Walter J. Levy, "Oil and the Decline of the West"

Summary by Mary Johnson

In 1979 the world was unprepared for the collapse of the Shah's regime in
Iran, which caused a decline in oil production that would be more than
compensated for by other oil producing countries. However, a temporary
decline in world oil production created a panic amongst importing countries
and international oil companies that resulted in attempts to obtain
additional oil supplies and increase stocks and panic buying at
uncontrollable spot oil prices.  This would cause official OPEC prices to
more than double meaning smaller obtainable quantities of oil for OPEC
customers. Affected countries demonstrated to producing countries and
trading companies that they were willing to pay any price to secure oil
supplies. Importing countries were aware and seemingly unconcerned this
would cause official OPEC prices to rise and they shockingly lacked
motivation to unite to find a solution to this global problem. The
Organization for Economic Cooperation and Development (OECD) and the
International Energy Agency (IEA), international institutions designed to
help in times of international crisis, felt they lacked the power and
support for interference and therefore remained silent. To say the least,
1979 left Iran in disarray, the oil economy in crisis (despite no overall
sustained shortage), and the Soviets invading Afghanistan. And so emerged
the unsettling realization of the failure of Western power and international
leadership.

An Unlikely Solution
World energy requirements could be met if:
- Oil production reached the 1979 level again by 1985
- The West would adhere to import limitation targets
- Increased conservation and further development of indigenous energy
sources was pursued
The likelihood that these conditions would be met was almost as high as that
of the petrodollar surplus being used to finance the balance-of-payment
deficit importing countries suffered during this time. All of these were
very necessary means to and end.

Associated Risks of Coping with the Problem:
- Sustained recessions
- Slow economic growth
- High inflation rates
- High unemployment
- Industrial and national bankruptcies
- Political upheaval

Another solution to the debt problem in importing countries would be a
devaluation of the currency in which the debt was incurred. This happened
between 1974 and 1978 and became known as "the golden age" of petrodollar
recycling.

Meanwhile, producing countries inflamed the situation by trying to force
prices to rise at a rate faster than inflation, decreasing economic
development programs and decreasing annual import expenditures. They found
another way to increase the value of oil exports was to add refining,
petrochemical and transport operations to national programs, in turn
creating a greater imbalance and surplus of petrodollars. The producing
countries' only concern being that of their willingness to turn oil in the
ground whose value is likely to increase with inflation into monetary assets
that tend to decline with inflation. Furthermore, if a reduction in
production was made it would increase the lifespan of the oil reserves and
the real price of oil and revenues would increase.

Another problem with the situation is that producing countries decided to
change negotiated oil prices retroactively. The fear of being cut off from
supplies was enough to create a relatively lawless relationship between
producing countries, the oil companies, and importing countries. This crisis
also left exploration and development efforts dependent on producing
countries that do not want to create a surplus that might jeopardize OPEC
prices.

Producing countries reduced the supply of oil to major international oil
companies from 78% in 1974 to 44% in 1979. Oil negotiations would include
increasing amounts of political and other conditions now that oil companies
provided less of a buffer zone between oil producing and importing
countries.

Fear of inadequate oil supplies and lack of unification of oil importing
countries has hurt the West. The IEA tried to avoid involvement in the
creation of a solution because they feared that their intervention might
upset OPEC. Saudi Oil Minister Zaki Yamani suggested a plan be developed for
an equitable allocation of oil resources. This would reduce the fear of
having inadequate supplies and decrease the possibility of extreme
negotiations. However, with the influence of international oil companies
being greatly reduced so would be the effectiveness of this proposal.

One solution was for the governments of oil importing countries to unite and
find an answer. Unfortunately, this is complicated by geopolitical and
internal revolutionary dangers in oil producing countries. Even though the
resolution of these issues would not solve the oil crisis, further
escalation of these conflicts could jeopardize any possible solution.

"Without going into details, the pervasive strength of all these forces is
illustrated by the fact that 13 of the present Arab heads of   state, or
more than half of them, have reached political power by forcibly removing
their predecessors in one way or another, and in the past 15 years Arabs
have fought Arabs in 12 fierce wars. This is the area on which, for better
or for worse, we depend on for stable oil supplies."

The Carter Doctrine, a result of the Soviet invasion of Afghanistan, was a
bold declaration from the US that any attempt to gain control of the Persian
Gulf region would be considered and assault on US interests and would be
repelled by any means necessary. This expression of interest in the Persian
Gulf was made because the US relies on the area for 30% of oil supplies,
Western Europe 60%, and Japan 70%. However, if fighting in the Persian Gulf
began the first targets would be 3 ports through which 80% of oil is pumped
and 8 other critical pump sites. The US could handle the shortage in oil
imports, but Western Europe and Japan could not suffer such losses. This
created an understandable lack of support from these countries for US
policy. In reality, the Carter Doctrine served more as a deterrent for the
Soviet Union, spoken with the hopes that it would never be tested. The
Carter Doctrine was viewed as a selfish expression by the US made to protect
its oil supplies.

Any reasonable attempt to stabilize the world's use of energy must be
considerate to the welfare of both producing and importing countries, which
is at best, a very optimistic fantasy. Also a part of the fantastic
solution, the US, Soviet Union, and China all agree on policy affecting oil
producing countries and conflicts in and between countries in the Middle
East and their neighbors all be resolved. A more realistic outlook would be
to anticipate many future energy crises, inhibited world economic progress,
and the instability of politics, free institutions, and security in the
West.