Geopolitics of Oil

by Saman Sepheri

International Socialist Review, November / December 2002

"If you want to rule the world you need to control the oil. All the oil. Anywhere."

Michel Collon, Monopoly

The region that comprises Iraq, Iran, Kuwait, and Saudi Arabia is at the epicenter of the pending U.S. war on Iraq. Despite all the rhetoric about weapons of mass destruction, one glaring fact stands out: These four countries have more proven oil reserves under their soil than the rest of the world combined.

A quick glance at the Bush administration's corporate ties reveals close connections to virtually the whole oil and gas industry. Vice President Dick Cheney was the head of Halliburton, the world's largest oil services firm. Secretary of Commerce Don Evans was a partner at Tom Brown, a Denver-based oil exploration firm. Exxon, the world's largest corporation in terms of revenue, was second only to scandal-ridden Enron in contributions to the Republican Party, and National Security Advisor Condeleezza Rice, the administration's "Russian expert," was on the board of directors of Chevron-the contractor for the development of the Caspian's largest oil field and pipeline network in Kazakhstan. Yet, the coming war with Iraq is less about satiating the U.S. thirst for oil and lining the pockets of Bush administration cronies-though it will help do both-than it is about the control of oil.

Oil is the world's most important commodity. Without oil, today's industrial society would simply be impossible. Oil and natural gas are the fuel for the engine of modern capitalism, with Organization for Economic Cooperation and Development (OECD) nations accounting for two-thirds of all oil consumed in the world.'

Oil and gas are not only the source of 62 percent of the energy used in the world, they are integrated into the production of many goods and products that we take for granted. But just as important, every tank, every airplane-from the B-52 to the stealth bomber-every cruise missile, and most war ships in the U.S. or any other nation's military arsenal, rely on oil to wage their terror. In fact, the U.S. Department of Defense is the consumer of over 80 percent of all the energy used by the U.S. government.

Overall, oil and gas make up 65 to 70 percent of all the energy consumed by the three largest economies in the world- the U.S., Japan, and the European Union. And many of the industrializing countries of the Third World, such as South Korea, China, Brazil, and Mexico, have seen their oil and gas consumption skyrocket.

First World War: Blood and oil

The importance of oil to modern industrial society grew rapidly with the proliferation of automobiles in the early 1900s. But the turning point for oil's importance was the First World War. By switching the British navy from coal to oil, British Secretary of the Navy Winston Churchill gave Britain and its allies a crucial advantage over their enemies. After the Allied victory, British foreign secretary Lord Curzon stated, "The Allies floated to victory on a wave of oil"

After the war, the epicenter of oil production shifted from Texas and the Caribbean basin to the Middle East, where vast oil reserves were discovered. From that point on, yesterday's allies-France, Britain, and the U.S.-became competitors in the carve up of what was to become the greatest prize of the century. Britain, which already had control of all of Iran's oil (won through a concession in 1901), emerged initially as the best-placed contender. Frustrated with the British government's attempt to block every American company's efforts to obtain concessions in Iran and Iraq, the president of Standard Oil of New Jersey (now Exxon) complained that "British domination would be a greater menace to [Standard Oil of] New Jersey's business than a German victory would have been."

Second World War: The U.S. becomes top dog

The U.S. government waged a hard battle to gain a foothold for U.S. oil companies in the region. But it was the Second World War that tipped the balance in the race for oil completely in the favor of the U.S. By the end of the war, Europe was devastated and Germany was destroyed. France and Great Britain, the major imperial powers, emerged much weaker from the war, while the U.S. emerged relatively unscathed and controlling over half the world's industrial output. This helped the United States claim the mantle of the dominant power in the West, while France and Britain became its junior partners.

This change in the pecking order of the world's imperial powers was reflected in the control of oil resources after the Second World War. In 1940, the U.S. share of Middle East oil stood at 10 percent. By 1950, it had jumped to 50 percent. Some of this was due to new concessions gained by the U.S. However, the U.S. took over Britain and France's oil holdings, busted up the British monopoly in Iran, and made France marginal in Iraq. For example, after Iran's nationalist Prime Minister Mohammad Mossadeq nationalized the British-controlled Anglo-Iranian Oil Company (AIOC) operations in 1951, the American CIA organized a coup to overthrow Mossadeq, replacing him with the Shah, who became a staunch ally of the U.S. Once Mossadeq was overthrown, Iranian oil was not returned to the British AIOC. It was divided up among Exxon, Mobil, Gulf Oil, and other American companies, which took their share for services rendered by the CIA with AIOC now holding a minority share of 40 percent.

The freebee and the fix

The United States used the Marshall Plan (the U.S. aid program to rebuild Europe after the Second World War, officially known as the Economic Cooperation Administration- ECA) to take control of European energy markets and to open access to raw materials in Europe's colonial holdings. Walter Levy, a Mobil Oil economist, and later the head of the Marshall Plan's oil division, noted in 1949 that "without ECA American oil business in Europe would already have been shot to pieces." Of $ 13 billion in Marshall Plan aid, fully $2 billion was slated for oil imports, while the Marshall Plan actually "blocked projects for European crude oil production and helped American oil companies gain control of Europe's refineries. All this was done without regard for the effects on domestic employment in coal or loss of internal self-sufficiency." The net effect of this aid was that petroleum replaced Europe's domestic coal as Europe's main source of energy.

The post-war era saw an enormous expansion in petroleum's share of world energy usage. In 1929, oil and gas had accounted for 32 percent, and in 1939, on the eve of the war, it accounted for 45 percent of all energy used in the United States. But by 1952, petroleum's share had risen to 67 percent and by the 1970s it had gone up to over 70 percent, where it has remained until today. Japan and Europe have shown a similar pattern of growth, with Japan relying on oil and gas for 63 percent of its energy needs and Europe for 65 to 70 percent today.

Super-profits

Corporate oil giants led by American firms extracted unbelievable profits from their investments after the Second World War. In Iran, between 1954 and 1964, Western companies earned a compounded interest rate of profit of 70 percent per year!" And in the Middle East as a whole, at the height of the oil companies' power in 1970, net assets of petroleum industries valued by the U.S. Commerce Department at $1.5 billion yielded $1.2 billion in profits-a return of 79 percent. It was no wonder that in the 1970s, 40 percent of all U.S. investments in developing countries, and 60 percent of all U.S. profits from developing countries, were oil related.

The great wealth extracted from Middle East countries helped oil corporations become massive edifices that dominated the world economic terrain. By 1973, seven of the world's 12 largest companies were oil corporations.' Known as the "Seven Sisters," these oil giants-Exxon, Mobil, Chevron, Texaco, Gulf, Shell, and BP-have dominated the world oil industry ever since.

Surrogates

By the mid 1960s, the U.S. had control of Middle East oil, and U.S. corporations had cornered the world market and were raking in immense profits. With what turned out to be two-thirds of the world's oil under its control, what strategy did the U.S. use to protect its prize?

The U.S. strategy, known as the Nixon Doctrine relied on building surrogate states in the area, which would be the executors of U.S. policy and guardians of Middle East oil. U.S. policy had three pillars in the Middle East: 1) Saudi Arabia, home to the world's largest oil reserves; 2) Iran, where the CIA had organized a coup in 1953 to install a U.S. ally, the Shah, to power; and 3) Israel, formed in 1948 and built as a colonial settler state based on the expulsion and brutal oppression of the native Palestinian population. Israel became the biggest recipient of U.S. aid, and wholly dependent on the U.S. for its existence. Each state was to perform a different role in the region.

The Saudi state was by and large the creation of the U.S. oil companies and the United States government. In the 1920s, Saudi Arabia was a feudal society with different families ruling various regions. It was forged into a nation in 1932 when Ibn Saud and his clan defeated the other families and unified the country, naming it after themselves.

Texaco and Standard Oil of California (SOCAL-later renamed Chevron) won a concession to drill for oil in Saudi Arabia in 1936-a mere four years after the country had been formed. To share the exploration, and marketing of their new Saudi oil concession, a new company named ARAMCO (Arab American Oil Company) was formed, which over the next two decades would become the largest oil producer in the world.

Saudi Arabia at the time had no government to speak of. There was no state structure, no ministries, no state budget, or army. Much of what became the Saudi state, in fact, was created by the United States and ARAMCO. Ghassane Salameh explains that:

In return for royalties, the government had nothing to give ARAMCO, but the signature on the bottom of the contract-no armed forces to defend the [oil] installations, no administration, no skilled labor, no educated personnel, no real infrastructure of any sort, much less a government capable of regulating the corporate giant at the heart of kingdom. As a result ARAMCO engaged in not only all aspects of Saudi oil production but also built housing, airports, schools, dug for water, and above all invited the U.S. military to install a base near the oil fields to protect [them].'S

In fact, it was the installation of this American base in Dharan in 1944, which prompted the Saudi king to form a ministry of defense.

Whatever may have changed since then, Saudi Arabia retains certain defining features. With 25 percent of the world's reserves and the largest oil production facilities in the world, oil defines the state, and Saudi Arabia is the Mecca of world oil. The Saudi state functions as a family business-in effect an extended family endeavor, ruled by the Ibn Saud family. Oil is the main source of state funding and the majority of the population is either directly or indirectly dependent on the state for employment for its livelihood. Finally, the survival of the state continues to depend on U.S. support, which, paradoxically, is also a major source of its internal instability.

Saudi Arabia was the economic prize. But Israel became the main security asset, the watchdog of the region. Its role was to challenge, check, and if necessary destroy any challenge to the U.S.-mostly threats from Arab nationalist regimes which

had taken power in 1950s and 1960s in Egypt, Syria, and Iraq. Israel was supported to the tune of $4 to $5 billion in U.S. aid and armed with U.S. weapons. Washington Senator Henry "Scoop" Jackson summarized the U.S. strategy:

[S]tability as now obtains in the Middle East is, in my view, largely the result of the strength and Western orientation of Israel on the Mediterranean and Iran on the Persian Gulf. These two countries, reliable friends of the United States, together with Saudi Arabia, have served to inhibit and contain those irresponsible and radical elements in certain Arab states-such as Syria, Libya, Lebanon, and Iran, who, were they free to do so, would pose a grave threat indeed to our principal sources of petroleum in the Persian Gulf.

Iran, the third pillar of the U.S. strategy, acted as the policeman of the Gulf. Iran had the population, state structure, and infrastructure that Saudi Arabia lacked, and the Shah of Iran, using Iran's oil income, built a formidable military with one of the world's most up-to-date air forces. Between 1970 and 1978, the U.S. exported over $20 billion worth of arms to Iran, amounting to what U.S. Representative Gerry Stud of Massachusetts called, "the most rapid buildup of military power under peacetime conditions in the history of the world." The Shah himself was arrogantly blunt about his role stating in 1974: "Without Iran to defend them the Arab states in the Gulf would be dead."

OPEC's rise

The 1970s also saw the rise of the Organization of Petroleum Exporting Countries (OPEC). OPEC was founded in Baghdad in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, and was later joined by Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, and Nigeria. It was originally formed as a way for these countries to try to negotiate a better share than the 10 to 15 cents on every dollar of immense profits the giant oil multinationals were making from the marketing and sale of their oil.

But soon, its member countries realized that they could coordinate the amount of oil exported, not only to get a larger share of their own oil revenue, but as a means to control the supply, and therefore the price, of oil. Each country received a quota, negotiated within OPEC, of how much oil it could produce. If they would stick to these production quotas, OPEC countries could manipulate prices. Holding 40 percent of world's production and a 50 percent share of oil available for export, OPEC has had a great leverage on oil supplies worldwide.

Moreover, OPEC also controls 90 percent of the world's excess oil production capacity-with Saudi Arabia holding more than half of that. While most other producers are nearly at the maximum of their production capacity, OPEC, limiting production through its system of quotas, is producing at about 80 percent of its full capacity. OPEC can easily ramp up production, to make up for shortages, in cases of emergency such as serious military conflicts.

Though the U.S. gets less than a quarter of its oil from OPEC, OPEC still has great influence on all oil importers worldwide. Its excess production capacity makes OPEC (and especially Saudi Arabia) of great strategic importance to the U.S.

OPEC's presence was especially felt with the 1973 oil embargo, organized by OPEC's Arab countries as a protest of Israel's war against Egypt and Syria. The embargo was organized against Israel, but also against the United States which was funneling arms and aid to Israel, ensuring an Israeli victory. During the embargo the price of oil tripled in a matter of weeks, increasing from $4 a barrel to $ 12 a barrel. However, more importantly than the increase itself, was the realization by OPEC of its power over oil markets.

1979: A blow to U.S. imperialism

The United States faced serious problems in the region by the end of 1970s. It had to contend with OPEC's control of oil supplies. Real disaster struck, however, when the Iranian revolution of 1979 overthrew the Shah. The "Policeman of the Gulf" was gone, replaced by an Islamic regime hostile to the United States. If the defeat in Vietnam had been a disaster for America's sense of invincibility and military might, seriously limiting its ability to commit troops abroad, the 1979 Iranian revolution struck a blow to U.S. policy in the most strategically prized region for the United States-the oil producing Persian Gulf.

The Iranian Revolution toppled the Shah, one of the three pillars of U.S. policy, a blow from which the U.S. has yet to fully recover. And in December 1979, the USSR invaded Afghanistan, adding to Washington's concerns in the region. Saudi Arabia was also shaken at roughly the same time. A military coup attempt took place in September 1979, followed in November by an armed takeover of the Grand Mosque in Mecca, Islam's holiest site, by those opposed to Saudi family rule, and riots by the Shiite minority in the oil rich Eastern Province in December.

A glance at two factors underlines the importance of the loss of Iran and the turbulence in Saudi Arabia. U.S. aid to Israel doubled in 1980, bolstering Israel after the loss of the Shah in Iran, and the price of oil tripled-rising from $12 per barrel to its highest price ever, $35 per barrel (equal to over $65 per barrel in 2002 dollars). The U.S. sent massive amounts of arms to Saudi Arabia and the Gulf states, and urged the formation of Gulf Cooperation Council (GCC) as a way to coordinate the efforts of Saudi Arabia with the Gulf's weaker states- Kuwait, Bahrain, Qatar, and the United Arab Emirates-to build a common front against Iran.

With the loss of the Shah, the U.S. no longer could rely on surrogates to police the Gulf. So in 1980, President Jimmy Carter, announced Washington's intention and willingness to interfere directly in the area under the new Carter Doctrine. The United States formed its new Rapid Deployment Force (RDF) with a mission ostensibly to guard against "any attempt by any outside force to gain control of the Persian Gulf region [which] will be regarded as an assault on the vital interests of the United States."

The outbreak of war between Iran and Iraq in 1980 provided the perfect opportunity for the U.S. to not only contain Iran and cement its ties to the Gulf States, but to reinsert its military more fully in the Gulf. The U.S. now set up a string of bases and command centers in the Gulf states, stationing the U.S. Fifth Fleet in Bahrain. By 1983, the RDF had been expanded into Central Command (CENTCOM), now a permanent military presence in the region, with 17 ships under its command and the authority to requisition 35,000 troops.

Moreover, with the GCC's help-and Kuwait and Saudi Arabia footing the bill-Iraq's army under Saddam Hussein was built up to force a retreat of Iranian forces, which by 1985 looked to be winning the war. Tilting towards Saddam Hussein against Iran, the U.S. approved and even oversaw the transfer of some of the chemical and biological weapons and missile technologies which Bush today is accusing Iraq of having secretly developed. With U.S. backing, Iran lost the war, and the Iranian threat was contained. But with Iraq's invasion of Kuwait in 1990, the U.S. now turned on its erstwhile ally. In a brief and completely one-sided bombardment and invasion, the U.S. killed at least 200,000 Iraqis-there is nothing close to an accurate count-many while they were retreating after the war was lost.

By 1992, the situation in the Gulf had been stabilized. The Iranian Revolution had been contained, and Iraq was left decimated and hampered with economic sanctions which were to kill more than a half million Iraqi children in the next decade. But regimes hostile to the U.S. were still in power in Iran and Iraq. Saddam Hussein had been left in power by the U.S., which feared an uprising from below would be more damaging and destabilizing than leaving the Iraqi regime intact, but caged and weakened. And the Iranian regime, although weakened and now more accommodating to the West, was still a source of concern for the U.S. The U.S. now moved from a policy of containment (of Iran) to that of dual containment (of Iran and Iraq).

Furthermore, Saudi Arabia was facing internal problems, both economic and political. The Saudi economy, wholly dependent on oil revenues, was facing serious challenges. Lower oil prices brought falling revenues and increasing government debt through the 1990s, and the U.S. military presence and bases in Saudi Arabia, used to launch the invasion of Iraq, were becoming a source of public resentment towards the U.S. and Saudi regimes. The Gulf region may have been temporarily stabilized for U.S. interests, but it was not by any means permanent.

Diversification

The U.S. quickly set out to strengthen its web of security arrangements in the region. The U.S. encouraged cooperation between Israel and Turkey, who signed military pacts and engaged in joint military training exercises. In the early 1990s, Turkey become the third largest recipient of U.S. military aid (behind Israel and Egypt), receiving as much as $700 million a year, using much of it to buy $2.3 billion worth of arms from the U.S. in just two years. Turkey's Incirlik air base was modernized and became home to the U.S. F-16 jets used to bomb Iraqi forces under the excuse of protecting Iraq's Kurdish minority in Iraq's northern "no-fly zone." Yet the U.S. has turned a blind eye when Turkey's F-16 jets, sitting on the same tarmac at Incirlik, have bombed the bases of the Kurdish minority in Turkey.

"Diversification of oil resources" became the motto for the United States. Sources other than the Persian Gulf; from Africa, to the North Sea to Canada, were tapped to diversify the source of U.S. oil imports. By U.S. calculations, this would not only cushion the U.S. (albeit temporarily) from any possible disruption from the Gulf, but just as importantly it would reduce the market share of OPEC, and therefore weaken its influence on oil supplies and prices.

OPEC had already lost market share during the 1973 oil boycott. While the boycott had established OPEC as the force that had effective control of world oil supplies and therefore oil prices, it had sent oil consumers to look for sources of oil other than OPEC's, such as Norway's North Sea, as they came on line. Under these pressures, OPEC's share, which had been about 50 percent of total world oil production in 1970, plummeted to a low of 31 percent by 1985. Since then, OPEC has managed to recoup some of losses, and raise its share to about 40 percent in 2000.24 But the push for diversification continues. For example, after over a decade of letting Africa rot in poverty, there is again interest and investments in Angola, Chad, and even Sudan to explore and develop oil resources, while in the Western Hemisphere, Mexico and Canada are chipping away at OPEC's share.

The Caspian's black gold

The Caspian Sea's oil riches, opened to Western markets only after the collapse of the Soviet Union in 1991, have shown the greatest promise as a potential alternative to Persian Gulf oil.

The oil and natural gas reserves in the former Soviet Union republics of Azerbaijan, Kazakhstan, and Turkmenistan, are estimated to hold about 70 billion barrels of oil, or three times the reserves of the United States. Some estimates put the reserves of oil as high as 200 billion barrels, making this potentially the second largest oil and gas reserves in the world after the Gulf. The American Petroleum Institute has called the Caspian region "the area of greatest resource potential outside of the Middle East." And Vice President Dick Cheney, while he was the CEO of Halliburton, stated that "I can't think of a time while we had a region emerge as suddenly to become as strategically as significant as the Caspian"

With its oil and gas riches potentially worth as much as $4 trillion, there has been a frenzied scramble to get a piece of the Caspian by all major oil companies. Chevron, Texaco, ExxonMobil, BP-Amoco, Shell, and Unocal have all made bids for development of Caspian oil. But the competition is not limited to the oil majors. Japanese and Chinese companies have taken stakes in the oil consortiums, trying to secure oil shares, and Iran and Russia have been competing to become the main transport route for Caspian oil out of the area.

There are however, problems facing the development of Caspian oil and gas. There has been tension among the five countries bordering the Caspian over how to divide the sea. But the biggest problem is transporting its oil and gas to the world markets. Because the Caspian is actually a lake, pipelines have to carry its oil and gas to ports or through any number of nations to reach consumers. These transport routes have been the source of competition, since these pipelines are not only a source of revenue, but the transportation routes are of strategic importance.

A number of pipelines have been proposed, with the cheapest and the most viable passing through Iran or using Russia's existing pipeline system. The U.S. considers it strategically imperative to prevent most of the oil from running through Russian and Iranian pipelines. It has officially announced its desire to build multiple routes, but in practice the U.S. has thrown its weight behind the Baku-Ceyhan and Trans-Caspian pipelines, which will cross the Caspian under the sea and carry oil and gas to the 'Turkish port of Ceyhan on the Mediterranean. Given the huge costs involved, major oil companies have balked at this proposal, questioning whether they can recoup investment and operation costs.

Only a few years ago, BP-Amoco, the major player in Azerbaijan, and other oil executives had expressed skepticism at the economic viability of this pipeline, despite U.S. and Turkish promises of subsidies. And analysts were suggesting that "the U.S. policy is built on a false promise to...torpedo major Russian and Iranian influence in the region-implying a much stronger commitment to the Caspian states than the U.S. really intends or even is able to keep."

But the September 11 attacks, and the U.S. invasion of Afghanistan, have completely changed this. The U.S. is now firmly planted on both sides of the Caspian. Not only has the U.S. government signed security pacts with Azerbaijan and placed troops in Georgia, but it now has bases and troops on the Eastern Caspian shores, in Kazakhstan, Uzbekistan, and Turkmenistan. With U.S. troops well in place, the Baku-Ceyhan pipeline's construction started officially in October, 2002.

The concerns of economic viability however, are real. If oil prices drop, the Caspian's oil will become less attractive. And, even though the Caspian may easily contain the estimated 200 billion barrels of oil, during the past three years the estimates of proven reserves have actually been reduced from 45 to 10 billion barrels. No doubt, with more exploration, much more than 10 billion barrels of oil will be found. However, at the end of the day, there may not be too little oil but too many pipelines to carry the volume of oil and gas eventually produced in the Caspian.

Growth

The world's energy consumption has increased by 84 percent since 1970 (from 207 to 382 quadrillion BTUs) and it is expected to increase by another 60 percent over the next twenty years. The industrially advanced countries have been using the lion's share of this energy: The U.S. uses 25 percent of all the energy consumed in the world, Japan 5 percent, and Western Europe 18 percent. Today, the U.S. is the biggest consumer of oil in the world, using 19 million barrels of the 77 million barrels used in the world daily.

But the rate of increase in energy consumption has not been uniform across the world. Industrialization and integration into the new global economy has meant an increase in energy usage in developing countries at a pace three times that of the U.S., Japan, and Western Europe. While the U.S., Western Europe, and Japan have seen their oil consumption increase by an average of 12 percent, Central and South America have seen an increase of 40 percent since 1990. Developing Asia has seen a 44 percent increase in energy consumption over the same period, led by South Korea and India, which have seen their energy grow by an astounding 84 percent and 59 percent, respectively. Energy demand in Latin America and developing Asian nations is expected to more than double by 2020. This growth will account for half of the total growth in energy demand in the world.

The biggest increases are expected to come from Asia. Asian economies are expected to overtake the United States as the biggest consumers of energy in the next twenty years. By 2020, these economies are expected to account for 27 percent of world energy consumption, while the U.S. is expected to consume 25 percent; Western Europe, 18 percent; Eastern Europe and the former Soviet Union, 13 percent; and Latin America, 5 percent of the world totals.

The biggest gains in Asia are expected to be in China, whose economy doubled in size the 1990s. Over the next 20 years, energy consumption in China is expected to grow at a rate four times the rate of the growth in Europe and the U.S. In less than 10 years China is expected to become the largest oil consumer in Asia, surpassing Japan as the world's second largest consumer of oil after the United States. Oil consumption is expected to increase by 150 percent by 2020, and China's natural gas usage is estimated to increase by 1,100 percent.

Russia: The new silk road?

The anticipated growth in energy demand has fueled the entry of new producers into the energy market. But the biggest entry in the oil markets, after a long hiatus following the collapse of the USSR, has been Russia. Before the 1991 collapse, the Soviet Union was the largest producer and the third largest exporter of petroleum in the world. While production is not at the pre-1989 levels, there is now enough excess production to resume oil and gas exports.

Two factors have allowed Russia's bounceback: The stabilization of oil prices (up from $9 per barrel in 1998, to $28 per barrel today) has made oil exports much more lucrative. And ironically, Russia's economic collapse has not only reduced internal demand, but with the devaluation of its currency, has made investment costs and Russian oil much cheaper.

Russia does not have huge oil reserves-no more than 45-50 billion barrels. But it is the world's second largest producer, and has made a serious bid to gain market share. With oil prices back above OPEC's target of $20 per barrel, the Russian economy has shown strong growth in the past few years. Russian gross domestic product has grown by 8.3 percent in 2000 and 5.1 percent in 2001.

The Russian economy is extremely sensitive to oil prices. With energy accounting for 40 percent of its exports, fully 90 percent of Russia's GDP growth has been due to oil and gas. Given Russia's reliance on oil income, it has had an interest in working with OPEC to stabilize oil prices by limiting production along with OPEC's production quotas. But, since oil prices had stabilized at $25 per barrel in early 2002, Russia has refused to continue any coordinated cuts with OPEC.

Hard up for foreign currency, and weighing its relations with the U.S. in the aftermath of September 11, Russia has tried to maximize its profits by winning market share from OPEC-a plan which fits well with the desire of the U.S. to diversify its sources of oil and reduce OPEC's control on oil markets.

Despite the show of cooperation between the U.S. and Russia, however, the September 11 attacks and U.S. invasion of Afghanistan have seriously undermined Russia's position and plans in the Caspian region and Central Asia.

But Russia's plans go beyond the Caspian. Although Russia is a major player in oil, it is natural gas which is Russia's strong suit. World natural gas reserves are even more geographically concentrated than oil, with Russia and Iran accounting for half of the world's reserves. Holding 32 percent of the world's reserves, Russia is to natural gas what Saudi Arabia is to oil.

While oil is expected to remain the dominant energy source in the world, natural gas consumption, however, is expected to grow at a faster rate. In fact, Jeroen van der Veer, president of Royal Dutch Shell Petroleum, stated that "Increasingly, the 21st century will be seen as the century of gas." Demand for natural gas in Korea, Taiwan, China, and India is expected to triple over the next decade.

And Europe's natural gas needs will rise rapidly as well, as Europe switches over from oil. Europe already uses natural gas for 22 percent of its energy needs. Yet, this share may rise to as much as 60 percent, over the next decade. Russia is planning to secure its position as an oil and gas supplier to Europe and East Asia. Russia's largest oil companies, Lukoil and Yukos, and the state-owned gas giant Gazprom which already supplies Europe with 25 percent of its natural gas, have been busy building the infrastructure to ensure their domination of European markets.

Russia's biggest investments however, are in he East. The largest single foreign investment n Russia has been Exxon-Mobil's $4 billion commitment to develop oil and gas at Sakhalin Island. Philip Watts, chairman of Shell, the biggest foreign investor in Russia, has called Sakhalin "the most ambitious green field project undertaken during my 30 years at Shell" 40 l Sakhalin, located between Russia and Japan, holds 10 billion barrels of oil and even bigger gas reserves. Yet this modest amount alone cannot justify the interest. Sakhalin does provide an easily accessible source of oil and gas for the markets of China, Korea and Japan. It can serve as the eastern transportation hub for Russia's oil and vast gas reserves elsewhere, and is an important part in Russia's bid to become a player as an energy supplier to the growing markets of developing Asia.

Russian companies have been joined by such regulars as Shell, Exxon-Mobil, BP, Texaco, Marathon Oil, Arco, and Halliburton, committing as much as $50 billion to the Sakhalin project. The proximity of Sakhalin to Eastern markets has also attracted interest from Japanese and Asian oil companies. Japan's Mitsui, Mitsubishi, and SODECO own about a 25 percent share in Sakhalin's projects. And India's ONGC has made major investments, to meet India's gas needs which are expected to quadruple in the next 50 years.

For any of these projects to come to fruition, major investments are needed. Russia's future may be in its natural gas but it needs oil income now to finance any future plans. Russia has to balance two contradictory factors: It needs market share and therefore is willing to increase production to take markets away from OPEC countries, but it needs oil prices to be high enough to make its oil exports be profitable.

One solution for Russian oil companies has been to look for cheap sources of oil-and Iraq has provided that. With the U.S. sanctions against Iraq in full force, Russian companies (and French companies to a smaller extent), have made inroads in Iraq. Russian companies have been a major outlet for Iraqi oil sold under the United Nation's oil-for-food program-buying Iraqi oil and then reselling it on the world markets.

But more importantly, while the American and British oil corporations have been kept out by the U.S. sanctions, Russian oil companies have signed multi-billion dollar agreements with the Iraqi government to develop Iraq's vast oil fields.

Lukoil, Russia's largest oil company, has signed a $20 billion deal to develop the West Qurna field with a potential 15 billion barrels oil, and Zarubezhneft is closing on a $90 billion of concession for Bin Umra fields. And the giant Majnoon field with a potential 30 billion barrels of oil (bigger than the total proven reserves in the U.S.) is still up for grabs. Russian President Putin's resistance to a UN-supported resolution effectively authorizing U.S. military action in Iraq is mainly to ensure that, with or without Saddam Hussein, Russian oil interests (as well as Iraqi debts to Russia) will be recognized.

Not quite dead yet

Since the 1991 Gulf War, diversification of oil resources and containment of threats to U.S. hegemony in the Middle East have served their purpose, but they have also created serious tensions and problems-for U.S. allies and foes alike-which are destabilizing the region. The presence of U.S. troops and dwindling oil income have undermined key U.S. allies such as Saudi Arabia, and isolation and economic pressures have unleashed a reform movement in Iran which could spin out of the control of the reformers themselves. In addition, the growing unpopularity of the sanctions, and the continued survival of the Iraqi regime, remain a thorn in U.S. Middle East policy.

Lower oil prices and decreasing oil income-coupled with a rising population-have had serious consequences for Saudi Arabia. This has put enormous strain on the Saudi state/families ability to maintain the standard of living that most Saudi's have been used to for years. According to World Bank estimates, Saudi Arabia's oil dependent Gross Domestic Product (GDP) dropped from $156.5 billion in 1980 to $125.5 in 1995, a drop of 25 percent. In the same period, Saudi Arabia's population more than doubled, growing from 9 million to over 19 million. This translates to a per capita GDP drop of 62 percent. Per capita income has dropped by about 60 percent since 1970s oil boom.

These problems are not limited to Saudi Arabia. Even though a number of Gulf economies have rebounded since 1990, the same pattern of declining income has been the rule in much of the Gulf. The Gulf economies have actually shrunk at a rate of 2.5 percent per year over the 1980s, shrinking twice as fast as the crisis-ridden African economies.

Saudi's economic difficulties, combined with the presence of the U.S. military, are fertile ground for opposition to the Saudi regime. They are also behind the Saudi cooling of relations with the U.S. and increased cooperation with Iran's reformers.

Iran, OPEC's second largest oil exporter after Saudi Arabia, relies on oil for 70 percent of it foreign exchange income. Yet its production has dropped by 45 percent since the 1979 revolution. Lack of investment has continued to take a toll on production numbers, aging wells and field are producing less, and new discoveries cannot be brought on line. Iran needs to invest $90 billion just to maintain production volume at current levels. Unable to internally finance these investments, Iran has been opening its oil industry to foreign investments for the first time since 1979.

Just as damaging to Iran's oil income is the rise in internal energy consumption. Over the past 20 years, Iran's population has doubled, increasing energy consumption rapidly. If present trends continue, Iran, today the world's fourth largest oil exporter will be a net importer of oil in 15 years. This would be disastrous to the Iranian economy and regime. In spite of U.S. economic sanctions, Iran has been fairly successful in attracting major oil companies to develop new oil and gas fields. Today, Shell, BP, France's TotalFina, Italy's AGIP and ENI, Russian Gazprom, Malaysia's Petronas, and Japan's Mitsui are involved in various projects in Iran.

Just as Russia's oil firms have been more than happy to exploit the vacuum left behind in Iraq's oil production, U.S. "allies" in Japan and Western Europe have been keen to use the U.S. absence to form their own independent relations with Iran and secure their own oil and gas deals, outside of U.S. control.

Ironically, Saudi Arabia, the product of American imperial might in the Gulf, and the Iranian regime, the product of a revolution against that imperial might, are facing similar problems. Their cooperation is a product of economic necessity, to stabilize their blood line, and secure income for oil.

Back to the Gulf

New players may have weakened OPEC, but Persian Gulf producers-and by extension OPEC-still hold all the advantages in oil production. Gulf oil is the cheapest to produce, the Gulf's reserves are the biggest in the world, and the Gulf contains the world's greatest excess production capacity, allowing it to control oil supplies and prices better.

New discoveries in the Caspian Sea, Africa, and South America have increased the amount of oil outside of OPEC's quota system, providing alternative sources for the gargantuan American oil market as well as other growing markets. But even bigger discoveries in the Persian Gulf have actually increased both the Middle East's and OPEC's share of world reserves. In 1980, the Middle East held 55 percent of the world's proven reserves and OPEC, 66 percent. Today, the Middle East's share has increased to 69 percent, while OPEC countries

now hold 80 percent of the world's reserves. And since non-OPEC countries' smaller reserves are being depleted much faster, their reserves will be depleted in, on average, 15 years; while OPEC's oil is forecast to last for another 80 years.

Gulf oil is also much cheaper to produce, making it much more profitable. Production costs for Persian Gulf OPEC nations are about $1.5 per barrel compared to about $4.5 in the U.S., $5.5 in Canada, $7 in the Caspian Sea, and as high as $10 a barrel in Russia. With worldwide imports from the Gulf expected to double in the next two decades, there is no way around the Gulf's domination of oil markets. The Persian Gulf is still the world's strategic prize.

Iraq: Too many birds with one stone?

The events of September 11 have provided the Bush gang with the unique opportunity to move from containing the tensions in the Persian Gulf to resolving them once and for all in its favor. It now wants to settle its "Iraqi and Iranian problems," bring Saudi Arabia back into orbit, and roll back OPEC to its pre-1970s irrelevance. In the words of one recent Pentagon presentation, Iraq is seen by the U.S. as "the tactical pivot" for re-molding the Middle East on Israeli-American lines.

In the event of a U.S. invasion, Iraq would become a vast source of cheap oil under U.S. control which could be used to undermine OPEC, provide the battering ram to deal with Iran and Saudi Arabia, and be a lever against Washington's potential political or economic rivals.

At some 112 billion barrels, Iraq now has the second largest proven reserves in the world after Saudi Arabia's 265 billion barrels. And like all other Middle East oil, Iraqi oil is cheap to produce. Iraq's oil, just like the Saudi's, is geographically concentrated, with fields containing as much as 10 to 30 billion barrels in one location. This translates into low production and exploration costs.

In addition to giving the U.S. Ieverage over the price of oil, control of Iraqi oil will also be an economic boon to U.S. oil giants. After the last Gulf war in 1991, there was a bonanza for American oil companies such as Dick Cheney's Halliburton, to rebuild Kuwaiti and Saudi oil infrastructure damaged in the war. The same will be repeated in Iraq. The only question is how many of the contracts will go to American companies, and which crumbs will be thrown to the Russian and French companies to win their acquiescence.

Lower oil prices will tighten the noose around Iran's ailing oil-dependent economy. Why not let economics soften up Iran, and make of the job of regime change in evil number two on Bush's "axis of evil" list easier? The same economic pressures, combined with enough "diplomatic" persuasion, could also force Saudi Arabia back under U.S. control.

Iraqi oil could also be a lever against stronger opponents of the U.S., providing a useful tool to undermine competitors such as Russia and China, and hampering Russia's bid to expand its oil development plans. The U.S. can also keep France, Germany, and Japan, who could pose a threat to its undisputed dominance, in check. As Asia Times writer Pepe Escobar put it: "Oil and gas are not the U.S.'s ultimate aim. It's about control.... If the U.S. controls the sources of energy of its rivals-Europe, Japan, China, and other nations aspiring to be more independent-they win."

Saman Sepehri is a member of the International Socialist Organization in Chicago.

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