Oil as a weapon

Since the Gaza Israel War there is a lot of pressure on the Arabs in the MENA region to use their oil wealth and the power they wield from it to coarse Israel into a ceasefire and withdrawal from the Gaza Strip. Understanding the dynamics of the oil market and the forces that dictate it would thus give us a better outlook of the position of the oil-producing states.

A general notion is that when oil prices climb, industry in oil-importing countries is hit hard. But studies reveal that the manufacturing sector is usually performing well when oil prices are high. The reason is that more manufacturing increases oil demand, and sensing this demand the producers raise oil price and the manufacturers pay that price because they have demands to fulfil. Inversely, when the industry is performing badly due to low demand, the consumption of oil reduces. Oil producers may lower the price to attract buyers but they still buy less. This would mean that the manufacturing sector dictates oil prices.

But it is not that simple. The fact that oil works like blood running through the veins of the global economy inevitably makes it a pivoting element in global politics. Moreover, not just the industries depend on it, the service sector, the defence sector, and all sectors comprising day to day life depend upon movement facilitated by oil and gas. Since control on oil means real power, ongoing competition amongst oil-producing states adds layers to the complexity.

Competition between oil-producing states and groupings is noteworthy. Post-WWII, the US and British dominated Seven Sisters not only commanded oil extraction and refining industries, they actually dictated global output and pricing because they owned major shares of oil-fields, especially located in the MENA region. The 1953 US-led coup against Iran’s Mosaddegh regime was organised by the Consortium for Iran — another name for the group of investor-owned oil and gas companies, aka the Seven Sisters. The ouster of Mosaddegh who had nationalised Iranian oil, and the enthronement of Reza Pahlavi, was followed by Iran’s Consortium Agreement of 1954 with the British.

Perhaps learning from this and from how a handful of Western states control oil-producing states like puppeteers control puppets, in 1960 Iran, Iraq, Kuwait, Saudi Arabia and Venezuela made the first Muslim-dominated cartel — OPEC — to exert control of oil-producing states upon the oil market. Later eight more leading oil-producers joined this club, and suddenly the US and Seven Sisters found their control on oil pricing and global economy slipping away from their hands. Yet because the US and Europe had been the major oil-importers, OPEC, while keeping their coffers filled, kept working in tandem with the interests of the West.

This changed in the 1973 Oil Shock, when OPEC, led by King Faisal, proclaimed an oil embargo against states that supported Israel in the Yom Kippur War, mainly Canada, Japan, the Netherlands, Britain and the US, with a staggering 300% rise in oil prices. Later in 1979, with the Iranian Revolution and the ensuing Iran-Iraq War, there was another drastic Second Oil Shock that doubled oil prices worldwide. Post-War both these major oil-producing countries have been under US oil-sanctions. They have been exemplified by the West, so the world knows that anyone not wanting to do business with them will be punished, by force, by coups or by intrigues — and will not be allowed to survive. The Arab Spring proved to be another set of punishments for those who were tilted towards the communist camp.

All this, and yet the world was changing! OPEC was tightening its grip on oil-price control, many a times in ways detrimental to the US camp. In 2000, US Congress tried to subject OPEC to US antitrust laws. The 2011 Shale Gas Revolution quickly propped up the US as one of the world’s top oil-exporters, enabling it to vie with OPEC as a contender. In 2016, oil prices were falling due to increases in US shale output, and in response OPEC signed an agreement with 10 other oil-producing countries, led by Russia, to create the OPEC+. In 2022, OPEC and OPEC+ countries combined produced about 59% of global oil production. Together they have exerted decisive influence on global oil market and oil prices, often adverse to Western interests. The world had changed also because the West was no longer the major oil-buyers, China was!

Today, OPEC has the flexibility to either move supply in tandem with non-OPEC oil-producers, or to offset non-OPEC supply changes, depending upon their strategic needs. They are able to use two tools: Market Share Targeting by increasing production; or Price Targeting by reducing production. And OPEC’s reactions happen in full consultation with OPEC+, as shown post-Ukraine War, when Saudi Arabia reiterated full commitment with Russia and OPEC+.

So, OPEC was already at war with the non-OPEC states, when early September, both the Saudis and Russia announced a 1.3mb/d cut through December, and immediately crude jumped $90 a barrel. Biden had warned the Kingdom there would be unspecified ‘consequences’ for partnering with Russia on cuts, but the Kingdom has not relented.

High fuel prices in the midst of a global economic crisis, when we seem to be headed towards bigger crashes, looks suicidal. With lower production and higher oil prices, the system will certainly collapse. But in the world of global strategies, bigger changes call for bigger risks!

One must also be reminded that many a time global economics plays out opposite to what analysts had been predicting. For instance, US oil-embargos on Iran and Iraq proved to be axe on their own feet, as their absence gave more sway to the Saudis in OPEC — a sway they used to constantly corner down the US.

It would be foolhardy for anyone to claim they fully understand the oil market and its geoeconomics, but it is certain that the OPEC members are in a position of waging war on the West. They don’t have to lift the sword for that, they even don’t have to utter a word. They just have to lower production and the global economy would be on bumps.

Like Israel is using starvation as a weapon of war, like it is tightening its clasps on the already imprisoned Gaza, the OPEC members are in a position to use oil as a weapon against Israel and the West, and starve them of energy! But only time will tell if the OPEC members have played their cards, and have they played them right!

Published in The Express Tribune, November 24^th, 2023.

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