The world’s proven oil reserves have been variously estimated at 600 to 700 billion barrels, give or take a few billion. That figure, standing alone, has very little meaning, but it is a useful point of reference. According to the American Petroleum Institute, the term "proven,” or "proved,” reserves is taken to mean "the estimated quantities of crude oil which geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions.” It is generally known—and this is one of the most salient aspects of the energy crisis—that the world’s proven oil reserves are far from evenly distributed. The Arab states of the Middle East and North Africa together account for nearly 60% of world-wide oil deposits. Saudi Arabia alone contains an estimated 140 billion barrels, more than 20% of the world’s total. By contrast, the United States has between 5 and 6% and the Soviet Union around 12%. (The Soviets are self-sufficient in terms of energy and will be for the foreseeable future, an important strategic asset.) Not only are Arab reserves remarkably abundant, they are also the most easily and inexpensively exploited in the world, primarily because of the geological features of the area. Finally, as a sort of icing on the Arab cake, most experts agree that a large percentage of the world’s probable, but as yet undiscovered reserves (as opposed to proven reserves), are located in the Middle East area. According to one estimate, nearly one-third of the Middle East resources are yet to be found.
Both Western Europe and Japan have built up a heavy dependence on Arab oil, drawing as much as 73 and 43%, respectively, from those reserves. (Recent North Sea discoveries are unlikely to result in a significant reduction in Europe’s dependence because of increasing demand; Japan gets an additional 39% from Middle Eastern, but non-Arab, Iran which did not join in the recent cut-backs or embargoes.) The United States, on the other hand, has historically been less dependent on Middle Eastern and North African oil, importing until the Yom Kippur War only about 6 to 10% of its daily consumption from those areas. But U. S. demand indicators have been pointing to the need for drastically increased crude oil imports, which experts agree must come principally from Arab deposits for the foreseeable future since other sources have only limited expansion capabilities. During the first ten months of 1973, crude oil imports from all sources increased a whopping 49% over the comparable period in 1972, with much of the increase coming from Arab sources. From January through October 1973, the U. S. imported approximately 6 million of the 17 million barrels consumed daily. (That consumption rate for petroleum, incidently, combined with U. S. consumption of other energy forms, means that 6% of the world’s population accounts for about one-third of the world’s energy consumption.)
The dramatically increased U. S. reliance on overseas crude—which must increasingly mean Arab crude—has been caused in large measure by the leveling off of U. S- domestic production at the very time the demand curve went into a steep climb. Pre-Yom Kippur War projections predicted a U. S. consumption level in 1980 of approximately 25 million barrels per day, a 67% increase over the 1970 daily consumption level of 15 million. Experts have concluded that U. S. domestic crude production has already peaked at around 12 million barrels a day and has since been declining. Arctic crude and production from discoveries in the lower continental U. S. are not expected to raise production above previous levels, but will instead merely slow the rate decline.
The statistical points just made bear reiteration because it is upon the facts concerning proven reserves, production, and consumption that the manipulative potential of oil depends. First, Arab states of the Middle East and North Africa control nearly 60% of the world's proven oil reserves. Second, the industrial economies of Western Europe and Japan are heavily dependent on Arab oil. And, finally, the United States, heretofore little reliant on Arab oil, is experiencing simultaneously a decline in domestic production and a steadily rising demand which cannot be fully met, or even largely met, from non-Arab overseas sources.
As early as 1960, it was becoming apparent that the long-established bilateral bargaining system between large international oil companies and individual producer governments was on its way out. The slow evolution toward coordinated bargaining by producers was given formal impetus in that year with the formation of the O.P.E.C., the Organization of Petroleum Exporting Countries, by several Middle East countries an Venezuela. Despite frequent disunity within the Organization, the producer governments have succeeded in, gaining more equitable proportions of oil revenues and in undermining or eliminating altogether many of the pricing discretions and operational prerogatives of the major international oil companies.
In the early 1970s, after not-so-veiled threats to cut off all oil production, the O.P.E.C. achieved major increases in the royalty and tax payments levied on oil capped by the "Tehran Agreement" of February 1971 which provided for further increases through 1975. An even more far-reaching program was negotiated in 1972, the so-called "participation agreement," under which producing governments acquire an initial 25% interest in existing concessions and work up gradually to 51%, or an assumption of control, by 1982. However, recent unilateral moves by Libya, Algeria, and Iraq have resulted in even more immediate control of their foreign-owned oil production. And more moderate states, including Saudi Arabia and Kuwait, have served notice they are unwilling to wait until 1982 to assume majority control. Furthermore, during 1973-74 the posted price of O.P.E.C. oil has nearly quadrupled.
Meanwhile, back during the 1967 Six-Day War, several Arab members of the O.P.E.C. instituted a short-lived and largely ineffectual oil embargo against the United States. With the aim of more effective political action, the O.A.P.E.C., Organization of Arab Petroleum Exporting Countries, was subsequently formed in 1968 with headquarters in Kuwait. (Current members of the O.A.P.E.C. are Abu Dhabi, Algeria, Bahrain, Egypt, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, and Syria.) It is this organization—a sort of Militant, ideological sub-unit of the O.P.E.C.—which demonstrated such remarkable economic and political clout in the wake of Yom Kippur, the application and apparent results of which we shall now examine in some detail.
The sequence of sanctions was set into motion on the first day of the Yom Kippur War with the nationalization by Iraq of the minority American share of the Basrah Petroleum Company—largely a symbolic gesture. Ten days later, on 17 October, the O.A.P.E.C. announced an immediate 5% cutback in oil production to be increased by 5% each month until the Israelis pulled out of occupied Arab territory and restored the rights of Palestinians. On that basis of 5% a month, all oil production would theoretically have been cut off by the middle of 1975.
On the next day, 18 October, Saudi Arabia, Kuwait, Algeria, and Qatar announced that they would exceed the 5% minimum and immediately cut production by 10%. Since total world production was only 2% ahead of demand before the cutbacks, the actions of 17 and 18 October alone had the effect of producing a world oil shortage. Meanwhile, the producers also went to work on prices, announcing a 17% rise in price and a whopping 70% rise in the "posted price"—the theoretical figure on which royalties and taxes are based. This had the effect of raising oil revenues for the Arabs even as they lowered production.
On 20 October, Saudi Arabia (from which the U. S. was getting about 3% of its crude) and Algeria joined t Libya, Abu Dhabi, and Bahrain in cutting off all oil exports to the United States.
On 21 October, Iraq nationalized the Dutch share of the Basrah Petroleum Company as "punishment" for support of Israel. A complete cutoff of oil was subsequently imposed on the Netherlands by six Arab states.
On 5 November, the Arabs raised their minimum level of production cuts to 25%.
Explaining the various degrees of sanctions, the oil minister of Saudi Arabia, Sheikh Amed Zaki Yamani, was quoted by the Associated Press on 13 November as follows: "If you’re hostile to us, you get no oil. If you’re neutral, you get oil but not at the same level as before. If you are friendly, you will get the same as before.” As noted above, the United States and the Netherlands were placed in the first category—the unfriendly category—along with South Africa, Rhodesia, and Portugal, whose white regimes, according to the Arabs, bear the same relation to Africa that Israel does to the Middle East. Britain, France, and Spain were judged friendly, placed in the most-favored-nation category, and, along with several black African states and oil-importing Middle Eastern states, received oil at previous levels. Such so-called "neutrals” as Japan and West Germany had to share what was left over, which steadily diminished as a result of production cuts.
Soon after the Arab announcements of production cutbacks and embargoes, apparent effects began to surface, particularly among the United States’ European allies. Britain, Italy, and Spain denied American requests for cooperation in the airlift to Israel. West Germany at first agreed to the transfer of U. S. tanks and other equipment from the European stockpile, yet, apparently in response to Arab threats, subsequently banned further use of her ports and airspace for the resupply effort. One diplomatic observer described the British government as "icy” toward U. S. aid efforts. The British, in fact, embargoed arms to both sides which had the practical effect of denying Israel spare parts for her British-made Centurion tanks. France was described by one commentator as "openly happy” that the United States was in a difficult position. Finally, Common Market foreign ministers voted to endorse the Egyptian demand that Israel pull back its forces to the 22 October cease-fire line and further stated that any peace agreement should be founded on Israeli withdrawal from Arab territories occupied in the 1967 war and on respect for the legal rights of Palestinians. This ministerial declaration was subsequently cited by the Arabs as the reason they had decided to give European Common Market countries, excluding the Netherlands, a reprieve from the 5% cutback in production scheduled for December.
Japan, Singapore, and the Philippines followed suit with pro-Arab statements and were likewise rewarded with the December reprieve. Japan responded to an earlier Arab call for her to break diplomatic relations with Israel with the half-measure of threatening to break relations unless Israel withdrew from Arab territory. In addition, Japanese bankers helped cement relations with the oil-rich Persian Gulf sheikhdom of Abu Dhabi, loaning the government there $33 million during the war. The money was originally earmarked for road and hospital construction, but some observers believe it was used instead for support of the Arab war effort. Japan reportedly also granted credits of $500 million to Iraq and $400 million to Egypt.
In addition to the apparent political effects just cited, the Arab oil measures immediately induced the following economic moves:
- Venezuela raised the tax valuation of exported oil by 56%. (That country’s new President, Carlos Andres Perez, has subsequently vowed to use oil as a weapon to extract economic benefits for Venezuela from industrialized nations.)
- Canada placed an extra tax of 40 cents per barrel on oil exported to the United States. (By February 1974, the Canadian tax had ballooned to $6.40 per barrel.)
- Nigeria almost doubled its oil prices; Indonesia announced a 20% rise.
- Iran announced an agreement to sell one consignment of crude during the first six months of 1974 at $16 to $17.40 a barrel, compared to the early 1973 price of around $3 a barrel for top crude.
- Transshippers of oil to the United States—countries which import crude from the Middle East and re-export the crude or refined products—threatened cutbacks, thereby hoping to avoid additional Arab sanctions.
In sum, a review of the events of last fall leads to the conclusion that Arab oil producers moved with impunity, with increasing confidence, and with a great deal of unity and success in their first real concerted effort at oil diplomacy. In a few short weeks, Arab oil diplomacy caused significant displacements in Western and Far Eastern economies and caused divisiveness, disorientation, and even bitterness among NATO allies as they scrambled to gain privileged positions vis-a-vis the Arabs.
It is still too soon to make any definitive judgments about what has transpired and is continuing to unfold in the Middle East. Nevertheless, we can make a preliminary and highly tentative assessment of what events of the last few months may mean for U. S. policy makers in the immediate and more distant future.
As for the domestic side, the President's call for energy self-sufficiency by the end of this decade in order to maintain maximum foreign policy flexibility makes a lot of strategic sense. Given the steepness of the U.S. energy demand curve, it seems clear that a Manhattan Project or Apollo-sized effort will indeed be necessary to even approximate that goal. It will take a combination of measures simultaneously aimed at energy conservation and at increased energy production. A change—perhaps even a radical change—in the American life style seems to be indicated on the one hand, and the development of America's vast coal reserves, increased use of safe nuclear power, and the development of additional exotic energy sources seems called for on the other.
As for U. S. foreign policy problems and prospects, diplomatic efforts should be directed over the short run toward maximum diversification of overseas petroleum sources on the assumption that Arab resources may again be periodically denied in the future. While prospects don't appear promising for discovery of additional easily-exploited reserves outside the Middle East area, efforts should nevertheless be pressed to assure the United States a position of prominence in early stages of major exploratory efforts since every barrel will help until the U. S. domestic program comes to fruition.
Second, efforts should be further pursued to develop cooperation and coordination among major oil consuming nations in order to meet producer unity with consumer unity. The Washington Energy Conference in February was a first, tentative step in that direction. But recent bilateral deals between various European governments and producer governments have demonstrated it will not be easy to sacrifice expedient solutions for the sake of the longer-term goal of stable energy supplies at equitable prices. Cooperation among consumers should extend not only to a sort of international collective bargaining, but also to mutual conservation measures, development of alternative energy sources, and even to formation of an international authority to avoid cutthroat competition for available energy in times of shortage and provide for energy sharing in critical situations. A collective international consumer approach to the already-organized producers must emphasize the constructive rather than the punitive, realizing that an escalating series of measures and Countermeasures can only throw the world economy into chaos to the detriment of producers and consumers alike. The ultimate aim should be cooperation between producers and consumers to their mutual benefit, but, as a prerequisite, the consuming nations must themselves cooperate in order to develop their bargaining efficacy as well as reduce their vulnerability to possible future oil cutbacks or embargoes.
Meanwhile, efforts should be pressed to promote an eventual comprehensive peace settlement between the Arabs and Israelis. Not only will final solution of that question remove the major raison d’être of Arab oil manipulations, but it will also undercut the anomalous Arab unity which reached an unprecedented level last winter. The Arab world is in fact far from monolithic, a factor which serves to reduce the long-term vulnerability of the still-fractured consumer "bloc.” Arab regimes may be distinguished on the basis of their amount of wealth and their conservative-radical orientation. With the lifting of the embargo in March, an event which itself revealed cracks in Arab solidarity, the differences in Arab regimes once again become central to any analysis of the politics of oil.
With regard to the first distinction, amount of wealth, governments with large and increasing monetary reserves such as Saudi Arabia and Kuwait, for example, have no real financial incentive to increase, or even to maintain production. Their oil in the ground can only become more valuable the longer it stays, and meanwhile they have more money than their economies can absorb. Such countries will be more receptive to offers of development expertise and technology and to resourceful plans for investing their money, than to prospects of higher oil revenues.
A second class of Arab oil producers includes those which over the years have plowed most of their oil revenues back into their own economies and require large additional revenues to achieve still-unattained developmental goals. With them, increased oil revenues are a definite incentive to increase production, and they are the first to suffer when called on to cease production for political reasons because they lack large monetary reserves to fall back on. Indeed, such regimes may even run the risk of internal instability to the point of revolution or coup d’état if heightened developmental expectations on the part of their populations are disappointed or denied altogether.
A second distinguishing characteristic among Arab regimes—their orientation along a conservative-radical continuum—has in the past been a highly significant factor in relations within the Middle East, and it seems likely that that distinction will weigh heavily in the future determination of the strategic character of the area.
A high percentage of Arab oil—which is, as we have seen, a high percentage of world oil—is located in and around the Persian Gulf. (For a full discussion of the strategic character of the Gulf see Colonel Victor J. Croizat’s "Stability in the Persian Gulf,” Naval Institute Proceedings, July 1973.) All the Gulf states, save one, Iraq, have conservative, monarchical-type regimes: Oman has a Sultan. The recently-formed Union of Arab Emirates consists of seven sheikhdoms; Qatar and Bahrain are also ruled by sheikhs. Saudi Arabia is a kingdom, and non-Arab (but big oil producer) Iran has an absolute monarch—the Shah. Historically, these conservative regimes have not maintained an identity of interests with radical regimes such as those in Iraq, Syria, and Libya, from which they have even suffered periodic subversion.
Nor are these conservative regimes comfortable in the face of the rather considerable Russian influence in the area. The well-known Communist antipathy toward their type of government, and the rather dramatic Russian naval build-up in the Persian Gulf and Indian Ocean give them cause for concern. Add to that the British withdrawal from "east of Suez” in 1971, and it appears even more unlikely that the Persian Gulf states will be inclined to remain estranged from the United States for very long since they undoubtedly see the need for a balancing force to insure their long-term autonomy. For our part, it seems clear that the interest in a balance is mutual, because Soviet hegemony in an area of such vital natural wealth would obviously be inimical to the strategic posture of the United States.
As we have seen, the Arabs control a large percentage of the world's proven and easily exploited oil reserves, and they demonstrated in the wake of Yom Kippur both a willingness and, for the first time, a capability to employ their oil resources as a potent political weapon. By imperiling industrial economies they achieved not only diplomatic isolation of their Israeli foes, but they also produced portentous strains in the Atlantic Alliance. If somewhat ironically, however, the United States should be grateful to the Arabs for their recent demonstration of the potency of the oil weapon. That relatively minimal manipulation of Middle East oil resources can win friends and debilitate enemies is a lesson better learned sooner than later. Five years from now, and five years more dependent on Arab oil, the lesson would have unquestionably been much more painful for the United States. Enlightened by recent events, it remains to limit future U. S. vulnerability. Success in that endeavor depends on continuation or efforts to curb waste while developing new energy sources, cooperation with other consuming states, and pursuit of a foreign policy which recognizes the differences among Arab regimes and aims toward an eventual Middle East settlement and producer-consumer cooperation, meanwhile avoiding what Captain W. F. Cass, calls, in his January 1973 Proceedings article, a "critical level of dependence" on foreign energy sources which could jeopardize the economy and limit foreign policy alternatives if the oil valves are once again closed.