OPEC as well as non-OPEC nations reaching the cheaper spot market. In frustration, the Saudis switched tactics and sought to keep production up, to regain their market share while convincing other nations--in the resulting price fall--of the profitability of maintaining production levels.

Motorists are understandably pleased by the price drop. Many economists view cheaper energy as a stimulus for development at home and a breather for hard-strapped non-energy-producing nations. There is, however, a fear that this price relief is a prelude to a new steep rise once weaker producers have been driven out of the market. Exploration has been cut back. Meanwhile, marginal U.S. producers no longer enjoy the insulation of what had been high-priced foreign oil. Alaska, the Southwest and other areas are adopting austerity measures because of this major revenue loss. Regional banks, with more than $60 billion in outstanding oil loans, are shaky. And there is evidence that foreign producer nations are buying up U.S. refineries and distribution systems at low prices. Once more comes the specter of the disappearance of a domestic industry and dependence on imports.

Within this context Bush, an oilman and candidate to succeed his chief, left on his Saudi pilgrimage, declaring that the United States could not tolerate “a continued free fall.” Bush promised to convince King Fahd that he must cut oil production in the interest of U.S. national security.

The President had to tidy up the ideological inconsistencies. He quickly reaffirmed the government’s fealty to the free market. After all, his original campaign pledge had been to remove government from energy operations. The Bush mission was a diplomatic service, not just for independent oilmen but for the entire industry. For the majors have a cash stake in high-priced oil and have long entertained fears that “wicked” Arabs might somehow conspire to lower the price of oil. And although the United States has considerably reduced its reliance on Middle Eastern oil during the last decade, it reaffirms the policy that the Persian Gulf, like the Mediterranean and the Caribbean seas, remains an arena of vital national interest.

The U.S. bomber assault against Libya also has an oil dimension. Moammar Kadafi may well be unbalanced as well as menacing. But he has understood the problems faced by oil-producing nations. He fought for diversified concessions for his country’s attractive low-sulphur oil, rather than accepting a contractual relationship with only one corporation. He insisted that the reserves, perhaps the largest in Africa, be developed and not just staked out for some future date. Kadafi aggressively sought higher payments than either the “free market” or the OPEC negotiations were likely to yield. And he pushed for nationalization or real partnership. A more pliable Libyan government would be a plus for the symbiotic interests of oil and current U.S. foreign policy.

Thus does energy resurface on the front pages. Once more the challenge to the citizen is to make the connections among what are presented as fragmented issues. Blessed by an extraordinary abundance of alternative resources, Americans have little need to panic. But they have much to learn concerning the workings and costs of their own political economy.

Conservation must be expanded rather than abandoned. It must include questioning the ways we use resources, technology and capital, as well as the violence we have done to nature. It must include intensified development of solar energy, hydroelectric power and other technologies amenable to local control.

We have a strategic reserve system for petroleum and this can be strengthened to protect us from threats to overseas sources. It could also serve as an intermediate way of protecting domestic production.

We have become aware of renewable alternatives and there is every reason to encourage their development. This, like true conservation, ultimately means challenging the private power forces that still dominate energy and define the parameters of public priorities.

We can no longer continue a trained innocence that protects us from seeing how exploitative and explosive are many global relations that provide the United States and other industrial nations with energy. More, the high energy prices of the past decade have pushed some non-energy producing countries deeper into poverty and debt. Yet U.S. and international agency policies have ignored and often frustrated efforts by such regions to begin indigenous energy development.

We must learn from the Chernobyl meltdown how unsolved are many of the problems of nuclear energy. It is easy but pertinent to note the disturbing role of Soviet bureaucracy and secrecy. Yet have nuclear technologies been accompanied by stringent requirements wherever employed--and with reasonable assurance as to the ultimate safety of such energy?

We must ask for a public energy policy that could encourage democratic institutions and accountability at home and will recognize that other people, often with far fewer options, have a moral right to a share in the earth’s abundance.

Yes, the economy of energy is political in essence. The challenge now, as before, is to make it democratically so.