Large Arab oil producers do not maintain spare production capacity purely out of altruism, but for geopolitical advantages.
Oil brings wealth, and burden of responsibility
"Responsibility walks hand in hand with capacity and power," wrote Josiah Gilbert Holland, the 19th-century American poet and novelist. The New Englander might have been writing presciently about the oilfields of Saudi Arabia and other Gulf states. Of course, he was not. Nor would most contemporary Americans think to describe Arab oil policy in such terms. One person who does is Dr Walid Khadduri, an Iraqi-born oil expert who is the co-author of the UN's 2009 Arab Human Development Report.
"Arab oil policy is based on the recognition that oil is a vital and strategic commodity for the world economy, and that producer countries have a responsibility to provide it reliably, without interruptions, and at reasonable prices," he writes in the report. "This responsibility requires the investment of tens of billions of dollars annually to expand capacity in order to meet incremental demand. It also extends to substituting for any major shortage in global markets, whether caused by industrial or political developments, or natural disasters."
Dr Khadduri, a former editor-in-chief of the Middle East Economic Survey, has spent most of his career studying such issues. Arab oil producers have paid a high price for standing ready to ramp up oil output in the event of unexpected shortages, he contends. Three times in the past five years they have pumped emergency supplies to the world: during a Venezuelan oil workers' strike from 2002 to 2003; during the 2003 invasion of Iraq; and after hurricanes knocked out Gulf of Mexico oil production in 2005.
"Major Arab oil producers all chipped in to help make up for supply shortfalls at these times, pre-empting major disruptions in the world economy," Dr Khadduri says. "The speed and flexibility of producers on these occasions is due to their policy of retaining spare production capacity for emergency use. It is highly costly because it entails leaving readily available oil in the ground, to be used only in emergencies, instead of for financing social projects."
Large Arab oil producers do not maintain spare production capacity purely out of altruism. It brings geopolitical advantages, enhancing state security. Would the US, France and Britain be so eager to extend a "defence umbrella" over the Gulf if Saudi Arabia and, to a lesser extent, the UAE could not increase oil output on demand? Increasingly, Dr Khadduri notes, election campaigns in industrialised countries feature speeches about "oil security" that are "used to build the case for sustainable sources of energy, instead of Arab oil".
Developed countries also blame OPEC, particularly the Gulf states, for high oil prices. When crude was heading towards a record peak last summer, the Australian prime minister Kevin Rudd urged the Group of Eight (G8) industrialised nations to "apply the blowtorch" to OPEC to boost production. Saudi Arabia obliged a month later, in July, raising output by 500,000 barrels per day just as New York and London traders clued in to a five-month-old slide in global oil demand and triggered a price slump.
When the furore over high oil prices was loudest, OPEC analysed consuming countries' fuel taxes, and showed that oil-tax revenues in the seven leading industrialised countries had exceeded total OPEC oil revenue in the period from 2004 to 2008. In Britain, with the highest taxes, government receipts last year from sales of transportation fuels were nearly twice the cost of the crude oil used in their production.
But this did not stop Gordon Brown, the British prime minister, from saying last October: "It is absolutely scandalous that OPEC is thinking of meeting in the next few days to cut oil production so they can push up the price of oil again, and we will certainly try and prevent this." Such opprobrium is not reserved for Arab exporters. Many Canadians are stung when the American consumers of about half their country's crude output label it "dirty oil". Recent studies have shown the carbon emissions associated with oil extracted from Canada's oil sands may be only 10 to 15 per cent higher than for Texan or Saudi crude, and Canadian producers are investing heavily to eliminate the difference.
Renewed World Energies (RWE), a South Carolina biofuel developer, belongs to a legion of small US companies hoping to benefit from the American energy independence movement. "Six years ago, Richard Armstrong and Tim Tompkins, determined and passionate to thwart American dependency on foreign oil, embarked on a new venture," states a recent press release. Mr Armstrong, the firm's president, says: "We are seeing our goals come to fruition with a viable alternative that unites green and market standards, and a day when dependence on foreign oil is a distant memory."
The US President Barack Obama pushed a more pointed line in his election campaign. "For the sake of our economy, our security and the future of our planet, I will set a clear goal as president: in 10 years, we will finally end our dependence on oil from the Middle East." It might not take that long, as the US now imports only 10 per cent of its oil supply from the region. Meanwhile, the UN warns that poor Arab nations face advancing deserts and more acute water shortages due to climate change.
Most do not produce or use much oil, yet they are still hurt when crude prices fall, as employment opportunities, remittances and economic assistance from their oil exporting neighbours dry up. email@example.com