Eco 357L

Summary by:

Kyle Howe

"Oil Power", Walter J. Levy. Foreign Affairs, June 1971

The Basic Argument:

Contributing to the energy crisis was the shift in power favoring oil-producing countries (Primarily members of the OPEC). Levy credits this to consuming countries becoming fully dependent on oil imports and then making no policies to assure a constant inexpensive supply of oil. Instead, they just relied on industry- large international oil companies. Europe’s increasing dependence upon Libyan oil without provision or government alternatives gave Libya a position to flex its power and the trend started from there.

Summary and Points Raised:

First, Levy spells out the dependence of international countries on the OPEC for oil. The U.S. imported 55% of its oil from the OPEC (Venezuela) at the time and it is stated that despite other possible discoveries, the eastern hemisphere was also dependent upon the OPEC for oil. The OPEC had basically formed an oil monopoly. As I stated above, the major turning point was in Libya, 1970, when there were confrontations between the oil companies and the Libyan government. The Libyan government wanted to increase their "take" so they increased their concessionary demands while threatening to cut off oil companies if they did not conform. In September 1970, companies agreed to increase posted prices by $.30 per barrel, increase tax rates, and they agreed to a $.02 annum escalation through 1975. Other members of the OPEC jumped on the bandwagon and increased demands accompanied by threats of withholding oil from companies. Venezuela did this during December 1970, and by February 1971, the price of Persian Gulf production was raised by $.35 and would escalate thereafter by $.11 per annum through 1975. And in April 1971, Libya obtained another increase in posted price of $.90. These new demands were most costly on developing countries that could not count on exporting to the producing countries or financing from an internal developed bank. They experienced the worst dramatic drain on resources and the largest imbalance of payments. It should be noted that the OPEC assured people that the new production costs would not be reflected in consumer prices. However, with oil companies’ profit margins narrowing, a raise in consumer price was inevitable. Levy stated that Western oil policies should primarily concentrate on availability. These policies could be based on concessionary arrangements and international agreements only if: all the parties’ interests are represented, and as long as any breach of contract would be harmful to the breaching party. For example, this would work if: a producing country could only afford brief interference in oil flows and therefore embargo threats would be unlikely. Moreover, this would work if a producing country’s regime would be seriously threatened by turmoil, therefore keeping it from making unreasonable demands.

One point Levy makes concerns OPEC policy implemented in June 1968. Amongst the agenda was an aim to, "bind interests of the oil companies with those of producing countries to prevent competition among producing countries and companies as sellers in the open market, and to make it difficult for any producing country on its own to insist on an abnormal increase in production." Levy argues that is really just a device for producing countries to restructure the oil trade so as to use oil companies for there own interests. This "participation" can be seen as a way for producing countries to enter the oil competition without actually competing. Levy adds, "A major decision that the oil companies will be facing is for how long they want to be held hostage by their resource interests in producing countries." So, companies are in a sticky situation. According to Levy, companies must consider both the likelihood of increasing loss of production and profits, as well the threat of producing countries’ potential of coming in and overriding oil companies. One resolution that he offers is that companies abandon producing countries and re-enter the market as a competing buyer. In this instance, the model company/purchaser would have an advantage regarding disposal power. However, they would be forfeiting their control of reserves. Another challenge of oil companies is that of balancing risks and interests in producing countries verses consuming countries. Levy says that in the short-run, companies’ interests should be allied with producing countries; and in the long -run, companies’ need to develop strong relations with consuming countries in order to establish confidence and minimize suspicions amongst consuming countries.

He recognizes the vital importance of assured inexpensive oil imports in the United States in order to keep our stance as a world power. Regarding this he feels that energy conservation as well as exploration and development in alternative indigenous energy sources, such as atomic energy, are a must and we must not become fully dependent upon insecure sources of oil. There were a few security policies that were pending at the time this article was written, but Levy fells that an increase in stockpiling is the best, most practical form of protection. During the 1970 crisis, Europe and other countries had only 30-60 days of supplies on hand. If say, a powerful country like the United States were to run out of oil during a crisis, the results would be economically disastrous. Another thing that deserves caution is the growing tightness of tanker and transport capacity. At the time this article was written there were new pipelines being built to alleviate some tightness, but Levy notes that any disruption in these pipelines in the future could result in an interruption of continual transport of oil.

Lastly, Levy feels that direct negotiations between consuming and producing countries could give rise to greater political confrontations, and may prove to be counterproductive when it is all said and done. It would be wiser for industrialized nations to gain leverage through their economic ties within the Common Market. This would hopefully stabilize a community of interest.