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American stakes in the Gulf.

With the Gulf War, the 'new world order' looks a little like 19th century imperialism fought with late-20th century weapons and sponsored by the Saudis and the Japanese. For the United States, this 'coalition' and the war itself present a tangle of economic and political goals and opportunities. Clearly there are material stakes in the region which compel the US to raise a standard of international law it has happily flown at half-mast elsewhere. If a suddenly-discovered moral internationalism is an unconvincing explanation for the American stance, however, the 'blood for oil' equation is not much better. There is much more at stake than access to what George Bush (in his January State of the Union address) proprietarily claimed as "the world's oil resources."

Although it was easy to miss amidst empty platitudes about domestic policy, a Strangelovian fascination with 'war of peace,' and self-serving smatterings of Congressional applause, Bush's January address did concede the American stakes in the Middle East. In turn, the president emphasized the importance of exports as a source of economic growth, the related importance of the 'stability and security' of the world economy, and the overriding question of American credibility and leadership and "the means to back it up." (As an aside, Bush also chided critics of Reagan-era military spending: "Our investment... is paying off.")

These concerns are the key to American policy. As the international economic status of the US has slipped, anxieties about global stability and the credibility of American power have increased. And with the military pretensions and economic power of the US sharply out of step, the implications of the war -- for the oil industry, for the world economy, and for future distribution of the overhead costs of world power -- will certainly outlast 1991.

Several facets of this story deserve a closer look. In historical and current terms, what is the relationship between the United States and the world oil industry? What are the broader economic implications, for the US, of crisis in the Gulf? And what does the web of reluctant fiscal alliances (which the US hopefully calls "the coalition") tell us about the present and future of American power?

Patterns in the sand

After World War I, American firms moved aggressively to dominate world oil. In the Middle East, the US began supplanting British influence. The "Red Line" Agreement of 1928 parcelled out Iraqi and Kuwaiti reserves among the established British, French, and Dutch concessions, and a five-firm American group. Through the 1930s, these firms tried to prevent competition or new reserves from upsetting world prices. These goals were particularly important for the American partners, whose domestic production was subject to savage competition. While price and production worries were temporarily eased by wartime regulation, the war years foreshadowed decades of anxiety and instability: oil-producing countries wanted to control their own resources; new discoveries constantly threatened market chaos; and control of world oil was now intimately linked to world power.

After 1945, Middle East oil was increasingly controlled by an informal partnership of American multinationals and the American government. Multinational needed their market position guaranteed by political and military power. The American government (prevented from developing its own foreign concessions by importanxious domestic oil interests) relied upon multinationals to maintain order in world markets. This entente was shaken by American support of Israel after 1948 but, in a broader sense, the Arab-Israeli conflict merely raised the regional stakes and the American military presence of all sides.

A more serious problem was posed by Middle Eastern nationalism, which the US consistently fought (and misunderstood). Through the 1950s, the US tightened its grip against both the vestiges of British power and indigenous political threats. Faced with nationalization of Iranian oil in 1954, for example, the US covertly toppled the Mossadegh government, reinstated the Shah, and -- in order to fit Iranian oil back into world markets -- turned the formerly British-dominated reserves over to a multinational consortium. The next decade marked the high tide of private, predominantly American control over world oil. The 'Seven Sisters' (Exxon, Mobil, Standard, Texaco, Gulf, Shell, and BP) controlled 90 per cent of oil outside North American and the Soviet bloc.

Control and stability, however, were slipping. Middle Eastern economic nationalism was given a tangible form with the formation of OPEC in 1960. OPEC was unable to control crude prices in the 1960s, as the US still held large domestic reserves. But by the early 1970s, a long decline in proven American reserves and a steady increase in American consumption gave OPEC the market clout it needed. Through the high prices and nationalization of the 'oil shock' of the 1970s, multinationals were forced from direct ownership to a reliance on 'sweetheart' buy-back deals -- by which major firms had more or less exclusive rights to oil flowing from fields they had formerly owned. At the same time, high prices gradually undercut OPEC's position. Production and exploration outside the Middle East (Alaska, the North Sea, Indonesia) accelerated and conservation eased demand pressures.

All of this muddied American interests. As direct American investment and dependence of Gulf oil slipped, the US tightened its regional alliances and tried to maintain a stalemate among regional rivals. This cold-hearted, grasping-at-straws policy (highlighted by overt support of Iraq and covert support of Iran in the mid-1980s) meant military saturation of the entire region and a perpectuation of the Iran-Iraq War. The US rushed to the support of conservative interests in any country which seemed likely or able to guarantee access to the region's oil. Meanwhile, OPEC and its consumers had reached a fragile truce. The Seven Sisters continued to exploit low-cost Middle East reserves (although their share had dropped to 40 per cent since 1973), while OPEC countries collected the rent, quietly cheated on their quotas, and became enthusiastic consumers of western military hardware. Enter, via Kuwait, Saddam Hussein.

Crude chaos: the United

States and world oil

As the schoolyard logic of the Iraqi-American standoff propelled the region towards war, it was difficult to see how sharply-constrained American interests in Gulf oil would be maintained or strengthened by military action. Over the past decade, the US had resigned itself to endemic instability in oil markets. As a consolation, this instability -- a mildly chaotic combination of futures speculation, spot purchasing by multinationals, OPEC's staggering ineptitude as a cartel, and sporadic expansion in Asia -- had meant low prices and flush markets. Events have exaggerated this instability, byt the US is in little position to correct matters by force.

Consider oil pricing. Oil firms and analysts have been unable to predict, let alone control, a speculative price set (as one Senator put it recently) by a bunch of yuppies "on the floor of the exchange screaming at each other based on rumors." The price has become little more than "a thermometer for measuring war fever." In markets which consider a rise or fall of $.50 volatile, daisy swings of $4.00 have become commonplace. Prices vacillated in response to lunar cycles and Hussein's dreams. When the US released crude from its strategic reserves in early September, the action was treated as an index of US attitudes rather than an increase in supply, and prices rose. And flushed with the optimism of CNN's early war coverage, prices confounded all analysts and plunged to pre-crisis levels. "Anybody who tries to trade oil and gas futures using any sort of logic," complained one broker, "will probably have their head handed to them."

Consider the state of world refining. Supply and demand run evenly through a number of discrete product markets, margins have dropped from $1.35 to barely $.25 a barrel in the last two years, and American refiners are extremely reluctant to construct new capacity. At the same time, 'east of Suez, markets (which rely heavily on Middle East refineries) were pursuing a major refinery-building program well before Iraq crossed the line in the sand. Singapore already ranks behind only Houston and Rotterdam as a refining centre, and its resident multinationals are expanding or planning expansion in Thailand and Indonesia. For multinational refiners in Asia, the implications of the crisis are endless -- a prolonged oil shock may increased pressures for nationalization; competition and conservation may undermine Asian markets; and uncertainty may affect plans to use Asian refineries to supply western US markets (a response to environmental restriction of California refining).

Consider the state of global production. One-third of world crude flow from the Middle East, but only about 6 per cent from Iraq and Kuwait. With other OPEC countries released from their quotas, the world has been a wash with oil since early fall. Indeed the most serious threat to regional oil was not the Iraqi invasion, but the potential damage of a war -- a chance which left most Asian countries ambivalent about intervention, but which the US proved willing to take. The prospects for world oil depend largely on events outside the Gulf. Although its oilfields are in dreadful shape, the Soviet Union still produces twice as much oil as Saudi Arabia. With the Soviet economy reeling, increased exports to hard currency markets and decreased exports to Eastern Europe could pay havoc with world markets. At the same time, Asian nations, increasingly dependent on Gulf imports, have eagerly encouraged new exploration -- much of it by non-American or state oil concerns. For their part, multinationals are moving away from cash acquisition of proven reserves or spot purchases, and -- for the first time since the mid-1970s -- risking hard cash on exploration.

Finally, consider the position of American oil firms. Higher prices have been a boon to those with reserves or inventories outside the Middle East (Amoco and Texaco posted third quarter profit increases of 58 and 26 per cent respectively), while the profit of those who rely on Middle Eastern or spot markets plunged (Pennzoil and Sunoco saw their returns drop 31 per cent and 71 per cent respectively). Others, such as Chevron and ARCO, claimed exploration write-offs or held down pump prices in order to avoid large profits. While profit gains in the fourth quarter were more spectacular and uniform (averaging 69 per cent), big oil is not placing any bets on the future. REfiners and retailers fear volatile prices -- which play havoc with inventories, purchasing contracts, and refining margins. Although pump prices rose steadily after the Iraqi invasion, retailers were unable to completely pass on higher crude prices. By early November, consumer advocates went so far as to accuse larger chains of holding prices down in an effort to squeeze smaller, non-integrated retailers.

World oil is competitive, chaotic, and no longer dominated by the United States. American interests (public and private) are frantically trying to retain some semblance of their former position by seeking short term stability and easily exploitable reserves. As an industry consultant told the Far Eastern Economic Review, "We need geology that makes sense, numbers that get your motor running, and a place that doesn't scare you to death." But neither the war nor any foreseeable resolution seem to offer such assurances. In the long term, it is difficult to reconcile the costs of American intervention with its stake in world oil. The market control of multinationals and OPEC is slipping, and the Middle East's other consumers (notably in Asia) are more inclined to search for alternatives than accept a militarized status quo.

Bigger stakes: the spectre

of global instability

Although inspired in large part by strategic myopia and the anxieties of American oil interests, American stakes in the current situation cannot simply be measured in barrels. In the past two decades the US has compounded its dependence on foreign oil with a dependence on the fortunes of other oil-importing countries. As the domestic economy stagnates and the dollar weakens, trade has swollen to almost 10 per cent of GNP and exports have become the sole source of economic growth. While the economic power of the US has slipped, its investment in teh stability and prosperity of its trading partners has increased. Less and less able to dictate international order, the Americans need it more and more.

The Gulf crisis has hit the US where it hurts, the pocketbooks of other countries and the shaky foundations of the world economy. Japan and industrialized Asia are most directly dependent on Middle East oil, and the war has opened cracks in Asian stock markets and sent the massive Asian chemicals and plastics industries reeling. In less developed countries, the war threatens a reprise of the 'oil shock' of the 1970s. Volatile oil prices have hit countries still suffering under the debts incurred during the last energy crisis. The result has been serious political instability, notably in the Philippines. And the crisis has, of course, rippled throughout the Middle East itself, uprooting regional labour markets and shuffling the importance of regional powers. Almost one million emigre workers (and their disbursements home) have been displaced. Egypt, which claims almost one-third of these workers, has seen its GNP slip five per cent. Turkey estimates its loses at $7 billion a year.

The Gulf is, in many respects, a linchpin of the global economy. The US is anxious to protect the flow of oil to itself and its allies, and the reverse flow of oil revenues -- much of which is denominated in American dollars. Indeed close ties between Saudi wealth and American banking, and between Kuwaiti wealth and British banking, account largely for Anglo-American leadership of the 'coalition.' And of course, as The Economist notes, the "oildoms of the Arabian peninsula have staked their futures on American power."

Other subscribers to the coalition have placed shorter-term bets on the American cause. Jordan, Syria, Egypt and Turkey clearly hope to extinguish a regional threat while distancing themselves from the broader implications of American intervention -- domestic dissent is a problem, but each government seems 'efficiently repressive enough' to pull it off. Much of Southeat Asia is walking a similarly fine line between latent opposition (reflecting the US record in Asia, and substantial Islamic populations in Indonesia and Malaysia), and economic realities -- most would happily buy Kuwaiti oil from the Iraqis, but there is little to be gained in losing the oil and the good favour of the United States.

For the US, the local, regional, and global implications of the crisis are interwoven in complex and troubling ways. High oil prices and heightened fears of recession brought the 'Uruguay Round' of the GATT talks to a distressing close. In a peculiarly American version of 'linkage,' Chrysler's Lee Iaccoca has suggested that renewed trade negotiations -- especially with Japan -- take American sacrifices in the Gulf into account. An attempt by the World Bank to map out various scenarios concluded glumly that instability would outlast any resolution of present tensions. Industry consultants have recommended placing world strategic reserves under control of the World Bank, or an industry realignment which would replace OPEC with direct ties between Gulf states and major consumers -- a solution reminiscent of the 1928 'Red Line.'

Paying the piper

If the crisis has encouraged solutions which reek of the 1920s, it has also raised a problem peculiar to the 1980s and 1990s -- global responsibility costs money and the US is less willing and able to foot the bill. Through the 1980s, American foreign policy was underwritten by public debt, private patrons of American power (the Saudis or Adolp Coors), and the proceeds of drug trafficking or price gouging on arms sales ('Iran-contra' and its predecessors). While satisfying a fetish for privatization and austerity, such inventive financing is not only politically dangerious, but woefully insufficient in larger crises.

In these terms, the war presents both opportunity and challenges. Faced with shrinking budgets, the collapse of Communism, and (as a Boeing executive put it recently) "peace breaking out all over," western militarists have publicly condemned Saddam Hussein while privately applauding his timing. The Americans "mainly want security of oil supplies," as The Economist notes, "[but] their military men see a chance to show they are needed after all, even if the Soviet bear has curled up in his den." The crisis has also allowed a more candid defense of the doctrine of 'low-intensity conflict' which -- deep in the shadow of Vietnam -- has always proved difficult to justify or explain (neither Reagan's apocalyptic 'evil empire' nor bush's patently cynical 'war on drugs' were particularly convincing).

The Americans did not go to war in order to save the military-industrial complex. But, as the carefully filtered coverage suggests, the war has become a golden opportunity to advertise the high-tech wares of war. Bush's January address built on CNN's SCUD fetish, implying a threat to American soil and renewing a commitment to 'Star Wars.' The next day the Pentagon announced successful tests of Star Wars technology." To win bigger budgets in the future," conceded Business Week, "the armed services must prove with Operation Desert Strom that the nearly $800 billion spent in the Reagan-era defense build up has been worth it."

Any full accounting of war costs has been scrupulously avoided. In some respects, this is (in the words of a Goldman-Sachs economist) "a prepaid war." The military has been simply blowing up (at $600,000 per Patriot missile and $1.3 million per cruise missil) a fraction of the arms purchased during the Reagan years. But the war has also led to a frenzy of procurement of low-tech basics, including $45 million of prepackaged rations, $210,000 of lip balm, and an indeterminate bill for desert footwear (the manufacturer was told: "we'll work out the bill later"). Adding to the (partially intentional) confusion, Congress has declared this an 'off-budget war' and used meaningless 'placeholder' figures in appropriations hearings and budget debates.

And of course fancy ballistics, prepaid or not, represent only a fraction of war costs, which have have been inflated by the ripple effects of the crisis and the economics of a post-Cold War world. In many cases, the US has been forced to purchase cooperation, especially from otherwise ambivalent regional powers. The US has written off Egypt's $7 billion arms debt, and granted Turkey substantially larger cotton import quotas and vague promises of a coveted membership in the EEC. The Soviets, loathe to give up on an Iraqi arms debt of almost $8 billion, were also lure to the American side by the possibility of EEC or IMF reconstruction assistance. Less directly, the US has used the crisis to pressure the Philippines in ongoing negotiations over the future of American bases. In all, support for the US was determined not by an ethical or strategic lines in the sand--but by the fiscal collapse of Communism, the rise of the EEC, any leverage the US could wield in weaker countries, and a network of Middle Eastern arms debt. It is a curious and capital-conscious coalition.

The immediate costs of intervention (estimated at $1 billion a day since January 15) present a more complex challenge. The US has floated the military intervention on global markets as if it were a public stock offering. Through the Gulf Crisis Financial Coordination Group (which also includes Japan, the Saudis, and members of the EC), the US has pressed others to underwrite the American military and compensate those hurt by high oil prices, sanctions, or the disruption of Middle Eastern labour markets. A bizarre exercise in itself, the Administration's cup rattling may also neatly mark the historical point at which the costs of the empire began outstripping the returns.

The US has received obligatory military support from NATO allies, while Asian and Middle Eastern countries have been made the targets of Secretary of State Baker's pledge drives. This all fits nicely into an election-oriented portrait which stressed the heroic presence of American troops and the fact that the US was not footing the bill alone. The Saudis and Kuwaitis pledged almost $12 billion before January 15, and another $24 billion after a week of fighting. As American journalist Doug Henwood noted, this made the American military look "less like a reborn imperial force than a gang of high-end mercenaries in the pay of horrid petrocracts." The Economist added drily, the Cold War seemed to have given way to an era of "rent-a-superpower."

For political and economic reasons, the US has been especially anxious to exact contributions from Gulf states and Japan. After all, the oildoms and the Japanese not only seemed to benefit most directly from Operation Desert Shield, but are widely considered the demons of US economic decline (as oil extortionists in the 1970s and unfair competitors in the 1980s respectively). The Gulf state contribution is quite simple--American troops are most directly defending Saudi and Kuwaiti soil, and the Saudis had been patrons of American power as far away as Nicaragua. The breadth of the Gulf contribution is more complicated; aside from purchasing their own defense and serving as a pit stop for the American forces, the Saudis have been pressed to funnel cash to countries hard hit by the crisis--as far as covering Iraqi debts to the Soviet Union in order to firm up Soviet cooperation. And since Gulf state contributions are generated out of current oil revenues, the Administration suddenly had a substantial stake in high oil prices--a fact which discouraged any consumer-oriented tampering with government reserves through the fall.

As the US struggles with the costs of world stability, the position of Japan is especially sensitive. It is, in a sense, Japan's world that Washington is trying to stabilize. Japan began by promising $1 billion towards the American cause, and by early September had raised the ante to almost $4 billion. For the US, the Japanese support was welcome, but a little like a quarter flipped from a well-manicured hand. One Senator blasted Japan for running up a tab on "a toll-free number that our friends and allies call whenever they run into trouble." In response to American pressure, the ruling Liberal Democrats pushed a constitutional amendment which would allow Japan's armed forces to serve in the Gulf. Other Japanese parties and Asian nations (for obviously different reasons) did not look kindly on Japanese constitutional reform and the issue died a messy parliamentary death. Although Japan upped its capitalization of the American cause (including substantial aid to oil-shocked nations) by $10 billion in late January, the gap between each country's share of global power and a peculiarly American notion of global responsibility is likely to remain a source of tension for some time.

Finally, sounding a little like public television fund-raising executives, the Administration has begun grumbling about the gap between pledges and contributions. Much of the Japanese contribution has been 'in kind'--that is, air conditioners, televisions, fax machines, and Sony walkmans for the American troops. German in-kind contributions, including four unarmed fighters to decorate Turkish airfields, is mostly East German military surplus that is hardly worth the shipping. Cash contributions have gone directly into federal coffers, and are still subject to Congressional appropriation -- a fact which does not sit well with the Administration or its fiscal allies.

This novel combination of American interests and American weakness foes not bode well for the futue of a 'new world order.' Acting on traditional and mundane concerns for the stability of commodity markets and world trade, and for its credibility as a world power, the US has found the costs of both stability and credibility increasingly out of reach. Unwilling and unable to pay the piper, the US is slow to admid that it can no longer call the tune. The current crisis -- however it is resolved or prolonged -- clearly marks a watershed in American power. What remains to be seen is whether, as the economic power of the US slips, its willingness to use force will fall accordingly or increase in desperation.

Colin Gordon teaches American history and foreign policy at the University of British Columbia, and has written for The Nation and Z.
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Title Annotation:Persian Gulf War
Author:Gordon, Colin
Publication:Canadian Dimension
Date:Apr 1, 1991
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