A Prelude to the Foundation of Political Economy

Oil, War, and Global Polity

C. Bina

• Editorial: Palgrave Macmillan
• Año: 2013
• ISBN:
  9781137106971
• Categoría: Business
• Categoría: International Business

A Prelude to the Foundation of Political Economy is a groundbreaking volume of theory and strategy on political economy and polity of the twenty-first century. Distilled in concrete terms, it elucidates the enigma of oil in view of the centrality of global social relations.

1

WORLD OIL AND THE CRISIS OF GLOBALIZATION

Truth emerges more readily from error than from confusion.

—Francis Bacon

INTRODUCTION

The oil crisis of 1973–74 was the symptom of the underlying fundamental changes that forcefully led to the internationalization of the oil industry. The production and pricing of crude oil associated with the various oil-producing regions of the world have since become part of a unified process through global competition. It was a mother of all crises that led to the restructuring of all oil, thus brought cheap and not so cheap oil under one all-inclusive, globalized market. This prompted the collapse of the International Petroleum Cartel (1928–72); this included the intricate basing-point pricing system at the Gulf of Mexico and the Persian Gulf, and what lingered as the institutional wherewithal and purposeful paraphernalia linked to the cartel’s success. In the meantime, the “Postwar Petroleum Order”—an indispensable part of the international order of the Pax Americana (1945–79)—had begun to fall by the wayside, and the umbilical cord of the US foreign policy was cut from cartelized oil for good. The crisis appeared as a faint signal at first. This prompted the United States and its habitual Western alliance, and the titans of the International Petroleum Cartel (IPC), to engage in an old mode of diplomacy and negotiation to find a customary solution. But it soon became clear that not only the Middle East oil but all oil across the world had also crossed the Rubicon—the new era was about to begin. A cauldron that had been bubbling for quite a while—perhaps since the days of nationalization of oil in Iran and the overthrow of Mohammad Mossadegh—blew its top like a gigantic volcano. The steely law of history seemed to have shown an ironic display of objectivity and resolve. The gusher of discontent was so vast, so dense, and so sudden that it took years to sink in even in the psyche of regulars who thought they had intimate knowledge of oil and politics. And, while bewildered or struck by a healthy bolt of amnesia, the vast majority to this date is still underestimating.

In contrast to the prevailing opinions at the time, the significance of the oil crisis was not due to the (temporary) shortage that resulted from the imposition of the embargo; rather, the oil embargo itself was the symptom that revealed an underlying transition that had already been taking place toward the globalization of the oil industry. One has to appreciate that the process of structural transformation in oil production had already begun in the late 1960s and early 1970s. The 1973 oil crisis was simply the culmination of that process, which ushered in an entirely new period in which an end was put to separate regional pricing, inadequate unification, and localized value formation within the global structure. The oil crisis of 1973–74 was not an ordinary oil shortage, similar to the ones that the world experienced in the 1956 Suez Crisis or the 1967 Arab-Israeli clash. This crisis was conveyed by a severe shortage resulting from the Arab oil embargo (see Akins 1973), but it was underpinned by socioeconomic/sociopolitical forces that had long been laid at work toward the persistent transformation of global order. Hence it would be naive to reduce the oil crisis of the early 1970s to its manifold effects and multifarious impacts such as the suddenness of supply interruption and shortage alone. In the wake of the crisis stood the restructuring of the entire oil sector from top to bottom, doing away with monopoly and allowing price determination through global competition—including competition between the least and the most productive oil regions of the world. These conditions, in turn, necessitated the formation of market prices that were based upon production costs of the least productive oil region, and the synchronized formation of differential oil rents in step with the existing productivity of oil fields across the various oil regions of the globe.

We shall demonstrate that the formation of differential oil rent came about through increased competitive conditions rather than through monopoly. We shall identify the US oil region as the least productive in the world, and show that during the period leading up to the crisis there was a significant decline in the productivity of the aging US oil fields. The increase in the cost of production of the least productive oil region together with the internationalization of oil production, led to the generalization of high market prices within the entire industry.

The first section is a critical review of the literature on the oil crisis. The second section examines the characteristic features of US oil production. The third section presents an alternative theory of the oil crisis. The chapter concludes with a summation and setting the crisis within a larger polity.

THE REVIEW OF LITERATURE

The oil crisis of 1973–74 was an important economic and political event that has been embroiled in controversy ever since. At first glance, because of the diversity of opinions and the number of unsettled questions, there seem to be as many theories about the oil crisis as there are theorists in this field of inquiry. But it may be useful to distinguish the common threads among prevailing views on the subject to be able to discern various theoretical lines and schools of thought. We divide the prevailing views on the oil crisis of 1973–74 into three main categories: (1) traditional theories of the oil crisis; (2) dependency theories of the oil crisis; and (3) conspiracy theories of the oil crisis.

Traditional View of the Oil Crisis

This category contains an extensive spectrum of arguments about the nature of the oil crisis of 1973–74. The analyses often contain references to such notions as the oligopolistic structures of the oil companies, the collective decision-making of Organization of the Petroleum Exporting Countries (OPEC), and the operation of supply and demand in the international oil market. Although many disagreements exist among these theorists, nevertheless, the majority tend to approach the oil crisis of 1973–74 more or less in the same theoretical and methodological fashion.¹ To sum up the arguments made by these theorists, one needs to link together a combination of emphases which add up to an explanation of the oil crisis of 1973–74. The first emphasis is upon “law of supply and demand,” within the sphere of exchange (Vernon 1975a). The second emphasis is upon the element of monopoly and “ability” on the part of OPEC to set prices at will (Penrose 1975). Third, some speak of the dependence of the US economy on foreign oil, especially on OPEC oil, which in turn created the severe momentary shortage that is said to have threatened “the supply security,” as the determining factor (Lenczowski 1975, McKie 1975, Blair 1976). Finally, it is often said that it was the suddenness of the price change and the problems of adjustment that resulted in the crisis; if there had been a possibility for a smooth transition, the oil crisis might have been avoided (Blair 1976). In addition, from the methodological standpoint, the crisis is either explicitly or implicitly considered to have resulted from the change in the perception of the actors involved in the oil market, rather than being the outcome of the changed realities of the time (Dasgupta and Heal 1979, Ch. 15).

From the viewpoint of supply conditions (Blair 1976), the shortfalls were short-lived after the oil embargo. In other words, a temporary shortage developed that, according to conventional economic theory, was similar to previous oil shortages and thus would not have any significant impact upon long-term equilibrium prices. As the history of this period vividly indicates, however, exactly the opposite resulted. But the conventional theory insists that the factors that established a higher floor for the post-embargo price of oil were the result of price determination by OPEC, and the dependence of the United States on imported oil. It should be noted from the outset that the first step in this analysis is to identify the cause or the causes of the oil crisis. Despite this necessity, most theorists in this category considered quite a few factors that were associated with the crisis without being able to understand the systematic relationship among them to identify the underlying causes (Bina 1985, Chs. 3 and 4). In the final analysis, for the majority of the theorists of this category, “OPEC-determined” oil prices, along with the notion of US “dependence” on imported oil, was considered to be the principal cause of the oil crisis.

There are, however, a number of misconceptions in this conclusion. First, the two mechanisms of the “posted price” and market price of oil are being confused. Second, price determination is considered to depend upon the will of OPEC, rather than understood as the outcome of objective production conditions. Finally, the conclusion tends to imply that the United States was unable to challenge OPEC because it had become a net importer and could no longer supply oil to the world market as much as it had during the 1956 and the 1967 Middle East conflicts that had also led to temporary interruptions. The question to be asked here is why, considering the condition of excess supply that prevailed following the removal of embargo, the oil prices did not decline significantly. If the laws of supply and demand did not hold in this particular case, then what kind of mechanism tends to regulate the process of price formation in this industry?

Another common feature of these theorists is that they have not developed a mechanism to connect the process of price determination in the preembargo period with that of postembargo conditions. The reason for this seems to be the lack of adequate theoretical and historical perspective. These theorists either relied on supply and demand conditions within the sphere of exchange, or resorted to the notions of monopoly, cartel, and oligopoly to describe the sudden price change of 1973–74 that affected the entire globe.

Not only after the oil embargo ended, but even prior to it, the market was also flooded with huge quantities of crude oil. Moreover, even the decline in demand resulting from the worldwide recession of 1974–75 did not seem to cause any substantial drop in the price of oil. In fact, after the oil embargo of 1973, a new floor for oil prices was clearly established. This implies that changes in supply and demand conditions were themselves the consequence of more fundamental changes in the international oil industry. In the final analysis, the traditional theorists argue, OPEC acted like a monopoly in setting the oil price unilaterally at its fourfold increase level. When asked why OPEC did not act in the same manner that it had in the previous years, most of these theorists reply that, in addition to the existence of monopoly, factors such as the US “dependence” on the foreign oil and the rising tides of resource conservation contributed to the crisis. The most explicit argument of this sort is developed by Dasgupta and Heal (1979) who state that all these developments resulted from changes in the perception of the actors involved and not the result of changes in the actual situation—a shallow argument.

There is a fundamental problem with the above formulation. It suggests implausibly that objective realities do not exist outside of one’s subjective perception (Dasgupta and Heal 1979, Ch. 15). That is why these authors maintain that, in the absence of futures markets, it is difficult to know how the perception of buyers and sellers are formulated. What the “futures market” does, however, is to present the extent of fluctuations and not necessarily the indispensable changes that had occurred through the crisis since early in the 1970s—the fresh mechanism that led to founding of the value, differential rent, and prices beyond the IPC (1928–72) in the entire oil industry. This is only a glimpse of innocence and complete irrelevance of the mainstream economic theory to a critical question of our time.

In retrospect, one may observe a great deal of displacement in the interpretation of the traditional school in the determination of the underlying cause of the crisis that established a nearly fourfold price increase, and brought about a transfer of a significant amount of wealth in the form of differential oil rent to the more productive oil regions. But it should be realized that the majority of these theorists were initially correct in describing the events and circumstances that were unfolding during the crisis. For instance, the impression of the “OPEC monopoly,” or the notion of “dependence” of the United States on imported oil, is a correct observation. But what is rarely acknowledged is the distinction between impressions (i.e., observable effects) and the primary causes.

As a result, these theorists were unable to explain the process of the oil crisis of 1973–74; at best they described the consequences of the crisis and its conditions. Their description of the supply-demand relation, the “posted-price” determination by OPEC, and the US dependence on imported oil is certainly true. What is also true is that these writers failed to pass beyond the surface of these facts to build a theory of the oil crisis.

Dependency Theory of the Oil Crisis

The dependency theories of the oil crisis of 1973–74 are deeply rooted in dependency theory in general.² This chapter neither claims nor intends to examine all the issues involved with this theory (see Prebisch 1950, Frank 1969a, 1969b, 1972; Emmanuel 1972; Amin 1974; Girvan 1976; Weeks 1981b; see Brenner 1977, Weeks 1981b for a critique; for further investigation see Latin American Perspectives 1976, 1977, 1979, 1981). The task here is rather to flush out specific claims of the dependency methodology as it relates to the analysis of the oil crisis. Thus, to begin with, we shall focus on Girvan’s (1975) evaluation of the oil crisis of 1973–74, together with evaluation of authors, such as Tanzer (1974) and Stork (1975), who had made contributions to the subject from the standpoint of the dependency theory. The major argument expressed by most of these writers presumes a hypothesized “OPEC offensive”³ against the industrialized countries of the West to achieve self-determination and sovereignty. This “offensive,” however, is said to be a reaction to the prolonged relations of domination that existed between the Imperialist countries on the one hand, and the Third World countries on the other. Such domination was accompanied by unequal relations, and consequently unequal exchange in trade, between the “center” and the “periphery”—a precursor of what is now known as the world system theory (see Wallerstein 1979). Some authors added that the atmosphere of the post-Vietnam era created a general political condition that permitted the dominated countries of the Third World, notably OPEC, to launch this “offensive” (Girvan 1975: 147).

The most fundamental error of these theorists is eclecticism, that is, putting the questions of politics, economics, geography, international relations, and epoch on an equal footing without seeking to determine their structural relationship and without any specificity as to the underlying cause(s) of the oil crisis. For instance, the process of price formation in the oil industry is identified with the determination of “posted prices” by OPEC. There is no consideration of the laws of motion of capitalism as an alternative system of value and price formation through competition in the event of collapse of the IPC. Instead the emphasis is upon determination by monopoly power. It is not surprising that the dependency view considers the oil crisis as an offensive against unequal exchange. Some even called it an artificial crisis, since at the end they did not perceive any change in the magnitude of “unequal exchange.” And setting up the problem this way, the dependency theorists missed the boat on the globalization of oil and, more importantly, on globalization in general in the era of post-Pax Americana.

These writers have scarcely recognized that prices are the phenomenal form of values in production and that value formation emerges through competition. They have made a double error of contrasting monopoly to competition, and committing price determination to “market power” circularly and in the absence of a viable theory of value in the oil industry.⁴ Discussing the notion of competition, these theorists tend to equate the existence of a large number of firms in an industry with competition, and that of a very few firms with monopoly—thus succumbing to economics orthodoxy. It should also be pointed out that such equivalence would be a clear misconception of both monopoly and competition in capitalism. Here one moves from competition to monopoly through moving along the spectrum of “pure competition”/“pure monopoly,” a fanciful stratagem that has absolutely nothing to do with the capitalist system of production and exchange. These scholars have failed rather miserably to realize that competition and integration in capitalism are part and parcel of a synthesis, thus concentration and centralization of capital cannot be dichotomized from the process of competition (Clifton 1977; Shaikh 1980, 1982; Weeks 1981a; Semmler 1984; Bina 1985, Ch. 6).

The oil crisis of 1973–74 is thus seen to result from the direct political action of OPEC. For instance, Tanzer argues: “As a result of the Arab oil embargo in late 1973, the OPEC countries effectively took over the ownership of their crude oil reserves and oil pricing, while the companies became primarily suppliers of technology and markets” (1980: 110). These changes seem to be at a phenomenal level, even entirely arbitrary in nature, if one does not accept the arguments advanced by the dependency theorists. These analyses are arbitrary insofar as they are not the outcome of an identified mechanism of value formation in production and of eventual price determination via competition. Consequently, most of these theorists do not offer any systematic analysis, except through alleged unequal exchange.

In this category, as in others, the various theorists do not completely agree with each other. For instance, in his explanation of the oil crisis, Tanzer’s emphasis is on the monopoly aspect of the international oil industry, whereas Girvan’s primary concern is the “OPEC offensive.” Finally, some of the dependency theorists allege that the social and political conditions of the post-Vietnam era, that is, the defeat of US imperialism, are the cause of the oil embargo and the “OPEC offensive.” Still others put together numerous factual observations, such as the US political decline, increased participation of OPEC internationally, and increased income of the OPEC countries, to demonstrate that dependency theory is compelling. These arguments are controversial and misplaced: partly because the hypothesized “OPEC offensive” supposedly resulted from a contradiction between the masses of the Third World and US imperialism rather than from the increased development of capitalism and transformation of the oil sector in the OPEC nations; and partly because the political actions of OPEC by themselves cannot possibly be understood without a prior analysis of the underlying cause of the crisis. This arbitrary change of focus, combined with the lack of appreciation of a materialist theory in the political economy, shunted many of these well-meaning, left-leaning scholars to a dead end. The “OPEC offensive,” far from being the cause of the oil crisis, was simply one of many eleme...